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                                                                    EXHIBIT 10aa


                              AMENDED AND RESTATED
                              EMPLOYMENT AGREEMENT





         THIS AGREEMENT, made and entered into by and between KMART CORPORATION,
a Michigan corporation (together with its successors and assigns permitted under
this Agreement, the "Company"), and Cecil Kearse (the "Executive").

         WHEREAS, the Company and the Executive entered into an employment
agreement as of December 3, 2001 (such agreement, the "Prior Agreement"),
embodying the terms of the Executive's employment with the Company;

         WHEREAS, in light of current conditions, the Company is considering
various strategic initiatives, including but not limited to a financial
restructuring;

         WHEREAS, the Company believes that the Executive's knowledge, skill and
experience will be essential in enabling the Company successfully to implement
any such strategic initiatives;

         WHEREAS, in order to ensure the Executive's continued focus on the
Company and its business during this critical period, the Company and the
Executive desire, among other things, to eliminate any uncertainty associated
with the payment of certain amounts previously awarded to the Executive and
reflected in the Prior Agreement; and

         WHEREAS, the Company desires to enter into an amended and restated
agreement embodying the terms of the Executive's continued employment (this
"Agreement") and the Executive desires to enter into this Agreement and to
accept such continued employment, subject to the terms and provisions of this
Agreement;

         NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:

         1. Definitions.

                  (a) "Base Salary" shall mean the salary granted to the
Executive pursuant to Section 4.

                  (b) "Board" shall mean the Board of Directors of the Company.

                  (c) "Cause" shall mean termination of the Executive based on
(i) conduct which is a material violation of Company policy or which is
fraudulent or unlawful or which



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materially interferes with the ability of the Executive to perform his duties,
(ii) misconduct which results in damage or injury to the Company, including
damage to its reputation, or (iii) gross negligence in the performance of, or
willful failure to perform, the Executive's duties and responsibilities.

                  (d) A "Change in Control" of the Company is deemed to have
occurred as of the first day that any one or more of the following conditions
shall have been satisfied:

                           (i) The "beneficial ownership" of securities
         representing more than thirty-three percent (33%) of the combined
         voting power of the Company is acquired by any "person" (as defined in
         Sections 13(d) and 14(d) of the Exchange Act) (other than the Company,
         any trustee or other fiduciary holding securities under an employee
         benefit plan of the Company, or any corporation owned, directly or
         indirectly, by the stockholders of the Company in substantially the
         same proportions as their ownership of stock of the Company); or

                           (ii) The stockholders of the Company approve a
         definitive agreement to merge or consolidate the Company with or into
         another corporation or a similar form of transaction involving the
         Company, or to sell or otherwise dispose of all or substantially all of
         its assets, or adopt a plan of liquidation; or

                           (iii) During any period of three consecutive years,
         individuals who at the beginning of such period were members of the
         Board cease for any reason to constitute at least a majority thereof
         (unless the election, or the nomination for election by the Company's
         stockholders, of each new director was approved by a vote of at least a
         majority of the directors then still in office who were directors at
         the beginning of such period or whose election or nomination was
         previously so approved).

                  The foregoing to the contrary notwithstanding, if a Potential
Change in Control involves a transaction proposed by the Executive (or a group
which includes the Executive), either as a first proposal or a competing
proposal, and a Change in Control does occur (whether or not the transaction
constituting such Change of Control is the same transaction proposed by the
Executive and whether or not the Executive participates as an equity investor in
the acquiring entity in such transaction), then for purposes of this agreement,
no Change in Control shall be deemed to have occurred with respect to any such
Executive.

                  (e) "Committee" shall mean the Compensation and Incentives
Committee of the Board or any other committee of the Board performing similar
functions.

                  (f) "Constructive Termination" by the Executive shall mean
termination based on the occurrence without the Executive's express consent of
any of the following: (i) except as provided in this Section 1(f), a significant
diminution by the Company of the Executive's role with the Company or a
significant detrimental change in the nature and/or scope of the Executive's
status with the Company, other than for Cause or Disability or (ii) a reduction
in the Executive's Base Salary, other than for Cause or Disability.
Notwithstanding the foregoing, in no event shall (A) the appointment by the
Company of Ronald Hutchison as the



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Chief Restructuring Officer of the Company, (B) the assignment to Mr. Hutchison,
in connection with such appointment, of the duties of managing and implementing
the restructuring of the Company or (C) the effect of the foregoing on the
Executive's role with the Company or in the nature and/or scope of the
Executive's status within the Company constitute a Constructive Termination or
an Included Constructive Termination (as defined in Section 6(d) below) for
purposes of this Agreement. The Executive shall further be required to comply
with the first two sentences of Section 9(d)(i) of this Agreement with respect
to a Constructive Termination.

                  (g) "Disability" shall mean the Executive's inability to
substantially perform his duties and responsibilities under this Agreement by
reason of any physical or mental incapacity for a period of 180 consecutive
days.

                  (h) "Effective Date" shall mean the date of execution of this
Agreement.

                  (i) A "Potential Change in Control" shall mean the happening
of any of the following:

                           (i) the Company enters into an agreement, the
         consummation of which would result in the occurrence of a Change in
         Control;

                           (ii) any person (including the Company) publicly
         announces an intention to take or to consider taking actions which if
         consummated would constitute a Change in Control;

                           (iii) any person, other than a trustee or other
         fiduciary holding securities under an employee benefit plan of the
         Company (or an entity owned, directly or indirectly, by the
         stockholders of the Company in substantially the same proportions as
         their ownership of stock of the Company), who is or becomes the
         beneficial owner, directly or indirectly, of securities of the Company
         representing 9.5% or more of the combined voting power of the Company's
         then outstanding securities, increases his beneficial ownership of such
         securities by 5% or more over the percentage so owned by such person on
         the date hereof; or

                           (iv) the Board adopts a resolution to the effect
         that, for purposes of this Plan, a Potential Change in Control has
         occurred.

                  (j) "Stock" shall mean the Common Stock of the Company.

                  (k) "Term of Employment" shall mean the period commencing on
the Effective Date and ending on January 31, 2006; provided, however, that the
Term of Employment shall be automatically extended for an additional year on the
first anniversary of the Effective Date and on each anniversary of the Effective
Date thereafter, unless written notice of non-extension is provided by either
Party to the other Party at least 60 days prior to the applicable succeeding
anniversary date.

         2. Term of Employment. Subject to Section 9, the Company hereby employs
the Executive, and the Executive hereby accepts such employment for the Term of
Employment.



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<PAGE>

         3. Position, Duties and Responsibilities. During the Term of
Employment, the Executive shall be employed and serve as the Executive Vice
President Merchandising of the Company (or such other position or positions as
may be agreed upon in writing by the Executive and the Company) and be
responsible for the management of the affairs of the Company as directed by the
Board and/or the Company's Chief Executive Officer ("CEO"). The Executive shall
devote substantially all of his business time, attention and skill to the
performance of such duties and responsibilities, and shall use his best efforts
to promote the interests of the Company. The Executive shall have all authority
commensurate with such position. The Executive shall not, without the prior
written approval of the Board, engage in any other business activity which is in
violation of policies established from time to time by the Company. Anything
herein to the contrary notwithstanding, nothing shall preclude the Executive
from (a) serving on the boards of directors of a reasonable number of other
corporations or the boards of a reasonable number of trade associations and/or
charitable organizations (subject to the reasonable approval of the Board), (b)
engaging in charitable activities and community affairs, and (c) managing his
personal investments and affairs, provided that such activities do not
materially interfere with the proper performance of his duties and
responsibilities as an executive officer of the Company.

         4. Base Salary. During the Term of Employment, the Executive shall be
paid an annualized Base Salary, payable in accordance with the regular payroll
practices of the Company, in an amount established by the Committee upon the
recommendation of the CEO. The Base Salary shall be reviewed no less frequently
than annually for increase in the discretion of the Board and/or the Committee.
The Base Salary, including any increase, shall not be decreased during the Term
of Employment. The Base Salary shall not be required to be deferred by the
Executive under any Company plan or program.

         5. Annual Incentive Awards. During the Term of Employment, the
Executive shall have an annual target bonus opportunity of a percentage of his
then-current Base Salary under the Company's Annual Incentive Bonus Plan or any
successor plan, such percentage to be established by the Committee upon the
recommendation of the CEO (the "Target Bonus"), payable if the performance goals
established by the Committee for the relevant year are met. The Target Bonus
percentage shall not be less than the Target Bonus percentage in effect for
fiscal year 2001 and shall not be decreased during the Term of Employment.

         6. Long-Term Incentive Programs.

                  (a) General. During the Term of Employment, the Executive
shall be eligible to participate in the long-term incentive programs of the
Company, with any awards under such programs to be in the sole discretion of the
Committee.

                  (b) Annual Stock Option Awards. During the Term of Employment,
the Executive will have an annual opportunity to be granted an option (the
"Annual Option") for shares of Stock at a target level value of a percentage of
Base Salary established by the Committee upon recommendation of the CEO, based
upon the achievement of performance goals established by the Committee. The
determination of the value of the Annual Option will be determined using the
valuation method employed by the Committee generally with respect to annual
option grants to other senior executives of the Company.



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                  (c) Cash Payments. Pursuant to Section 6(d) of the Prior
Agreement, the Executive was awarded an amount equal to $1,000,000 (the "Cash
Payment"). In the event the Executive's employment is terminated prior to
January 31, 2004 under circumstances that do not constitute a Loan Forgiveness
Event (as defined in subparagraph (d) below), the Executive shall be required to
(i) forfeit the Cash Payment as of the effective date of such termination if, as
of such date, the Executive had not received the Cash Payment, (ii) repay the
Cash Payment to the Company within 10 days following the effective date of such
termination if, prior to the effective date of such termination, the Executive
had received both the Cash Payment and an additional payment (the "Additional
Payment") necessary to cover applicable federal, state and local income and
excise taxes in respect of the Cash Payment and such Additional Payment or (iii)
repay the Cash Payment to the Company within 10 days following the effective
date of such termination less any taxes previously paid and/or payable by the
Executive and not refunded or refundable by any applicable state or local taxing
entity if, prior to the effective date of such termination, the Executive
received the Cash Payment but did not receive an Additional Payment. In the
event the Executive remains employed through January 31, 2004 and had not
previously received the Cash Payment prior to such date, at such time that the
Cash Payment is received, the Company shall provide the Executive with an
Additional Payment.

                  (d) Loan. The Company has provided the Executive a loan in the
principal amount of $2,500,000 (the "Loan") and the Executive has executed a
full recourse, unsecured promissory note with respect to the Loan, with
customary terms and conditions.

                  Notwithstanding any other provision of the promissory note to
the contrary, the outstanding principal and accrued interest under the Loan
shall automatically and without further action on the part of the Company or the
Executive be forgiven in full by the Company, provided the Executive remains
employed by the Company through January 31, 2004. All principal and accrued
interest on the Loan shall also be forgiven, without further action on the part
of the Company or the Executive, prior to January 31, 2004 if the Executive's
termination of employment from the Company occurs prior to such date under any
circumstance that results in acceleration of vesting prior to the scheduled
vesting date of any stock options then held by the Executive pursuant to the
provisions of Section 9 hereof; provided, however, that if such accelerated
vesting event occurs as a result of a Constructive Termination, principal and
accrued interest on the Loan shall only be forgiven if such Constructive
Termination is also an Included Constructive Termination, as defined in the next
sentence (the Executive's continued employment through January 31, 2004, and
each of the forgiveness events referenced in this sentence being a "Loan
Forgiveness Event"). For purposes of this Agreement, an "Included Constructive
Termination" shall mean a Constructive Termination (1) due to a reduction of the
Executive's Base Salary or (2) due to a failure by the Company to pay the
Executive's Base Salary.

                  The Company shall provide additional payments to the Executive
("Gross-Up Payments") to cover all applicable federal, state and local income
and excise taxes payable by the Executive upon a Loan Forgiveness Event,
including, without limitation, any tax imposed by Section 4999 of the Code or
any similar tax, due with respect to the forgiven Loan and the Gross-Up
Payments.



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                  (e) Hold Harmless Payment. In the event that the Internal
Revenue Service determines at any time prior to the Loan Forgiveness event, that
the Loan should be taken into account as taxable income by the Executive at the
time the Loan was entered into, any resulting tax, including any resulting state
and local taxes (collectively "Associated Taxes"), and any related interest and
penalties, will be either paid by the Company directly to the IRS or to the
Executive, at his election, when due. In addition, the Company shall make
additional payments to the Executive to hold him harmless from: (i) any tax
liabilities attributable to its payment of such related interest and penalties,
and (ii) any imputed income associated with the interest-free component of the
Executive's repayment obligation (the "Hold Harmless Payments"). Should the
Company wish to contest with the IRS the accelerated inclusion of such income or
any issue related to penalties, interest or the Hold Harmless Payments, then the
Executive shall reasonably cooperate with the Company as to such contest, and at
the time that they are then due, the Company shall pay to the IRS (or at his
election to the Executive) the Associated Taxes, and any related interest and
penalties, and to the Executive, the Hold Harmless Payments. Any such Associated
Taxes shall be repaid by the Executive to the Company (without interest) if and
when the Loan is otherwise repayable by the Executive.

         7. Employee Benefit Programs. During the Term of Employment, the
Executive shall be eligible to participate in all employee pension and welfare
benefit plans and programs made available generally to the Company's
senior-level executives (other than the CEO) or to its employees generally, as
such plans or programs may be in effect from time to time, including, without
limitation, pension, profit sharing, savings and other retirement plans or
programs, medical, dental, hospitalization, short-term and long-term disability
and life insurance plans, accidental death and dismemberment protection, travel
accident insurance, and any other pension or retirement plans or programs and
any other employee welfare benefit plans or programs that may be sponsored by
the Company from time to time, including any plans that supplement the
above-listed types of plans or programs, whether funded or unfunded.

         8. Reimbursement of Business and Other Expenses; Perquisites;
Vacations.

                  (a) The Executive is authorized to incur reasonable expenses
in carrying out his duties and responsibilities under this Agreement and the
Company shall promptly reimburse him for all reasonable business expenses
incurred in connection with carrying out the business of the Company, subject to
documentation in accordance with the Company's policy. The Company shall pay all
reasonable legal and financial advisor expenses incurred in connection with the
preparation of this Agreement.

                  (b) During the Term of Employment, the Company shall reimburse
the Executive for personal financial (including tax) counseling (other than
legal fees) by a firm or consultant to be chosen by the Executive, such
reimbursement to be no more than the amount authorized under Company policy in
effect from time to time.

                  (c) The Executive shall be entitled to four weeks paid
vacation per year.

                  (d) The Company agrees to continue and maintain a directors'
and officers' liability insurance policy covering the Executive to the extent
the Company provides such coverage for its other executive officers or former
officers.



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<PAGE>

         9. Termination of Employment.

                  (a) Termination Due to Death. In the event the Executive's
employment is terminated due to his death, his estate or his beneficiaries as
the case may be, shall be entitled to the following:

                           (i) Base Salary through the date of death;

                           (ii) a pro rata annual bonus for the year in which
         the Executive's death occurs, based on the Target Bonus for such year,
         payable in a single installment promptly after his death;

                           (iii) the balance of any annual or long-term cash
         incentive awards (if any) earned (but not yet paid) pursuant to the
         terms of the applicable programs;

                           (iv) any restricted stock award outstanding at the
         time of his death shall become fully vested and any forfeiture
         provisions set forth in the relevant restricted stock agreement based
         on the continued employment of the Executive shall immediately lapse;

                           (v) any stock option or other equity award
         outstanding at the time of death shall become fully vested, and his
         estate shall have the right to exercise any such award for the lesser
         of (a) 12 months from the date of death or (b) the remainder of the
         full original term of the option (notwithstanding any contrary
         provision of any plan or agreement);

                           (vi) any amounts earned, accrued or owing to the
         Executive but not yet paid under this Agreement; and

                           (vii) other or additional benefits in accordance with
         applicable plans and programs of the Company.

                  (b) Termination Due to Disability. In the event the
Executive's employment is terminated due to his Disability, he shall be entitled
in such case to the following:

                           (i) Base Salary through the date of termination;

                           (ii) through the Company's long-term disability plans
         or otherwise, an amount equal to 60% of the Base Salary for the period
         beginning on the date of termination through the Executive's attainment
         of age 65;

                           (iii) the annual bonus for the year in which
         termination due to Disability occurs, based on the Target Bonus for
         such year, payable in a single installment promptly following
         termination due to Disability;

                           (iv) the balance of any annual or long-term cash
         incentive awards (if any) earned (but not yet paid) pursuant to the
         terms of the applicable programs;



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                           (v) any restricted stock award outstanding at the
         time of his termination due to Disability shall become fully vested and
         any forfeiture provisions set forth in the relevant restricted stock
         agreement based on the continued employment of the Executive shall
         immediately lapse;

                           (vi) any stock option or other equity award
         outstanding at the time of termination due to Disability shall become
         fully vested, and he shall have the right to exercise any such award
         for the lesser of (a) 12 months from the date of Disability or (b) the
         remainder of the full original term of the option (notwithstanding any
         contrary provision of any plan or agreement);

                           (vii) any amounts earned, accrued or owing to the
         Executive but not yet paid under this Agreement; and

                           (viii) other or additional benefits in accordance
         with applicable plans and programs of the Company.

         In no event shall a termination of the Executive's employment for
Disability occur unless the Party terminating his employment gives written
notice to the other Party in accordance with Section 16 below.

                  (c) Termination by the Company for Cause. In the event the
Company terminates the Executive's employment for Cause, he shall be entitled
to:

                           (i) Base Salary through the date of the termination
         of his employment;

                           (ii) the balance of any annual or long-term cash
         incentive awards (if any) earned (but not yet paid) pursuant to the
         terms of the applicable programs;

                           (iii) any amounts earned, accrued or owing to the
         Executive but not yet paid under this Agreement; and

                           (iv) other or additional benefits in accordance with
         applicable plans or programs of the Company.

                  (d) Termination Without Cause or Constructive Termination.

                           (i) A Constructive Termination shall not take effect
         unless the provisions of this paragraph 9(d)(i) are complied with. The
         Company shall be given written notice by the Executive of the intention
         to terminate his employment on account of a Constructive Termination,
         such notice (A) to state in detail the particular act or acts or
         failure or failures to act that constitute the grounds on which the
         proposed Constructive Termination is based and (B) to be given within
         six months of the Executive learning of such act or acts or failure or
         failures to act. The Company shall have 30 days after the date that
         such written notice has been given to the Company in which to cure such
         conduct, to the extent such cure is possible.



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                           (ii) In the event the Executive's employment is
         terminated by the Company without Cause, other than due to Disability
         or death, or in the event there is a Constructive Termination, the
         Executive shall be entitled to:

                                    (A) Base Salary through the date of
        termination of the Executive's employment;

                                    (B) Base Salary, at the monthly rate in
        effect on the date of termination of the Executive's employment (or in
        the event a reduction in Base Salary is the basis for a Constructive
        Termination, then the Base Salary in effect immediately prior to such
        reduction), payable each month for an additional 36 months following
        such termination (the "Severance Period"); provided, however, that, at
        the Company's option, such amount may be payable by the Company in a
        present value lump sum payment;

                                    (C) pro rata annual bonus for the year in
        which termination occurs, based on the Target Bonus for such year,
        payable in a single installment promptly following termination;

                                    (D) an amount equal to one-twelfth (1/12) of
        the Target Bonus amount for the year in which termination occurs,
        payable each month over the Severance Period; provided, however, that,
        at the Company's option, such amount may be payable by the Company in a
        present value lump sum payment;

                                    (E) the balance of any annual or long-term
        cash incentive awards earned (but not yet paid) pursuant to the terms of
        the applicable programs;

                                    (F) any restricted stock award outstanding
        at the time of such termination of employment shall become fully vested,
        and any forfeiture provisions set forth in the relevant restricted stock
        agreement based on the continued employment of the Executive shall
        immediately lapse;

                                    (G) any stock option or other equity award
        outstanding at the time of termination shall become fully vested, and he
        shall have the right to exercise any such award for the remainder of the
        lesser of (a) 36 months from the date of termination or (b) the full
        original term of the option (notwithstanding any contrary provision of
        any plan or agreement);

                                    (H) any amounts earned, accrued or owing to
        the Executive but not yet paid under this Agreement;

                                    (I) continued participation in all medical,
        dental, hospitalization and life insurance coverage and in other
        employee welfare benefit plans or programs in which he was participating
        on the date of the termination of his employment until the end of the
        Severance Period; provided that the Company's obligations under this
        clause (I) shall be reduced to the extent that the Executive receives
        similar coverage and benefits under the plans and programs of a
        subsequent employer: and provided, further, that (x) if the Executive is
        precluded from continuing his participation in any employee benefit plan
        or program as provided in this clause, he shall be provided with the
        after-tax



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         economic equivalent of the benefits provided under the plan or program
         in which he is unable to participate for the period specified in this
         clause (I) of this Section 9(d), (y) the economic equivalent of any
         benefit foregone shall be deemed to be the lowest cost that would be
         incurred by the Executive in obtaining such benefit himself on an
         individual basis, and (z) payment of such after-tax economic equivalent
         shall be made quarterly in advance; and

                                    (J) other or additional benefits in
        accordance with applicable plans and programs of the Company.

                  (e) Termination of Employment Following a Change in Control.
If, within two years following a Change in Control, the Executive's employment
is terminated without Cause or there is a Constructive Termination, (in either
event, a "CIC Termination") the Executive shall be entitled to the payments and
benefits provided in Section 9(d) above, provided that all cash payments
provided therein shall be paid in a lump sum without any discount and all of
such payments shall be grossed up to cover applicable federal, state and local
income and excise taxes thereon, including, without limitation, any tax imposed
by Section 4999 of the Code or any similar tax. In addition, immediately
following a CIC Termination, all accrued or earned amounts that are not
otherwise vested, as well as all options, restricted stock and other
equity-based awards in which he is not yet vested, shall become fully vested,
including, without limitation, the Executive's accrued benefits under any
supplemental retirement plan maintained by the Company. All accrued benefits
under such plans shall be paid as a lump-sum cash payment, except for amounts,
if any, payable to the Executive under the Company's tax qualified pension plan.

                  (f) Voluntary Termination. In the event of a termination of
employment by the Executive on his own initiative, other than a termination due
to death or Disability or a Constructive Termination, the Executive shall have
the same entitlements as provided in Section 9(c) above for a termination for
Cause. A voluntary termination under this Section 9(f) shall be effective upon
30 days' prior written notice to the Company and shall not be deemed a breach of
this Agreement.

                  (g) Repayment of Cash Payment and/or Loan. In the event of the
Executive's termination of employment prior to January 31, 2004 under
circumstances that do not constitute a Loan Forgiveness Event, the unpaid
principal and accrued interest under the Loan shall be repayable in full
immediately upon such termination in accordance with the terms of this Agreement
and/or the promissory note and the Cash Payment (or portion thereof) shall be
repayable or forfeited as provided in Section 6(c) hereof. Any cash compensation
then owed to the Executive by the Company, as well as any cash funds or the fair
market value of any vested shares held in any of the Executive's accounts under
any of the Company's nonqualified benefit plans, may be offset against any
amounts then owed by the Executive to the Company with respect to the Cash
Payment and/or the Loan; provided, however, that in the event there is any
dispute between the Company and the Executive as to whether the Cash Payment
and/or the Loan are repayable or shall be forgiven based on the underlying
circumstances of termination, no offset shall be applied by the Company until
such dispute has been finally resolved in accordance with the provisions of
Section 15 hereof and all amounts subject to offset shall be held by the



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Company pending such resolution. For purposes of such offset, "fair market
value" of the stock shall be defined as the mean of the highest price and lowest
price at which the stock shall have been sold, regular way, on the date of
termination of employment, as reported on the Composite Transactions reporting
system.

                  (h) Payment Following a Change in Control. In the event of a
CIC Termination and if the aggregate of all payments of benefits made or
provided to the Executive under Section 9(e) above and under all other plans and
programs of the Company (the "Aggregate Payment") is determined to constitute a
Parachute Payment, as such term is deemed in Section 280G(b)(2) of the Internal
Revenue Code, the Company shall pay to the Executive, prior to the time an
excise tax imposed by Section 4999 of the Internal Revenue Code ("Excise Tax")
is payable with respect to such Aggregate Payment, an additional amount which,
after the imposition of all income and excise taxes thereon, is equal to the
Excise Tax on the Aggregate Payment. The determination of whether the Aggregate
Payment constitutes a Parachute Payment and, if so, the amount to be paid to the
Executive and the time of payment pursuant to this Section 9(h) shall be made by
an independent auditor (the "Auditor") jointly selected by the Company and the
Executive and paid by the Company. The Auditor shall be a nationally recognized
United States public accounting firm which has not, during the two years
preceding the date of its selection, acted in any way on behalf of the Company
or any affiliate thereof. If the Executive and the Company cannot agree on the
firm to serve as the Auditor, then the Executive and the Company shall each
select one accounting firm and those two firms shall jointly select the
accounting firm to serve as the Auditor.

                  (i) No Mitigation; No Offset. In the event of any termination
of employment under this Section 9, the Executive shall be under no obligation
to seek other employment and there shall be no offset against amounts due the
Executive under this Agreement on account of any remuneration attributable to
any subsequent employment that he may obtain except as specifically provided in
this Section 9.

                  (j) Nature of Payments. Any amounts due under this Section 9
are in the nature of severance payments considered to be reasonable by the
Company. Failure to qualify for any such payment is not in the nature of a
penalty.

                  (k) Exclusivity of Severance Payments. Upon termination of the
Executive's employment during the Term of Employment, he shall not be entitled
to any payments or benefits from the Company, other than as provided herein, or
any payments by the Company on account of any claim by him of wrongful
termination, including claims under any federal, state or local human and civil
rights or labor laws, other than the payments and benefits provided hereunder,
except for any benefits which may be due the Executive in normal course under
any employee benefit plan of the Company which provides benefits after
termination of employment.

                  (l) Non-competition. The Executive agrees that any right to
receive any payments and/or benefits hereunder, other than Base Salary and/or
any other compensation already earned by the Executive and required to be paid
by state law other than under this Agreement, will cease and be immediately
forfeited if the Executive breaches the provisions of Section 10 below. The
Executive agrees that any violation of the provisions of Section 10 below



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will result in the immediate forfeiture of any rights to exercise or receive
stock options or restricted stock. The foregoing is in addition to the rights of
the Company under Section 10.

                  (m) Release of Claims. As a condition of the Executive's
entitlement to the payment and/or delivery of any of the severance rights and
benefits provided in this Section 9 (other than in the event of the Executive's
death or in the event of a Change in Control), the Executive shall be required
to execute and honor a release of claims in the form reasonably requested by the
Company.

                  (n) Termination at Will. Notwithstanding anything herein to
the contrary, the Executive's employment with the Company is terminable at will
with or without Cause; provided, however, that a termination of the Executive's
employment shall be governed in accordance with the terms hereof.

         10. Restrictive Covenants.

                  (a) Non-Compete. By and in consideration of the substantial
compensation and benefits provided by the Company hereunder, and further in
consideration of the Executive's exposure to the proprietary information of the
Company, the Executive agrees that he shall not, during the Term of Employment
and for a period ending with the earlier of 18 months following termination of
employment for any reason or a Change in Control, directly or indirectly own,
manage, operate, join, control, be employed by, or participate in the ownership,
management, operation or control of or be connected in any manner, including,
but not limited to, holding the positions of officer, director, shareholder,
consultant, independent contractor, employee, partner, or investor, with any
Competing Enterprise; provided, however, that the Executive may invest in
stocks, bonds or other securities of any corporation or other entity (but
without participating in the business thereof) if such stocks, bonds, or other
securities are listed for trading on a national securities exchange or
NASDAQ-National Market and the Executive's investment does not exceed 1% of the
issued and outstanding shares of capital stock, or in the case of bonds or other
securities, 1% of the aggregate principal amount thereof issued and outstanding.
For purposes of this Section 10, "Competing Enterprise" shall mean any and/or
all of the following: (i) Albertson's Inc., American Retail Group, Inc.,
American Stores Company, Carrefour se, Fleming Companies, Inc., Kohl's
Corporation, The May Department Store Company, Montgomery Ward & Co., Inc.,
J.C. Penny Company, Royal Ahold, Safeway, Inc., Sears, Roebuck and Co., Service
Merchandise Company, ShopKo Stores, Inc., Supervalue Inc., Target Corp., The
Home Depot, Inc., Toys R Us Inc., TJX Companies, Inc., and Wal-Mart Stores,
Inc., and (ii) an entity or enterprise whose business is in competition with the
business of the Company which operates retail stores selling general merchandise
and/or food if at least 10 of such stores have an area of 50,000 or more square
feet and at least 10 of such stores with 50,000 or more square feet are within
25 miles of any one or more Kmart stores.

                  (b) Nonsolicitation. By and in consideration of the
substantial compensation and benefits to be provided by the Company hereunder,
and further in consideration of the Executive's exposure to the proprietary
information of the Company, the Executive agrees that he shall not, during the
Term of Employment and for a period of at least 24 months following termination
of employment for any reason, without the express prior written approval of the
Company, (i) directly or indirectly, in one or a series of transactions,
recruit, solicit or otherwise



                                       12
<PAGE>

induce or influence any proprietor, partner, stockholder, lender, director,
officer, employee, sales agent, joint venturer, investor, lessor, supplier,
agent, representative or any other person which has a business relationship with
the Company, or had a business relationship with the Company within the 24 month
period preceding the date of the incident in question, to discontinue, reduce or
modify such employment, agency or business relationship with the Company, or
(ii) directly or indirectly, employ or seek to employ (including through any
employer of the Executive) or cause any Competing Enterprise to employ or seek
to employ any person or agent who is then (or was at any time within six months
prior to the date the Executive or the Competing Enterprise employs or seeks to
employ such person) employed or retained by the Company.

                  (c) Confidential Information. During the Term of Employment
and at all times thereafter, Executive agrees that he will not divulge to anyone
or make use of any Confidential Information except in the performance of his
duties as an executive of the Company or when legally required to do so (in
which case the Executive shall give prompt written notice to the Company in
order to allow the Company the opportunity to object or otherwise resist such
disclosure). "Confidential Information" shall mean any knowledge or information
of any type relating to the business of the Company or any of its subsidiaries
or affiliates, as well as any information obtained from customers, clients or
other third parties, including, without limitation, all types of trade secrets
and confidential commercial information. The Executive agrees that he will
return to the Company immediately upon termination, any and all documents,
records or reports (including electronic information) that contain any
Confidential Information. Confidential Information shall not include information
(i) that is or becomes part of the public domain, other than through the breach
of this Agreement by the Executive or (ii) regarding the Company's business or
industry properly acquired by the Executive in the course of his career as an
executive in the Company's industry and independent of the Executive's
employment by the Company. The Executive acknowledges that the Company has
expended, and will continue to expend, significant amounts of time, effort and
money in the procurement of its Confidential Information, that the Company has
taken all reasonable steps in protecting the secrecy of the Confidential
Information, that said Confidential Information is of critical importance to the
Company.

                  (d) Non-Disparagement. The Executive agrees that, during the
term of employment and thereafter (including following the Executive's
termination of employment for any reason), the Executive will not make
statements or representations, or otherwise communicate, directly or indirectly,
in writing, orally, or otherwise, or take any action which may, directly or
indirectly, disparage the Company or any subsidiary or affiliate or their
respective officers, directors, employees, advisors, businesses or reputations.
Notwithstanding the foregoing, nothing in this Agreement shall preclude either
the Executive or the Company from making truthful statements or disclosures that
are required by applicable law, regulation or legal process.

                  (e) Cooperation. The Executive agrees to cooperate with the
Company, during the term of employment and thereafter (including following the
Executive's termination of employment for any reason), by being reasonably
available to testify on behalf of the Company or any subsidiary or affiliate in
any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, and to assist the Company, or any subsidiary or affiliate, in any
such action, suit or proceeding, by providing information and meeting and
consulting with the



                                       13
<PAGE>

Board or its representatives or counsel, or representatives or counsel to the
Company, or any subsidiary or affiliate, as reasonably requested. The Company
agrees to reimburse the Executive for all expenses actually incurred in
connection with his provision of testimony or assistance.

                  (f) Remedies. The Executive agrees that any breach of the
terms of this Section 10 would result in irreparable injury and damage to the
Company for which the Company would have no adequate remedy at law; the
Executive therefore also agrees that in the event of said breach or any
reasonable threat of breach, the Company shall be entitled to an immediate
injunction and restraining order to prevent such breach and/or threatened breach
and/or continued breach by the Executive and/or any and all persons and/or
entities acting for and/or with the Executive. The terms of this paragraph shall
not prevent the Company from pursuing any other available remedies for any
breach or threatened breach hereof, including, but not limited to, remedies
available under this Agreement and the recovery of damages. The Executive and
the Company further agree that the provisions of the covenant not to compete are
reasonable. Should a court or arbitrator determine, however, that any provision
of the covenant not to compete is unreasonable, either in period of time,
geographical area, or otherwise, the parties hereto agree that the covenant
shall be interpreted and enforced to the maximum extent which such court or
arbitrator deems reasonable.

                  (g) Continuing Operation. The provisions of this Section 10
shall survive any termination of this Agreement and the Term of Employment, and
the existence of any claim or cause of action by the Executive against the
Company, whether predicated on this Agreement or otherwise, shall not constitute
a defense to the enforcement by the Company of the covenants and agreements of
this Section. The Executive agrees to cooperate with the Company, during the
term of employment and thereafter (including following the Executive's
termination of employment for any reason), by being reasonably available to
testify on behalf of the Company or any subsidiary or affiliate in any action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
and to assist the Company, or any subsidiary or affiliate, in any such action,
suit or proceeding, by providing information and meeting and consulting with the
Board or its representatives or counsel, or representatives or counsel to the
Company, or any subsidiary or affiliate, as reasonably requested. The Company
agrees to reimburse the Executive for all expenses actually incurred in
connection with his provision of testimony or assistance.

                  (h) Notice to Employer. The Executive agrees that as long as
the provisions of Section 10(a) or 10(b) continue to bind the Executive, he will
provide written notice of the terms and provisions of this Section 10 to any
prospective employer.

         11. Assignability; Binding Nature. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective successors, heirs
(in the case of the Executive) and assigns. No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred pursuant
to a merger or consolidation in which the Company is not the continuing entity,
or the sale or liquidation of all or substantially all of the assets of the
Company, provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law. The Company further
agrees that, in the event of a sale or reorganization transaction as described
in the preceding



                                       14
<PAGE>

sentence, it shall take whatever action it legally can in order to cause such
assignee or transferee to expressly assume the liabilities, obligations and
duties of the Company hereunder. No rights or obligations of the Executive under
this Agreement may be assigned or transferred by the Executive other than his
rights to compensation and benefits, which may be transferred only by will or
operation of law, except as otherwise provided herein.

         12. Entire Agreement. This Agreement contains the entire understanding
and agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the Parties with respect thereto
including but not limited to the Prior Agreement; provided, however, that this
Agreement shall not supersede any separate written commitments by the Company
with respect to indemnification; and provided, further, that all outstanding
awards granted under the Prior Agreement shall remain outstanding under their
terms and the terms of the Prior Agreement.

         13. Miscellaneous Provisions.

                  (a) No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by the Executive and an authorized
officer of the Company. No waiver by either Party of any breach by the other
Party of any condition or provision contained in this Agreement to be performed
by such other Party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same or any prior or subsequent time. Any waiver
must be in writing and signed by the Executive or an authorized officer of the
Company, as the case may be.

                  (b) In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.

                  (c) The respective rights and obligations of the Parties
hereunder shall survive any termination of the Executive's employment to the
extent necessary to the intended preservation of such rights and obligations.
(d) The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of his incompetence, reference in this Agreement to
the Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.

                  (e) All amounts required to be paid by the Company shall be
subject to reduction in order to comply with applicable Federal, state and local
tax withholding requirements, except as otherwise provided herein.

                  (f) The headings of the sections contained in this Agreement
are for convenience only and shall not be deemed to control or affect the
meaning or construction of any provision of this Agreement.



                                       15
<PAGE>

                  (g) This Agreement may be executed in two or more
counterparts.

         14. Governing Law/Jurisdiction. This Agreement shall be governed by and
construed and interpreted in accordance with the laws of Michigan without
reference to principles of conflict of laws. Subject to Section 15, the Company
and the Executive hereby consent to the jurisdiction of any or all of the
following courts for purposes of resolving any dispute under this Agreement: (i)
the United States District Court of Detroit, Michigan or (ii) the State of
Michigan Courts of Oakland County, Michigan. The Company and the Executive
further agree that any service of process or notice requirements in any such
proceeding shall be satisfied if the rules of such court relating thereto have
been substantially satisfied. The Company and the Executive hereby waive, to the
fullest extent permitted by applicable law, any objection which it or the
Executive may now or hereafter have to such jurisdiction and any defense of
inconvenient forum.

         15. Resolution of Disputes. Any disputes arising under or in connection
with this Agreement shall be resolved by binding arbitration, to be held in
Detroit, Michigan in accordance with the rules and procedures of the American
Arbitration Association. Judgment upon the award rendered by the arbitrator(s)
may be entered in any court having jurisdiction thereof. All costs and expenses
of any arbitration or court proceeding (including fees and disbursements of
counsel) shall be borne by the respective Party incurring such costs and
expenses, but the Company shall reimburse the Executive for such reasonable
costs and expenses in the event he substantially prevails in such arbitration or
court proceeding. Notwithstanding the foregoing, following a Change of Control,
all reasonable costs and expenses (including fees and disbursements of counsel)
incurred by the Executive pursuant to this Section 15 shall be paid on behalf of
or reimbursed to the Executive promptly by the Company; provided, however, that
no reimbursement shall be made of such expenses if and to the extent the
arbitrator(s) or the court determine(s) that any of the Executive's litigation
assertions or defenses were in bad faith or frivolous. Notwithstanding the
foregoing, the Company shall be entitled to seek equitable relief pursuant to
Section 10(d) hereof without otherwise waiving the right to exclusive
arbitration of all other disputes.

         16. Notices. Any notice given to a Party shall be in writing and shall
be deemed to have been given when delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the Party concerned at the address indicated below or to such changed address as
such Party may subsequently give such notice of:

                  If to the Company:        Kmart Corporation
                                            3100 West Big Beaver Road
                                            Troy, MI 48084-3163
                                            Attention: General Counsel

                  If to the Executive:      Cecil Kearse
                                            c/o Kmart Corporation
                                            3100 West Big Beaver Road
                                            Troy, MI 48084-3163

                  With a copy to:           Stephen T. Lindo, Esq.
                                            Willkie Farr & Gallagher
                                            787 Seventh Avenue
                                            New York, NY 10019-6099



                                       16
<PAGE>

         17. Approval By Court. The Company shall undertake to file a motion
(the "Motion") seeking, and use its best efforts to obtain, approval of this
Agreement by a United States Bankruptcy Court or by a United States District
Court having jurisdiction over the Company and its bankruptcy case (the
"Applicable Court"), promptly, and in no event more than seven business days
following the filing of a case under the provisions of Title 11 of the United
States Bankruptcy Code. Upon approval of the Motion by the Applicable Court, the
promissory note with respect to the Loan (the "Note") shall be amended and
restated (the "Amended Note"), provided that the Amended Note shall be in
substantially the same form as the Note, but modified so as to be consistent
with the terms and conditions provided herein. The Executive shall promptly
deliver the Amended Note to the Company following the approval of the Motion,
and the Company shall simultaneously deliver to the Executive the Note marked
"Cancelled."



                                       17
<PAGE>

         IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
dates provided below.

                                            KMART CORPORATION

                                            By:
                                               ---------------------------
                                            Dated: January 21, 2002


                                            EXECUTIVE

                                            ------------------------------
                                            Cecil Kearse
                                            Dated: January 21, 2002



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