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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 JUNE 28, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934Commission file number 1-416


SEARS, ROEBUCK AND CO.

(Exact name of registrant as specified in its charter)


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


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

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

Yes   x
    
    No   o


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

Yes   x
    
    No   o


As of July 26, 2003, the Registrant had 282,976,679 common shares, $.75 par value, outstanding.



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TABLE OF CONTENTS



|                                                |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                  
|                                                | Item 1. Financial Statements                                                                 
|                                                |                                                                                               | Condensed Consolidated Statements of Income         
|                                                |                                                                                               | Condensed Consolidated Balance Sheets               
|                                                |                                                                                               | Condensed Consolidated Statements of Cash Flows     
|                                                |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                                                |                                                                                               | 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 4. Submission of Matters to a Vote of Security-Holders                                  
|                                                | Item 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURE                                      
|CERTIFICATIONS                                 
|Amended and Restated Non-Compete/Severance Agmt
|Letter from Registrant to Robert J. O'Leary    
|Computation of Ratio of Income to Fixed Charges
|Acknowledgement of Awareness                   
|906 Certification of Chief Executive Officer   
|906 Certification of Chief Financial Officer   



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##### Table of Contents



SEARS, ROEBUCK AND CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
13 Weeks and 26 Weeks Ended June 28, 2003

PagePART I -- FINANCIAL INFORMATIONItem 1
    
    Financial StatementsCondensed Consolidated Statements of Income (Unaudited)13 and 26 Weeks Ended June 28, 2003 and June 29, 2002
    
    
    1Condensed Consolidated Balance Sheets
June 28, 2003 (Unaudited), June 29, 2002 (Unaudited)
and December 28, 2002
    
    
    2Condensed Consolidated Statements of Cash Flows (Unaudited)
26 Weeks Ended June 28, 2003 and June 29, 2002
    
    
    3Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    4Independent Accountants' Report
    
    
    14Item 2
    
    Management's Discussion and Analysis of Operations, Financial Condition and Liquidity
    
    
    15Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4
    
    Disclosure Controls and Procedures
    
    
    31PART II -- OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    32Item 4
    
    Submission of Matters to a Vote of Security-Holders
    
    
    34Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    35






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










PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

millions, except per common share data
    
    13 Weeks Ended
    
    
    26 Weeks EndedJune 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,2003
    
    
    2002
    
    
    2003
    
    
    2002REVENUESMerchandise sales and services
    
    $
    8,851
    
    
    $
    8,753
    
    
    $
    16,325
    
    
    $
    16,400Credit and financial products revenues
    
    
    1,345
    
    
    
    1,389
    
    
    
    2,751
    
    
    
    2,779Total revenues
    
    
    10,196
    
    
    
    10,142
    
    
    
    19,076
    
    
    
    19,179COSTS AND EXPENSESCost of sales, buying and occupancy
    
    
    6,402
    
    
    
    6,342
    
    
    
    11,876
    
    
    
    11,968Selling and administrative
    
    
    2,327
    
    
    
    2,236
    
    
    
    4,437
    
    
    
    4,297Provision for uncollectible accounts
    
    
    461
    
    
    
    701
    
    
    
    944
    
    
    
    1,082Depreciation and amortization
    
    
    230
    
    
    
    221
    
    
    
    455
    
    
    
    431Interest
    
    
    287
    
    
    
    276
    
    
    
    566
    
    
    
    568Special charges and impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111Total costs and expenses
    
    
    9,707
    
    
    
    9,776
    
    
    
    18,278
    
    
    
    18,457Operating income
    
    
    489
    
    
    
    366
    
    
    
    798
    
    
    
    722Other income, net
    
    
    13
    
    
    
    10
    
    
    
    14
    
    
    
    88Income before income taxes, minority interest and
cumulative effect of a change in accounting principle
    
    
    502
    
    
    
    376
    
    
    
    812
    
    
    
    810Income taxes
    
    
    (186
    )
    
    
    (140
    )
    
    
    (301
    )
    
    
    (288
    )Minority interest
    
    
    (7
    )
    
    
    (7
    )
    
    
    (10
    )
    
    
    25Income before cumulative effect of change in accounting
principle
    
    
    309
    
    
    
    229
    
    
    
    501
    
    
    
    547Cumulative effect of a change in accounting for goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (208
    )NET INCOME
    
    $
    309
    
    
    $
    229
    
    
    $
    501
    
    
    $
    339EARNINGS PER COMMON SHAREBASICEarnings per share before cumulative effect of change
in accounting principle
    
    $
    1.04
    
    
    $
    0.72
    
    
    $
    1.63
    
    
    $
    1.72Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.65
    )Earnings per share
    
    $
    1.04
    
    
    $
    0.72
    
    
    $
    1.63
    
    
    $
    1.07DILUTEDEarnings per share before cumulative effect of change
in accounting principle
    
    $
    1.04
    
    
    $
    0.71
    
    
    $
    1.63
    
    
    $
    1.70Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.65
    )Earnings per share
    
    $
    1.04
    
    
    $
    0.71
    
    
    $
    1.63
    
    
    $
    1.05Cash dividends declared per common share
    
    $
    0.23
    
    
    $
    0.23
    
    
    $
    0.46
    
    
    $
    0.46Average common and common equivalent shares outstanding
    
    
    298.0
    
    
    
    321.1
    
    
    
    307.9
    
    
    
    322.5


See accompanying notes.

1



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SEARS, ROEBUCK AND CO.
Condensed Consolidated Balance Sheets

(Unaudited)millions
    
    June 28,
    
    
    June 29,
    
    
    December 28,2003
    
    
    2002
    
    
    2002ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,921
    
    
    $
    1,019
    
    
    $
    1,962Credit card receivables
    
    
    31,323
    
    
    
    29,812
    
    
    
    32,595Less allowance for uncollectible accounts
    
    
    1,957
    
    
    
    1,485
    
    
    
    1,836Net credit card receivables
    
    
    29,366
    
    
    
    28,327
    
    
    
    30,759Other receivables
    
    
    728
    
    
    
    635
    
    
    
    863Merchandise inventories
    
    
    5,447
    
    
    
    5,396
    
    
    
    5,115Prepaid expenses and deferred charges
    
    
    620
    
    
    
    617
    
    
    
    535Deferred income taxes
    
    
    839
    
    
    
    1,010
    
    
    
    749Total current assets
    
    
    39,921
    
    
    
    37,004
    
    
    
    39,983Property and equipment, net
    
    
    6,909
    
    
    
    6,797
    
    
    
    6,910Deferred income taxes
    
    
    627
    
    
    
    365
    
    
    
    734Goodwill
    
    
    945
    
    
    
    936
    
    
    
    944Tradenames and other intangible assets
    
    
    703
    
    
    
    725
    
    
    
    704Other assets
    
    
    1,268
    
    
    
    917
    
    
    
    1,134TOTAL ASSETS
    
    $
    50,373
    
    
    $
    46,744
    
    
    $
    50,409LIABILITIESCurrent liabilitiesShort-term borrowings
    
    $
    5,464
    
    
    $
    3,981
    
    
    $
    4,525Current portion of long-term debt and capitalized lease
obligations
    
    
    5,050
    
    
    
    4,325
    
    
    
    4,808Accounts payable and other liabilities
    
    
    6,759
    
    
    
    6,831
    
    
    
    7,485Unearned revenues
    
    
    1,256
    
    
    
    1,180
    
    
    
    1,199Other taxes
    
    
    496
    
    
    
    471
    
    
    
    580Total current liabilities
    
    
    19,025
    
    
    
    16,788
    
    
    
    18,597Long-term debt and capitalized lease obligations
    
    
    21,462
    
    
    
    20,348
    
    
    
    21,304Pension and postretirement benefits
    
    
    2,336
    
    
    
    2,276
    
    
    
    2,491Minority interest and other liabilities
    
    
    1,318
    
    
    
    1,237
    
    
    
    1,264Total Liabilities
    
    
    44,141
    
    
    
    40,649
    
    
    
    43,656COMMITMENTS AND CONTINGENT LIABILITIESSHAREHOLDERS EQUITYCommon shares
    
    
    323
    
    
    
    323
    
    
    
    323Capital in excess of par value
    
    
    3,501
    
    
    
    3,516
    
    
    
    3,505Retained earnings
    
    
    8,861
    
    
    
    7,605
    
    
    
    8,497Treasury stock  at cost
    
    
    (5,463
    )
    
    
    (4,506
    )
    
    
    (4,474
    )Deferred ESOP expense
    
    
    (34
    )
    
    
    (48
    )
    
    
    (42
    )Accumulated other comprehensive loss
    
    
    (956
    )
    
    
    (795
    )
    
    
    (1,056
    )Total Shareholders Equity
    
    
    6,232
    
    
    
    6,095
    
    
    
    6,753TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    50,373
    
    
    $
    46,744
    
    
    $
    50,409Total common shares outstanding
    
    
    282.6
    
    
    
    315.9
    
    
    
    316.7


See accompanying notes.

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

26 Weeks Endedmillions
    
    June 28,
    
    
    June 29,2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    501
    
    
    $
    339Adjustments to reconcile net income to net cash provided by (used in)
operating activitiesDepreciation and amortization
    
    
    455
    
    
    
    431Cumulative effect of change in accounting principle
    
    
    
    
    
    
    208Provision for uncollectible accounts
    
    
    944
    
    
    
    1,082Special charges and impairments
    
    
    
    
    
    
    111Gain on sales of property and investments
    
    
    (4
    )
    
    
    (76
    )Income tax benefit on nonqualified stock options
    
    
    1
    
    
    
    24Change in:Deferred income taxes
    
    
    46
    
    
    
    (95
    )Credit card receivables
    
    
    718
    
    
    
    (1,161
    )Merchandise inventories
    
    
    (256
    )
    
    
    (216
    )Other operating assets
    
    
    48
    
    
    
    (189
    )Other operating liabilities
    
    
    (1,039
    )
    
    
    (647
    )Net cash provided by (used in) by operating activities
    
    
    1,414
    
    
    
    (189
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (1,832
    )Proceeds from sales of property and investments
    
    
    19
    
    
    
    130Purchases of property and equipment
    
    
    (319
    )
    
    
    (391
    )Purchases of long-term investments
    
    
    (22
    )
    
    
    (9
    )Net cash used in investing activities
    
    
    (322
    )
    
    
    (2,102
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from long-term debt
    
    
    2,920
    
    
    
    3,974Repayments of long-term debt
    
    
    (2,846
    )
    
    
    (1,715
    )Increase in short term borrowings
    
    
    919
    
    
    
    411Repayments of ESOP note receivable
    
    
    
    
    
    
    7Common shares repurchased
    
    
    (1,019
    )
    
    
    (427
    )Common shares issued for employee stock plans
    
    
    25
    
    
    
    136Dividends paid to shareholders
    
    
    (145
    )
    
    
    (147
    )Net cash (used in) provided by financing activities
    
    
    (146
    )
    
    
    2,239Effect of exchange rate changes on cash and cash equivalents
    
    
    13
    
    
    
    7NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    959
    
    
    
    (45
    )BALANCE AT BEGINNING OF YEAR
    
    
    1,962
    
    
    
    1,064BALANCE AT END OF PERIOD
    
    $
    2,921
    
    
    $
    1,019


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 June 28, 2003 and June 29,
2002, the related Condensed Consolidated Statements of Income for the 13 and 26
weeks ended June 28, 2003 and June 29, 2002, and the Condensed Consolidated
Statements of Cash Flows for the 26 weeks ended June 28, 2003 and June 29,
2002, 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) 2002
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 2002 financial statements to
conform with the current year presentation.

On July 15, 2003, the Company announced it entered into a definitive agreement
to sell its domestic Credit and Financial Products business, including its
clubs and services business, to Citicorp, Inc. (Citicorp) (See Note 13). The
June 28, 2003 Condensed Consolidated Financial Statements do not reflect any
effects that may arise from the potential sale of the business.

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 direct
merchant of traditionally styled, casual clothing for men, women and children,
accessories, footwear, home products and soft luggage.

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 fiscal 2002. 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 26 weeks ended
June 29, 2002.

13 Weeks
    
    
    26 WeeksEnded
    
    
    EndedJune 29,
    
    
    June 29,millions, except per share data
    
    2002
    
    
    2002(Pro Forma)
    
    
    (Pro Forma)Revenues
    
    $
    10,458
    
    
    $
    19,833Income before cumulative effect of accounting change
    
    
    216
    
    
    
    530Net income
    
    
    216
    
    
    
    322Earnings per share:Basic
    
    $
    0.68
    
    
    $
    1.01Diluted
    
    $
    0.67
    
    
    $
    1.00


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
fiscal 2002.

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

NOTE 3  CREDIT CARD RECEIVABLES AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

A summary of the Companys credit card receivables is as follows:

June 28,
    
    
    June 29,
    
    
    December 28,millions
    
    2003
    
    
    2002
    
    
    2002Gross credit card receivables(1)Domestic
    
    $
    29,443
    
    
    $
    28,246
    
    
    $
    30,766Sears Canada
    
    
    1,849
    
    
    
    1,534
    
    
    
    1,79731,292
    
    
    
    29,780
    
    
    
    32,563Other customer receivables
    
    
    31
    
    
    
    32
    
    
    
    32Total credit card receivables
    
    $
    31,323
    
    
    $
    29,812
    
    
    $
    32,595




| |  | 
| |  | 



---

|(1) |  | At June 28, 2003, June 29, 2002 and December 28, 2002, $24.5 billion, $18.1 billion and $23.8
billion, respectively, of
credit card receivables were segregated in securitization entities.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

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

millions
    
    2003
    
    
    2002Beginning of year balance
    
    $
    1,836
    
    
    $
    1,166First quarter activity:Provision
    
    
    483
    
    
    
    381Net charge-offs
    
    
    (472
    )
    
    
    (385
    )First quarter ending balance
    
    $
    1,847
    
    
    $
    1,162Second quarter activity:Provision
    
    
    461
    (1)
    
    
    701
    (2)Net charge-offs
    
    
    (351
    )(1)
    
    
    (378
    )Second quarter ending balance
    
    $
    1,957
    
    
    $
    1,485




---

|(1) |  | Provision and net charge-offs were reduced by $93
million and $178 million, respectively, due to the sale of
previously charged-off accounts discussed below.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes provision of $300 million as a result of a
change in accounting estimate related to the refinement of
the Companys method of determining its allowance for
uncollectible accounts. See discussion below.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

In the second quarter of 2003, the Company sold approximately $2.5 billion of
previously charged-off credit card receivable accounts, which generated cash
proceeds of $178 million. The proceeds represent recoveries and are reflected
as a reduction to gross charge-offs. As a result of the sale, the Company
realized a $93 million gain, which was recorded as a reduction to provision
expense. The Company also contracted to sell a majority of its future
charged-off accounts at contractually agreed recovery rates.

In the second quarter of 2002, the Company refined its method of determining
its allowance for uncollectible accounts to include the uncollectible portion
of current accounts and credit card fee balances, resulting in an increase in
the allowance for uncollectible accounts in the amount of $300 million. In
accordance with Accounting Principles Board Opinion No. 20, Accounting
Changes the effect of this change in accounting was recorded as a change in
accounting estimate in the second quarter of 2002.

5



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

NOTE 4  BORROWINGS

Total borrowings outstanding at June 28, 2003, June 29, 2002 and December 28,
2002 were $31.3 billion, $28.5 billion and $30.0 billion, respectively. Total
borrowings are presented on the balance sheet as follows:

June 28,
    
    
    June 29,
    
    
    December 28,millions
    
    2003
    
    
    2002
    
    
    2002Short-term borrowings:Unsecured commercial paper
    
    $
    3,259
    
    
    $
    3,906
    
    
    $
    2,950Asset-backed commercial paper
    
    
    750
    
    
    
    
    
    
    
    1,500Asset-backed facility
    
    
    1,400
    
    
    
    
    
    
    
    Bank loans
    
    
    55
    
    
    
    75
    
    
    
    755,464
    
    
    
    3,981
    
    
    
    4,525Long-term debt(1):Notes and debentures outstanding(2)
    
    
    14,410
    
    
    
    13,560
    
    
    
    13,094Securitizations
    
    
    10,892
    
    
    
    10,476
    
    
    
    11,951Capital lease obligations
    
    
    525
    
    
    
    474
    
    
    
    458Total borrowings
    
    $
    31,291
    
    
    $
    28,491
    
    
    $
    30,028SFAS No. 133 Hedge Accounting Adjustment
    
    
    685
    
    
    
    163
    
    
    
    609Total debt
    
    $
    31,976
    
    
    $
    28,654
    
    
    $
    30,637Memo: Sears Canada debt
    
    $
    1,621
    
    
    $
    1,531
    
    
    $
    1,478




---

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



|(2) |  | On August 1, 2003, SRAC announced that it had elected to call for redemption the entire outstanding principal amount of its
$250 million 7% notes due March 1, 2038. The redemption date is September 1, 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

The Company maintains committed credit facilities to support its unsecured
commercial paper borrowings. In February 2003, the Companys domestic wholly
owned financing subsidiary, Sears Roebuck Acceptance Corp. (SRAC), through a
syndicate of banks, obtained an unsecured, 364-day revolving credit facility in
the amount of $3.5 billion. The facility includes the option to extend the
repayment of borrowings, if any, to February 2005.

The Company maintains asset-backed commercial paper programs. In February
2003, $2.8 billion was renewed with an expiration date of February 2004. In
March 2003, capacity was expanded by $0.8 billion with an expiration in March
2004. At June 28, 2003, $0.8 billion was outstanding under these programs.

In March 2003, the Company negotiated a $2.0 billion private asset-backed
facility. The facility is scheduled to enter its amortization period in
January 2004 and bears interest at a variable rate based on LIBOR. The Company
has borrowed $1.4 billion through this facility as of June 28, 2003.

NOTE 5  SPECIAL CHARGES AND IMPAIRMENTS

During the first quarter of 2002, Sears Canada converted its seven stores
operating under the Eatons banner to Sears Canada stores resulting in
severance, asset impairment and other exit costs amounting to $111 million.
All actions related to this charge were completed by the end of 2002.

Following is a summary of the 2003 activity in the reserve established for
employee termination costs in connection with the Companys productivity
initiatives:

6



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

Ending
    
    
    
    
    
    
    
    
    
    
    EndingReserve
    
    
    
    
    
    
    
    
    
    
    ReserveBalance
    
    
    
    
    
    
    
    
    
    
    BalanceDec. 28,
    
    
    2003
    
    
    Cash
    
    
    June 28,millions
    
    2002
    
    
    Additions
    
    
    Payments
    
    
    2003Employee termination costs
    
    $
    23
    
    
    $
    28
    
    
    $
    (18
    )
    
    $
    33


The Company recorded a pretax charge of $28 million in the second quarter of
2003 for the estimated cost of severance for approximately 650 associates. Of
the $28 million pretax charge, $16 million was recorded as selling and
administrative expense in the Retail and Related Services segment and $12
million was recorded in the Corporate and Other segment.

NOTE 6  SHAREHOLDERS EQUITY

Dividend Payments

Under terms of indentures entered into in 1991 and thereafter, the Company
cannot take specified actions, including the declaration of cash dividends,
that would cause its unencumbered assets, as defined, to fall below 150% of its
liabilities, as defined. At June 28, 2003, approximately $7.3 billion could be
paid in dividends to shareholders under the most restrictive indentures.

Share Repurchase Program

The Company resumed its share repurchase activity in the second quarter of 2003
and repurchased 34.9 million common shares at a cost of approximately $1.0
billion under the $1.5 billion program approved by the Board of Directors in
December 2001. As of June 28, 2003, the Company had, under the existing share
repurchase program, remaining authorization to repurchase $0.2 billion of
common shares by December 31, 2004.

On July 15, 2003, the Board of Directors approved a resolution giving the
Company authorization to acquire an additional $1.0 billion of the Companys
common shares by December 31, 2006. The shares will be purchased in the open
market or through privately negotiated transactions. The timing will depend on
prevailing market conditions, alternative uses of capital and other factors.

7



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##### Table of Contents



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

Comprehensive Income and Accumulated Other Comprehensive Loss

The following table shows the computation of comprehensive income:

|                                                 |  |                |     |  |                |   |     |          |  |   |          |  |  |   |     |  
|------------------------------------------------ |  | -------------- | --- |  | -------------- | - | --- | -------- |  | - | -------- |  |  | - | --- | -
|                                                 |  | 13 Weeks Ended |     |  | 26 Weeks Ended
|                                                 |  |                |     |  |               
|millions                                         |  | June 28,       |     |  | June 29,       |   |     | June 28, |  |   | June 29,
|                                                 |  | 2003           |     |  | 2002           |   |     | 2003     |  |   | 2002    
|                                                 |  |                |     |  |                |   |     |          |  |   |         
|Net income                                       |  | $              | 309 |  |                | $ | 229 |          |  | $ | 501      |  |  | $ | 339
|Other comprehensive income:                      |  |                |     |  |                |   |     |          |  |   |          |  |  |   |    
|Amounts amortized into interest expense from OCI |  |                | 4   |  |                |   | 4   |          |  |   | 8        |  |  |   | 8  
|Change in fair value of cash flow hedges         |  |                |    |  |                |   | (3  | )        |  |   | 1        |  |  |   | (3  | )
|Foreign currency translation adjustments         |  |                | 50  |  |                |   | 29  |          |  |   | 91       |  |  |   | 30 
|                                                 |  |                |     |  |                |   |     |          |  |   |         
|Total accumulated other comprehensive income     |  |                | 54  |  |                |   | 30  |          |  |   | 100      |  |  |   | 35 
|                                                 |  |                |     |  |                |   |     |          |  |   |         
|Total comprehensive income                       |  | $              | 363 |  |                | $ | 259 |          |  | $ | 601      |  |  | $ | 374
|                                                 |  |                |     |  |                |   |     |          |  |   |         

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

June 28,
    
    
    June 29,
    
    
    December 28,millions
    
    2003
    
    
    2002
    
    
    2002Accumulated derivative loss
    
    $
    (192
    )
    
    $
    (205
    )
    
    $
    (201
    )Currency translation adjustments
    
    
    (53
    )
    
    
    (125
    )
    
    
    (144
    )Minimum pension liability, net of tax(1)
    
    
    (711
    )
    
    
    (465
    )
    
    
    (711
    )Accumulated other comprehensive loss
    
    $
    (956
    )
    
    $
    (795
    )
    
    $
    (1,056
    )




---

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

---

NOTE 7  EARNINGS PER SHARE

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

13 Weeks Ended
    
    
    26 Weeks Endedmillions, except per share data
    
    June 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,2003
    
    
    2002
    
    
    2003
    
    
    2002Net income(1)
    
    $
    309
    
    
    $
    229
    
    
    $
    501
    
    
    $
    339Average common shares outstanding
    
    
    296.4
    
    
    
    316.1
    
    
    
    307.1
    
    
    
    317.5Dilutive effect of stock options
    
    
    1.6
    
    
    
    5.0
    
    
    
    0.8
    
    
    
    5.0Average common and common equivalent shares outstanding
    
    
    298.0
    
    
    
    321.1
    
    
    
    307.9
    
    
    
    322.5Earnings per share
Basic
    
    $
    1.04
    
    
    $
    0.72
    
    
    $
    1.63
    
    
    $
    1.07Diluted
    
    $
    1.04
    
    
    $
    0.71
    
    
    $
    1.63
    
    
    $
    1.05




---

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

---

8



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##### Table of Contents



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

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

26 Weeks Endedmillions, except per share data
    
    June 28,
    
    
    June 29,2003
    
    
    2002Income before cumulative effect of accounting change(1)
    
    $
    501
    
    
    $
    547Average common shares outstanding
    
    
    307.1
    
    
    
    317.5Dilutive effect of stock options
    
    
    0.8
    
    
    
    5.0Average common and common equivalent shares outstanding
    
    
    307.9
    
    
    
    322.5Earnings per shareBasic
    
    $
    1.63
    
    
    $
    1.72Diluted
    
    $
    1.63
    
    
    $
    1.70




---

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

---

In each period, certain options were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive. At June 28,
2003, options to purchase 23.3 million common shares at prices ranging from $30
to $64 per share, and 23.5 million common shares at prices ranging from $27 to
$64 per share, were excluded from the 13 and 26 week 2003 calculations,
respectively. At June 29, 2002, options to purchase 3.6 million common shares
at prices ranging from $54 to $64 and $53 to $64 per share were excluded from
the 13 and 26 week 2002 calculations, respectively.

NOTE 8- STOCK BASED COMPENSATION

At June 28, 2003, the Company had various stock-based employee compensation
plans, which are described more fully in Note 11 of the Notes to Consolidated
Financial Statements in the Companys 2002 Annual Report on Form 10-K. The
Company accounts for those plans in accordance with Accounting Principles Board
Opinion No. 25, Accounting For Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as no options granted under those plans had an exercise price less than
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation.

13 Weeks Ended
    
    
    26 Weeks Endedmillions, except earnings per share
    
    June 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,2003
    
    
    2002
    
    
    2003
    
    
    2002Net income  as reported
    
    $
    309
    
    
    $
    229
    
    
    $
    501
    
    
    $
    339Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related taxes
    
    
    13
    
    
    
    14
    
    
    
    25
    
    
    
    29Net income  pro forma
    
    $
    296
    
    
    $
    215
    
    
    $
    476
    
    
    $
    310Earnings per share  basicAs reported
    
    $
    1.04
    
    
    $
    0.72
    
    
    $
    1.63
    
    
    $
    1.07Pro forma
    
    
    1.00
    
    
    
    0.68
    
    
    
    1.55
    
    
    
    0.98Earnings per share  dilutedAs reported
    
    $
    1.04
    
    
    $
    0.71
    
    
    $
    1.63
    
    
    $
    1.05Pro forma
    
    
    0.99
    
    
    
    0.67
    
    
    
    1.54
    
    
    
    0.96


9



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##### Table of Contents



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

NOTE 9  IMPLEMENTATION OF NEW ACCOUNTING STANDARD

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

The Financial Accounting Standard Boards Emerging Issues Task Force (EITF)
Issue No. 02-16, Accounting By A Customer (Including A Reseller) For Cash
Consideration Received From A Vendor addressed the accounting treatment for
vendor allowances. The adoption of EITF Issue No. 02-16 in the first quarter
of 2003 did not have a material impact on the Companys financial position or
results of operations.

NOTE 10  LEGAL PROCEEDINGS

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

On October 18, 2002, a lawsuit was filed in the United States District Court
for the Northern District of Illinois against the Company and certain current
and former officers alleging that certain public announcements by the Company
concerning its credit card business violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
Additional lawsuits of the same tenor followed; with one exception, which is
pending in the United States District Court for the Northern District of
California, these cases are pending in the Northern District of Illinois. The
plaintiffs purport to represent classes of shareholders who purchased the
Companys common shares between October 24, 2001 and October 17, 2002. A
similar lawsuit was filed on June 16, 2003, alleging similar claims as well as
claims under Section 11 of the Securities Act of 1933, against the Company,
certain officers, and Sears Roebuck Acceptance Corp. (SRAC). The plaintiffs
purport to represent a class of noteholders who purchased certain notes issued
by SRAC between June 21, 2002 and October 17, 2002. The Northern District of
Illinois shareholder actions have been consolidated and the Department of the
Treasury of the State of New Jersey has been appointed lead plaintiff for the
purported class. On June 16, 2003, plaintiffs in the shareholder action filed
a consolidated amended complaint. Defendants have filed a motion to dismiss
the complaint, and briefing on the motion is expected to be completed by early
September 2003.

On November 15, 2002, two lawsuits were filed in the United States District
Court for the Northern District of Illinois against the Company, certain
officers and directors, and alleged fiduciaries of Sears 401(k) Savings Plan
(the Plan), seeking damages and equitable relief under the Employee
Retirement Income Security Act (ERISA). The plaintiffs purport to represent
participants and beneficiaries of the Plan, and allege breaches of fiduciary
duties under ERISA in connection with the Plans investment in the Companys
common shares and alleged communications made to Plan participants regarding
the Companys financial condition. Additional lawsuits of the same tenor
followed. These actions have been consolidated into a single class action.
Plaintiffs filed a consolidated amended complaint on May 14, 2003. Defendants
have filed a motion to dismiss the complaint, however, a briefing schedule for
answering and reply papers has not yet been fixed.

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. After the
Company filed a motion to dismiss the complaint, the

10



---



##### Table of Contents



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

plaintiff was granted leave to amend the complaint. The Company has filed a
motion to dismiss the amended complaint, and briefing on the motion was
completed by August 4, 2003. Two similar suits were subsequently filed in the
Circuit Court of Cook County, Illinois, and a third was filed in the United
States District Court for the Northern District of Illinois. Motions have been
made to dismiss these actions, or, in the alternative, to stay them, pending
disposition of the action in New York. The Cook County, Illinois actions have
been stayed pending resolution of the motion to dismiss the amended complaint
in the New York action.

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

NOTE 11  FINANCIAL GUARANTEES

The Company had total financial guarantees of $75 million at June 28, 2003,
which primarily included a $70 million guaranty representing a commitment by
the Company to guarantee the performance of certain municipal bonds issued in
connection with the Companys headquarters building. This guaranty expires in
2012. In addition, the Company had additional guarantees of approximately $5
million in which the Company guaranteed leases of certain Company affiliates.

NOTE 12  SEGMENT DISCLOSURES

In response to guidance issued by the Securities and Exchange Commission
related to the use of non-GAAP financial measures, the Company revised its
segment presentation beginning in the first quarter of 2003 to include
noncomparable items within the segment to which it relates for all periods
presented. The following tables set forth operating results and total assets
by segment:

For the 13 weeks ended June 28, 2003

Retail and
    
    
    Credit and
    
    
    CorporateRelated
    
    
    Financial
    
    
    and
    
    
    Sears
    
    
    Consolidatedmillions
    
    Services
    
    
    Products
    
    
    Other
    
    
    Canada
    
    
    GAAPMerchandise sales and services
    
    $
    7,771
    
    
    $
    
    
    
    $
    100
    
    
    $
    980
    
    
    $
    8,851Credit and financial products revenues
    
    
    
    
    
    
    1,266
    
    
    
    
    
    
    
    79
    
    
    
    1,345Total revenues
    
    
    7,771
    
    
    
    1,266
    
    
    
    100
    
    
    
    1,059
    
    
    
    10,196Costs and expensesCost of sales, buying and occupancy
    
    
    5,662
    
    
    
    
    
    
    
    41
    
    
    
    699
    
    
    
    6,402Selling and administrative
    
    
    1,723
    
    
    
    215
    
    
    
    121
    
    
    
    268
    
    
    
    2,327Provision for uncollectible accounts
    
    
    
    
    
    
    446
    
    
    
    
    
    
    
    15
    
    
    
    461Depreciation and amortization
    
    
    187
    
    
    
    5
    
    
    
    10
    
    
    
    28
    
    
    
    230Interest
    
    
    16
    
    
    
    245
    
    
    
    
    
    
    
    26
    
    
    
    287Total costs and expenses
    
    
    7,588
    
    
    
    911
    
    
    
    172
    
    
    
    1,036
    
    
    
    9,707Operating income (loss)
    
    $
    183
    
    
    $
    355
    
    
    $
    (72
    )
    
    $
    23
    
    
    $
    489Total assets
    
    $
    12,818
    
    
    $
    31,723
    
    
    $
    2,090
    
    
    $
    3,742
    
    
    $
    50,373


11



---



##### Table of Contents



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

For the 13 weeks ended June 29, 2002

Retail and
    
    
    Credit and
    
    
    CorporateRelated
    
    
    Financial
    
    
    and
    
    
    Sears
    
    
    Consolidatedmillions
    
    Services
    
    
    Products
    
    
    Other
    
    
    Canada
    
    
    GAAPMerchandise sales and services
    
    $
    7,699
    
    
    $
    
    
    
    $
    92
    
    
    $
    962
    
    
    $
    8,753Credit and financial products revenues
    
    
    
    
    
    
    1,321
    
    
    
    
    
    
    
    68
    
    
    
    1,389Total revenues
    
    
    7,699
    
    
    
    1,321
    
    
    
    92
    
    
    
    1,030
    
    
    
    10,142Costs and expensesCost of sales, buying and occupancy
    
    
    5,602
    
    
    
    
    
    
    
    35
    
    
    
    705
    
    
    
    6,342Selling and administrative
    
    
    1,616
    
    
    
    264
    
    
    
    110
    
    
    
    246
    
    
    
    2,236Provision for uncollectible accounts
    
    
    
    
    
    
    693
    
    
    
    
    
    
    
    8
    
    
    
    701Depreciation and amortization
    
    
    176
    
    
    
    5
    
    
    
    16
    
    
    
    24
    
    
    
    221Interest
    
    
    5
    
    
    
    247
    
    
    
    
    
    
    
    24
    
    
    
    276Total costs and expenses
    
    
    7,399
    
    
    
    1,209
    
    
    
    161
    
    
    
    1,007
    
    
    
    9,776Operating income (loss)
    
    $
    300
    
    
    $
    112
    
    
    $
    (69
    )
    
    $
    23
    
    
    $
    366Total assets
    
    $
    12,685
    
    
    $
    28,454
    
    
    $
    2,280
    
    
    $
    3,325
    
    
    $
    46,744


For the 26 weeks ended June 28, 2003

Retail and
    
    
    Credit and
    
    
    CorporateRelated
    
    
    Financial
    
    
    and
    
    
    Sears
    
    
    Consolidatedmillions
    
    Services
    
    
    Products
    
    
    Other
    
    
    Canada
    
    
    GAAPMerchandise sales and services
    
    $
    14,415
    
    
    $
    
    
    
    $
    163
    
    
    $
    1,747
    
    
    $
    16,325Credit and financial products revenues
    
    
    
    
    
    
    2,596
    
    
    
    
    
    
    
    155
    
    
    
    2,751Total revenues
    
    
    14,415
    
    
    
    2,596
    
    
    
    163
    
    
    
    1,902
    
    
    
    19,076Costs and expensesCost of sales, buying and occupancy
    
    
    10,576
    
    
    
    
    
    
    
    65
    
    
    
    1,235
    
    
    
    11,876Selling and administrative
    
    
    3,284
    
    
    
    433
    
    
    
    222
    
    
    
    498
    
    
    
    4,437Provision for uncollectible accounts
    
    
    
    
    
    
    917
    
    
    
    
    
    
    
    27
    
    
    
    944Depreciation and amortization
    
    
    370
    
    
    
    9
    
    
    
    21
    
    
    
    55
    
    
    
    455Interest
    
    
    25
    
    
    
    487
    
    
    
    
    
    
    
    54
    
    
    
    566Total costs and expenses
    
    
    14,255
    
    
    
    1,846
    
    
    
    308
    
    
    
    1,869
    
    
    
    18,278Operating income (loss)
    
    $
    160
    
    
    $
    750
    
    
    $
    (145
    )
    
    $
    33
    
    
    $
    798Total assets
    
    $
    12,818
    
    
    $
    31,723
    
    
    $
    2,090
    
    
    $
    3,742
    
    
    $
    50,373


12



---



##### Table of Contents



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

For the 26 weeks ended June 29, 2002

Retail and
    
    
    Credit and
    
    
    CorporateRelated
    
    
    Financial
    
    
    and
    
    
    Sears
    
    
    Consolidatedmillions
    
    Services
    
    
    Products
    
    
    Other
    
    
    Canada
    
    
    GAAPMerchandise sales and services
    
    $
    14,467
    
    
    $
    
    
    
    $
    150
    
    
    $
    1,783
    
    
    $
    16,400Credit and financial products revenues
    
    
    
    
    
    
    2,639
    
    
    
    
    
    
    
    140
    
    
    
    2,779Total revenues
    
    
    14,467
    
    
    
    2,639
    
    
    
    150
    
    
    
    1,923
    
    
    
    19,179Costs and expensesCost of sales, buying and occupancy
    
    
    10,607
    
    
    
    
    
    
    
    56
    
    
    
    1,305
    
    
    
    11,968Selling and administrative
    
    
    3,128
    
    
    
    492
    
    
    
    204
    
    
    
    473
    
    
    
    4,297Provision for uncollectible accounts
    
    
    
    
    
    
    1,064
    
    
    
    
    
    
    
    18
    
    
    
    1,082Depreciation and amortization
    
    
    344
    
    
    
    10
    
    
    
    28
    
    
    
    49
    
    
    
    431Interest
    
    
    1
    
    
    
    518
    
    
    
    
    
    
    
    49
    
    
    
    568Special charges and impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    111Total costs and expenses
    
    
    14,080
    
    
    
    2,084
    
    
    
    288
    
    
    
    2,005
    
    
    
    18,457Operating income (loss)
    
    $
    387
    
    
    $
    555
    
    
    $
    (138
    )
    
    $
    (82
    )
    
    $
    722Total assets
    
    $
    12,685
    
    
    $
    28,454
    
    
    $
    2,280
    
    
    $
    3,325
    
    
    $
    46,744


NOTE 13  SUBSEQUENT EVENTS

On July 15, 2003, the Company announced it has entered into a definitive
agreement to sell substantially all the assets and liabilities primarily related to its Credit and Financial Products business to Citicorp for
approximately $32 billion, representing approximately a 10 percent premium to
the Companys $29 billion gross domestic credit card receivables portfolio. As
part of the transaction, the Company and Citibank (USA) N.A. will also enter
into a long-term marketing and servicing alliance with an initial term of 10
years, with an option to renew. The transaction has been approved by the Board
of Directors and is expected to close by year-end 2003, subject to customary
regulatory review and closing conditions. The carrying value of
domestic credit card receivables and securitized debt which will be sold as part of the transaction
were approximately $29 billion and $11 billion, respectively, at June 28, 2003.
The Company expects to receive proceeds of approximately $32 billion, which
includes the assumption of approximately $11 billion of
securitized debt and cash proceeds
of approximately $21 billion. The cash proceeds are expected to be utilized to
retire debt, return cash to the Companys shareholders and for general
corporate purposes. Upon completion of the transaction, substantially all of
the approximately 8,500 employees of the Companys Credit and Financial
Products business will become employees of Citicorp. Citicorp will also assume
ownership of substantially all of the business operating facilities.

Under the long-term marketing and servicing alliance, Citibank (USA) N.A. will
provide credit and customer service benefits to the Companys proprietary and
Gold MasterCard holders. As part of the alliance, the Company expects to
receive annual performance payments from Citibank (USA) N.A. based upon the
level of new account and credit sales generation activities as well as other
activities. In addition, Citibank (USA) N.A. will continue to support the
Companys current zero percent financing program.

On August 1, 2003, Sears Roebuck Acceptance Corp., a wholly owned finance
subsidiary of the Company, announced that it had elected to call for redemption
of the entire outstanding principal amount of its $250 million 7% notes due
March 1, 2038. The redemption date is September 1, 2003.

13



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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 June 28, 2003 and June 29, 2002, and the related
Condensed Consolidated Statements of Income for the 13-week and 26-week periods
ended June 28, 2003 and June 29, 2002 and the Condensed Consolidated Statements
of Cash Flows for the 26 week periods ended June 28, 2003 and June 29, 2002.
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 28, 2002, 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 28, 2003, we
expressed an unqualified opinion (which includes an explanatory paragraph
relating to the adoption of new accounting standards) on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying Condensed Consolidated Balance Sheet as of December 28, 2002 is
fairly stated, in all material respects, in relation to the Consolidated
Balance Sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Chicago, Illinois
August 6, 2003

14



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002




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

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


    

Retail
and Related Services consisting of:
-       Full-line Stores (includes operations
of Sears Auto        Centers and online revenues
of Sears.com)
    
    
    
    Credit and Financial Products
includes domestic credit
card operations and related
financial product offerings
(credit protection and
insurance products)-
    
    Specialty Stores
(Dealer Stores, Hardware Stores,
    
    
    
    Corporate and
Other includes:National Tire & Battery,
The Great Indoors, Commercial Sales and Outlet
stores)
    
    
    
    -
    
    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-
    
    Direct to Customer (includes Lands End
online and catalog operations as well as
results of operations for Lands End
retail stores; also includes direct
marketing of goods, services and
memberships, through specialty catalogs
and other direct channels)
    
    
    
    -
    
    Home improvement services
(primarily siding and windows
through Sears Home
Improvement Services)-
    
    Product Repair Services (includes
product repair, service contract
protection and installation services for
all major brands of home products; also sells
and services residential heating
and cooling systems)

    
    
    
    Sears Canada conducts
similar retail, credit, and
corporate operations in
Canada through Sears Canada
Inc. (Sears Canada), a
consolidated, 54.4% owned
subsidiary of Sears.


SALE OF DOMESTIC CREDIT AND FINANCIAL PRODUCTS BUSINESS

On July 15, 2003, the Company announced it has entered into a definitive
agreement to sell substantially all the assets and liabilities primarily related to its Credit and Financial Products business to Citicorp for
approximately $32 billion, representing approximately a 10 percent premium to
the Companys $29 billion gross domestic credit card receivables portfolio. As
part of the transaction, the Company and Citibank (USA) N.A. will also enter
into a long-term marketing and servicing alliance with an initial term of 10
years, with an option to renew. The transaction has been approved by the Board
of Directors and is expected to close by year-end 2003, subject to customary
regulatory review and closing conditions. The carrying value of
domestic credit card receivables and securitized debt which will be sold as part of this transaction
were approximately $29 billion and $11 billion, respectively, at June 28, 2003.
The Company expects to receive proceeds of approximately $32 billion, which
includes the assumption of approximately $11 billion of
securitized debt and cash proceeds
of approximately $21 billion. The cash proceeds are expected to be utilized to
retire debt, return cash to the Companys shareholders and for general
corporate purposes. Upon completion of the transaction, substantially all of
the approximately 8,500 employees of the Companys Credit and Financial
Products business will become employees of Citicorp. Citicorp will also assume
ownership of substantially all of the business operating facilities.

Under the long-term marketing and servicing alliance, Citibank (USA) N.A. will
provide credit and customer service benefits to the Companys proprietary and
Gold MasterCard holders. As part of the alliance, the Company expects to
receive annual performance payments from Citibank (USA) N.A. based upon the
level of new account and credit sales generation activities as well as other
activities. In addition, Citibank (USA) N.A. will continue to support the
Companys current zero percent financing program.

15



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

CONSOLIDATED OPERATIONS

Total revenuesfor the 13 and 26 weeks ended June 28, 2003 were $10.2 billion
and $19.1 billion, respectively, compared to $10.1 billion and $19.2 billion
for the 13 and 26 week periods ended June 29, 2002, respectively.



| |  |  | Revenues from merchandise sales and serviceswere $8.9 billion for
the 13 weeks ended June 28, 2003, an increase of 1.1% from the
comparable prior year period. This increase is driven by the addition
of the Lands End direct to customer business, which contributed $336
million of revenue in the second quarter of 2003, partially offset by a
decline in retail store revenues. Revenues in Full-line Stores were
$5.5 billion in the second quarter of 2003, a decrease of 2.4% from the
comparable 2002 period driven by a 3.1% decline in comparable store
sales. Lower store sales in the second quarter of 2003 were
attributable to the continued weakness in the retail environment.
Specialty Stores revenues were $1.4 billion, a decrease of 5.1% from
the prior year. Direct to Customer revenues increased to $373 million
in the second quarter of 2003, primarily due to the addition of Lands
End, which was acquired in June 2002. For the 26 weeks ended June 28,
2003, merchandise sales and services revenues were $16.3 billion
compared to $16.4 billion for the comparable prior year period. Again,
this decrease is due to the decline in retail store sales, which posted
a comparable store sales decrease of 5.0% for the first half of 2003,
partially offset by revenues of $669 million generated by the Lands
End direct to customer business.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credit and financial products revenueswere $1.3 billion for the 13
weeks ended June 28, 2003, a decrease of 3.2% from the comparable prior
year period. For the 26 weeks ended June 29, 2003, credit and
financial products revenues were $2.75 billion compared to $2.78
billion for the comparable prior year period. The decrease in credit
revenues in the second quarter of 2003 was driven by a decline in the
yield, partially offset by an increase in average receivable balances.
The lower yield is attributable to reduced finance charges on credit
products due in part to lower late fee revenue and a lower interest
rate environment, and an increase in the size of the Sears Gold
MasterCard (MasterCard) portfolio, which has a lower yield than the
proprietary card.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Costs and expenseswere $9.7 billion and $18.3 billion for the 13 and 26 weeks
ended June 28, 2003, respectively, compared with $9.8 billion and $18.5
billion, respectively, for the comparable prior year periods.



| |  |  | Cost of sales, buying and occupancyas a percentage of merchandise
sales and services was 72.3% in the second quarter of 2003, compared to
72.5% in the second quarter of 2002. Correspondingly, gross margin
rates were 27.7% and 27.5% for the 13 weeks ended June 28, 2003 and
June 29, 2002, respectively. The improvement in the gross margin rate
was primarily due to a reduction in promotional
activity within Sears Canada, as well as improvements in vendor
sourcing and the inclusion of Lands Ends results in the second
quarter of 2003, whose business has a higher gross margin rate. These
benefits were partially offset by a significant increase in domestic
promotional activity during the quarter due to cooler spring weather
and a relatively weak and competitive retail environment. Gross margin
rates for the 26 weeks ended June 28, 2003 and June 29, 2002 were 27.3%
and 27.0%, respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Selling and administrativeexpenses as a percentage of total
revenues were 22.8% in the second quarter of 2003, compared to 22.0% in
the comparable prior year period. This increase was due to the decline
in revenues, particularly among domestic retail stores, as well as the
inclusion of Lands End, which has a higher expense ratio, partially
offset by the Companys ongoing productivity initiatives. In addition,
second quarter 2003 included a pretax charge of $28 million for
severance costs for approximately 650 associates in connection with the
Companys productivity initiatives. The Company expects to realize
annual savings of approximately $59 million as a result of these
actions. For the 26 weeks ended June 28, 2003 and June 29, 2002,
selling and administrative expenses as a percentage of total revenues
were 23.3% and 22.4%, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The provision for uncollectible accounts(provision) was $461
million and $944 million, respectively, for the 13 and 26 weeks ended
June 28, 2003. This compares to $701 million and $1.1 billion for the
13
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002



| |  |  | and 26 weeks ended June 29, 2002. The variance in the 2003 provision to the 2002 provision is primarily due to the $300 million pretax charge taken in the second
quarter of 2002, which reflects the Companys decision to refine its
methodology for determining its allowance for uncollectible accounts to
include the uncollectible portion of current accounts and credit card fee
balances. In addition, the current year provision benefited from a $93
million gain related to the sale of approximately $2.5 billion of
previously charged-off credit card accounts. This sale generated pretax
cash proceeds of $178 million.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interestexpense was $287 million for the 13 weeks ended June 28,
2003 compared to $276 million in the comparable prior year period. The
slight increase is primarily due to higher debt levels to support
receivables growth and partially pre-fund 2003 debt maturities. This
increase was partially offset by lower interest costs in a favorable
interest rate environment. Interest expense for the 26 weeks ended
June 28, 2003 was $566 million compared to $568 million in the
comparable prior year period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Special charges and impairmentsreflect costs incurred from
strategic actions implemented by the Company to restructure its
operations and costs due to asset impairments. During the first
quarter of 2002, Sears Canada converted its seven stores operating
under the Eatons banner to Sears Canada stores, resulting in severance,
asset impairment and other exit costs amounting to $111 million. This
restructuring enabled Sears Canada to better leverage its buying and
advertising efforts, and Sears Canada brand equity.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other incomewas $13 million and $14 million, respectively, for the 13 and 26
weeks ended June 28, 2003, as compared to $10 million and $88 million for the
comparable prior year periods. The decrease in the 2003 year-to-date other
income was primarily due to a $71 million pretax gain on the sale of a portion
of the Companys holdings in Advance Auto Parts (AAP) in the first quarter of
2002.

Income taxesas a percentage of income before taxes, minority interest and
cumulative effect of change in accounting principle were 37.1% in the second
quarter of 2003, compared with 37.2% in the second quarter of 2002. The
effective income tax rate for the 26 weeks ended June 28, 2003 was 37.1%
compared to 35.6% for the comparable prior year period. The increase in the
effective income tax rate in the first half of 2003 was attributable to
favorability in the first quarter of 2002 due to the lower tax rate on the sale
of a portion of the Companys investment in AAP, as well as a lower effective
tax rate for Sears Canada in the prior year as a result of the special charge
taken related to the conversion of the Eatons stores.

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

Net income was $309 million and $229 million for the 13 weeks ended June 28,
2003 and June 29, 2002, respectively. For the 26 weeks ended June 28, 2003 and
June 29, 2002, net income was $501 million and $339 million, respectively. As
noted above, the Companys results of operations for the second quarter of 2003
were impacted by two significant items, the gain on the sale of previously
charged-off credit card accounts and severance costs related to the Companys
ongoing productivity initiatives. In addition, the Companys first and second
quarter 2002 results were affected by items such as the adoption of new
accounting standards, special charges, a gain on the sale of investments and a
change in accounting estimate related to the refinement of the Companys method
for determining its allowance for uncollectible accounts. In aggregate, these
items increased net income for both the 13 and 26 week periods ended June 28,
2003 by $41 million, and reduced net income for the 13 and 26 weeks ended June
29, 2002 by $191 million and $381 million, respectively.

17



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

Due to holiday buying patterns, merchandise sales are typically higher in the
fourth quarter than in other quarterly periods, and a disproportionate share of
operating income is typically earned in the fourth quarter. This business
seasonality results in performance for the 13 and 26 weeks ended June 28, 2003
which is not necessarily indicative of performance for the balance of the year.

SEGMENT OPERATIONS

The Company is organized into four principal business segments  Retail and
Related Services, Credit and Financial Products, Corporate and Other, and Sears
Canada. Following is a discussion of results of operations by business
segment.

Retail and Related Services

Retail and Related Services results and key statistics were as follows:

13 Weeks Ended
    
    
    26 Weeks Endedmillions, except number of stores
    
    June 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,2003
    
    
    2002
    
    
    2003
    
    
    2002Full-line Stores
    
    $
    5,462
    
    
    $
    5,599
    
    
    $
    10,113
    
    
    $
    10,701Specialty Stores
    
    
    1,366
    
    
    
    1,440
    
    
    
    2,489
    
    
    
    2,558Direct to Customer
    
    
    373
    
    
    
    70
    
    
    
    741
    
    
    
    112Product Repair Services
    
    
    570
    
    
    
    590
    
    
    
    1,072
    
    
    
    1,096Total Retail and Related Services revenues
    
    
    7,771
    
    
    
    7,699
    
    
    
    14,415
    
    
    
    14,467Cost of sales, buying and occupancy
    
    
    5,662
    
    
    
    5,602
    
    
    
    10,576
    
    
    
    10,607Selling and administrative
    
    
    1,723
    
    
    
    1,616
    
    
    
    3,284
    
    
    
    3,128Depreciation and amortization
    
    
    187
    
    
    
    176
    
    
    
    370
    
    
    
    344Interest
    
    
    16
    
    
    
    5
    
    
    
    25
    
    
    
    1Total costs and expenses
    
    
    7,588
    
    
    
    7,399
    
    
    
    14,255
    
    
    
    14,080Operating income
    
    $
    183
    
    
    $
    300
    
    
    $
    160
    
    
    $
    387Number of:Full-line Stores
    
    
    
    
    
    
    
    
    
    
    869
    
    
    
    870Specialty Stores
    
    
    
    
    
    
    
    
    
    
    1,307
    
    
    
    1,295Lands End Retail Stores
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    15Total Retail Stores
    
    
    
    
    
    
    
    
    
    
    2,191
    
    
    
    2,180Comparable store sales percentage (decrease) increase(1)Hardlines
    
    
    -2.1
    %
    
    
    -1.0
    %
    
    
    -3.4
    %
    
    
    -1.7
    %Softlines
    
    
    -4.5
    %
    
    
    -15.1
    %
    
    
    -8.4
    %
    
    
    -12.0
    %Full-line Stores
    
    
    -3.1
    %
    
    
    -5.8
    %
    
    
    -5.2
    %
    
    
    -4.9
    %Specialty Stores
    
    
    -5.1
    %
    
    
    2.4
    %
    
    
    -4.1
    %
    
    
    2.3
    %Total
    
    
    -3.5
    %
    
    
    -4.6
    %
    
    
    -5.0
    %
    
    
    -3.8
    %




---

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

---

Retail and Related Services revenues increased 0.9% in the second quarter of
2003, primarily due to the addition of Lands End in June 2002 which offset a
3.5% decline in comparable store sales for the quarter. Retail and Related
Services revenues for the 26 weeks ended June 28, 2003 and June 29, 2002 were
$14.4 billion and $14.5 billion, respectively, driven by a 5.0% decline in
comparable store sales partially offset by the addition of the Lands End
direct to customer business.

18



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

Full-line Stores revenues decreased 2.4% for the 13 weeks ended June 28, 2003
from the comparable prior year period and comparable store sales declined 3.1%.
In Hardlines, comparable store sales declined 2.1% in the quarter, as sales of
home electronics and home office continue to be impacted by competition and
price deflation. Home appliance sales were relatively flat for the quarter
with a significant decline in air conditioner sales negatively impacting sales
by 160 basis points. While home appliance sales were down during the first
half of the quarter, sales rebounded during the latter half of the quarter with
sales trending positive. In June 2003, the Company announced a re-launch
initiative for the home appliance business which is focused on capturing market
share and accelerating growth of this business. This comprehensive program is
focused on enhanced value, assortment and customer service. The majority of
the elements for this initiative are expected to be implemented by the end of
the third quarter of 2003. Lawn and garden sales remain a key strength within
Hardlines with comparable store sales increasing $44 million, or 6.1%, for the
second quarter. In Softlines, comparable store sales declined 4.5% in the
second quarter of 2003 which reflects improvements from previous trends in
various Softlines categories such as womens ready to wear and childrens
apparel. The Company expects improving comparable store sales trends in its
Full-line Stores in the second half of 2003, due in part to the expected
positive impacts of the continued roll-out of Lands End.

Specialty Stores revenues decreased 5.1% in the second quarter of 2003 compared
with the prior year period due to comparable store sales declines across most
of the specialty store formats. This decrease was partially offset by the
addition of three new The Great Indoors stores and a comparable store sales
increase of 0.3% for Dealer stores. Specialty Stores revenues for the 26 weeks
ended June 28, 2003 and June 29, 2002 were $2.5 billion and $2.6 billion,
respectively. As stated above, the Company has opened three The Great Indoors
stores since the second quarter of 2002, including a new store opening in the
second quarter of 2003. To date, the financial performance of The Great
Indoors stores has not met the expectations of the Company. As a result, the
Company has initiated a review to determine actions that would improve the
profitability and productivity of the format. Such actions may include
restructuring of The Great Indoors format and/or store closures. The Company
expects to conclude its review in the second half of 2003.

Direct to Customer revenues for the 13 and 26 weeks ended June 28, 2003
increased over the comparable prior year period primarily due to the
acquisition of Lands End, which contributed $336 million and $669 million in
revenues in each respective period. Product Repair Services revenues decreased
slightly for the 13 and 26 week periods ended June 28, 2003 compared to the
prior year periods. This decrease is primarily driven by a decline in revenues
from the cooling and heating business as a result of the cooler spring and
summer weather across most of the U.S.

Retail and Related Services gross margin as a percentage of Retail and Related
Services revenues for the 13 weeks ended June 28, 2003 decreased 10 basis
points compared to the prior year. This decrease was due to a significant
increase in promotional activity in a highly competitive and weak retail
environment, largely offset by improvements in sourcing, as well as the
inclusion of Lands End direct to customer business, which has a higher margin
rate. The Company expects the higher level of promotional activity to continue
in the second half of 2003 due to the competitive environment. In addition,
higher levels of apparel clearance inventories than originally planned are
expected to put pressure on margins in the third quarter of 2003. For the 26
week period ended June 28, 2003, the gross margin rate decreased 10 basis
points compared to the comparable prior year period.

Retail and Related Services selling and administrative expense as a percentage
of Retail and Related Services revenues increased 120 basis points in the
second quarter of 2003 compared to the prior year. While the Company continues
to recognize expense savings from its productivity initiatives, selling and
administrative expense leverage was unfavorably affected by decreases in retail
store revenues and the inclusion of Lands End, which has a higher expense
ratio. In addition, second quarter 2003 selling and administrative expense
included a $16 million charge for severance costs related to continued
productivity initiatives. For the 26 weeks ended June 28, 2003, selling and
administrative expense as a percentage of Retail and Related Services revenues
also increased 120 basis points from the prior year.

Retail and Related Services reported operating income of $183 million for the
13 weeks ended June 28, 2003, compared to $300 million in the second quarter of
2002, as a result of lower store sales, increased promotional

19



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

activity and increased operating expense. For the 26 weeks ended June 28,
2003, Retail and Related Services reported operating income of $160 million
compared to $387 million in the comparable prior year period.

Credit and Financial Products

Credit and Financial Products results were as follows:

13 Weeks Ended
    
    
    26 Weeks Endedmillions
    
    June 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,2003
    
    
    2002
    
    
    2003
    
    
    2002Credit and Financial Products revenues
    
    $
    1,266
    
    
    $
    1,321
    
    
    $
    2,596
    
    
    $
    2,639Selling and administrative
    
    
    215
    
    
    
    264
    
    
    
    433
    
    
    
    492Provision for uncollectible accounts
    
    
    446
    
    
    
    693
    
    
    
    917
    
    
    
    1,064Depreciation and amortization
    
    
    5
    
    
    
    5
    
    
    
    9
    
    
    
    10Interest
    
    
    245
    
    
    
    247
    
    
    
    487
    
    
    
    518Total costs and expenses
    
    
    911
    
    
    
    1,209
    
    
    
    1,846
    
    
    
    2,084Operating income
    
    $
    355
    
    
    $
    112
    
    
    $
    750
    
    
    $
    555


A summary of Credit information is as follows:

13 Weeks Ended
    
    
    26 Weeks EndedJune 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,2003
    
    
    2002
    
    
    2003
    
    
    2002Credit share(1)
    
    
    42.4
    %
    
    
    44.8
    %
    
    
    42.1
    %
    
    
    44.3
    %Average account balance as of June 28, 2003
and June 29, 2002:Sears Card
    
    
    
    
    
    
    
    
    
    $
    1,217
    
    
    $
    1,197MasterCard
    
    
    
    
    
    
    
    
    
    $
    1,700
    
    
    $
    1,494Total portfolio
    
    
    
    
    
    
    
    
    
    $
    1,390
    
    
    $
    1,274Portfolio yield:Sears Card
    
    
    17.91
    %
    
    
    19.40
    %
    
    
    18.20
    %
    
    
    19.67
    %MasterCard
    
    
    14.77
    %
    
    
    15.97
    %
    
    
    14.70
    %
    
    
    14.86
    %Total portfolio
    
    
    16.56
    %
    
    
    18.47
    %
    
    
    16.73
    %
    
    
    18.51
    %




---



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

---



13 Weeks Ended
    
    
    
    
    
    
    
    
    
    
    26 Weeks Endedmillions
    
    June 28,
    
    
    % of
    
    
    June 29,
    
    
    % of
    
    
    June 28,
    
    
    % of
    
    
    June 29,
    
    
    % of2003
    
    
    Total
    
    
    2002
    
    
    Total
    
    
    2003
    
    
    Total
    
    
    2002
    
    
    TotalAverage credit card receivables:Sears Card
    
    $
    16,784
    
    
    
    57.1
    %
    
    $
    20,094
    
    
    
    72.8
    %
    
    $
    17,320
    
    
    
    58.1
    %
    
    $
    20,878
    
    
    
    75.9
    %MasterCard
    
    
    12,614
    
    
    
    42.9
    %
    
    
    7,519
    
    
    
    27.2
    %
    
    
    12,511
    
    
    
    41.9
    %
    
    
    6,634
    
    
    
    24.1
    %Total
    
    $
    29,398
    
    
    
    100.0
    %
    
    $
    27,613
    
    
    
    100.0
    %
    
    $
    29,831
    
    
    
    100.0
    %
    
    $
    27,512
    
    
    
    100.0
    %Ending credit card receivables:Sears Card
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,501
    
    
    
    56.0
    %
    
    $
    19,679
    
    
    
    69.7
    %MasterCard
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,942
    
    
    
    44.0
    %
    
    
    8,567
    
    
    
    30.3
    %Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    29,443
    
    
    
    100.0
    %
    
    $
    28,246
    
    
    
    100.0
    %


For the 13 weeks ended June 28, 2003, Credit and Financial Products revenues
decreased 4.2% to $1.27 billion compared to the prior year, as a 6.5% increase
in average balances was more than offset by a 191 basis point

20



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

decline in portfolio yield. The lower yield is primarily attributable to the
lower interest rate environment, lower late fee revenue and a shift of the
portfolio composition from an average of approximately 27% MasterCard account
balances in the second quarter of 2002 to approximately 43% in the second
quarter of 2003. The MasterCard product generally carries a risk-based finance
charge rate that typically is lower than the finance charge rate on the Sears
Card. In addition, MasterCard accountholders typically repay their account
balances more quickly, which reduces the finance charge revenues generated on
the portfolio. The increase in average balances per card was primarily
attributable to the growth of the MasterCard portfolio, which generally carries
a higher average credit line and outstanding balances, and has greater utility
due to its global acceptance and cash access features. Credit and Financial
Products revenues for the 26 weeks ended June 28, 2003 and June 29, 2002 were
$2.60 billion and $2.64 billion, respectively.

Interest expense for the second quarter of 2003 was in line with the prior year
as lower funding costs in a lower interest rate environment were offset by
higher funding levels to support receivables growth. As of June 28, 2003 and
June 29, 2002, approximately 78% and 83%, respectively, of the Companys
funding portfolio was variable rate debt. The Company allocates domestic debt
and interest expense to its Credit and Financial Products segment, assuming
that the segment would be capitalized at a 9 to 1 debt to equity ratio.

Selling and administrative expense decreased $49 million, or 18.6%, in the
second quarter of 2003 from the prior year. The decline is primarily due to
decreased operating costs reflective of ongoing productivity efforts, as well
as increased reimbursement from the Retail and Related Services segment for
zero percent financing. Selling and administrative expenses for the 26 weeks
ended June 28, 2003, decreased $59 million, or 12.0%, from the comparable prior
year period.

The provision for uncollectible accounts was $446 million in the second quarter
of 2003 compared to $693 million in the prior year quarter, a variance of $247
million. This variance is primarily due to the $300 million pretax charge
taken in the prior year quarter as a result of the Companys decision to refine
its methodology for determining the allowance for uncollectible accounts to
include the uncollectible portion of current accounts and credit card fee
balances. In addition, the current year provision benefited from a $93 million
gain related to the sale of approximately $2.5 billion of previously
charged-off credit card accounts. This benefit was offset by higher
uncollectible losses as a result of higher balances, the seasoning of the
MasterCard portfolio and an increase in bankruptcies. See Discussion of
Portfolio Quality below.

Credit and Financial Products operating income of $355 million in the second
quarter of 2003 increased $243 million over the prior year quarter. However,
as previously discussed, both 2002 and 2003 results were impacted by
significant items. In the second quarter of 2002, the Company recorded a $300
million pretax charge related to the refinement of its method for determining
the allowance for uncollectible accounts. In the second quarter of 2003, the
Company recognized a $93 million pretax gain resulting from the sale of
previously charged-off receivables. Operating income for the 26 weeks ended
June 28, 2003 increased $195 million from the prior year to $750 million.

Discussion of Portfolio Quality

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

Portfolio growth since the second quarter of 2002 is primarily attributable to
substitution programs conducted in 2002 in which the Company substituted Sears
Card accounts with MasterCard accounts. As of the end of the second quarters
of 2003 and 2002, MasterCard accounts represented approximately 44% and 30%,
respectively, of total ending credit card receivables. The Company expects
that the MasterCard percentages will grow slightly in 2003, as continued growth
in MasterCard credit card receivables will offset expected declines in Sears
Card

21



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

receivables. The age of the MasterCard portfolio is an important factor
related to the delinquency and loss levels because delinquencies and
charge-offs typically increase as young portfolios mature (referred to as
seasoning). Consequently, as the MasterCard portfolio matures, the
delinquency and charge-off rates are expected to increase in 2003. The Company
expects the total portfolio net-charge-offs to average 6.5% to 7.0% in 2003.

The average account balance for the MasterCard product has increased from the
prior year, from $1,494 in the second quarter of 2002 to $1,700 in the second
quarter of 2003. Such balance growth is due to the seasoning of the portfolio
and the expanded utility of the product, as customers can use the MasterCard at
other merchants, and as a result of its balance transfer and cash access
features. While the expanded utility and higher balances have generated
additional revenues, the Company has experienced an increase in charge-off
rates. The increase in charge-offs is primarily related to the continuing weak
economic environment, the seasoning of the MasterCard portfolio and increased
bankruptcy filing levels.

During the second quarter of 2003, the Company continued to adjust the
risk-based authorization criteria across a number of activities including
balance transfer and convenience check strategies and MasterCard substitution
thresholds. The Company has also revoked lines of credit and accelerated
credit line decreases on certain delinquent and/or inactive accounts.

Delinquencies

The entire balance of an account, including any balances related to
zero-percent sales in that account, is considered delinquent if the minimum
payment is not received by the payment due date. The aging methodology is
based on the number of completed billing cycles during which a customer has
failed to make a required payment. Delinquencies not only have the potential
to reduce earnings by increasing the allowance for uncollectible accounts and
related provision expense, but they also result in additional operating costs
dedicated to resolving the delinquencies. The Company contractually charges
off accounts at 240 days, whereas most bank card issuers charge off at 180
days. As a result, the Companys delinquency rates are not directly comparable
to participants in the bank card industry. The Companys 60-plus day
delinquency rates are presented in the chart below:

(GRAPH)

22



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

During the second quarter of 2003, 60-plus day delinquency rates for the
portfolio increased by 54 basis points compared to the second quarter of 2002
while the 60-plus day delinquency rate for the MasterCard portfolio increased
239 basis points over the prior year to 4.96% at June 28, 2003. The 60-plus
day delinquency rate for the
Sears Card portfolio increased 58 basis points to 9.33% at June 28, 2003. The
Sears Card delinquency rate increase reflects the effects of the soft economic
environment. The increase in the MasterCard portfolio delinquency rate
reflects the seasoning of the portfolio as well as the soft economic
environment. The decline in the 60-plus day delinquency rate since the end of
2002 reflects a typical seasonal decline in delinquencies.

Charge-offs

Net charge-offs consist of the principal amount of losses (excluding accrued
finance charges and credit card fees) less current period recoveries. The
Company charges off credit card receivable balances automatically when a
customers number of missed monthly payments outstanding reaches eight.
Accounts may be charged off sooner in the event of customer bankruptcy. The
Company has a re-aging policy to cure delinquent accounts when the customer has
demonstrated a pattern of meeting payment requirements by making two
consecutive minimum monthly payments. Accounts cannot be re-aged more than
once in a twelve-month period. For accounts more than 150 days past due, the
Company provides a workout or renewal program to certain qualified
accountholders. Accounts in a current workout program are considered current
upon receipt of the first agreed upon payment and remain current as long as
they abide by the terms of the program.

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

13 Weeks Ended
    
    
    26 Weeks Endedmillions
    
    June 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,2003
    
    
    2002
    
    
    2003
    
    
    2002Gross charge-offsSears Card
    
    $
    394
    
    
    $
    410
    
    
    $
    802
    
    
    
    856MasterCard
    
    
    213
    
    
    
    58
    
    
    
    377
    
    
    
    97Total
    
    
    607
    
    
    
    468
    
    
    
    1,179
    
    
    
    953RecoveriesSears Card
    
    
    (253
    )
    
    
    (99
    )
    
    
    (357
    )
    
    
    (212
    )MasterCard
    
    
    (18
    )
    
    
    (2
    )
    
    
    (25
    )
    
    
    (3
    )Total
    
    
    (271
    )
    
    
    (101
    )
    
    
    (382
    )
    
    
    (215
    )Net charge-offsSears Card
    
    
    141
    
    
    
    311
    
    
    
    445
    
    
    
    644MasterCard
    
    
    195
    
    
    
    56
    
    
    
    352
    
    
    
    94Total
    
    $
    336
    
    
    $
    367
    
    
    $
    797
    
    
    
    738Bankruptcy filings
    
    $
    289
    
    
    $
    224
    
    
    $
    544
    
    
    
    423Reported net charge-offs as a % of average receivables:Sears Card
    
    
    3.37
    %
    
    
    6.20
    %
    
    
    5.15
    %
    
    
    6.17
    %MasterCard
    
    
    6.16
    %
    
    
    2.99
    %
    
    
    5.61
    %
    
    
    2.83
    %Total
    
    
    4.57
    %
    
    
    5.32
    %
    
    
    5.34
    %
    
    
    5.37
    %Net charge-offs as a % of average receivables (without
consideration of the sale of previously
charged-off accounts):Sears Card
    
    
    6.89
    %
    
    
    6.20
    %
    
    
    6.85
    %
    
    
    6.17
    %MasterCard
    
    
    6.48
    %
    
    
    2.99
    %
    
    
    5.77
    %
    
    
    2.83
    %Total
    
    
    6.71
    %
    
    
    5.32
    %
    
    
    6.40
    %
    
    
    5.37
    %


In the second quarter of 2003, the Company sold approximately $2.5 billion of
previously charged-off credit card receivable accounts, which generated cash
proceeds of $178 million. The proceeds represent recoveries and are

23



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

reflected as a reduction to charge-offs. As a result of the sale, the Company
realized a $93 million gain, which was recorded as a reduction to provision
expense. The Company also contracted to sell a majority of its future
charged-off accounts at contractually agreed recovery rates.

Net charge-offs as a percent of average balances, without consideration of the
sale of previously charged-off receivables noted earlier, increased to 6.71% in
the second quarter of 2003, up 139 basis points from the comparable prior year
period. Due to the significance of this sale transaction, management believes
it is helpful to consider the net charge-off percentage without consideration
of the sale of previously charged-off receivables. The MasterCard net
charge-off rate increase reflects the seasoning of the portfolio, increased
bankruptcies and higher average credit lines on the MasterCard accounts. The
net charge-off rate for both portfolios was also affected by the weak economic
environment as both contractual and bankruptcy charge-offs increased.
Bankruptcy filing dollars increased $65 million in the second quarter of 2003
over prior year levels. The increase in bankruptcy filing dollars was
primarily due to an increase in the number of MasterCard bankruptcy filings and
due to MasterCard accounts having higher average credit lines and account
balances. The dollar value of the bankruptcy filings is expected to increase
through 2003, as the MasterCard portfolio continues to mature. The Company
expects total portfolio net charge-offs to average 7.4% to 7.8% in the
remainder of 2003, with net charge-offs for full-year 2003 averaging 6.5% to
7.0%. The Companys net charge-off rate is presented in the following chart:

(GRAPH)



| |  |  | 
| |  |  | 

Provision and Allowance for Uncollectible Accounts

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

24



---



##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

The following table summarizes the activity in the domestic allowance for
uncollectible accounts for the periods indicated:

13 Weeks Ended
    
    
    26 Weeks Ended
    
    
    Year Endedmillions
    
    June 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,
    
    
    December 28,2003
    
    
    2002
    
    
    2003
    
    
    2002
    
    
    2002Balance, beginning of period
    
    $
    1,790
    
    
    $
    1,115
    
    
    $
    1,780
    
    
    $
    1,115
    
    
    $
    1,115Domestic provision
    
    
    446
    
    
    
    693
    
    
    
    917
    
    
    
    1,064
    
    
    
    2,203Net charge-offs
    
    
    (336
    )
    
    
    (367
    )
    
    
    (797
    )
    
    
    (738
    )
    
    
    (1,538
    )Allowance for uncollectible accounts
    
    $
    1,900
    
    
    $
    1,441
    
    
    $
    1,900
    
    
    $
    1,441
    
    
    $
    1,780Allowance as percent of ending balances
    
    
    
    
    
    
    
    
    
    
    6.45
    %
    
    
    5.10
    %
    
    
    5.79
    %


As of June 28, 2003, the Companys allowance for uncollectible accounts as a
percentage of credit card receivables was 6.45% compared with 5.10% as of June
29, 2002 and 5.79% as of December 28, 2002. The increase from the second
quarter of 2002 is primarily due to increases in the allowance in the remainder
of 2002 as a result of increased delinquencies and bankruptcies resulting from
a weak economy, the seasoning of the MasterCard portfolio, an increase in
receivable balances and the sale of previously charged-off accounts. An
additional $110 million was recorded to the allowance in the second quarter of
2003. Of this amount, $85 million is related to the sale of previously
charged-off receivables discussed earlier. The remaining $25 million is
primarily reflective of the seasoning of the MasterCard portfolio.

Corporate and Other

Corporate and Other segment results were as follows:

13 Weeks Ended
    
    
    26 Weeks Endedmillions
    
    June 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,2003
    
    
    2002
    
    
    2003
    
    
    2002Home Improvement Services revenues
    
    $
    100
    
    
    $
    92
    
    
    $
    163
    
    
    $
    150Cost of sales, buying and occupancy
    
    
    41
    
    
    
    35
    
    
    
    65
    
    
    
    56Selling and administrative
    
    
    121
    
    
    
    110
    
    
    
    222
    
    
    
    204Depreciation and amortization
    
    
    10
    
    
    
    16
    
    
    
    21
    
    
    
    28Total costs and expenses
    
    
    172
    
    
    
    161
    
    
    
    308
    
    
    
    288Operating loss
    
    $
    (72
    )
    
    $
    (69
    )
    
    $
    (145
    )
    
    $
    (138
    )


Revenues from the home improvement services businesses included in the
Corporate and Other segment increased by 8.7% to $100 million in the second
quarter of 2003 primarily due to increased revenue generated from cabinet
refacing and kitchen remodeling. Segment operating loss for the quarter of $72
million was slightly higher than the prior year as benefits generated by the
Companys previous productivity improvements were more than offset by a charge
of $12 million for severance costs related to continuing productivity
initiatives.

25



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

Sears Canada

Sears Canada results were as follows:

13 Weeks Ended
    
    
    26 Weeks Endedmillions
    
    June 28,
    
    
    June 29,
    
    
    June 28,
    
    
    June 29,2003
    
    
    2002
    
    
    2003
    
    
    2002Merchandise sales and services
    
    $
    980
    
    
    $
    962
    
    
    $
    1,747
    
    
    $
    1,783Credit revenues
    
    
    79
    
    
    
    68
    
    
    
    155
    
    
    
    140Total revenues
    
    
    1,059
    
    
    
    1,030
    
    
    
    1,902
    
    
    
    1,923Cost of sales, buying and occupancy
    
    
    699
    
    
    
    705
    
    
    
    1,235
    
    
    
    1,305Selling and administrative
    
    
    268
    
    
    
    246
    
    
    
    498
    
    
    
    473Provision for uncollectible accounts
    
    
    15
    
    
    
    8
    
    
    
    27
    
    
    
    18Depreciation and amortization
    
    
    28
    
    
    
    24
    
    
    
    55
    
    
    
    49Interest
    
    
    26
    
    
    
    24
    
    
    
    54
    
    
    
    49Special charges and impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111Total costs and expenses
    
    
    1,036
    
    
    
    1,007
    
    
    
    1,869
    
    
    
    2005Operating income (loss)
    
    $
    23
    
    
    $
    23
    
    
    $
    33
    
    
    $
    (82
    )Comparable store sales percentage decrease
    
    
    -6.5
    %
    
    
    -2.6
    %
    
    
    -10.0
    %
    
    
    -1.8
    %


Total Sears Canada revenues were $1.1 billion for the 13 weeks ended June 28,
2003, a 2.8% increase compared to the prior year. Sears Canadas total
merchandise sales reported in U.S. dollars increased by 1.9% in the second
quarter of 2003 despite a same store sales decrease of 6.5% due to a favorable
variance in the exchange rate. The decline in comparable store sales is
reflective of a planned reduction in unprofitable sales promotions, a
substantially lower seasonal clearance inventory position and continued
consumer caution. Merchandise sales for the 26 weeks ended June 28, 2003
decreased 2.0% to $1.7 billion primarily as a result of a 10.0% decline in
comparable store sales, which was primarily offset by the impact of foreign
exchange rates.

Credit revenues for the 13 weeks ended June 28, 2003 increased $11 million, or
16.2%, compared to the prior year primarily due to an increase in balances,
specifically for Sears Canada MasterCard. Within Sears Canada credit
operations, the net charge-off rate increased to 5.5% in the second quarter of
2003 from 4.6% in the second quarter of 2002. Canada experienced similar
economic conditions as the U.S. and as a result, charge-offs increased.
Credit revenues for the 26 weeks ended June 28, 2003 and June 29, 2002 were
$155 million and $140 million, respectively.

Sears Canada gross margin rate as a percentage of merchandise sales and
services revenues improved by 200 basis points in the second quarter of 2003
reflecting a reduction in promotional markdowns due to lower clearance inventory
levels. The gross margin rate for the 26 weeks ended June 28, 2003 improved by
250 basis points from the comparable prior year period.

Sears Canada selling and administrative expense increased $22 million in the
quarter as compared to the second quarter of 2002 as reductions in advertising
and payroll expenses were more than offset by the variance in the exchange rate
from the prior year, as noted above. Selling and administrative expense
increased $25 million for the 26 weeks ended June 28, 2003 compared to the
prior year.

Sears Canada reported operating income for the 13 weeks ended June 28, 2003 of
$23 million, flat to the prior year, while operating income for the 26 weeks
ended June 28, 2003 was $33 million compared to an operating loss of $82
million for the comparable prior year period. The first quarter of 2002
included a pretax charge of $111 million for severance costs, asset impairments
and other exit costs associated with the conversion of seven stores operating
under the Eatons banner to Sears Canada stores.

26



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

Net cash provided by operating activities was $1.4 billion for the 26 weeks
ended June 28, 2003, compared to net cash used in operating activities of $189
million for the 26 weeks ended June 29, 2002. The cash provided in the first
half of 2003 resulted from the decline of outstanding balances within the
credit card receivables portfolio offset by cash used to fund inventory
increases and pay operating liabilities.

As of June 28, 2003, the Companys current assets exceeded current liabilities
by $20.9 billion. This working capital surplus primarily results from the
$31.3 billion of credit card receivables outstanding at the end of the quarter
of which $24.5 billion were segregated in securitization entities for financing
purposes. The liquidity of these assets provides financial flexibility and
access to multiple sources of capital.

Net cash used in investing activities was $322 million for the 26 weeks ended
June 28, 2003 compared to $2.1 billion in the comparable prior year period.
The first half of 2002 investing activity includes the purchase of Lands End
as well as proceeds from the disposition of a portion of the Companys holdings
in Advance Auto Parts.

The Company may from time to time consider selective strategic transactions to
create value and improve performance, which may include acquisitions,
dispositions, restructurings, joint ventures and partnerships. Proceeds from
any transaction, should such a transaction occur, are expected to be utilized
by returning cash to the Companys shareholders, reducing debt or for general
corporate purposes.

Financing Activities

The Companys financing activities include net borrowings, dividend payments
and share issuances and repurchases. Net cash used in financing activities
totaled $146 million for the 26 weeks ended June 28, 2003, compared to net cash
provided by financing activities of $2.2 billion for the comparable prior year
period due to the acquisition of Lands End.

The Companys total debt balances were as follows:

June 28,
    
    
    % of
    
    
    June 29,
    
    
    % of
    
    
    December 28,
    
    
    % ofmillions
    
    2003
    
    
    Total
    
    
    2002
    
    
    Total
    
    
    2002
    
    
    TotalShort-term borrowings
    
    $
    5,464
    
    
    
    17.5
    %
    
    $
    3,981
    
    
    
    14.0
    %
    
    $
    4,525
    
    
    
    15.1
    %Long-term debt(1)
    
    
    25,827
    
    
    
    82.5
    %
    
    
    24,510
    
    
    
    86.0
    %
    
    
    25,503
    
    
    
    84.9
    %Total borrowings
    
    $
    31,291
    
    
    
    100.0
    %
    
    $
    28,491
    
    
    
    100.0
    %
    
    $
    30,028
    
    
    
    100.0
    %SFAS 133 hedge accounting adjustment
    
    
    685
    
    
    
    
    
    
    
    163
    
    
    
    
    
    
    
    609Total debt
    
    $
    31,976
    
    
    
    
    
    
    $
    28,654
    
    
    
    
    
    
    $
    30,637Memo: Sears Canada debt
    
    $
    1,621
    
    
    
    
    
    
    $
    1,531
    
    
    
    
    
    
    $
    1,478




---

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

---

The Companys total borrowings increased $1.3 billion in the first half of 2003
from $30.0 billion at December 28, 2002 to $31.3 billion at June 28, 2003.
During the 26 weeks ended June 28, 2003, the Company borrowed $1.4 billion of a
$2.0 billion private asset-backed facility and decreased its asset-backed
commercial paper outstanding to $0.8 billion. The proceeds from these
short-term borrowings contributed to the increase in cash of approximately $1.0
billion, from year-end 2002.

The Company uses interest rate derivatives to synthetically convert fixed rate
debt to variable rate debt. The interest rate derivatives qualify as fair
value hedges in accordance with SFAS No. 133 Accounting for Derivative

27



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##### Table of Contents



SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

Instruments and Hedging Activities, and as such are recorded on the balance
sheet at market value with an offsetting entry to the underlying hedged item,
which is debt. The market valuation increased by $0.5 billion from June 29,
2002.

During the second quarter of 2003, the Company resumed its share repurchase
activity and repurchased 34.9 million common shares at a cost of approximately
$1.0 billion under the $1.5 billion common share repurchase program approved by
the Board of Directors in December 2001. As of June 28, 2003, the Company had
remaining authorization to repurchase $0.2 billion of common shares by December
31, 2004 under the existing share repurchase program.

On July 15, 2003, the Board of Directors approved a resolution giving the
Company authorization to acquire an additional $1.0 billion of the Companys
common shares by December 31, 2006. The shares will be purchased in the open
market or through privately negotiated transactions. The timing will depend
on prevailing market conditions, alternative uses of capital and other factors.

Liquidity

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

Capital market borrowings are used primarily to support the Companys Credit
business. Ongoing access to the capital markets is critical to the Credit
business and the Company regularly reviews a range of strategic alternatives
for addressing funding needs. Economic and market conditions could affect the
Companys ability to access the public debt markets. However, the Company
believes it has a sufficient range of alternatives to obtain the financing
necessary to maintain its current level of operations, capital expenditures and
dividends. As of June 28, 2003, the following were available to the Company:



| |  |  | Cash and marketable securities of $2.9 billion;
| | - |  | -----------------------------------------------



| |  |  | Asset backed commercial paper conduit programs with access up to
$3.6 billion, of which $2.8 billion capacity was available;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | A $2.0 billion asset-backed facility, of which $0.6 billion capacity was available;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | A $3.5 billion unsecured, committed 364-day revolving credit facility; and
| | - |  | --------------------------------------------------------------------------



| |  |  | A $0.5 billion committed credit facility for Sears Canada.
| | - |  | ----------------------------------------------------------

As of June 28, 2003, the Companys long-term debt was due to be repaid as
follows: $2.1 billion remaining in 2003; $4.7 billion in 2004; $4.1 billion in
2005; $3.1 billion in 2006 and $11.8 billion thereafter. On August 1, 2003,
Sears Roebuck Acceptance Corp., a wholly owned financing subsidiary of the
Company, announced that it had elected to call for redemption the entire
outstanding principal amount of its $250 million 7% notes due March 1, 2038.
The redemption date is September 1, 2003. The Company has not identified any
reasonably possible circumstances that would allow debt holders to trigger any
early payment or acceleration provisions in the debt portfolio.

28



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SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

The expected sale of the Companys Credit and Financial Products business to
Citicorp will significantly affect the Companys short-term and future funding
requirements and related funding strategies. Proceeds from the sale of the
business are intended to be used primarily to retire debt, return cash to the
Companys shareholders, and for general corporate purposes. Historically, debt
obligations due to mature in the next year have been satisfied with a
combination of the liquidation of short-term investments, short-term
borrowings, new long-term debt issuances and operating cash flows. Following
the closing of the sale of the business, near-term obligations will be
satisfied primarily with proceeds from the sale. In addition, the Company is
targeting, exclusive of seasonal working capital requirements, long-term debt
less cash of approximately $1.5 billion.

SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES

The Companys significant accounting policies are discussed in the Notes to the
Consolidated Financial Statements that are included in the Companys 2002
Annual Report on Form 10-K that is filed with the Securities and Exchange
Commission. In most cases, the accounting policies utilized by the Company are
the only ones permissible under U.S. Generally Accepted Accounting Principles
for businesses in our industry. However, the
application of certain of these policies requires significant judgements or a
complex estimation process that can affect the results of operations and
financial position of the Company, as well as the related footnote disclosures.
The Company bases its estimates on historical experience and other assumptions
that it believes are reasonable. If actual amounts are ultimately different
from previous estimates, the revisions are included in the Companys results of
operations for the period in which the actual amounts become known. The
accounting policies and estimates that can have a significant impact on the
operating results, financial position and footnote disclosures of the Company
are described in the Management Discussion and Analysis in the Companys 2002
Annual Report on Form 10-K.

OUTLOOK

Given the current economic environment and cautious consumer sentiment, the
Company expects that near-term retail sector growth will be modest.
Correspondingly, the Company anticipates full year earnings per share to be
between $4.80 and $5.00. This compares to its previous forecast issued in the
first quarter of 2003 of earnings per share between $4.95 and $5.15. In the
Retail and Related Services segment, the Company anticipates full-year
operating income to be roughly flat with the previous year. This assumes
comparable store sales of flat to up low-single digit in the second half.
Credit and Financial Products segment operating income is expected to decline
mid-single digit from the previous year. The Company expects that the gain
recognized from the sale of previously charged-off receivables and operating
expense favorability will be largely offset by higher gross charge-offs and
lower late fee revenues. This full-year expectation excludes any effect that
may result from the sale of the domestic Credit and Financial Products
business. For a discussion of additional factors that could affect this
outlook, please refer to the following cautionary statement regarding
forward-looking information.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The above Outlook and certain other 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 uncertainties that may cause the
Companys actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. Forward-looking statements
include information concerning the Companys future financial performance,
business strategy, plans, goals and objectives. Statements preceded by,
followed by or that otherwise include the words believes, expects,
anticipates, intends, estimates, plans, forecasts, is likely to,
projected and similar expressions or future or conditional verbs such as
will, should, would, may and could are generally

29



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SEARS, ROEBUCK AND CO.
13 and 26 Weeks Ended June 28, 2003 and June 29, 2002

forward-looking in nature and not historical facts. This quarterly report also
contains forward-looking statements about the Companys expectations regarding
the sale of its Credit and Financial Products business and its alliance with
Citicorp, including statements concerning expected benefits to the Company and
the timing of closing the transaction. These statements are forward looking
statements based on assumptions about the future that are subject to risks and
uncertainties, and actual results may differ materially from the results
projected in the forward looking statements. Risks and uncertainties include
the possibility that the sale of the Credit and Financial Products business
does not close, that the Company and Citicorp may be required to modify aspects
of the transaction in order to achieve regulatory approval or other factors
outside the control of the companies.

Following are some of the additional risks and uncertainties that could affect
our financial condition or results of operations, and could cause actual
results, performance or achievements to differ from the future results,
performance or achievements expressed or implied by these forward-looking
statements: Citicorps ability to successfully integrate and operate the Credit
and Financial Products business and the ability of the Company to successfully
integrate its retail businesses with a third-party credit card program, which
involves significant training and the integration of complex systems and
processes; competitive conditions in retail and credit; changes in consumer
confidence and spending; delinquency and charge-off trends in the credit card
receivables portfolio; consumer debt levels and the level of consumer
bankruptcies; the success of initiatives to address increased delinquencies and
credit losses and improve credit profitability; the success of the Full-line
Store strategy and other strategies; the possibility that the Company will
identify new business and strategic options for one or more of its business
segments, potentially including selective acquisitions, dispositions,
restructurings, joint ventures and partnerships; the Companys ability to
integrate and operate Lands End successfully; the outcome of pending legal
proceedings; anticipated cash flow; social and political conditions such as
war, political unrest and terrorism or natural disasters; the possibility of
negative investment returns in the Companys pension plan; changes in interest
rates; the volatility in financial markets; changes in the Companys debt
ratings, credit spreads and cost of funds; the possibility of interruptions in
systematically accessing the public debt markets; general economic conditions
and normal business uncertainty. In addition, Sears typically earns a
disproportionate share of its operating income in the fourth quarter due to
seasonal buying patterns, which are difficult to forecast with certainty.
Additional discussion of these and other risks and uncertainties is contained
elsewhere under Managements Discussion and Analysis and Quantitative and
Qualitative Disclosures About Market Risk.

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

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 June 28, 2003 are disclosed
in the Companys Form
10-K for the year ended December 28, 2002. As of June 28, 2003, 78% of the
Companys funding portfolio was variable rate (including current maturities of
fixed-rate long-term debt that will reprice in the next 12 months and
fixed-rate debt synthetically converted to variable rate through the use of
derivative financial instruments). Based on the size of the Companys variable
rate funding portfolio as of June 28, 2003, which totaled $24.5 billion, a 100
basis point change in interest rates would affect pretax funding cost by
approximately $245 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 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 primarily uses variable rate funding to match funding costs with
the finance charge revenues generated by its credit card portfolio, as finance
charges on credit card balances vary with the prime rate. 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, President and Chief Executive Officer (principal executive officer)
and Glenn R. Richter, Senior Vice President and Chief Financial Officer
(principal financial officer), have evaluated the effectiveness of the
Companys disclosure controls and procedures, as such term is defined in
Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934,
as amended, within 90 days of the filing date of this 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

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

On October 18, 2002, a lawsuit was filed in the United States District Court
for the Northern District of Illinois against the Company and certain current
and former officers alleging that certain public announcements by the Company
concerning its credit card business violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
Additional lawsuits of the same tenor followed; with one exception, which is
pending in the United States District Court for the Northern District of
California, these cases are pending in the Northern District of Illinois. The
plaintiffs purport to represent classes of shareholders who purchased the
Companys common shares between October 24, 2001 and October 17, 2002. A
similar lawsuit was filed on June 16, 2003, alleging similar claims as well as
claims under Section 11 of the Securities Act of 1933, against the Company,
certain officers, and Sears Roebuck Acceptance Corp. (SRAC). The plaintiffs
purport to represent a class of noteholders who purchased certain notes issued
by SRAC between June 21, 2002 and October 17, 2002. The Northern District of
Illinois shareholder actions have been consolidated and the Department of the
Treasury of the State of New Jersey has been appointed lead plaintiff for the
purported class. On June 16, 2003, plaintiffs in the shareholder action filed
a consolidated amended complaint. Defendants have filed a motion to dismiss
the complaint, and briefing on the motion is expected to be completed by early
September 2003.

On November 15, 2002, two lawsuits were filed in the United States District
Court for the Northern District of Illinois against the Company, certain
officers and directors, and alleged fiduciaries of Sears 401(k) Savings Plan
(the Plan), seeking damages and equitable relief under the Employee
Retirement Income Security Act (ERISA). The plaintiffs purport to represent
participants and beneficiaries of the Plan, and allege breaches of fiduciary
duties under ERISA in connection with the Plans investment in the Companys
common shares and alleged communications made to Plan participants regarding
the Companys financial condition. Additional lawsuits of the same tenor
followed. These actions have been consolidated into a single class action.
Plaintiffs filed a consolidated amended complaint on May 14, 2003. Defendants
have filed a motion to dismiss the complaint, however, a briefing schedule for
answering and reply papers has not yet been fixed.

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. After the
Company filed a motion to dismiss the complaint, the plaintiff was granted
leave to amend the complaint. The Company has filed a motion to dismiss the
amended complaint, and briefing on the motion was completed by August 4, 2003.
Two similar suits were subsequently filed in the Circuit Court of Cook County,
Illinois, and a third was filed in the United States District Court for the
Northern District of Illinois. Motions have been made to dismiss these
actions, or, in the alternative, to stay them, pending disposition of the
action in New York. The Cook County, Illinois actions have been stayed pending
resolution of the motion to dismiss the amended complaint in the New York
action.

32



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##### Table of Contents



SEARS, ROEBUCK AND CO.

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

33



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##### Table of Contents



SEARS, ROEBUCK AND CO.





Item 4. Submission of Matters to a Vote of Security-Holders On May 8, 2003, the Company held its annual meeting of shareholders at
the Merchandise Review Center in Hoffman Estates, Illinois. Hall Adams, Jr., James R. Cantalupo and W. James Farrell, were elected
to Class C of the Board of Directors for three year terms expiring at
the 2006 annual meeting of shareholders. The shareholders approved the
recommendation of the Audit Committee that Deloitte & Touche LLP be
appointed auditors for 2003. Shareholders proposals regarding poison
pills and executive retirement plan benefits were defeated. A
Shareholder proposal regarding declassification of the Board was
approved by a majority of votes cast. The votes on these matters were
as follows:  1.
       
       Election of Directors Name
    
    For
    
    WithheldHall Adams, Jr.
    
    
    215,238,458
    
    
    
    66,865,980James R. Cantalupo
    
    
    187,766,284
    
    
    
    94,338,154W. James Farrell
    
    
    187,981,173
    
    
    
    94,123,265
  2.
       
       Appointment of Deloitte & Touche LLP as auditors for 2003 For
    
    Against
    
    Abstain270,673,173
    
    
    8,832,822
    
    
    
    2,600,042
  3.
       
       Shareholder proposal regarding declassification of the Board For
    
    Against
    
    Abstain
    
    Broker Non-Votes139,441,642
    
    
    91,041,514
    
    
    
    4,922,431
    
    
    
    46,698,851
  4.
       
       Shareholder proposal regarding poison pill For
    
    Against
    
    Abstain
    
    Broker Non-Votes111,045,636
    
    
    119,002,029
    
    
    
    5,357,118
    
    
    
    46,699,655
  5.
       
       Shareholder proposal regarding executive retirement plan benefits For
    
    Against
    
    Abstain
    
    Broker Non-Votes37,438,667
    
    
    192,802,835
    
    
    
    5,140,983
    
    
    
    46,721,953
 34




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##### Table of Contents



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 April 17, 2003 was filed with the
Securities and Exchange Commission on April 17, 2003 to report, under Item
5, that the Registrant issued a press release (attached as Exhibit 99
thereto). 35




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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)August 6, 2003
    
    By
    
    /s/ Michael J. GrahamMichael J. Graham
Vice President and Controller
(Principal Accounting Officer and duly authorized 
officer of Registrant)
 36




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##### Table of Contents



SEARS, ROEBUCK AND CO. 
 CERTIFICATIONS I, Alan J. Lacy, Chairman of the Board of Directors, President and Chief
Executive Officer of Sears, Roebuck and Co., certify that:  1.
       
       I have reviewed this 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: August 6, 2003
    
    By:
    
    /s/ Alan J. LacyAlan J. Lacy
Chairman of the Board of Directors, President
and Chief Executive Officer 37




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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: August 6, 2003
    
    By:
    
    /s/ Glenn R. RichterGlen R. Richter
Senior Vice President and
Chief Financial Officer
 38




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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 Registration
Statement No. 333-8141 of the
Registrant).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).
    
    Amended and Restated Non-Compete/Severance Agreement
between Registrant and Paul J. Liska dated May 17,
2003 and amendment thereto dated June 18, 2003.***10(b).
    
    Letter from Registrant to Robert J. OLeary relating
to employment dated as of June 2, 2003.*12.
    
    Computation of ratio of income to fixed charges for
Sears and consolidated subsidiaries for each of the
five years ended December 28, 2002 and for the
six-month period ended June 28, 2003.*15.
    
    Acknowledgement of awareness from
Deloitte & Touche LLP, dated [August
6, 2003], concerning unaudited
interim financial information.*32(a).
    
    Certification of Chief Executive
Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350).*32(b).
    
    Certification of Chief Financial
Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350).
  *
       
       Filed herewith.  **
       
       Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted material has been filed separately
with the Securities and Exchange Commission. 39