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

                                   FORM 10-Q/A
                                 AMENDMENT NO. 1

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                  For the quarterly period ended July 28, 2004

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

               For the transition period from ________ to ________

                          Commission File No. 000-50278

                            KMART HOLDING CORPORATION
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                          <C>
            Delaware                                              32-0073116
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)
</TABLE>

<TABLE>
<S>                                                               <C>
3100 West Big Beaver Road - Troy, Michigan                           48084
 (Address of principal executive offices)                         (Zip Code)
</TABLE>

       Registrant's telephone number, including area code (248) 463-1000

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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                               Yes   X   No
                                   -----    -----

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

                               Yes   X   No
                                   -----    -----

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                               Yes   X   No
                                   -----    -----

As of August 6, 2004, 89,647,641 shares of Common Stock of the Registrant were
outstanding.


                                       1
<PAGE>
EXPLANATORY NOTE

               The purpose of this Amendment No. 1 to Quarterly Report on Form
     10-Q/A is to restate the unaudited financial statements of Kmart Holding
     Corporation and its subsidiaries (the "Company," "we" or "our") filed with
     the Securities and Exchange Commission ("SEC") on Form 10-Q on August 16,
     2004.

               In conjunction with their review of Sears Holdings Corporation's
     registration statement on Form S-4 in connection with the pending merger
     between Kmart and Sears, Roebuck and Company ("Sears"), the SEC reviewed
     Kmart's Form 10-K for the year ended January 28, 2004. Upon shareholder
     approvals of the merger transaction, Sears Holdings Corporation will be a
     new retail company resulting from the merger of Kmart and Sears. As a
     result of this review, it has been determined that the Company did not
     reflect an embedded beneficial conversion feature of the convertible note
     issued upon emergence from bankruptcy.

     The accounting treatment of the note is based on the determination of a
     commitment date as defined by Emerging Issues Task Force No. 00-27
     "Application of Issue No. 98-5 to Certain Convertible Instruments" ("EITF
     00-27"). A commitment date occurs when, amongst other things, an agreement
     is binding on both parties and the agreement specifies all significant
     terms, including the quantity to be exchanged. The Company believed that it
     had met these qualifications as of the initial agreement date and accounted
     for the note accordingly. The SEC believes that at the time of the
     agreement these conditions had not been met, and therefore a commitment
     date did not occur until issuance of the note. After discussions with the
     SEC, the Company has agreed to restate its financial statements. This
     amendment reflects a May 6, 2003 commitment date, resulting in a portion of
     the note being allocated to stockholders' equity, as required by EITF
     00-27. The restatement resulted in a non-cash charge to interest expense of
     $2 million, $5 million and $4 million due to the amortization of the
     discount in the 13-weeks ended July 28, 2004 and July 30, 2003, and the
     26-weeks ended July 28, 2004, respectively.

               See Note 3 to the unaudited Condensed Consolidated Financial
     Statements for further explanation and a discussion of the impact to the
     Company's net income and earnings per share.

               The Items of our Quarterly Report on Form 10-Q for the quarterly
     period ended July 28, 2004 which are amended and restated herein are:

          1.   Part 1, Item 1 - Financial Statements

          2.   Part 1, Item 2 - Management's Discussion and Analysis of
               Financial Condition and Results of Operations

          3.   Part 1. Item 4 - Controls and Procedures

               Except as otherwise expressly noted herein, this Amendment No. 1
     to Quarterly Report on Form 10-Q/A does not reflect events occurring after
     the August 16, 2004 filing of our Quarterly Report on Form 10-Q in any way,
     except as those required to reflect the effects of this restatement of our
     financial statements for the periods presented or as deemed necessary in
     connection with the completion of restated financial statements.

               The remaining Items contained within this Amendment No. 1 to our
     Quarterly Report on Form 10-Q/A consist of all other Items originally
     contained in our Quarterly Report on Form 10-Q for the quarterly period
     ended July 28, 2004 in the form filed with the SEC on August 16, 2004.
     These remaining Items are not amended hereby, but are included for the
     convenience of the reader. In order to preserve the nature and character of
     the disclosures set forth in such Items as originally filed, except as
     expressly noted herein, this report continues to speak as of the date of
     the original filing, and we have not updated the disclosures in this report
     to speak as of a later date. While this report primarily relates to the
     historical periods covered, events may have taken place since the original
     filing that might have been reflected in this report if they had taken
     place prior to the original filing.


                                       2
<PAGE>
                                      INDEX
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                           -----
<S>       <C>                                                              <C>
PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

          Condensed Consolidated Statements of Operations (Unaudited) --
             for the 13-weeks ended July 28, 2004 (As restated) and
             July 30, 2003 (As restated)                                     4

          Condensed Consolidated Statements of Operations (Unaudited) --
          Successor Company - for the 26-weeks ended July 28, 2004 (As
             restated) and 13-weeks ended July 30, 2003 (As restated)
          Predecessor Company - for the 13-weeks ended April 30, 2003        5

          Condensed Consolidated Balance Sheets (Unaudited)-- as of July
             28, 2004 (As restated), January 28, 2004 (As restated) and
             July 30, 2003 (As restated)                                     6

          Condensed Consolidated Statements of Cash Flows (Unaudited) --
          Successor Company - for the 26-weeks ended July 28, 2004 (As
             restated) and the 13-weeks ended July 30, 2003 (As
             restated)
          Predecessor Company - for the 13-weeks ended April 30, 2003        7

          Notes to Unaudited Condensed Consolidated Financial Statements    8-23

Item 2.   Management's Discussion and Analysis of Financial Condition
             and Results of Operations                                     24-31

Item 3.   Quantitative and Qualitative Disclosures about Market Risk        32

Item 4.   Controls and Procedures                                           32

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings                                                 33

Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of
             Equity Securities                                              33

Item 4.   Submission of Matters to a Vote of Security Holders               33

Item 6.   Exhibits and Reports on Form 8-K                                 33-34

          Signatures                                                        35
</TABLE>


                                       3
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                    13-WEEKS ENDED   13-WEEKS ENDED
                                                     JULY 28, 2004    JULY 30, 2003
                                                    --------------   --------------
                                                     (AS RESTATED)    (AS RESTATED)

<S>                                                 <C>              <C>
Sales                                                   $4,785           $5,652
Cost of sales, buying and occupancy                      3,543            4,419
                                                        ------           ------

Gross margin                                             1,242            1,233
Selling, general and administrative expenses             1,039            1,225
Net gains on sales of assets                               (72)              (2)
                                                        ------           ------

Operating income                                           275               10
Interest expense, net                                       33               26
Bankruptcy-related recoveries                               (5)              --
Equity income in unconsolidated subsidiaries                --               (2)
                                                        ------           ------

Income (loss) from operations before income taxes          247              (14)
Provision for (benefit from) income taxes                   93               (6)
                                                        ------           ------

Net income (loss)                                       $  154           $   (8)
                                                        ======           ======

Basic net income (loss) per common share                $ 1.72           $(0.09)
                                                        ======           ======

Diluted net income (loss) per common share              $ 1.54           $(0.09)
                                                        ======           ======

Basic weighted average shares (millions)                  89.5             89.7

Diluted weighted average shares (millions)               101.5             89.7
</TABLE>

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


                                       4
<PAGE>
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                        PREDECESSOR
                                                                           SUCCESSOR COMPANY              COMPANY
                                                                    -------------------------------   --------------
                                                                    26-WEEKS ENDED   13-WEEKS ENDED   13-WEEKS ENDED
                                                                     JULY 28, 2004    JULY 30, 2003   APRIL 30, 2003
                                                                    --------------   --------------   --------------
                                                                     (AS RESTATED)    (AS RESTATED)
<S>                                                                 <C>              <C>              <C>
Sales                                                                   $9,400           $5,652           $6,181
Cost of sales, buying and occupancy                                      7,021            4,419            4,762
                                                                        ------           ------           ------

Gross margin                                                             2,379            1,233            1,419
Selling, general and administrative expenses                             2,043            1,225            1,421
Net gains on sales of assets                                              (104)              (2)              --
Restructuring, impairment and other charges                                 --               --               37
                                                                        ------           ------           ------

Operating income (loss)                                                    440               10              (39)
Interest expense, net                                                       61               26               57
Bankruptcy-related recoveries                                              (12)              --               --
Equity income in unconsolidated subsidiaries                                (3)              (2)              (7)
Reorganization items, net                                                   --               --              769
                                                                        ------           ------           ------

Income (loss) from continuing operations before income taxes               394              (14)            (858)
Provision for (benefit from) income taxes                                  149               (6)              (6)
                                                                        ------           ------           ------

Income (loss) from continuing operations                                   245               (8)            (852)
Discontinued operations (net of income taxes of $0)                         --               --              (10)
                                                                        ------           ------           ------

Net income (loss)                                                       $  245           $   (8)          $ (862)
                                                                        ======           ======           ======
Basic income (loss) per common share from continuing operations         $ 2.74           $(0.09)          $(1.63)
Discontinued operations                                                     --               --            (0.02)
                                                                        ------           ------           ------

Basic net income (loss) per common share                                $ 2.74           $(0.09)          $(1.65)
                                                                        ======           ======           ======

Diluted income (loss) per common share from continuing operations       $ 2.47           $(0.09)          $(1.63)
Discontinued operations                                                     --               --            (0.02)
                                                                        ------           ------           ------
Diluted net income (loss) per common share                              $ 2.47           $(0.09)          $(1.65)
                                                                        ======           ======           ======

Basic weighted average shares (millions)                                  89.5             89.7            522.7

Diluted weighted average shares (millions)                               101.1             89.7            522.7
</TABLE>

                  See accompanying Notes to Unaudited Condensed
                       Consolidated Financial Statements.


                                       5
<PAGE>
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                          JULY 28, 2004   JANUARY 28, 2004   JULY 30, 2003
                                                                          -------------   ----------------   -------------
                                                                          (AS RESTATED)     (AS RESTATED)    (AS RESTATED)
<S>                                                                       <C>             <C>                <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                                 $2,626            $2,088           $1,200
   Merchandise inventories                                                    3,212             3,238            4,063
   Accounts receivable, net                                                     225               301              305
   Other current assets                                                         130               184              254
                                                                             ------            ------           ------
TOTAL CURRENT ASSETS                                                          6,193             5,811            5,822
   Property and equipment, net                                                  240               153               43
   Other assets and deferred charges                                            212               110               90
                                                                             ------            ------           ------

TOTAL ASSETS                                                                 $6,645            $6,074           $5,955
                                                                             ======            ======           ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
   Long-term debt and mortgages payable due within one year                  $    4            $    4           $   22
   Accounts payable                                                             977               820            1,083
   Accrued payroll and other liabilities                                        772               671              652
   Taxes other than income taxes                                                291               281              333
                                                                             ------            ------           ------
TOTAL CURRENT LIABILITIES                                                     2,044             1,776            2,090
LONG-TERM LIABILITIES
   Long-term debt and mortgages payable                                          80                76               51
   Capital lease obligations                                                    335               374              401
   Pension obligations                                                          880               873              861
   Unfavorable operating leases                                                 316               342              334
   Other long-term liabilities                                                  439               424              482
                                                                             ------            ------           ------
TOTAL LIABILITIES                                                             4,094             3,865            4,219

SHAREHOLDERS' EQUITY
   Preferred stock 20,000,000 shares authorized; no shares outstanding           --                --               --
   Common stock $0.01 par value, 500,000,000 shares authorized;
      89,647,641, 89,633,760 and 89,677,509 shares issued, respectively           1                 1                1
   Treasury stock, at cost                                                       (1)               (1)              --
   Capital in excess of par value                                             2,072             1,974            1,743
   Retained earnings (Accumulated deficit)                                      479               234               (8)
   Accumulated other comprehensive income                                        --                 1               --
                                                                             ------            ------           ------
TOTAL SHAREHOLDERS' EQUITY                                                    2,551             2,209            1,736
                                                                             ------            ------           ------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                   $6,645            $6,074           $5,955
                                                                             ======            ======           ======
</TABLE>

                  See accompanying Notes to Unaudited Condensed
                       Consolidated Financial Statements.


                                       6
<PAGE>
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                              PREDECESSOR
                                                                  SUCCESSOR COMPANY             COMPANY
                                                            -----------------------------   --------------
                                                               26-WEEKS        13-WEEKS        13-WEEKS
                                                                ENDED           ENDED            ENDED
                                                            JULY 28, 2004   JULY 30, 2003   APRIL 30, 2003
                                                            -------------   -------------   --------------
                                                            (AS RESTATED)   (AS RESTATED)
<S>                                                         <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                           $  245          $   (8)          $ (862)
   Adjustments to reconcile net income (loss) to net cash
      provided by (used for) operating activities:
         Depreciation and amortization                             28              10              177
         Store closings inventory charges                          17              --               --
         Net gains on sales of assets                            (104)             (2)              --
         Deferred income taxes                                     21              (2)              --
         Equity income in unconsolidated subsidiaries              (3)             (2)              (7)
         Restructuring, impairments and other charges              --              --               44
         Reorganization items, net                                 --              --              769
   Dividends received from Meldisco                                 3              --               36
   Cash used for store closings and other charges                  --              (5)             (64)
   Cash used for payments of exit costs and other
      reorganization items                                         --            (451)             (19)
   Change in:
         Merchandise inventories                                   10             368              480
         Accounts receivable                                       41              75              114
         Accounts payable                                         156             (77)            (117)
         Taxes payable                                            133             (11)             (16)
         Other assets                                              13              26                9
         Other liabilities                                        (24)            (93)              32
                                                               ------          ------           ------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES              536            (172)             576
                                                               ------          ------           ------
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from sales of assets                                  153              44               64
   Capital expenditures                                          (124)            (27)              (4)
                                                               ------          ------           ------
NET CASH PROVIDED BY INVESTING ACTIVITIES                          29              17               60
                                                               ------          ------           ------
CASH FLOWS FROM FINANCING ACTIVITIES
   Payments on capital lease obligations                          (25)            (14)             (16)
   Payments on mortgages                                           (2)             (4)              (1)
   Proceeds from issuance of debt                                  --              60               --
   Debt issuance costs                                             --             (46)              --
   Fees paid to Plan Investors                                     --             (13)              --
   Issuance of common shares                                       --             140               --
                                                               ------          ------           ------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES              (27)            123              (17)
                                                               ------          ------           ------
NET CHANGE IN CASH AND CASH EQUIVALENTS                           538             (32)             619
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                  2,088           1,232              613
                                                               ------          ------           ------
CASH AND CASH EQUIVALENTS, END OF PERIOD                       $2,626          $1,200           $1,232
                                                               ======          ======           ======
</TABLE>

                  See accompanying Notes to Unaudited Condensed
                       Consolidated Financial Statements.


                                       7
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

               Kmart Holding Corporation ("Kmart," "we," "us," "our," the
     "Company" or the "Successor Company") is the nation's third largest
     discount retailer. We operate in the general merchandise retailing industry
     through 1,503 Kmart discount stores and Supercenters with locations in 49
     states, Puerto Rico, the U.S. Virgin Islands, Guam and through our
     e-commerce shopping site, www.kmart.com.

               These interim Unaudited Condensed Consolidated Financial
     Statements have been prepared in accordance with the rules and regulations
     of the Securities and Exchange Commission ("SEC"). Accordingly, they do not
     include all of the information and footnotes required by accounting
     principles generally accepted in the United States of America for complete
     financial statements. In the opinion of management, all adjustments (which
     include normal recurring adjustments) considered necessary for a fair
     presentation have been included. All significant intercompany accounts and
     transactions have been eliminated. Operating results for the interim period
     are not necessarily indicative of the results that may be expected for the
     full year. Readers of these interim period statements should refer to the
     audited consolidated financial statements and notes thereto which are
     included in our Annual Report on Form 10-K/A for the year ended January 28,
     2004. Certain prior period amounts have been reclassified to conform to the
     current interim period presentation.

               The American Institute of Certified Public Accountants Statement
     of Position 90-7, "Financial Reporting by Entities in Reorganization under
     the Bankruptcy Code" ("SOP 90-7") requires that the financial statements
     for the period following filing for Chapter 11 bankruptcy protection
     through the date a plan of reorganization is confirmed distinguish
     transactions and events that are directly associated with the
     reorganization from the ongoing operations of the business. Accordingly,
     revenues, expenses, realized gains and losses and provisions for losses
     directly associated with reorganization and restructuring of the business
     during the Predecessor Company's (defined below) bankruptcy proceedings
     have been reported separately as Reorganization items, net in the Unaudited
     Condensed Consolidated Statements of Operations. See below for a more
     detailed discussion of the Company's Chapter 11 proceedings.

2.   EMERGENCE FROM CHAPTER 11 BANKRUPTCY PROTECTION AND FRESH-START ACCOUNTING

     Confirmation of Plan of Reorganization

               On May 6, 2003 (the "Effective Date"), Kmart Corporation (the
     "Predecessor Company") emerged from reorganization proceedings under
     Chapter 11 of the federal bankruptcy laws ("Bankruptcy Code" or "Chapter
     11") pursuant to the terms of the Plan of Reorganization (defined below).
     The Predecessor Company became a wholly-owned subsidiary of Kmart
     Management Corporation, which is a wholly-owned subsidiary of Kmart Holding
     Corporation.

               On January 22, 2002 (the "Petition Date"), the Predecessor
     Company and 37 of its U.S. Subsidiaries (collectively the "Debtors") filed
     voluntary petitions for reorganization under Chapter 11 in the United
     States Bankruptcy Court for the Northern District of Illinois (the
     "Court"). During the reorganization proceedings, the Debtors continued to
     operate their business as debtors-in-possession under the jurisdiction of
     the Court and in accordance with the applicable provisions of the
     Bankruptcy Code and orders of the Court. On January 24, 2003, the Debtors
     filed a Plan of Reorganization and related Disclosure Statement and on
     February 25, 2003, filed an Amended Joint Plan of Reorganization (the "Plan
     of Reorganization") and related amended Disclosure Statement with the
     Court. The Plan of Reorganization received the formal endorsement of the
     statutory creditors' committees and, as modified, was confirmed by the
     Court by order docketed on April 23, 2003.


                                       8
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
     (CONTINUED)

     Plan Investors

               At the time of emergence, ESL Investments, Inc. ("ESL") and Third
     Avenue Trust, on behalf of certain of its investment series ("Third
     Avenue," and together with ESL, the "Plan Investors") made a substantial
     investment in the Successor Company in furtherance of our financial and
     operational restructuring plan. The Plan Investors and their affiliates
     received approximately 32 million shares of our newly issued common stock
     ("Common Stock") in satisfaction of pre-petition claims they held, and we
     issued 14 million shares of Common Stock to affiliates of ESL and to Third
     Avenue, in exchange for $127 million, net of commitment fees and Plan
     Investor expenses of $13 million. In addition, we issued a 9 percent, $60
     million principal convertible note (the "Note") to affiliates of ESL. The
     term of the Note was extended two years to May 2006 by notice given in
     December 2003, consistent with the terms of the agreement. With respect to
     the Note, the principal is convertible at any time, at the option of the
     holder, into 6 million shares of Common Stock at a conversion price equal
     to $10 per share. ESL was also granted the option to purchase, prior to May
     6, 2005, approximately 6.6 million shares of Common Stock at a price of $13
     per share. A portion of the option was assigned to Third Avenue. The
     investment was made pursuant to an Investment Agreement dated January 24,
     2003, as amended (the "Investment Agreement"). See Note 3 - Restatement,
     for further discussion of the Note and the related embedded beneficial
     conversion feature.

               Each of the Plan Investors is represented on our Board of
     Directors.

     Discharge of Liabilities

               Under Chapter 11, actions by creditors to collect indebtedness
     owed prior to the Petition Date were stayed and certain other pre-petition
     contractual obligations were not enforced against the Debtors. The
     Predecessor Company received approval from the Court to pay certain
     pre-petition liabilities including employee salaries and wages, benefits
     and other employee obligations.

               On the Effective Date, all then-outstanding equity securities of
     the Predecessor Company, as well as substantially all of its pre-petition
     liabilities, were cancelled. Common Stock was issued in satisfaction of
     certain of those claims. On the Effective Date, 89,677,509 shares of Common
     Stock and 8,173,145 options to purchase shares of Common Stock were issued
     pursuant to the Plan of Reorganization. All of the shares of Common Stock
     issued on May 6, 2003 were or will be distributed pursuant to the Plan of
     Reorganization in satisfaction of pre-petition claims, except that 14
     million shares were issued to affiliates of ESL and to Third Avenue
     pursuant to the Investment Agreement described above. The options to
     purchase shares of Common Stock were issued to the Plan Investors and the
     Successor Company's Chief Executive Officer. All shares were issued without
     registration under the Securities Act of 1933 in reliance on the provisions
     of Section 1145 of the Bankruptcy Code and Section 4(2) of the Securities
     Act of 1933. In addition, as part of the Plan of Reorganization, an
     independent creditor litigation trust was established for the benefit of
     the Predecessor Company's pre-petition creditors and equity holders, and to
     pursue claims which arose from the Predecessor Company's prior accounting
     and stewardship investigations.

     Fresh-Start Adjustments

               In connection with our emergence from Chapter 11, we reflected
     the terms of the Plan of Reorganization in our consolidated financial
     statements, applying the terms of SOP 90-7 with respect to financial
     reporting. Upon applying Fresh-Start accounting, a new reporting entity
     (the Successor Company) is deemed to be created and the recorded amounts of
     assets and liabilities are adjusted to reflect their estimated fair values.
     The reported historical financial statements of the Predecessor Company for
     periods ended prior to May 1, 2003 generally are not comparable to those of
     the Successor Company. In this Quarterly Report on Form 10-Q/A, references
     to the 13-weeks ended April 30, 2003 and prior periods refer to the
     Predecessor Company. References to the Successor Company refer to the
     Company on and after April 30, 2003 after giving effect to the provisions
     of the Plan of Reorganization and the application of Fresh-Start
     accounting.


                                       9
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
     (CONTINUED)

               To facilitate the calculation of the enterprise value of the
     Successor Company, we developed a set of financial projections. Based on
     these financial projections and with the assistance of a financial advisor,
     we determined the enterprise value using various valuation methods,
     including (i) a comparison of the Company and its projected performance to
     the market values of comparable companies, (ii) a review and analysis of
     several recent transactions of companies in similar industries to the
     Company, and (iii) a calculation of the present value of the future cash
     flows under the projections. The estimated enterprise value is highly
     dependent upon achieving the future financial results set forth in the
     projections as well as the realization of certain other assumptions which
     are not guaranteed. The estimated enterprise value of the Company was
     calculated to be approximately $2.3 billion to $3.0 billion. We selected
     the midpoint of the range, $2.6 billion, as the estimated enterprise value.
     In applying Fresh-Start accounting, adjustments to reflect the fair value
     of assets and liabilities, on a net basis, and the write-off of the
     Predecessor Company's equity accounts resulted in a charge of $5.6 billion.
     The fair value adjustments included the recognition of approximately $2.2
     billion of intangible assets that were previously not recorded in the
     Predecessor Company's financial statements, such as favorable leasehold
     interests, Kmart brand rights, pharmacy customer relationships and other
     lease and license agreements. The restructuring of the Predecessor
     Company's capital structure and resulting discharge of pre-petition debt
     resulted in a gain of $5.6 billion. The charge for the revaluation of the
     assets and liabilities and the gain on the discharge of pre-petition debt
     are recorded in Reorganization items, net in the Unaudited Condensed
     Consolidated Statements of Operations. In addition, the excess of fair
     value of net assets over reorganization value (i.e., "negative goodwill")
     of approximately $5.6 billion was allocated on a pro-rata basis reducing
     our non-current, non-financial instrument assets, including the previously
     unrecorded intangible assets, to $10 million as of April 30, 2003.

               Refer to our Annual Report on Form 10-K/A for the year ended
     January 28, 2004 for a more detailed discussion.

     Claims Resolution

               We continue to make progress in the reconciliation and settlement
     of the various classes of claims associated with the discharge of the
     Predecessor Company's liabilities subject to compromise pursuant to the
     Plan of Reorganization. Since June 30, 2003, the first distribution date
     established in the Plan of Reorganization, approximately 19.7 million
     shares of the 31.9 million shares previously issued to us as disbursing
     agent with respect to such claims have been distributed to holders of Class
     5 claims and approximately $4.1 million in cash has been distributed to
     holders of Class 7 claims. Due to the significant volume of claims filed
     to-date, it is premature to estimate with any degree of accuracy the
     ultimate allowed amount of such claims for each class of claims under the
     Plan of Reorganization. Accordingly, our current distribution reserve for
     claim settlements is approximately 20 percent of shares issued. Differences
     between amounts filed and our estimates are being investigated and will be
     resolved in connection with our claims resolution process. In this regard,
     it should be noted that the claims reconciliation process may result in
     material adjustments to current estimates of allowable claims.

               During the second quarter of fiscal 2004, we reduced the
     distribution reserve from 30 percent to 20 percent, resulting in the
     distribution of approximately 2.2 million shares to claimants who had
     previously received shares for allowed claims. The remaining shares in the
     distribution reserve will be issued to claimants on a pro-rata basis if,
     upon settlement of all claims, the ultimate amount allowed for Class 5
     claims is consistent with the Plan of Reorganization.

               The next scheduled distribution under the Plan of Reorganization
     is expected to commence on or about October 1, 2004.

     Bankruptcy-Related Recoveries

               For the 13-weeks and 26-weeks ended July 28, 2004, we recognized
     recoveries of $5 million and $12 million, respectively, from vendors who
     had received cash payments for pre-petition obligations or preference
     payments. See Note 19 - Commitments and Contingencies for a more detailed
     discussion.


                                       10
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
     (CONTINUED)

3.   RESTATEMENT

               The accompanying unaudited condensed consolidated financial
     statements for the 13-weeks ended July 28, 2004 and July 30, 2003 and the
     26-weeks ended July 28, 2004 and as of July 28, 2004, January 28, 2004 and
     July 30, 2003 have been restated. The restatement reflects the recognition
     of an embedded beneficial conversion feature of the Company's Note with the
     Plan Investors. Accounting for the embedded beneficial conversion feature
     and the resulting recognition of additional interest expense is in
     accordance with Emerging Issues Task Force Issue No. 00-27, "Application of
     Issue No. 98-5 to Certain Convertible Instruments" ("EITF 00-27").

               As discussed in Note 2, the Note with the Plan Investors is
     convertible into shares of Common stock at a conversion price equal to $10
     per share. The accounting treatment of the Note is based on the
     determination of a commitment date as defined by EITF 00-27. A commitment
     date occurs when, amongst other things, an agreement is binding on both
     parties and the agreement specifies all significant terms, including the
     quantity to be exchanged. For purposes of calculating the intrinsic value
     of the embedded beneficial conversion feature, the Company initially
     determined that the commitment date was January, 24, 2003, the date the
     Investment Agreement with the Plan Investors was signed. It was
     subsequently determined that the commitment date was May 6, 2003, the date
     the Note was issued and when the quoted market price of the Company's
     Common stock was $15.

               Upon applying the criteria of EITF 00-27, the Company first
     allocated the proceeds received from the Plan Investors, net of expenses,
     of $187 million to the Note, Common stock and stock options issued pursuant
     to the Investment Agreement and based on their relative fair values. The
     Company used a Black-Scholes model to value the stock options with the
     following assumptions: no dividend yield, option life of two years,
     volatility of 45 percent and an interest rate of 2.76 percent. The fair
     value of the options was $32 million as of May 6. 2003. The fair value of
     the convertible debt was based on the market price of our Common stock of
     $15 on the issuance date, and was $90 million as of May 6. 2003.

               An effective conversion price was then calculated and used to
     measure the intrinsic value of the embedded beneficial conversion feature.
     The resulting discount of $49 million reduced the initial carrying amount
     of the Note to $11 million, with a corresponding increase in Capital in
     excess of par value. In addition, the Company recognized a related deferred
     tax liability of $18 million due to the difference between the book and tax
     basis of the Note, with a corresponding decrease in Capital in excess of
     par value. The debt discount was amortized to interest expense over one
     year using the effective interest method through December 2003, at which
     time the Plan Investors elected to extend the term of the Note an
     additional two years through May 6, 2006. The remaining debt discount as of
     December 2003 will be recognized over the additional two year term.

               We recognized an additional $2 million, $5 million and $4 million
     of interest expense due to the amortization of the discount in the 13-weeks
     ended July 28, 2004 and July 30, 2003, and the 26-weeks ended July 28,
     2004, respectively.

               Following is the effect of our restatement on our unaudited
     condensed consolidated financial statements.


                                       11
<PAGE>
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

            EFFECT OF THE RESTATEMENTS ON THE CONDENSED CONSOLIDATED
                            STATEMENTS OF OPERATIONS
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                          13-WEEKS ENDED JULY 28, 2004
                                               --------------------------------------------------
                                               As previously reported   Adjustments   As restated
                                               ----------------------   -----------   -----------
<S>                                            <C>                      <C>           <C>
Operating income                                        $ 275             $   --         $ 275

Interest expense, net                                      31                  2            33
Bankruptcy-related recoveries                              (5)                --            (5)
                                                        -----             ------         -----
Income from operations before income taxes                249                 (2)          247

Provision for income taxes                                 94                 (1)           93
                                                        -----             ------         -----

Net income                                              $ 155             $   (1)        $ 154
                                                        =====             ======         =====

Basic net income per common share                       $1.73             $(0.01)        $1.72
                                                        =====             ======         =====

Diluted net income per common share                     $1.54             $   --         $1.54
                                                        =====             ======         =====
</TABLE>

<TABLE>
<CAPTION>
                                                          13-WEEKS ENDED JULY 30, 2003
                                               --------------------------------------------------
                                               As previously reported   Adjustments   As restated
                                               ----------------------   -----------   -----------
<S>                                            <C>                      <C>           <C>
Operating income                                       $   10             $   --        $   10

Interest expense, net                                      21                  5            26
Equity income in unconsolidated subsidiaries               (2)                --            (2)
                                                       ------             ------        ------
Loss from operations before income taxes                   (9)                (5)          (14)

Benefit from income taxes                                  (4)                (2)           (6)
                                                       ------             ------        ------

Net loss                                               $   (5)            $   (3)       $   (8)
                                                       ======             ======        ======

Basic and diluted net loss per common share            $(0.06)            $(0.03)       $(0.09)
                                                       ======             ======        ======
</TABLE>

<TABLE>
<CAPTION>
                                                          26-WEEKS ENDED JULY 28, 2004
                                               --------------------------------------------------
                                               As previously reported   Adjustments   As restated
                                               ----------------------   -----------   -----------
<S>                                            <C>                      <C>           <C>
Operating income                                        $ 440             $   --         $ 440

Interest expense, net                                      57                  4            61
Bankruptcy-related recoveries                             (12)                --           (12)
Equity income in unconsolidated subsidiaries               (3)                --            (3)
                                                        -----             ------         -----
Income from operations before income taxes                398                 (4)          394

Provision for income taxes                                150                 (1)          149
                                                        -----             ------         -----

Net income                                              $ 248             $   (3)        $ 245
                                                        =====             ======         =====

Basic net income per common share                       $2.77             $(0.03)        $2.74
                                                        =====             ======         =====

Diluted net income per common share                     $2.47             $   --         $2.47
                                                        =====             ======         =====
</TABLE>


                                       12
<PAGE>
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

          The restatement had no effect on the Predecessor Company's unaudited
Condensed Consolidated Statement of Operations for the 13-weeks ended April 30,
2003.

                   EFFECT OF THE RESTATEMENTS ON THE CONDENSED
                           CONSOLIDATED BALANCE SHEETS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                JULY 28, 2004
                                             --------------------------------------------------
                                             As previously reported   Adjustments   As restated
                                             ----------------------   -----------   -----------
<S>                                          <C>                      <C>           <C>
LIABILITIES
Long-term debt and mortgages payable                 $  103              $(23)         $   80
                                                     ======              ====          ======

Other long-term liabilities                          $  430              $  9          $  439
                                                     ======              ====          ======

Total liabiliites                                    $4,108              $(14)         $4,094
                                                     ======              ====          ======

SHAREHOLDERS' EQUITY
Capital in excess of par value                       $2,041              $ 31          $2,072
                                                     ======              ====          ======

Retained earnings                                    $  496              $(17)         $  479
                                                     ======              ====          ======

Total shareholders' equity                           $2,537              $ 14          $2,551
                                                     ======              ====          ======
</TABLE>

<TABLE>
<CAPTION>
                                                              JANUARY 28, 2004
                                             --------------------------------------------------
                                             As previously reported   Adjustments   As restated
                                             ----------------------   -----------   -----------
<S>                                          <C>                      <C>           <C>
ASSETS
Other assets and deferred charges                    $  120              $(10)         $  110
                                                     ======              ====          ======

Total Assets                                         $6,084              $(10)         $6,074
                                                     ======              ====          ======
LIABILITIES
Long-term debt and mortgages payable                 $  103              $(27)         $   76
                                                     ======              ====          ======

Total liabilities                                    $3,892              $(27)         $3,865
                                                     ======              ====          ======

SHAREHOLDERS' EQUITY
Capital in excess of par value                       $1,943              $ 31          $1,974
                                                     ======              ====          ======

Retained earnings                                    $  248              $(14)         $  234
                                                     ======              ====          ======

Total shareholders' equity                           $2,192              $ 17          $2,209
                                                     ======              ====          ======

Total Liabilities and Shareholders' Equity           $6,084              $(10)         $6,074
                                                     ======              ====          ======
</TABLE>


                                       13
<PAGE>
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
<CAPTION>
                                                                              JULY 30, 2003
                                                           --------------------------------------------------
                                                           As previously reported   Adjustments   As restated
                                                           ----------------------   -----------   -----------
<S>                                                        <C>                      <C>           <C>
LIABILITIES
Long-term debt and mortgages payable due within one year           $   66              $(44)        $   22
                                                                   ======              ====         ======

Accrued payroll and other liabilities                              $  636              $ 16         $  652
                                                                   ======              ====         ======

Total current liabilities                                          $2,118              $(28)        $2,090
                                                                   ======              ====         ======

Total liabilities                                                  $4,247              $(28)        $4,219
                                                                   ======              ====         ======

SHAREHOLDERS' EQUITY
Capital in excess of par value                                     $1,712              $ 31         $1,743
                                                                   ======              ====         ======

Accumulated deficit                                                $   (5)             $ (3)        $   (8)
                                                                   ======              ====         ======

Total shareholders' equity                                         $1,708              $ 28         $1,736
                                                                   ======              ====         ======
</TABLE>

               The deferred tax liability was offset with the Company's other
     deferred tax liabilities and assets for each period and presented as a
     single amount in the Consolidated Balance Sheets. The Company had a net
     deferred tax liability as of July 28, 2004 which was classified in Other
     long-term liabilities. The Company had a net deferred tax asset as of
     January 28, 2004 which was classified in Other assets and deferred charges.
     The Company had a net deferred tax liability as of July 30, 2003 which was
     classified in Accrued payroll and other liabilities.

4.   NEW ACCOUNTING PRONOUNCEMENTS

               In December 2003, the SEC issued Staff Accounting Bulletin
     ("SAB") No. 104, "Revenue Recognition" ("SAB 104"). SAB 104 supercedes SAB
     101, "Revenue Recognition in Financial Statements" ("SAB 101") to include
     the guidance from Emerging Issues Task Force Issue No. 00-21, "Accounting
     for Revenue Arrangements with Multiple Deliverables." The primary purpose
     of SAB 104 is to rescind accounting guidance contained in SAB 101 related
     to multiple element revenue arrangements. There was no impact to the
     Company upon adoption of SAB 104.

5.   REAL ESTATE AND PROPERTY TRANSACTIONS

     Home Depot U.S.A., Inc.

               On June 3, 2004, the Company entered into multiple definitive
     agreements with Home Depot U.S.A., Inc. (a subsidiary of The Home Depot,
     Inc.) ("Home Depot") to sell up to four owned properties and assign up to
     20 leased properties for a maximum purchase price of $365 million in cash.
     Pursuant to the first of these agreements, on June 15, 2004, the Company
     completed the sale of four owned properties to Home Depot for $59 million
     in cash, resulting in a net gain of $43 million. On August 10, 2004, the
     second agreement was amended, which limited the number of leased properties
     to be assigned to not more than 15 properties with a maximum purchase price
     of $230 million in cash. We completed the assignment of nine of these
     properties on August 13, 2004, resulting in proceeds to the Company of $114
     million in cash. We anticipate that Home Depot may close on the remaining
     six leases by the end of August 2004, subject to closing conditions being
     satisfied. In the event Home Depot does not close on certain of these
     properties, we have the option to assign up to two of these properties to
     Home Depot for a maximum of $42 million in cash.


                                       14
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

     Sears, Roebuck and Co.

               On June 29, 2004, the Company entered into an agreement with
     Sears, Roebuck and Co. ("Sears") to sell up to two owned properties and
     assign up to 52 leased properties for a maximum purchase price of $621
     million in cash. Pursuant to this agreement, certain closing conditions for
     a minimum of 43 of the properties must be satisfied by August 31, 2004.
     However, if the closing conditions have not been satisfied by August 31,
     2004, the Company, at its option, may give written notice to Sears by
     September 9, 2004 to proceed with the closing with respect to those
     properties for which closing conditions have been satisfied. In the event
     the closing conditions for the 43 properties have not been satisfied by
     August 31, 2004 and written notice has not been given to Sears by the
     Company, either party may terminate the purchase agreement subsequent to
     September 9, 2004, but prior to the date closing conditions are satisfied
     for at least 43 properties. Assuming such conditions are met, the Company
     will receive 30% of the purchase price in September 2004. The remaining 70%
     of the purchase price will be received when Sears has been assigned the
     leases and occupies the properties, which shall take place no later than
     April 15, 2005.

     Other

               The Company also sold certain other assets, resulting in net
     gains of $29 million and $61 million for the 13-weeks and 26-weeks ended
     July 28, 2004, respectively. Included within this gain for the 26-week
     period was $17 million related to the sale of the Company's Trinidad
     subsidiary and its associated property, $12 million related to the sale of
     the Company's corporate airplanes and $32 million from sales of other real
     and personal property. During this same time period, the Company acquired
     22 previously-leased properties for $84 million.

6.   PENSION PLAN

               The following table summarizes the net periodic benefit cost
     recognized for our qualified employee pension plan.

<TABLE>
<CAPTION>
                                                                                                             Predecessor
                                                                        Successor Company                      Company
                                                        ------------------------------------------------   --------------
                                                        26-Weeks Ended   13-Weeks Ended   13-Weeks Ended   13-Weeks Ended
     (dollars in millions)                               July 28, 2004    July 28, 2004    July 30, 2003   April 30, 2003
     ---------------------                              --------------   --------------   --------------   --------------
     <S>                                                <C>              <C>              <C>              <C>
     Components of Net Periodic Expense

        Interest costs                                       $ 77             $ 39             $ 38             $ 38
        Expected return on plan assets                        (69)             (35)             (29)             (33)
        Net loss recognition                                   --               --               --               18
        Amortization of unrecognized transition asset          --               --               --               (2)
                                                             ----             ----             ----             ----
        Net periodic expense                                 $  8             $  4             $  9             $ 21
                                                             ====             ====             ====             ====
</TABLE>

               During the 13-weeks and 26-weeks ended July 28, 2004
     contributions to the plan were approximately $1 million. Contributions to
     the plan were not required for the 13-weeks ended July 30, 2003 or April
     30, 2003. The estimated contribution for fiscal 2004 is $11 million.

7.   EARNINGS PER SHARE

               Basic earnings per share is calculated by dividing net income by
     the weighted average number of common shares outstanding during each
     period. Diluted earnings per share assumes the exercise of stock options,
     the conversion of convertible debt and the impact of restricted stock when
     dilutive.

               A reconciliation of basic weighted average common shares
     outstanding to diluted weighted average common shares outstanding is as
     follows:

<TABLE>
<CAPTION>
                                              13-Weeks Ended   26-Weeks Ended
     (in millions)                             July 28, 2004    July 28, 2004
     -------------                            --------------   --------------
     <S>                                      <C>              <C>
     Basic weighted average common shares           89.5             89.5
     Dilutive effect of stock options                6.0              5.6
     9% convertible note                             6.0              6.0
                                                   -----            -----
     Diluted weighted average common shares        101.5            101.1
                                                   =====            =====
</TABLE>


                                       15
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

               A reconciliation of net income available to common shareholders
     to net income available to common shareholders with assumed conversions is
     as follows:

<TABLE>
<CAPTION>
                                                          13-Weeks Ended   26-Weeks Ended
     (dollars in millions)                                 July 28, 2004    July 28, 2004
     ---------------------                                --------------   --------------
                                                           (as restated)    (as restated)
     <S>                                                  <C>              <C>
     Net income available to common shareholders               $154             $245
     Interest and accretion of debt discount on 9%
        convertible note, net of tax                              2                5
                                                               ----             ----
     Income available to common shareholders with
        assumed conversions                                    $156             $250
                                                               ====             ====
</TABLE>

               Common stock equivalents were excluded from the calculation of
     diluted earnings per share for the 13-weeks ended July 30, 2003 and April
     30, 2003 as they were anti-dilutive. Upon our emergence from bankruptcy,
     all common stock equivalents of the Predecessor Company were cancelled.

8.   DEBT

     Credit Facility

               Our credit agreement (the "Credit Facility") is a $1.0 billion
     revolving credit facility with an $800 million letter of credit sub-limit
     under which Kmart Corporation is the borrower. From its inception, we have
     only used the Credit Facility to support issuances of letters of credit. In
     July 2004, we voluntarily reduced the size of the Credit Facility from $1.5
     billion to $1.0 billion to reduce the overall cost of the facility. In
     conjunction with the reduction of our Credit Facility, we accelerated the
     amortization of $9 million of the associated debt issuance costs.
     Availability under the Credit Facility is subject to an inventory borrowing
     base formula. The Credit Facility is guaranteed by the Successor Company,
     Kmart Management Corporation, Kmart Services Corporation (a subsidiary of
     Kmart Management Corporation) and Kmart Corporation's direct and indirect
     domestic subsidiaries. The Credit Facility is secured primarily by first
     liens on inventory, the proceeds thereof and certain related assets of
     Kmart Corporation and the guarantors.

               Borrowings under the Credit Facility are subject to a sliding
     pricing scale based on our earnings before interest, taxes, depreciation,
     amortization and other charges ("EBITDA") levels and such adjustments are
     implemented quarterly. Borrowings currently bear interest at either (i) the
     Prime rate plus 1.5% per annum or (ii) the LIBOR rate plus 2.5% per annum,
     at our discretion, and utilization of the letter of credit sub-facility in
     support of trade and standby letters of credit currently bears interest at
     1.25% and 2.50% per annum, respectively. In addition, we are currently
     required to pay a fee based on the unutilized commitment under the Credit
     Facility equal to 0.50% per annum. The Credit Facility gives the Company
     the ability to repurchase up to $500 million of the Company's Common Stock,
     depending on our EBITDA levels and subject to the approval of the Company's
     Board of Directors.

               As of July 28, 2004, we had utilized $341 million of the Credit
     Facility for letters of credit issued for ongoing import purchasing
     operations, and contractual and regulatory purposes, including letters of
     credit utilized as collateral to support our self-insurance programs.
     During the first six months of fiscal 2004, we replaced letters of credit
     used as collateral for certain programs with cash collateral to reduce fees
     on our letters of credit. We continue to classify the cash collateral in
     Cash and cash equivalents due to our ability to convert the cash to letters
     of credit at any time at our discretion. As of July 28, 2004, $214 million
     of cash was posted as collateral.

               Total availability under the Credit Facility as of July 28, 2004
     was approximately $630 million.

               The Credit Facility financial covenants include a requirement
     that we maintain certain availability minimums, and failure to do so
     triggers additional required minimum levels of EBITDA. The Credit Facility
     also contains other customary covenants, including certain reporting
     requirements and covenants that restrict our ability to incur or create
     liens, indebtedness and guarantees, make investments, pay dividends or make
     other equity distributions, sell or dispose of stock or assets, change the
     nature of our business and enter into affiliate transactions, mergers and
     consolidations. Failure to satisfy these covenants would (in some cases,
     after the receipt of notice and/or the expiration of a grace period) result
     in an event of default that could result in our inability to access the
     funds. As of July 28, 2004, and in all periods since our emergence from
     Chapter 11, we have been in compliance with all Credit Facility covenants.


                                       16
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

     Predecessor Company Debt

               Borrowings of the Predecessor Company during Chapter 11
     proceedings were available through the Court-approved $2 billion
     debtor-in-possession financing facility ("DIP Credit Facility") for the
     payment of permitted pre-petition claims, working capital needs, letters of
     credit and other general corporate purposes. On May 6, 2003, in connection
     with the Debtors' emergence from Chapter 11, the DIP Credit Facility was
     terminated.

               Due to its filing for Chapter 11, the Predecessor Company was in
     default on all of its debt agreements entered into prior to January 22,
     2002. While operating under Chapter 11, the Predecessor Company was
     prohibited under the Bankruptcy Code from paying interest on unsecured
     pre-petition debts. On the Petition Date, the Predecessor Company stopped
     accruing interest on all unsecured pre-petition debt until it emerged from
     bankruptcy in accordance with SOP 90-7. Contractual interest expense not
     accrued or recorded by the Predecessor Company on certain pre-petition debt
     totaled $67 million for the 13-weeks ended April 30, 2003.

     Interest Expense, Net

<TABLE>
<CAPTION>
                                                                                                             Predecessor
                                                                        Successor Company                     Company
                                                        ------------------------------------------------   --------------
                                                        26-Weeks Ended   13-Weeks Ended   13-Weeks Ended   13-Weeks Ended
     (dollars in millions)                               July 28, 2004    July 28, 2004    July 30, 2003   April 30, 2003
     ---------------------                              --------------   --------------   --------------   --------------
                                                         (as restated)    (as restated)    (as restated)
     <S>                                                <C>              <C>              <C>              <C>
     Components of Interest Expense, Net

        Interest expense                                     $ 32              $15              $23              $21
        Accretion of obligations at net present value          25               13              ---              ---
        Amortization of debt issuance costs                    16               12                5               37
        Interest income                                       (12)              (7)              (2)              (1)
                                                             ----              ---              ---              ---
        Interest expense, net                                $ 61              $33              $26              $57
                                                             ====              ===              ===              ===
</TABLE>

               Cash paid for interest was $28 million, $13 million, $17 million
     and $19 million for the 26-weeks ended July 28, 2004 and the 13-weeks ended
     July 28, 2004, July 30, 2003 and April 30, 2003, respectively.

9.   INCOME TAXES

               We recorded a tax provision of $93 million and $149 million
     during the 13-weeks and 26-weeks ended July 28, 2004, respectively, based
     on the estimated effective tax rate for fiscal 2004 of 37.8%. We recorded a
     $6 million tax benefit from our losses during the 13-weeks ended July 30,
     2003 based upon the estimated effective tax rate for the 39-weeks ended
     January 28, 2004 (successor period). The $6 million tax benefit recorded
     during the first quarter of fiscal 2003 relates to an Internal Revenue Code
     provision allowing for the 10-year carryback of certain losses.

               The Predecessor Company recorded a full valuation allowance
     against its net deferred tax assets in accordance with SFAS No. 109,
     "Accounting for Income Taxes," as realization of such assets in future
     years was uncertain. Accordingly, no tax benefit was realized from the
     Predecessor Company's losses in the first quarter of fiscal 2003. Given the
     Company's actual and forecasted levels of profitability in fiscal 2004,
     management believes that a portion of the pre-emergence net deferred tax
     assets will more likely than not be realized. As such, the Company reduced
     the valuation allowance on its pre-emergence net deferred tax assets by $92
     million in the second quarter of fiscal 2004 to reflect its estimated
     utilization through the end of fiscal 2004. The Company will continue to
     assess the likelihood of realization of its pre-emergence net deferred tax
     assets and would reduce the valuation allowance on such assets in the
     future if it becomes more likely than not that the net deferred tax assets
     will be utilized. In accordance with SOP 90-7, subsequent to emergence from
     Chapter 11, the benefit from the reduction of the valuation allowance is
     recorded as a direct credit to Capital in excess of par value with no
     impact on the Company's earnings or cash flows.

               During the 26-weeks ended July 28, 2004, we reduced our reserves
     for Predecessor Company income tax liabilities by $5 million, primarily due
     to favorable claims settlements. We recorded this adjustment to Capital in
     excess of par value in our Unaudited Condensed Consolidated Balance Sheet
     as of July 28, 2004.

               As of July 28, 2004, the Company has post-emergence net deferred
     tax assets of $57 million. It is the Company's position that this net
     deferred tax asset will be utilized in the near future and no valuation
     allowance is required.


                                       17
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

               Cash paid for income taxes was $2 million, $1 million and $1
     million for the 26-weeks ended July 28, 2004, and the 13-weeks ended July
     28, 2004 and July 30, 2003, respectively. Cash received for tax refunds and
     credits was $2 million for the 13-weeks ended April 30, 2003.

10.  TREASURY STOCK

               On August 28, 2003, the Company's Board of Directors approved the
     repurchase of up to $10 million of the Company's outstanding stock for the
     primary purpose of providing restricted stock grants to certain employees.
     On June 29, 2004, the Company's Board of Directors increased the existing
     share repurchase authorization to $100 million and broadened the scope of
     future repurchases to include the repurchase of shares in furtherance of
     general corporate purposes. During fiscal 2003, we repurchased 128,400
     shares of Common Stock (weighted-average price of $28.87 per share)
     primarily for the purpose of providing restricted stock grants, at a cost
     of approximately $4 million. We issued 17,109 and 32,061 shares of
     restricted stock during the 13-weeks and 26-weeks ended July 28, 2004,
     respectively; see Note 11 - Stock-Based Compensation. There were 29,868 and
     43,749 shares in treasury as of July 28, 2004 and January 28, 2004,
     respectively. There were no shares in treasury as of July 30, 2003.

11.  STOCK-BASED COMPENSATION

               The Company accounts for stock-based compensation using the fair
     value method. Total stock-based compensation expense of approximately $1
     million will be recognized in fiscal 2004 for outstanding stock options.

               The Predecessor Company accounted for stock options using the
     intrinsic value method in accordance with Accounting Principles Board
     Opinion No. 25, "Accounting for Stock Issued to Employees" and related
     interpretations, which did not require the recognition of expense for the
     fair value of stock-based compensation.

               In accordance with the disclosure requirements of SFAS No. 148,
     "Accounting for Stock-Based Compensation - Transition and Disclosure, an
     Amendment of FASB Statement No. 123" the pro forma effects of recognizing
     the fair value of stock-based compensation on net loss and loss per share
     had the Predecessor Company applied the fair value method to stock options
     granted by the Predecessor Company would have resulted in a pro forma
     adjustment of $38 million for stock-based employee compensation income, a
     pro forma net loss of $824 million and a pro forma basic/diluted loss per
     share of $1.58 for the 13-weeks ended April 30, 2003. Pro forma stock-based
     employee compensation income of $38 million for the 13-weeks ended April
     30, 2003 is due to the reversal of expense for options that were not vested
     upon cancellation of the outstanding stock awards of the Predecessor
     Company.

               Upon our emergence from Chapter 11, all outstanding stock options
     of the Predecessor Company were cancelled in accordance with the Plan of
     Reorganization.

               During the 26-weeks ended July 28, 2004, we issued 32,061 shares
     of restricted stock at grant prices ranging from $29.23 to $33.44. We
     accounted for these restricted stock grants as fixed awards, and recorded
     deferred employee compensation to Capital in excess of par value. Deferred
     employee compensation of $1 million is being amortized to compensation
     expense on a straight-line basis over the vesting period of three years for
     these grants.

12.  PROPERTY HELD FOR SALE

               Property held for sale was $35 million, $56 million and $117
     million as of July 28, 2004, January 28, 2004 and July 30, 2003,
     respectively, and is included within Other current assets in our Unaudited
     Condensed Consolidated Balance Sheets. During the 13-weeks and 26-weeks
     ended July 28, 2004, we sold $15 million and $17 million of these assets
     for their book value, respectively. During the second quarter of fiscal
     2003, we sold $43 million of these assets for a net gain of $1 million.

13.  COMPREHENSIVE INCOME (LOSS)

               Comprehensive income (loss) represents net income or loss,
     adjusted for the effect of other items that are recorded directly to
     shareholders' equity. During the 26-weeks ended July 28, 2004, we sold
     available-for-sale equity securities and in conjunction with these sales,
     reduced accumulated other comprehensive income by $1 million. Comprehensive
     income and net income are equivalent for the 13-weeks ended July 28, 2004.
     For the 13-weeks ended April 30, 2003, comprehensive loss included a
     minimum pension liability adjustment of $94 million. No adjustments were
     made to comprehensive income (loss) for the 13-weeks ended July 30, 2003.


                                       18
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

14.  INVESTMENTS IN AFFILIATED RETAIL COMPANIES

               Kmart footwear departments are operated under a master agreement
     and license agreement with certain Meldisco subsidiaries of Footstar, Inc.
     ("FTS"), substantially all of which are 49% owned by Kmart and 51% owned by
     FTS. On March 2, 2004, FTS and its direct and indirect subsidiaries,
     including all Meldisco subsidiaries, filed for Chapter 11 protection in the
     United States Bankruptcy Court for the Southern District of New York. FTS
     continues to operate its businesses and manage its properties as
     debtors-in-possession. Given the profitability of the Meldisco subsidiaries
     with which we do business, and the likelihood of future receipts of the
     amounts due from those Meldisco subsidiaries, no valuation reserve has been
     established for $24 million due to us from FTS as of July 28, 2004. On
     August 12, 2004, FTS filed a motion with the Bankruptcy Court to assume the
     master agreement and the license agreements. In order to effect such
     assumption, FTS must cure all past defaults. FTS asserts that the amount
     required to cure past defaults is $18 million, and that such amount should
     be reduced by overpayments FTS alleges it made to the Company for certain
     fees. We filed a proof of claim in the FTS bankruptcy case for an amount in
     excess of our recorded receivable; however, at this time, we are not able
     to accurately determine the ultimate amount to be realized as we have not
     received all information from FTS necessary for us to complete our claim.
     The Company believes the cure amount may be substantially in excess of $18
     million. If no resolution is achieved consensually with FTS with respect to
     the assumption of the master agreement and the license agreements and the
     cure amount, the issue will be resolved by the Bankruptcy Court.

               On May 7, 2004, FTS sold 353 of its Footaction stores to Foot
     Locker, Inc. for $225 million. Following the sale of the Footaction stores,
     FTS consists primarily of the Meldisco business.

               We have been advised that FTS will be restating its financial
     statements for certain prior periods. As a result, we have not received
     final financial statements for fiscal 2002, 2003 or the first and second
     quarters of fiscal 2004 for the Meldisco subsidiaries with which we do
     business at the time of our filing of this Quarterly Report on Form 10-Q.
     We have received preliminary financial results from FTS which we believe
     provide a reliable basis to estimate equity income as recognized in all
     periods presented in our Unaudited Condensed Consolidated Statements of
     Operations. For the 26-weeks ended July 28, 2004 and the 13-weeks ended
     July 28, 2004, July 30, 2003 and April 30, 2003, those Meldisco
     subsidiaries had net sales at our footwear departments of $384 million,
     $198 million, $222 million and $246 million, respectively. We had no equity
     income from the Meldisco subsidiaries for the 13-weeks ended July 28, 2004.
     For the 26-weeks ended July 28, 2004 and the 13-weeks ended July 30, 2003
     and April 30, 2003, our equity income in those Meldisco subsidiaries was $3
     million, $2 million and $7 million, respectively. Although there can be no
     assurance until FTS restates its financial statements, at this time, we do
     not expect the restatement to have a material effect on our equity income
     or other fees earned from the Meldisco subsidiaries.

               The Company has reviewed FTS' monthly operating reports for
     periods following their Chapter 11 filing, and noted that FTS has allocated
     certain of their reorganization costs to the Meldisco business. These
     charges have adversely impacted our estimated earnings recorded in fiscal
     2004. We disagree with their approach and have notified FTS of our
     position.

15.  RELATED PARTY TRANSACTIONS

               During the second quarter of fiscal 2004, ESL hired an employee
     of the Company. This employee has assumed the role of Vice President of
     ESL, and will continue to serve Kmart as Vice President - In-Store Business
     Development.

               As further discussed in the Company's MD&A, the Company is
     considering various uses of its cash, including investments in various
     forms of securities. The Board of Directors of the Company has delegated
     authority to invest the Company's surplus cash to Edward Lampert, subject
     to various limitations including those in the Company's existing Credit
     Facility as well as additional limitations that have been or may be from
     time to time adopted by the Board of Directors and/or the Finance Committee
     of the Board of Directors. Mr. Lampert is Chairman of the Company's Board
     of Directors and is the Chairman and Chief Executive Officer of ESL.
     Neither Mr. Lampert nor ESL will receive compensation for any such
     investment activities undertaken on behalf of the Company.


                                       19
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

               Further, to clarify the expectations that the Board of Directors
     has with respect to the investment of our surplus cash, the Board has
     renounced, in accordance with Delaware law, any interest or expectancy of
     the Company associated with any investment opportunities in securities that
     may come to the attention of Mr. Lampert or any employee, officer, director
     or adviser to ESL and its affiliated investment entities who also serves as
     an officer or director of the Company (each, a "Covered Party") other than
     (a) investment opportunities that come to such Covered Party's attention
     directly and exclusively in such Covered Party's capacity as a director of,
     officer or employee of the Company, (b) control investments in companies in
     the mass merchandise or discount retailing industry and (c) investment
     opportunities in companies or assets with a significant role in the
     Company's retailing business, including investment in real estate currently
     leased by the Company or in suppliers for which the Company is a
     substantial customer representing over 10% of such companies' revenues,
     unless in any such instance ESL has a pre-existing investment.

16.  DISCONTINUED OPERATIONS

               During the first quarter of fiscal 2003, the Predecessor Company
     closed 316 stores, of which 66 stores met the criteria to be accounted for
     as discontinued operations. The Company applied the provisions of SFAS No.
     144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
     which requires closed stores to be classified as discontinued operations
     when the operations and cash flows of the stores have been (or will be)
     eliminated from ongoing operations and the company no longer has any
     significant continuing involvement in the operations associated with the
     stores after closure. The table below sets forth the components of the net
     loss associated with the discontinued operations for the 13-weeks ended
     April 30, 2003.

<TABLE>
<CAPTION>
                                                     Predecessor Company
                                                      -------------------
                                                        13-Weeks Ended
     (dollars in millions)                              April 30, 2003
     ---------------------                           -------------------
     <S>                                             <C>
     Sales                                                  $232
     Cost of sales, buying and occupancy                     150
                                                            ----

     Gross margin                                             82
     Selling, general and administrative expenses             43
     Restructurings, impairments and other charges             5
     Reorganization items, net                                44
                                                            ----
     Discontinued operations, net of tax                    $(10)
                                                            ====
</TABLE>

17.  SPECIAL CHARGES

               Special charges are transactions which, in management's judgment,
     may make meaningful comparisons of operating results between reporting
     periods difficult. In determining what amounts constitute a special charge,
     management considers the nature, magnitude and frequency of their
     occurrence. During fiscal 2002, the Predecessor Company instituted certain
     restructuring actions to improve operations and executed significant
     inventory liquidations as a result of the stores closed under Chapter 11
     proceedings. The effects of these actions on the 13-weeks ended April 30,
     2003 are summarized below.

     Corporate Cost Reduction Initiatives

               During fiscal 2002 and the 13-weeks ended April 30, 2003, the
     Predecessor Company eliminated approximately 950 positions with an initial
     charge of $50 million recorded in fiscal 2002. The Predecessor Company
     reduced its reserve for such corporate cost reductions by $10 million in
     the 13-weeks ended April 30, 2003, as a result of a change in the estimated
     expenses. This reduction is included in Restructuring, impairment and other
     charges in the Unaudited Condensed Consolidated Statements of Operations.

     Accelerated Depreciation

               The Predecessor Company recorded charges of $52 million during
     the 13-weeks ended April 30, 2003 for accelerated depreciation on
     unimpaired assets to be disposed of following the 316 store closings. Of
     the $52 million recorded, $47 million is included in Restructurings,
     impairments and other charges and $5 million is included in Discontinued
     operations in the Unaudited Condensed Consolidated Statements of
     Operations.


                                       20
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
     (CONTINUED)

     Reserve Activity

               As part of Fresh-Start accounting, reserves established in
     connection with certain restructurings were discharged as of April 30, 2003
     in accordance with the Plan of Reorganization. See Note 2 - Emergence from
     Chapter 11 Bankruptcy Protection and Fresh-Start Accounting for a detailed
     discussion of the discharge of Liabilities subject to compromise under the
     Plan of Reorganization.

               Restructuring reserves related to the fiscal 2002 employee
     severance program were assumed by the Successor Company. There was no
     activity to the reserve for the 13-weeks ended July 28, 2004. Payments made
     against the reserve were $1 million and $19 million for the 26-weeks ended
     July 28, 2004 and the 13-weeks ended July 30, 2003, respectively. During
     the 13-weeks ended April 30, 2003, the Predecessor Company recorded
     non-cash reductions of $2 million and decreased the reserve by $10 million,
     as noted above. As of July 28, 2004, January 28, 2004 and July 30, 2003,
     the liability for the fiscal 2002 employee severance program was $1
     million, $4 million and $17 million, respectively.

18.  REORGANIZATION ITEMS, NET

               Reorganization items represent amounts the Predecessor Company
     incurred as a result of its Chapter 11 reorganization, and are presented
     separately in the Unaudited Condensed Consolidated Statements of
     Operations. For the 13-weeks ended April 30, 2003, the following were
     recorded:

<TABLE>
<CAPTION>
                                                         Predecessor Company
                                                         -------------------
                                                            13-Weeks Ended
     (dollars in millions)                                  April 30, 2003
     ---------------------                               -------------------
     <S>                                                 <C>
     Gain on extinguishment of debt                            $(5,642)
     Revaluation of assets and liabilities                       5,642
     Fleming settlement                                            385
     Estimated claims for rejected executory contracts             200
     2003 store closings                                           158
     Other                                                          26
                                                               -------
     Reorganization items, net                                 $   769
                                                               =======
</TABLE>

               The following paragraphs provide additional information relating
     to costs that were recorded in Reorganization items, net in the Unaudited
     Condensed Consolidated Statement of Operations for the 13-weeks ended April
     30, 2003.

     Gain on extinguishment of debt/Revaluation of assets and liabilities

               See Note 2 - Emergence from Chapter 11 Bankruptcy Protection and
     Fresh-Start Accounting for a discussion on the extinguishment of debt and
     the revaluation of assets and liabilities.

     Fleming settlement

               On February 3, 2003, the Predecessor Company announced the
     termination of the supply relationship with Fleming Companies, Inc.
     ("Fleming") by means of a rejection of the 2001 contract through the
     Debtor's Chapter 11 reorganization. As part of the bankruptcy proceedings,
     Fleming filed a claim of $1.5 billion on March 11, 2003. The Predecessor
     Company and Fleming came to an agreement on a settlement of Fleming's
     claims, and on March 27, 2003, the Court approved the settlement of all
     claims asserted by Fleming. Under the settlement, the Predecessor Company
     paid Fleming $15 million of Fleming's net post-petition administrative
     claim, which exceeded $30 million. Additionally, Fleming's general
     unsecured claim was reduced from approximately $1.5 billion to $385
     million, which was recorded in the first quarter of fiscal 2003.


                                       21
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
     (CONTINUED)

     Estimated claims for rejected executory contracts

               For the 13-weeks ended April 30, 2003, the Predecessor Company
     recorded expense of $200 million for estimated allowable claims for
     rejected executory contracts, primarily equipment leases and service
     contracts. The estimate was based on a review of each class of contract. On
     April 30, 2003, upon adoption of Fresh-Start accounting, these liabilities
     were discharged in accordance with the Plan of Reorganization; see Note 2 -
     Emergence from Chapter 11 Bankruptcy Protection and Fresh-Start Accounting.

     2003 store closings

               As a result of the decision to close the 316 stores, the
     Predecessor Company recorded a charge of $214 million in the first quarter
     of fiscal 2003 for lease terminations and other costs, of which $56 million
     is included in Discontinued operations and the remaining $158 million is
     included in Reorganization items, net in the Unaudited Condensed
     Consolidated Statements of Operations.

     Other reorganization items

               For the 13-weeks ended April 30, 2003, the Predecessor Company
     recorded professional fees of $43 million, employee costs of $66 million
     relating to the Key Executive Retention Program, a gain of $17 million for
     the sale of pharmacy customer lists, income of $65 million for lease
     auction proceeds related to the 2003 and 2002 closed stores, a gain of $15
     million for the settlement of pre-petition liabilities and net expenses of
     $14 million for other miscellaneous reorganization items.

19.  COMMITMENTS AND CONTINGENCIES

     Securities Action Litigation

               On March 18, 2002, a class action was filed in the United States
     District Court for the Eastern District of Michigan on behalf of
     participants or beneficiaries of the Kmart Corporation Retirement Savings
     Plan against various current and former employees and former directors of
     Kmart Corporation alleging breach of fiduciary duty under the Employee
     Retirement Income Security Act for excessive investment in the Predecessor
     Company's stock; failure to provide complete and accurate information about
     the Predecessor Company's common stock; and failure to provide accurate
     information regarding the Predecessor Company's financial condition.
     Subsequently, amended complaints were filed that added additional current
     and former employees and former directors of the Predecessor Company as
     defendants. Kmart is not a defendant in this litigation. On July 29, 2002,
     the plaintiffs filed proofs of claim with the Court in an aggregate amount
     equal to $180 million. On August 20, 2003, the defendants' motion to
     dismiss the purported class action in the United States District Court for
     the Eastern District of Michigan was denied. That court certified the class
     on April 16, 2004, but the class has yet to be defined.

     Other and Routine Actions

               Two of our past providers of surety bonds, Fireman's Fund
     Insurance Company ("Fireman's Fund"), and the Hartford Insurance Company
     ("Hartford") elected not to participate in the continuation of our surety
     program during the pendency of the Predecessor Company's bankruptcy case.
     Fireman's Fund has now filed a motion with the Bankruptcy Court seeking (i)
     recovery of $34 million that Fireman's Fund alleges it has paid pursuant to
     pre-petition surety bonds it issued with regard to the Predecessor
     Company's workers' compensation insurance programs, and (ii) an order
     obligating us to make all payments of Fireman's Fund's future obligations
     under the bonds, which Fireman's Fund contends could be in excess of $35
     million. We have filed an opposition to the motion contending, among other
     things, that Fireman's Fund's claim is an unsecured pre-petition claim that
     was resolved under the Plan of Reorganization that was approved by the
     Bankruptcy Court, and therefore Fireman's Fund has the same rights as any
     other general unsecured creditor under that Plan. Kmart has been advised by
     Hartford that they may file a similar motion.


                                       22
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
     (CONTINUED)

               On November 7, 2003, the Company filed suit in the United States
     District Court for the Eastern District of Michigan against Capital One
     Bank, Capital One, F.S.B., and Capital One Services, Inc. (collectively,
     "Capital One"). The complaint alleges breach of contract, breach of the
     covenant of good faith and fair dealing, unjust enrichment, promissory
     estoppel and tortious interference with business relationships and
     prospective economic advantage arising out of Capital One's alleged failure
     to market and support a co-branded credit card under an agreement the
     parties had with respect to a Kmart MasterCard. Kmart is seeking monetary
     damages. On December 26, 2003 Kmart voluntarily dismissed the federal court
     complaint and refiled the complaint in Oakland County Circuit Court (State
     of Michigan) based on a lack of diversity of citizenship amongst the
     parties. On January 29, 2004 Capital One filed a petition for removal of
     the state court action back to the federal court and, in response, Kmart
     filed a motion to remand on February 9, 2004. The case was remanded to the
     Oakland County Circuit Court on June 10, 2004 and is scheduled for trial on
     March 1, 2005.

               In Capital Factors v. Kmart Corporation, the United States
     District Court for the Northern District of Illinois ruled that the Court
     did not have the authority to authorize the payment of pre-petition claims
     of certain trade vendors by the Company. That ruling was appealed by the
     Company to the Seventh Circuit Court of Appeals. Oral arguments were heard
     by the Seventh Circuit on January 22, 2004 and an opinion was issued on
     February 24, 2004. The Seventh Circuit upheld the decision of the District
     Court. A critical vendor sought a rehearing by the Seventh Circuit, which
     was denied, and a petition for Writ of Certiorari was filed in the Supreme
     Court of the United States that is currently pending. Kmart is not involved
     in the motion for a rehearing and will not further appeal the Seventh
     Circuit's ruling. In order to satisfy our fiduciary responsibility to
     pursue claims against the critical vendors during the pendency of the
     appeal, on January 26, 2004 we filed 45 lawsuits against a total of 1,189
     vendors that received these payments. Subsequently, many of the cases were
     severed into lawsuits against individual defendants although all cases are
     proceeding on a common pretrial procedural track. The lawsuits seek to
     recover critical vendor payments in excess of $174 million. The Company
     notified affected vendors that we are willing to settle these claims for a
     percentage of the money they received, based on the amount of the claim.
     The ultimate amount of recovery can not be determined at this time. As of
     July 28, 2004, Kmart has settled 179 critical vendor claims.

               We are a party to a substantial number of other claims, lawsuits
     and pending actions which are routine and incidental to our business. To
     the extent that any claim relates to a contract which was assumed by us
     when we emerged or relates to a time period occurring after the Petition
     Date, the Successor Company shall be responsible for any damages which may
     result. In addition, certain contracts allow for damage provisions or other
     repayments as a result of our termination of the contracts.

               We assess the likelihood of potential losses on an ongoing basis,
     and when they are considered probable and reasonably estimable, we record
     an estimate of the ultimate outcome. If there is no single point estimate
     of loss that is considered more likely than others, an amount representing
     the low end of the range of possible outcomes is recorded. Our Unaudited
     Condensed Balance Sheet as of July 28, 2004 only reflects potential losses
     for which the Successor Company may have ultimate responsibility.

20.  SUBSEQUENT EVENTS

     Corporate Cost Reductions

               We initiated a corporate cost reduction program in August 2004,
     and in connection with this program, eliminated approximately 250 positions
     at our corporate headquarters in Troy, Michigan. Severance benefits,
     outplacement services and continuing health insurance benefits, which
     amounts are based on employees' years of service and job grade, aggregating
     $6 million will be paid to affected employees primarily over the next six
     months. The anticipated annual savings of this action is $18 million on a
     pre-tax basis. We are also continuing efforts to reduce other corporate
     non-payroll expenses.

     Letter of Credit Facility

               On August 13, 2004, the Company entered into a letter of credit
     agreement (the "LC Agreement") with a commitment amount of up to $200
     million through January 7, 2005 and increasing to $600 million thereafter.
     The standby letters of credit issued under the LC Agreement bear interest
     at 0.20% per annum. The LC Agreement is subject to a pledge and security
     agreement pursuant to which, after January 7, 2005, the Company must post
     as collateral cash in an amount equal to 100.5% of the face value of
     letters of credit outstanding under the LC Agreement. Prior to January 7,
     2005, the collateral posted by the Company is a leasehold mortgage on
     certain properties leased by the Company.


                                       23
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS

     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

               Part I, Item 2 of this report should be read in conjunction with
     Part II, Item 7 of our Annual Report on Form 10-K/A for the year ended
     January 28, 2004. The information contained herein is not a comprehensive
     discussion and analysis of the financial condition and results of
     operations of the Company, but rather an update of the previous
     disclosures.

     CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

               This Form 10-Q/A, as well as other statements or reports made by
     or on behalf of Kmart, which address activities, events or developments
     that we expect or anticipate may occur in the future are forward-looking
     statements within the meaning of the Private Securities Litigation Reform
     Act of 1995 that reflect, when made, Kmart's current views with respect to
     current events and financial performance. Such forward-looking statements
     are based upon assumptions concerning future conditions that may ultimately
     prove to be inaccurate and involve risks, uncertainties and factors that
     could cause actual results to differ materially from any anticipated future
     results, express or implied by such forward-looking statements. Factors
     that could cause actual results to differ materially from these
     forward-looking statements include, but are not limited to, factors
     relating to Kmart's internal operations and the external environment in
     which it operates; Kmart's ability to successfully implement business
     strategies and otherwise fund and execute planned changes in various
     aspects of the business; marketplace demand for the products of Kmart's key
     brand partners, as well as the engagement of appropriate new brand
     partners; changes in consumer spending and Kmart's ability to anticipate
     buying patterns and implement appropriate inventory strategies; Kmart's
     ability to reverse its negative same-store sales trend; competitive
     pressures and other third party actions, including pressures from pricing
     and other promotional activities of competitors, as well as new competitive
     store openings; the resolution of allowed claims for which we are obligated
     to pay cash under the Plan of Reorganization; Kmart's ability to properly
     monitor its inventory needs in order to timely acquire desired goods in
     appropriate quantities and/or fulfill labor needs at planned costs; Kmart's
     ability to attract and retain customers; Kmart's ability to maintain normal
     terms with vendors and service providers; Kmart's ability to maintain
     contracts, including leases, that are critical to its operations; Kmart's
     ability to develop a market niche; regulatory and legal developments;
     general economic conditions; weather conditions, including those which
     affect buying patterns of Kmart's customers; other factors affecting
     business beyond Kmart's control; and Kmart's ability to attract, motivate
     and/or retain key executives and associates. Kmart undertakes no obligation
     to release publicly the results of any revisions to these forward-looking
     statements to reflect events or circumstances after the date such
     statements were made.

               Consequently, all of the forward-looking statements are qualified
     by these cautionary statements and there can be no assurance that the
     results or developments anticipated will be realized or that they will have
     the expected effects on our business or operations. The forward-looking
     statements contained herein or otherwise that we make or are made on our
     behalf speak only as of the date of this report, or if not contained
     herein, as of the date when made, and we do not undertake to update these
     risk factors or such forward-looking statements.

     RESULTS OF OPERATIONS

               The results of operations presented below reflect certain
     restatements to our previously reported results of operations for the
     13-weeks ended July 28, 2004 and July 30, 2003 and the 26-weeks ended July
     28, 2004. See Note 3 - Restatement for a discussion of the restatement.

               Due to the application of Fresh-Start accounting upon our
     emergence from bankruptcy, the reported historical financial statements of
     the Predecessor Company for periods prior to May 1, 2003 generally are not
     comparable to those of the Successor Company.


                                       24
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

               The following table is presented solely to complement
     management's discussion and analysis.

<TABLE>
<CAPTION>
                                                                                                         PREDECESSOR
                                                                    SUCCESSOR COMPANY                      COMPANY
                                                    ------------------------------------------------   --------------
                                                    13-WEEKS ENDED   13-WEEKS ENDED   13-WEEKS ENDED   13-WEEKS ENDED
     (dollars in millions)                           JULY 28, 2004    JULY 30, 2003   APRIL 28, 2004   APRIL 30, 2003
     ---------------------                          --------------   --------------   --------------   --------------
                                                     (AS RESTATED)    (AS RESTATED)    (AS RESTATED)
     <S>                                            <C>              <C>              <C>              <C>
     Sales                                              $4,785           $5,652           $4,615           $6,181
     Cost of sales, buying and occupancy                 3,543            4,419            3,478            4,762
                                                        ------           ------           ------           ------

     Gross margin                                        1,242            1,233            1,137            1,419
     Selling, general and administrative expenses        1,039            1,225            1,004            1,421
     Net gains on sales of assets                          (72)              (2)             (32)              --
     Restructuring, impairment and other charges            --               --               --               37
                                                        ------           ------           ------           ------

     Operating income (loss)                               275               10              165              (39)
     Interest expense, net                                  33               26               28               57
     Bankruptcy related recoveries                          (5)              --               (7)              --
     Equity income in unconsolidated subsidiaries           --               (2)              (3)              (7)
     Reorganization items, net                              --               --               --              769
                                                        ------           ------           ------           ------

     Income (loss) from continuing operations
        before income taxes                                247              (14)             147             (858)
     Provision for (benefit from) income taxes              93               (6)              56               (6)
                                                        ------           ------           ------           ------

     Income (loss) from continuing operations              154               (8)              91             (852)

     Discontinued operations                                --               --               --              (10)
                                                        ------           ------           ------           ------

     Net income (loss)                                  $  154           $   (8)          $   91           $ (862)
                                                        ======           ======           ======           ======
</TABLE>

     13-WEEKS ENDED JULY 28, 2004 COMPARED TO 13-WEEKS ENDED JULY 30, 2003

               Same-store sales and total sales decreased 14.9% and 15.3%,
     respectively, for the 13-weeks ended July 28, 2004 as compared to the
     13-weeks ended July 30, 2003. Same-store sales include sales of all open
     stores that have been open for more than 13 full months. Factors affecting
     same-store sales and total sales included reductions in promotional events
     and newspaper advertising; the effect of unseasonably cool weather in the
     current quarter on sales of summer seasonal products including lawn and
     garden merchandise; and a transition in our apparel lines leading up to
     back-to-school product launches.

               Gross margin increased $9 million to $1.24 billion, for the
     13-weeks ended July 28, 2004, from $1.23 billion for the 13-weeks ended
     July 30, 2003. Gross margin, as a percentage of sales, increased to 26.0%
     for the 13-weeks ended July 28, 2004, from 21.8% in the prior year. The
     improvement in our gross margin rate was primarily attributable to reduced
     markdowns on promotions and clearance items and improvements in shrinkage
     at our distribution centers and stores. Included in gross margin was a $16
     million charge recorded in the second quarter of fiscal 2004 in conjunction
     with the store closings inventory liquidations.


                                       25
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

               Selling, general and administrative expenses ("SG&A") decreased
     $186 million to $1.04 billion, or 21.7% of sales for the 13-weeks ended
     July 28, 2004, from $1.23 billion, also 21.7% of sales, for the 13-weeks
     ended July 30, 2003. The decline resulted from a reduction in store payroll
     and related expenditures due to increased operating efficiencies and
     reduced sales volume at our stores, and to reductions in our weekly and
     mid-week circular advertising, partially offset by an increase in
     electronic media advertising. The remaining net reduction in SG&A is due to
     continued efforts to reduce our operating expenses.

               Operating income for the 13-weeks ended July 28, 2004 was $275
     million, or 5.7% of sales, as compared to $10 million, or 0.2% of sales,
     for the same period in the prior year. Operating income increased primarily
     due to the decrease in SG&A and the increase in the gross margin rate,
     partially offset by reduced gross margin dollars as a result of lower
     same-store sales, as discussed above. Also increasing Operating income were
     net gains of $72 million from sales of real and personal property,
     including $43 million of net gains from the sale of four owned properties
     to Home Depot; see Note 5 - Real Estate and Property Transactions for a
     more detailed discussion.

               Interest expense, net for the 13-weeks ended July 28, 2004 and
     July 30, 2003 was $33 million and $26 million, respectively. In July 2004,
     we voluntarily reduced the size of our credit agreement from $1.5 billion
     to $1.0 billion to reduce the overall cost of the facility. In conjunction
     with this action, we accelerated the amortization of $9 million of the
     associated debt issuance costs, which is included in Interest expense, net
     for the 13-weeks ended July 28, 2004. During the 13-weeks ended July 28,
     2004, $13 million of interest expense was recorded for the accretion of
     obligations recorded at net present value. Interest expense is net of
     interest income of $7 million and $2 million for the 13-weeks ended July
     28, 2004 and July 30, 2003, respectively.

               The effective income tax rate was 37.7% and (42.9%) for the
     13-weeks ended July 28, 2004 and July 30, 2003, respectively; see Note 9 -
     Income Taxes for a more detailed discussion.

     13-WEEKS ENDED APRIL 28, 2004 COMPARED TO 13-WEEKS ENDED APRIL 30, 2003

               Same-store sales and total sales decreased 12.9% and 25.3%,
     respectively, for the 13-weeks ended April 28, 2004 as compared to the
     13-weeks ended April 30, 2003. The decrease in same-store sales is due
     primarily to several Company-wide promotional events occurring in the first
     quarter of fiscal 2003 along with a reduction in advertising, including the
     frequency of mid-week circulars in the current year. The decrease in total
     sales is attributable to the decrease in same-store sales and the closure
     of 316 stores in the first quarter of fiscal 2003.

               Gross margin decreased $282 million to $1.14 billion, for the
     13-weeks ended April 28, 2004, from $1.42 billion for the 13-weeks ended
     April 30, 2003. Gross margin, as a percentage of sales, increased to 24.6%
     for the 13-weeks ended April 28, 2004, from 23.0% for the 13-weeks ended
     April 30, 2003. Favorably affecting the gross margin rate were fewer
     clearance markdowns and reduced depreciation as a result of the write-off
     of long-lived assets in conjunction with the application of Fresh-Start
     accounting.

               SG&A decreased $417 million to $1.0 billion, or 21.8% of sales
     for the 13-weeks ended April 28, 2004, from $1.42 billion, or 23.0% of
     sales, for the 13-weeks ended April 30, 2003. The decrease in SG&A resulted
     from reduced payroll and related expenses in our stores during the first
     quarter of the current year, as well as the effect of store closings and
     corporate cost reduction initiatives implemented in the first quarter of
     fiscal 2003. Also affecting the decline was a reduction in advertising
     expenses and lower depreciation as a result of the write-off of long-lived
     assets in conjunction with the application of Fresh-Start accounting.

               Operating income for the 13-weeks ended April 28, 2004 was $165
     million, or 3.6% of sales, as compared to a loss of $39 million, or (0.6%)
     of sales, for the same period in the prior year. The improvement was
     primarily due to the decrease in SG&A and the improvement in our gross
     margin rate, as discussed above, partially offset by an overall decline in
     gross margin dollars due to our reduced store base. Operating income was
     also affected by net gains on sales of assets of $32 million in the first
     quarter of the current year and Restructuring, impairment and other charges
     of $37 million in the first quarter of fiscal 2003.


                                       26
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

               Interest expense, net for the 13-weeks ended April 28, 2004 and
     April 30, 2003 was $28 million and $57 million, respectively. During the
     13-weeks ended April 28, 2004, $12 million of interest expense was recorded
     for the accretion of obligations recorded at net present value. Included in
     interest expense for the 13-weeks ended April 30, 2003 was $37 million of
     amortization of debt issuance costs associated with the Predecessor
     Company's Court-approved $2 billion debtor-in-possession financing
     facility. Interest at the stated contractual amount on unsecured debt that
     was not charged to earnings for the 13-weeks ended April 30, 2003 was $67
     million. Interest expense is net of interest income of $5 million and $1
     million for the 13-weeks ended April 28, 2004 and April 30, 2003,
     respectively.

               The effective income tax rate was 38.1% and (0.7%) for the
     13-weeks ended April 28, 2004 and April 30, 2003, respectively; see Note 9
     - Income Taxes for a more detailed discussion.

     26-WEEKS ENDED JULY 28, 2004 (SUCCESSOR COMPANY)

               Total sales were $9.40 billion for the 26-weeks ended July 28,
     2004. Same-store sales decreased 13.9%. Reductions in promotions and
     advertising, including the frequency of mid-week circulars in the current
     year, have affected same-store sales and total sales.

               Gross margin for the 26-weeks ended July 28, 2004 was $2.38
     billion or 25.3% of sales. A reduction in clearance markdowns and
     improvements in shrinkage at our distribution centers and stores favorably
     affected gross margin in the current period. Included in gross margin was a
     $17 million charge in conjunction with the store closings inventory
     liquidations.

               SG&A was $2.04 billion, or 21.7% of sales for the period. Reduced
     payroll and related expenses at our stores, as well as a reduction in
     advertising expenses favorably affected SG&A for the period.

               Operating income for the 26-weeks ended July 28, 2004 was $440
     million, or 4.7% of sales. Operating income was favorably affected by the
     gross margin improvements and reductions in SG&A, as discussed above. Also
     included in operating income are net gains of $104 million from sales of
     real and personal property, including $43 million of net gains from the
     sale of four owned properties to Home Depot; see Note 5 - Real Estate and
     Property Transactions.

               Interest expense, net for the 26-weeks ended July 28, 2004 was
     $61 million. In July 2004, we voluntarily reduced the size of our credit
     agreement from $1.5 billion to $1.0 billion to reduce the overall cost of
     the facility. In conjunction with this action, we accelerated the
     amortization of $9 million of the associated debt issuance costs, which is
     included in Interest expense, net for the 26-weeks ended July 28, 2004.
     During the 26-weeks ended July 28, 2004, $25 million of interest expense
     was recorded for the accretion of obligations recorded at net present
     value. Interest expense is net of interest income of $12 million.

               The effective income tax rate was 37.8% for the 26-weeks ended
     July 28, 2004; see Note 9 - Income Taxes for a more detailed discussion.

     LIQUIDITY AND FINANCIAL CONDITION

               Kmart continued to maintain strong liquidity for the 26-weeks
     ended July 28, 2004 with cash flow from operations of $536 million and $153
     million from proceeds from asset sales. Our principal cash needs are for
     our operations and capital expenditures, which are satisfied through
     working capital generated by our business and our existing $2.6 billion
     balance in cash and cash equivalents as of July 28, 2004. Working capital
     generated by our business, is significantly affected by our level of sales
     and the credit extended by our vendors. In addition, we have funds
     available under our $1.0 billion Credit Facility as of July 28, 2004. From
     its inception, we have only used the Credit Facility to support issuances
     of letters of credit. However, should we experience significant negative
     sales trends, a significant disruption of terms with our vendors, the
     Credit Facility for any reason becomes unavailable and/or actual results
     differ materially from those projected, our compliance with financial
     covenants and our cash resources could be adversely affected.

               In the normal course of business, the Company considers
     opportunities to purchase leased operating properties, as well as offers to
     sell owned or if leased, assign operating and non-operating properties.
     These transactions may, individually or in the aggregate, result in
     material proceeds or outlays of cash. In addition, the Company reviews
     leases that will expire in the short-term in order to determine the
     appropriate action to take with respect to the lease.


                                       27
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

     CREDIT FACILITY

               Our Credit Facility is a $1.0 billion revolving credit facility
     with an $800 million letter of credit sub-limit under which Kmart
     Corporation is the borrower. From its inception, we have only used the
     Credit Facility to support issuances of letters of credit. In July 2004, we
     voluntarily reduced the size of the Credit Facility from $1.5 billion to
     $1.0 billion to reduce the overall cost of the facility. Availability under
     the Credit Facility is subject to an inventory borrowing base formula. The
     Credit Facility is guaranteed by the Successor Company, Kmart Management
     Corporation, Kmart Services Corporation (a subsidiary of Kmart Management
     Corporation) and Kmart Corporation's direct and indirect domestic
     subsidiaries. The Credit Facility is secured primarily by first liens on
     inventory, the proceeds thereof and certain related assets of Kmart
     Corporation and the guarantors.

               Borrowings under the Credit Facility are subject to a pricing
     grid based on our earnings before interest, taxes, depreciation,
     amortization and other charges ("EBITDA") levels and such adjustments are
     implemented quarterly. Borrowings currently bear interest at either (i) the
     Prime rate plus 1.5% per annum or (ii) the LIBOR rate plus 2.5% per annum,
     at our discretion, and utilization of the letter of credit sub-facility in
     support of trade and standby letters of credit currently bears interest at
     1.25% and 2.50% per annum, respectively. In addition, we are currently
     required to pay a fee based on the unutilized commitment under the Credit
     Facility equal to 0.50% per annum. The Credit Facility gives the Company
     the ability to repurchase up to $500 million of the Company's Common Stock,
     depending on our EBITDA levels and subject to the approval of the Company's
     Board of Directors.

               In accordance with the terms and conditions of the Credit
     Facility, we are submitting the required information to support a reduction
     in the current interest rates. We anticipate borrowings, if any, under the
     Credit Facility will bear interest at either (i) the Prime rate plus 1.0%
     per annum or (ii) the LIBOR rate plus 2.0% per annum, at our discretion,
     and utilization of the letter of credit sub-facility in support of trade
     and standby letters of credit will bear interest at 1.25% and 2.00% per
     annum, respectively. The unutilized commitment fee will equal 0.375% per
     annum.

               As of July 28, 2004, we had utilized $341 million of the Credit
     Facility for letters of credit issued for ongoing import purchasing
     operations, and contractual and regulatory purposes, including letters of
     credit utilized as collateral to support our self-insurance programs.
     During the first six months of fiscal 2004, we replaced letters of credit
     used as collateral for certain programs with cash collateral to reduce fees
     on our letters of credit. We continue to classify the cash collateral in
     Cash and cash equivalents due to our ability to convert the cash to letters
     of credit at any time at our discretion. As of July 28, 2004, $214 million
     of cash was posted as collateral.

               Total availability under the Credit Facility as of July 28, 2004
     was approximately $630 million.

               The Credit Facility financial covenants include a requirement
     that we maintain certain availability minimums, and failure to do so
     triggers additional required minimum levels of EBITDA. The Credit Facility
     also contains other customary covenants, including certain reporting
     requirements and covenants that restrict our ability to incur or create
     liens, indebtedness and guarantees, make investments, pay dividends or make
     other equity distributions, sell or dispose of stock or assets, change the
     nature of our business and enter into affiliate transactions, mergers and
     consolidations. Failure to satisfy these covenants would (in some cases,
     after the receipt of notice and/or the expiration of a grace period) result
     in an event of default that could result in our inability to access the
     funds. As of July 28, 2004 and in all periods since our emergence from
     Chapter 11, we have been in compliance with all Credit Facility covenants.

     CASH FLOWS

               Operating activities provided net cash of $536 million and $576
     million for the 26-weeks ended July 28, 2004 and the 13-weeks ended April
     30, 2003, respectively. During the 13-weeks ended July 30, 2003, operating
     activities used $172 million of net cash. Improved net earnings and a
     reduction in working capital primarily drove the cash flow increase for the
     26-weeks ended July 28, 2004. For the 13-weeks ended July 30, 2003, the use
     of cash was primarily due to payments of $451 million for exit costs and
     reorganization items, partially offset by a reduction of inventory, net of
     accounts payable. For the 13-weeks ended April 30, 2003, a decrease in
     inventory due to liquidation sales in conjunction with store closings and
     improved inventory management, partially offset by a decrease in accounts
     payable, had a favorable affect on operating cash flow.


                                       28
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

               Investing activities generated $29 million, $17 million and $60
     million for the 26-weeks ended July 28, 2004 and the 13-weeks ended July
     30, 2003 and April 30, 2003, respectively. During the current period, we
     received proceeds of $153 million from sales of real and personal property,
     including $59 million from the sale of four owned properties to Home Depot.
     We have not received any other proceeds as of July 28, 2004 for the sale
     and assignment of other properties to Home Depot or Sears as remaining
     transactions had not yet been consummated. See Note 5 - Real Estate and
     Property Transactions and Note 12 - Property Held for Sale for a more
     detailed discussion of these transactions. During the 26-weeks ended July
     28, 2004, we purchased 22 previously-leased operating properties for $84
     million. Proceeds of $64 million were received during the 13-weeks ended
     April 30, 2003, from the sale of four owned Kmart store locations and the
     sale of furniture and fixtures from closed store locations.

               Payments on capital lease obligations and mortgages of $27
     million and $17 million were the uses of cash for financing activities
     during the 26-weeks ended July 28, 2004 and the 13-weeks ended April 30,
     2003, respectively. Financing activities provided $123 million in cash for
     the 13-weeks ended July 30, 2003. Upon emergence from bankruptcy in May
     2003, the Company received net proceeds of $127 million from the issuance
     of Common Stock to the Plan Investors and proceeds of $60 million from the
     issuance of the convertible note to affiliates of ESL. The positive affect
     of these items was partially offset by payments made for other financing
     arrangements. Refer to Note 2 - Emergence from Chapter 11 Bankruptcy
     Protection and Fresh-Start Accounting for a more detailed discussion.

               On August 28, 2003, the Company's Board of Directors approved the
     repurchase of up to $10 million of the Company's outstanding stock for the
     primary purpose of providing restricted stock grants to certain employees.
     On June 29, 2004, the Company's Board of Directors increased the existing
     share repurchase authorization to $100 million and broadened the scope of
     future repurchases to include the repurchase of shares in furtherance of
     general corporate purposes. As of July 28, 2004, we had repurchased
     approximately $4 million of Common Stock.

     FUTURE LIQUIDITY ITEMS

     PENSION PLAN

               Prior to 1996, the Predecessor Company maintained defined benefit
     pension plans covering eligible associates. Effective January 31, 1996, the
     pension plans were frozen, and associates no longer earn additional
     benefits under the plans (except for purposes of the subsidized early
     retirement program provided by the plan). The plans' assets consist
     primarily of equity and fixed income securities. Prior to 2004, no
     contributions had been made to the plans for the past eight years.

               During the 13-weeks and 26-weeks ended July 28, 2004
     contributions to the plans were approximately $1 million. The estimated
     contribution for fiscal 2004 is $11 million. Contributions to the plans
     were not required for the 13-weeks ended July 30, 2003 or April 30, 2003.

               Pension expense was $8 million, $4 million, $9 million and $21
     million for the 26-weeks ended July 28, 2004 and the 13-weeks ended July
     28, 2004, July 30, 2003 and April 30, 2003, respectively.

     REAL ESTATE TRANSACTIONS

     Home Depot U.S.A., Inc.

               On June 3, 2004, the Company entered into multiple definitive
     agreements with Home Depot U.S.A., Inc. (a subsidiary of The Home Depot,
     Inc.) ("Home Depot") to sell up to four owned properties and assign up to
     20 leased properties for a maximum purchase price of $365 million in cash.
     Pursuant to the first of these agreements, on June 15, 2004, the Company
     completed the sale of four owned properties to Home Depot for $59 million
     in cash, resulting in a net gain of $43 million. On August 10, 2004 the
     second agreement was amended, which limited the number of leased properties
     to be assigned to not more than 15 properties with a maximum purchase price
     of $230 million in cash. We completed the assignment of nine of these
     properties on August 13, 2004, resulting in proceeds to the Company of $114
     million in cash. We anticipate that Home Depot may close on the remaining
     six leases by the end of August 2004, subject to certain closing conditions
     being satisfied. In the event Home Depot does not close on certain of these
     properties, we have the option to assign up to two of these properties to
     Home Depot for a maximum of $42 million in cash.


                                       29
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

     Sears, Roebuck and Co.

               On June 29, 2004, the Company entered into an agreement with
     Sears, Roebuck and Co. ("Sears") to sell up to two owned properties and
     assign up to 52 leased properties for a maximum purchase price of $621
     million in cash. Pursuant to this agreement, certain closing conditions for
     a minimum of 43 of the properties must be satisfied by August 31, 2004.
     However, if the closing conditions have not been satisfied by August 31,
     2004, the Company, at its option, may give written notice to Sears by
     September 9, 2004 to proceed with the closing with respect to those
     properties for which closing conditions have been satisfied. In the event
     the closing conditions for the 43 properties have not been satisfied by
     August 31, 2004 and written notice has not been given to Sears by the
     Company, either party may terminate the purchase agreement subsequent to
     September 9, 2004, but prior to the date closing conditions are satisfied
     for at least 43 properties. Assuming such conditions are met, the Company
     will receive 30% of the purchase price in September 2004. The remaining 70%
     of the purchase price will be received when Sears has been assigned the
     leases and occupies the properties, which shall take place no later than
     April 15, 2005.

     OTHER

               In light of the Company's liquidity position and subject to
     compliance with our Credit Facility, we may consider various uses of cash
     and other resources in the future which could include investments in
     various forms of securities, share repurchases, the acquisition of related
     or unrelated businesses, and the payment of dividends.

     STORE ACTIVITY

               During the 26-weeks ended July 28, 2004 the Company purchased 22
     previously leased store locations; closed four operating stores; and
     allowed leases to expire on four stores. As of July 28, 2004, we operated
     1,503 stores.

               In the second quarter of fiscal 2003, we closed one store. In the
     first quarter of fiscal 2003, the Predecessor Company closed 316 stores.

     CRITICAL ACCOUNTING POLICIES AND ESTIMATES

               In preparing our financial statements, certain of our accounting
     policies require considerable judgment to select the appropriate
     assumptions to calculate financial estimates. By their nature, these
     estimates are complex and subject to an inherent degree of uncertainty. We
     base our estimates on historical experience, terms of existing contracts,
     our evaluation of trends and other assumptions that we believe to be
     reasonable under the circumstances. We continually evaluate the information
     used to make these estimates as our business and the economic environment
     change.

               Management believes the current assumptions and other
     considerations used to estimate amounts reflected in our financial
     statements are appropriate. However, if actual experience differs from the
     assumptions and other considerations used in estimating amounts, the
     resulting changes could have a material adverse effect on our consolidated
     results of operations, and in certain situations, could have a material
     adverse effect on our financial condition. We have disclosed our critical
     accounting policies and estimates, which include inventory valuation,
     self-insurance reserves, pension accounting and deferred taxes, in our
     Annual Report on Form 10-K/A for the year ended January 28, 2004.

     RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

               For a comprehensive discussion see Note 4 - New Accounting
     Pronouncements.

     DISCONTINUED OPERATIONS

               During the first quarter of fiscal 2003, the Predecessor Company
     closed 316 stores. Of the total stores closed, 66 met the criteria for
     discontinued operations. For a comprehensive discussion see Note 16 -
     Discontinued Operations.

               For the 13-weeks ended April 30, 2003, 250 of the 316 stores
     closed were accounted for in continuing operations as they did not meet the
     criteria for discontinued operations. Total sales, gross margin and SG&A
     for these 250 stores were $854 million, $301 million and $146 million,
     respectively.


                                       30
<PAGE>
     MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

     SPECIAL CHARGES

               Special charges are transactions which, in management's judgment,
     may make meaningful comparisons of operating results between reporting
     periods difficult. In determining what amounts constitute a special charge,
     management considers the nature, magnitude and frequency of their
     occurrence. For the 13-weeks ended April 30, 2003, the Predecessor Company
     recorded special charges of $42 million. For a comprehensive discussion see
     Note 17 - Special Charges.

     REORGANIZATION ITEMS, NET

               Reorganization items represent amounts the Predecessor Company
     incurred as a result of Chapter 11, and are presented separately in the
     Unaudited Condensed Consolidated Statements of Operations as required by
     SOP 90-7. The Predecessor Company recorded $813 million for the 13-weeks
     ended April 30, 2003 for reorganization items. For a comprehensive
     discussion see Note 18 - Reorganization Items, net.

     OTHER MATTERS

               Martha Stewart was convicted on March 5, 2004 of conspiracy,
     obstruction of justice and two counts of making false statements to federal
     investigators. Ms. Stewart has been sentenced to five months in prison,
     five months of home confinement and two years probation. Ms. Stewart is
     appealing the sentence. The Martha Stewart Everyday brand is considered a
     distinctive brand for Kmart and we currently sell Martha Stewart Everyday
     home, garden, colors, baby, kitchen, keeping and decorating product lines,
     along with candles and accessories. To date, we have not experienced any
     significant adverse impact from this matter on the sales of Martha Stewart
     Everyday brand products. Although product sales have not been significantly
     affected by past events, the Company is not able to determine the potential
     effects that these events may have on the future sales of its Martha
     Stewart Everyday brand products.

               In March 2002, the Court issued an order providing for the
     continuation of the Predecessor Company's existing surety bond coverage,
     which permitted the Predecessor Company to self-insure its workers'
     compensation programs in various states. We have reached agreements with
     four issuers of pre-petition surety bonds on the terms and conditions of a
     continuation of their respective bonds.


                                       31
<PAGE>
     ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

               At July 28, 2004, we did not have any derivative instruments that
     increased our exposure to market risks for interest rates, foreign currency
     rates, commodity prices or other market price risks. We do not use
     derivatives for speculative purposes. Currently, our exposure to market
     risks results primarily from changes in interest rates, principally with
     respect to the Credit Facility, which is a variable rate financing
     agreement. We do not use swaps or other interest rate protection agreements
     to hedge this risk.

     ITEM 4. CONTROLS AND PROCEDURES

               Under the supervision of, and with the participation of our
     management, including our Chief Executive Officer and Chief Financial
     Officer, we conducted an evaluation of the effectiveness of the design and
     operation of our disclosure controls and procedures, as defined in Rules
     13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
     amended (the "Exchange Act"), as of the end of the period covered by this
     report (the "Evaluation Date"). Based on this evaluation, our Chief
     Executive Officer and Chief Financial Officer concluded that, as of the
     Evaluation Date, our disclosure controls and procedures were effective in
     alerting them on a timely basis to material information relating to the
     Company (including its consolidated subsidiaries) required to be included
     in the Company's periodic filings under the Exchange Act. Notwithstanding
     the foregoing, a control system, no matter how well designed and operated,
     can provide only reasonable, not absolute, assurance that it will uncover
     or detect failures within the Company to disclose material information
     otherwise required to be set forth in the Company's periodic reports.

               As a result of the Securities and Exchange Commission's ("SEC")
     review of our Form 10-K for the year ended January 28, 2004, it was
     determined that the Company did not reflect an embedded beneficial
     conversion feature of the convertible note issued upon the Company's
     emergence from bankruptcy as required by Emerging Issues Task Force No.
     00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments"
     ("EITF 00-27"). This review was performed in conjunction with the SEC's
     review of Sears Holdings Corporation's registration statement on Form S-4
     in connection with the pending merger between Kmart and Sears, Roebuck and
     Company ("Sears"). Upon shareholder approvals of the merger transaction,
     Sears Holdings Corporation will be a new retail company resulting from the
     merger of Kmart and Sears. According to EITF 00-27, the accounting
     treatment of the note is based on the determination of a commitment date. A
     commitment date occurs when, amongst other things, an agreement is binding
     on both parties and the agreement specifies all significant terms,
     including the quantity to be exchanged. The Company believed that it had
     met these qualifications as of the initial agreement date and accounted for
     the note accordingly. The SEC believes that at the time of the agreement,
     these conditions had not been met, and therefore the commitment date did
     not occur until the issuance of the note. After discussions with the SEC,
     the Company has agreed to restate its financial statements.

               The determination that the commitment date was at the issuance of
     the note rather than when the agreement was signed effected the valuation
     of the beneficial conversion feature as a result of a change in the fair
     value of the Company's common stock between these two periods. The
     restatement is further discussed in "Explanatory Note" in the forepart of
     this Form 10-Q/A, and in Note 3, "Restatement" in the Notes to the
     Unaudited Condensed Consolidated Financial Statements in Item 1. In
     management's opinion, given the interpretive nature of the restatement,
     such restatement did not change its conclusion that the Company's controls
     and procedures are effective.

               No changes in the Company's internal controls over financial
     reporting have come to management's attention that occurred during the
     Company's last fiscal quarter that have materially affected, or are
     reasonably likely to materially affect, the Company's internal control over
     financial reporting.


                                       32
<PAGE>
     PART II. OTHER INFORMATION

     ITEM 1. LEGAL PROCEEDINGS

               See Note 19 of the Notes to Unaudited Condensed Consolidated
     Financial Statements for information concerning legal proceedings.

     ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
             EQUITY SECURITIES

               On August 28, 2003, the Company's Board of Directors approved the
     repurchase of up to $10 million of the Company's outstanding stock for the
     primary purpose of providing restricted stock grants to certain employees.
     On June 29, 2004, the Company's Board of Directors increased the existing
     share repurchase authorization to $100 million and broadened the scope of
     future repurchases to include the repurchase of shares in furtherance of
     general corporate purposes. We have the authorization to repurchase
     approximately $96 million of Common Stock under the program as of July 28,
     2004.

<TABLE>
<CAPTION>
                                                                          Total           Approximate
                                                                     Number of Shares     Dollar Value
                                                          Average   Purchased as Part    of Shares that
                                            Total          Price       of Publicly         May Yet Be
                                      Number of Shares   Paid per       Announced       Purchased Under
                 Period                 Purchased (1)      Share         Program          the Program
     ------------------------------   ----------------   --------   -----------------   ---------------
     <S>                              <C>                <C>        <C>                 <C>
     April 29, 2004 to May 26, 2004            --             --            --            $ 6,000,000

     May 27, 2004 to June 23, 2004          7,761         $65.00            --            $ 6,000,000

     June 24, 2004 to July 28, 2004            --             --            --            $96,000,000
</TABLE>

     (1)  During the second quarter of fiscal 2004, the Company repurchased
          7,761 shares of Common Stock for purposes of paying withholding taxes
          for certain former associates that were part of the Class 5
          claimholders incremental distribution.

     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

               The following information is furnished with respect to the 2004
     Annual Meeting of Shareholders of Kmart Holding Corporation held on May 25,
     2004.

               The shareholders voted to ratify the appointment of BDO Seidman,
     LLP as independent auditors of the Corporation for fiscal year 2004. The
     vote was 65,656,595 for, 225,751 against and 51,686 abstentions. There were
     no broker non-votes.

               The shareholders also voted to approve the Company's incentive
     plans and grant of shares. The vote was 57,932,608 for, 501,452 against and
     72,004 abstentions. There were 7,427,968 broker non-votes.

     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits:

          Exhibit 10.1 Employment Agreement dated as of June 1, 2004, between
                       Kmart Management Corporation and David Whipple
                       (previously filed as Exhibit 10.1 to the Company's
                       Quarterly Report on Form 10-Q, for the period ended July
                       28, 2004, and incorporated herein by reference)

          Exhibit 10.2 Asset Purchase Agreement dated as of June 29, 2004
                       between Kmart Corporation and Sears, Roebuck and Co.
                       (previously filed as Exhibit 10.2 to the Company's
                       Quarterly Report on Form 10-Q, for the period ended July
                       28, 2004, and incorporated herein by reference)


                                       33
<PAGE>
          Exhibit 10.3 Letter of Credit Agreement dated as of August 13, 2004
                       among Kmart Corporation, Bank of America, National
                       Association and Fleet National Bank as issuing banks
                       (previously filed as Exhibit 10.3 to the Company's
                       Quarterly Report on Form 10-Q, for the period ended July
                       28, 2004, and incorporated herein by reference)

          Exhibit 31.1 Chief Executive Officer Certification pursuant to Rule
                       13a-14(a)/15d-14(a) of the Securities Exchange Act of
                       1934, as Amended

          Exhibit 31.2 Chief Financial Officer Certification pursuant to Rule
                       13a-14(a)/15d-14(a) of the Securities Exchange Act of
                       1934, as Amended

          Exhibit 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as
                       adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                       of 2002

     (b)  Reports on Form 8-K:

          We filed the following Current Reports on Form 8-K with the SEC:

          1.   On May 17, 2004, Kmart Holding Corporation furnished a Current
               Report on Form 8-K to report the first quarter 2004 operating
               results.

          2.   On June 4, 2004, Kmart Holding Corporation furnished a Current
               Report on Form 8-K to announce it has signed definitive
               agreements to sell up to 24 stores to The Home Depot, Inc.

          3.   On June 30, 2004, Kmart Holding Corporation furnished a Current
               Report on Form 8-K to announce it has signed a definitive
               agreement to sell up to 54 store to Sears, Roebuck and Co. and to
               announce that the Company's Board of Directors has increased the
               Company's existing share repurchase authorization to $100
               million.


                                       34
<PAGE>
                                   SIGNATURES

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

The signatory hereby acknowledges and adopts the typed form of his/her name in
the electronic filing of this document with the Securities and Exchange
Commission.

                              Date: FEBRUARY 11, 2005

                                             Kmart Holding Corporation
                                                   (Registrant)


                              By:               /s/ Aylwin B. Lewis
                                  ----------------------------------------------
                                                  Aylwin B. Lewis
                                       President and Chief Executive Officer
                                           (Principal Executive Officer)


                                             /s/ James D. Donlon, III
                                  ----------------------------------------------
                                               James D. Donlon, III
                                  Senior Vice President, Chief Financial Officer
                                           (Principal Financial Officer)


                                                /s/ James F. Gooch
                                  ----------------------------------------------
                                                  James F. Gooch
                                            Vice President, Controller
                                          (Principal Accounting Officer)


                                       35
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number    Description
-------   -----------
<S>       <C>
  31.1    Chief Executive Officer Certification pursuant to Rule
          13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended

  31.2    Chief Financial Officer Certification pursuant to Rule
          13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended

  32.1    Certifications pursuant to 18 U. S. C. Section 1350, as adopted
          pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>