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

                                    FORM 10-Q




 X   QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
---  EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2003
                               --------------

                                       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)


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

  3100 West Big Beaver Road -- Troy, Michigan                      48084
--------------------------------------------------------------------------------
    (Address of principal executive offices)                     (Zip Code)

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 May 30, 2003, 89,677,509 shares of Common Stock of Kmart Holding
Corporation were outstanding.

<PAGE>

                                      INDEX

<TABLE>
<CAPTION>
PART I               FINANCIAL INFORMATION                                                                       PAGE
------               ---------------------                                                                       ----
<S>                  <C>                                                                                       <C>
Item 1.              Financial Statements

                     Condensed Consolidated Statements of Operations (Unaudited) --                                3
                     Predecessor Company -- for the 13-weeks ended April 30, 2003 and May 1, 2002

                     Condensed Consolidated Balance Sheets (Unaudited) --                                          4
                     Successor Company -- as of April 30, 2003
                     Predecessor Company -- as of May 1, 2002 and January 29, 2003

                     Condensed Consolidated Statements of Cash Flows (Unaudited) --                                5
                     Predecessor Company -- for the 13-weeks ended April 30, 2003 and May 1, 2002

                     Notes to Unaudited Condensed Consolidated Financial Statements                              6-21

Item 2.              Management's Discussion and Analysis of Results of Operations and Financial                22-28
                     Condition

Item 3.              Quantitative and Qualitative Disclosures about Market Risk                                   29

Item 4.              Controls and Procedures                                                                      29

PART II              OTHER INFORMATION
-------              -----------------

Item 1.              Legal Proceedings                                                                            30

Item 2.              Changes in Securities and Use of Proceeds                                                    30

Item 3.              Defaults Upon Senior Securities                                                              30

Item 5.              Other Information                                                                          30-31

Item 6.              Exhibits and Reports on Form 8-K                                                           31-32

                     Signatures                                                                                   33

                     Certifications                                                                             34-36
</TABLE>


                                       2
<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                          PREDECESSOR COMPANY
                                                                        ------------------------
                                                                            13 WEEKS ENDED
                                                                          APRIL 30,    MAY 1,
                                                                            2003        2002
                                                                          ----------  ---------
<S>                                                                         <C>        <C>
    Sales                                                                   $ 6,181    $ 7,181
    Cost of sales, buying and occupancy                                       4,762      6,436
                                                                            -------    -------
    Gross margin                                                              1,419        745
    Selling, general and administrative expenses                              1,421      1,670
    Restructuring, impairment and other charges                                  37         --
    Equity income in unconsolidated subsidiaries                                  7          5
                                                                            -------    -------
    Loss before interest, reorganization items, income taxes and
       discontinued operations                                                  (32)      (920)
    Interest expense, net (contractual interest for 13 week periods ended
       April 30, 2003 and May 1, 2002 was $124 and $102, respectively)           57         33
    Reorganization items, net                                                   769        251
    Benefit from income taxes                                                    (6)       (12)
                                                                            -------    -------
    Loss before discontinued operations                                        (852)    (1,192)

    Discontinued operations                                                     (10)      (250)
                                                                            -------    -------
    Net loss                                                                $  (862)   $(1,442)
                                                                            =======    =======

    Basic/diluted loss before discontinued operations                       $ (1.63)   $ (2.37)
    Discontinued operations                                                   (0.02)     (0.50)
                                                                            -------    -------
    Basic/diluted net loss per common share                                 $ (1.65)   $ (2.87)
                                                                            =======    =======
    Basic/diluted weighted average shares (millions)                          522.7      502.9
</TABLE>


See accompanying Notes to unaudited Condensed Consolidated Financial Statements.

                                       3
<PAGE>

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            SUCCESSOR               PREDECESSOR
                                                                             COMPANY                  COMPANY
                                                                           ------------       ------------------------
                                                                             APRIL 30,        MAY 1,       JANUARY 29,
                                                                               2003            2002            2003
                                                                           ------------       --------     -----------
<S>                                                                        <C>               <C>           <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                                  $  1,232        $  1,829        $    613
  Merchandise inventories                                                       4,431           5,255           4,825
  Receivable from Plan Investors                                                  187               -               -
  Accounts receivable                                                             382             316             473
  Other current assets                                                            322             281             191
                                                                             --------        --------        --------
TOTAL CURRENT ASSETS                                                            6,554           7,681           6,102

Property and equipment, net                                                        10           5,972           4,892
Other assets and deferred charges                                                  96             219             244
                                                                             --------        --------        --------
TOTAL ASSETS                                                                 $  6,660        $ 13,872        $ 11,238
                                                                             ========        ========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
   Long-term debt due within one year                                        $      8        $      -        $      -
   Accounts payable                                                             1,160           1,658           1,248
   Accrued payroll and other liabilities                                        1,321             659             710
   Taxes other than income taxes                                                  274             237             162
                                                                             --------        --------        --------
TOTAL CURRENT LIABILITIES                                                       2,763           2,554           2,120

Long-term debt and notes payable                                                  108               -               -
Capital lease obligations                                                         415             694             623
Pension obligation                                                                854               -               -
Other long-term liabilities                                                       807             140             181
                                                                             --------        --------        --------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE                                     4,947           3,388           2,924

LIABILITIES SUBJECT TO COMPROMISE                                                   -           7,805           7,969

Company obligated mandatorily redeemable convertible preferred
  securities of a subsidiary trust holding solely 7 3/4% convertible
  junior subordinated debentures of Predecessor Company
  (redemption value $898 and $648, respectively)                                    -             889             646
Successor preferred stock 20,000,000 shares authorized;
  0 outstanding                                                                     -               -               -
Predecessor common stock $1 par value, 1,500,000,000 shares
  authorized; 502,689,273 and 519,123,988 shares outstanding, respectively          -             503             519
Successor common stock $0.01 par value, 500,000,000 shares
  authorized, 89,677,509 shares outstanding                                         1               -               -
Capital in excess of par value                                                  1,712           1,697           1,922
Accumulated deficit                                                                 -            (410)         (2,742)
                                                                             --------        --------        --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                         $  6,660        $ 13,872        $ 11,238
                                                                             --------        --------        --------
</TABLE>

See accompanying Notes to unaudited Condensed Consolidated Financial Statements.

                                       4
<PAGE>

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                PREDECESSOR COMPANY
                                                               ----------------------
                                                                   13 WEEKS ENDED

                                                                 APRIL 30,   MAY 1,
                                                                   2003       2002
                                                               ----------- ----------
<S>                                                            <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net loss                                                   $  (862)   $(1,442)
      Adjustments to reconcile net loss
         to net cash provided by operating activities:
                Discontinued operations non-cash charges              40        247
                Restructuring, impairments and other charges           2        558
                Reorganization items, net                            769        251
                Depreciation and amortization                        177        181
                Equity income in unconsolidated subsidiaries          (7)        (5)
                Dividends received from Meldisco                      36         45
                Cash used for store closings and other charges       (64)       (39)
                Change in:
                  Inventories                                        480       (109)
                  Accounts payable                                  (117)     1,104
                  Deferred income taxes and taxes payable            (16)        (9)
                  Other assets                                       125        198
                  Other liabilities                                   32         40
                                                                 -------    -------
NET CASH PROVIDED BY OPERATING ACTIVITIES                            595      1,020
                                                                 -------    -------
NET CASH (USED FOR) PROVIDED BY REORGANIZATION ITEMS                 (19)        12
                                                                 -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES
      Proceeds from sale of property and equipment                    64          -
      Capital expenditures                                            (4)       (52)
                                                                 -------    -------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES                  60        (52)
                                                                 -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES
      Net borrowings on DIP Credit Facility                            -       (300)
      Payments on debt                                                (1)       (47)
      Debt issuance costs                                              -        (30)
      Payments on capital lease obligations                          (16)       (19)
                                                                 -------    -------
NET CASH USED FOR FINANCING ACTIVITIES                               (17)      (396)
                                                                 -------    -------
NET CHANGE IN CASH AND CASH EQUIVALENTS                              619        584
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                         613      1,245
                                                                 -------    -------
CASH AND CASH EQUIVALENTS, END OF PERIOD                         $ 1,232    $ 1,829
                                                                 =======    =======
</TABLE>



See accompanying Notes to unaudited Condensed Consolidated Financial Statements.

                                       5
<PAGE>

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

1.       PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

                  CHAPTER 11 REORGANIZATION

                  On January 22, 2002 ("Petition Date"), Kmart Corporation
         ("Predecessor Company") and 37 of its U.S. subsidiaries (collectively,
         the "Debtors") filed voluntary petitions for reorganization under
         Chapter 11 of the federal bankruptcy laws ("Bankruptcy Code" or
         "Chapter 11") in the United States Bankruptcy Court for the Northern
         District of Illinois ("Court") under case numbers 02 B 02462 through 02
         B 02499. 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 ("Confirmation Date").
         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 May 6, 2003, ("Effective Date") the Predecessor Company
         emerged from reorganization proceedings under Chapter 11 pursuant to
         the terms of the Debtors' Plan of Reorganization and became a
         wholly-owned subsidiary of Kmart Management Corporation, which is a
         newly-formed, wholly-owned subsidiary of a newly-created holding
         company, Kmart Holding Corporation ("Kmart," "we," "us," "our," the
         "Company" or "Successor Company"). Kmart is the nation's third largest
         discount retailer and the sixth largest general merchandise retailer.

                  In connection with our emergence from bankruptcy, we reflected
         the terms of the Plan of Reorganization in our consolidated financial
         statements applying the terms of 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") with
         respect to financial reporting upon emergence from Chapter 11
         ("Fresh-Start accounting"). 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 (see Note 3 -- Fresh-Start Accounting). The
         reported historical financial statements of the Predecessor Company for
         periods prior to April 30, 2003 generally are not comparable to those
         of the Successor Company. In this Quarterly Report on Form 10-Q,
         references to our 2003 and 2002 results of operations refer to the
         Predecessor Company.

                  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 Kmart
         Holding Corporation's new common stock in satisfaction of pre-petition
         claims they held and we issued 14 million shares of new common stock to
         affiliates of ESL and Third Avenue, in exchange for $127, net of $13 of
         commitment fees and Plan Investor expenses. In addition, we issued a
         9%, $60 principal amount convertible note to affiliates of ESL. The
         principal and accrued interest in respect to the 9% convertible note is
         convertible at any time, at the option of the holder, into new common
         shares at a conversion price equal to $10 per share. ESL was also
         granted the option, exercisable at its own discretion prior to May 6,
         2005, to purchase from the Successor Company approximately 6.6 million
         new common shares at a price of $13 per share. A portion of the option
         was assigned to Third Avenue. The investment was made pursuant to the
         Investment Agreement dated January 24, 2003 (as amended, the
         "Investment Agreement").

                  ESL and its affiliates beneficially own over 50% of the common
         stock of the Successor Company, including shares received in exchange
         for pre-petition obligations, as well as shares obtainable upon
         exercise of options and conversion of the $60 convertible note issued
         to affiliates of ESL. Each of the Plan Investors is represented on our
         Board of Directors.



                                       6
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                  DISCHARGE OF LIABILITIES
                  (all amounts in actual dollars unless otherwise noted)

                  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. New common stock of the
         Successor Company was issued in satisfaction of certain of those
         claims. The new securities of the Successor Company issued on the
         Effective Date pursuant to the Plan of Reorganization and related
         transactions, consisted of 89,677,509 shares of new common stock and
         options to purchase 8,324,883 shares of new common stock. 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 for 14 million shares issued to affiliates
         of ESL and Third Avenue in exchange for $127 million, net of $13
         million of commitment fees and Plan Investor expenses. All such 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, Kmart has established an independent creditor
         litigation trust ("Creditor Trust") for the benefit of the Predecessor
         Company's pre-petition creditors and equity holders, to pursue claims
         which arose from the Predecessor Company's prior accounting and
         stewardship investigations. The following table outlines the discharge
         of the Predecessor Company's Liabilities subject to compromise pursuant
         to the Plan of Reorganization:

<TABLE>
<CAPTION>
                    TYPE OF CLAIM/SECURITY                               TREATMENT UNDER THE PLAN OF REORGANIZATION
                    ----------------------                               ------------------------------------------
<S>                                                                  <C>
      Class 1 - Secured Claims                                       100% cash recovery.

      Class 3 - Pre-petition Lender Claims                           Issued 18,723,775 shares of new common stock of the
                                                                     Successor Company and cash recovery of $243 million.

      Class 4 - Pre-petition Note Claims                             Issued 25,008,573 shares of new common stock of the
                                                                     Successor Company.

      Class 5 - Trade Vendor and Lease Rejection                     Issued 31,945,161 shares of new common stock of the
      Claims over $30,000                                            Successor Company.

      Class 6 - Other Unsecured Claims over $30,000                  Claim holders will receive their pro-rata share of the
                                                                     "Other Unsecured Claims Cash Payment" on the third anniversary
                                                                     of the effective date of the Plan of Reorganization.

      Class 7 - General Unsecured Convenience Claims                 Recovery to be paid in cash equal to 6.25% of allowed
      less than or equal to $30,000                                  claims or $1,825 if the amount of such allowed claims
                                                                     is greater than $30,000 and the holder of such claim has made
                                                                     the convenience claim election. In addition, the holder of any
                                                                     General Unsecured Convenience Claim may elect to be treated, in
                                                                     lieu of payment, as a Trade Vendor/Lease Rejection claim
                                                                     holder.

      Class 8 - Trust Preferred Obligations                          These obligations were cancelled upon emergence.
                                                                     Holders may receive, as described below, recoveries
                                                                     under the Creditor Trust.

      Class 10 - Subordinated Security Claims                        Current holders, together with those who held common
                                                                     stock of the Predecessor Company, may receive up to
                                                                     2.5% of the recoveries under the Creditor Trust.

      Class 11 - Existing Common Stock                               The Predecessor Company's stock was cancelled upon
                                                                     emergence.  Holders, together with those who hold
                                                                     Subordinated Security Claims, may receive up to 2.5% of
                                                                     the recoveries under the Creditor Trust.

      Class 12 - Other Interests                                     Cancelled -- no recovery.
</TABLE>


                                       7
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                  Holders of Pre-petition Note Claims, Trade Vendor and Lease
         Rejection Claims over $30,000, Other Unsecured Claims over $30,000 and
         Trust Preferred Obligations will receive their pro-rata share of
         recoveries in the Creditor Trust (excluding up to 2.5% of such
         recoveries, which may be payable to holders of Subordinated Securities
         Claims and Predecessor Company's Common Stock).

                  In addition to the classes described above, the Plan of
         Reorganization allows for two additional classes of claims, Class 2 --
         Other Priority Claims and Class 9 -- Intercompany Claims. The Class 2
         claims are primarily claims held by current and former employees for
         unpaid wages, salaries, bonuses, severance pay, vacation pay and other
         unpaid employee benefits. We believe we have paid all such amounts and
         therefore should be no significant amount of such claims if any, that
         remain unpaid. The Class 9 claims are claims by one or more of Kmart
         and its affiliates against other Kmart affiliates on account of various
         matters. Kmart, at its option, may either reinstate or eliminate
         intercompany claims.

                  There are also other unclassified claims, including
         administrative claims, priority tax claims, Pension Benefit Guarantee
         Corporation claims, workers' compensation programs and consignment
         claims. Administrative claims will receive a 100 % cash recovery;
         priority tax claims will receive a 100% cash recovery, paid over a
         six-year period beginning on their assessment date; and the Pension
         Benefit Guarantee Corporation claims, workers' compensation programs
         and consignment claims were assumed by the Successor Company.

                  CLAIMS RESOLUTION

                  We continue to make progress in the reconciliation and
         settlement of the various classes of claims. On June 11, 2003, we filed
         a motion with the Bankruptcy Court requesting approval to make an
         interim distribution to approximately 12,472 claims with an allowed
         claim amount of approximately $730.2 on the first distribution date
         specified in the Plan of Reorganization as June 30, 2003. In addition,
         the court has previously entered orders allowing claims aggregating
         approximately $389 million that, subject to the approval of the motions
         by the court, will receive an interim distribution on June 30, 2003.
         These two claims will also receive an interim distribution on June 30,
         2003. If the above and related motions are approved by the Bankruptcy
         Court, we anticipate distributing approximately 4.2 million shares to
         the holders of Class 5 claims from the shares previously issued to us
         as disbursing agent with respect to such claims and approximately $1.7
         in cash to holders of Class 7 claims. Due to the significant volume of
         claims filed to-date and the anticipated receipt of additional claims
         by June 20, 2003 (the bar date for certain cure claims and
         administrative claims), it is premature to estimate the ultimate
         allowed amount of such claims for each class of claims under the Plan
         of Reorganization.

2.       BASIS OF PRESENTATION

                  These interim unaudited Condensed Consolidated Financial
         Statements have been prepared in accordance with the rules and
         regulations of the Securities Exchange Commission. 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
         statements should refer to the Predecessor Company's audited
         consolidated financial statements and notes thereto which are included
         in its Annual Report on Form 10-K for the year ended January 29, 2003.
         Certain reclassifications of prior period financial statements have
         been made to conform to the current interim period presentation.

                  SOP 90-7 requires that the financial statements for the period
         following the Chapter 11 filing through the Confirmation Date
         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 the reorganization and
         restructuring of the business are reported separately as Reorganization
         items, net in the unaudited Condensed Consolidated Statement of
         Operations. The unaudited Condensed Consolidated Balance Sheet
         distinguishes pre-petition liabilities subject to compromise from both
         those pre-petition liabilities that are not subject to compromise and
         from post-petition liabilities. Liabilities subject to compromise are
         reported at the amounts expected to be allowed, even if they may be
         settled for lesser amounts. In addition, cash used for reorganization
         items is disclosed separately in the unaudited Condensed Consolidated
         Statements of Cash Flows.


                                       8
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                  In accordance with SOP 90-7, we adopted Fresh-Start accounting
         as of the Confirmation Date. However, in light of the proximity of such
         date to our quarter end, for accounting purposes, the effects of
         Fresh-Start accounting and the Plan of Reorganization, including the
         cancellation of the existing common stock and the issuance of the new
         common stock, have been reported "as if" they occurred on April 30,
         2003. References to the Successor Company in the unaudited Condensed
         Consolidated Financial Statements and the Notes thereto 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. The April 30, 2003 Successor Company financial
         statements are unaudited. In connection with subsequent filings with
         the Securities and Exchange Commission, we have engaged
         PricewaterhouseCoopers LLP as the independent accountants to audit
         these financial statements.

3.       FRESH-START ACCOUNTING

                  FRESH-START ADJUSTMENTS

                  In accordance with Fresh-Start accounting, all assets and
         liabilities are recorded at their respective fair market values. Such
         fair values represent our best estimates based on independent
         appraisals and valuations.

                  To facilitate the calculation of the enterprise value of the
         Successor Company, we developed a set of financial projections. Based
         on these financial projections, the enterprise value was determined by
         the Company, with assistance of a financial advisor, 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 Kmart 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
         restructuring of Kmart's capital structure and resulting discharge of
         pre-petition debt resulted in 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 Statement of Operations. In addition,
         the excess of fair value of net assets over reorganization value
         ("negative goodwill") was allocated on a pro-rata basis and reduced our
         non-current assets, with the exception of financial instruments, to $10
         in accordance with SFAS No. 141.

                  As part of the provisions of SOP 90-7, we are required to
         adopt, for the current reporting period, all accounting guidance that
         is effective within a twelve-month period. See Note 20 - Recently
         Adopted Accounting Pronouncements for a discussion of the impact on our
         financial statements of the accounting guidance we were required to
         adopt.

                  CHANGES TO SIGNIFICANT ACCOUNTING POLICIES

                  Fresh-Start accounting requires the selection of appropriate
         accounting policies for the Successor Company. The significant
         accounting policies disclosed in the Predecessor Company's Annual
         Report on Form 10-K for the year ended January 29, 2003 will continue
         to be used by the Successor Company except for the policy related to
         merchandise inventories. We have elected to change the method of
         accounting for our merchandise inventories from the last-in, first-out
         ("LIFO") method to the first-in, first out ("FIFO") method. We believe
         that this change is preferable to provide a better matching of expenses
         and revenues given falling product costs that have resulted in the
         value of inventories under the LIFO method to be approximately equal to
         their replacement cost on a FIFO basis. As part of the provisions of
         Fresh-Start accounting, we did not restate our financial statements for
         prior periods.



                                       9
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

         The following table reflects the reorganization adjustments to Kmart's
         unaudited Condensed Consolidated Balance Sheet as of April 30, 2003:

<TABLE>
<CAPTION>
                                                    PREDECESSOR                                                    SUCCESSOR
                                                      COMPANY                                                       COMPANY
                                                      APRIL 30,       FRESH START                                   APRIL 30,
                                                        2003          ADJUSTMENTS        RECAPITALIZATION             2003
                                                     ----------       -----------        ----------------          ----------

<S>                                                  <C>               <C>                   <C>                   <C>
ASSETS

CURRENT ASSETS
   Cash and cash equivalents                         $    1,232        $       -             $     -               $    1,232
   Merchandise inventories                                4,446              (15)                  -                    4,431
   Other current assets                                     528              168  (1)            195  (2)                 891
                                                     ----------        ---------             -------               ----------
    TOTAL CURRENT ASSETS                             $    6,206        $     153             $   195               $    6,554

   Property and equipment, net                            4,623           (4,613) (1)              -                       10
   Other assets and deferred charges                        212             (154) (1)             38  (2)                  96
                                                     ----------        ---------             -------               ----------

TOTAL ASSETS                                         $   11,041        $  (4,614)            $   233               $    6,660
                                                     ==========        =========             =======               ==========


LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)


CURRENT LIABILITIES
   Long-term debt due within one year                $        -        $       -             $     8  (2)          $        8
   Accounts payable                                       1,151                -                   9  (2)               1,160
   Other current liabilities                                915              117  (1)            563  (2)               1,595
                                                     ----------        ---------             -------               ----------
    TOTAL CURRENT LIABILITIES                        $    2,066        $     117             $   580               $    2,763

   Long-term debt                                             -                -                 108  (2)                 108
   Capital lease obligations                                415                -                   -                      415
   Other long-term liabilities                              174              279  (1)          1,208  (2)               1,661
                                                     ----------        ---------             -------               ----------
    TOTAL LIABILITIES NOT                                 2,655              396               1,896                    4,947
     SUBJECT TO COMPROMISE

   LIABILITIES SUBJECT TO COMPROMISE                      8,896              114  (1)         (9,010) (2)                   -

   Trust convertible securities                             387             (387) (1)              -                        -
   Other comprehensive income                              (908)             908  (1)              -                        -
   Common stock                                             537             (537) (1)              1  (3)                   1
   Other equity                                            (526)          (5,108) (1)          7,346  (4)               1,712
                                                     ----------        ---------             -------               ----------
TOTAL LIABILITIES AND
   SHAREHOLDERS' EQUITY (DEFICIT)                    $   11,041        $  (4,614)            $   233               $    6,660
                                                     ==========        =========             =======               ==========
</TABLE>

         1.       To adjust assets and liabilities to fair market value ("FMV"),
                  and reflect the writeoff of Predecessor Company's equity and
                  the application of negative goodwill to long-lived assets.
         2.       To record assumption or discharge of Liabilities subject to
                  compromise and cash to be received from the Plan Investors.
         3.       To record par value of new common stock for the Successor
                  Company.
         4.       To record gain on discharge of liabilities subject to
                  compromise and additional paid-in-capital of new common stock
                  for the Successor Company.

                                       10
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

4.       DISCONTINUED OPERATIONS

                  During the first quarter of fiscal 2003 and the second quarter
         of fiscal 2002, we closed 316 and 283 stores, respectively. SFAS No.
         144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
         Long-Lived Assets," 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 Company
         determined that it has met the second criteria, as upon closure of the
         stores, operations cease and the Company has no continuing
         involvement. To determine if cash flows have been or will be
         eliminated from ongoing operations, the Company evaluated a number of
         qualitative and quantitative factors, including: proximity to a
         remaining open store, physical location within a metropolitan or
         non-metropolitan statistical area and transferability of sales between
         open and closed trade areas. Based on these criteria, we identified a
         small number of stores closed in fiscal 2002 that met the criteria for
         discontinued operations; however, in management's opinion they were
         not considered material to our consolidated results of operations and
         were not separately presented. Upon closure of the 316 stores in 2003,
         which included a substantial exit of the state of Texas, we
         reevaluated the 283 stores that were closed in 2002 and the 316 stores
         closed in 2003 to identify stores that should be accounted for as
         discontinued operations. This analysis resulted in a total of 121
         stores receiving discontinued operations treatment for all periods
         presented in our unaudited Condensed Consolidated Statements of
         Operations. The table below sets forth the components of the net loss
         associated with the discontinued operations for the 13-weeks ended
         April 30, 2003 and May 1, 2002.
<TABLE>
<CAPTION>
                                                        13 Weeks Ended
                                                    April 30,        May 1,
                                                      2003           2002
                                                   ----------     ----------
<S>                                                <C>            <C>
Sales                                              $      232     $      458
Cost of sales, buying and occupancy                       150            585
                                                   ----------     ----------

Gross margin                                               82           (127)
Selling, general and administrative expenses               43            100
Restructurings, impairments and other charges               5              -
Reorganization items, net                                  44             23
                                                   ----------     ----------

Net loss from discontinued operations              $      (10)     $    (250)
                                                   ==========      =========
</TABLE>

5.       DEBT RESTRUCTURING

         Exit Financing Facility

                  On May 6, 2003, our $2 billion exit credit agreement (the
         "Exit Financing Facility"), which was an integral part of the Plan of
         Reorganization, syndicated by General Electric Capital Corporation,
         Fleet Retail Finance Inc. and Bank of America, N.A became effective.
         Debt issuance costs associated with the Exit Financing Facility totaled
         $58 and will be amortized through May 2006. The Exit Financing Facility
         is a revolving credit facility under which Kmart Corporation is the
         borrower and contains an $800 letter of credit subfacility.
         Availability under the Exit Financing Facility is also subject to an
         inventory borrowing base formula. The Exit Financing 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 Exit Financing Facility is secured by first liens on
         inventory, the proceeds thereof and certain related assets of Kmart
         Corporation and the guarantors. Borrowings under the Exit Financing
         Facility currently bear interest at either the Prime rate plus 2.5% per
         annum or the LIBOR rate plus 3.5% per annum, at our discretion, which
         interest rate margin may be reduced after the first anniversary of the
         effective date of the Exit Financing Facility if Kmart meets certain
         earnings before interest, taxes, depreciation, amortization and other
         charges ("EBITDA") targets. In addition, we are required to pay a fee
         based on the unutilized commitment under the Exit Credit Facility equal
         to 0.75% per annum.

                  The Exit Financing Facility financial covenants include a
         requirement that Kmart maintain minimum availability of $100 under the
         facility and a restriction on capital spending. In the event that Kmart
         fails to maintain certain specified excess availability minimums under
         the Exit Financing Facility, Kmart will also be required to maintain
         minimum levels of EBITDA. The Exit Financing 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

                                       11
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

         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 necessary to maintain our operations.

         Predecessor Company Debt

                  Borrowings of the Predecessor Company 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. Debt issuance costs of $71 were amortized through
         April 30, 2003. The DIP Credit Facility was a revolving credit facility
         under which the Predecessor Company was the borrower and the rest of
         the Debtors were guarantors, and was collateralized by first liens on
         substantially all of the Debtors assets (subject to valid and
         unavoidable pre-petition liens and certain other permitted liens).
         Borrowings under the DIP Credit Facility were denominated in U.S.
         dollars bearing interest at the Prime Rate plus 2.5% per annum, or at
         the Predecessor Company's option, in Eurodollars bearing interest at
         the LIBOR rate plus 3.5% per annum. 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 from paying interest on unsecured pre-petition debts.

                  Included in Interest expense, net in the unaudited Condensed
         Consolidated Statements of Operations is interest income of $1, for the
         13-week periods ended April 30, 2003 and May 1, 2002. On the Petition
         Date, we stopped accruing interest on all unsecured pre-petition debt
         in accordance with SOP 90-7. Contractual interest expense not accrued
         or recorded on certain pre-petition debt totaled $67 and $69 for the
         13-week periods ended April 30, 2003 and May 1, 2002, respectively.

6.       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, we instituted
         certain restructuring actions to improve our operations and executed
         significant inventory liquidations as a result of the stores closed
         under Kmart's Chapter 11 proceedings. Their effect on the 13-weeks
         ended April 30, 2003 and May 1, 2002 are summarized below.

         Accelerated Depreciation

                  During the fourth quarter of fiscal 2002, we analyzed our
         stores based on profitability, lease terms and geographic areas. As a
         result of the analysis we decided to close 316 stores, and in light of
         the shortened recoverability period in the stores to be closed,
         recorded $52 during the 13 week-period ended April 30, 2003 for
         accelerated depreciation on unimpaired assets to be disposed of
         following the store closings. Of the charge, $47 is included in
         Restructurings, impairments and other charges and $5 is included in
         Discontinued operations in the unaudited Condensed Consolidated
         Statements of Operations.

         Corporate Cost Reduction Initiatives

                  During the fourth quarter of 2002, we announced our intention
         to eliminate positions at our corporate headquarters and positions
         nationally that provide corporate support in the first quarter of 2003.
         As a result of the expected job eliminations, we recorded a charge of
         $36 during the fourth quarter of fiscal 2002. For the 13 week-period
         ended April 30, 2003 we recorded a credit of $10 as a result of a
         change in our estimated expense. This credit is included in
         Restructurings, impairments and other charges in the accompanying
         unaudited Condensed Consolidated Statements of Operations.

         Markdowns for Inventory Liquidation

                  During the first quarter of fiscal 2002, we recorded a charge
         of $758 to write-down inventory to be liquidated at our 283 closing
         stores to net realizable value. Of the charge, $542 is included in Cost
         of sales, buying and occupancy and

                                       12
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

         $216 is included in Discontinued operations in the accompanying
         unaudited Condensed Consolidated Statements of Operations.

                  Of the charge, $384 relates to the write-down of inventory to
         estimated selling value in connection with liquidation sales in the 283
         stores for which we received Court approval to close on March 20, 2002.
         The liquidation sales and store closings were completed on June 2,
         2002. In addition, a charge of $266 was recorded related to the
         acceleration of markdowns on approximately 107,000 stock keeping units
         (SKUs) of inventory items that were transferred from our remaining open
         stores to the 283 closing stores and included in the liquidation sales.
         The SKUs were no longer carried as part of our product assortment in
         our remaining open stores and were reduced to estimated selling value.
         The remaining $108 of the charge related to liquidation fees and
         expenses associated with the disposition of inventory through the
         liquidation sales at the 283 closing stores.

7.       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. For the
         13-week periods ended April 30, 2003, and May 1, 2002, the following
         have been recorded:

<TABLE>
<CAPTION>
                                                                         April 30,         May 1,
                                                                           2003             2002
                                                                         -------          -------
<S>                                                                      <C>              <C>
              Gain on extinguishment of debt                             $(5,642)         $     -
              Revaluation of assets and liabilities                        5,642                -
              Fleming settlement                                             385                -
              2003 store closings                                            158                -
              Estimated claims for rejected executory contracts              200                -
              2002 store closings                                              -              203
              Other                                                           26               48
                                                                         -------          -------
              Reorganization items, net                                  $   769          $   251
                                                                         =======          =======
</TABLE>

                  The following paragraphs provide additional information
         relating to costs that were recorded in the line Reorganization items,
         net in our unaudited Condensed Consolidated Statement of Operations for
         the 13-week periods ended April 30, 2003 and May 1, 2002:

         Gain on extinguishment of debt/Revaluation of assets and liabilities

                  See Note 3 -- Fresh-Start Accounting for a discussion on the
         extinguishment of debt and the revaluation of assets and liabilities.

         Fleming settlement

                  On February 3, 2003, we announced that we had terminated our
         supply relationship with 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. Kmart and Fleming came to an agreement on a settlement of
         Fleming's claims, and on March 27, 2003, the Court approved our
         settlement of all claims asserted by Fleming. Under the settlement,
         Kmart paid Fleming $15 of Fleming's net post-petition administrative
         claim, which exceeded $30. Additionally, Fleming's general unsecured
         claim was reduced from approximately $1.5 billion to $385, which was
         recorded in the first quarter of 2003.

         2003 store closings

                  On January 28, 2003, the Court approved the closure of 326
         stores located in 40 states, which number was later reduced to 316.
         Stores were selected by evaluating the market and financial performance
         of every store and the terms of every lease. Several factors were
         considered in the store closing analysis, including historical and
         projected operating results; the anticipated impact of current and
         future competition; future lease liability and real estate value; store
         age, size, and capital spending requirements; the expected impact of
         store closings on Kmart's competitive position; the estimated potential
         savings from exiting markets and regions; the potential impact of store
         closings on purchasing power and allowances; and the potential impact
         of store closings on market coverage. Shortly after receiving Court
         approval, we

                                       13
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

         commenced store closing sales which were completed by April 13, 2003.
         In accordance with SFAS No. 144, 66 of the 316 closed stores were
         considered discontinued operations (see Note 4 -- Discontinued
         Operations). As a result of our decision to close the 316 stores, we
         charged to our closed store reserve $214 for lease terminations and
         other costs, of which $56 was recorded to discontinued operations and
         the remaining $158 was recorded to Reorganization items, net in the
         unaudited Condensed Consolidated Statements of Operations. In addition,
         we reclassified $181 of capital lease obligations to the closed store
         reserve. The reserve for estimated costs was recorded in accordance
         with SFAS No. 146, "Accounting for Costs Associated with Exit or
         Disposal Activities." On April 30, 2003, upon adoption of Fresh-Start
         accounting, this reserve was discharged in accordance with the Plan of
         Reorganization, see Note 1 -- Proceedings under Chapter 11 of the
         Bankruptcy Code.

         2002 store closings

                 On March 20, 2002, the Court approved the closure of 283
        stores. Stores were selected by evaluating the market and financial
        performance of every store and the terms of every lease. Candidates for
        closure were stores that did not meet our financial requirements for
        ongoing operations. In accordance with SFAS No. 144, 55 of the 283
        closed stores are considered discontinued operations (see Note 4 --
        Discontinued Operations). As a result of our decision to close the 283
        stores, we charged to our closed store reserve $228 for lease
        terminations and other costs, of which $25 was recorded to Discontinued
        operations and the remaining $203 was recorded to Reorganization items,
        net in the unaudited Condensed Consolidated Statements of Operations. In
        addition, we reclassified $144 of capital lease obligations to the
        closed store reserve. The closed store reserve is included in the line
        Liabilities subject to compromise in our unaudited Condensed
        Consolidated Balance Sheet as of May 1, 2002. The reserve for estimated
        costs was recorded in accordance with EITF 94-3, "Liability Recognition
        for Certain Employee Termination Benefits and Other Costs to Exit an
        Activity (including Certain Costs Incurred in a Restructuring)". On
        April 30, 2003, upon adoption of Fresh-Start accounting, this reserve
        was discharged in accordance with the Plan of Reorganization, see Note 1
        -- Proceedings under Chapter 11 of the Bankruptcy Code.

                  As a result of both store closing actions, Kmart's existing
         store base has been reduced from 2,114 stores prior to the announcement
         of the 2002 store closings to 1,513 upon completion of the 2003 store
         closings.

         Estimated claims for rejected executory contracts

                 For the 13-weeks ended April 30, 2003, we recorded expense of
        $200 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. Our estimate of claims may be
        different from amounts filed by our creditors. Differences between
        amounts filed and our estimate will be investigated and 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. On April 30, 2003,
        upon adoption of Fresh-Start accounting, these liabilities were
        discharged in accordance with the Plan of Reorganization, see Note 1 --
        Proceedings under Chapter 11 of the Bankruptcy Code.

         Other reorganization items

                  For the 13-weeks ended April 30, 2003, we recorded
         professional fees of $43, employee costs of $66 relating to the Key
         Executive Retention Plan ("KERP"), a gain of $17 for the sale of
         pharmacy lists, income of $65 for lease auction proceeds related to the
         2003 and 2002 closed stores, a gain of $15 for the settlement of
         pre-petition liabilities and net expenses of $14 for other
         miscellaneous reorganization items. For the 13-weeks ended May 1, 2002,
         we recorded professional fees of $38, employee costs of $26, a gain of
         $14 for the sale of pharmacy lists, a gain of $5 for the settlement of
         pre-petition liabilities and net expense of $3 for other miscellaneous
         reorganization items.


                                       14
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

8.       RESTRUCTURING RESERVE ACTIVITY

                  The following table provides information regarding reserve
         activity during the 13 week periods ended April 30, 2003 and May 1,
         2002. As part of Fresh-Start accounting, reserves established in
         connection with certain restructurings were discharged in accordance
         with the Plan of Reorganization. See Note 3 - Fresh-Start Accounting
         for a detailed discussion of the discharge of Liabilities subject to
         compromise under the Plan of Reorganization.

<TABLE>
<CAPTION>
                                                               13 Weeks Ended
                               ----------------------------------------------------------------------------------
                                        April 30, 2003                             May 1, 2002
                                 2002       2002        2000         2002        2001       2001        2000
                               Employee    Store      Strategic     Store     BlueLight    Supply    Strategic
                               Severance  Closings     Actions     Closings     .com       Chain      Actions
                               ---------  --------    ---------    --------   ---------    ------    ---------

<S>                              <C>        <C>        <C>          <C>          <C>        <C>        <C>
Balance, beginning of year       $ 69       $294       $ 95         $  -         $ 18       $ 11       $ 98

Additions charged to                7          -          -          228            -          -          -
operations
Reclassifications                   -          -          -          144            -          -          -
                                 ----       ----       ----         ----         ----       ----        ---
Total additions                     7          -          -          372            -          -          -

Reductions:
  Cash payments:
    Lease obligations               -          -          -            -            -          -          3
    Employee costs                 40          -          -            -            -          4          -
    Contractual obligations         -          -          -            -            1          -          -
Non-cash reductions:
    Discharge of liabilities        -        294         95            -            -          -          -
                                 ----       ----       ----         ----         ----       ----        ---
Balance, end of period           $ 36       $  -       $  -         $372         $ 17       $  7       $ 95
                                 ====       ====       ====         ====         ====       ====       ====
</TABLE>


9.       TRADE VENDORS' LIEN PROGRAM

                  On May 6, 2003, the post-emergence Trade Vendors' Lien Program
         became effective. Under this program, certain vendors who provide
         retail merchandise to us on credit after May 6, 2003, or who had
         provided merchandise to us on credit after the Petition Date and before
         May 6, 2003 which was not paid for as of May 6, 2003, were granted
         mortgages on certain unencumbered owned and operated real properties
         (the "Trade Vendor Lien"). The Trade Vendor Lien expires by its terms
         on May 6, 2005, and may be terminated at the sole discretion of Kmart
         on or after May 6, 2004.

                  In addition, under the Plan of Reorganization, any person or
         entity acquiring property under the Plan of Reorganization, and any
         creditor and/or equity security holder of the Debtors or the
         reorganized Kmart entities is deemed to have contractually subordinated
         any existing or future claim, right or interest they may have in and to
         any proceeds received from the disposition, release or liquidation of
         any of Kmart's and Kmart's subsidiaries' leasehold interests in any
         open and operating stores as of May 6, 2003 to the claims of the trade
         vendors participating in the Trade Vendors' Lien Program. The lenders
         under the Exit Financing Facility and certain other parties are not
         subordinated in this regard. So long as the Trade Vendors' Lien is
         still effective (i) we may not encumber, sell, lease, transfer or
         otherwise dispose of or take other action to impair the subordination
         granted under the program with respect to more than 20% of the fair
         market value of the leases subject to the program, and (ii) any loan or
         investment under a certain amount by ESL or Third Avenue is subject to
         the subordination set forth in the provision. This claims subordination
         terminates upon termination or expiration of the Trade Vendors' Lien.

10.      PROPERTY HELD FOR SALE

                  Included in Other current assets in our unaudited Condensed
         Consolidated Balance Sheet for the period ended April 30, 2003, is $160
         of property held for sale, accounted for in accordance with SFAS No.
         144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
         The $160 consists primarily of 11 closed store locations and
         undeveloped property. We are actively marketing the properties and
         expect to sell them within one year. For the 13-week period ended April
         30, 2003, we recorded a $7 loss on the impairment of certain property
         held for sale. The loss is

                                       15
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

         recorded in Selling, general and administrative expenses in our
         unaudited Condensed Consolidated Statements of Operations.

11.      WORKERS' COMPENSATION

                  In March 2002, the Court issued an order providing for the
         continuation of our existing surety bond coverage, which permits us to
         self-insure our workers' compensation programs in various states. We
         have recently begun discussions with certain of the issuers of the
         surety bonds regarding the further continuation of the bonds, either on
         the terms as set forth in the Court's surety order or on other terms
         acceptable to us. If our discussions prove unsuccessful and the
         existing surety bonds were to be cancelled, we could lose our
         self-insured status in the states covered by the surety bonds and be
         required to pursue alternative workers' compensation issuance programs.
         These alternative programs include (i) retaining self-insurance
         privileges in certain states using alternative forms of security, (ii)
         purchasing insurance policies to cover our workers' compensation
         liabilities in certain states, and (iii) as a last resort,
         participating in state-assigned risk and/or state fund insurance
         programs. Although it is too soon to predict the likelihood that we
         would have to implement an alternative workers' compensation program,
         or to estimate the cost of any resulting program, we expect any such
         costs would exceed levels incurred historically. However, we do not
         expect any such additional costs to have a material adverse effect on
         our financial position or results of operation.

12.      INCOME TAXES

                  We recorded a full valuation allowance against our net
         deferred tax assets in accordance with SFAS No. 109, "Accounting for
         Income Taxes," as realization of such assets in future years is
         uncertain. Accordingly, we have not recognized any tax benefit from our
         losses in the first quarters of 2003 and 2002. The $6 tax benefit
         recorded in the first quarter of fiscal 2003 relates to a special
         provision of the Internal Revenue Code that allows a 10-year carryback
         of certain losses. The $12 tax benefit recorded in the first quarter of
         fiscal 2002 related primarily to amounts refunded to Kmart as a result
         of the Job Creation and Worker Assistance Act of 2002, which was
         enacted in the first quarter of fiscal 2002.

13.       LOSS PER SHARE

                  We calculate loss per share in accordance with SFAS No. 128,
         "Earnings Per Share." Basic and dilutive earnings per share information
         is presented in the unaudited Condensed Consolidated Statements of
         Operations. For the 13-week periods ended April 30, 2003 and May 1,
         2002, a net loss was incurred, therefore dilutive common stock
         equivalents were not used in the calculation of earnings per share as
         they would have an anti-dilutive effect. For the 13-week period ended
         April 30, 2003, dilutive common stock equivalents include options to
         purchase 43.3 million shares of common stock at prices ranging from
         4.86 to 24.03 and potential conversion of certain trust preferred
         securities of 25.5 million common shares. All outstanding stock options
         and trust convertible securities of the Predecessor Company were
         cancelled in accordance with the Plan of Reorganization. For the
         13-week period ended May 1, 2002, dilutive common stock equivalents
         include options to purchase 54.6 million shares of common stock at
         prices ranging from $4.86 to $26.03 and potential conversion of certain
         trust convertible preferred securities of 59.9 million common shares.
         At the time of emergence, we issued stock options to ESL and our Chief
         Executive Officer.

14.      STOCK BASED COMPENSATION

                  In December 2002, the FASB issued SFAS No. 148, "Accounting
         for Stock-Based Compensation -- Transition and Disclosure, an Amendment
         of FASB Statement No. 123" ("SFAS No. 148"), which provides three
         alternative methods of transition to the fair value method of
         accounting for stock options. SFAS No. 148 also amends the disclosure
         requirements of SFAS No. 123, "Accounting for Stock-Based
         Compensation."

                  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 (APB No. 25)"
         and related interpretations. The intrinsic value method does not
         require the recognition of expense for the fair value of stock-based
         compensation. As previously discussed all outstanding stock options of
         the Predecessor Company were cancelled in accordance with the Plan of
         Reorganization.


                                       16
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                  In accordance with the disclosure requirements of SFAS No.
         148, the pro forma effects of recognizing compensation expense on net
         loss and loss per share, had we applied the fair value method, is as
         follows:

<TABLE>
<CAPTION>
                                                                             13 Weeks Ended
                                                                   April 30, 2003       May 1, 2002
                                                                   --------------       -----------
<S>                                                                     <C>              <C>
Net loss, as reported                                                   ($ 862)          ($1,442)
Deduct:  Total stock-based employee compensation income
   (expense) determined under the fair value-based method
   for all awards, net of related tax effects                               38               (11)
                                                                        ------           -------
Pro forma net loss                                                      ($ 824)          ($1,453)
                                                                        ======           =======

Basic/diluted loss per share:
        As reported                                                     ($1.65)          ($ 2.87)
                                                                        ======           =======
        Pro forma                                                       ($1.58)          ($ 2.89)
                                                                        ======           =======
</TABLE>

                  No stock options of the Predecessor Company were granted
         following the Predecessor Company's Chapter 11 filing. Upon emergence
         from Chapter 11, all outstanding awards of the Predecessor Company's
         stock-based compensation programs were cancelled. Pro-forma stock-based
         employee compensation income of $38 for 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.

15.      COMPREHENSIVE LOSS

                  Comprehensive loss represents net loss, adjusted for the
         effect of other items that are recorded directly to shareholders'
         equity. For the 13-week period ended April 30, 2003, comprehensive loss
         included a minimum pension liability adjustment of $94 which was
         subsequently eliminated through the application of Fresh-Start
         accounting. Comprehensive loss and net loss are equivalent for the
         13-week period ended May 1, 2002.

16.      RELATED PARTY TRANSACTIONS

                  Commencing March 2002, Kmart engaged various services of AP
         Services (formerly known as JA&A Services), a consulting firm, whose
         Chairman and another Principal held executive officer positions within
         Kmart. Specifically, their Chairman, Albert A. Koch, previously served
         as our Chief Financial Officer, and another Principal, Edward J.
         Stenger, previously served as our Treasurer. We recorded expenses of $7
         and paid fees of $5 for the 13-weeks ended April 30, 2003, and recorded
         expenses of $3 and paid fees of $1 for the 13-weeks ended May 1, 2002,
         respectively, to the firm for services rendered under the consulting
         agreement, including the services of Messrs. Koch and Stenger.

17.      INVENTORIES AND COST OF MERCHANDISE SOLD

                  For the periods ended January 29, 2003 and May 1, 2002, our
         inventory is accounted for using the LIFO method. Inventories valued on
         LIFO at January 29, 2003 and May 1, 2002 were $190 and $269 lower,
         respectively, than the amounts that would have been reported under the
         FIFO method. As required by SOP 90-7, inventories at April 30, 2003
         were stated at fair value. As previously discussed, we elected to
         change our method of accounting for merchandise inventories from LIFO
         to FIFO, see Note 3 -- Fresh Start Accounting.

18.      INVESTMENTS IN AFFILIATED RETAIL COMPANIES

         Meldisco

                  Kmart footwear departments are operated under a license
         agreement with the Meldisco subsidiaries of Footstar, Inc. ("FTS"),
         substantially all of which are 49% owned by Kmart and 51% owned by FTS.
         We are aware that FTS will be restating its financial statements for
         prior periods. As a result, we have not received final financial
         statements for fiscal 2002 or the first quarter of fiscal 2003 for
         Meldisco at the time of our filing of this Quarterly Report on Form
         10-Q. For the 13-weeks ended April 30, 2003, we have received
         preliminary financial statements and believe they provide a reliable
         basis for making a reasonable estimate of $7 of equity income. For the
         13-week period ended April 30, 2003, Meldisco had net sales of $246.
         For the 13-week period ended May 1, 2002, Meldisco had net sales of
         $307, gross profit of $139 and net income of $17. We do not expect the
         restatement to have a material effect on our equity income from
         Meldisco.


                                       17
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

19.      OTHER COMMITMENTS AND CONTINGENCIES

         Contingent Liabilities

                  The Predecessor Company had (i) guaranteed obligations for
         real property leases of certain Debtors and former subsidiaries of
         Kmart including, but not limited to, The Sports Authority, Inc.,
         OfficeMax, Inc. and Borders Group, Inc., some of which leases were
         assigned pre-petition; (ii) contingent liabilities under real property
         leases assigned by Kmart pre-petition; and (iii) guaranteed
         indebtedness of other parties related to certain of our leased
         properties financed by industrial revenue bonds. To the extent not
         expressly assumed or reinstated under the Plan of Reorganization these
         guarantees were discharged subject to pre-petition claims
         administration.

         Legal Proceedings

             Fair Labor Standards Litigation

                  Kmart is a defendant in six putative class actions and one
         multi-plaintiff case pending in California, all relating to Kmart's
         classification of assistant managers and various other employees as
         "exempt" employees under the federal Fair Labor Standards Act ("FLSA")
         and the California Labor Code, and Kmart's alleged failure to pay
         overtime wages as required by these laws. These seven wage-and-hour
         cases were all filed during 2001 and are currently pending in the
         United States District Court for the Eastern District of California
         (Henderson v. Kmart), the United States District Court for the Central
         District of California (Gulley v. Kmart, the multi-plaintiff case,
         which was originally brought in state court) and the Superior Courts of
         the State of California for the Counties of Alameda, Los Angeles and
         Riverside (Panossian v. Kmart, Wallace v. Kmart, Pierce v. Kmart,
         Hancock v. Kmart, Pryor v. Kmart). If all of these cases were
         determined adversely to Kmart, the resulting damages could have a
         material adverse impact on our results of operations and financial
         condition. However, there have been no class certifications, all of the
         cases are stayed and enjoined as a result of Kmart's Chapter 11
         proceedings and confirmation of the Plan and, based on our initial
         investigations, we believe that we have meritorious defenses to each of
         these claims. We presently do not expect to have any material financial
         exposure as a result of these cases.

                  Kmart is a defendant in a putative class action pending in
         Oklahoma relating to the proper payment of overtime to hourly
         associates under the FLSA. The plaintiff claims he represents a class
         of all current and former Kmart employees who have been improperly
         denied overtime pay. This case was filed on March 4, 2003 and is
         currently pending in the U.S. District Court for the Northern District
         of Oklahoma. At this time, the likelihood of a material unfavorable
         outcome is not considered probable.

                  There is an increasing trend of high profile class action
         litigation, particularly in the retail industry, against employers of
         large numbers of people which allege violations of the FLSA. Other
         companies against which these cases have been filed have paid
         significant settlements and/or had significant judgments entered
         against them. Kmart has a large employee base; however no FLSA class
         actions against Kmart have yet been certified. The actions described
         above are the only FLSA related matters that are currently pending
         against Kmart.

                  To the extent that any awards are granted to the respective
         plaintiffs, the Successor Company will be responsible only for any
         portion of any such award relating to a post-petition period. Any
         portion of any such award that is a monetary claim relating to a
         pre-petition period will be addressed in accordance with the Plan of
         Reorganization.

         Securities Action Litigation

                  Since February 21, 2002, five separate purported class actions
         have been filed on behalf of purchasers of Kmart common stock. The
         initial complaints were filed on behalf of purchasers of common stock
         between May 17, 2001 and January 22, 2002, inclusive, and named Charles
         C. Conaway, former CEO and Chairman of the Board of Kmart as the sole
         defendant. The complaints filed in the United States District Court for
         the Eastern District of Michigan, allege, among other things, that Mr.
         Conaway made material misstatements or omissions during the alleged
         class period that inflated the trading prices of the Predecessor
         Company's common stock and seek, among other things, damages under
         Section 10b-5 of the Securities and Exchange Act of 1934. On October
         15, 2002, an amended consolidated complaint was filed that enlarged the
         class of persons on whose behalf the action was brought to include
         purchasers of the

                                       18
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

         Predecessor Company's securities between March 13, 2001 and May 15,
         2002, and added former officers and PricewaterhouseCoopers LLP as
         defendants. Kmart is not a defendant in this litigation.

                  On July 31, 2002, attorneys for plaintiffs in the then pending
         class action lawsuits filed a class proof of claim in the Court (the
         "Class Proof of Claim") on behalf of the plaintiffs and all purchasers
         of the Predecessor Company's common stock between May 17, 2001 and
         January 22, 2002, inclusive. The Class Proof of Claim, which is
         asserted against the Debtors, reserved the right to identify additional
         claimants or members of the class group in the future. In support of
         the Class Proof of Claim, the claimants rely on the above-referenced
         class actions filed against the parties identified above. The claimants
         state that the grounds for liability are alleged damages for violations
         of federal securities laws, including the Securities Exchange Act of
         1934, in connection with the purchase or acquisition of the Predecessor
         Company's common stock by the claimants during the class period. The
         Class Proof of Claim alleges that the Debtors are liable to the
         claimants for damages in a sum not presently determinable but believed
         to be not less than $700 in the aggregate, plus interest, costs and
         allowed attorneys' fees.

                  On March 18, 2002, a purported 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 directors of Kmart 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 our financial condition.
         Subsequently, amended complaints were filed that added additional
         current and former employees and directors of Kmart 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.

                  On April 26, 2002, a lawsuit was filed in the United States
         District Court for the Eastern District of Michigan on behalf of three
         limited partnerships (the "Softbank Funds") that purchased stock of
         Bluelight.com, a subsidiary of Kmart, naming Charles C. Conaway, as
         former CEO and Chairman of the Board of Kmart, as the sole defendant.
         The Complaint alleges that Mr. Conaway breached his fiduciary duty,
         took certain actions and made certain misrepresentations that induced
         plaintiffs to exchange their Bluelight.com stock for the Predecessor
         Company's stock and prevented plaintiffs from realizing the market
         value of their stock. The complaint also alleges violations of Section
         10b-5 of the Securities and Exchange Act of 1934 and Section 410 of the
         Michigan Uniform Securities Act. Kmart was not a defendant in this
         litigation. On January 16, 2003, the District Court dismissed the
         complaint. On February 14, 2003, a lawsuit was filed by the Softbank
         Funds against Mr. Conaway in the Circuit Court of Cook County,
         Illinois. This lawsuit seeks $33 from the defendant for alleged breach
         of fiduciary duty in connection with the failure of the Predecessor
         Company to cause the registration of the plaintiffs' shares of the
         Predecessor Company's common stock to become effective. This claim is
         essentially the same as count I of the lawsuit that was dismissed on
         January 16, 2003. On May 2, 2002, the plaintiffs filed proofs of claim
         with the Court in an aggregate amount equal to $56.

                  The foregoing actions, which were brought by or on behalf of
         holders of common stock of the Predecessor Company and are referred to
         as "Securities Actions" under the Plan of Reorganization, were brought
         against persons other than the Company and, therefore, were not
         extinguished when we emerged from Chapter 11. Accordingly, to the
         extent that any awards are granted to the respective plaintiffs under
         these actions and a claim is allowed against the Predecessor Company
         under the proofs of claim previously filed with the Court, the allowed
         claim, to the extent not covered by insurance, will be addressed in
         accordance with the Plan of Reorganization. Except as noted above, the
         foregoing actions relate to periods occurring prior to the Petition
         Date. Any obligations which we may have with respect to a claim for
         indemnification by any of the defendants will be governed by the terms
         of the Plan of Reorganization.

         Other and Routine Actions

                  Kmart is a defendant in a putative class action pending in
         Colorado relating to proper access to facilities for the disabled under
         the Americans with Disabilities Act ("ADA"). The plaintiff claims he
         represents a class of disabled customers who have been improperly
         denied access to facilities required under the ADA. This case was filed
         on October 1, 1999 and is currently pending in the United States
         District Court in Denver, Colorado. This action has been stayed
         pursuant to the automatic bankruptcy stay and the plan injunction. No
         class has been certified. At this time, the likelihood of a material
         unfavorable outcome is not considered probable.

                  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

                                       19
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

         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,
         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 balance sheet as of April 30, 2003 only reflects potential losses
         for which the Successor Company may have ultimate responsibility.

         Investigative Matters

                  Kmart has been provided with copies of anonymous letters that
         were sent to the SEC, our auditors, directors, legal counsel and
         others, expressing concern with respect to various matters. The letters
         purported to be sent by certain of our employees. The letters were
         referred to the Predecessor Company's Audit Committee of the Board of
         Directors, which engaged outside counsel to review and investigate the
         matters set forth in the letters. We are cooperating with the SEC and
         the U. S. Attorney's office for the Eastern District of Michigan with
         respect to the investigations of these matters. The staff of the SEC
         has expressed concerns with respect to the manner in which we recorded
         vendor allowances prior to the change in accounting principles at the
         end of fiscal 2001, as well as the Staff's intention to continue to
         pursue its investigation of these matters. The United States Attorney
         for the Eastern District of Michigan also is undertaking an inquiry
         into these matters. A detailed discussion of the investigation and
         stewardship review, as well as the results of such investigation and
         review, is contained in the Disclosure Statement, which we filed as
         Exhibit 2.2 to our Current Report on Form 8-K dated March 7, 2003.

                  After consultation with the statutory committees in our
         Chapter 11 proceedings, we have determined that the Creditor Trust is
         the preferred available mechanism for resolving any legal claims that
         arose out of these investigations. As part of the Plan of
         Reorganization, the trustee of the trust is charged with responsibility
         for determining which claims to pursue and, thereafter, litigating such
         claims. Pursuant to the Plan of Reorganization and various
         confidentiality orders issued by the Court, we will share with the
         trustee evidence gathered and certain work product developed during the
         investigations.

20.      RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

                  In June 2001, the Financial Accounting Standards Board
         ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement
         Obligations" ("SFAS No. 143"). SFAS No. 143 requires a liability for
         the cost of an asset retirement obligation be recognized and measured
         initially at fair value in the period in which the liability is
         incurred. The asset retirement costs are capitalized as part of the
         long-lived asset and depreciated over the asset's life. The provisions
         of SFAS No. 143 were effective for this fiscal year beginning January
         30, 2003. The adoption of SFAS No. 143 did not have a material effect
         on our financial statements.

                  In June 2002, the FASB issued SFAS No. 146, which supercedes
         EITF Issue No. 94-3, "Liability Recognition for Certain Employee
         Termination Benefits and Other Costs to Exit an Activity (Including
         Certain Costs Incurred in Restructuring)." The new standard requires a
         liability for a cost associated with an exit or disposal activity to be
         recognized and measured initially at fair value in the period in which
         the liability is incurred, rather than at the time of commitment to an
         exit plan. SFAS No. 146 was effective for exit or disposal activities
         that were initiated after December 31, 2002. As a result of adopting
         the provisions of this standard, certain lease termination and other
         restructuring costs were recognized in the first quarter of 2003 that
         otherwise would have been recognized in the fourth quarter of 2002.

                  In November 2002, the EITF reached a final consensus on EITF
         Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for
         Certain Consideration Received from a Vendor." This issue addressed the
         income statement classification of cash consideration received from a
         vendor and the recognition criteria for performance-driven vendor
         rebates or refunds. This consensus, effective for the Predecessor
         Company's fiscal year ended January 29, 2003, resulted in certain co-op
         advertising recoveries which would previously have been recorded as a
         reduction of SG & A, being recorded as a reduction of Cost of sales,
         buying and occupancy.

                  In January 2003, the FASB issued Interpretation No. 46,
         "Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No.
         46 provides guidance on the identification and consolidation of
         variable interest entities ("VIEs"). VIEs

                                       20
<PAGE>
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
         (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

         are defined in FIN No. 46 as entities that have insufficient equity at
         risk or have equity investors who lack characteristics of a financial
         controlling interest. This Interpretation requires the primary
         beneficiary of an unconsolidated variable interest entity to
         consolidate the VIE if the entity does not effectively disperse risks
         among the parties involved. We have performed an analysis, and we have
         determined that there were no entities that require consolidation upon
         adoption of this standard.

                  In April 2003, the FASB issued SFAS No. 149, "Amendment of
         Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS
         No. 149"). This statement amends and clarifies the accounting for
         derivative instruments and hedging activities under SFAS No. 133,
         "Accounting for Derivative Instruments and Hedging Activities." As
         required by SOP 90-7, the Company must adopt, as of the current
         reporting period, all accounting guidance that would otherwise become
         effective within the next twelve months. We have adopted SFAS No. 149
         effective April 30, 2003. There was no impact to the Company upon the
         adoption of SFAS No. 149 as we currently do not hold any derivative
         instruments or participate in hedging activities.

                  In May 2003, the FASB issued SFAS No. 150, "Accounting for
         Certain Financial Instruments with Characteristics of both Liabilities
         and Equity" ("SFAS No. 150"). SFAS No. 150 requires certain financial
         instruments with characteristics of both liabilities and equity to be
         classified as liabilities. As required by SOP 90-7, we are required to
         adopt, as of the current reporting period, all accounting guidance that
         is effective within the next twelve month period. We have adopted SFAS
         No. 150 effective April 30, 2003. We did not have any financial
         instruments that were classified as equity prior to the adoption of
         SFAS No. 150 that were required to be reclassified to liabilities.

21.      SUBSEQUENT EVENTS

                  On June 4, 2003, Martha Stewart was indicted in the United
         States District Court of the Southern District of New York. The Martha
         Stewart brand is considered a distinctive brand for Kmart and we
         currently sell Martha Stewart home, garden, colors, baby, kitchen,
         keeping and decorating product lines, along with candles and
         accessories. Martha Stewart has resigned her position as Chairman and
         Chief Executive Officer of Martha Stewart Omnimedia, Inc.; however, she
         will serve as the Chief Creative Officer and remain on the Board of
         Directors. To-date, we have not experienced any significant adverse
         impact from this matter on the sales of Martha Stewart brand product
         lines.

                  On June 10, 2003 our common stock began trading on the NASDAQ
         National Market System under the symbol KMRT. The common stock had
         previously traded on the OTC Bulletin Board.


                                       21
<PAGE>

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION
         (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

                  This Form 10-Q, as well as other statements or reports made by
         or on behalf of Kmart, may contain or may incorporate by reference
         material which includes 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. Statements, other than those based on historical
         facts, which address activities, events or developments that we expect
         or anticipate may occur in the future are forward-looking statements,
         which are based upon a number of assumptions concerning future
         conditions that may ultimately prove to be inaccurate. Such
         forward-looking statements are and will be, as the case may be, subject
         to many risks, uncertainties and factors relating to Kmart's operations
         and business environment which may cause the actual results of Kmart to
         be materially different from any 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, the following:

         o        general economic conditions,
         o        weather conditions, including those which affect buying
                  patterns of our customers,
         o        marketplace demand for the products of our key brand partners,
                  as well as the engagement of appropriate new brand partners,
         o        changes in consumer spending and our ability to anticipate
                  buying patterns and implement appropriate inventory
                  strategies,
         o        competitive pressures and other third party actions, including
                  pressures from pricing and other promotional activities of
                  competitors, as well as new competitive store openings,
         o        the impact of external forces, such as the severe acute
                  respiratory syndrome, on our business,
         o        the resolution of allowed claims for which we are obligated to
                  pay cash under the Plan of Reorganization,
         o        our ability to timely acquire desired goods in appropriate
                  quantities and/or fulfill labor needs at planned costs,
         o        our ability to properly monitor our inventory needs and remain
                  in-stock,
         o        our ability to successfully implement business strategies and
                  otherwise execute planned changes in various aspects of the
                  business,
         o        our ability to operate pursuant to our Exit Financing
                  Facility,
         o        regulatory and legal developments,
         o        our ability to attract, motivate and/or retain key executives
                  and associates,
         o        our ability to attract and retain customers,
         o        our ability to offset the negative effects that filing for
                  reorganization under Chapter 11 has had on our business,
                  including the loss in customer traffic and the impairment of
                  vendor relations,
         o        our ability to obtain and maintain normal terms with vendors
                  and service providers,
         o        our ability to maintain contracts, including leases, that are
                  critical to our operations,
         o        our ability to implement our long-term strategy and/or develop
                  a market niche,
         o        our ability to fund and execute our business plan, and
         o        other factors affecting business beyond our control.

                  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.

                                       22
<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION - (CONTINUED)
         (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         OVERVIEW

                  On the Petition Date, Kmart Corporation (the Predecessor
         Company), and 37 of its U.S. subsidiaries filed voluntary petitions for
         reorganization under Chapter 11. On January 24, 2003, the Debtors filed
         a Plan of Reorganization and related Disclosure Statement and on
         February 25, 2003, filed the Plan of Reorganization and a 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.

                  On the Effective Date, the Predecessor Company emerged from
         reorganization proceedings under Chapter 11 pursuant to the terms of
         the Debtors' Plan of Reorganization and became a wholly-owned
         subsidiary of Kmart Management Corporation, which is a newly-formed,
         wholly-owned subsidiary of a newly-created holding company, Kmart
         Holding Corporation (the Successor Company). Kmart is the nation's
         third largest discount retailer and the sixth largest general
         merchandise retailer.

                  In accordance with SOP 90-7, we adopted Fresh-Start accounting
         as of the Confirmation Date. However, in light of the proximity of such
         date to our fiscal quarter end, we have applied, for accounting
         purposes, the effects of Fresh-Start accounting and the Plan of
         Reorganization, including the cancellation of the existing common stock
         and the issuance of the new common stock, "as if" they occurred on
         April 30, 2003. 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 (see Note 3 -- Fresh-Start Accounting). The
         reported historical financial statements of the Predecessor Company for
         periods prior to April 30, 2003 generally are not comparable to those
         of the Successor Company. In this Quarterly Report on Form 10-Q,
         references to our 2003 and 2002 results of operations refer to the
         Predecessor Company.

                  At the time of emergence, 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 Kmart
         Holding Corporation's new common stock in satisfaction of pre-petition
         claims they held and we issued 14 million shares of new common stock to
         affiliates of ESL and Third Avenue, in exchange for $127, net of $13 of
         commitment fees and Plan Investor expenses. In addition, we issued a
         9%, $60 principal amount convertible note to the affiliates of ESL. The
         principal and unpaid interest in respect to the 9% convertible note is
         convertible at any time, at the option of the holder, into new common
         shares at a conversion price equal to $10 per share. ESL also was
         granted the option, exercisable in its own discretion prior to May 6,
         2005, to purchase from the Successor Company approximately 6.6 million
         new Common Shares at a price of $13 per share. A portion of the option
         was assigned to Third Avenue. The investment was made pursuant to the
         Investment Agreement.

                  ESL and its affiliates beneficially own over 50% of the common
         stock of the Successor Company, including shares received in exchange
         for pre-petition obligations, as well as shares obtainable upon
         exercise of options and conversion of the $60 convertible note issued
         to affiliates of ESL. Each of the Plan Investors is represented on our
         Board of Directors.

                  The Plan of Reorganization became effective on May 6, 2003, at
         which time all then-outstanding equity securities of the Predecessor
         Company, as well as substantially all of its pre-petition liabilities,
         were cancelled. Holders of the Predecessor Company's stock may receive
         up to 2.5% of the recoveries under the Creditor Trust, see Note 1 --
         Proceedings under Chapter 11 of the Bankruptcy Code. New common stock
         of the Successor Company was issued in satisfaction of certain of those
         pre-petition liability claims, see Note 1 -- Proceedings under Chapter
         11 of the Bankruptcy Code. The new securities of the Successor Company
         issued on the Effective Date pursuant to the Plan of Reorganization and
         related transactions, consisted of 89,677,509 shares of new common
         stock and options to purchase 8,324,883 shares of new common stock. 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 for 14 million shares of common stock of
         the Successor Company issued to affiliates of ESL and Third Avenue in
         exchange for $127, net $13 of commitment fees and Plan Investor
         expenses. All such 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, Kmart has established
         a Creditor Trust for the benefit of the Predecessor Company's
         pre-petition

                                       23
<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION - (CONTINUED)
         (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         creditors and equity holders, to pursue claims which arose from the
         Predecessor Company's prior accounting and stewardship investigations.
                  The ability of Kmart to continue as a going concern is
         predicated upon numerous issues, including our ability to achieve the
         following:

             o    implementing our business plan and returning Kmart to
                  profitability;
             o    taking appropriate action to offset the negative effects
                  that the Chapter 11 filing has had on our business,
                  including the loss in customer traffic and the impairment of
                  vendor relations;
             o    operating within the framework of our $2 billion Exit
                  Financing Facility, including its limitations on capital
                  expenditures, its financial covenants, our ability to
                  generate cash flows from operations or seek other sources of
                  financing and the availability of projected vendor terms;
                  and
             o    attracting, motivating and/or retaining key executives and
                  associates.

                  These challenges are in addition to those operational and
         competitive challenges faced by Kmart in connection with our business
         as a discount retailer. See "Cautionary Statement Regarding
         Forward-Looking Information" above.

         CRITICAL ACCOUNTING POLICIES AND ESTIMATES

                  The preparation of financial statements requires that we make
         estimates and assumptions that affect the reported amounts of assets
         and liabilities at the date of the financial statements and revenues
         and expenses during the period. We base our estimates on historical
         experience and other assumptions that we believe to be reasonable under
         the circumstances, the results of which form the basis for making
         judgments about carrying values of assets and liabilities that are not
         readily apparent from other sources. We continually evaluate the
         information used to make these estimates as our business and the
         economic environment change. We have disclosed our critical accounting
         policies and estimates in the Predecessor Company's Annual Report on
         Form 10-K for the year ended January 29, 2003, filed with the
         Securities Exchange Commission on March 24, 2003. See Note 3 -- Fresh
         Start Accounting for a discussion of our change from the Last-in
         First-Out method of inventory valuation to the First-in First-Out
         method for our accounting for merchandise inventories.

         RESULTS OF OPERATIONS

                  The following Management's Discussion and Analysis ("MD&A")
         discussion provides a comparative analysis of operating results as
         reported for the 13-weeks ended April 30, 2003 and May 1, 2002.

                  Same-store sales and total sales decreased 3.2% and 13.9%,
         respectively, for the 13-weeks ended April 30, 2003 as compared to the
         same period from the previous year. The decrease in same store sales is
         primarily due to sluggish retail sales as a result of consumer concerns
         over the war with Iraq, general economic factors and unseasonable
         weather conditions. Same-store sales include sales of all open stores
         that have been open for greater than 13 full months. The decrease in
         total sales is attributable to the decrease in same-store sales and the
         closure of 283 stores during the second quarter of 2002.

                  Gross margin increased $674 to $1,419, for the 13-weeks ended
         April 30, 2003, from $745 for the 13-weeks ended May 1, 2002. Gross
         margin, as a percentage of sales, increased to 23.0% for the 13-weeks
         ended April 30, 2003, from 10.4% for the 13-week period ended May 1,
         2002. The increase in gross margin is primarily related to the charge
         of $542 recorded in the first quarter of 2002 in conjunction with the
         store closing liquidation sales. In addition, our gross margin rate was
         positively affected by a favorable gross margin rate realized from
         closing store liquidation sales, a decrease in sales of food and
         consumables, which carry lower margins and a decrease in promotional
         markdowns, partially offset by the impact of clearance markdowns.

                  Selling, general and administrative expenses ("SG&A"), which
         includes advertising costs (net of co-op recoveries of $69 in fiscal
         2002) decreased $249 for the 13-weeks ended April 30, 2003 to $1,421,
         or 23.0% of sales, from $1,670, or 23.3% of sales, for the 13-weeks
         ended May 1, 2002. The decrease in SG&A is primarily the result of the
         closure of 283 stores in the second quarter of 2002 and lower payroll
         and other related expenses in the first quarter of 2003 stemming from
         corporate headquarters cost reduction initiatives. In addition, SG&A
         was favorably impacted by a decrease in utility expenses and electronic
         media advertising, and lower depreciation expense as a result of the
         impairment charge recorded in the fourth quarter of fiscal 2002. These
         decreases were partially offset by co-op recoveries

                                       24
<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION - (CONTINUED)
         (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


         recorded to SG&A in 2002, that are recorded to cost of sales, buying
         and occupancy in 2003, resulting from the application of EITF 02-16,
         "Accounting by a customer (Including a Reseller) for Certain
         Consideration Received from a Vendor," an increase in pension expense,
         and higher premiums for our workers' compensation insurance.

                  Operating loss for the 13-weeks ended April 30, 2003 was $32,
         or (0.5%) of sales, as compared to operating loss of $920, or (12.8%)
         of sales, for the same period of the prior year. The decrease in
         operating loss was primarily due to the 2002 charge for accelerated
         inventory markdowns of $542 in conjunction with store closing
         liquidations in the first quarter of fiscal 2002 and the decrease in
         SG&A as discussed above.

                  Net interest expense for the 13-weeks ended April 30, 2003 and
         May 1, 2002 was $57 and $33, respectively. The increase in interest
         expense is due to accelerated amortization on debt issuance costs
         related to our DIP Credit Facility in connection with our emergence
         from Chapter 11. Included in net interest expense is interest income of
         $1 for the 13-weeks ended April 30, 2003 and May 1, 2002. Interest at
         the stated contractual amount on unsecured debt that was not charged to
         earnings for the 13-weeks ended April 30, 2003 and May 1, 2002 was $67
         and $69, respectively.

                  Effective income tax rate was (0.7%) and (1.0%) for the
         13-weeks ended April 30, 2003 and May 1, 2002, respectively, see Note
         12 -- Income Taxes.

                  Significant changes were made to our unaudited Condensed
         Consolidated Balance Sheet to reflect the application of Fresh-Start
         accounting. See Note 3 -- Fresh Start Accounting for further details of
         the adjustments.

         LIQUIDITY AND FINANCIAL CONDITION

                  On May 6, 2003, our $2 billion Exit Financing Facility
         financed by General Electric Capital Corporation, Fleet Retail Finance,
         Inc. and Bank of America, N.A. became effective. Debt issuance costs
         associated with the Exit Financing Facility totaled $58 and will be
         amortized through May 2006. The Exit Financing Facility is a revolving
         credit facility under which Kmart Corporation is the debtor and its
         parent entities and most direct and indirect subsidiaries are
         guarantors. The Exit Financing Facility is collateralized by first
         liens on inventory, the proceeds thereof, and certain intellectual
         property necessary to realize the value of the inventory. Borrowings
         under the Exit Financing Facility currently bear interest at either the
         Prime rate plus 2.5% per annum or the LIBOR rate plus 3.5% per annum,
         at our discretion, which interest rate margin may be reduced after the
         first anniversary of the effective date of the Exit Financing Facility
         if Kmart meets certain EBITDA targets. In addition, we are required to
         pay a fee based on the unutilized commitment under the Exit Financing
         Facility equal to 0.75% per annum. The Exit Financing Facility
         financial covenants include a requirement that Kmart maintain minimum
         availability of $100 under the facility and a restriction on capital
         spending. In the event that Kmart fails to maintain certain specified
         excess availability minimums under the Exit Financing Facility, Kmart
         will also be required to maintain minimum levels of EBITDA. The Exit
         Financing 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
         necessary to maintain our operations.

                  Following the Petition Date and prior to emergence, the
         Predecessor Company utilized cash flows from operations and the
         Debtor-in-Possession Credit Facility ("DIP Credit Facility") as its
         primary sources of working capital. The DIP Credit Facility was a
         revolving credit facility under which the Predecessor Company was the
         borrower and the rest of the Debtors were guarantors.

                  Net cash provided by operating activities for the 13-weeks
         ended April 30, 2003 was $595 compared to net cash provided by
         operating activities of $1,020 for the same period in 2002. The
         decrease in cash provided by operating activities was primarily due to
         increased payments on accounts payable in the first quarter of 2003 as
         compared to the first quarter of 2002 due to the stay on pre-petition
         liabilities following our filing for protection under Chapter 11.

                  Net cash used for reorganization items was $19 for the
         13-weeks ended April 30, 2003 compared to net cash provided by
         reorganization items of $12 for the same period in 2002. The change in
         cash used for reorganization items

                                       25
<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION - (CONTINUED)
         (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         relates primarily to 2003 payments under the Key Employee Retention
         Program ("KERP") and payments to retain bankruptcy advisors.

                  Net cash provided by investing activities was $60 for the
         13-weeks ended April 30, 2003 compared to net cash used for investing
         activities of $52 for the same period in 2002. The change in net cash
         provided by investing activities is due to proceeds of $45 from the
         sale of four owned Kmart store locations, $18 from the sale of
         furniture and fixtures from our closed store locations, and a reduction
         in capital expenditures from $52 in 2002 to $4 in 2003.

                  Net cash used for financing activities was $17 for the
         13-weeks ended April 30, 2003 compared to net cash used for financing
         activities of $396 for the comparable period in 2002. The decrease in
         cash used for financing activities is primarily the result of the
         repayment of $330, including debt issuance costs, on our DTP Credit
         Facility in 2002.

                  Due to the seasonal nature of the retail industry, where
         merchandise sales and cash flows from operations are historically
         higher in the fourth quarter than any other period, a disproportionate
         amount of operating income and cash flows from operations are earned in
         the fourth quarter. Our results of operations and cash flows are
         primarily dependent upon the large sales volume generated during the
         fourth quarter of our fiscal year. Fourth quarter sales represented
         over 29% of total net sales in fiscal 2002. As a result, operating
         performance for the interim periods is not necessarily indicative of
         operating performance for the entire year. To support the higher
         seasonal sales volume we experience a seasonal inventory build in
         October and November and, as a result, our usage of credit lines is
         higher for this period of the year. We believe that our Exit Financing
         Facility will be adequate to support our forecasted seasonal borrowing
         needs.

                  Our cash needs are satisfied through working capital generated
         by our business and funds available under our Exit Financing Facility.
         The level of cash generated by our business is dependent, in
         significant part, on our level of sales and the credit extended by our
         vendors. Since our filing for reorganization under Chapter 11, most of
         our vendors have resumed normal trade terms. Should, however, we
         experience a significant disruption of terms with our vendors, sales
         fail to improve, the Exit Financing 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.

         Inflation

                  Inflation has not had a significant impact on our business
         over the past three years and we do not expect it to have a significant
         impact on operations in the foreseeable future, unless global or
         geo-political factors substantially affect the world economy.

         Future Liquidity Items

                  We expect to make payments of approximately $640 in
         conjunction with our emergence from Chapter 11. The actual amounts
         will depend upon the Reconciliation of Claims entitled to cash
         payments. We will fund these cash payments with existing cash balances
         and cash contributions received from the Plan Investors, including $60
         aggregate principal amount of convertible notes and $127, net of $13 of
         commitment fees and Plan Investor expenses, for the purchase of new
         common shares of the Successor Company.

                  We do not expect to borrow from the Exit Financing Facility
         except in the normal course of business to fund the seasonal inventory
         build-up for the fourth quarter, as discussed above.

         Pension Plan

                  Prior to 1996, Kmart 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. For the past nine years, the
         Predecessor Company has not been required to make contributions to the
         plans.

                  In light of returns in the equity markets in 2003 and prior
         years, and the effect of such returns on the value of the plans'
         assets, we presently expect that we will be required to commence making
         significant contributions to the plans in 2005 or 2006, although it is
         possible that contributions could be required earlier. Given that the
         plans are frozen, the timing for the commencement of our future funding
         requirements will depend, in large part, on the future investment

                                       26
<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION - (CONTINUED)
         (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         performance of the plans' assets. Once funding obligations commence, we
         presently anticipate that such obligations could continue for a period
         of five or six years at an average rate of between $100 and $200 a
         year, or between $700 and $1 billion in the aggregate. The actual level
         of contributions will depend upon a number of factors, including actual
         demographic experience, pension fund returns and other changes
         affecting valuations.

                  In addition to the funding described above, as a result of the
         returns over the most recent years, decreases in our annual discount
         rate and expected rate of return on assets, we recorded pension expense
         in the first quarter, as opposed to income as has been recorded in the
         most recent years.

         FRESH-START ADJUSTMENTS

                  In accordance with Fresh-Start accounting, all assets and
         liabilities are recorded at their respective fair market values. Fair
         values used represent our best estimates based on independent
         appraisals and valuations.

                  To facilitate the calculation of the enterprise value of the
         Successor Company, we developed a set of financial projections. Based
         on these financial projections, the enterprise value was determined by
         the Company, with assistance of a financial advisor, 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 Kmart 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
         restructuring of Kmart's capital structure and resulting discharge of
         pre-petition debt resulted in 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 Statement of Operations. In addition,
         the excess of fair value of net assets over reorganization value
         ("negative goodwill") was allocated on a pro-rata basis and reduced our
         non-current assets, with the exception of financial instruments, to $10
         in accordance with SFAS No. 141.

         DISCONTINUED OPERATIONS

                  During the first quarter of fiscal 2003 and the second quarter
         of fiscal 2002, we closed 316 and 283 stores, respectively. We
         identified 121 stores that met the criteria for discontinued operations
         (see Note 4 - Discontinued Operations). The results of operations for
         these 121 closed stores have been classified as discontinued operations
         for all periods presented in our unaudited Condensed Consolidated
         Statements of Operations. The table below sets forth the components of
         the net loss associated with the discontinued operations for the
         13-weeks ended April 30, 2003 and May 1, 2002.

<TABLE>
<CAPTION>
                                                               13 Weeks Ended
                                                   -----------------------------------
                                                    April 30, 2003        May 1, 2002
                                                   ---------------     ---------------
<S>                                                <C>                 <C>
Sales                                              $           232     $           458
Cost of sales, buying and occupancy                            150                 585
                                                   ---------------     ---------------
Gross margin                                                    82                (127)
Selling, general and administrative expenses                    43                 100
Restructurings, impairments and other charges                    5                   -
Reorganization items, net                                       44                  23
                                                   ---------------     ---------------
Net loss from discontinued operations              $           (10)    $          (250)
                                                   ===============     ===============
</TABLE>


                  Of the 599 stores that were closed in 2003 and 2002, 478 are
         included in continuing operations, as they did not meet the criteria
         for discontinued operations. For the 13-week period ended April 30,
         2003, total sales, gross margin and SG&A for the 250 stores that were
         closed in fiscal 2003 and reported in continuing operations are $854,
         $291 and $125, respectively. For the 13-week period ended May 1, 2002,
         total sales, gross margin and SG&A for the 478 stores that were closed
         in fiscal 2003 and 2002 and reported in continuing operations were
         $1,674, ($267) and $373, respectively.

                                       27
<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION - (CONTINUED)
         (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         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, we instituted
         certain restructuring actions to improve our operations and executed
         significant inventory liquidations as a result of the stores closed
         under Kmart's Chapter 11 proceedings. For the 13-weeks ended April 30,
         2003 and May 1, 2002 we recorded special charges of $42 and $758,
         respectively. For a comprehensive discussion see Note 6 -- 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. We recorded
         $769 and $251 for the 13-week periods ended April 30, 2003 and May 1,
         2002, respectively, for reorganization items. The increase in
         Reorganization items, net is primarily due to the Fleming settlement of
         $385 and expense of $200 for estimated claims for rejected executory
         contracts. For a comprehensive discussion see Note 7 -- Reorganization
         items, net.

         OTHER MATTERS

                  Contingent Liabilities

                  The Predecessor Company had (i) guaranteed obligations for
         real property leases of certain Debtors and former subsidiaries of
         Kmart including, but not limited to, The Sports Authority, Inc.,
         OfficeMax, Inc. and Borders Group, Inc., some of which leases were
         assigned pre-petition; (ii) contingent liabilities under real property
         leases assigned by Kmart pre-petition; and (iii) guaranteed
         indebtedness of other parties related to certain of our leased
         properties financed by industrial revenue bonds. To the extent not
         expressly assumed or reinstated under the Plan of Reorganization these
         guarantees were discharged subject to pre-petition claims
         administration.

         OTHER

                  On June 4, 2003, Martha Stewart was indicted in the United
         States District Court of the Southern District of New York. The Martha
         Stewart brand is considered a distinctive brand for Kmart and we
         currently sell Martha Stewart home, garden, colors, baby, kitchen,
         keeping and decorating product lines, along with candles and
         accessories. Martha Stewart has resigned her position as Chairman and
         Chief Executive Officer of Martha Stewart Omnimedia, Inc.; however, she
         will serve as the Chief Creative Officer and remain on the Board of
         Directors. To-date, we have not experienced any significant adverse
         impact from this matter on the sales of Martha Stewart brand products.
         Although product sales have not been significantly affected by past
         events, the Company is not able to determine the potential effects
         these events may have on the future sales of its Martha Stewart brand
         products.


                  On June 10, 2003, our common stock began trading on the
          NASDAQ National Market System under the symbol KMRT. The common stock
          had previously traded on the OTC Bulletin Board.


                                       28
<PAGE>
         ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                  At April 30, 2003, 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 Exit Financing 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

                  Within the 90-day period prior to the date of filing this
         report, we carried out an evaluation, under the supervision of our
         management Disclosure Committee (which includes the Chief Executive
         Officer and Acting Chief Financial Officer), of the effectiveness of
         the design and operation of our disclosure controls and procedures
         pursuant to Exchange Act Rules 13a-14 and 15d-14. Based upon this
         evaluation, the Chief Executive Officer and Acting Chief Financial
         Officer concluded that our disclosure controls and procedures are
         effective to ensure that information required to be disclosed in our
         periodic SEC reports is recorded, processed, summarized, and reported
         as and when required.

                  There have not been any significant changes to our internal
         controls or any other factors that could significantly affect these
         controls subsequent to the date of management's evaluation.


                                       29
<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 AND USE OF PROCEEDS

                  The Plan of Reorganization became effective on May 6, 2003, at
         which time all then-outstanding equity securities of the Predecessor
         Company, as well as substantially all pre-petition liabilities, were
         cancelled. New common stock of the Successor Company was issued in
         satisfaction of certain of those claims. Information concerning the new
         securities is summarized in Part I, Item 1, above, in Note 1 of
         the Notes to unaudited Condensed Consolidated Financial Statements and
         in our Registration Statement on Form 8-A filed May 6, 2003.

                  The new securities of the Successor Company issued on May 6,
         2003 pursuant to the Plan of Reorganization and related transactions,
         consisted of 89,677,509 shares of common stock of the Successor
         Company, options to purchase 8,324,883 shares of common stock of the
         Successor Company and $60 million aggregate principal amount of
         convertible notes. The principal and accrued interest in respect to the
         9% convertible note is convertible at any time, at the option of the
         holder, into new common shares at a conversion price equal to $10 per
         share. 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 for 14 million shares of
         common stock of the Successor Company, which were issued in exchange
         for $127 million, net of $13 million of commitment fees and Plan
         Investors expenses. All such 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.

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

                  As a result of its Chapter 11 filing, the Predecessor Company
         did not make principal or interest payments on unsecured indebtedness
         incurred prior to January 22, 2002. In addition, the Predecessor
         Company was not permitted to pay dividends on its trust convertible
         preferred securities. As of May 6, 2003, all unsecured indebtedness
         incurred by the Predecessor Company and the trust convertible preferred
         securities were cancelled.

         ITEM 5.  OTHER INFORMATION

                  Upon emergence from Chapter 11, the Board of Directors of
         Kmart Holding Corporation was fixed at nine. The members of the Board
         are: E. David Coolidge III, William C. Crowley, Julian C. Day, William
         Foss, Edward S. Lampert, Steven T. Mnuchin, Ann Reese, Brandon Stranzl
         and Thomas J. Tisch. Biographical information about our directors can
         be found on our web site www.kmart.com. Edward S. Lampert was appointed
         Chairman of the Board of Directors.

                  The Board of Directors established the following committees:
         the Audit Committee, the Compensation Committee, the Nominating and
         Governance Committee and the Finance Committee. The members of the
         committees are set forth below:

                  Audit Committee:

                           Ann Reese, Chair
                           E. David Coolidge III
                           Brandon Stranzl

                  Compensation and Incentives Committee:

                           Edward S. Lampert, Chair
                           Ann Reese
                           Thomas J. Tisch

                  Corporate Governance Committee:

                           Steven T. Mnuchin, Chair
                           William Foss

                                       30
<PAGE>
                           Thomas J. Tisch

                  Finance Committee:

                           Edward S. Lampert, Chair
                           William C. Crowley
                           Julian C. Day
                           Steven T. Mnuchin

                  Mr. Harold W. Lueken was appointed to the position of Senior
         Vice President, General Counsel and Secretary, effective May 12, 2003,
         and in connection with his appointment, entered into an employment
         agreement dated May 6, 2003.

                  The employment of Mr. Ronald B. Hutchison as Chief
         Restructuring Officer with Kmart terminated May 31, 2003. The
         employment of Michael T. Macik as Executive Vice President of Human
         Resources terminated effective May 1, 2003, pursuant to the terms of a
         separation agreement dated June 3, 2003.

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      The following exhibits are filed as a part of this report:

<TABLE>
<S>               <C>
                  Exhibit 1.1 -- Amended and Restated Certificate of Incorporation of Kmart Holding Corporation

                  Exhibit 1.2 -- By-Laws of Kmart Holding Corporation

                  Exhibit 4.1 -- 9% Convertible Subordinated Note issued by Kmart Holding Corporation to CRK Partners, L.P.

                  Exhibit 4.2 -- 9% Convertible Subordinated Note issued by Kmart Holding Corporation to CRK Partners II, L.P.

                  Exhibit 4.3 -- 9% Convertible Subordinated Note issued by Kmart Holding Corporation to ESL Institutional Partners,
                                 L.P.

                  Exhibit 4.4 -- 9% Convertible Subordinated Note issued by Kmart Holding Corporation to ESL Investors, L.L.C.

                  Exhibit 4.5 -- Registration Rights Agreement, dated May 6, 2003, by and among Kmart Holding Corporation, ESL
                                 Investments, Inc. and Third Avenue Trust, on behalf of certain of its investment series.

                  Exhibit 4.6 -- Guarantee Agreement, dated May 6, 2003, by and among Kmart Corporation, CRK Partners, L.P., CRK
                                 Partners II, L.P., ESL Institutional Partners, L.P. and ESL Investors L.L.C.

                  Exhibit 4.7 -- Kmart Creditor Trust Agreement, dated as of April 30, 2003, by and among Kmart Corporation, the
                                 other Affiliated Debtors party thereto and Douglas J. Smith, as Trustee.

                  Exhibit 4.8 -- First Amendment to Kmart Creditor Trust Agreement, dated as of May 6, 2003, by and among Kmart
                                 Corporation, the other Affiliated Debtors party thereto and Douglas J. Smith, as Trustee.

                  Exhibit 10.1 --Credit Agreement, dated as of May 6, 2003, among Kmart Corporation, as Borrower, the other Credit
                                 Parties signatory thereto, as Credit Parties, the Lenders signatory thereto, from time to time, as
                                 Lenders, and General Electric Capital Corporation, as Administrative Agent, Co-Collateral Agent and
                                 Lender, GECC Capital Markets Group, Inc., as Co-Lead Arranger and Co-Book Runner, Fleet Retail
                                 Finance Inc., as Co-Syndication Agent, Co-Collateral Agent and Lender Fleet Securities, Inc., as
                                 Co-Lead Arranger and Co-Book Runner, Bank of America, N.A., as Co-Syndication Agent and Lender,
                                 Banc of America Securities LLC, as Co-Lead Arranger and Co-Book Runner, GMAC Commercial Finance
                                 LLC, as Co-Documentation Agent and Foothill Capital Corporation, as Co-Documentation Agent.
</TABLE>


                                       31
<PAGE>
<TABLE>
<S>               <C>
                  Exhibit 10.2 --Assignment and Assumption Agreement, dated as of May 6, 2003, between Kmart Holding Corporation
                                 and Kmart Corporation assigning Julian C. Day's Employment Agreement to Kmart Holding Corporation.

                  Exhibit 10.3 --Kmart Holding Corporation Nonqualified Stock Option Agreement between Kmart Holding Corporation
                                 and Julian C. Day.

                  Exhibit 10.4 --Employment Agreement, dated as of May 6, 2003, between Kmart Management Corporation and Harold W.
                                 Lueken.

                  Exhibit 10.5 --Michael T. Macik Separation Agreement.

                  Exhibit 99.1 --Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

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

                  1.       On March 7, 2003, the Predecessor Company filed a
                           Current Report on Form 8-K to report the filing of
                           the Joint Plan of Reorganization and Disclosure
                           Statement with the Bankruptcy Court.

                  2.       On March 24, 2003, the Predecessor Company filed a
                           Current Report on Form 8-K to report fourth quarter
                           2002 operating results.

                  3.       On March 24, 2003, the Predecessor Company filed
                           Current Reports on Form 8-K to report the filing of
                           Monthly Operating Reports for the months of January
                           and February with the Bankruptcy Court.

                  4.       On April 17, 2003, the Predecessor Company filed a
                           Current Report on Form 8-K to report certain
                           financial information that was disclosed in the
                           Bankruptcy Court as well as the First Amended Plan of
                           Reorganization.

                  5.       On April 30, 2003, the Predecessor Company filed a
                           Current Report on Form 8-K to report the filing of
                           the Findings of Fact, Conclusions of Law, and Order
                           Under 11 U.S.C. Sections 1129(a) and (b) and Fed. R.
                           Rule Bankr. P. 3020 Confirming the First Amended
                           Joint Plan of Reorganization of Kmart Corporation and
                           Its Affiliated Debtors and Debtors-in-Possession, as
                           modified, dated April 22, 2003, and docketed by the
                           Court on April 23, 2003.


                                       32
<PAGE>
                                   SIGNATURES

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

         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:               June 16, 2003
                                         Kmart Holding Corporation
                                  ----------------------------------------------
                                                (Registrant)



                           By:               /s/ Julian C. Day
                                  ----------------------------------------------
                                                Julian C. Day
                                             PRESIDENT AND CHIEF
                                              EXECUTIVE OFFICER
                                        (Principal Executive Officer)

                                            /s/ Richard J. Noechel
                                  ----------------------------------------------
                                              Richard J. Noechel
                                              VICE PRESIDENT AND
                                                  CONTROLLER
                                  (Principal Accounting Officer and Co-Principal
                                              Financial Officer)





                                       33
<PAGE>
                                 CERTIFICATIONS

         I, Julian C. Day, certify that:

         1.       I have reviewed this quarterly report on Form 10-Q of Kmart
                  Holding Corporation;

         2.       Based on my knowledge, this quarterly report does not contain
                  any untrue statement of a material fact or omit to state a
                  material fact necessary to make the statements made, in light
                  of the circumstances under which such statements were made,
                  not misleading with respect to the period covered by this
                  quarterly report;

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this quarterly report,
                  fairly present in all material respects the financial
                  condition, results of operations and cash flows of the
                  registrant as of, and for, the periods presented in this
                  quarterly report;

         4.       The registrant's other certifying officers and I are
                  responsible for establishing and maintaining disclosure
                  controls and procedures (as defined in Exchange Act Rules
                  13a-14 and 15d-14) for the registrant and we have:

                  a)       designed such disclosure controls and procedures to
                           ensure that material information relating to the
                           registrant, including its consolidated subsidiaries,
                           is made known to us by others within those entities,
                           particularly during the period in which this
                           quarterly report is being prepared;

                  b)       evaluated the effectiveness of the registrant's
                           disclosure controls and procedures as of a date
                           within 90 days prior to the filing date of this
                           quarterly report (the "Evaluation Date"); and

                  c)       presented in this quarterly report our conclusions
                           about the effectiveness of the disclosure controls
                           and procedures based on our evaluation as of the
                           Evaluation Date;

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

                  a)       all significant deficiencies in the design or
                           operation of internal controls which could adversely
                           affect the registrant's ability to record, process,
                           summarize and report financial data and have
                           identified for the registrant's auditors any material
                           weaknesses in internal controls; and

                  b)       any fraud, whether or not material, that involves
                           management or other employees who have a significant
                           role in the registrant's internal controls; and

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

         Date: June 16, 2003


         /s/ Julian C. Day
         -----------------
         Julian C. Day
         Chief Executive Officer


                                       34
<PAGE>
                                 CERTIFICATIONS


I, Richard J. Noechel, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Kmart Holding
     Corporation;

2.   Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

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

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

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

Date: June 16, 2003



/s/ Richard J. Noechel
----------------------
Richard J. Noechel
Vice President and Controller (as Co-Principal Financial Officer)




                                       35
<PAGE>


                                 CERTIFICATIONS


I, James F. Gooch, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Kmart Holding
     Corporation;

2.   Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

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

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

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

Date: June 16, 2003



/s/ James F. Gooch
------------------
James F. Gooch
Vice President and Treasurer (as Co-Principal Financial Officer)





                                       36
<PAGE>
                                  Exhibit Index
                                  -------------
<TABLE>
<CAPTION>
                  Exhibit No.                           Description
                  -----------                           -----------

<S>               <C>
                  Exhibit 1.1 -- Amended and Restated Certificate of Incorporation of Kmart Holding Corporation

                  Exhibit 1.2 -- By-Laws of Kmart Holding Corporation

                  Exhibit 4.1 -- 9% Convertible Subordinated Note issued by Kmart Holding Corporation to CRK Partners, L.P.

                  Exhibit 4.2 -- 9% Convertible Subordinated Note issued by Kmart Holding Corporation to CRK Partners II, L.P.

                  Exhibit 4.3 -- 9% Convertible Subordinated Note issued by Kmart Holding Corporation to ESL Institutional Partners,
                                 L.P.

                  Exhibit 4.4 -- 9% Convertible Subordinated Note issued by Kmart Holding Corporation to ESL Investors, L.L.C.

                  Exhibit 4.5 -- Registration Rights Agreement, dated May 6, 2003, by and among Kmart Holding Corporation, ESL
                                 Investments, Inc. and Third Avenue Trust, on behalf of certain of its investment series.

                  Exhibit 4.6 -- Guarantee Agreement, dated May 6, 2003, by and among Kmart Corporation, CRK Partners, L.P., CRK
                                 Partners II, L.P., ESL Institutional Partners, L.P. and ESL Investors L.L.C.

                  Exhibit 4.7 -- Kmart Creditor Trust Agreement, dated as of April 30, 2003, by and among Kmart Corporation, the
                                 other Affiliated Debtors party thereto and Douglas J. Smith, as Trustee.

                  Exhibit 4.8 -- First Amendment to Kmart Creditor Trust Agreement, dated as of May 6, 2003, by and among Kmart
                                 Corporation, the other Affiliated Debtors party thereto and Douglas J. Smith, as Trustee.

                  Exhibit 10.1 --Credit Agreement, dated as of May 6, 2003, among Kmart Corporation, as Borrower, the other Credit
                                 Parties signatory thereto, as Credit Parties, the Lenders signatory thereto, from time to time, as
                                 Lenders, and General Electric Capital Corporation, as Administrative Agent, Co-Collateral Agent and
                                 Lender, GECC Capital Markets Group, Inc., as Co-Lead Arranger and Co-Book Runner, Fleet Retail
                                 Finance Inc., as Co-Syndication Agent, Co-Collateral Agent and Lender Fleet Securities, Inc., as
                                 Co-Lead Arranger and Co-Book Runner, Bank of America, N.A., as Co-Syndication Agent and Lender,
                                 Banc of America Securities LLC, as Co-Lead Arranger and Co-Book Runner, GMAC Commercial Finance
                                 LLC, as Co-Documentation Agent and Foothill Capital Corporation, as Co-Documentation Agent.

                  Exhibit 10.2-- Assignment and Assumption Agreement, dated as of May 6, 2003, between Kmart Holding Corporation
                                 and Kmart Corporation assigning Julian C. Day's Employment Agreement to Kmart Holding Corporation.

                  Exhibit 10.3 --Kmart Holding Corporation Nonqualified Stock Option Agreement between Kmart Holding Corporation
                                 and Julian C. Day.

                  Exhibit 10.4 --Employment Agreement, dated as of May 6, 2003, between Kmart Management Corporation and Harold W.
                                 Lueken.

                  Exhibit 10.5 --Michael T. Macik Separation Agreement.

                  Exhibit 99.1 --Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>