<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 April 28, 2004

                                       OR

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

               For the transition period from ________ to________

                          Commission File No. 000-50278

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

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

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

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

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

                                           Yes [X]  No [ ]

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

                                           Yes [X]  No [ ]

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

                                           Yes [X]   No [ ]

As of May 14, 2004, 89,638,293 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 May 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 due to the amortization of the debt discount for
the 13 weeks ended April 30, 2004.

            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 13-week
period ended April 28, 2004 which are amended and restated herein are:

      1.    Part 1, Item 1 - Financial Statements

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

      3.    Part 1, Item 4 - Controls and Procedures

            Except as otherwise expressly noted herein, this Amendment No. 1 to
Quarterly Report on Form 10-Q/A does not reflect events occurring after the May
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 13-week period ended April 28, 2004
in the form filed with the SEC on May 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>
                                                                                                      PAGE
                                                                                                      -----
<S>                                                                                                   <C>
PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

          Condensed Consolidated Statements of Operations (Unaudited) --                                4
          Successor Company - for the 13-weeks ended April 28, 2004 (as restated)
          Predecessor Company - for the 13-weeks ended April 30, 2003

          Condensed Consolidated Balance Sheets (Unaudited)  --                                         5
          Successor Company - as of April 28, 2004, (as restated) January 28, 2004 (as restated)
          and April 30, 2003 (as restated)

          Condensed Consolidated Statements of Cash Flows (Unaudited) --                                6
          Successor Company - for the 13-weeks ended April 28, 2004 (as restated)
          Predecessor Company - for the 13-weeks ended April 30, 2003

          Notes to Unaudited Condensed Consolidated Financial Statements                              7-19

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of                  20-24
              Operations

Item 3.   Quantitative and Qualitative Disclosures about Market Risk                                   25

Item 4.   Controls and Procedures                                                                      25

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings                                                                            26

Item 6.   Exhibits and Reports on Form 8-K                                                             26

          Signatures                                                                                   27
</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>
                                                                       SUCCESSOR COMPANY    PREDECESSOR COMPANY
                                                                       -----------------    -------------------
                                                                         13-WEEKS ENDED       13-WEEKS ENDED
                                                                          APRIL 28, 2004       APRIL 30, 2003
                                                                       -----------------    -------------------
                                                                         (AS RESTATED)
<S>                                                                   <C>                    <C>
Sales                                                                 $           4,615      $           6,181
Cost of sales, buying and occupancy                                               3,478                  4,762
                                                                      -----------------      -----------------
Gross margin                                                                      1,137                  1,419
Selling, general and administrative expenses                                      1,004                  1,421
Net gains on sales of assets                                                        (32)                     -
Restructuring, impairment and other charges                                           -                     37
                                                                      -----------------      -----------------
Operating income (loss)                                                             165                    (39)
Interest expense, net                                                                28                     57
Bankruptcy-related recoveries                                                        (7)                     -
Equity income in unconsolidated subsidiaries                                         (3)                    (7)
Reorganization items, net                                                             -                    769
                                                                      -----------------      -----------------
Income (loss) from continuing operations before income taxes                        147                   (858)

Provision for (benefit from) income taxes                                            56                     (6)
                                                                      -----------------      -----------------
Income (loss) from continuing operations                                             91                   (852)
Discontinued operations (net of income taxes of $0)                                   -                    (10)
                                                                      -----------------      -----------------
Net income (loss)                                                     $              91      $            (862)
                                                                      =================      =================

Basic income (loss) per common share from continuing operations       $            1.02      $           (1.63)
Discontinued operations                                                               -                  (0.02)
                                                                      -----------------      -----------------
Basic net income (loss) per common share                              $            1.02      $           (1.65)
                                                                      =================      =================

Diluted income (loss) per common share from continuing operations     $            0.94      $           (1.63)
Discontinued operations                                                               -                  (0.02)
                                                                      -----------------      -----------------
Diluted net income (loss) per common share                            $            0.94      $           (1.65)
                                                                      =================      =================

Basic weighted average shares (millions)                                           89.5                  522.7

Diluted weighted average shares (millions)                                        100.3                  522.7
</TABLE>

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                              SUCCESSOR COMPANY
                                                                           -----------------------------------------------------
                                                                           APRIL 28, 2004      JANUARY 28, 2004   APRIL 30, 2003
                                                                           --------------      ----------------  ---------------
                                                                           (AS RESTATED)        (AS RESTATED)    (AS RESTATED)
<S>                                                                         <C>               <C>               <C>
ASSETS
CURRENT ASSETS
 Cash and cash equivalents                                                  $     2,228       $          2,088  $          1,232
 Merchandise inventories                                                          3,394                  3,238             4,431
 Accounts receivable, net                                                           237                    301               382
 Other current assets                                                               169                    184               509
                                                                            -----------       ----------------  ----------------
TOTAL CURRENT ASSETS                                                              6,028                  5,811             6,554
 Property and equipment, net                                                        190                    153                10
 Other assets and deferred charges                                                   85                    110                96
                                                                            -----------       ----------------  ----------------
TOTAL ASSETS                                                                $     6,303       $          6,074  $          6,660
                                                                            ===========       ================  ================

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
 Mortgages payable due within one year                                      $         4       $              4  $              8
 Accounts payable                                                                   985                    820             1,160
 Accrued payroll and other liabilities                                              660                    671             1,321
 Taxes other than income taxes                                                      276                    281               274
                                                                            -----------       ----------------  ----------------
TOTAL CURRENT LIABILITIES                                                         1,925                  1,776             2,763
LONG-TERM LIABILITIES
 Long-term debt and mortgages payable                                                77                     76                59
 Capital lease obligations                                                          360                    374               415
 Pension obligation                                                                 877                    873               854
 Unfavorable operating leases                                                       329                    342               344
 Other long-term liabilities                                                        435                    424               481
                                                                            -----------       ----------------  ----------------
TOTAL LIABILITIES                                                                 4,003                  3,865             4,916

SHAREHOLDERS' EQUITY
 Preferred stock 20,000,000 shares authorized; no shares outstanding                  -                      -                 -
 Common stock $0.01 par value, 500,000,000 shares authorized;
   89,638,293, 89,633,760 and 89,677,509 shares issued, respectively                  1                      1                 1
 Treasury stock, at cost                                                             (1)                    (1)                -
 Capital in excess of par value                                                   1,975                  1,974             1,743
 Retained earnings                                                                  325                    234                 -
 Accumulated other comprehensive income                                               -                      1                 -
                                                                            -----------       ----------------  ----------------
TOTAL SHAREHOLDERS' EQUITY                                                        2,300                  2,209             1,744
                                                                            -----------       ----------------  ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                  $     6,303       $          6,074  $          6,660
                                                                            ===========       ================  ================
</TABLE>

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       SUCCESSOR COMPANY         PREDECESSOR COMPANY
                                                                       -----------------        --------------------
                                                                            13-WEEKS                  13-WEEKS
                                                                             ENDED                      ENDED
                                                                         APRIL 28, 2004            APRIL 30, 2003
                                                                         (AS RESTATED)
                                                                       -----------------        --------------------
<S>                                                                    <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                                     $             91        $               (862)
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
          Depreciation and amortization                                                9                         177
          Net gains on sales of assets                                               (32)                          -
          Deferred income taxes                                                       19                           -
          Equity income in unconsolidated subsidiaries                                (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                                       -                         (64)
  Cash used for payments of exit costs and other
    reorganization items                                                               -                         (19)
  Change in:
          Merchandise inventories                                                   (156)                        480
          Accounts receivable                                                         26                         114
          Accounts payable                                                           165                        (117)
          Taxes payable                                                               33                         (16)
          Other assets                                                                32                           9
          Other liabilities                                                          (45)                         32
                                                                        ----------------        --------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                            142                         576
                                                                        ----------------        --------------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from sales of assets                                                       66                          64
  Capital expenditures                                                               (55)                         (4)
                                                                        ----------------        --------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                             11                          60
                                                                        ----------------        --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Payments on capital lease obligations                                              (12)                        (16)
  Payments on mortgages                                                               (1)                         (1)
                                                                        ----------------        --------------------
NET CASH USED FOR FINANCING ACTIVITIES                                               (13)                        (17)
                                                                        ----------------        --------------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                              140                         619
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     2,088                         613
                                                                        ----------------        --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                $          2,228        $              1,232
                                                                        ================        ====================
</TABLE>

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

                                       6
<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
      1,505 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.

                                       7
<PAGE>

      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

      Plan Investors

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

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

      Discharge of Liabilities

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

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

      Fresh-Start Adjustments

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

                                       8
<PAGE>

      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

      Claims Resolution

            We continue to make progress in the reconciliation and settlement of
      the various classes of claims associated with the discharge of the
      Predecessor Company's liabilities subject to compromise pursuant to the
      Plan of Reorganization. Since June 30, 2003, the first distribution date
      established in the Plan of Reorganization, approximately 15.6 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 $2.6 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, we have maintained a distribution
      reserve of approximately 30 percent of shares issued for claim
      settlements. The 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 and Class 7 claims is consistent with
      the Plan of Reorganization. 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.

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

      Bankruptcy-Related Recoveries

            For the 13-weeks ended April 28, 2004, we recognized $7 million of
      recoveries from vendors who had received cash payments for pre-petition
      obligations.

3.    RESTATEMENT

            The accompanying unaudited condensed consolidated financial
      statements for the 13-weeks ended April 28, 2004, and as of April 28,
      2004, January 28, 2004 and April 30, 2003 have been restated. The
      restatement reflects the recognition of an embedded beneficial conversion
      feature of the Company's convertible 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").

                                       9
<PAGE>

      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

            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 of interest expense due to
      the amortization of the discount in the 13-weeks ended April 28, 2004.

            Following is the effect of our restatement on our unaudited
      Condensed Consolidated Statement of Operations for the 13-weeks ended
      April 28, 2004 and on our unaudited Condensed Consolidated Balance Sheets
      as of April 28, 2004, January 28, 2004 and April 30, 2003.

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

<TABLE>
<CAPTION>
                                                               13-WEEKS ENDED APRIL 28, 2004
                                                   -------------------------------------------------------
                                                   As previously reported       Adjustments    As restated
                                                   ----------------------       -----------    -----------
<S>                                                <C>                          <C>            <C>
Operating income                                       $            165           $      -       $    165

Interest expense, net                                                26                  2             28
Bankruptcy-related recoveries                                        (7)                 -             (7)
Equity income in unconsolidated subsidiaries                         (3)                 -             (3)
                                                       ----------------           --------       --------
Income from operations before income taxes                          149                 (2)           147

Provision for income taxes                                           56                  -             56
                                                       ----------------           --------       --------
Net income                                             $             93           $     (2)      $     91
                                                       ================           ========       ========

Basic net income per common share                      $           1.04           $  (0.02)      $   1.02
                                                       ================           ========       ========

Diluted net income per common share                    $           0.94           $      -       $   0.94
                                                       ================           ========       ========
</TABLE>

                                     10
<PAGE>

      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

            The restatement had no effect on the Predecessor Company's 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>
                                                                   APRIL 28, 2004
                                                     --------------------------------------------------
                                                     As previously reported   Adjustments   As restated
                                                     ----------------------   -----------   -----------
<S>                                                  <C>                      <C>           <C>
ASSETS

Other assets and deferred charges                     $                  95     $    (10)     $     85
                                                      =====================     ========      ========

Total Assets                                          $               6,313     $    (10)     $  6,303
                                                      =====================     ========      ========

LIABILITIES
Long-term debt and mortgages payable                  $                 102     $    (25)     $     77
                                                      =====================     ========      ========

Total liabiliites                                     $               4,028     $    (25)     $  4,003
                                                      =====================     ========      ========

SHAREHOLDERS' EQUITY
Capital in excess of par value                        $               1,944     $     31      $  1,975
                                                      =====================     ========      ========

Retained earnings                                     $                 341     $    (16)     $    325
                                                      =====================     ========      ========

Total shareholders' equity                            $               2,285     $     15      $  2,300
                                                      =====================     ========      ========

Total Liabilities and Shareholders' Equity            $               6,313     $    (10)     $  6,303
                                                      =====================     ========      ========
</TABLE>

<TABLE>
<CAPTION>

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

Total Assets                                          $  6,084              $  (10)       $ 6,074
                                                      ========              ======        =======
LIABILITIES
Long-term debt and mortgages payable                  $    103              $  (27)       $    76
                                                      ========              ======        =======
Total liabilities                                     $  3,892              $  (27)       $ 3,865
                                                      ========              ======        =======
SHAREHOLDERS' EQUITY
Capital in excess of par value                        $  1,943              $   31        $ 1,974
                                                      ========              ======        =======
Retained earnings                                     $    248              $  (14)       $   234
                                                      ========              ======        =======
Total shareholders' equity                            $  2,192              $   17        $ 2,209
                                                      ========              ======        =======
Total Liabilities and Shareholders' Equity            $  6,084              $  (10)      $  6,074
                                                      ========              ======       ========
</TABLE>

                                       11
<PAGE>

      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           APRIL 30, 2003
                                                   ------------------------------------------------------------
                                                   As previously reported         Adjustments       As restated
                                                   ----------------------       ---------------    ------------
<S>                                                <C>                          <C>                <C>
LIABILITIES
Long-term debt and mortgages payable                  $              108        $           (49)   $         59
                                                      ==================        ===============    ============
Other long-term liabilities                           $              463        $            18    $        481
                                                      ==================        ===============    ============
Total liabilities                                     $            4,947        $           (31)   $      4,916
                                                      ==================        ===============    ============

SHAREHOLDERS' EQUITY
Capital in excess of par value                        $            1,712        $            31    $      1,743
                                                      ==================        ===============    ============
Total shareholders' equity                            $            1,713        $            31    $      1,744
                                                      ==================        ===============    ============
</TABLE>

            The deferred tax liability was offset with the Company's other
      deferred tax liabilities and assets and presented as a single amount in
      the Consolidated Balance Sheets.

            The Company had a net deferred tax asset as of April 28, 2004 and as
      of January 28, 2004 which were classified in Other assets and deferred
      charges. The Company had a net deferred tax liability as of April 30, 2003
      which was classified in Other long-term liabilities.

4.    NEW ACCOUNTING PRONOUNCEMENTS

            In December 2003, the Financial Accounting Standards Board ("FASB")
      issued Statement of Financial Accounting Standards ("SFAS") No. 132
      (revised 2003), "Employers' Disclosures about Pensions and Other
      Postretirement Benefits" ("SFAS No. 132 (R)"). SFAS No. 132 (R) revises
      the annual and interim disclosure requirements about pension and other
      postretirement benefits. We have complied with the new interim disclosure
      requirements in this Quarterly Report on Form 10-Q/A.

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

5.    PENSION PLAN

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

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

  Interest costs                                             $        38               $    38
  Expected return on plan assets                                     (34)                  (33)
  Net loss recognition                                                 -                    18
  Amortization of unrecognized transition asset                        -                    (2)
                                                             -----------               -------
  Net periodic expense                                       $         4               $    21
                                                             ===========               =======
</TABLE>

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

                                       12
<PAGE>

      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

            A reconciliation of basic weighted average common shares outstanding
      to diluted weighted average common shares outstanding for the 13-weeks
      ended April 28, 2004 is as follows:

<TABLE>
<CAPTION>
                                                  Successor
                                                   Company
                                               --------------
                                               13-Weeks Ended
              (in millions)                    April 28, 2004
--------------------------------------         ---------------
<S>                                            <C>
Basic weighted average common shares                 89.5
Dilutive effect of stock options                      4.8
9% convertible note                                   6.0
                                                    -----
Diluted weighted average common shares              100.3
                                                    =====
</TABLE>

            A reconciliation of net income available to common shareholders to
      net income available to common shareholders with assumed conversions for
      the 13-weeks ended April 28, 2004 is as follows:

<TABLE>
<CAPTION>
                                                                                  Successor
                                                                                   Company
                                                                               --------------
                                                                               13-Weeks Ended
                     (dollars in millions)                                      April 28, 2004
----------------------------------------------------------------               ---------------
                                                                                (as restated)
<S>                                                                            <C>
Net income available to common shareholders                                       $      91
Interest and accretion of debt discount on 9% convertible note, net of tax                3
                                                                                  ---------
Income available to common shareholders with assumed conversions                  $      94
                                                                                  =========
</TABLE>

            Common stock equivalents of the Predecessor Company were excluded
      from the calculation of diluted earnings per share for the 13-weeks ended
      April 30, 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 a revolving $1.5
      billion credit facility with an $800 million 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. 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 currently bear interest at
      either (i) the Prime rate plus 1.5% per annum or (ii) the LIBOR rate plus
      2.5% per annum, at our discretion, and utilization of the letter of credit
      sub-facility currently bears interest at 1.25% to 2.50% per annum. These
      interest rate margins may be adjusted after July 31, 2004 depending on our
      earnings before interest, taxes, depreciation, amortization and other
      charges ("EBITDA") levels. In addition, we are required to pay a fee based
      on the unutilized commitment under the Credit Facility equal to 0.50% per
      annum until July 31, 2004, and 0.375% to 0.50% thereafter, depending on
      our EBITDA levels. 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.

                                       13
<PAGE>

      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

            As of April 28, 2004, we had utilized $356 million of the Credit
      Facility for letters of credit issued for ongoing import purchasing
      operations, and contractual and regulatory purposes, including letters of
      credit utilized as collateral to support our self-insurance programs.
      During the first quarter of fiscal 2004, we replaced letters of credit
      used as collateral for certain programs with cash collateral to reduce
      utilization fees on our letters of credit. We continue to classify the
      cash collateral in Cash and cash equivalents due to our ability to convert
      the cash to letters of credit at any time at our discretion. As of April
      28, 2004, $71 million of cash was posted as collateral.

            Total availability under the Credit Facility as of April 28, 2004
      was $1.144 billion.

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

      Predecessor Company Debt

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

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

      Interest Expense, Net

            Included in Interest expense, net in the Unaudited Condensed
      Consolidated Statements of Operations is interest income of $5 million and
      $1 million for the 13-weeks ended April 28, 2004 and April 30, 2003,
      respectively. Debt issuance costs of $4 million and $37 million were
      amortized during the 13-weeks ended April 28, 2004 and April 30, 2003,
      respectively, and are included in Interest expense, net. Cash paid for
      interest was $4 million and $2 million for the 13-weeks ended April 28,
      2004 and April 30, 2003, respectively.

8.    INCOME TAXES

            We recorded a tax provision of $56 million during the 13-weeks ended
      April 28, 2004 based on the estimated effective tax rate for fiscal 2004
      of 38.1%.

            The Predecessor Company recorded a full valuation allowance against
      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. 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.

            Cash paid for income taxes was $1 million for the 13-weeks ended
      April 28, 2004 and cash received was $2 million for the 13-weeks ended
      April 30, 2003.

                                       14
<PAGE>

      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9.    TREASURY STOCK

            On August 28, 2003, the Company's Board of Directors approved the
      repurchase of up to $10 million of the Company's outstanding stock for the
      purpose of providing restricted stock grants to certain employees. During
      fiscal 2003, we repurchased 128,400 shares of Common Stock
      (weighted-average price of $28.87 per share) for this purpose at a cost of
      approximately $4 million. During the 13-weeks ended April 28, 2004, we
      issued 14,952 shares of restricted stock; see Note 10 - Stock-Based
      Compensation. There were 39,216 and 43,749 shares in treasury as of April
      28, 2004 and January 28, 2004, respectively.

10.   STOCK-BASED COMPENSATION

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

            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
      stock-based compensation income on net loss and loss per share had the
      Predecessor Company applied the fair value method to stock options granted
      by the Predecessor Company, are as follows:

<TABLE>
<CAPTION>
                                                           Predecessor Company
                                                           -------------------
                                                              13-Weeks Ended
   (dollars in millions, except per share data)               April 30, 2003
-------------------------------------------------          --------------------
<S>                                                        <C>
Net loss, as reported                                          $       (862)
Deduct: Total stock-based employee compensation
  income determined under the fair value-based
  method for all awards, net of related tax effects                      38
                                                               ------------
Pro forma net loss                                             $       (824)
                                                               ============

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

          Pro forma stock-based employee compensation income of $38 million
      for the 13-weeks ended April 30, 2003 is due to the reversal of expense
      for options that were not vested upon cancellation of the outstanding
      stock awards of the Predecessor Company.

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

            During the first quarter of fiscal 2004, we issued 14,952 shares of
      restricted stock at a grant price of $33.44. We accounted for this
      restricted stock grant as a fixed award, and recorded deferred employee
      compensation in Capital in excess of par value. The deferred employee
      compensation is being amortized to compensation expense on a straight-line
      basis over the vesting period of three years.

11.   REAL ESTATE TRANSACTIONS INCLUDING PROPERTY HELD FOR SALE

            Property held for sale was $50 million, $56 million and $160 million
      as of April 28, 2004, January 28, 2004 and April 30, 2003, respectively,
      and is included within Other current assets in our Unaudited Condensed
      Consolidated Balance Sheets. During the 13-weeks ended April 28, 2004, we
      sold $2 million of these assets for their book value.

                                       15
<PAGE>

      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

            The Company also sold certain other assets, resulting in a net gain
      of $32 million for the 13-weeks ended April 28, 2004. Included within this
      gain was $12 million related to the sale of our corporate airplanes, $17
      million related to the sale of the Kmart Trinidad subsidiary and its
      associated property and $3 million related to various other asset sales.
      During this same time period, the Company acquired eleven previously
      leased properties for $33 million.

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. For the 13-weeks ended April 28, 2004, we recorded an adjustment
      to shareholders' equity in accordance with SFAS No. 115, "Accounting for
      Certain Investments in Debt and Equity Securities," of $1 million to
      reduce the value of our investment in certain available-for-sale equity
      securities to current market value. For the 13-weeks ended April 30, 2003,
      comprehensive loss included a minimum pension liability adjustment of $94
      million.

13.   INVESTMENTS IN AFFILIATED RETAIL COMPANIES

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

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

            We have been advised that FTS will be restating its financial
      statements for certain prior periods. As a result, we have not received
      final financial statements for fiscal 2002, 2003 or the first quarter of
      fiscal 2004 for the Meldisco subsidiaries with which we do business at the
      time of our filing of this Quarterly Report on Form 10-Q. We received
      preliminary financial statements from FTS which we believe provide a
      reliable basis to estimate equity income as recognized in all periods
      presented in our Unaudited Condensed Consolidated Statements of
      Operations. For the 13-weeks ended April 28, 2004 and April 30, 2003,
      those Meldisco subsidiaries had net sales at our footwear departments of
      $186 million and $246 million, respectively. For the 13-weeks ended April
      28, 2004 and April 30, 2003, our equity income in those Meldisco
      subsidiaries was $3 million and $7 million, respectively. Although there
      can be no assurance until FTS restates its financial statements, at this
      time, we do not expect the restatement to have a material effect on our
      equity income or other fees earned from the Meldisco subsidiaries.

14.   DISCONTINUED OPERATIONS

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

                                       16
<PAGE>
      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

<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>

15.   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.

            Restructuring reserves related to the fiscal 2002 employee severance
      program were assumed by the Successor Company. Payments made against the
      reserve were $1 million for the 13-weeks ended April 28, 2004. In
      addition, we recorded non-cash reductions of $2 million to the reserve
      during the first quarter of fiscal 2004. As of April 28, 2004, January 28,
      2004 and April 30, 2003, the liability for the fiscal 2002 employee
      severance program was $1 million, $4 million and $36 million,
      respectively.

16.   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 have been
      recorded:

                                       17
<PAGE>
      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

<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 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.

                                       18
<PAGE>
      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

17.   COMMITMENTS AND CONTINGENCIES

            On February 11, 2004, the Company filed a suit in the Bankruptcy
      Court for the Northern District of Illinois (the "Bankruptcy Court")
      against MSO IP Holdings, Inc. ("MSO"), a subsidiary of Martha Stewart
      Living Omnimedia, Inc., pertaining to the License Agreement between MSO
      and Kmart Corporation (the "Agreement"). The Agreement was assumed by the
      Company as part of the Chapter 11 proceedings. The parties sought
      interpretation of the royalty structure of the Agreement. As a result of a
      settlement the Company reached with MSO, the Company dismissed the suit
      with prejudice on April 23, 2004. The settlement amends several terms of
      the Agreement, including extending the Agreement two years, through 2009;
      expanding the scope of the Agreement to include several new product
      categories; eliminating the product category minimum guarantee; reducing
      the aggregate minimum guarantee in future years; and making certain other
      adjustments.

            One of our past providers of surety bonds, Fireman's Fund Insurance
      Company ("Fireman's Fund"), elected not to participate in the continuation
      of our surety program during the pendency of the Predecessor Company's
      bankruptcy case. Fireman's Fund has now filed a motion with the Bankruptcy
      Court seeking (i) recovery of $34 million that Fireman's Fund alleges it
      has paid pursuant to pre-petition surety bonds it issued with regard to
      the Predecessor Company's workers' compensation insurance programs, and
      (ii) an order obligating us to make all payments of Fireman's Fund's
      future obligations under the bonds, which Fireman's Fund contends could be
      in excess of $35 million. We have filed an opposition to the motion
      contending, among other things, that Fireman's Fund's claim is an
      unsecured pre-petition claim that was resolved under the Plan of
      Reorganization that was approved by the Bankruptcy Court, and therefore
      Fireman's Fund has the same rights as any other general unsecured creditor
      under that Plan. A hearing on the motion has been tentatively scheduled
      for June 15, 2004.

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

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

                                       19
<PAGE>

      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS

      ITEM  2. MANAGEMENT'S DISCUSSION AND ANALYSIS

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

      CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

      RESULTS OF OPERATIONS

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

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

      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. Same-store sales include sales of all open
      stores that have been open for more than 13 full months. 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.

                                       20
<PAGE>

      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS - (CONTINUED)

            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.

            Selling, General and Administrative Expenses ("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 current quarter, 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
      current quarter 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.

            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.

      LIQUIDITY AND FINANCIAL CONDITION

            Our cash needs are satisfied through working capital generated by
      our business and availability under our Credit Facility. The level of cash
      generated by our business is dependent, in significant part, on our level
      of sales and the credit extended by our vendors. Since our emergence from
      Chapter 11, most of our vendors continue to support us and have resumed
      normal trade terms. We continue to focus on maintaining our favorable
      vendor relationships and do not expect to experience any significant
      disruption of terms with our vendors. Should we experience a significant
      disruption of terms with our vendors, sales fail to improve, the Credit
      Facility for any reason becomes unavailable and/or actual results differ
      materially from those projected, our compliance with financial covenants
      and our cash resources could be adversely affected.

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

      CREDIT FACILITY

            Our Credit Facility is a revolving $1.5 billion credit facility with
      an $800 million 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. 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.

                                       21
<PAGE>

      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS - (CONTINUED)

            Borrowings under the Credit Facility currently bear interest at
      either (i) the Prime rate plus 1.5% per annum or (ii) the LIBOR rate plus
      2.5% per annum, at our discretion, and utilization of the letter of credit
      sub-facility currently bears interest at 1.25% to 2.50% per annum. These
      interest rate margins may be adjusted after July 31, 2004 depending on our
      EBITDA levels. In addition, we are required to pay a fee based on the
      unutilized commitment under the Credit Facility equal to 0.50% per annum
      until July 31, 2004, and 0.375% to 0.50% thereafter, depending on our
      EBITDA levels. 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 April 28, 2004, we had utilized $356 million of the Credit
      Facility for letters of credit issued for ongoing import purchasing
      operations, and contractual and regulatory purposes, including letters of
      credit utilized as collateral to support our self-insurance programs.
      During the first quarter of fiscal 2004, we replaced letters of credit
      used as collateral for certain programs with cash collateral to reduce
      utilization fees on our letters of credit. We continue to classify the
      cash collateral in Cash and cash equivalents due to our ability to convert
      the cash to letters of credit at any time at our discretion. As of April
      28, 2004, $71 million of cash was posted as collateral.

            Total availability under the Credit Facility as of April 28, 2004
      was $1.144 billion.

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

      CASH FLOWS

            Net cash provided by operating activities was $142 million for the
      13-weeks ended April 28, 2004 compared to $576 million for the 13-weeks
      ended April 30, 2003. The Company's net income drove the operating cash
      flow for the first quarter of fiscal 2004. Favorable working capital
      changes also impacted cash flow from operations during this period. 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 effect on operating cash flow.

            For the 13-weeks ended April 28, 2004 and the 13-weeks ended April
      30, 2003, investing activities of the Company generated $11 million and
      $60 million, respectively. Proceeds of $66 million in the current period
      primarily related to the sale of $38 million of non-core assets and were
      partially offset by capital expenditures of $55 million for the purchase
      of 11 previously leased store locations and store maintenance. In the
      prior year period, proceeds of $64 million were received from the sale of
      four owned Kmart store locations and the sale of furniture and fixtures
      from closed store locations.

            Payments on capital leases and mortgage obligations of $13 million
      and $17 million were the primary uses of cash for financing activities for
      the 13-weeks ended April 28, 2004 and the 13-weeks ended April 30, 2003,
      respectively.

            In fiscal 2003, the Company's Board of Directors approved the
      repurchase of up to $10 million of the Company's outstanding stock for the
      purpose of providing restricted stock grants to certain employees. As of
      April 28, 2004, we had repurchased approximately $4 million of Common
      Stock in relation to this program.

                                       22
<PAGE>

      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS - (CONTINUED)

      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. No contributions have
      been made to the plan for the past eight years.

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

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

      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.

      CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

      RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

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

      DISCONTINUED OPERATIONS

            During the first quarter of fiscal 2003, the Predecessor Company
      closed 316 stores. Of the total store closings, 66 met the criteria for
      discontinued operations. For a comprehensive discussion see Note 14 -
      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 15 - Special Charges.

                                       23
<PAGE>

      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS - (CONTINUED)

      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 16 - Reorganization Items, net.

      OTHER MATTERS

            In March 2002, the Court issued an order providing for the
      continuation of the Predecessor Company's existing surety bond coverage,
      which permitted the Predecessor Company to self-insure its workers'
      compensation programs in various states. Discussions have been ongoing
      with the issuers of pre-petition surety bonds regarding the further
      continuation of the bonds. To date, we have reached agreements with
      Liberty Mutual Insurance Company, historically the Predecessor Company's
      largest provider of surety bonds, as well as RLI Insurance, on the terms
      and conditions of a continuation of their respective bonds. In addition,
      we currently have agreements in principle with Westchester Fire Insurance
      Company and with XL Insurance, the remaining issuers of pre-petition
      surety bonds that participated in the continuation of our surety program
      during the pendency of the Predecessor Company's bankruptcy case. If such
      negotiations prove unsuccessful and the applicable surety bonds were to be
      cancelled, we could lose our self-insured status in the states covered by
      those surety bonds and be required to pursue alternative workers'
      compensation insurance programs in the affected states. These alternative
      programs include (i) retaining self-insurance privileges in certain states
      using alternative forms of security, (ii) purchasing insurance policies to
      cover our workers' compensation liabilities in certain states, and (iii)
      participating in state-assigned risk and/or state funded insurance
      programs. We do not expect that any such alternative programs would result
      in additional costs having a material adverse effect on our financial
      position or results of operations.

            On June 4, 2003, Martha Stewart was indicted in the United States
      District Court of the Southern District of New York. She was convicted on
      March 5, 2004 of conspiracy, obstruction of justice and two counts of
      making false statements to federal investigators. Ms. Stewart filed a
      motion for a new trial, which was denied on May 5, 2004. Sentencing in the
      matter is currently scheduled for June 17, 2004. 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. Ms. Stewart has resigned her positions as Chairman, Chief
      Executive Officer and Chief Creative Officer of Martha Stewart Living
      Omnimedia, Inc., and her seat on the company's Board of Directors. She has
      assumed the position of Founding Editorial Director. To date, we have not
      experienced any significant adverse impact from this matter on the sales
      of Martha Stewart Everyday brand products. Although product sales have not
      been significantly affected by past events, the Company is not able to
      determine the potential effects that these events may have on the future
      sales of its Martha Stewart Everyday brand products.

                                       24
<PAGE>

      ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

      ITEM 4. CONTROLS AND PROCEDURES

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

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

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

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

                                       25
<PAGE>

      PART  II. OTHER INFORMATION

      ITEM  1. LEGAL PROCEEDINGS

            See Note 17 of the Notes to Unaudited Condensed Consolidated
            Financial Statements for information concerning legal proceedings.

      ITEM  6. EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibits:

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

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

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

      (b)   Reports on Form 8-K:

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

            1.    On March 8, 2004, Kmart Holding Corporation furnished a
                  Current Report on Form 8-K to announce the hiring of a Senior
                  Vice President.

            2.    On March 18, 2004, Kmart Holding Corporation filed a Current
                  Report on Form 8-K to report the fourth quarter 2003 operating
                  results.

                                       26
<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)

                                       27
<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>