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

                                   FORM 10-Q/A
                                 AMENDMENT NO. 1

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

                 For the quarterly period ended October 27, 2004

                                       OR

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

             For the transition period from __________ to __________

                          Commission File No. 000-50278

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

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

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

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

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

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

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

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

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

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

As of November 5, 2004, 89,178,003 shares of Common Stock of the Registrant were
outstanding.


                                        1
<PAGE>
EXPLANATORY NOTE

     The purpose of this Amendment No. 1 to Quarterly Report on Form 10-Q/A is
to restate the unaudited financial statements of Kmart Holding Corporation and
its subsidiaries (the "Company," "we" or "our") filed with the Securities and
Exchange Commission ("SEC") on Form 10-Q on November 17, 2004.

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

The accounting treatment of the note is based on the determination of a
commitment date as defined by Emerging Issues Task Force No. 00-27 "Application
of Issue No. 98-5 to Certain Convertible Instruments" ("EITF 00-27"). A
commitment date occurs when, amongst other things, an agreement is binding on
both parties and the agreement specifies all significant terms, including the
quantity to be exchanged. The Company believed that it had met these
qualifications as of the initial agreement date and accounted for the note
accordingly. The SEC believes that at the time of the agreement these conditions
had not been met, and therefore a commitment date did not occur until issuance
of the note. After discussions with the SEC, the Company has agreed to restate
its financial statements. This amendment reflects a May 6, 2003 commitment date,
resulting in a portion of the note being allocated to stockholders' equity, as
required by EITF 00-27. The restatement resulted in a non-cash charge to
interest expense of $2 million, $8 million, $6 million and $13 million due to
the amortization of the discount for the 13-weeks ended October 27, 2004 and
October 29, 2003, the 39-weeks ended October 27, 2004 and the 26-weeks ended
October 29, 2003, respectively.

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

     The Items of our Quarterly Report on Form 10-Q for the quarterly period
ended October 27, 2004 which are amended and restated herein are:

     1.   Part 1, Item 1 - Financial Statements

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

     3.   Part 1, Item 4 - Controls and Procedures

     Except as otherwise expressly noted herein, this Amendment No. 1 to
Quarterly Report on Form 10-Q/A does not reflect events occurring after the
November 17, 2004 filing of our Quarterly Report on Form 10-Q in any way, except
as those required to reflect the effects of this restatement of our financial
statements for the periods presented or as deemed necessary in connection with
the completion of restated financial statements.

     The remaining Items contained within this Amendment No. 1 to our Quarterly
Report on Form 10-Q/A consist of all other Items originally contained in our
Quarterly Report on Form 10-Q for the quarterly period ended October 27, 2004 in
the form filed with the SEC on November 17, 2004. These remaining Items are not
amended hereby, but are included for the convenience of the reader. In order to
preserve the nature and character of the disclosures set forth in such Items as
originally filed, except as expressly noted herein, this report continues to
speak as of the date of the original filing, and we have not updated the
disclosures in this report to speak as of a later date. While this report
primarily relates to the historical periods covered, events may have taken place
since the original filing that might have been reflected in this report if they
had taken place prior to the original filing.


                                        2
<PAGE>
                                      INDEX

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

          Condensed Consolidated Statements of Operations (Unaudited) --  for the
             13-weeks ended October 27, 2004 (as restated) and October 29, 2003
             (as restated)                                                                    4

          Condensed Consolidated Statements of Operations (Unaudited) --
          Successor Company - for the 39-weeks ended October 27, 2004 (as restated)
             and the 26-weeks ended October 29, 2003 (as restated)
             Predecessor Company - for the 13-weeks ended April 30, 2003                      5

          Condensed Consolidated Balance Sheets (Unaudited)--  as of October 27, 2004,
             (as restated) January 28, 2004 (as restated) and October 29, 2003
             (as restated)                                                                    6

          Condensed Consolidated Statements of Cash Flows (Unaudited) --
          Successor Company - for the 39-weeks ended October 27, 2004 (as restated)
             and the 26-weeks ended October 29, 2003 (as restated)
          Predecessor Company - for the 13-weeks ended April 30, 2003 (as restated)           7

          Notes to Unaudited Condensed Consolidated Financial Statements                   8-24

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of
             Operations                                                                   25-34

Item 3.   Quantitative and Qualitative Disclosures about Market Risk                         35

Item 4.   Controls and Procedures                                                            35

PART II   OTHER INFORMATION
Item 1.   Legal Proceedings                                                                  36

Item 2.   Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases
             of Equity Securities                                                            36

Item 6.   Exhibits                                                                        36-37

          Signatures                                                                         38
</TABLE>


                                        3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                               13-WEEKS ENDED
                                                    -----------------------------------
                                                    OCTOBER 27, 2004   OCTOBER 29, 2003
                                                    ----------------   ----------------
                                                      (AS RESTATED)      (AS RESTATED)
<S>                                                 <C>                <C>
Sales                                                    $4,392             $5,092
Cost of sales, buying and occupancy                       3,247              3,925
                                                         ------             ------

Gross margin                                              1,145              1,167
Selling, general and administrative expenses              1,043              1,179
Net gains on sales of assets                               (807)                (1)
                                                         ------             ------

Operating income (loss)                                     909                (11)
Interest expense, net                                        24                 32
Bankruptcy-related recoveries                                (1)                --
Equity income in unconsolidated subsidiaries                 --                 (1)
                                                         ------             ------

Income (loss) from operations before income taxes           886                (42)
Provision for (benefit from) income taxes                   334                (14)
                                                         ------             ------

Net income (loss)                                        $  552             $  (28)
                                                         ======             ======

Basic net income (loss) per common share                 $ 6.19             $(0.31)
                                                         ======             ======

Diluted net income (loss) per common share               $ 5.45             $(0.31)
                                                         ======             ======

Basic weighted average shares (millions)                   89.2               89.6

Diluted weighted average shares (millions)                101.6               89.6
</TABLE>

           See accompanying Notes to Unaudited Condensed Consolidated
                             Financial Statements.


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

<TABLE>
<CAPTION>
                                                                                                            PREDECESSOR
                                                                             SUCCESSOR COMPANY                COMPANY
                                                                    -----------------------------------   --------------
                                                                     39-WEEKS ENDED     26-WEEKS ENDED    13-WEEKS ENDED
                                                                    OCTOBER 27, 2004   OCTOBER 29, 2003   APRIL 30, 2003
                                                                    ----------------   ----------------   --------------
                                                                      (AS RESTATED)      (AS RESTATED)
<S>                                                                 <C>                <C>                <C>
Sales                                                                   $13,792            $10,744            $6,181
Cost of sales, buying and occupancy                                      10,268              8,344             4,762
                                                                        -------            -------            ------

Gross margin                                                              3,524              2,400             1,419
Selling, general and administrative expenses                              3,086              2,404             1,421
Net gains on sales of assets                                               (911)                (3)               --
Restructuring, impairment and other charges                                  --                 --                37
                                                                        -------            -------            ------

Operating income (loss)                                                   1,349                 (1)              (39)
Interest expense, net                                                        85                 58                57
Bankruptcy-related recoveries                                               (13)                --                --
Equity income in unconsolidated subsidiaries                                 (3)                (3)               (7)
Reorganization items, net                                                    --                 --               769
                                                                        -------            -------            ------

Income (loss) from continuing operations before income taxes              1,280                (56)             (858)
Provision for (benefit from) income taxes                                   483                (20)               (6)
                                                                        -------            -------            ------

Income (loss) from continuing operations                                    797                (36)             (852)
Discontinued operations (net of income taxes of $0)                          --                 --               (10)
                                                                        -------            -------            ------

Net income (loss)                                                       $   797            $   (36)           $ (862)
                                                                        =======            =======            ======

Basic income (loss) per common share from continuing operations         $  8.91            $ (0.40)           $(1.63)
Discontinued operations                                                      --                 --             (0.02)
                                                                        -------            -------            ------
Basic net income (loss) per common share                                $  8.91            $ (0.40)           $(1.65)
                                                                        =======            =======            ======

Diluted income (loss) per common share from continuing operations       $  7.93            $ (0.40)           $(1.63)
Discontinued operations                                                      --                 --             (0.02)
                                                                        -------            -------            ------
Diluted net income (loss) per common share                              $  7.93            $ (0.40)           $(1.65)
                                                                        =======            =======            ======

Basic weighted average shares (millions)                                   89.4               89.6             522.7

Diluted weighted average shares (millions)                                101.4               89.6             522.7
</TABLE>

           See accompanying Notes to Unaudited Condensed Consolidated
                             Financial Statements.


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

<TABLE>
<CAPTION>
                                                                          OCTOBER 27, 2004   JANUARY 28, 2004   OCTOBER 29, 2003
                                                                          ----------------   ----------------   ----------------
                                                                            (AS RESTATED)      (AS RESTATED)      (AS RESTATED)
<S>                                                                       <C>                <C>                <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                                   $2,564             $2,088             $  941
   Merchandise inventories                                                      3,902              3,238              4,404
   Accounts receivable, net                                                       649                301                348
   Other current assets                                                           195                184                204
                                                                               ------             ------             ------
TOTAL CURRENT ASSETS                                                            7,310              5,811              5,897
   Property and equipment, net                                                    288                153                115
   Other assets and deferred charges                                               67                110                105
                                                                               ------             ------             ------

TOTAL ASSETS                                                                   $7,665             $6,074             $6,117
                                                                               ======             ======             ======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
   Long-term debt and mortgages payable due within one year                    $    4             $    4             $   25
   Accounts payable                                                             1,264                820              1,203
   Accrued expenses and other liabilities                                         777                671                746
   Taxes other than income taxes                                                  276                281                295
                                                                               ------             ------             ------
TOTAL CURRENT LIABILITIES                                                       2,321              1,776              2,269
LONG-TERM LIABILITIES
   Long-term debt and mortgages payable                                            80                 76                 24
   Capital lease obligations                                                      288                374                419
   Pension obligations                                                            874                873                867
   Unfavorable operating leases                                                   302                342                322
   Other long-term liabilities                                                    728                424                486
                                                                               ------             ------             ------
TOTAL LIABILITIES                                                               4,593              3,865              4,387

SHAREHOLDERS' EQUITY
   Preferred stock 20,000,000 shares authorized; no shares outstanding             --                 --                 --
   Common stock $0.01 par value, 500,000,000 shares authorized;
      89,178,003, 89,633,760 and 89,655,445 shares issued, respectively             1                  1                  1
   Treasury stock, at cost                                                        (36)                (1)                (1)
   Capital in excess of par value                                               2,076              1,974              1,766
   Retained earnings (Accumulated deficit)                                      1,031                234                (36)
   Accumulated other comprehensive income                                          --                  1                 --
                                                                               ------             ------             ------
TOTAL SHAREHOLDERS' EQUITY                                                      3,072              2,209              1,730
                                                                               ------             ------             ------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                     $7,665             $6,074             $6,117
                                                                               ======             ======             ======
</TABLE>

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


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

<TABLE>
<CAPTION>
                                                                                                    PREDECESSOR
                                                                     SUCCESSOR COMPANY                COMPANY
                                                            -----------------------------------   --------------
                                                                39-WEEKS           26-WEEKS          13-WEEKS
                                                                  ENDED              ENDED             ENDED
                                                            OCTOBER 27, 2004   OCTOBER 29, 2003   APRIL 30, 2003
                                                            ----------------   ----------------   --------------
                                                              (AS RESTATED)      (AS RESTATED)
<S>                                                         <C>                <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                             $  797             $  (36)           $ (862)
   Adjustments to reconcile net income (loss) to net cash
      provided by (used for) operating activities:
      Depreciation and amortization                                  42                 23               177
      Store closings inventory charges                               22                 --                --
      Net gains on sales of assets                                 (911)                (3)               --
      Deferred income taxes                                         460                 (5)               --
      Equity income in unconsolidated subsidiaries                   (3)                (3)               (7)
      Restructuring, impairments and other charges                   --                 --                44
      Reorganization items, net                                      --                 --               769
   Dividends received from Meldisco                                   3                 --                36
   Cash used for store closings and other charges                    --                (11)              (64)
   Cash used for payments of exit costs and other
      reorganization items                                           --               (470)              (19)
   Change in:
      Merchandise inventories                                      (686)                27               480
      Accounts receivable                                            21                 32               114
      Accounts payable                                              444                 43              (117)
      Taxes payable                                                  11                 (4)              (16)
      Other assets                                                   --                (39)                9
      Other liabilities                                             (29)                50                32
                                                                 ------             ------            ------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES                171               (396)              576
                                                                 ------             ------            ------

CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from sales of assets                                    524                 93                64
   Capital expenditures                                            (179)               (61)               (4)
                                                                 ------             ------            ------
NET CASH PROVIDED BY INVESTING ACTIVITIES                           345                 32                60
                                                                 ------             ------            ------

CASH FLOWS FROM FINANCING ACTIVITIES
   Payments on capital lease obligations                            (37)               (29)              (16)
   Payments on debt                                                  (3)               (36)               (1)
   Proceeds from issuance of debt                                    --                 60                --
   Debt issuance costs                                               --                (46)               --
   Fees paid to Plan Investors                                       --                (13)               --
   Issuance of common shares                                         --                140                --
   Purchase of treasury stock                                        --                 (3)               --
                                                                 ------             ------            ------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES                (40)                73               (17)
                                                                 ------             ------            ------

NET CHANGE IN CASH AND CASH EQUIVALENTS                             476               (291)              619
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                    2,088              1,232               613
                                                                 ------             ------            ------
CASH AND CASH EQUIVALENTS, END OF PERIOD                         $2,564             $  941            $1,232
                                                                 ======             ======            ======
</TABLE>

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


                                       7
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

          Kmart Holding Corporation ("Kmart," "we," "us," "our," the "Company"
     or the "Successor Company") is the nation's third largest discount
     retailer. We operate in the general merchandise retailing industry through
     1,484 Kmart discount stores and Supercenters with locations in 49 states,
     Puerto Rico, the U.S. Virgin Islands, Guam and through our e-commerce
     shopping site, www.kmart.com.

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

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

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

     Confirmation of Plan of Reorganization

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

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


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

     Plan Investors

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

     Discharge of Liabilities

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

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

     Fresh-Start Adjustments

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


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

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

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

     Claims Resolution

          We continue to make progress in the reconciliation and settlement of
     the various classes of claims associated with the discharge of the
     Predecessor Company's liabilities subject to compromise pursuant to the
     Plan of Reorganization. Since June 30, 2003, the first distribution date
     established in the Plan of Reorganization, approximately 21.3 million
     shares of the 31.9 million shares previously issued to us as disbursing
     agent with respect to such claims have been distributed to holders of Class
     5 claims and approximately $4.1 million in cash has been distributed to
     holders of Class 7 claims. Due to the significant volume of claims filed
     to-date, it is premature to estimate with any degree of accuracy the
     ultimate allowed amount of such claims for each class of claims under the
     Plan of Reorganization. Accordingly, our current distribution reserve for
     claim settlements is 20 percent of shares issued. Differences between
     amounts filed and our estimates are being investigated and will be resolved
     in connection with our claims resolution process. In this regard, it should
     be noted that the claims reconciliation process may result in material
     adjustments to current estimates of allowable claims.

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

          The next scheduled distribution under the Plan of Reorganization is
     expected to commence on or about January 1, 2005.

          On August 31, 2004, we entered into a settlement agreement with a past
     provider of our surety bonds, Fireman's Fund Insurance Company ("Fireman's
     Fund") to resolve all issues in connection with its pre-petition claims. In
     accordance with the terms of the settlement agreement, Kmart assumed
     responsibility for Fireman's Fund future obligations under the bonds issued
     with respect to the Predecessor Company's workers' compensation insurance
     program and Fireman's Fund assigned its Class 5 claim to the Company. We
     received 494,481 shares of the Company's Common Stock relating to the
     settlement between the parties on August 31, 2004, which represents 80% of
     the shares Fireman's Fund would have received for an allowed claim. The
     remaining 20% will be received upon the final settlement of all Class 5
     claims, as noted above. The Company recorded a liability for the
     obligations under the bonds of approximately $33 million.


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

     Bankruptcy-Related Recoveries

          For the 13-weeks and 39-weeks ended October 27, 2004, we recognized
     recoveries of $1 million and $13 million, respectively, from vendors who
     had received cash payments for pre-petition obligations (critical vendor
     claims) or preference payments. See Note 20 - Commitments and Contingencies
     for a more detailed discussion of the critical vendor claims lawsuit.

          We entered into two settlement agreements in the second quarter of
     fiscal 2004 with respect to certain other bankruptcy-related recoveries.
     These agreements resulted in the receipt of $1.4 million in cash and the
     assignment of a Class 5 claim to the Company. We received 8,217 shares of
     Common Stock relating to this assignment in July 2004, which represents 80%
     of the total claim. The remaining 20% will be received upon the final
     settlement of all Class 5 claims, as noted above.

3.   RESTATEMENT

          The accompanying unaudited condensed consolidated financial statements
     for the 13-weeks ended October 27, 2004 and October 29, 2003, the 39-weeks
     ended October 27, 2004, and the 26-weeks ended October 29, 2003, and as of
     October 27, 2004, January 28, 2004 and October 29, 2003 have been restated.
     The restatement reflects the recognition of an embedded beneficial
     conversion feature of the Company's Note with the Plan Investors.
     Accounting for the embedded beneficial conversion feature and the resulting
     recognition of additional interest expense is in accordance with Emerging
     Issues Task Force Issue No. 00-27, "Application of Issue No. 98-5 to
     Certain Convertible Instruments" ("EITF 00-27").

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

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

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

          We recognized an additional $2 million, $8 million, $6 million and $13
     million of interest expense due to the amortization of the discount for the
     13-weeks ended October 27, 2004 and October 29, 2003, the 39-weeks ended
     October 27, 2004 and the 26-weeks ended October 29, 2003, respectively.

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


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

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

<TABLE>
<CAPTION>
                                                        13-WEEKS ENDED OCTOBER 27, 2004
                                               --------------------------------------------------
                                               As previously reported   Adjustments   As restated
                                               ----------------------   -----------   -----------
<S>                                            <C>                      <C>           <C>
Operating income                                        $ 909             $   --          $ 909

Interest expense, net                                      22                  2             24
Bankruptcy-related recoveries                              (1)                --             (1)
                                                        -----             ------          -----
Income from operations before income taxes                888                 (2)           886

Provision for income taxes                                335                 (1)           334
                                                        -----             ------          -----
Net income                                              $ 553             $   (1)         $ 552
                                                        =====             ======          =====

Basic net income per common share                       $6.20             $(0.01)         $6.19
                                                        =====             ======          =====
Diluted net income per common share                     $5.45             $   --          $5.45
                                                        =====             ======          =====
</TABLE>

<TABLE>
<CAPTION>
                                                        13-WEEKS ENDED OCTOBER 29, 2003
                                               --------------------------------------------------
                                               As previously reported   Adjustments   As restated
                                               ----------------------   -----------   -----------
<S>                                            <C>                      <C>           <C>
Operating loss                                         $  (11)             $   --         $  (11)

Interest expense, net                                      24                   8             32
Equity income in unconsolidated subsidiaries               (1)                 --             (1)
                                                       ------              ------         ------
Loss from operations before income taxes                  (34)                 (8)           (42)

Benefit from income taxes                                 (11)                 (3)           (14)
                                                       ------              ------         ------

Net loss                                               $  (23)             $  (5)         $  (28)
                                                       ======              ======         ======

Basic and diluted net loss per common share            $(0.26)             $(0.05)        $(0.31)
                                                       ======              ======         ======

</TABLE>


<TABLE>
<CAPTION>
                                                        39-WEEKS ENDED OCTOBER 27, 2004
                                               --------------------------------------------------
                                               As previously reported   Adjustments   As restated
                                               ----------------------   -----------   -----------
<S>                                            <C>                      <C>           <C>
Operating income                                        $1,349              $   --      $1,349

Interest expense, net                                       79                   6          85
Bankruptcy-related recoveries                              (13)                 --         (13)
Equity income in unconsolidated subsidiaries                (3)                 --          (3)
                                                        ------              ------      ------
Income from operations before income taxes               1,286                  (6)      1,280

Provision for income taxes                                 485                  (2)        483
                                                        ------              ------      ------

Net income                                              $  801              $   (4)     $  797
                                                        ======              ======      ======

Basic net income per common share                       $ 8.96              $(0.05)     $ 8.91
                                                        ======              ======      ======

Diluted net income per common share                     $ 7.93              $   --      $ 7.93
                                                        ======              ======      ======

</TABLE>


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

<TABLE>
<CAPTION>
                                                 26-WEEKS ENDED OCTOBER 29, 2003
                                               -----------------------------------
                                                   As
                                               previously                    As
                                                reported    Adjustments   restated
                                               ----------   -----------   --------
<S>                                            <C>          <C>           <C>
Operating loss                                   $   (1)      $  --        $   (1)

Interest expense, net                                45           13           58
Equity income in unconsolidated subsidiaries         (3)          --           (3)
                                                 ------       ------       ------
Income from operations before income taxes          (43)         (13)         (56)

Benefit from income taxes                           (15)          (5)         (20)
                                                 ------       ------       ------
Net loss                                         $  (28)      $   (8)      $  (36)
                                                 ======       ======       ======

Basic and diluted net loss per common share      $(0.32)      $(0.08)      $(0.40)
                                                 ======       ======       ======
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                 OCTOBER 27, 2004
                                       -----------------------------------
                                           As
                                       previously                    As
                                        reported    Adjustments   restated
                                       ----------   -----------   --------
<S>                                    <C>          <C>           <C>
LIABILITIES
Other long-term liabilities              $  720        $  8       $  728
                                         ======        ====       ======

Long-term debt and mortgages payable     $  101        $(21)      $   80
                                         ======        ====       ======

Total liabiliites                        $4,606        $(13)      $4,593
                                         ======        ====       ======

SHAREHOLDERS' EQUITY
Capital in excess of par value           $2,045        $ 31       $2,076
                                         ======        ====       ======

Retained earnings                        $1,049        $(18)      $1,031
                                         ======        ====       ======

Total shareholders' equity               $3,059        $ 13       $3,072
                                         ======        ====       ======
</TABLE>


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

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

Total Assets                                     $6,084         $(10)        $6,074
                                                 ======         ====         ======

LIABILITIES
Long-term debt and mortgages payable             $  103         $(27)        $   76
                                                 ======         ====         ======

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

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

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

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

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

<TABLE>
<CAPTION>
                                                        OCTOBER 29, 2003
                                           -----------------------------------------
                                           As previously   Adjustments   As restated
                                             reported
                                           -------------   -----------   -----------
<S>                                        <C>             <C>           <C>
LIABILITIES
Long-term debt and mortgages payable due
   within one year                             $   61         $(36)         $   25
                                               ======         ====          ======

Accrued expenses and other liabilities         $  733         $ 13          $  746
                                               ======         ====          ======

Total current liabilities                      $2,292         $(23)         $2,269
                                               ======         ====          ======

Total liabilities                              $4,410         $(23)         $4,387
                                               ======         ====          ======

SHAREHOLDERS' EQUITY
Capital in excess of par value                 $1,735         $ 31          $1,766
                                               ======         ====          ======

Accumulated deficit                            $  (28)        $ (8)         $  (36)
                                               ======         ====          ======

Total shareholders' equity                     $1,707         $ 23          $1,730
                                               ======         ====          ======
     </TABLE>

               The deferred tax liability was offset with the Company's other
     deferred tax liabilities and assets for each period and presented as a
     single amount in the Consolidated Balance Sheets. The Company had a net
     deferred tax liability as of October 27, 2004 which was classified in Other
     long-term liabilities. The Company had a net deferred tax asset as of
     January 28, 2004 which was classified in Other assets and deferred charges.
     The Company had a net deferred tax liability as of October 29, 2003 which
     was classified in Accrued expenses and other liabilities.


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

4.   REAL ESTATE AND PROPERTY TRANSACTIONS

     Home Depot U.S.A., Inc.

          On June 3, 2004, the Company entered into multiple agreements with
     Home Depot U.S.A., Inc. (a subsidiary of The Home Depot, Inc.) ("Home
     Depot") to sell owned properties and assign leased properties for a maximum
     purchase price of $365 million in cash. These agreements were later amended
     to reflect that the Company would sell four properties and assign 14
     properties for an aggregate purchase price of $271 million. Pursuant to
     these agreements, on June 15, 2004, the Company completed the sale of four
     owned properties to Home Depot for $59 million in cash, resulting in a net
     gain of $43 million. The Company completed the assignment of 13 of the
     remaining properties in the third quarter of fiscal 2004, resulting in
     proceeds to the Company of $200 million in cash, and a net gain of $198
     million. We anticipate closing on the final property during the fourth
     quarter, resulting in additional proceeds of $12 million.

     Sears, Roebuck and Co.

          On June 29, 2004, the Company entered into an agreement with Sears,
     Roebuck and Co. ("Sears") to sell owned properties and assign leased
     properties for a maximum purchase price of $621 million in cash. On
     September 29, 2004, the Company agreed to sell four owned properties,
     assign 45 leased properties and lease one owned store to Sears for a total
     purchase price of approximately $576 million. The Company received 30% of
     the purchase price in September 2004 upon closing, and recognized a gain on
     the transaction of $599 million. The remaining 70% of the purchase price
     will be received when Sears occupies the properties, which shall take place
     no later than April 15, 2005. The receivable for the remaining purchase
     price of $403 million is included in Accounts receivable, net in our
     Unaudited Condensed Consolidated Balance Sheet as of October 27, 2004. ESL
     and its affiliates own over 10 percent of both Sears and the Company.

     Other

          The Company also sold certain other assets, resulting in net gains of
     $10 million and $71 million for the 13-weeks and 39-weeks ended October 27,
     2004, respectively. Included within this gain for the 39-week period was
     $18 million related to the sale of the Company's Trinidad subsidiary and
     its associated property, $12 million related to the sale of the Company's
     corporate airplanes and $41 million from sales of other real and personal
     property. During the 39-weeks ended October 27, 2004 and the 26-weeks ended
     October 26, 2003, we purchased 28 and eight previously-leased operating
     properties for $103 million and $61 million, respectively.

5.   PENSION PLAN

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

<TABLE>
<CAPTION>
                                                                                                                       Predecessor
                                                                      Successor Company                                  Company
                                          -------------------------------------------------------------------------  --------------
                                           13-Weeks Ended     13-Weeks Ended     39-Weeks Ended     26-Weeks Ended   13-Weeks Ended
     (dollars in millions)                October 27, 2004   October 29, 2003   October 27, 2004   October 29, 2003  April 30, 2003
     ---------------------                ----------------   ----------------   ----------------   ----------------  --------------
<S>                                       <C>                <C>                <C>                <C>               <C>
     Components of Net Periodic Expense

     Interest costs                             $ 38               $ 38               $ 115              $ 76             $ 38
     Expected return on plan assets              (35)               (32)               (104)              (61)             (33)
     Net loss recognition                         --                 --                  --                --               18
     Amortization of unrecognized
        transition asset                          --                 --                  --                --               (2)
                                                ----               ----               -----              -----            ----
     Net periodic expense                       $  3               $  6               $  11              $ 15             $ 21
                                                ====               ====               =====              ====             ====

</TABLE>

          During the 39-weeks ended October 27, 2004 contributions to the plan
     were approximately $10 million. Contributions to the plan were not required
     during fiscal 2003. The minimum required contribution for fiscal 2004 and
     fiscal 2005 is approximately $11 million and $4 million, respectively.

6.   EARNINGS PER SHARE

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


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

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

<TABLE>
<CAPTION>
                                               13-Weeks Ended     39-Weeks Ended
     (in millions)                            October 27, 2004   October 27, 2004
     -------------                            ----------------   ----------------
<S>                                           <C>                <C>
     Basic weighted average common shares            89.2               89.4
     Dilutive effect of stock options                 6.4                6.0
     9% convertible note                              6.0                6.0
                                                    -----              -----
     Diluted weighted average common shares         101.6              101.4
                                                    =====              =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                13-Weeks Ended     39-Weeks Ended
     (dollars in millions)                     October 27, 2004   October 27, 2004
     ---------------------                     ----------------   ----------------
                                                 (as restated)     (as restated)
<S>                                            <C>                <C>
     Net income available to common
        shareholders                                 $552               $797
     Interest and accretion of debt
        discount on 9%  convertible
        note, net of tax                                2                  7
                                                     ----               ----
     Income available to common shareholders
        with assumed conversions                     $554               $804
                                                     ====               ====
</TABLE>

          Certain common stock equivalents were excluded from the calculation of
     diluted earnings per share for the 13-weeks and 39-weeks ended October 27,
     2004 as they were anti-dilutive. All common stock equivalents were excluded
     from the calculation of diluted earnings per share for the 13-weeks ended
     October 29, 2003 and April 30, 2003 and the 26-weeks ended October 29, 2003
     as they were anti-dilutive. Upon our emergence from bankruptcy, all common
     stock equivalents of the Predecessor Company were cancelled.

7.   DEBT

     Credit Facility

          Our credit agreement (the "Credit Facility") is an $800 million
     revolving credit facility with an equivalent letter of credit sub-limit
     under which Kmart Corporation is the borrower. Availability under the
     Credit Facility is subject to an inventory borrowing base formula. Since
     its issuance, we have only used the Credit Facility to support outstanding
     letters of credit. To reduce the overall cost of the facility, we
     voluntarily reduced the size of the Credit Facility from $1.5 billion to
     $1.0 billion in July 2004 and we amended and restated the Credit Facility
     in October 2004 to eliminate the synthetic term loan provisions, which
     reduced the size of the Credit Facility from $1.0 billion to $800 million.
     In conjunction with these reductions to our Credit Facility, the
     accelerated amortization of the associated debt issuance costs totaled $3
     million for the 13-week period and $12 million for the 39-weeks ended
     October 27, 2004, respectively. The Credit Facility is guaranteed by the
     Successor Company, Kmart Management Corporation, Kmart Services Corporation
     (a subsidiary of Kmart Management Corporation) and Kmart Corporation's
     direct and indirect domestic subsidiaries. The Credit Facility is secured
     primarily by first liens on inventory, the proceeds thereof and certain
     related assets of Kmart Corporation and the guarantors.

          Borrowings under the Credit Facility are subject to a sliding pricing
     scale based on our earnings before interest, taxes, depreciation,
     amortization and other charges ("EBITDA") levels and such adjustments are
     implemented quarterly. Utilization of the Credit Facility in support of
     trade and standby letters of credit currently bears interest at 1.25% and
     2.00% per annum, respectively. In addition, we are required to pay a fee
     based on the unutilized commitment under the Credit Facility equal to
     0.375% per annum. The Credit Facility gives the Company the ability to
     repurchase up to $500 million of the Company's Common Stock, depending on
     our EBITDA levels and subject to the approval of the Company's Board of
     Directors.


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

          As of October 27, 2004, we had utilized $22 million of the Credit
     Facility for letters of credit issued for ongoing import purchasing
     operations, and contractual and regulatory purposes, including letters of
     credit utilized as collateral to support our self-insurance programs.
     During fiscal 2004, we have replaced letters of credit used as collateral
     for certain programs with cash collateral which reduces fees paid by the
     Company with respect to the letters of credit. We continue to classify the
     cash collateral as Cash and cash equivalents due to our ability to convert
     the cash to letters of credit at any time at our discretion. As of October
     27, 2004, $221 million of cash was posted as collateral.

          Total availability under the Credit Facility as of October 27, 2004
     was approximately $750 million.

          The Credit Facility financial covenants include a requirement that we
     maintain certain availability minimums, and failure to do so triggers
     additional required minimum levels of EBITDA. The Credit Facility also
     contains other customary covenants, including certain reporting
     requirements and covenants that restrict our ability to incur or create
     liens, indebtedness and guarantees, make investments, pay dividends or make
     other equity distributions, sell or dispose of stock or assets, change the
     nature of our business and enter into affiliate transactions, mergers and
     consolidations. Failure to satisfy these covenants would result in an event
     of default that could result in our inability to access the funds. As of
     October 27, 2004, and in all periods since our emergence from Chapter 11,
     we have been in compliance with all Credit Facility covenants.

     Letter of Credit Agreement

          On August 13, 2004, the Company entered into a letter of credit
     agreement (the "LC Agreement") with a commitment amount of up to $200
     million through January 7, 2005, and increasing to $600 million thereafter.
     Standby letters of credit issued under the LC Agreement bear interest at
     0.20% per annum. No interest is charged for trade letters of credit issued
     under the LC Agreement; however, we are required to pay a fee based on the
     unutilized commitment, as defined in the LC Agreement, equal to 0.125% per
     annum.

          We amended the LC Agreement on October 4, 2004, primarily to provide
     Kmart with an election to post either cash or inventory as collateral.
     Electing inventory would result in incremental costs under the LC
     Agreement. The LC Agreement is subject to a pledge and security agreement
     pursuant to which, after January 7, 2005, the Company must post as
     collateral cash in an amount equal to 100.5% of the face value of letters
     of credit outstanding under the LC Agreement or elect to post inventory as
     collateral, subject to certain conditions. Prior to January 7, 2005, the
     collateral posted by the Company is a leasehold mortgage on certain
     properties leased by the Company.

          The LC Agreement contains customary covenants, including covenants
     that restrict our ability to incur or create liens on collateralized
     assets, and sell, transfer, assign or otherwise dispose of any
     collateralized assets. Failure to satisfy these covenants would result in
     an event of default that could result in our inability to issue new letters
     of credit. Subject to these covenants the Company is required to maintain
     in a deposit account $250 million of cash invested with the issuing bank
     until such time that the cash collateral is equal to the 100.5% of the face
     value of the letters of credit outstanding, as discussed above. This cash
     is classified as Cash and cash equivalents as of October 27, 2004. As of
     October 27, 2004, and in all periods since inception of the LC Agreement,
     we have been in compliance with all covenants of the LC Agreement.

          As of October 27, 2004, we had utilized $197 million of the LC
     Agreement.

     Predecessor Company Debt

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

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


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

     Interest Expense, Net

<TABLE>
<CAPTION>
                                                                                                                       Predecessor
                                                                        Successor Company                                Company
                                             ----------------------------------------------------------------------  ---------------
                                              13-Weeks Ended    13-Weeks Ended    39-Weeks Ended    26-Weeks Ended   13-Weeks Ended
     (dollars in millions)                   October 27, 2004  October 29, 2003  October 27, 2004  October 29, 2003  April 30, 2003
     ---------------------                   ----------------  ----------------  ----------------  ----------------  --------------
                                               (as restated)   (as restated)       (as restated)     (as restated)
     <S>                                     <C>               <C>               <C>               <C>               <C>
     Components of Interest Expense, Net

        Interest expense                           $14               $25               $ 46              $48               $21
        Accretion of obligations at net
           present value                            13                 5                 38                5                --
        Amortization of debt issuance costs          6                 4                 22                9                37
        Interest income                             (9)               (2)               (21)              (4)               (1)
                                                   ---               ---               ----              ---               ---
        Interest expense, net                      $24               $32               $ 85              $58               $57
                                                   ===               ===               ====              ===               ===
</TABLE>

          Cash paid for interest was $42 million, $37 million, and $19 million
     for the 39-weeks ended October 27, 2004, the 26-weeks ended October 29,
     2003 and the 13-weeks ended April 30, 2003, respectively.

8.   INCOME TAXES

          We recorded a tax provision of $334 million and $483 million during
     the 13-weeks and 39-weeks ended October 27, 2004, respectively, based on
     the estimated effective tax rate for fiscal 2004 of 37.7%. We recorded a
     $14 million and $20 million tax benefit from our losses during the 13-weeks
     and 26-weeks ended October 29, 2003, respectively, based upon the estimated
     effective tax rate for the 39-weeks ended January 28, 2004 (successor
     period). The $6 million tax benefit recorded during the first quarter of
     fiscal 2003 relates to an Internal Revenue Code provision allowing for the
     10-year carryback of certain losses.

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

          During the second quarter of fiscal 2004 and the third quarter of
     fiscal 2003, we reduced our reserves for Predecessor Company income tax
     liabilities by $5 million and $24 million, respectively, primarily due to
     favorable claims settlements. We recorded these adjustments to Capital in
     excess of par value in our Unaudited Condensed Consolidated Balance Sheets.

          Cash paid for income taxes was $4 million for the 39-weeks ended
     October 27, 2004. Cash received for tax refunds and credits was $6 million
     and $2 million for the 26-weeks ended October 29, 2003 and the 13-weeks
     ended April 30, 2003, respectively.

9.   TREASURY STOCK

          The Company has a share repurchase program with authorization to
     repurchase $100 million of Common Stock. Since the inception of the share
     repurchase program in fiscal 2003, we have repurchased 128,400 shares of
     Common Stock for grants of stock based compensation (weighted-average price
     of $28.87 per share) at a cost of approximately $4 million.

          During fiscal 2004, we were assigned 507,974 shares of common stock
     (weighted average price of $76.14 per share) with an approximate value of
     $39 million. These assignments were the result of settlement agreements
     resolving claims arising from our Chapter 11 reorganization; see Note 2 -
     Emergence from Chapter 11 Bankruptcy Protection and Fresh-Start Accounting.


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

          There were 499,506, 43,749 and 48,953 shares in treasury as of October
     27, 2004, January 28, 2004 and October 29, 2003, respectively.

10.  STOCK-BASED COMPENSATION

          The Company accounts for stock-based compensation using the fair value
     method. Upon the departure of our former President and Chief Executive
     Officer, Julian C. Day, in October 2004, the vesting period for 778,880
     stock options was accelerated and 389,439 stock options were cancelled
     effective immediately, as required by the terms of his nonqualified stock
     option agreement, as amended, with the Company. The accelerated vesting
     resulted in $2 million of compensation cost to be recognized during the
     13-weeks ended October 27, 2004.

          On October 18, 2004, the Company's new President and Chief Executive
     Officer, Aylwin B. Lewis, was granted 150,000 options to purchase shares of
     Common Stock with a grant price of $88.62 per share and 50,781 shares of
     restricted stock at a grant price of $88.62 per share. These grants vest in
     installments over 4.25 years from the grant date and we will recognize
     compensation expense of approximately $10 million during this same period.
     The options expire 10 years from the date of grant.

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

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

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

          We account for restricted stock grants as fixed awards, and record
     deferred employee compensation to Capital in excess of par value. During
     the 39-weeks ended October 27, 2004, we granted 82,842 shares of restricted
     stock at a weighted average price of $66.39 per share. During the 26-weeks
     ended October 29, 2003 we granted 68,436 shares of restricted stock at a
     weighted average price of $29.22 per share. As of October 27, 2004,
     deferred employee compensation on all outstanding restricted stock grants
     is $7 million and is being amortized to compensation expense on a
     straight-line basis over the vesting period of three to four years.

11.  PROPERTY HELD FOR SALE

          Property held for sale was $30 million, $56 million and $70 million as
     of October 27, 2004, January 28, 2004 and October 29, 2003, respectively,
     and is included within Other current assets in our Unaudited Condensed
     Consolidated Balance Sheets. During the 13-weeks and 39-weeks ended October
     27, 2004, we sold $5 million and $22 million of these assets for a gain of
     $1 million and $1 million, respectively. During the second and third
     quarters of fiscal 2003, we sold $90 million of assets classified as
     property held for sale for a net gain of $2 million. See Note 4 - Real
     Estate and Property Transactions for further discussion of these
     transactions.

12.  COMPREHENSIVE INCOME (LOSS)

          Comprehensive income (loss) represents net income or loss, adjusted
     for the effect of other items that are recorded directly to shareholders'
     equity. During the 39-weeks ended October 27, 2004, we sold
     available-for-sale equity securities and in conjunction with these sales,
     reduced accumulated other comprehensive income by $1 million. Comprehensive
     income and net income are equivalent for the 13-weeks ended October 27,
     2004. For the 13-weeks ended April 30, 2003, comprehensive loss included a
     minimum pension liability adjustment of $94 million. No adjustments were
     made to comprehensive income (loss) for the 13-weeks and 26-weeks ended
     October 29, 2003.


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

13.  INVESTMENTS IN AFFILIATED RETAIL COMPANIES

          Kmart footwear departments are operated under a master agreement with
     Footstar, Inc. ("FTS") and related license agreements with certain Meldisco
     subsidiaries of FTS, most of which are 49% owned by Kmart and 51% owned by
     FTS. On March 2, 2004, FTS and its direct and indirect subsidiaries,
     including all Meldisco subsidiaries, filed for Chapter 11 protection in the
     United States Bankruptcy Court for the Southern District of New York. FTS
     continues to operate its businesses and manage its properties as
     debtors-in-possession. Given the likelihood of future receipts of the
     amounts due from the Meldisco subsidiaries with which we do business, no
     valuation reserve has been established for $24 million due to us from FTS
     as of October 27, 2004.

          On August 12, 2004, FTS filed a motion with the bankruptcy court to
     assume the master agreement and the license agreements. On September 30,
     2004, the Company objected to that motion, and also filed a separate motion
     to terminate the master agreement and the license agreements because of
     various defaults by FTS under the agreements. Should the bankruptcy court
     overrule the Company's objection and permit FTS to assume the master
     agreement and the license agreements, FTS must cure all past defaults under
     those agreements. On July 26, 2004, the Company filed a proof of claim in
     the FTS bankruptcy case for an amount in excess of our recorded receivable
     of $24 million; however, at this time, we are not able to accurately
     determine the ultimate amount to be realized as we have not received all
     information from FTS necessary for us to complete our claim. The Company
     believes the cure amount may be substantially in excess of $24 million. FTS
     asserts that the amount required to cure past defaults is $18 million, and
     that such amount should be reduced by overpayments FTS alleges it made to
     the Company for certain fees. If no resolution is achieved consensually
     with FTS with respect to the assumption of the master agreement, the
     license agreements and the cure amount, and the bankruptcy court permits
     FTS to assume the master agreement and the license agreements, the cure
     amount will be determined by the bankruptcy court.

          In September 2004, FTS restated six years of its consolidated
     financial statements for fiscal years 1997 through 2002. These restatements
     have not had a significant effect on our previously reported equity income
     derived from our investment in the Meldisco subsidiaries. FTS has yet to
     file audited financial statements and periodic reports for fiscal years
     2003 and periodic reports for the first three quarters of fiscal 2004.

          We have received preliminary financial results from FTS for fiscal
     2003 and for the first two quarters of fiscal 2004 as of the filing of this
     quarterly report on our Form 10-Q. These statements provide the basis of
     our estimate of equity income as presented in our Unaudited Condensed
     Consolidated Statements of Operations for the Meldisco subsidiaries with
     which we do business. We have not received preliminary financial statements
     for the third quarter of fiscal 2004. The Company has reviewed FTS' monthly
     operating reports for periods following its Chapter 11 filing, and noted
     that FTS has allocated certain of its reorganization and other costs to the
     Meldisco business. These charges have adversely impacted our estimated
     earnings recorded in fiscal 2004. We disagree with FTS' approach and have
     notified FTS of our position.

          The table below lists the net sales at our footwear departments for
     those Meldisco subsidiaries and our equity income earned from those
     Meldisco subsidiaries for the 13-weeks ended October 27, 2004, October 29,
     2003 and April 30, 2003, the 39-weeks ended October 27, 2004 and the
     26-weeks ended October 29, 2003.

<TABLE>
<CAPTION>
                                                                                                           Predecessor
                                                         Successor Company                                   Company
                             -------------------------------------------------------------------------   --------------
                              13-Weeks Ended     13-Weeks Ended     39-Weeks Ended     26-Weeks Ended    13-Weeks Ended
     (dollars in millions)   October 27, 2004   October 29, 2003   October 27, 2004   October 29, 2003   April 30, 2003
     ---------------------   ----------------   ----------------   ----------------   ----------------   --------------
     <S>                     <C>                <C>                <C>                <C>                <C>
     Net sales                     $177               $201               $561               $423              $246
     Equity income                 $ --               $  1               $  3               $  3              $  7
</TABLE>

14.  BARTER TRANSACTIONS

          In fiscal 2004, we entered into barter transactions for advertising
     services with The WB Television Network ("The WB") and E! Entertainment
     Television, Inc. ("E!"). We promoted The WB in a significant number of our
     television, newspaper and other advertising expenditures during the third
     quarter of fiscal 2004. In return, we received advertising on certain
     television shows of The WB. We are promoting E! in our print advertising
     from August 2004 through November 2004, and we are receiving apparel
     promotions on the E! News Live show for a comparable period.


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

          We recognize barter revenue in accordance with Emerging Issues Task
     Force No. 99-17 ("EITF 99-17"), "Accounting for Advertising Barter
     Transactions." In accordance with EITF 99-17, the fair value of these
     barter arrangements was not determinable and therefore the revenue and
     expenses were not recognized in our Unaudited Condensed Consolidated
     Statements of Operations.

15.  RELATED PARTY TRANSACTIONS

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

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

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

16.  CORPORATE COST REDUCTION AND ASSOCIATE TERMINATION BENEFITS

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

          Upon the resignation of our former President and Chief Executive
     Officer, he received a $2 million severance payment, pro-rata portions of
     his annual and Long Term Incentive Plan bonuses and accelerated vesting of
     778,880 stock options, all as required by various agreements with the
     Company. In conjunction with these actions, we incurred compensation
     expense of $5 million in the third quarter of fiscal 2004, which is
     recorded in SG&A in our Unaudited Condensed Consolidated Statement of
     Operations for the 13-weeks and 39-weeks ended October 27, 2004.

17.  DISCONTINUED OPERATIONS

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


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

<TABLE>
<CAPTION>
                                                     Predecessor Company
                                                     -------------------
                                                        13-Weeks Ended
     (dollars in millions)                              April 30, 2003
     ---------------------                              --------------
     <S>                                             <C>
     Sales                                                   $232
     Cost of sales, buying and occupancy                      150
                                                             ----
     Gross margin                                              82
     Selling, general and administrative expenses              43
     Restructurings, impairments and other charges              5
     Reorganization items, net                                 44
                                                             ----
     Discontinued operations, net of tax                     $(10)
                                                             ====
</TABLE>

          The Company applied the provisions of SFAS No. 144 to the stores sold
     to Home Depot and Sears and determined that none of the stores met the
     criteria to be accounted for as discontinued operations.

18.  SPECIAL CHARGES

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

     Corporate Cost Reduction Initiatives

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

     Accelerated Depreciation

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

     Reserve Activity

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

19.  REORGANIZATION ITEMS, NET

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


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

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

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

     Gain on extinguishment of debt/Revaluation of assets and liabilities

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

     Fleming settlement

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

     Estimated claims for rejected executory contracts

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

     2003 store closings

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

     Other reorganization items

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


                                       23
<PAGE>
     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
     (CONTINUED)

20.  COMMITMENTS AND CONTINGENCIES

     Other and Routine Actions

          On November 7, 2003, the Company filed suit in the United States
     District Court for the Eastern District of Michigan, which was later
     dismissed and refiled in the Oakland County Circuit Court (State of
     Michigan), against Capital One Bank, Capital One, F.S.B., and Capital One
     Services, Inc. (collectively, "Capital One"). The complaint, as amended,
     alleges breach of contract, tortious interference with business
     relationships, misappropriation of a trade secret, trademark infringement,
     and a violation of the Michigan Consumer Protection Act, which claims arise
     out of Capital One's alleged failure to market and support a co-branded
     credit card under an agreement the parties had with respect to a Kmart
     MasterCard. Kmart is seeking monetary damages. Capital One has filed a
     motion to dismiss; a hearing on that motion has not been scheduled. Trial
     is currently set for June, 2005. Discovery is proceeding.

          On September 24, 2004, the Company filed suit against i2 Technologies,
     Inc. ("i2") and two of its senior executives in the District Court for
     Dallas County, Texas. The suit alleges fraud, breach of contract and
     rescission arising out of the September 29, 2000 contract between Kmart and
     i2 for software licenses, software development and consulting work (the
     "Contract"). After entering into the Contract, Kmart experienced difficulty
     in integrating the new software. Kmart also discovered that several of the
     software component packages it had purchased did not exist. Kmart is
     seeking monetary damages. There are no court dates set yet.

          In Capital Factors v. Kmart Corporation, the United States District
     Court for the Northern District of Illinois ruled that the Court did not
     have the authority to authorize the payment of pre-petition claims of
     certain trade vendors by the Company. That ruling was appealed by the
     Company to the Seventh Circuit Court of Appeals. The Seventh Circuit upheld
     the decision of the District Court. Critical vendors sought a rehearing by
     the Seventh Circuit, which was denied, and filed petitions for Writ of
     Certiorari to the Supreme Court, which were also denied. In order to
     satisfy our fiduciary responsibility to pursue claims against the critical
     vendors, on January 26, 2004 we filed 45 lawsuits against a total of 1,189
     vendors that received these payments. Subsequently, many of the cases were
     severed into lawsuits against individual defendants although all cases are
     proceeding on a common pretrial procedural track. The lawsuits seek to
     recover critical vendor payments in excess of $174 million. The Company
     notified affected vendors that we are willing to settle these claims for a
     percentage of the money they received, based on the amount of the claim.
     The ultimate amount of recovery can not be determined at this time. As of
     October 27, 2004, Kmart has settled 215 critical vendor claims.

          We are a party to a substantial number of other claims, lawsuits and
     pending actions which are routine and incidental to our business. To the
     extent that any such claim relates to a contract which was assumed by us
     when we emerged from Chapter 11 or relates to a time period occurring after
     the Petition Date, the Company shall be responsible for any damages which
     may result. In addition, certain contracts allow for damage provisions or
     other repayments as a result of our termination of the contracts.

          We assess the likelihood of potential losses on an ongoing basis, and
     when they are considered probable and reasonably estimable, we record an
     estimate of the ultimate outcome. If there is no single point estimate of
     loss that is considered more likely than others, an amount representing the
     low end of the range of possible outcomes is recorded. Our Unaudited
     Condensed Consolidated Balance Sheet as of October 27, 2004 only reflects
     potential losses for which the Company may have ultimate responsibility.


                                       24
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS

     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

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

     CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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


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

     RESULTS OF OPERATIONS

          The results of operations presented below reflect certain restatements
     to our previously reported results of operations for the 13-weeks ended
     October 27, 2004 and October 29, 2003, the 39-weeks ended October 27, 2004,
     and the 26-weeks ended October 29, 2003. See Note 3 - Restatement for a
     discussion of the restatement.

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

<TABLE>
<CAPTION>
                                                                  SUCCESSOR COMPANY
                                                         -----------------------------------
                                                          13-WEEKS ENDED     13-WEEKS ENDED
     (dollars in millions)                               OCTOBER 27, 2004   OCTOBER 29, 2003
     ---------------------                               ----------------   ----------------
                                                           (AS RESTATED)      (AS RESTATED)
<S>                                                 <C>                <C>
     Sales                                                    $4,392             $5,092
     Cost of sales, buying and occupancy                       3,247              3,925
                                                              ------             ------

     Gross margin                                              1,145              1,167
     Selling, general and administrative expenses              1,043              1,179
     Net gains on sales of assets                               (807)                (1)
                                                              ------             ------

     Operating income (loss)                                     909                (11)
     Interest expense, net                                        24                 32
     Bankruptcy related recoveries                                (1)                --
     Equity income in unconsolidated subsidiaries                 --                 (1)
                                                              ------             ------

     Income (loss) from operations before income taxes           886                (42)
     Provision for (benefit from) income taxes                   334                (14)
                                                              ------             ------

     Net income (loss)                                        $  552             $  (28)
                                                              ======             ======
</TABLE>

     13-WEEKS ENDED OCTOBER 27, 2004 COMPARED TO 13-WEEKS ENDED OCTOBER 29, 2003

          Same-store sales and total sales decreased 12.8% and 13.7%,
     respectively, for the 13-weeks ended October 27, 2004 as compared to the
     13-weeks ended October 29, 2003. Same-store sales include sales of all open
     stores that have been open for more than 13 full months. The decline in
     same-store and total sales has been affected by soft customer demand during
     the back-to-school season, less promotional advertising in our circulars
     and increased competition at certain store locations.

          Favorable markon, improvements in shrink, and reductions in markdowns
     on promotional and clearance items were the primary factors improving our
     gross margin rate this quarter. This improvement in the current quarter was
     partially offset by the effect of the decline in sales on certain fixed
     operating costs. As a result, gross margin as a percentage of sales
     increased to 26.1% for the 13-weeks ended October 27, 2004, from 22.9% in
     the prior year comparable quarter. Gross margin decreased $22 million to
     $1.15 billion, for the 13-weeks ended October 27, 2004, from $1.17 billion
     for the 13-weeks ended October 29, 2003.

          Selling, general and administrative expenses ("SG&A") decreased $136
     million to $1.04 billion for the 13-weeks ended October 27, 2004, from
     $1.18 billion for the 13-weeks ended October 29, 2003. SG&A, as a
     percentage of sales, increased to 23.7% for the 13-weeks ended October 27,
     2004, from 23.2% in the prior year comparable quarter. The decline in SG&A
     resulted from a reduction in store payroll and related expenditures due to
     increased operating efficiencies and reduced sales volume at our stores,
     and to reductions in newspaper advertising. Included in SG&A for the period
     is compensation expense of $5 million related to the departure of our
     former President and Chief Executive Officer.


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

          Operating income for the 13-weeks ended October 27, 2004 was $909
     million, or 20.7% of sales, as compared to a loss of $11 million, or (0.2%)
     of sales, for the same period in the prior year. Adjusted operating income
     for the 13-weeks ended October 27, 2004 was $102 million, or 2.3% of sales,
     as compared to a loss of $(12) million, or (0.2%) of sales, for the same
     period in the prior year. Adjusted operating income for the 13-weeks ended
     October 27, 2004 and October 29, 2003 exclude $807 million and $1 million
     of gains on sales of assets, respectively, primarily related the previously
     announced transactions with Home Depot and Sears; see Note 4 - Real Estate
     and Property Transactions. See below for a discussion of adjusted operating
     income as a non-GAAP measure. Operating income increased in the current
     quarter due to the decrease in SG&A as compared to the prior quarter in
     fiscal 2003, as discussed above.

          Interest expense, net for the 13-weeks ended October 27, 2004 and
     October 29, 2003 was $24 million and $32 million, respectively. During the
     13-weeks ended October 27, 2004, $13 million of interest expense was
     recorded for the accretion of obligations recorded at net present value. To
     reduce the overall cost of our Credit Facility, we restated and amended it
     in October 2004, reducing the facility from $1.0 billion to $800 million.
     We recognized $6 million of debt issuance costs in Interest expense, net
     for the 13-weeks ended October 27, 2004, $3 million of which we accelerated
     in conjunction with the reduction to our Credit Facility. Interest expense
     is net of interest income of $9 million and $2 million for the 13-weeks
     ended October 27, 2004 and October 29, 2003, respectively.

          The effective income tax rate was 37.7% and (33.3%) for the 13-weeks
     ended October 27, 2004 and October 29, 2003, respectively; see Note 8 -
     Income Taxes for a more detailed discussion.

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

<TABLE>
<CAPTION>
                                                                      SUCCESSOR COMPANY                      PREDECESSOR
                                                    ----------------------------------------------------       COMPANY
                                                     26-WEEKS ENDED     26-WEEKS ENDED     3-WEEKS ENDED   13-WEEKS ENDED
     (dollars in millions)                          OCTOBER 27, 2004   OCTOBER 29, 2003   APRIL 28, 2004   APRIL 30, 2003
     ---------------------                          ----------------   ----------------   --------------   --------------
                                                      (AS RESTATED)      (AS RESTATED)     (AS RESTATED)
<S>                                            <C>                <C>                <C>              <C>
     Sales                                               $9,177             $10,744           $4,615           $6,181
     Cost of sales, buying and occupancy                  6,790               8,344            3,478            4,762
                                                         ------             -------           ------           ------

     Gross margin                                         2,387               2,400            1,137            1,419
     Selling, general and administrative expenses         2,082               2,404            1,004            1,421
     Net gains on sales of assets                          (879)                 (3)             (32)              --
     Restructuring, impairment and other charges             --                  --               --               37
                                                         ------             -------           ------           ------

     Operating income (loss)                              1,184                  (1)             165              (39)
     Interest expense, net                                   57                  58               28               57
     Bankruptcy related recoveries                           (6)                 --               (7)              --
     Equity income in unconsolidated subsidiaries            --                  (3)              (3)              (7)
     Reorganization items, net                               --                  --               --              769
                                                         ------             -------           ------           ------

     Income (loss) from continuing operations
        before income taxes                               1,133                 (56)             147             (858)
     Provision for (benefit from) income taxes              427                 (20)              56               (6)
                                                         ------             -------           ------           ------

     Income (loss) from continuing operations               706                 (36)              91             (852)

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

     Net income (loss)                                   $  706             $   (36)          $   91           $ (862)
                                                         ======             =======           ======           ======
</TABLE>


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

     26-WEEKS ENDED OCTOBER 27, 2004 COMPARED TO 26-WEEKS ENDED OCTOBER 29, 2003

          Same-store sales and total sales decreased 13.9% and 14.6%,
     respectively, for the 26-weeks ended October 27, 2004 as compared to the
     26-weeks ended October 29, 2003. Factors contributing to the decline in
     same store and total sales included reductions in promotional events and
     promotional advertising in our circulars, soft customer demand during the
     back-to-school season and increased competition at certain store locations.

          Favorable markon, improvements in shrink, and reductions in markdowns
     on promotional and clearance items were the primary factors improving our
     gross margin rate this period. The margin rate improvement in the current
     period was partially offset by the effect of the decline in sales on
     certain fixed operating costs. As a result, gross margin as a percentage of
     sales increased to 26.0% for the 26-weeks ended October 27, 2004, from
     22.3% for the 26-weeks ended October 29, 2003. Gross margin decreased $13
     million to $2.39 billion, for the 26-weeks ended October 27, 2004, from
     $2.40 billion for the 26-weeks ended October 29, 2003.

          SG&A decreased $322 million for the 26-weeks ended October 27, 2004 to
     $2.08 billion, or 22.7% of sales, from $2.40 billion, or 22.4% of sales,
     for the 26-weeks ended October 29, 2003. The decline resulted from a
     reduction in store payroll and related expenditures due to increased
     operating efficiencies and reduced sales volume at our stores, and to
     reductions in newspaper advertising. The remaining net reduction in SG&A is
     due primarily to continued efforts to reduce our operating costs.

          Operating income for the 26-weeks ended October 27, 2004 was $1.18
     billion as compared to a loss of $1 million for the same period of the
     prior year. Adjusted operating income for the 26-weeks ended October 27,
     2004 was $305 million as compared to a loss of $4 million, for the same
     period in the prior year. Adjusted operating income for the 26-weeks ended
     October 27, 2004 and October 29, 2003 exclude $879 million and $3 million
     of gains on sales of assets, respectively, primarily related to the
     previously announced transactions with Home Depot and Sears; see Note 4 -
     Real Estate and Property Transactions. See below for a discussion of
     adjusted operating income as a non-GAAP measure. Operating income also
     increased in the current period due to the decrease in SG&A as compared to
     the prior period in fiscal 2003, as discussed above.

          Interest expense, net for the 26-weeks ended October 27, 2004 and
     October 29, 2003 was $57 million and $58 million, respectively. To reduce
     the overall cost of the facility, we voluntarily reduced the size of the
     Credit Facility from $1.5 billion to $1.0 billion in July 2004 and we
     amended and restated the Credit Facility in October 2004 to eliminate the
     synthetic term loan provisions, which reduced the size of the Credit
     Facility from $1.0 billion to $800 million. We recognized $18 million of
     debt issuance costs in Interest expense, net for the 26-weeks ended October
     27, 2004, $12 million of which we accelerated in conjunction with the
     reduction to our Credit Facility. During the 26-weeks ended October 27,
     2004, $26 million of interest expense was recorded for the accretion of
     obligations recorded at net present value. Interest expense is net of
     interest income of $16 million and $4 million for the 26-weeks ended
     October 27, 2004 and October 29, 2003, respectively.

          Effective income tax rate was 37.7% and (35.7%) for the 26-weeks ended
     October 27, 2004 and October 29, 2003, respectively.

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

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

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


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

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

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

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

          The effective income tax rate was 38.1% and (0.7%) for the 13-weeks
     ended April 28, 2004 and April 30, 2003, respectively; see Note 8 - Income
     Taxes for a more detailed discussion.

     39-WEEKS ENDED OCTOBER 27, 2004 (SUCCESSOR COMPANY)

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

          Total sales were $13.79 billion for the 39-weeks ended October 27,
     2004. Same-store sales decreased 13.6%. Reductions in promotions and
     advertising, including the frequency of mid-week circulars in the current
     year, have affected same-store sales and total sales.

          Gross margin for the 39-weeks ended October 27, 2004 was $3.52 billion
     or 25.6% of sales. A reduction in clearance markdowns and improvements in
     shrink favorably affected gross margin in the current period. Included in
     gross margin was a $22 million charge in conjunction with store closings
     inventory liquidations.

          SG&A was $3.09 billion or 22.4% of sales for the period. Reduced
     payroll and related expenses at our stores, as well as a reduction in
     advertising expenses favorably affected SG&A for the period.

          Operating income for the 39-weeks ended October 27, 2004 was $1.35
     billion, or 9.8% of sales. Operating income was favorably affected by the
     improvements in gross margin and reductions in SG&A, as discussed above.
     Adjusted operating income for the 39-weeks ended October 27, 2004 was $438
     million, which excludes gains on sales of assets of $911 million, primarily
     related to the previously announced transactions with Home Depot and Sears
     - see Note 4 - Real Estate and Property Transactions. See below for a
     discussion of adjusted operating income as a non-GAAP measure.

          Interest expense, net for the 39-weeks ended October 27, 2004 was $85
     million. To reduce the overall cost of the facility, we voluntarily reduced
     the size of the Credit Facility from $1.5 billion to $1.0 billion in July
     2004 and we amended and restated the Credit Facility in October 2004 to
     eliminate the synthetic term loan provisions, which reduced the size of the
     Credit Facility from $1.0 billion to $800 million. We recognized $22
     million of debt issuance costs in Interest expense, net for the 39-weeks
     ended October 27, 2004, $12 million of which we accelerated in conjunction
     with the reduction to our Credit Facility. During the 39-weeks ended
     October 27, 2004, $38 million of interest expense was recorded for the
     accretion of obligations recorded at net present value. Interest expense is
     net of interest income of $21 million.


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

          The effective income tax rate was 37.7% for the 39-weeks ended October
     27, 2004; see Note 8 - Income Taxes for a more detailed discussion.

     NON-GAAP MEASURES

          Adjusted operating income is a non-GAAP measure. The Company has
     provided this non-GAAP measure as we believe the significant gains on sales
     of assets realized in the current period do not reflect the results from
     our core business, and they distort the ability to assess the quality of
     our earnings. The non-GAAP measure provides a more meaningful comparison of
     our ongoing results and helps facilitate an analysis of the Company's
     operating performance. In addition, management ignores the impact of these
     gains when assessing the Company's results for the period. This non-GAAP
     financial measure should be evaluated in conjunction with, and is not a
     substitute for, GAAP financial measures. Following is a reconciliation of
     adjusted results to GAAP results:

<TABLE>
<CAPTION>
                                                13-WEEKS ENDED                   26-WEEKS ENDED         39-WEEKS ENDED
                                        -----------------------------   -----------------------------   --------------
     (dollars in millions)              OCT. 27, 2004   OCT. 29, 2003   OCT. 27, 2004   OCT. 29, 2003   OCT. 27, 2004
     ---------------------              -------------   -------------   -------------   -------------   --------------
     <S>                                <C>             <C>             <C>             <C>             <C>
     Adjusted operating income (loss)        $102           $(12)           $  305           $(4)           $  438
     Gains on sales of assets                 807              1               879             3               911
                                             ----           ----            ------           ---            ------
     GAAP operating income (loss)            $909           $(11)           $1,184           $(1)           $1,349
                                             ====           ====            ======           ===            ======
</TABLE>

     LIQUIDITY AND FINANCIAL CONDITION

          Kmart continued to maintain strong liquidity for the 39-weeks ended
     October 27, 2004 with cash flow from operations of $171 million and $524
     million in proceeds from asset sales. Our principal cash needs are for our
     operations and capital expenditures, which have been satisfied through our
     net earnings and our existing $2.6 billion balance in cash and cash
     equivalents as of October 27, 2004. Working capital required for our
     business is significantly affected by our level of sales, seasonality and
     the credit extended by our vendors. In addition, we have funds available
     under our Credit Facility. From its inception, we have only used the Credit
     Facility to support issuances of letters of credit. However, should we
     experience significant negative sales trends, a significant disruption of
     terms with our vendors, the Credit Facility for any reason becomes
     unavailable and/or actual results differ materially from those projected,
     our compliance with financial covenants and our cash resources could be
     adversely affected. The Company continues to explore various alternatives
     to reduce the cost and improve the terms of our Credit Facility to reflect
     the improvement in the Company's financial condition.

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

     CREDIT FACILITY

          Our credit agreement (the "Credit Facility") is an $800 million
     revolving credit facility with an equivalent letter of credit sub-limit
     under which Kmart Corporation is the borrower. Availability under the
     Credit Facility is subject to an inventory borrowing base formula. Since
     its issuance, we have only used the Credit Facility to support outstanding
     letters of credit. To reduce the overall cost of the facility, we
     voluntarily reduced the size of the Credit Facility from $1.5 billion to
     $1.0 billion in July 2004 and we amended and restated the Credit Facility
     in October 2004 to eliminate the synthetic term loan provisions, which
     reduced the size of the Credit Facility from $1.0 billion to $800 million.
     In conjunction with these reductions to our Credit Facility, the
     accelerated amortization of the associated debt issuance costs totaled $3
     million for the 13-week period and $12 million for the 39-weeks ended
     October 27, 2004, respectively. The Credit Facility is guaranteed by the
     Successor Company, Kmart Management Corporation, Kmart Services Corporation
     (a subsidiary of Kmart Management Corporation) and Kmart Corporation's
     direct and indirect domestic subsidiaries. The Credit Facility is secured
     primarily by first liens on inventory, the proceeds thereof and certain
     related assets of Kmart Corporation and the guarantors.


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

          Borrowings under the Credit Facility are subject to a sliding pricing
     scale based on our earnings before interest, taxes, depreciation,
     amortization and other charges ("EBITDA") levels and such adjustments are
     implemented quarterly. Utilization of the Credit Facility in support of
     trade and standby letters of credit currently bears interest at 1.25% and
     2.00% per annum, respectively. In addition, we are required to pay a fee
     based on the unutilized commitment under the Credit Facility equal to
     0.375% per annum. The Credit Facility gives the Company the ability to
     repurchase up to $500 million of the Company's Common Stock, depending on
     our EBITDA levels and subject to the approval of the Company's Board of
     Directors.

          As of October 27, 2004, we had utilized $22 million of the Credit
     Facility for letters of credit issued for ongoing import purchasing
     operations, and contractual and regulatory purposes, including letters of
     credit utilized as collateral to support our self-insurance programs.
     During fiscal 2004, we have replaced letters of credit used as collateral
     for certain programs with cash collateral which reduces fees paid by the
     Company with respect to the letters of credit. We continue to classify the
     cash collateral as Cash and cash equivalents due to our ability to convert
     the cash to letters of credit at any time at our discretion. As of October
     27, 2004, $221 million of cash was posted as collateral.

          Total availability under the Credit Facility as of October 27, 2004
     was approximately $750 million.

          The Credit Facility financial covenants include a requirement that we
     maintain certain availability minimums, and failure to do so triggers
     additional required minimum levels of EBITDA. The Credit Facility also
     contains other customary covenants, including certain reporting
     requirements and covenants that restrict our ability to incur or create
     liens, indebtedness and guarantees, make investments, pay dividends or make
     other equity distributions, sell or dispose of stock or assets, change the
     nature of our business and enter into affiliate transactions, mergers and
     consolidations. Failure to satisfy these covenants would result in an event
     of default that could result in our inability to access the funds. As of
     October 27, 2004, and in all periods since our emergence from Chapter 11,
     we have been in compliance with all Credit Facility covenants.

     Letter of Credit Agreement

          On August 13, 2004, the Company entered into a letter of credit
     agreement (the "LC Agreement") with a commitment amount of up to $200
     million through January 7, 2005 and increasing to $600 million thereafter.
     Standby letters of credit issued under the LC Agreement bear interest at
     0.20% per annum. No interest is charged for trade letters of credit issued
     under the LC Agreement; however, we are required to pay a fee based on the
     unutilized commitment, as defined in the LC Agreement, equal to 0.125% per
     annum.

          We amended the LC Agreement on October 4, 2004, primarily to provide
     Kmart with an election to post either cash or inventory as collateral.
     Electing inventory would result in incremental costs under the LC
     Agreement. As of October 27, 2004, Kmart has posted cash collateral of $250
     million to support the LC Agreement. We classify the cash collateral as
     Cash and cash equivalents due to our ability to post inventory as
     collateral at any time at our discretion. The LC Agreement is subject to a
     pledge and security agreement pursuant to which, after January 7, 2005, the
     Company must post as collateral cash in an amount equal to 100.5% of the
     face value of letters of credit outstanding under the LC Agreement or elect
     to post inventory as collateral, subject to certain conditions. Prior to
     January 7, 2005, the collateral posted by the Company is a leasehold
     mortgage on certain properties leased by the Company.

          The LC Agreement contains customary covenants, including covenants
     that restrict our ability to incur or create liens on collateralized
     assets, and sell, transfer, assign or otherwise dispose of any
     collateralized assets. Failure to satisfy these covenants would result in
     an event of default that could result in our inability to issue new letters
     of credit. Subject to these covenants the Company is required to maintain
     in a deposit account $250 million of cash invested with the issuing bank
     until such time that the cash collateral is equal to the 100.5% of the face
     value of the letters of credit outstanding, as discussed above. This cash
     is classified as Cash and cash equivalents as of October 27, 2004. As of
     October 27, 2004, and in all periods since inception of the LC Agreement,
     we have been in compliance with all covenants of the LC Agreement.

          As of October 27, 2004, we had utilized $197 million of the LC
     Agreement.


                                       31
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

     CASH FLOWS

          Operating activities provided net cash of $171 million and $576
     million for the 39-weeks ended October 27, 2004 and the 13-weeks ended
     April 30, 2003, respectively. During the 26-weeks ended October 29, 2003,
     operating activities used $396 million of net cash. Cash flow for the
     current 39-week period was favorably affected by our strong net earnings
     which was partially offset by the increase in our inventories, net of
     associated accounts payable for the upcoming holiday season and by funding
     $77 million for future associate medical and dental expenses. For the
     26-weeks ended October 29, 2003, the use of cash was primarily due to
     payments of $470 million for exit costs and reorganization items. For the
     13-weeks ended April 30, 2003, a decrease in inventory due to liquidation
     sales in conjunction with store closings and improved inventory management,
     partially offset by a decrease in accounts payable, had a favorable affect
     on operating cash flow.

          Investing activities generated $345 million, $32 million and $60
     million for the 39-weeks ended October 27, 2004, the 26-weeks ended October
     29, 2003 and the 13-weeks ended April 30, 2003, respectively. During the
     current year, we received proceeds of $524 million from sales of real and
     personal property, including $432 million from the sale of owned and
     assignment of leased properties to Sears and Home Depot. See Note 4 - Real
     Estate and Property Transactions and Note 12 - Property Held for Sale for a
     more detailed discussion of these transactions. During the 39-weeks ended
     October 27, 2004 and the 26-weeks ended October 26, 2003, we purchased 28
     and eight previously-leased operating properties for $103 million and $61
     million, respectively. Additionally, we received proceeds of $92 million
     from the sale of property held for sale during the 26-weeks ended October
     29, 2003. Proceeds of $64 million were received during the 13-weeks ended
     April 30, 2003, from the sale of four owned Kmart store locations and the
     sale of furniture and fixtures from closed store locations.

          Payments on capital lease obligations and mortgages of $40 million and
     $17 million were the uses of cash for financing activities during the
     39-weeks ended October 27, 2004 and the 13-weeks ended April 30, 2003,
     respectively. Financing activities provided $73 million in cash for the
     26-weeks ended October 29, 2003. Upon emergence from bankruptcy in May,
     2003, the Company received net proceeds of $127 million from the issuance
     of Common Stock to the Plan Investors and proceeds of $60 million from the
     issuance of the convertible note to affiliates of ESL. The positive effect
     of these items was partially offset by payments made for other financing
     arrangements. See Note 2 - Emergence from Chapter 11 Bankruptcy Protection
     and Fresh-Start Accounting for a more detailed discussion.

          The Company has a share repurchase program with authorization to
     repurchase $100 million in Common Stock. As of October 27, 2004, we had
     repurchased approximately $4 million of Common Stock.

     FUTURE LIQUIDITY ITEMS

     PENSION PLAN

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

          During the 39-weeks ended October 27, 2004 contributions to the plans
     were approximately $10 million. The minimum required contribution for
     fiscal 2004 and fiscal 2005 is approximately $11 million and $4 million,
     respectively.


                                       32
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

     REAL ESTATE TRANSACTIONS

     Home Depot U.S.A., Inc.

          On June 3, 2004, the Company entered into multiple agreements with
     Home Depot U.S.A., Inc. (a subsidiary of The Home Depot, Inc.) ("Home
     Depot") to sell owned properties and assign leased properties for a maximum
     purchase price of $365 million in cash. These agreements were later amended
     to reflect that the Company would sell four properties and assign 14
     properties for an aggregate purchase price of $271 million. Pursuant to
     these agreements, on June 15, 2004, the Company completed the sale of four
     owned properties to Home Depot for $59 million in cash, resulting in a net
     gain of $43 million. The Company completed the assignment of 13 of the
     remaining properties in the third quarter of fiscal 2004, resulting in
     proceeds to the Company of $200 million in cash, and a net gain of $198
     million. We anticipate closing on the final property during the fourth
     quarter, resulting in additional proceeds of $12 million.

     Sears, Roebuck and Co.

          On June 29, 2004, the Company entered into an agreement with Sears,
     Roebuck and Co. ("Sears") to sell owned properties and assign leased
     properties for a maximum purchase price of $621 million in cash. On
     September 29, 2004, the Company agreed to sell four owned properties,
     assign 45 leased properties and lease one owned store to Sears for a total
     purchase price of approximately $576 million. The Company received 30% of
     the purchase price in September, 2004 upon closing, and recognized a gain
     on the transaction of $599 million. The remaining 70% of the purchase price
     will be received when Sears occupies the properties, which shall take place
     no later than April 15, 2005. The receivable for the remaining purchase
     price of $403 million is included in Accounts receivable, net in our
     Unaudited Condensed Consolidated Balance Sheet as of October 27, 2004. ESL
     and its affiliates own over 10 percent of both Sears and the Company.

     OTHER

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

     STORE ACTIVITY

          During the 39-weeks ended October 27, 2004, the Company purchased 28
     previously leased store locations; sold 17 stores; closed four stores; and
     allowed leases to expire on four stores. As of October 27, 2004, we
     operated 1,486 stores.

          In the second and third quarters of fiscal 2003, we closed one store
     and purchased seven previously leased store locations and one previously
     leased distribution center. In the first quarter of fiscal 2003, the
     Predecessor Company closed 316 stores.

     CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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


                                       33
<PAGE>
     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS - (CONTINUED)

     DISCONTINUED OPERATIONS

          During the 39-weeks ended October 27, 2004, the Company applied the
     provisions of SFAS No. 144 to the stores sold to Home Depot and Sears and
     determined that none of the stores met the criteria to be accounted for as
     discontinued operations.

          During the first quarter of fiscal 2003, the Predecessor Company
     closed 316 stores. Of the total stores closed, 66 met the criteria for
     discontinued operations. For a comprehensive discussion, see Note 17 -
     Discontinued Operations.

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

     SPECIAL CHARGES

          Special charges are transactions which, in management's judgment, may
     make meaningful comparisons of operating results between reporting periods
     difficult. In determining what amounts constitute a special charge,
     management considers the nature, magnitude and frequency of their
     occurrence. For the 13-weeks ended April 30, 2003, the Predecessor Company
     recorded special charges of $42 million. For a comprehensive discussion,
     see Note 18 - Special Charges.

     REORGANIZATION ITEMS, NET

          Reorganization items represent amounts the Predecessor Company
     incurred as a result of Chapter 11, and are presented separately in the
     Unaudited Condensed Consolidated Statements of Operations as required by
     SOP 90-7. The Predecessor Company recorded $813 million for the 13-weeks
     ended April 30, 2003 for reorganization items. For a comprehensive
     discussion, see Note 19 - Reorganization Items, net.

     OTHER MATTERS

          The Martha Stewart Everyday brand is considered a distinctive brand
     for Kmart and we currently sell Martha Stewart Everyday home, garden,
     colors, baby, kitchen, keeping and decorating product lines, along with
     candles and accessories. To date, we have not experienced any significant
     adverse impact from Ms. Stewart's recent conviction and incarceration on
     the sales of Martha Stewart Everyday brand products. Although product sales
     have not been significantly affected by past events, the Company is not
     able to determine the potential effects that these events may have on the
     future sales of its Martha Stewart Everyday brand products.


                                       34
<PAGE>
     ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          At October 27, 2004, we did not have any derivative instruments that
     increased our exposure to market risks for interest rates, foreign currency
     rates, commodity prices or other market price risks. We do not use
     derivatives for speculative purposes. Currently, our exposure to market
     risks results primarily from changes in interest rates, principally with
     respect to the Credit Facility, which is a variable rate financing
     agreement. We do not use swaps or other interest rate protection agreements
     to hedge this risk.

     ITEM 4. CONTROLS AND PROCEDURES

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

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

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

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


                                       35
<PAGE>
     PART II. OTHER INFORMATION

     ITEM 1.LEGAL PROCEEDINGS

          See Note 20 of the Notes to Unaudited Condensed Consolidated Financial
     Statements for information concerning legal proceedings.

     ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
     PURCHASES OF EQUITY SECURITIES

          The Company has a share repurchase program with authorization to
     repurchase $100 million of Common Stock. As of October 27, 2004, we had
     repurchased approximately $4 million of Common Stock.

<TABLE>
<CAPTION>
                                                                             Total           Approximate
                                                                        Number of Shares     Dollar Value
                                                             Average   Purchased as Part    of Shares that
                                               Total          Price       of Publicly         May Yet Be
                                         Number of Shares   Paid per       Announced       Purchased Under
                Period                       Purchased        Share         Program          the Program
                ------                   ----------------   --------   -----------------   ---------------
<S>                                      <C>                <C>        <C>                 <C>
July 29, 2004 to August 25, 2004                 --              --            --            $96,000,000

August 26, 2004 to September 22, 2004       496,211(1)       $76.09            --            $96,000,000

September 23, 2004 to October 27, 2004        5,276(2)       $85.85            --            $96,000,000
</TABLE>

     (1)  The Company was assigned 494,481 shares (weighted-average price of
          $76.06 per share) of Common Stock as part of a settlement agreement
          reached with a Class 5 claimholder; in addition the Company was
          assigned 1,730 shares (weighted-average price of $83.37 per share) of
          Common Stock for payment of withholding taxes related to the vesting
          of restricted stock.

     (2)  The Company was assigned 5,276 shares of Common Stock as part of a
          settlement agreement reached with a critical vendor.

     ITEM 6. EXHIBITS

     Exhibit 10.1   Employment Agreement, dated as of October 18, 2004, between
                    Kmart Holding Corporation and Aylwin B. Lewis (previously
                    filed as Exhibit 10.1 to the Company's Quarterly Report on
                    Form 10-Q, for the period ended October 27, 2004, and
                    incorporated herein by reference)

     Exhibit 10.2   Julian C. Day Separation Agreement, dated as of October 18,
                    2004 (previously filed as Exhibit 10.2 to the Company's
                    Quarterly Report on Form 10-Q, for the period ended October
                    27, 2004, and incorporated herein by reference)

     Exhibit 10.3   First Amendment to Letter of Credit Agreement, dated as of
                    August 13, 2004 among Kmart Corporation, Bank of America,
                    National Association and Fleet National Bank as issuing
                    banks (previously filed as Exhibit 10.3 to the Company's
                    Quarterly Report on Form 10-Q, for the period ended October
                    27, 2004, and incorporated herein by reference)

     Exhibit 10.4   Credit Agreement, dated as of May 6, 2003, as amended and
                    restated as of October 7, 2004, 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 Syndication
                    Agent, Co-Collateral Agent and Lender, Fleet Securities,
                    Inc., as Co-Lead Arranger and Co-Book Runner, GMAC
                    Commercial Finance LLC, as Co-Documentation Agent and Wells
                    Fargo Foothill Inc. as Co-Documentation Agent (previously
                    filed as Exhibit 10.4 to the Company's Quarterly Report on
                    Form 10-Q, for the period ended October 27, 2004, and
                    incorporated herein by reference)

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


                                       36
<PAGE>
     Exhibit 31.2   Chief Financial Officer Certification pursuant to Rule
                    13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
                    as Amended

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


                                       37
<PAGE>
                                   SIGNATURES

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

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

                            Date: FEBRUARY 11, 2005

                                  Kmart Holding Corporation
                                  ----------------------------------------------
                                  (Registrant)


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


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


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


                                       38
<PAGE>
                                  EXHIBIT INDEX

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

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

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