• The Company's proprietary and third party information systems;
  
• Related hardware, software and data and telephone networks; and,
  
• Information systems service providers.

As of January 30, 1999, the Company has completed an inventory and assessment of its mission critical (vital to business operations) information systems. The Company has remediated approximately 82% of its mission critical systems and has assessed or tested approximately 63% of them as Year 2000 compliant, subject to certification. The Company expects to have substantially completed remediation and testing by July 1999 and certification by November 1999. The Company has issued a moratorium on deploying any non-Year 2000 changes into its systems production environment from July 1, 1999 through April 1, 2000 (subject to business critical changes), which will assist in completing certification.

The Company has obtained written assurances from two mission critical information systems service providers that their systems and services will be Year 2000 compliant and is assessing their Year 2000 test plans and results. One of these service providers is the primary provider of the Company's computer, data and voice infrastructure, which supports merchandise procurement and distribution, inventory control, point-of-sale and other information systems and functions. The other service provider is providing the Company's new account processing system and operating platform to which the Company is converting its Credit business.

The business management area includes:

• Equipment and systems that contain embedded computer technology, such as elevators and security systems;
  
• Resale merchandise; and,
  
• Non-information systems service providers.
  

Based on the Company's assessment, it believes that its equipment and systems that contain embedded computer technology present little Year 2000 exposure or risk. Based on information from its merchandise manufacturers, the Company believes that, with the exception of certain older model personal computers, its resale merchandise does not have Year 2000 compliance issues. The Company has assessed its mission critical, non-information systems service providers and does not believe that these service providers pose a substantial Year 2000 compliance risk to the Company.

The Company has divided its mission critical merchandise vendors into three tiers:

• The first tier is the Company's 40 largest merchandise vendors, which comprise approximately 50% of its merchandise sales;
  
• The second tier is the 306 next largest vendors, which comprise approximately 30% of its merchandise sales; and,
  
• The third tier is the 639 next largest vendors, which comprise approximately 10% of its merchandise sales.

The Company has communicated to each mission critical vendor that if it is not Year 2000 compliant by July 1, 1999, the Company may find an alternative vendor. The Company categorizes its vendors on a scale of green (on target to be compliant by July 1), yellow (on target to be compliant by July 1 but minor concerns about progress) and red (not on target to be compliant by July 1). The Company has performed site visits of all but one (which it anticipates completing by April 1, 1999) of its first tier vendors. The Company is performing telephone conferences with second tier vendors. The Company has completed telephone conferences with 90% of second tier vendors with a red rating and anticipates completing telephone conferences with all others by June 1. In addition, the Company is tracking responses to the Year 2000 questionnaire distributed to all mission critical vendors in January 1998, reviewing follow-up progress reports, reviewing vendors' filings with the Securities and Exchange Commission and conducting electronic data interchange testing for all mission critical vendors. As of February 28, 1999, the Company has assigned red ratings to one first tier vendor (less than 1% of merchandise sales), 55 second tier vendors (approximately 5% of merchandise sales) and 256 third tier vendors (approximately 3% of merchandise sales).

Contingency Plans
The Company is developing contingency plans that identify what actions need to be taken if a critical system, merchandise vendor or service provider is not Year 2000 compliant. Each of the Company's business units is required to develop contingency plans, which the Company expects to finalize by July 1999.

Risks
The Company believes that its most significant Year 2000 risk factors are:

• Failure of either of its two mission critical information systems service providers to make their systems Year 2000 compliant;
  
• Failure of the Company to timely complete implementation of its new payroll processing system, which it anticipates completing by July 1999; and,
  
• Failure of a first tier mission critical merchandise vendor, or multiple merchandise vendors or service providers, to supply merchandise or services for an extended period of time.

Although the occurrence of any one of these scenarios could have a material adverse effect on the Company, the Company does not believe that any of these scenarios or any other Year 2000 compliance issues that would materially affect the Company's operations are reasonably likely to occur.

Costs
As of January 30, 1999, the Company estimates total costs (including external costs and the costs of internal personnel) related to its Year 2000 effort to be approximately $65 million, of which the Company (including Sears Canada) had incurred approximately $30 million through January 30, 1999. In addition, the Company has accelerated the planned development of new systems with improved business functionality to replace systems that were not Year 2000 compliant, including the Company's new payroll processing system. The Company expects these systems will cost approximately $78 million, of which the Company had incurred approximately $53 million through January 30, 1999. The Company funds Year 2000 costs with cash flows from operations.