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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------

                                  FORM 10-K/A
                                AMENDMENT NO. 1

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



       FOR THE FISCAL YEAR ENDED JANUARY 30, 2002



                              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. 1-327
                             ---------------------

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

<Table>
<S>                                            <C>
                   MICHIGAN                                      38-0729500
       (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)
</Table>

               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
                                 (248) 463-1000

 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT
                                    OF 1934:

<Table>
<Caption>
        TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
        -------------------                   -----------------------------------------
<S>                                  <C>
   Common Stock, $1.00 par value               New York, Pacific and Chicago Exchanges
                                     (suspended from trading on the exchanges December 19, 2002)
</Table>

 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT
                                    OF 1934:
                                      NONE

     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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A.  [X]

     The aggregate market value of voting stock including Common Stock held by
non-affiliates of the Registrant on May 1, 2002 was $628,361,591. The market
value of the Common Stock is based on the closing price on the New York Stock
Exchange on such date.

     As of May 1, 2002, 502,689,273 shares of Common Stock of the Registrant
were outstanding.
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<PAGE>

                                EXPLANATORY NOTE

     The purpose of this Amendment No. 1 to Annual Report on Form 10-K/A is to
restate the audited financial statements of Kmart Corporation and its
subsidiaries ("Kmart," "we," "us" or "our") for the fiscal years ended January
30, 2002, January 31, 2001 and January 26, 2000 to reflect certain adjustments
identified as a result of our ongoing review of our accounting practices and
procedures and to correspondingly modify related disclosures. Certain of these
adjustments were identified as out-of-period adjustments during the preparation
of Kmart's Quarterly Report on Form 10-Q for the third quarter ended October 30,
2002, while others were previously identified and described in our Quarterly
Report on Form 10-Q for the second quarter ended July 31, 2002, filed with the
Securities and Exchange Commission (the "SEC") on September 16, 2002. Upon
review of the aggregate impact of all of these adjustments, we concluded that
restating our historical financial statements was appropriate because the
aggregate impact was material to the current estimate of our fiscal year 2002
results.

     We have amended and restated in its entirety each Item of our Annual Report
on Form 10-K for the fiscal year ended January 30, 2002 to reflect these
adjustments. Except as otherwise expressly noted herein, this Amendment No. 1 to
Annual Report on Form 10-K/A does not reflect events occurring after the May 15,
2002 filing of our Annual Report on Form 10-K for the fiscal year ended January
30, 2002 or modify or update the disclosures set forth in that Annual Report on
Form 10-K in any way, except as required to reflect the effects of the
restatement of our financial statements for the fiscal years ended January 30,
2002, January 31, 2001 and January 26, 2000 or deemed necessary in connection
with the completion of restated financial statements.

     The Items of our Annual Report on Form 10-K for the fiscal year ended
January 30, 2002 which are amended and restated herein are:

      1. Item 1 -- Business, has been amended to remove the section entitled
         "Restatement of 2001 Unaudited Quarterly Financial Data" and to update
         certain factual and cautionary language in the section entitled
         "Proceedings Under Chapter 11 of the Bankruptcy Code."

      2. Item 3 -- Legal Proceedings has been amended to include an item that
         occurred prior to the original filing date on May 15, 2002.

      3. Item 5 -- Market for Kmart's Common Equity and Related Stockholder
         Matters

      4. Item 6 -- Selected Financial Data has been restated.

      5. Item 7 -- Management's Discussion and Analysis of Financial Condition
         and Results of Operations, has been revised.

      6. Item 8 -- Financial Statements and Supplementary Data, has been
         restated.

      7. Schedule II -- Valuation and Qualifying Accounts

      8. The signature page has been amended to reflect Kmart's current officers
         and directors.

      9. The certifications required by Section 302 of the Sarbanes-Oxley Act of
         2002 have been added.

     10. The certifications required by Section 906 of the Sarbanes-Oxley Act of
         2002 have been added as Exhibits.

     The remaining Items contained within this Amendment No. 1 to Annual Report
on Form 10-K/A consist of all other Items originally contained in our Annual
Report on Form 10-K for the fiscal year ended January 30, 2002 in the form filed
with the SEC on May 15, 2002 (the "Original 2001 10-K"). 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. All information
contained in this Amendment No. 1 to Annual Report on Form 10-K/A is subject to
updating and supplementing as provided in our reports filed with the SEC
subsequent to the date of the original filing of the Annual Report on Form 10-K,
including but not limited to our Quarterly Reports on Form 10-Q for the thirteen
week periods ending May 1, July 31 and October 30, 2002, respectively.

                                        2
<PAGE>

                                     PART I

ITEM 1. BUSINESS

HISTORY

     Kmart Corporation is the nation's second largest discount retailer and the
fourth largest general merchandise retailer. Kmart was incorporated under the
laws of the State of Michigan on March 9, 1916, as the successor to the business
developed by its founder, S. S. Kresge, who opened his first store in 1899.
After operating Kresge department stores for over 45 years, our store program
commenced with the opening of the first Kmart store in March 1962. Our principal
executive offices are located at 3100 West Big Beaver Road, Troy, Michigan
48084.

PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

     On January 22, 2002 ("Petition Date"), Kmart and 37 of its U.S.
subsidiaries (collectively, the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 of the federal bankruptcy laws ("Bankruptcy
Code" or "Chapter 11") in the United States Bankruptcy Court for the Northern
District of Illinois ("Court") under case numbers 02 B 02462 through 02 B 02499.
The reorganization is being jointly administered under the caption "In re Kmart
Corporation, et al. Case No. 02 B 02474." The Debtors are currently operating
their business as debtors-in-possession pursuant to the Bankruptcy Code.

     We decided to seek judicial reorganization based upon a rapid decline in
our liquidity resulting from our below-plan sales and earnings performance in
the fourth quarter of the 2001 fiscal year, the evaporation of the surety bond
market and erosion of supplier confidence. Other factors included intense
competition in the discount retailing industry, unsuccessful sales and marketing
initiatives, the continuing recession, and recent capital market volatility. As
a debtor-in-possession, Kmart is authorized to continue to operate as an ongoing
business, but may not engage in transactions outside the ordinary course of
business without the approval of the Court, after notice and an opportunity for
a hearing.

     At first day hearings held on January 22 and 25, 2002, the Court entered
orders granting authority to Kmart to, among other things, pay pre-petition and
post-petition employee wages, salaries, benefits and other employee obligations,
to pay selected vendors and other providers for pre-petition amounts owed, and
to honor customer service programs, including warranty returns, layaways and
gift certificates. On January 25, 2002, the Court also gave interim approval for
$1.15 billion of a $2 billion senior secured 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 March 6, 2002, the Court approved the entire $2 billion DIP Credit
Facility underwritten by JP Morgan Chase Bank, Fleet Retail Finance, Inc.,
General Electric Capital Corporation and Credit Suisse First Boston to
supplement our cash flow from operations during the reorganization process. A
description of the DIP Credit Facility appears in Item 7. Management's
Discussion and Analysis -- Analysis of Financial Condition.

     Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as
well as most other pending litigation, are stayed and other contractual
obligations against Kmart generally may not be enforced. Absent an order of the
Court, substantially all pre-petition liabilities are subject to settlement
under a plan of reorganization to be voted upon by creditors and equity holders
and approved by the Court. Although the Debtors expect to file a reorganization
plan or plans that provide for emergence from bankruptcy in 2003 or 2004, there
can be no assurance that a reorganization plan or plans will be proposed by the
Debtors or confirmed by the Court, or that any such plan(s) will be consummated.
As provided by the Bankruptcy Code, the Debtors initially have the exclusive
right to solicit a plan of reorganization for 120 days. On April 23, 2002, the
Court extended to August 7, 2002, the period in which Kmart has the exclusive
right to file a plan of reorganization and extended to October 4, 2002, the
period in which Kmart has the exclusive right to submit acceptances to the plan.
A hearing to extend further these exclusive periods is scheduled for July 24,
2002. Further extensions may be granted by the Court. If the Debtors fail to
file a plan of reorganization during such period (as such period may be
extended) or if such plan is not accepted by the required number of creditors
and equity holders, any party in interest may subsequently file its own plan of
reorganization. A plan of
                                        3
<PAGE>

reorganization must be confirmed by the Court, upon certain findings being made
by the Court which are required by the Bankruptcy Code. The Court may confirm a
plan notwithstanding the non-acceptance of the plan by an impaired class of
creditors or equity security holders if certain requirements of the Bankruptcy
Code are met.

     The United States Trustee has appointed an unsecured creditors committee
and a financial institutions committee. A request has also been made for the
establishment of an equity holders committee. The official committees and their
legal representatives often take positions on matters that come before the
Court, and are the most likely entities with which Kmart will negotiate the
terms of a plan of reorganization. There can be no assurance that these
committees will support Kmart's positions in the bankruptcy proceedings or the
plan of reorganization once proposed, and disagreements between Kmart and these
committees could protract the bankruptcy proceedings, could negatively impact
Kmart's ability to operate during bankruptcy and could delay Kmart's emergence
from bankruptcy.

     Under the Bankruptcy Code, we may assume or reject executory contracts and
unexpired leases, including our store leases, subject to the approval of the
Court and our satisfaction of certain other requirements. In the event we choose
to reject an executory contract or unexpired lease, parties affected by these
rejections may file claims with the court-appointed claims agent as proscribed
by the Bankruptcy Code and/or orders of the Court. Unless otherwise agreed, the
assumption of an executory contract or unexpired lease will require Kmart to
cure all prior defaults under such executory contract or lease, including all
pre-petition liabilities, some of which may be significant. In addition, in this
regard, we expect that liabilities that will be subject to compromise through
the Chapter 11 process will arise in the future as a result of the rejection of
additional executory contracts and/or unexpired leases, and from the
determination of the Court (or agreement by parties in interest) of allowed
claims for items that we now claim as contingent or disputed. Conversely, we
would expect that the assumption of additional executory contracts may convert
some liabilities shown on our financial statements as subject to compromise to
post-petition liabilities. Due to the uncertain nature of many of the potential
claims, we are unable to project the magnitude of such claims with any degree of
certainty. Kmart has incurred, and will continue to incur, significant costs
associated with the reorganization.

     On April 15, 2002, we filed with the Court schedules of assets and
liabilities and statements of financial affairs setting forth, among other
things, the assets and liabilities of the Debtors as shown by our books and
records, subject to the assumptions contained in certain notes filed in
connection therewith. All of the schedules are subject to further amendment or
modification. We have mailed notices to all known creditors that the deadline
for filing proofs of claim with the Court is July 31, 2002. Differences between
amounts scheduled by Kmart and claims by creditors will be investigated and
resolved in connection with our claims resolution process, and may be
significant. That process will not commence until after the July 31, 2002 bar
date and, in light of the number of creditors of the Debtors, may take
considerable time to complete. Accordingly, the ultimate number and amount of
allowed claims is not presently known. Similarly, the ultimate distribution with
respect to allowed claims is not presently ascertainable.

     We have filed over 100 motions in the Chapter 11 case whereby we were
granted authority or approval with respect to various items required by the
Bankruptcy Code and/or necessary for our reorganization efforts. In addition to
motions pertaining to real estate disposition matters, we have obtained orders
providing for, among other things, (i) implementation of a key employee
retention and incentive program, (ii) authorization of a second lien for vendors
in connection with our secured inventory trade credit program, (iii)
authorization of a settlement agreement with our sureties who support our
self-insurance program and state licensing requirements, and (iv) the extension
of time to assume or reject leases.

     Under the priority scheme established by the Bankruptcy Code, certain
post-petition liabilities and pre-petition liabilities need to be satisfied
before shareholders are entitled to receive any distribution. The ultimate
recovery to creditors, trust convertible preferred securities holders and/or
common shareholders, if any, will not be determined until confirmation of a plan
or plans of reorganization. No assurance can be given as to what values, if any,
will be ascribed in the bankruptcy proceedings to each of these constituencies.

                                        4
<PAGE>

     A plan of reorganization could also result in holders of Kmart common stock
receiving no distribution on account of their interests and cancellation of
their interests. Holders of Kmart common stock should assume that they could
receive little or no value as part of a plan of reorganization. In addition,
under certain conditions specified in the Bankruptcy Code, a plan of
reorganization may be confirmed notwithstanding its rejection by an impaired
class of creditors or equity holders and notwithstanding the fact that equity
holders do not receive or retain property on account of their equity interests
under the plan. In light of the foregoing, Kmart considers, as described above,
the value of the common stock to be highly speculative and cautions equity
holders that the stock may ultimately be determined to have no value.
Accordingly, Kmart urges that appropriate caution be exercised with respect to
existing and future investments in the Kmart common stock or in any claims
related to pre-petition liabilities and/or other Kmart securities.

     Notwithstanding our plan, at this time, it is not possible to predict the
effect of the Chapter 11 reorganization on our business, various creditors and
security holders or when we will be able to exit Chapter 11. Our future results
are dependent upon our confirming and implementing, on a timely basis, a plan of
reorganization.

     The ability of Kmart to continue as a going concern is predicated upon
numerous issues, including our ability to achieve the following:

     - developing a long-term strategy and/or market niche to revitalize our
       business and return Kmart to profitability;

     - taking appropriate action to offset the negative effects that the Chapter
       11 filing has had on our business, including the loss in customer traffic
       and the impairment of vendor relations;

     - operating within the framework of our DIP Credit Facility, including its
       limitations on capital expenditures and its financial covenants, our
       ability to generate cash flows from operations or seek other sources of
       financing and the availability of projected vendor credit terms;

     - attracting, motivating and/or retaining key executives and associates;
       and

     - developing and, thereafter, having confirmed by the Court, a plan of
       reorganization.

     These challenges are in addition to those operational and competitive
challenges faced by Kmart in connection with our business as a discount
retailer. See "Cautionary Statement Regarding Forward-Looking Information in
Item 3. Management's Discussion and Analysis of Results of Operations."

     A plan of reorganization could materially change the amounts reported in
the financial statements, which do not give effect to all adjustments of the
carrying value of assets or liabilities that might be necessary as a consequence
of a plan of reorganization.

     The Consolidated Financial Statements contained herein have been prepared
on a going concern basis, which assumes continuity of operations and realization
of assets and satisfaction of liabilities in the ordinary course of business,
and in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code." The ability
of Kmart to continue as a going concern, as described above, is predicated upon,
among other things, the confirmation of a reorganization plan, compliance with
the provisions of the DIP Credit Facility and the ability to generate cash flows
from operations and obtain financing sources sufficient to satisfy our future
obligations. Please refer to Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition, and Note 2 of the Notes to
Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data, for additional information.

OPERATIONS

     We operate in the general merchandise retailing industry through 2,114
Kmart discount stores with locations in each of the 50 United States, Puerto
Rico, the U.S. Virgin Islands and Guam, and through our e-commerce shopping
site, www.kmart.com. Our general merchandise retail operations are located in
324 of

                                        5
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the 331 Metropolitan Statistical Areas in the United States. Kmart stores are
generally one-floor, free-standing units ranging in size from 40,000 to 194,000
square feet. On March 20, 2002, the Court approved the closure of 283 stores
located in 40 states and in Puerto Rico, or approximately 13% of our 2,114
stores. We anticipate closing these locations in the second quarter of fiscal
2002, following liquidation sales.

     We currently have 124 Kmart Supercenters that combine a full grocery, deli,
bakery, video rental and 24 hour/seven-days-a-week availability along with the
general merchandise selection of a Kmart discount store. Kmart Supercenters
represent the third largest super center operation in the United States. The
store closings noted above include 12 Kmart Supercenters.

     A key component of our developing strategy is to invest in merchandising
and marketing initiatives to enhance our strategic positioning by offering
exclusive brands that will differentiate us from our competitors, including
Martha Stewart Everyday home, garden, colors, baby, kitchen, keeping and
decorating products, along with candles and accessories; Jaclyn Smith women's
apparel, jewelry and accessories; Kathy Ireland women's apparel, accessories and
exercise equipment; Disney apparel for infants and children; Sesame Street
apparel for infants and children; Route 66 men's and women's apparel and
accessories; and JOE BOXER apparel, accessories and home furnishings. We are
seeking or have received Court approval to continue our relationships with most
of these key brand partners.

     We will optimize our supply chain to maximize efficiencies and service
capabilities. We are continuing to evaluate the performance of every store and
terms of every lease. We are pursuing opportunities to reduce annual expenses
through reengineering the organization, staff reductions, office consolidations
and other actions.

     Based upon our results under the BlueLight Always campaign during 2001, we
have scaled back the strategy under which we lowered prices from a peak of over
30,000 items to approximately 18,000 items through the end of January 2002.
During fiscal 2002, we plan to rely more heavily on promotional activities.

     Information regarding our discontinued operations and dispositions appears
in Note 9 of the Notes to Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Data, of this Form 10-K/A.

     Information regarding our analysis of operations and financial condition
appears in Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition, of this Form 10-K/A.

COMPETITION

     We have several major competitors on a national level, including Wal-Mart,
Target, Sears, Kohl's, and J.C. Penney, and many competitors on a local and
regional level which compete with our individual stores. Success in this
competitive market is based on factors such as price, quality, service, product
assortment and convenience.

SEASONALITY

     Due to the seasonal nature of the retail industry, where merchandise sales
and cash flows from operations are historically higher in the fourth quarter
than any other period, a disproportionate amount of operating cash flows are
generated in the fourth quarter. In preparation for the fourth quarter holiday
season, we significantly increase our merchandise inventories, which
traditionally have been financed by cash flows from operations, bank lines of
credit, trade credit and terms from vendors. Our profitability and cash flows
are primarily dependent upon the large sales volume generated during the fourth
quarter of our fiscal year. Fourth quarter sales represented over 30% of total
net sales in fiscal 2001.

CREDIT SALES

     Kmart and Capital One Financial Corporation ("Capital One") launched a
Kmart MasterCard on September 25, 2000. The Kmart MasterCard combines the
exclusivity of private label card benefits along with MasterCard's global
acceptance at more than 18 million locations. Capital One is the exclusive
issuer and

                                        6
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creditor of the Kmart MasterCard and is responsible for the evaluation and
approval of credit applications for the Kmart MasterCard. As of January 30,
2002, there were 4,285,000 cardholders. Kmart bears no credit risk or risk of
loss with respect to any Kmart MasterCard account. The former private label
Kmart Credit Card through Household Bank(SB), N.A., a unit of Household
International, Inc. was discontinued in October 2000. In addition to the Kmart
MasterCard program, which is owned and operated by Capital One, all of our
stores accept major bank credit cards as payment for merchandise.

EMPLOYEES

     We employed approximately 234,000 persons as of January 30, 2002.
Approximately 22,000 employees will be affected by the store closures expected
to be completed in the second quarter of fiscal 2002.

FOOD AND CONSUMABLES DISTRIBUTION AGREEMENT

     In February 2001, we entered into a strategic alliance with Fleming
Companies, Inc. ("Fleming"). During the ten-year term of the agreement, Fleming
will supply substantially all food and consumables products in all current and
future Kmart stores and Kmart Supercenters. Under terms of the agreement,
Fleming provides procurement, storage, and logistics functions. Fees paid to
Fleming under the agreement for such services vary based on volume and other
factors. We continue to be responsible for in-store product pricing, promotional
planning, assortment planning and in-store display. This agreement created a
strategic alliance between Fleming and Kmart to merchandise, procure and
distribute pantry and supermarket products in the most cost efficient manner and
to provide for the joint exploration, evaluation, and implementation of
practices and procedures to reduce total supply chain costs. Fleming began
supplying merchandise under the new agreement in early fiscal 2001.

EFFECT OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS

     Compliance with federal, state and local provisions which have been enacted
or adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had, and is not
expected to have, a material adverse effect on capital expenditures, earnings or
the competitive position of Kmart and its subsidiaries.

ITEM 2. PROPERTIES

     At January 30, 2002, we operated a total of 2,114 general merchandise
stores which are located in the United States, Puerto Rico, the U.S. Virgin
Islands and Guam. We lease our store facilities, with the exception of 133
stores that we own. Our store leases are generally for terms of 25 years with
multiple five-year renewal options that allow us the option to extend the life
of the lease up to 50 years beyond the initial non-cancelable term. On March 20,
2002, the Court approved the closure of 283 stores in 40 states and in Puerto
Rico.

     We own our headquarters and one administrative building in Troy, Michigan
and lease an administrative building in Royal Oak, Michigan. We own one
distribution center and lease 17 other distribution centers in the United States
for initial terms of 10 to 30 years with options to renew for additional terms.
In addition, we own or lease 169 parcels not currently used for store
operations, the majority of which are rented to others.

     A description of our leasing arrangements appears in Note 14 of the Notes
to Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data, of this Form 10-K/A.

ITEM 3. LEGAL PROCEEDINGS

     On the Petition Date, Kmart and 37 of its U.S. subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the Bankruptcy Code in the
Court. The reorganization is being jointly administered under the caption "In re
Kmart Corporation, et al., case No. 02 B 02474." Included in the Consolidated
Financial Statements are subsidiaries operating outside of the United States,
which have not commenced Chapter 11 cases or other similar proceedings
elsewhere, and are not debtors. The assets and liabilities and results of

                                        7
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operations of such non-filing subsidiaries are not considered material to the
Consolidated Financial Statements. We retain control of our assets and are
authorized to operate the business as a debtor-in-possession while being subject
to the jurisdiction of the Court. As of the Petition Date, most pending
litigation is stayed, and absent further order of the Court, substantially all
pre-petition liabilities are subject to settlement under a plan of
reorganization. At this time, it is not possible to predict the outcome of the
Chapter 11 cases or their effect on our business. If it is determined that the
liabilities subject to compromise in the Chapter 11 cases exceed the fair value
of the assets, unsecured claims may be satisfied at less than 100% of their fair
value and the equity interests of our shareholders may have no value. See Item
1. Business Proceedings Under Chapter 11 of the Bankruptcy Code.

     Kmart has been provided with copies of anonymous letters sent to the SEC,
our auditors, directors and legal counsel expressing concern with respect to
various matters. The letters purport to be sent by certain of our employees. The
letters have been referred to the Audit Committee, which has engaged outside
counsel to review and investigate the matters set forth in the letters. We are
cooperating with the SEC and the U. S. Attorney's office for the Eastern
District of Michigan with respect to their investigations of these matters.

     Since February 21, 2002, five separate purported class actions have been
filed on behalf of purchasers of Kmart common stock between May 17, 2001 and
January 22, 2002, inclusive, naming Charles Conaway as CEO and Chairman of the
Board of Kmart as the sole defendant. The complaints filed in the United States
District Court for the Eastern District of Michigan, allege that Mr. Conaway
made material misstatements or omissions during the alleged class period that
inflated the trading prices of Kmart's common stock and seek, among other
things, damages under Section 10b-5 of the Securities and Exchange Act of 1934.
Kmart is not a defendant in these actions.

     Kmart is involved in discussions with the United States Attorney for the
District of Puerto Rico regarding a criminal investigation arising out of the
alleged actions of certain of our employees following the 1998 Hurricane
Georges.

     On March 18, 2002, a purported class action was filed in the United States
District Court for the Eastern District of Michigan on behalf of participants or
beneficiaries of the Kmart Corporation Retirement Savings Plan against various
officers and directors of Kmart alleging breach of fiduciary duty under ERISA
for excessive investment in company stock; failure to provide complete and
accurate information about Kmart common stock and failure to provide accurate
information regarding our financial condition. Class action allegations are also
made for current and former employees who participate in the Kmart Corporation
Retirement Savings Plan. Kmart is not a defendant in this litigation.

     On April 26, 2002, a lawsuit was filed in the United States District Court
for the Eastern District of Michigan on behalf of three limited partnerships
that purchased stock of BlueLight.com, a subsidiary of Kmart, naming Charles C.
Conaway, as CEO and Chairman of the Board of Kmart, as the sole defendant. The
Complaint alleges that Mr. Conaway breached his fiduciary duty, took certain
actions and made certain misrepresentations that induced plaintiffs to exchange
their BlueLight.com stock for Kmart stock and prevented plaintiffs from
realizing the market value of their stock. The complaint also alleges violations
of Section 10b-5 of the Securities and Exchange Act of 1934 and Section 410 of
the Michigan Uniform Securities Act. Kmart is not a defendant in this
litigation.

     Kmart is a defendant in six putative class actions and one multi-plaintiff
case pending in California, all relating to our classification of assistant
managers and various other employees as "exempt" employees under the federal
Fair Labor Standards Act and the California Labor Code and our alleged failure
to pay overtime wages as required by these laws. These seven wage-and-hour cases
were all filed during 2001 and are currently pending in the U.S. District Court
for the Eastern District of California (Henderson v. Kmart), the U.S. District
Court for the Central District of California (Gulley v. Kmart, the
multi-plaintiff case, which was originally brought in state court) and the
Superior Courts of the State of California for the Counties of Alameda, Los
Angeles and Riverside (Panossian v. Kmart, Wallace v. Kmart, Pierce v. Kmart,
Hancock v. Kmart, Pryor v. Kmart). If all of these cases were determined
adversely to Kmart, the resulting damages would have a material adverse impact
on our results of operations and financial condition. However, there have been
no class certifications, all of the cases are stayed as a result of the
Company's bankruptcy and, based on
                                        8
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our initial investigations, we believe that the Company has numerous defenses to
each of these claims. As a result, we are currently unable to quantify the
financial exposure of these cases.

     We are a party to a substantial number of other claims, lawsuits, and
pending actions, most of which are routine and all of which are incidental to
our business. Some matters involve claims for large amounts of damages as well
as other relief. We assess the likelihood of potential losses on an ongoing
basis and when they are considered probable and reasonably estimable, records 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. Although the final consequences
of these proceedings are not presently determinable, in the opinion of
management, they are not expected to have a material adverse affect on our
liquidity, financial position or results of operations.

     In addition to the foregoing, there are numerous other matters filed with
the Court in our reorganization proceedings by creditors, landlords or other
third parties related to our business operations or the conduct of our
reorganization activities. Although none of these individual matters which have
been filed to date have had or are expected to have a material adverse effect on
Kmart, our ability to successfully manage the reorganization process and develop
an acceptable reorganization plan could be negatively impacted by adverse
determinations by the Court on certain of these matters.

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

     Not applicable.

                                    PART II

ITEM 5. MARKET FOR KMART'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock was listed on the New York, Pacific and Chicago Stock
Exchanges. There were approximately 75,997 shareholders of record of Kmart
common stock as of May 1, 2002. Our common stock was suspended from trading on
the exchanges as of December 19, 2002.

     The quarterly high and low sales prices for our common stock for the two
most recent fiscal years are set forth in Note 22 of the Notes to Consolidated
Financial Statements in Item 8. Financial Statements and Supplemental Data, of
this Form 10-K/A.

ITEM 6. SELECTED FINANCIAL DATA

     The table below summarizes our recent financial information. For further
information, refer to our Consolidated Financial Statements and Notes to
Consolidated Financial Statements in Item 8. Financial Statements and
Supplemental Data, of this Form 10-K/A.

                                        9
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                   (AS RESTATED)(6)
                                                    -----------------------------------------------
                                                     2001      2000      1999      1998      1997
---------------------------------------------------------------------------------------------------
<S>                                                 <C>       <C>       <C>       <C>       <C>
SUMMARY OF OPERATIONS
Total sales(1)....................................  $36,151   $37,028   $35,925   $33,674   $32,183
Comparable sales %(2).............................     (0.1)%     1.1%      4.8%      4.8%      4.8%
Total sales %.....................................     (2.4)%     3.1%      6.6%      4.6%      2.4%
U.S. Kmart total sales %..........................     (2.4)%     3.1%      6.6%      5.6%      5.0%
Cost of sales, buying and occupancy...............   29,853    29,732    28,161    26,357    25,167
Selling, general and administrative expenses......    7,588     7,366     6,569     6,288     6,174
Restructuring, impairment and other charges.......    1,091        --        --        19       114
Interest expense, net.............................      344       287       280       293       363
Continuing income (loss) before income taxes,
  preferred dividend, and reorganization items....   (2,725)     (370)      959       755       407
Chapter 11 reorganization items...................      183        --        --        --        --
Net income (loss) from continuing operations(3)...   (2,612)     (268)      594       491       242
Discontinued operations...........................      166        --      (230)       --        --
Net income (loss).................................   (2,446)     (268)      364       491       242
PER COMMON SHARE
Basic:
  Continuing income (loss)........................  $ (5.29)  $ (0.53)  $  1.21   $  1.00   $  0.50
  Discontinued operations.........................  $  0.34   $    --   $ (0.47)  $    --   $    --
  Net income (loss)...............................  $ (4.95)  $ (0.53)  $  0.74   $  1.00   $  0.50
Diluted:(4)
  Continuing income (loss)........................  $ (5.29)  $ (0.53)  $  1.15   $  0.96   $  0.49
  Discontinued operations.........................  $  0.34   $    --   $ (0.41)  $    --   $    --
  Net income (loss)...............................  $ (4.95)  $ (0.53)  $  0.74   $  0.96   $  0.49
Book value........................................  $  6.42   $ 12.09   $ 12.73   $ 11.84   $ 10.89
FINANCIAL DATA
Working capital(5)................................  $ 7,189   $ 3,540   $ 3,915   $ 4,060   $ 4,163
Total assets......................................   14,183    14,815    15,192    14,238    13,614
Liabilities subject to compromise.................    8,093        --        --        --        --
Long-term debt(5).................................      330     2,084     1,759     1,538     1,725
Long-term capital lease obligations...............      857       943     1,014     1,091     1,179
Trust convertible preferred securities............      889       887       986       984       981
Capital expenditures..............................    1,385     1,089     1,277       981       678
Depreciation and amortization.....................      824       777       770       671       660
Current ratio(5)..................................     12.0       1.9       1.9       2.1       2.2
Basic weighted average shares outstanding
  (millions)......................................      494       483       492       492       487
Diluted weighted average shares outstanding
  (millions)(4)...................................      494       483       562       565       492
Number of Stores..................................    2,114     2,105     2,171     2,161     2,136
U.S. Kmart store sales per comparable selling
  square footage..................................  $   235   $   236   $   233   $   222   $   211
U.S. Kmart total selling square footage
  (millions)......................................      154       153       155       154       151
</Table>

                                        10
<PAGE>

(1) Our fiscal year ends on the last Wednesday in January. Fiscal 2000 consisted
    of 53 weeks.

(2) Comparable store sales for 2000 are based on the 52 week period ended
    January 24, 2001.

(3) Net income (loss) from continuing operations includes not only the items in
    Restructuring, impairment and other charges of $23 for VERP/Severance, $97
    for BlueLight.com, and $971 for asset impairments in 2001, $19 ($13 net of
    tax) related to Voluntary Early Retirement Programs in 1998 and $114 ($81
    net of tax) related to Voluntary Early Retirement Programs in 1997, but also
    includes in 2001, 2000 and 1999 non-comparable charges of $163 related to
    our supply chain restructuring, $728 ($463 net of tax) for strategic
    initiatives and $11 ($7 net of tax) to reflect the cumulative effect of a
    change in accounting method for layaway sales, respectively.

(4) Consistent with the requirements of Statement of Financial Accounting
    Standards No. 128, "Earnings per Share," preferred securities were not
    included in the calculation of diluted earnings per share for 2001, 2000 and
    1997 due to their anti-dilutive effect.

(5) For fiscal year 2001, working capital, long-term debt and current ratio do
    not include liabilities classified as subject to compromise.

(6) We have restated our previously reported annual financial statements to
    reflect certain adjustments as discussed in Note 1 of the Notes to
    Consolidated Financial Statements in Item 8 Financial Statements and
    Supplementary Data of this Form 10K/A.

                                        11
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     This Form 10-K/A, as well as other statements or reports made by or on
behalf of Kmart, may contain or may incorporate by reference material which
includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that reflect, when made, Kmart's current views
with respect to current events and financial performance. Statements, other than
those based on historical facts, which address activities, events or
developments that we expect or anticipate may occur in the future are forward-
looking statements, which are based upon a number of assumptions concerning
future conditions that may ultimately prove to be inaccurate. Such
forward-looking statements are and will be, as the case may be, subject to many
risks, uncertainties and factors relating to Kmart's operations and business
environment which may cause the actual results of Kmart to be materially
different from any future results, express or implied, by such forward-looking
statements. Factors that could cause actual results to differ materially from
these forward-looking statements include, but are not limited to, the following:

  GENERAL FACTORS

     - general economic conditions,

     - weather conditions, including those which affect buying patterns of our
       customers,

     - marketplace demand for the products of our key brand partners, as well as
       the engagement of appropriate new brand partners,

     - changes in consumer spending and our ability to anticipate buying
       patterns and implement appropriate inventory strategies,

     - competitive pressures and other third party actions, including pressures
       from pricing and other promotional activities of competitors,

     - our ability to timely acquire desired goods in appropriate quantities
       and/or fulfill labor needs at planned costs,

     - our ability to properly monitor our inventory needs and remain in-stock,

     - our ability to successfully implement business strategies and otherwise
       execute planned changes in various aspects of the business,

     - regulatory and legal developments,

     - our ability to attract, motivate and/or retain key executives and
       associates,

     - our ability to attract and retain customers,

     - other factors affecting business beyond our control,

  BANKRUPTCY RELATED FACTORS

     - our ability to continue as a going concern,

     - our ability to operate pursuant to the terms of the DIP Credit Facility,

     - our ability to obtain Court approval with respect to motions in the
       Chapter 11 proceeding from time to time,

     - our ability to develop, confirm and consummate one or more plans of
       reorganization with respect to the Chapter 11 cases,

                                        12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     - risks associated with third parties seeking and obtaining court approval
       to terminate or shorten the exclusivity period that we have to propose
       and confirm one or more plans of reorganization, for the appointment of a
       Chapter 11 trustee or to convert the cases to Chapter 7 cases,

     - our ability to offset the negative effects that the filing for
       reorganization under Chapter 11 has had on our business, including the
       loss in customer traffic and the constraints placed on available capital,

     - our ability to obtain and maintain normal terms with vendors and service
       providers,

     - the ability of our vendors to obtain satisfactory credit terms from
       factors and other financing sources,

     - our ability to maintain contracts, including leases, that are critical to
       our operations,

     - the potential adverse impact of the Chapter 11 cases on our liquidity or
       results of operations,

     - our ability to develop a long-term strategy and/or market niche, and

     - our ability to fund and execute our business plan.

     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.

     Similarly, these and other factors, including the terms of any
reorganization plan ultimately confirmed, can affect the value of our various
pre-petition liabilities, common stock and/or other equity securities. No
assurance can be given as to what values, if any, will be ascribed in the
bankruptcy proceedings to each of these constituencies.

     A plan of reorganization could result in holders of Kmart common stock
receiving no distribution on account of their interests and cancellation of
their interests. Holders of Kmart common stock should assume that they could
receive little or no value as part of a plan of reorganization. In addition,
under certain conditions specified in the Bankruptcy Code, a plan of
reorganization may be confirmed notwithstanding its rejection by an impaired
class of creditors or equity holders and notwithstanding the fact that equity
holders do not receive or retain property on account of their equity interests
under the plan. In light of the foregoing, Kmart considers the value of the
common stock to be highly speculative and cautions equity holders that the stock
may ultimately be determined to have no value. Accordingly, Kmart urges that
appropriate caution be exercised with respect to existing and future investments
in Kmart common stock or any claims relating to pre-petition liabilities and/or
other Kmart securities.

RESTATEMENT OF FISCAL 2001 AND PRIOR PERIOD FINANCIAL STATEMENTS

     As part of the review and preparation of the Quarterly Report on Form 10-Q
for the third quarter ended October 31, 2002, we identified certain adjustments
that were recorded out-of-period, while others were previously identified and
described in our Quarterly Report on Form 10-Q for the second quarter ended July
31, 2002 filed with the SEC on September 16, 2002. Upon review of the aggregate
impact of all of these adjustments, we concluded that restating our historical
financial statements was appropriate because the aggregate impact was material
to the current estimate of our fiscal year 2002 results.

                                        13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     The tables below show the results of the restatements on reported results
for fiscal years 2001, 2000 and 1999 presented in this Amendment No. 1 to our
Annual Report on Form 10-K/A which relate primarily to:

     a) Lease accrual adjustments -- An understatement, as disclosed in the 2002
        third quarter report on Form 10-Q, of historical accruals for certain
        leases with varying rent payments and a related understatement of
        historical rent expense.

     b) Accounts payable adjustments -- A software programming error in Kmart's
        accounts payable system, as disclosed in the 2002 third quarter report
        on Form 10-Q, that resulted in some paid invoices awaiting a store
        report of delivery not being appropriately treated in our financial
        statements. This error, restricted to a single vendor with unique
        billing arrangements, resulted in an understatement of Cost of sales,
        buying and occupancy since 1999.

     c) Inventory loads -- Adjustments, as disclosed in the Quarterly Report on
        Form 10-Q for the period ended July 31, 2002, for certain costs formerly
        capitalized into inventory. Inventory included amounts added for
        internal purposes to analyze gross margin on a comparable basis across
        all business units and to optimize purchasing decisions. These amounts
        are commonly referred to in the retail industry as "inventory loads,"
        and should have been eliminated for external reporting purposes to the
        extent the related inventory remained unsold at the end of the period.

     d) Vendor allowances -- The premature recording, as disclosed in the
        Quarterly Report on Form 10-Q for the period ended July 31, 2002, of
        vendor allowance transactions in fiscal year 2000 and prior fiscal
        years.

     In addition, given the restatement for the items noted above, we are
adjusting previously reported financial results for miscellaneous immaterial
items that were identified and previously recorded in the ordinary course of
business. These items are now being recorded in the appropriate fiscal periods.

                                        14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     The following tables summarize the effects of the restatement reflected in
this Form 10-K/A on our Statements of Operations for fiscal years 2001, 2000 and
1999.

<Table>
<Caption>
                                               LEASE       ACCOUNTS
                            AS PREVIOUSLY     ACCRUAL       PAYABLE     INVENTORY     VENDOR                 AS
     FISCAL YEAR 2001         REPORTED*     ADJUSTMENTS   ADJUSTMENTS     LOADS     ALLOWANCES   OTHER    RESTATED
     ----------------       -------------   -----------   -----------   ---------   ----------   ------   --------
<S>                         <C>             <C>           <C>           <C>         <C>          <C>      <C>
Sales.....................     $36,151        $   --        $   --       $   --       $  --      $   --    36,151
Cost of sales, buying and
  occupancy...............      29,936             5            42           --         (94)        (36)   29,853
                               -------        ------        ------       ------       -----      ------   -------
Gross margin..............     $ 6,215        $   (5)       $  (42)      $   --       $  94      $   36   $ 6,298
Selling, general and
  administrative
  expenses................     $ 7,588        $   --        $   --       $    7       $  --      $   (7)  $ 7,588
Restructuring, impairments
  and other charges.......     $ 1,099        $   --        $   --       $   --       $  --      $   (8)  $ 1,091
Operating (loss) income...     $(2,472)       $   (5)       $  (42)      $   (7)      $  94      $   51   $(2,381)
Reorganization items,
  net.....................     $  (184)       $   --        $   --       $   --       $  --      $    1   $  (183)
(Benefit from) provision
  for income taxes........     $  (115)       $   --        $   --       $   --       $  --      $  115   $    --
Net (loss)/income from
  continuing operations...     $(2,587)       $   (5)       $  (42)      $   (7)      $  94      $  (65)  $(2,612)
Discontinued operations...     $   169        $   --        $   --       $   --       $  --      $   (3)  $   166
Net (loss) income.........     $(2,418)       $   (5)       $  (42)      $   (7)      $  94      $  (68)  $(2,446)
Basic/Diluted (loss)
  earnings per common
  share
  Net (loss) income from
    continuing
    operations............     $ (5.23)       $(0.01)       $(0.09)      $(0.01)      $0.19      $(0.14)  $ (5.29)
  Discontinued
    operations............        0.34            --            --           --          --          --      0.34
                               -------        ------        ------       ------       -----      ------   -------
Net (loss) income.........     $ (4.89)       $(0.01)       $(0.09)      $(0.01)      $0.19      $(0.14)  $ (4.95)
                               =======        ======        ======       ======       =====      ======   =======
</Table>

---------------

* As previously reported in the Original 2001 10-K filed on May 15, 2002.

<Table>
<Caption>
                                               LEASE       ACCOUNTS
                            AS PREVIOUSLY     ACCRUAL       PAYABLE     INVENTORY     VENDOR                 AS
     FISCAL YEAR 2000         REPORTED*     ADJUSTMENTS   ADJUSTMENTS     LOADS     ALLOWANCES   OTHER    RESTATED
     ----------------       -------------   -----------   -----------   ---------   ----------   ------   --------
<S>                         <C>             <C>           <C>           <C>         <C>          <C>      <C>
Sales.....................     $37,028        $   --        $   --       $   --       $   --     $   --    37,028
Cost of sales, buying and
  occupancy...............      29,658             4             9           12           52         (3)   29,732
                               -------        ------        ------       ------       ------     ------   -------
Gross margin..............     $ 7,370        $   (4)       $   (9)      $  (12)      $  (52)    $    3   $ 7,296
Selling, general and
  administrative
  expenses................     $ 7,402        $   --        $   --       $   --       $   --     $  (36)  $ 7,366
Operating (loss) income...     $   (45)       $   (4)       $   (9)      $  (12)      $  (52)    $   39   $   (83)
(Benefit from) provision
  for income taxes........     $  (134)       $   (1)       $   (3)      $   (5)      $  (19)    $   14   $  (148)
Net (loss) income.........     $  (244)       $   (3)       $   (6)      $   (7)      $  (33)    $   25   $  (268)
Basic/Diluted (loss)
  earnings per common
  share...................     $ (0.48)       $(0.01)       $(0.01)      $(0.01)      $(0.07)    $ 0.05   $ (0.53)
</Table>

---------------

* As previously reported in the Original 2001 10-K filed on May 15, 2002.

                                        15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                LEASE       ACCOUNTS
                             AS PREVIOUSLY     ACCRUAL       PAYABLE     INVENTORY     VENDOR                AS
     FISCAL YEAR 1999          REPORTED*     ADJUSTMENTS   ADJUSTMENTS     LOADS     ALLOWANCES   OTHER   RESTATED
     ----------------        -------------   -----------   -----------   ---------   ----------   -----   --------
<S>                          <C>             <C>           <C>           <C>         <C>          <C>     <C>
Sales......................     $35,925        $   --          $--        $   --       $   --     $  --    35,925
Cost of sales, buying and
  occupancy................      28,111            10            1            14           33        (8)   28,161
                                -------        ------          ---        ------       ------     -----   -------
Gross margin...............     $ 7,814        $  (10)         $(1)       $  (14)      $  (33)    $   8   $ 7,764
Selling, general and
  administrative
  expenses.................     $ 6,558        $   --          $--        $    7       $   --     $   4   $ 6,569
Operating (loss) income....     $ 1,300        $  (10)         $(1)       $  (21)      $  (33)    $   4   $ 1,239
(Benefit from) provision
  for income taxes.........     $   337        $   (3)         $--        $   (8)      $  (12)    $   1   $   315
Net income (loss) from
  continuing operations....     $   633        $   (7)         $(1)       $  (13)      $  (21)    $   3   $   594
Net income (loss)..........     $   403        $   (7)         $(1)       $  (13)      $  (21)    $   3   $   364
Basic earnings (loss) per
  common share
  Continuing income
    (loss).................     $  1.29        $(0.01)         $--        $(0.03)      $(0.05)    $0.01   $  1.21
  Net income (loss)........     $  0.82        $(0.01)         $--        $(0.03)      $(0.05)    $0.01   $  0.74
Diluted earnings (loss) per
  common share
  Continuing income
    (loss).................     $  1.22        $(0.01)         $--        $(0.02)      $(0.05)    $0.01   $  1.15
  Net income (loss)........     $  0.81        $(0.01)         $--        $(0.02)      $(0.05)    $0.01   $  0.74
</Table>

---------------

* As previously reported in the Original 2001 10-K filed on May 15, 2002.

     The aggregate effect of the restatement on fiscal years prior to 1999
resulted in a reduction to beginning retained earnings for fiscal year 1999 of
$138.

     The following is a summary of the effects of the restatement on our
Consolidated Balance Sheets as of January 30, 2002 and January 31, 2001, for all
amounts that changed by 5% or more.

<Table>
<Caption>
                                                                  AS
                                                              PREVIOUSLY      AS
                                                              REPORTED*    RESTATED
                                                              ----------   --------
<S>                                                           <C>          <C>
January 30, 2002
  Accounts payable..........................................    $  103      $   89
  Accrued payroll and other liabilities.....................    $  378      $  420
  Other long-term liabilities...............................    $   79      $  132
  Retained earnings.........................................    $1,261      $1,032
January 31, 2001
  Other assets and deferred charges.........................    $  523      $  617
  Accrued payroll and other liabilities.....................    $1,587      $1,691
  Other long-term liabilities...............................    $  834      $  883
  Retained earnings.........................................    $4,018      $3,817
</Table>

---------------

* As previously reported in the Original 2001 10-K filed on May 15, 2002.

                                        16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

RESTATEMENT OF QUARTERLY FINANCIAL INFORMATION FOR FISCAL 2001

     Our financial statements also reflect a change in our accounting method for
interim recognition of cost recoveries from vendors, which change was reflected
in the financial statements included in the Original 2001 Form 10-K. Prior to
the filing of the Original 2001 Form 10-K, we had concluded that it would be
preferable to change our accounting method due to our bankruptcy filing and the
increased uncertainty relating to vendor rebates and allowances ("allowances"),
and the corresponding difficulty in reliably estimating such amounts in the
future. Under the revised methodology, Kmart recognizes a cost recovery from
vendors only when a formal agreement for such amount has been obtained and the
underlying activity for which the amount was provided has been performed. This
change in methodology does not affect the results that otherwise would have been
reported for the full fiscal year, but rather affects the interim recognition of
allowances during the year. We believe our new method is preferable because it
provides higher precision, better verifiability, reduced reliance on estimates
and is consistent with an analogous application of Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements." While this change in method
was adopted in the fourth quarter of fiscal 2001, generally accepted accounting
principles required the restatement of the first three quarters of fiscal 2001
to reflect this change.

     Additionally, in January 2002, Kmart announced that we had received an
anonymous letter sent to the SEC, our auditors and directors expressing concern
with respect to various matters. Accordingly, the Board of Directors had
instructed that an internal investigation be undertaken under the supervision of
the Audit Committee by outside legal counsel, with the assistance of independent
accounting advisors. Based on the results of the investigation as of the time of
the filing of the Original 2001 10-K, as well as the results of our new
management team's review of Kmart's accounting policies and methods, we had
concluded that (1) an adjustment should be made with respect to the accounting
for up-front consideration in a transaction from a vendor which more
appropriately should have been deferred and recognized over the life of the
contract and (2) the recording of additional general liability reserves in the
fourth quarter was more appropriately designated as a second quarter event.
Accordingly, prior to the filing of the Original 2001 Form 10-K, adjustments
were made for such transactions, including restatements of previously reported
quarterly financial statements for fiscal 2001. Our financial statements for
prior fiscal years were not affected.

     In light of the foregoing, we filed amendments to our Quarterly Reports on
Form 10-Q/A for the first three quarters of fiscal 2001 on June 12, 2002, in
order to restate the unaudited Condensed Consolidated Financial Statements for
the quarterly periods reflected therein. For information regarding our prior
restatement of interim financial statements for fiscal 2001 to reflect the
matters described in the preceding paragraph and the change in methodology, see
Note 22 of the Notes to Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Data, of this Form 10-K/A, and the amendments to
our Quarterly Reports on Form 10-Q/A for the first three quarters of fiscal
2001, filed on June 12, 2002.

OVERVIEW

     As a result of a rapid decline in our liquidity resulting from our
below-plan sales and earnings performance in the fourth quarter, the evaporation
of the surety bond market, an erosion of supplier confidence, intense
competition, unsuccessful sales and marketing initiatives, the continuing
recession, and recent capital market volatility, Kmart and 37 of its U.S.
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the Bankruptcy Code in the Court, on January 22, 2002.

     Under Chapter 11 we are operating our business as a debtor-in-possession.
As of the Petition Date, actions to collect pre-petition indebtedness as well as
most other pending litigation, are stayed and other contractual obligations
generally may not be enforced against Kmart. In addition, under the Bankruptcy
Code we may assume or reject executory contracts, including lease obligations.
Parties affected by these rejections may file claims with the Court in
accordance with the reorganization process. Substantially all pre-petition

                                        17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

liabilities are subject to settlement under a plan of reorganization to be voted
upon by creditors and equity holders and approved by the Court.

     Information regarding the Chapter 11 case appears in Item 1.
Business -- Proceedings Under Chapter 11 of the Bankruptcy Code, of this Form
10-K/A.

     On January 25, 2002, the Court gave interim approval for $1.15 billion of a
$2 billion senior secured DIP Credit Facility for payment of permitted
pre-petition claims, working capital needs, letters of credit and other general
corporate purposes. On March 6, 2002, the Court approved the entire $2 billion
DIP Credit Facility. The DIP Credit Facility requires that we maintain certain
financial covenants and restricts future liens, indebtedness, capital
expenditures, dividend payments and sale of assets. A description of the DIP
Credit Facility appears in Item 7. Management's Discussion and
Analysis -- Analysis of Financial Condition.

     The ability of Kmart to continue as a going concern is predicated upon
numerous issues, including our ability to achieve the following:

     - developing a long-term strategy and/or market niche to revitalize our
       business and return Kmart to profitability;

     - taking appropriate action to offset the negative effects that the Chapter
       11 filing has had on our business, including the loss in customer traffic
       and the impairment of vendor relations;

     - operating within the framework of our DIP Credit Facility, including its
       limitations on capital expenditures, its financial covenants, our ability
       to generate cash flows from operations or seek other sources of financing
       and the availability of projected vendor credit terms;

     - attracting, motivating and/or retaining key executives and associates;
       and

     - developing and, thereafter, having confirmed by the Court, a plan of
       reorganization.

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

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements requires that we make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and revenues and expenses during the period. We
base our estimates on historical experience and other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about carrying values of assets and liabilities that
are not readily apparent from other sources. We continually evaluate the
information used to make these estimates as our business and the economic
environment change. The use of estimates is pervasive throughout our financial
statements, but the accounting policies and estimates we consider most critical
are as follows:

  INVENTORY VALUATION

     Our inventories are valued at the lower of cost or market value, primarily
using the retail inventory method. The last-in, first-out method, utilizing
internal inflation indices is used to determine cost. Inventory valuation
requires significant judgments and estimates, including merchandise markdowns
and provisions for shrinkage. We evaluate all of our inventory units to
determine excess or slow-moving units based on current quantities and
projections of future demand and market conditions. For those units in inventory
that are so identified, as well as prior season fashion merchandise, we estimate
market value or net sales value based upon current realization trends. If the
projected net sales value is less than cost on a unit basis, we provide a

                                        18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

markdown allowance to reflect the lower value of that inventory. If actual
market or weather conditions are more or less favorable than those projected by
management, adjustments may result.

  RESTRUCTURING CHARGES

     We have provided restructuring charges in both fiscal 2000 and 2001 to
close stores, liquidate inventory, and optimize our information systems, supply
chain and BlueLight.com. These charges required judgments about exit costs to be
incurred for employee severance, contract and lease terminations, the future net
realizable value of long-lived assets and inventory to be disposed of, and other
liabilities. As a result of the bankruptcy proceedings, certain estimates for
store closings are now calculated based on statutory formulas, however,
significant judgment is involved in estimating the claims of lessors for items
other than rent, including cure costs, taxes, utilities, etc. The ability to
obtain agreements with lessors to terminate leases or with other parties to
assign leases can also affect the accuracy of current estimates.

  IMPAIRMENT OF LONG-LIVED ASSETS

     It is our policy to review our long-lived assets for possible impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. We recognize losses relating to the impairment of
long-lived assets when future undiscounted cash flows are less than an asset's
carrying value. Assumptions and estimates used in the evaluation of impairment,
including current and future economic trends for stores in many geographic
regions, are subject to a high degree of judgment and complexity and changes in
the assumptions and estimates may affect the carrying value of long-lived
assets, and could result in additional impairment charges in future periods.

  SELF-INSURANCE RESERVES

     We self-insure or retain a portion of the exposure for losses related to
workers compensation and general liability costs. General liability costs relate
primarily to litigation that arises from store operations. It is our policy to
record our self-insurance reserves, as determined actuarially, based upon claims
filed and an estimate of claims incurred but not yet reported. Any actuarial
projection of losses concerning workers compensation and general liability is
subject to a high degree of variability. Among the causes of this variability
are unpredictable external factors affecting future inflation rates, litigation
trends, legal interpretations, benefit level changes and claims settlement
patterns, including the effect of the bankruptcy proceedings.

     For a detailed discussion of our accounting policies and related estimates
and judgments, see Note 3 of the Notes to Consolidated Financial Statements, in
Item 8. Financial Statements and Supplementary Data, of this Form 10-K/A. While
we believe that the historical experience and other factors considered provide a
meaningful basis for the accounting policies applied in the preparation of the
Consolidated Financial Statements, we cannot guarantee that our estimates and
assumptions will be accurate, which could require us to make adjustments to
these estimates in future periods.

                                        19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

ANALYSIS OF OPERATIONS EXCLUDING NON-COMPARABLE ITEMS DESCRIBED BELOW

     The following table segregates non-comparable items from operating income
as reported in the Consolidated Statements of Operations:

<Table>
<Caption>
                                                                 (AS RESTATED)
                                                          ---------------------------
                                                           2001      2000      1999
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Sales...................................................  $36,151   $37,028   $35,925
Cost of sales, buying and occupancy.....................   29,778    29,367    28,161
                                                          -------   -------   -------
Gross margin............................................    6,373     7,661     7,764
Selling, general and administrative.....................    7,500     7,003     6,569
Equity (loss) income in unconsolidated subsidiaries.....       --       (13)       44
                                                          -------   -------   -------
Operating (loss) income before non-comparable items.....   (1,127)      645     1,239
Non-comparable items:
  Long-lived asset impairment...........................      971        --        --
  Charge for supply chain restructuring.................      163        --        --
  Charge for BlueLight.com..............................       97        --        --
  Charge for employee severance and VERP................       23        --        --
  Strategic actions charge..............................       --       728        --
                                                          -------   -------   -------
Operating (loss) income as reported before interest,
  income taxes, reorganization items and dividends on
  convertible preferred securities of subsidiary
  trust.................................................  $(2,381)  $   (83)  $ 1,239
                                                          =======   =======   =======
Same-store sales %......................................    (0.1%)      1.1%      4.8%
</Table>

     Management uses operating income before non-comparable items, among other
metrics, to measure operating performance. It supplements and is not intended to
represent a measure of performance in accordance with disclosures required by
accounting principles generally accepted in the United States.

     The following discussion and analysis excludes non-comparable items. See
the table above for a reconciliation to reported amounts and the section titled
Description of Non-comparable Items described below. Prior to the restatement
reflected herein, the previously reported amounts for gross margin, as a
percentage sales were 17.4%, 20.9% and 21.8% for fiscal years 2001, 2000 and
1999, respectively; Selling, general and administrative expenses ("SG&A"), as a
percentage of sales, were 20.7%, 19.0% and 18.3% for fiscal years 2001, 2000 and
1999, respectively; and Operating loss, as a percentage of sales, were (3.3%),
1.8% and 3.6% for fiscal years 2001, 2000 and 1999, respectively.

FISCAL 2001 COMPARED TO FISCAL 2000

     Fiscal 2001, which ended on January 30, 2002, included 52 weeks. Fiscal
2000, which ended on January 31, 2001, included 53 weeks. Same-store sales for
fiscal 2001 compare the 52 week period ended January 30, 2002, to the 52 week
period ended January 31, 2001, and therefore exclude the first week of fiscal
year 2000. Same-store sales include sales of all stores that have been open for
greater than 13 full months.

     Same-store sales and total sales for 2001 decreased (0.1%) and (2.4%),
respectively. The decrease in same-store sales is due primarily to fewer sales
transactions due to reduced promotional activity and increased competition in
the discount retail industry, the deflationary effect of our BlueLight Always
program under which we lowered prices on over 30,000 high-frequency items and
the effect of prior year clearance sales of discontinued merchandise. In
addition, total sales decreased due to an additional week of sales in 2000 due
to the 53 week fiscal year and the net effect of store openings and closings.

                                        20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     Gross Margin decreased by ($1,288) from fiscal 2000 and was, as a
percentage of sales, 17.6% in 2001 and 20.7% in 2000. The decline in gross
margin rate is driven by a 13.6% rate in the fourth quarter, attributable to the
pricing effects of our BlueLight Always program, and to higher markdowns of
seasonal apparel due to unseasonably warm weather, an increase in sales of food
and consumables, which on a percent of sales basis, carry lower margins; and an
adjustment to inventory for LIFO, due to lower inventory levels, partially
offset by a decrease in clearance sales in 2001 as compared to 2000 and lower
distribution costs under our arrangement with Fleming.

     SG&A, which includes advertising costs (net of co-op recoveries of $427 in
2001 and $633 in 2000), was 20.7% of sales in 2001 versus 18.9% in 2000. The
increase of $497 over the prior year is due primarily to increased expenses for
general liability and workers compensation claims as reserves were increased by
approximately $210 in 2001 following significant analysis and actuarial studies,
a decrease in co-op recoveries caused by erosion in supplier confidence as a
result of the events leading up to our bankruptcy filing under Chapter 11,
employee compensation and utility rate increases, partially offset by a
reduction in advertising expense.

     Operating loss was ($1,127), or (3.1)% of sales, for 2001 compared to
operating income of $645 million, or 1.7% of sales, for 2000. The decrease in
operating income is attributable to lower sales, a lower gross margin rate and
an increase in SG&A expenses as discussed above.

     Net interest expense was $344 and $287 in 2001 and 2000, respectively.
Included in net interest expense is interest income of $4 and $17 for 2001 and
2000, respectively. Net interest expense increased by $57 as a result of the
issuance in January 2001 of $400 million of 9.375% Notes due January 2006, the
issuance in June 2001 of $430 million of 9 7/8% Notes due June 2008, increased
borrowings under our Revolving Credit Agreement and lower investment income. As
of the Petition Date, we stopped accruing interest on debt classified as
Liabilities subject to compromise in our Consolidated Balance Sheets in
accordance with SOP 90-7.

     Effective income tax rate was (0.0%) and (40.0%) in 2001 and 2000,
respectively. The decrease in the effective income tax benefit rate is due to a
valuation allowance established for deferred tax assets which we may not be able
to utilize in future years. See Note 17 of the Notes to Consolidated Financial
Statements, in Item 8. Financial Statements and Supplementary Data, of this Form
10-K/A.

FISCAL 2000 COMPARED TO FISCAL 1999

     The following discussion excludes non-comparable items. See the table above
for a reconciliation to reported amounts and the section titled Description of
Non-comparable Items described below.

     Fiscal 2000, which ended on January 31, 2001, included 53 weeks. Fiscal
1999, which ended on January 26, 2000 included 52 weeks. Same-store sales for
fiscal 2000 compare the 52 week period ended January 24, 2001 to the 52 week
period ended January 26, 2000, and therefore exclude the last week of fiscal
year 2000. Same store-sales include sales of all stores that have been open for
greater than 13 full months.

     Same-store sales and total sales for 2000 increased 1.1% and 3.1%,
respectively. The increase in same-store sales primarily reflected the
completion of our discount store conversion initiative in 2000. In addition,
total sales increased due to the net effect of store openings and closings, and
to an additional week of sales in 2000 due to the 53 week fiscal year.

     Gross margin decreased ($103) to $7,661 in fiscal 2000, and was, as a
percentage of sales, 20.7% in 2000 and 21.6% in 1999. The decline in the gross
margin rate was due to a shift to clearance sales and promotional sales from
regular sales, growth in lower margin food and consumables sales categories, and
to incremental expenses for the distribution of these grocery and consumable
goods.

                                        21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     SG&A, which includes advertising costs (net of co-op recoveries of $633 in
2000 and $603 in 1999), was 18.9% of sales in 2000 versus 18.3% in 1999. The
increase of $434 over the prior year was primarily attributable to normal wage
increases, an investment in store labor and employee severance costs.

     Operating income was $645, or 1.7% of sales, for 2000 compared to operating
income of $1,239, or 3.4% of sales, for 1999.

     Net interest expense was $287 and $280 in 2000 and 1999, respectively.
Included in net interest expense is interest income of $17 and $23 for 2000 and
1999, respectively. The net increase of $7 primarily relates to additional
borrowings under our credit facilities and lower investment income.

     Effective income tax rate was (40.0%) and 32.8% in 2000 and 1999,
respectively. See Note 17 of the Notes to Consolidated Financial Statements, in
Item 8. Financial Statements and Supplementary Data, of this Form 10-K/A.

ANALYSIS OF FINANCIAL CONDITION

     Following the Petition Date, we have utilized cash flows from operations
and the DIP Credit Facility as our primary sources of working capital. Shortly
after the Petition Date, in conjunction with our filing under Chapter 11, we
entered into a $2 billion DIP Credit Facility and the Court gave interim
approval to borrow up to $1.15 billion. On March 6, 2002, the Court approved the
entire $2 billion DIP Credit Facility. The DIP Credit Facility is a revolving
credit facility under which Kmart is the borrower and the rest of the Debtors
are guarantors. The DIP Credit Facility has been afforded superpriority claim
status in the Chapter 11 case and is collateralized by first liens on
substantially all of the Debtors' assets (subject to valid and unavoidable
prepetition liens and certain other permitted liens) and provides that proceeds
be used for working capital needs and other general corporate purposes. This
superpriority claim and lien position is shared on an equal and ratable basis
with up to $200 million of claims of our principal cash management banks
relating to overdrafts, fees and certain other liabilities arising from the
provision of treasury, depository and cash management services to the Debtors.

     Borrowings under the DIP Credit Facility bear interest at the Prime Rate
plus 2.5% per annum or, at Kmart's option, at the LIBOR rate plus 3.5% per
annum. The DIP Credit Facility stipulates that borrowings thereunder may not
exceed the lesser of 95% of our borrowing base (which is tied to our eligible
inventory levels) or 95% of the commitment (currently $2 billion). Kmart is
obligated to pay an unused commitment fee to the DIP Credit Facility lenders
equal to (i) 1% per annum on the total unused commitment to the extent that the
average total commitment usage is less than or equal to 33 1/3% of the total
commitment, (ii) 3/4% per annum on the total unused commitment to the extent
that the average total commitment usage is greater than 33 1/3% but less than or
equal to 66 2/3% of the total commitment and (iii) 1/2% per annum on the total
unused commitment to the extent that the average total commitment usage is
greater than 66 2/3% of the total commitment.

     To the extent that the cumulative net cash proceeds from the sale of
certain leasehold interests and fixed assets exceeds $150 from and after the
Petition Date, the DIP Credit Facility requires us to prepay loans and reduce
commitments thereunder in an amount equal to 50% of such excess.

     Under the DIP Credit Facility, capital expenditures are restricted to $650
during fiscal 2002, $800 during fiscal 2003 and $212 during fiscal 2004 up to
April 22, 2004, the maturity date, providing that no more than 55% of the
capital expenditures permitted in any fiscal year may be made in the first two
fiscal quarters and 20% of the unused portion of permitted capital expenditures
in any fiscal year may be carried forward to and used in the following year. We
are also required to maintain specified levels of cumulative earnings before
interest, taxes, depreciation, amortization and special charges for periods
ending as early as June 2002 and thereafter. The DIP 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

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

dividend payments, sell or dispose of 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 expiration of a grace
period) result in an event of default that could cause, absent the receipt of
appropriate waivers, the funds necessary to maintain our operations to become
unavailable. The DIP Credit Facility contains other customary events of default,
including (i) certain ERISA events, (ii) a change of control and (iii) the
occurrence of certain specified events in the Chapter 11 cases.

     There were $400, $664 and $330 of borrowings outstanding under our $400
credit facility, $1.1 billion credit facility and DIP Credit Facility,
respectively, at the end of fiscal year 2001.

     Net cash provided by operating activities was $927 in 2001 as compared to
net cash provided by operating activities of $1,114 in 2000. The decrease in net
cash provided by operating activities was primarily the result of lower net
earnings, excluding non-comparable items, partially offset by a decrease in
inventory and an increase in accounts payable. Inventory decreased $560 due to
the erosion of supplier confidence brought on by events leading up to the
bankruptcy filing, resulting in the interruption of our supply chain. The
increase in accounts payable is attributable to the bankruptcy filing because
pre-petition indebtedness was stayed. Substantially all liabilities as of the
Petition Date are subject to settlement under a plan of reorganization to be
voted upon by creditors and equity holders and approved by the Court.

     Net cash used for investing activities was $1,430 in 2001 compared to
$1,144 in 2000. The increase in cash used for investing activities was primarily
due to higher capital expenditures for the conversion and expansion of Kmart
stores to Kmart Supercenters, expansion of aisles to increase visibility of
promotional items and an investment in point-of-sale equipment.

     Net cash provided by financing activities was $1,353 in 2001 compared to
$87 in 2000. The increase in cash provided by financing activities was primarily
the result of the issuance of $430 of 9 7/8% Notes due June 2008, increased
borrowings under the Credit Facility and the 364-day Facility and borrowings of
$330 under our DIP Credit Facility, partially offset by the redemption of $262
of Collateralized Mortgage Backed Securities.

     Due to the seasonal nature of the retail industry, where merchandise sales
and cash flows from operations are historically higher in the fourth quarter
than any other period, a disproportionate amount of operating income and cash
flows from operations is earned in the fourth quarter. Our results of operations
and cash flows are primarily dependent upon the large sales volume generated
during the fourth quarter of our fiscal year. Fourth quarter sales represented
over 30% of total net sales in fiscal 2001. As a result, operating performance
for the interim periods is not necessarily indicative of operating performance
for the entire year. To support the higher seasonal sales volume we experience a
seasonal inventory build in October and November and, as a result, our usage of
credit lines is higher for this period of the year. We believe that our DIP
Credit Facility will be adequate to support our forecasted seasonal borrowing
needs.

     Our cash needs are satisfied through working capital generated by our
business and funds available under our DIP 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 filing for
reorganization under Chapter 11, most of our vendors have resumed normal trade
terms. In addition, while we have experienced since the filing negative
same-store sales, our plans for the remainder of the year, in light of our
efforts to stabilize and revitalize the business, contemplate, at a minimum, a
modest improvement in our same-store sales comparison, which should have a
favorable impact on our cash resources. Should, however, we experience a
significant disruption of terms with our vendors, margins fail to improve,
and/or the DIP 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 July 2001, we terminated the common stock repurchase program that was
initiated in April 1999. Under the program we repurchased approximately 22
million shares of common stock at a cost of

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

approximately $55 and $200 in fiscal years 2000 and 1999, respectively. We also
terminated the trust convertible preferred securities repurchase program that
was initiated in February 2000. Under the program we repurchased approximately 2
million shares of trust convertible securities during fiscal year 2000 at a cost
of approximately $84.

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

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

     Information concerning our obligations and commitments to make future
payments under contracts, such as debt and lease agreements, and under
contingent commitments is aggregated in the following tables.

<Table>
<Caption>
                                                       PAYMENTS DUE BY PERIOD
                                         --------------------------------------------------
                                                   WITHIN                            AFTER
        CONTRACTUAL OBLIGATIONS           TOTAL    1 YEAR   2-3 YEARS   4-5 YEARS   5 YEARS
-------------------------------------------------------------------------------------------
<S>                                      <C>       <C>      <C>         <C>         <C>
Long-term debt.........................  $ 3,676   $1,151    $  714      $  728     $1,083
Capital lease obligations..............    2,243      234       433         344      1,232
Operating leases.......................    9,634      728     1,374       1,177      6,355
Other long-term obligations............      646      143       248         165         90
                                         -------   ------    ------      ------     ------
Total contractual cash obligations.....  $16,199   $2,256    $2,769      $2,414     $8,760
                                         =======   ======    ======      ======     ======
</Table>

<Table>
<Caption>
                                              AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
                                           ------------------------------------------------
                                                   WITHIN                            AFTER
     OTHER COMMERCIAL COMMITMENTS          TOTAL   1 YEAR   2-3 YEARS   4-5 YEARS   5 YEARS
-------------------------------------------------------------------------------------------
<S>                                        <C>     <C>      <C>         <C>         <C>
Trade Lines of Credit.................     $162     $162      $ --        $ --       $ --
Standby Letters of Credit.............       98       98        --          --         --
Guarantees............................      641       49       102         125        365
                                           ----     ----      ----        ----       ----
Total commercial commitments..........     $901     $309      $102        $125       $365
                                           ====     ====      ====        ====       ====
</Table>

     Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as
well as most other pending litigation, are stayed and other contractual
obligations against Kmart may not be enforced. In addition, we may assume or
reject executory contracts, including lease obligations, such as the 283 stores
we were authorized to close by the Court on March 6, 2002. Therefore, the
commitments shown in the above table and discussed above may not reflect actual
cash outlays in the future periods.

  GUARANTEES

     As of January 30, 2002, we had (i) guaranteed obligations for real property
leases of certain current and former subsidiaries of Kmart including, but not
limited to, The Sports Authority, Inc., OfficeMax, Inc. and Borders Group, Inc.,
some of which leases have been assigned pre-petition; (ii) contingent liability
under real property leases assigned by Kmart pre-petition; and (iii) guaranteed
$82 of indebtedness of other parties related to certain of our leased properties
financed by industrial revenue bonds. Our rights and obligations with respect to
our guarantee of leases of the former subsidiaries The Sports Authority, Inc.,
Office Max, Inc., and Borders Group, Inc., which are detailed below, are
governed by Lease Guarantee, Indemnification and Reimbursement Agreements dated
as of November 23, 1994, November 9, 1994 and May 24, 1995, respectively, as
they may be amended from time to time. Kmart's contingent obligations, described
above, which are not reflected in our financial statements, are dependent on the
future performance by the parties whose obligations we guarantee and are subject
to settlement under a plan of reorganization to be voted upon by creditors and
equity holders and approved by the Court.

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

     As of January 30, 2002, our outstanding guarantees for real property leases
of The Sports Authority, Inc., Office Max, Inc., and Borders Group, Inc. were as
follows:

<Table>
<Caption>
                                                              PRESENT
                                                               VALUE
                                                               AT 7%    GROSS LEASE
                                                              -------   -----------
                                                               2001     2001   2000
                                                              -------   ----   ----
<S>                                                           <C>       <C>    <C>
The Sports Authority........................................   $184     $312   $341
Borders Group, Inc..........................................     89      150    163
OfficeMax...................................................     66       97    111
                                                               ----     ----   ----
Total.......................................................   $339     $559   $615
                                                               ====     ====   ====
</Table>

DESCRIPTION OF NON-COMPARABLE ITEMS

     During fiscal years 2001 and 2000, we instituted certain restructuring
actions to improve our operations. Also, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," we recorded an impairment charge in fiscal
2001. These actions are summarized below.

 LONG-LIVED ASSET IMPAIRMENT

     Due to below-plan sales and earnings performance in the fourth quarter, our
filing under Chapter 11 and planned actions under such filings, we performed a
recoverability test on our long-lived assets. In accordance with SFAS No. 144,
we recorded a non-cash charge of $971 in the fourth quarter of fiscal 2001. This
charge is included in the Restructuring, impairment and other charges line in
the Consolidated Statements of Operations.

     Of the $971 charge, $921 relates to long-lived assets in our stores. We
reviewed assets on a store level basis, which is the lowest level of assets for
which there are identifiable cash flows. The carrying amount of the store asset
groups were compared to the related expected undiscounted future cash flows to
be generated by those assets over the estimated remaining useful life of the
primary asset. Cash flows were projected for each store based upon historical
results and expectations. In cases where the expected future cash flows were
less than the carrying amount of the assets, those stores were considered
impaired and the asset group was written down to fair value. Fair value was
based on appraised value or estimated sales values of similar assets in recent
transactions.

     We performed an additional assessment of assets that were not included in
the above store analysis. We recorded charges totaling $50 for capital projects
that were cancelled due to capital expenditure restrictions in our DIP Credit
Facility.

 SUPPLY CHAIN OPERATIONS

     On September 6, 2001, we announced that we would restructure certain
aspects of our supply chain operations. This restructuring program focused on
the supply chain infrastructure, including the reconfiguration of our
distribution center ("DC") network and implementation of new operating software
across our supply chain. As a result of these actions, we recorded a $163 charge
during the third quarter of fiscal year 2001.

     Reconfiguration of the distribution center network entailed replacing two
aging distribution centers with two state-of-the-art facilities. The existing
distribution centers were not properly fitted for softline DC operations and
required significant investment to upgrade. Replacing the facilities is expected
to enable increased throughput and quicker inventory turns and improve
efficiency across all other centers. In addition, the distribution of
slower-moving goods is being centralized at one newly designated center.
Included in the
                                        25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

charge was $37 for a reserve for future lease obligations related to the closing
of the two aging distribution centers, both of which we have exited, and a $10
charge to provide for contractual employee obligations in accordance with EITF
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." These charges are included in Cost of sales, buying and
occupancy in the Consolidated Statements of Operations. During the fourth
quarter of fiscal 2001, $6 was paid and charged to the reserves. Additionally,
we reversed through Reorganization items $30 of this charge to reduce the
reserves for future lease obligations to the amount of allowed claims under the
Bankruptcy Code.

     We recorded an $88 charge for the disposal of computer equipment and
software, leasehold improvements and other assets that will no longer be
utilized. These charges are included in Selling, general and administrative
expenses in the Consolidated Statements of Operations. In addition, we recorded
a $5 charge for other supply chain assets. These charges were recorded in
accordance with SFAS No. 144 and are included in Cost of sales, buying and
occupancy in the Consolidated Statements of Operations. New real-time
distribution software will be implemented across our supply chain improving
product flow and efficiency while enabling a world class distribution network.
The current warehouse management software system does not provide adequate
performance reporting and is not cost effective to upgrade. Due to increased
efficiency associated with the new software we will be able to increase
productivity through improved cube management while reducing labor costs.
Completion of the implementation is expected by the end of the third quarter of
fiscal 2003. The existing supply chain software will continue to be utilized
until replaced in 2003. Depreciation has been accelerated to reflect the revised
remaining useful lives. We recorded a charge of $23 related to the accelerated
depreciation for these assets in 2001. These charges are included in Cost of
sales, buying and occupancy in the Consolidated Statements of Operations.

     As a result of these actions we expect results from operations before
income taxes to improve by approximately $5 per year. These savings will be
achieved through reductions in labor costs, depreciation expense and maintenance
costs, and increased productivity.

     The following table summarizes the significant components and presentation,
in the Consolidated Statements of Operations, of the charge for the
restructuring of our supply chain operations during 2001.

<Table>
<Caption>
                                                            COST OF SALES,
                                                              BUYING AND
                                                              OCCUPANCY      SG&A   TOTAL
                                                            --------------   ----   -----
<S>                                                         <C>              <C>    <C>
Lease obligations.........................................       $37         $--    $ 37
Accelerated depreciation of software......................        23          --      23
Asset impairments.........................................         5          88      93
Contractual employment obligations........................        10          --      10
                                                                 ---         ---    ----
Total.....................................................       $75         $88    $163
                                                                 ===         ===    ====
</Table>

  BLUELIGHT.COM

     As a result of the changed environment for internet businesses, in which
their ability to raise capital became restricted, management's revised future
cash flow projections and the potential need for significant additional cash
advances, we adopted a multi-step plan to substantially restructure the
operations of BlueLight.com.

     At the end of the second quarter, we acquired the remaining 40% interest in
BlueLight.com, giving us control of the entity. To acquire the 40% interest, we
issued $69 in shares of Kmart common stock and paid $16 in cash for a total
purchase price of $85. In connection with the acquisition, the return of capital
put rights were terminated, the related $62.5 liability was relieved, and the
4.4 million warrants for Kmart common stock

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

issued to SOFTBANK Venture Capital (currently, Mobius Venture Capital) and other
investors were cancelled.

     As a result of these activities, we recorded a $92 charge during the second
quarter of fiscal year 2001. Of the charge, $41 related to the impairment of our
investment in BlueLight.com, which was written down to fair value. This charge
was recorded based upon our revised cash flow projections for the business in
accordance with SFAS No. 144. The remaining $51 of the charge related to the
restructuring of our e-commerce business.

     Of the $51 restructuring charge, $29 related to assets impaired as a result
of the restructuring. These assets represent furniture and fixtures, leasehold
improvements, and computer software and hardware, the majority of which were
located in the headquarters of BlueLight.com, and have not been utilized in the
restructured operations. This charge was recorded in accordance with SFAS No.
144. Liabilities for lease terminations, contract terminations and other costs
totaling $22 were established in accordance with EITF 94-3 as a result of the
decision to exit the BlueLight.com headquarters building and outsource certain
aspects of our overall e-commerce business, including fulfillment, technology
and customer service. During the year, $5 has been paid and charged against the
liability.

     During the remainder of 2001, we continued executing our restructuring
plan, including formally communicating severance benefits to 114 employees at
the BlueLight.com headquarters and terminating ninety-eight of those employees.
We recorded an additional $5 charge in the third quarter of fiscal 2001 to
provide for these costs, $4 of which has been paid and charged against the
liability.

     We also outsourced the hosting of our site, fulfillment of e-commerce
orders and all related customer service. The restructuring has reduced the
operating costs of BlueLight.com by over 75%, from a first half of fiscal 2001
loss of $55 to a second half loss of $12. We are pursuing additional cost
savings, which we expect to reduce our e-commerce loss by over $45 in 2002 from
2001 levels.

     All charges for the restructuring and impairment of the investment are
included in the line Restructuring, impairment and other charges in the
Consolidated Statements of Operations. The results of BlueLight.com's operations
are fully consolidated in our financial statements commencing July 31, 2001.

  EMPLOYEE SEVERANCE AND VERP

     During the first quarter of 2001, we realigned our organization and reduced
our workforce by 350 employees through a voluntary early retirement program
("VERP") and other employee separations. The total cost of the realignment
aggregated $23, which is included in our Consolidated Statements of Operations
in the line Restructuring, impairment and other charges. The charge relates, in
part, to 130 employees that accepted the VERP offer, with costs aggregating $6.
The remaining 220 employees were severed and given post-employment benefits
including severance, outplacement services, continuation of healthcare benefits
and other benefits totaling $17. All payments associated with the severance and
VERP charge have been made as of January 30, 2002.

  2000 STRATEGIC ACTIONS

     In the second quarter of fiscal year 2000, we announced a series of
strategic actions aimed at strengthening financial performance by achieving
improvements in return on invested capital. These actions included deciding to
close certain Kmart and Kmart Supercenters, accelerating certain inventory
reductions and redefining our information technology strategy. As a result of
these initiatives, we recorded a pre-tax charge of $740 ($471 net of tax) during
the second quarter of 2000. During the third quarter of fiscal year 2000, we
reduced this charge by $12 ($8 net of tax) due to changing the number of
scheduled store closings from 72 to 69, thus reducing the reserve for closed
stores from $300 to $288 million. During fiscal year 2001, $42 was paid and
charged to the reserve. In connection with the bankruptcy filing, we recorded to
the reserve a

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

non-cash adjustment of $37 for the rejection of certain leases associated with
the 2000 strategic actions charge to reduce the reserve to the allowed claim
amount under the Bankruptcy Code.

     The following table summarizes the significant components of the charge for
strategic actions taken during fiscal year 2000 and the presentation in our
Consolidated Statements of Operations:

<Table>
<Caption>
                                                            COST OF SALES,
                                                              BUYING AND
                                                              OCCUPANCY      SG&A   TOTAL
                                                            --------------   ----   -----
<S>                                                         <C>              <C>    <C>
Store closings:
  Lease obligations and maintenance.......................       $ --        $191   $191
  Asset impairments.......................................         --         97      97
  Inventory write-downs...................................         75         --      75
Inventory reductions......................................        290         --     290
Information technology....................................         --         60      60
Contractual employment obligations........................         --         15      15
                                                                 ----        ----   ----
Total.....................................................       $365        $363   $728
                                                                 ====        ====   ====
</Table>

REORGANIZATION ITEMS

     Reorganization items represent amounts we incurred as a result of the
Chapter 11 proceedings in accordance with SOP 90-7. The amounts for
Reorganization items in the Consolidated Statements of Operations include a
charge of $8 for professional services, a credit of $17 for the reduction of
lease obligations due to the rejection of closed store leases not classified as
discontinued operations and a credit of $174 for the reduction of our estimated
obligation for general liability claims.

INTERNAL INVESTIGATION -- DEVELOPMENTS SINCE FILING OF THE ORIGINAL 2001 10-K

  INVESTIGATIVE MATTERS

     The following sets forth developments that have occurred since the filing
of the Original 2001 10-K in connection with the internal investigation and
related stewardship review being conducted under the supervision of the Audit
Committee of the Board of Directors. As previously disclosed, following the
receipt of anonymous letters, the Board of Directors had instructed that an
internal investigation be undertaken under the supervision of the Audit
Committee by outside legal counsel, with the assistance of independent
accounting advisors. The Original 2001 10-K had reflected, as of the date of
filing, the results of the investigation with respect to various accounting
matters. As of the date of the filing, we believed that the investigation was
complete with respect to accounting matters affecting the financial statements
in the Original 2001 10-K. Set forth below is a discussion of certain matters
relating to vendor allowances and inventories that have been investigated since
the filing of the Original 2001 10-K.

  VENDOR ALLOWANCE MATTERS

  Premature Recognition of Vendor Allowances

     Since the filing of our Original 2001 10-K we became aware of documents
that indicated that there were certain vendor allowance transactions prematurely
recorded in our fiscal year 2000 fourth quarter financial statements that
required investigation. We also determined that such early recognition of vendor
allowances occurred in other prior fiscal periods, although the impact of these
transactions on our financial statements was less significant. We described the
effect of these items in our Form 10-Q for the thirteen week period ended July
31, 2002 that we filed with the SEC on September 16, 2002. In addition, we
recently became aware of allowances received from a vendor aggregating $14,
which had previously been recognized in our fiscal year

                                        28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

2000 financial statements and that we have determined should more appropriately
have been recognized over the five-year life of the contract that we entered
into with this vendor.

     It is important to note that although we have conducted all procedures we
deemed reasonable under the circumstances to identify and quantify vendor
allowances that were prematurely recorded, and which were restated to correct
and record such allowances in the appropriate period, there can be no assurance
that we have captured all of such allowance transactions. Furthermore, we
believe that our ability to accurately identify prematurely recorded allowance
transactions diminishes with the passage of time. We have taken actions to
strengthen our internal controls concerning vendor allowance transactions and
have restated our prior period financial statements for these adjustments.

  2001 Interim Recognition of Allowances

     During the Fall of 2002 and in response to inquiries from the staff of the
SEC, Kmart reviewed its historical practices for the recording of allowances
prior to the adoption in the fourth quarter of fiscal year 2001 of a new
accounting policy, effective February 1, 2001, for the interim financial
reporting of vendor allowances. The effect of these practices relates only to
Kmart's interim financial statements.

     For interim reporting periods in fiscal 2000 and prior, our policy was to
record allowances not yet subject to a written agreement during the first three
quarters of a fiscal year based upon our estimate of annual allowances ("our
plan") as determined by historical experience and current understandings with
our vendors. These amounts were supplemented by allowances obtained that were
not contemplated in our plan ("incrementals"). During the fourth quarter of
fiscal 2001, we adopted a new accounting policy, effective as of February 1,
2001, for interim financial reporting only, requiring that cost recoveries from
vendors be recognized only when a formal agreement for such amount has been
obtained and the underlying activity for which the amount was provided has been
performed.

     As part of its review of allowances, the current management of Kmart
observed that the total level of allowances originally recorded during the first
three quarters of fiscal year 2001 appeared high, given the challenges that
faced the business in fiscal year 2001 and the fact that sales failed to
increase as originally contemplated in Kmart's business plan. In that regard, it
was noted that had Kmart recorded allowances during the first three quarters of
fiscal year 2001 at rates which corresponded to more historical rates, Kmart
would have recorded fewer allowances.

     During the first three quarters of fiscal year 2001, Kmart characterized
and recorded as incremental allowances $110, $163 and $50, respectively. Kmart
selectively identified for review certain of such allowances that had been
characterized and recorded as incrementals prior to the adoption of the new
accounting policy. Of those reviewed, the amount of allowances which appeared to
be questionable, other than those previously disclosed, were $27, $42 and $23,
respectively. The questions about these allowances relate to, among other
things, the failure to have appropriate signed documentation in place, the
failure to have adequate records demonstrating that the allowance was
collectible or the failure to otherwise comply with Kmart's historical policies.
Based on the investigation, it appears that some of these allowances may have
been reported in error in the quarterly financial statements. Given, however,
that Kmart's review of allowances was selective, as well as the difficulties of
confirming on a retroactive basis whether an incremental allowance is
supplemental to the plan, Kmart cannot exclude the possibility that there may be
additional incremental allowances in fiscal year 2001 which could be subject to
question.

     Any errors, as described in the preceding paragraphs, concerning the
recording of allowances that were reflected in our fiscal year 2001 interim
unaudited financial statements prior to the change in accounting policy were no
longer reflected in our restated financial statements as filed with the SEC on
May 15, 2002. This results from the change in accounting policy, given that
under the new accounting policy there is no longer a distinction between planned
and incremental allowances, no allowances are recognized absent a formal
agreement and the recording of allowances is no longer based on a plan.
                                        29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

  INVENTORY MATTERS

     Following the filing of the Original 2001 10-K and in response to inquiries
from the staff of the SEC, we have conducted an internal inventory quality
review with respect to our 1999, 2000 and 2001 fiscal years. We continue to
believe, following the conclusion of this review, that our inventory balances
during these periods were, in all material respects, appropriately valued at the
lower of cost or market and that, therefore, our financial statements require no
adjustment for inventory quality matters. However, we have provided the
following additional information with respect to our historical inventory
markdown and reserve practices so as to enhance a reader's understanding of our
financial statements as presented herein.

  2000 Strategic Actions Charge and Related Matters

     During the second quarter of fiscal year 2000, we reported a $740 charge
for strategic actions including the closure of certain stores, acceleration of
certain inventory reductions and redefining our information technology strategy.
The $740 charge included $290 for the estimated loss on disposal for the
accelerated liquidation of certain discontinued product, which is characterized
in Management's Discussion and Analysis of this 2001 Form 10-K/A as a
"non-comparable" item. During the course of the recent internal inventory
review, we analyzed the assumptions of the charge related to the accelerated
liquidation of the discontinued merchandise, including historical markdown
cadences, or the timing for recognizing markdowns in our financial statements,
for discontinued product. In carrying out such review, current management
observed that the effect of an accelerated markdown cadence, combined with
certain transfer costs, approximated $156. In light of these observations with
respect to accelerated markdown cadences, current management noted that
approximately $134, the remaining portion of the charge, could have been viewed
as an operating item and, as such, not reported as a "non-comparable" item.
Similarly, current management observes that if the $134 portion of the charge
had been reflected as an operating item, it could have been recorded against an
existing inventory reserve.

  Inventory Valuation Reserves

     At the end of fiscal year 1999, Kmart had designated valuation reserves
related to its discontinued and aged seasonal merchandise inventories of $63, as
well as general reserves existing in its LIFO provision of $158. In light of
these reserves, the inventory at the end of fiscal 1999 was, in the judgment of
current management, properly stated at the lower of cost or market in accordance
with generally accepted accounting principles. During the fourth quarter of
fiscal year 2000, the $158 general reserve that existed in our LIFO valuation
was recharacterized within inventory reserves as a reserve for markdowns on
discontinued and aged seasonal merchandise.

     During the first quarter of 2001, we changed our method of recording the
effect of permanent markdowns and began to record them as a direct reduction in
the carrying value of the related inventory instead of being estimated and
recorded as a valuation reserve. At that time, the then existing reserves of
$172 for permanent markdowns on discontinued and aged seasonal merchandise were
applied directly to the marked-down merchandise. Accordingly, a permanent
markdown accrual was no longer necessary.

  2001 Clearance Markdowns

     As indicated in this Annual Report on Form 10-K/A, inventory valuation is
considered to be one of our critical accounting policies as significant
judgments and estimates are required in determining merchandise markdowns, among
other reasons. A number of factors are considered in determining the timing and
amount of merchandise markdowns including rate of product sell-through,
projected future demand, and market conditions and weather conditions. The
timing of such decisions may have a significant effect on quarterly financial
results.

                                        30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     During our recent internal inventory review, we noted that levels of
clearance markdowns in the second and third quarter of 2001 appeared low in
relation to historical markdown experience apparently as a result of, among
other things, of decisions to minimize markdown activity and related charges in
light of Kmart's then operating performance. Although current management found
that inventory balances had been properly stated, in all material respects,
under our policy of valuing inventory at the lower of cost or market value
during each of the quarterly periods of 2001, current management noted that the
fewer markdowns in the second and third quarters of 2001 served to increase
reported earnings in those quarters, and increase markdowns and decrease
reported earnings in the first and fourth quarters. For example, we observed
that had markdowns been taken in each quarter of 2001 in a manner which, on a
percentage of sales basis, corresponded to the average of the markdowns taken,
on a quarterly basis, during fiscal years 1998, 1999 and 2000, excluding the
effect of special events such as store closings, the level of clearance
markdowns in 2001 could have been increased by $55 and $105 in the second and
third quarters, respectively, and reduced by $40 and $120 in the first and
fourth quarters, respectively. The actual effect, however, that a different
markdown practice could have had on our quarterly net income for the full fiscal
year is difficult to predict, given the numerous other factors, estimates and
assumptions that would affect our results.

RECORDING OF TAX VALUATION ALLOWANCE

     Following the Petition Date, we recorded a non-cash charge of $1,032 to
provide a valuation allowance on net deferred tax assets in accordance with SFAS
No. 109 "Accounting for Income Taxes," as realization of such assets in future
years is uncertain.

DISCONTINUED OPERATIONS

     In connection with Kmart's bankruptcy filing, we recorded a non-cash credit
of $166 for the reduction of our obligation due to the rejection of leases for
our discontinued operations to reduce the reserves to the amount of the allowed
claim under the Bankruptcy Code.

FISCAL YEAR 2002

     Our BlueLight Always campaign significantly impacted the gross margin
decline that occurred in the fourth quarter of fiscal 2001 and we do not expect
that to continue in fiscal 2002. In that regard, we have scaled back the
BlueLight Always campaign under which we lowered prices from a peak of over
30,000 items to approximately 18,000 items through the end of January 2002. In
addition, significant allowances, which have historically been collected in the
fourth quarter, were severely impacted in 2001 by the events leading up to the
bankruptcy. These two factors alone accounted for the majority of our gross
margin rate erosion.

     The DIP Credit Facility restricts us to $650 for capital expenditures for
fiscal year 2002. Projects identified in the fiscal year 2002 capital budget
include $213 for store operations and maintenance, $84 for supply chain
operations, $55 for store expansions, $43 for information technology and $22 for
merchandising.

  STORE ACTIVITY

     We ended the year with an increase in our number of stores from 2,105 in
2000 compared to 2,114 in 2001. We opened 20 stores (14 Kmart stores and six
Kmart Supercenters) and closed 11 Kmart stores. We expect to open three Kmart
Supercenters during 2002. Capital expenditures relating to these projects will
be funded through operating cash flows.

     On March 20, 2002, the Court approved the closure of 283 stores, or
approximately 13% of our 2,114 stores. The closures include 270 Kmart discount
stores and 12 Kmart Supercenters in 40 states, and one Kmart store in Puerto
Rico. Stores were selected by evaluating the market and financial performance of
every store and the terms of every lease. Candidates for closure were stores
that did not meet our financial

                                        31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

requirements for ongoing operations. Renegotiating lease terms was also explored
to improve store profitability and avoid the need for closure.

     Shortly after receiving Court approval we commenced store-closing sales,
which are expected to continue for approximately two to three months.
Approximately 22,000 associates will be impacted by the closures. Associates
have been notified and received information about the benefits and other
resources available to them.

     On April 4, 2002, we announced that we had contracted with firms to assist
in the disposition of leases for these stores. Under the agreement, the firms
will assist our internal real estate staff in identifying retailers and
investors interested in an assignment and landlords interested in a termination
of the leases for the closing stores. Leases that are not marketed will be
rejected shortly after the completion of the related store-closing sales.

     The closure of these stores is expected to significantly enhance our
operational and financial performance. We anticipate the sales generated from
store closings and related cost savings will enhance our cash flow by
approximately $550 in 2002 and approximately $45 annually thereafter. These
stores represented approximately $3,500 in sales in 2001. As a result of these
anticipated store closings, we recorded a charge of approximately $500 in the
fourth quarter of 2001, which is included in the long-lived asset impairment
charge described above. In the first quarter of fiscal 2002, we will record an
additional $600 to $800 charge relating primarily to exit costs to be incurred
for lease rejections and severance, and markdowns taken on inventory in
connection with liquidation sales. In conjunction with the store-closing sales,
we will also accelerate certain inventory reductions for which we expect a
charge in the first quarter of fiscal 2002 for approximately $250.

  PENSKE

     On April 9, 2002 we reached an agreement with Penske Corporation, Penske
Auto Centers, Inc., and Penske Auto Centers, LLC (collectively "Penske") whereby
Penske and Kmart will work together to achieve an orderly wind-down of
operations at auto service centers at more than 563 Kmart stores in 44 states
following Penske's unilateral decision to close the business as of April 6,
2002. We account for our investment in Penske Auto Centers LLC under the equity
method and our investment at January 30, 2002 had no carrying value. We do not
expect this matter to have a material adverse effect on our liquidity, financial
position or results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

     The provisions of Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," and
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," (collectively, "SFAS No. 133") became effective for Kmart on
February 1, 2001. SFAS No. 133 requires all derivatives to be recorded on the
balance sheet at fair value and establishes accounting treatment for various
types of hedges. We currently do not engage in these types of transactions, and
there was no impact to our financial statements from the adoption of SFAS No.
133.

     In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
effective for all business combinations initiated after June 30, 2001. This
statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001 or thereafter.
Also, in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," and SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective for fiscal years beginning after December 15, 2001. The adoption SFAS
No. 141 and SFAS No. 142 are not expected to have a material impact on our
earnings or financial position. We are currently assessing the impact that SFAS
No. 143 will have on our earnings and financial position.
                                        32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective for fiscal years
beginning after December 15, 2001. We have elected early adoption of SFAS No.
144 for the fiscal year 2001. See Note 6 of the Notes to Condensed Consolidated
Financial Statements, in Item 8. Financial Statements and Supplementary Data, of
this Form 10-K/A for a discussion of the impairment charges recorded in
accordance with SFAS No. 144.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     At January 30, 2002, 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 DIP
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 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following information is submitted pursuant to the requirements of Item
8:

<Table>
<Caption>
                                                               PAGE
                                                               -----
<S>                                                            <C>
Consolidated Statements of Operations for the Years Ended
  January 30, 2002, January 31, 2001 and January 26, 2000...    34
Consolidated Balance Sheets as of January 30, 2002 and
  January 31, 2001..........................................    35
Consolidated Statements of Cash Flows for the Years Ended
  January 30, 2002, January 31, 2001 and January 26, 2000...    36
Consolidated Statements of Shareholders' Equity for the
  Years Ended January 30, 2002, January 31, 2001 and January
  26, 2000..................................................    37
Notes to Consolidated Financial Statements..................   38-67
Schedule II -- Valuation and Qualifying Accounts............    68
Report of Independent Accountants...........................    70
</Table>

                                        33
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                     (AS RESTATED -- SEE NOTE 1)
                                                                     ---------------------------
YEARS ENDED JANUARY 30, 2002, JANUARY 31, 2001 AND JANUARY 26, 2000   2001      2000      1999
------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                                  <C>       <C>       <C>
Sales..........................................................      $36,151   $37,028   $35,925
Cost of sales, buying and occupancy............................       29,853    29,732    28,161
                                                                     -------   -------   -------
Gross margin...................................................        6,298     7,296     7,764
Selling, general and administrative expenses...................        7,588     7,366     6,569
Equity (loss) income in unconsolidated subsidiaries............           --       (13)       44
Restructuring, impairment and other charges....................        1,091        --        --
                                                                     -------   -------   -------
Continuing (loss) income before interest, reorganization items,
  income taxes and dividends on convertible preferred securities of
  subsidiary trust.............................................       (2,381)      (83)    1,239
Interest expense, net (contractual interest for fiscal year 2001
  was $352)....................................................          344       287       280
Reorganization items, net......................................         (183)       --        --
(Benefit from) provision for income taxes......................           --      (148)      315
Dividends on convertible preferred securities of subsidiary trust,
  net of income taxes of $0, $25 and $27, respectively (contractual
  dividend for fiscal year 2001 was $72, net of tax)...........           70        46        50
                                                                     -------   -------   -------
Net (loss) income from continuing operations...................       (2,612)     (268)      594
Discontinued operations, net of income taxes of $0 and $124....          166        --      (230)
                                                                     -------   -------   -------
Net (loss) income..............................................      $(2,446)  $  (268)  $   364
                                                                     =======   =======   =======
BASIC EARNINGS (LOSS) PER COMMON SHARE
Net (loss) income from continuing operations...................      $ (5.29)  $ (0.53)  $  1.21
Discontinued operations........................................         0.34        --     (0.47)
                                                                     -------   -------   -------
Net (loss) income..............................................      $ (4.95)  $ (0.53)  $  0.74
                                                                     =======   =======   =======
DILUTED (LOSS) EARNINGS PER COMMON SHARE
Net (loss) income from continuing operations...................      $ (5.29)  $ (0.53)  $  1.15
Discontinued operations........................................         0.34        --     (0.41)
                                                                     -------   -------   -------
Net (loss) income..............................................      $ (4.95)  $ (0.53)  $  0.74
                                                                     =======   =======   =======
Basic weighted average shares (millions).......................        494.1     482.8     491.7
Diluted weighted average share (millions)......................        494.1     482.8     561.7
</Table>

See accompanying Notes to Consolidated Financial Statements
                                        34
<PAGE>

CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                              (AS RESTATED -- SEE NOTE 1)
                                                              ---------------------------
AS OF JANUARY 30, 2002 AND JANUARY 31, 2001                       2001           2000
-----------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S>                                                           <C>            <C>
                                         ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................    $ 1,245        $   401
Merchandise inventories.....................................      5,796          6,350
Other current assets........................................        800            925
                                                                -------        -------
TOTAL CURRENT ASSETS........................................      7,841          7,676
Property and equipment, net.................................      6,093          6,522
Other assets and deferred charges...........................        249            617
                                                                -------        -------
TOTAL ASSETS................................................    $14,183        $14,815
                                                                =======        =======

                          LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt due within one year..........................    $    --        $    68
Accounts payable............................................         89          2,190
Accrued payroll and other liabilities.......................        420          1,691
Taxes other than income taxes...............................        143            187
                                                                -------        -------
TOTAL CURRENT LIABILITIES...................................        652          4,136
Long-term debt and notes payable............................        330          2,084
Capital lease obligations...................................        857            943
Other long-term liabilities.................................        132            883
                                                                -------        -------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE.................      1,971          8,046

Liabilities subject to compromise...........................      8,093             --

Company obligated mandatorily redeemable convertible
  preferred securities of a subsidiary trust holding solely
  7 3/4% convertible junior subordinated debentures of Kmart
  (redemption value of $898 and $898, respectively).........        889            887
Common stock, $1 par value, 1,500,000,000 shares authorized;
  503,294,515 and 486,509,736 shares issued, respectively...        503            487
Capital in excess of par value..............................      1,695          1,578
Retained earnings...........................................      1,032          3,817
                                                                -------        -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................    $14,183        $14,815
                                                                =======        =======
</Table>

See accompanying Notes to Consolidated Financial Statements
                                        35
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                      (AS RESTATED -- SEE NOTE 1)
                                                                      ---------------------------
YEARS ENDED JANUARY 30, 2002, JANUARY 31, 2001, AND JANUARY 26, 2000   2001      2000      1999
-------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<S>                                                                   <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net (loss) income.............................................      $(2,446)  $  (268)  $   364
  Adjustments to reconcile net income (loss) to net cash provided by
     operating activities:
  Discontinued operations.......................................         (166)       --       230
  Restructuring, impairment and other charges...................        1,254       728        --
  Reorganization items, net.....................................         (183)       --        --
  Depreciation and amortization.................................          824       777       770
  Equity loss (income) in unconsolidated subsidiaries...........           --        13       (44)
  Dividends received from Meldisco..............................           51        44        38
  Decrease (increase) in inventories............................          560       335      (544)
  Increase (decrease) in accounts payable.......................        1,046      (137)      169
  Deferred income taxes and taxes payable.......................          (55)     (204)      258
  Changes in other assets.......................................          295        29      (127)
  Changes in other liabilities..................................          (23)       14       133
  Cash used for store closings..................................         (128)     (102)      (80)
                                                                      -------   -------   -------
  Net cash provided by continuing operations....................        1,029     1,229     1,167
  Net cash used for discontinued operations.....................         (102)     (115)      (83)
                                                                      -------   -------   -------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................          927     1,114     1,084
                                                                      -------   -------   -------
NET CASH USED FOR REORGANIZATION ITEMS..........................           (6)       --        --
                                                                      -------   -------   -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures..........................................       (1,385)   (1,089)   (1,277)
  Investment in BlueLight.com...................................          (45)      (55)       --
  Acquisition of Caldor leases..................................           --        --       (86)
                                                                      -------   -------   -------
NET CASH USED FOR INVESTING ACTIVITIES..........................       (1,430)   (1,144)   (1,363)
                                                                      -------   -------   -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of debt................................        1,824       400       300
  Payments on debt..............................................         (320)      (73)      (90)
  Debt issuance costs...........................................          (49)       (3)       (3)
  Payments on capital lease obligations.........................          (86)      (78)      (77)
  Payments of dividends on preferred securities of subsidiary
     trust......................................................          (72)      (73)      (80)
  Purchase of convertible preferred securities of subsidiary
     trust......................................................           --       (84)       --
  Issuance of common shares.....................................           56        53        63
  Purchase of common shares.....................................           --       (55)     (200)
                                                                      -------   -------   -------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES............        1,353        87       (87)
                                                                      -------   -------   -------
NET CHANGE IN CASH AND CASH EQUIVALENTS.........................          844        57      (366)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................          401       344       710
                                                                      -------   -------   -------
CASH AND CASH EQUIVALENTS, END OF YEAR..........................      $ 1,245   $   401   $   344
                                                                      =======   =======   =======
</Table>

See accompanying Notes to Consolidated Financial Statements
                                        36
<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<Table>
<Caption>

                                                         (AS RESTATED --
                                              CAPITAL      SEE NOTE 1)      ACCUMULATED    (AS RESTATED --
                                             IN EXCESS   ---------------       OTHER         SEE NOTE 1)
                                    COMMON    OF PAR        RETAINED       COMPREHENSIVE   ---------------
(DOLLARS IN MILLIONS)               STOCK      VALUE        EARNINGS           LOSS             TOTAL
----------------------------------------------------------------------------------------------------------
<S>                                 <C>      <C>         <C>               <C>             <C>
BALANCE AT JANUARY 27, 1999.......   $493     $1,667         $ 3,741           $ (60)          $ 5,841
Comprehensive Income
  Net income......................     --         --             364              --               364
  Additional minimum pension
     liability adjustment.........     --         --              --              47                47
                                                                                               -------
TOTAL COMPREHENSIVE INCOME........                                                                 411
Repurchased shares................    (17)      (174)             --              --              (191)
Shares issued to employee benefit
  plans...........................      3         40              --              --                43
Shares issued for stock option
  plans...........................      2         18              --              --                20
Other.............................     --          4              (1)             --                 3
                                     ----     ------         -------           -----           -------
BALANCE AT JANUARY 26, 2000.......    481      1,555           4,104             (13)            6,127
Comprehensive Loss
  Net loss........................     --         --            (268)             --              (268)
                                                                                               -------
TOTAL COMPREHENSIVE LOSS..........                                                                (268)
Repurchased shares................     (5)       (50)             --              --               (55)
Shares issued to employee benefit
  plans...........................     11         59              --              --                70
Shares issued for stock option
  plans...........................     --          1              --              --                 1
Discount on redemption of
  preferred securities............     --         13              (3)             --                10
Other.............................     --         --              (3)             --                (3)
                                     ----     ------         -------           -----           -------
BALANCE AT JANUARY 31, 2001.......    487      1,578           3,830             (13)            5,882
Comprehensive Loss
  Net loss........................     --         --          (2,446)             --            (2,446)
  Additional minimum pension
     liability adjustment.........     --         --              --            (339)             (339)
                                                                                               -------
TOTAL COMPREHENSIVE LOSS..........                                                              (2,785)
Shares issued to employee benefit
  plans...........................      9         44              --              --                53
Shares issued for stock option
  plans...........................      1          9              --              --                10
Shares issued to acquire
  BlueLight.com...................      6         63              --              --                69
Other.............................     --          1              --              --                 1
                                     ----     ------         -------           -----           -------
BALANCE AT JANUARY 30, 2002.......   $503     $1,695         $ 1,384           $(352)          $ 3,230
                                     ====     ======         =======           =====           =======
</Table>

See accompanying Notes to Consolidated Financial Statements
                                        37
<PAGE>

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

1)  RESTATEMENT OF FISCAL 2001 AND PRIOR PERIODS FINANCIAL STATEMENTS

     As part of the review and preparation of the Quarterly Report on Form 10-Q
for the third quarter ended October 30, 2002, we identified certain adjustments
that were recorded out-of-period, while others were previously identified and
described in our Quarterly Report on Form 10-Q for the second quarter ended July
31, 2002 filed with the Securities and Exchange Commission ("SEC") on September
16, 2002. Upon review of the aggregate impact of all of these adjustments, we
concluded that restating our historical financial statements was appropriate
because the aggregate impact was material to the current estimate of our fiscal
year 2002 results.

     The tables below show the results of the restatements on reported results
for fiscal years 2001, 2000 and 1999 presented in this Amendment No. 1 to our
Annual Report on Form 10-K/A which relate primarily to:

     a) Lease accrual adjustments -- An understatement, as disclosed in the 2002
        third quarter report on Form 10-Q, of historical accruals for certain
        leases with varying rent payments and a related understatement of
        historical rent expense.

     b) Accounts payable adjustments -- A software programming error in Kmart's
        accounts payable system, as disclosed in the 2002 third quarter report
        on Form 10-Q, that resulted in some paid invoices awaiting a store
        report of delivery not being appropriately treated in our financial
        statements. This error, restricted to a single vendor with unique
        billing arrangements, resulted in an understatement of Cost of sales,
        buying and occupancy since 1999.

     c) Inventory loads -- Adjustments, as disclosed in the Quarterly Report on
        Form 10-Q for the period ended July 31, 2002, for certain costs formerly
        capitalized into inventory. Inventory included amounts added for
        internal purposes to analyze gross margin on a comparable basis across
        all business units and to optimize purchasing decisions. These amounts
        are commonly referred to in the retail industry as "inventory loads,"
        and should have been eliminated for external reporting purposes to the
        extent the related inventory remained unsold at the end of the period.

     d) Vendor allowances -- The premature recording, as disclosed in the
        Quarterly Report on Form 10-Q for the period ended July 31, 2002, of
        vendor allowance transactions in fiscal year 2000 and prior fiscal
        years.

     In addition, given the restatement for the items noted above, we are
adjusting previously reported financial results for miscellaneous immaterial
items that were identified and previously recorded in the ordinary course of
business. These items are now being recorded in the appropriate fiscal periods.

                                        38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     The following tables summarize the effects of the restatement reflected in
this Form 10-K/A on our Statements of Operations for fiscal years 2001, 2000 and
1999.

<Table>
<Caption>
                                                LEASE       ACCOUNTS
                             AS PREVIOUSLY     ACCRUAL       PAYABLE     INVENTORY     VENDOR                 AS
                               REPORTED*     ADJUSTMENTS   ADJUSTMENTS     LOADS     ALLOWANCES   OTHER    RESTATED
                             -------------   -----------   -----------   ---------   ----------   ------   --------
<S>                          <C>             <C>           <C>           <C>         <C>          <C>      <C>
FISCAL YEAR 2001
Sales......................     $36,151        $   --        $   --       $   --       $   --     $   --   $36,151
Cost of sales, buying and
  occupancy................     $29,936        $    5        $   42       $   --       $  (94)    $  (36)  $29,853
                                -------        ------        ------       ------       ------     ------   -------
Gross margin...............     $ 6,215        $   (5)       $  (42)      $   --       $   94     $   36   $ 6,298
Selling, general and
  administrative
  expenses.................     $ 7,588        $   --        $   --       $    7       $   --     $   (7)  $ 7,588
Restructuring, impairment
  and other charges........     $ 1,099        $   --        $   --       $   --       $   --     $   (8)  $ 1,091
Operating (loss) income....     $(2,472)       $   (5)       $  (42)      $   (7)      $   94     $   51   $(2,381)
Reorganization items,
  net......................     $  (184)       $   --        $   --       $   --       $   --     $    1   $  (183)
(Benefit from) provision
  for income taxes.........     $  (115)       $   --        $   --       $   --       $   --     $  115   $    --
Net (loss)/income from
  continuing operations....     $(2,587)       $   (5)       $  (42)      $   (7)      $   94     $  (65)  $(2,612)
Discontinued operations....     $   169        $   --        $   --       $   --       $   --     $   (3)  $   166
Net (loss) income..........     $(2,418)       $   (5)       $  (42)      $   (7)      $   94     $  (68)  $(2,446)
Basic/Diluted loss per
  common share
  Net (loss) income from
     continuing
     operations............     $ (5.23)       $(0.01)       $(0.09)      $(0.01)      $ 0.19     $(0.14)  $ (5.29)
  Discontinued
     operations............        0.34            --            --           --           --         --      0.34
                                -------        ------        ------       ------       ------     ------   -------
Net (loss) income..........     $ (4.89)       $(0.01)       $(0.09)      $(0.01)      $ 0.19     $(0.14)  $ (4.95)
                                =======        ======        ======       ======       ======     ======   =======
</Table>

<Table>
<Caption>
                                                LEASE       ACCOUNTS
                             AS PREVIOUSLY     ACCRUAL       PAYABLE     INVENTORY     VENDOR                 AS
                               REPORTED*     ADJUSTMENTS   ADJUSTMENTS     LOADS     ALLOWANCES   OTHER    RESTATED
                             -------------   -----------   -----------   ---------   ----------   ------   --------
<S>                          <C>             <C>           <C>           <C>         <C>          <C>      <C>
FISCAL YEAR 2000
Sales......................     $37,028        $   --        $   --       $   --       $   --     $   --   $37,028
Cost of sales, buying and
  occupancy................     $29,658        $    4        $    9       $   12       $   52     $   (3)  $29,732
                                -------        ------        ------       ------       ------     ------   -------
Gross margin...............     $ 7,370        $   (4)       $   (9)      $  (12)      $  (52)    $    3   $ 7,296
Selling, general and
  administrative
  expenses.................     $ 7,402        $   --        $   --       $   --       $   --     $  (36)  $ 7,366
Operating (loss) income....     $   (45)       $   (4)       $   (9)      $  (12)      $  (52)    $   39   $   (83)
(Benefit from) provision
  for income taxes.........     $  (134)       $   (1)       $   (3)      $   (5)      $  (19)    $   14   $  (148)
Net (loss) income..........     $  (244)       $   (3)       $   (6)      $   (7)      $  (33)    $   25   $  (268)
Basic/Diluted (loss)
  earnings per common
  share....................     $ (0.48)       $(0.01)       $(0.01)      $(0.01)      $(0.07)    $ 0.05   $ (0.53)
</Table>

---------------

* As previously reported in the Original 2001 Form 10-K filed on May 15, 2002.

                                        39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                 LEASE       ACCOUNTS
                              AS PREVIOUSLY     ACCRUAL       PAYABLE     INVENTORY     VENDOR                AS
                                REPORTED*     ADJUSTMENTS   ADJUSTMENTS     LOADS     ALLOWANCES   OTHER   RESTATED
                              -------------   -----------   -----------   ---------   ----------   -----   --------
<S>                           <C>             <C>           <C>           <C>         <C>          <C>     <C>
FISCAL YEAR 1999
Sales.......................     $35,925        $   --          $--        $   --       $   --     $  --   $35,925
Cost of sales, buying and
  occupancy.................     $28,111        $   10          $ 1        $   14       $   33     $  (8)  $28,161
                                 -------        ------          ---        ------       ------     -----   -------
Gross margin................     $ 7,814        $  (10)         $(1)       $  (14)      $  (33)    $   8   $ 7,764
Selling, general and
  administrative expenses...     $ 6,558        $   --          $--        $    7       $   --     $   4   $ 6,569
Operating income (loss).....     $ 1,300        $  (10)         $(1)       $  (21)      $  (33)    $   4   $ 1,239
(Benefit from) provision for
  income taxes..............     $   337        $   (3)         $--        $   (8)      $  (12)    $   1   $   315
Net income (loss) from
  continuing operations.....     $   633        $   (7)         $(1)       $  (13)      $  (21)    $   3   $   594
Net income (loss)...........     $   403        $   (7)         $(1)       $  (13)      $  (21)    $   3   $   364
Basic earnings (loss) per
  common share
  Continuing income
     (loss).................     $  1.29        $(0.01)         $--        $(0.03)      $(0.05)    $0.01   $  1.21
  Net income (loss).........     $  0.82        $(0.01)         $--        $(0.03)      $(0.05)    $0.01   $  0.74
Diluted earnings (loss) per
  common share
  Continuing income
     (loss).................     $  1.22        $(0.01)         $--        $(0.02)      $(0.05)    $0.01   $  1.15
  Net income (loss).........     $  0.81        $(0.01)         $--        $(0.02)      $(0.05)    $0.01   $  0.74
</Table>

     The aggregate effect of the restatement on fiscal years prior to 1999
resulted in a reduction to beginning retained earnings for fiscal year 1999 of
$138.

     The following is a summary of the effects of the restatement on our
Consolidated Balance Sheets as of January 30, 2002 and January 31, 2001, for all
amounts that changed by 5% or more.

<Table>
<Caption>
                                                              AS PREVIOUSLY      AS
                                                                REPORTED*     RESTATED
                                                              -------------   --------
<S>                                                           <C>             <C>
January 30, 2002
  Accounts payable..........................................     $  103        $   89
  Accrued payroll and other liabilities.....................     $  378        $  420
  Other long-term liabilities...............................     $   79        $  132
  Retained earnings.........................................     $1,261        $1,032
January 31, 2001
  Other assets and deferred charges.........................     $  523        $  617
  Accrued payroll and other liabilities.....................     $1,587        $1,691
  Other long-term liabilities...............................     $  834        $  883
  Retained earnings.........................................     $4,018        $3,817
</Table>

---------------

* As previously reported in the Original 2001 Form 10-K filed on May 15, 2002.

     For information on restatements of unaudited quarterly financial
information see Note 22.

                                        40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

2)  PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

     On January 22, 2002 ("Petition Date"), Kmart Corporation and 37 of its U.S.
subsidiaries (collectively "the Debtors") filed voluntary petitions for
reorganization under Chapter 11 of the federal bankruptcy laws ("Bankruptcy
Code" or "Chapter 11") in the United States Bankruptcy Court for the Northern
District of Illinois ("Court"). The reorganization is being jointly administered
under the caption "In re Kmart Corporation, et al. case No. 02 B 02474."
Included in the Consolidated Financial Statements are subsidiaries operating
outside of the United States, which have not commenced Chapter 11 cases or other
similar proceedings elsewhere, and are not debtors. The assets and liabilities
of such non-filing subsidiaries are not considered material to the Consolidated
Financial Statements. Kmart Corporation and all of its consolidated subsidiaries
are collectively referred to herein as "Kmart," "we," "us," or "our." We decided
to seek judicial reorganization based upon a rapid decline in liquidity
resulting from below-plan sales and earnings performance in the fourth quarter
of the 2001 fiscal year, the evaporation of the surety bond market, an erosion
in supplier confidence, intense competition in the discount retail industry,
unsuccessful sales and marketing initiatives, the continuing recession and
recent capital market volatility.

     As a debtor-in-possession, Kmart is authorized to continue to operate as an
ongoing business, but may not engage in transactions outside the ordinary course
of business without the approval of the Court, after notice and an opportunity
for a hearing. Under the Bankruptcy Code, actions to collect pre-petition
indebtedness, as well as most other pending litigation, are stayed and other
contractual obligations against Kmart may not be enforced. In addition, under
the Bankruptcy Code we may assume or reject executory contracts, including lease
obligations. Parties affected by these rejections may file claims with the Court
in accordance with the reorganization process. Absent an order of the Court,
substantially all pre-petition liabilities are subject to settlement under a
plan of reorganization to be voted upon by creditors and equity holders and
approved by the Court.

     On January 25, 2002, the Court gave interim approval for $1.15 billion of a
$2 billion senior secured debtor-in-possession financing facility ("DIP Credit
Facility") for payment of permitted pre-petition claims, working capital needs,
letters of credit and other general corporate purposes. On March 6, 2002, the
Court approved the entire $2 billion DIP Credit Facility to supplement our cash
flow from operations during the reorganization process. The DIP Credit Facility
requires that we maintain certain financial covenants and restricts liens,
indebtedness, capital expenditures, dividend payments and sales of assets.

     The accompanying Consolidated Financial Statements have been prepared on a
going concern basis, which assumes continuity of operations and realization of
assets and satisfaction of liabilities in the ordinary course of business, and
in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code." Accordingly, all
pre-petition liabilities subject to compromise have been segregated in the
Consolidated Balance Sheets and classified as Liabilities subject to compromise,
at the estimated amount of allowable claims. Liabilities not subject to
compromise are separately classified as current and non-current. Revenues,
expenses, realized gains and losses, and provisions for losses resulting from
the reorganization are reported separately as Reorganization items. Cash used
for reorganization items is disclosed separately in the Consolidated Statements
of Cash Flows.

     The ability of Kmart to continue as a going concern is predicated upon
numerous issues, including our ability to achieve the following:

     - developing a long-term strategy and/or market niche to revitalize our
       business and return Kmart to profitability;

     - taking appropriate action to offset the negative effects that the Chapter
       11 filing has had on our business, including the loss in customer traffic
       and the impairment of vendor relations;

                                        41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     - operating within the framework of our DIP Credit Facility, including its
       limitations on capital expenditures, its financial covenants, our ability
       to generate cash flows from operations or seek other sources of financing
       and the availability of projected vendor credit terms;

     - attracting, motivating and/or retaining key executives and associates;
       and

     - developing and, thereafter, having confirmed by the Court, a plan of
       reorganization.

     These challenges are in addition to those operational and competitive
challenges faced by Kmart in connection with our business as a discount
retailer.

3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Operations:  Kmart operates discount department stores located in
all 50 states, Puerto Rico, the U.S. Virgin Islands, and Guam. Kmart has two
equity investments including our 49% interest in substantially all of the
Meldisco subsidiaries of Footstar, Inc. ("FTS"), which operate the footwear
department in Kmart stores and our 36% interest in Penske Auto Centers LLC. See
Note 23 regarding the wind down of Penske Auto Centers LLC operations. We have
one operating segment that comprises our retail business.

     Basis of Consolidation:  The Consolidated Financial Statements include all
majority-owned subsidiaries in which we exercise control. Investments in which
we exercise significant influence, but which we do not control (generally 20% to
50% ownership interest), are accounted for under the equity method of
accounting. All material intercompany transactions and balances have been
eliminated.

     Fiscal Year:  Our fiscal year ends on the last Wednesday in January. Fiscal
year 2001 consisted of 52 weeks and ended on January 30, 2002. Fiscal year 2000
consisted of 53 weeks and ended on January 31, 2001. Fiscal year 1999 consisted
of 52 weeks and ended on January 26, 2000.

     Bankruptcy Accounting:  Since the Chapter 11 bankruptcy filing, we have
applied the provisions of SOP 90-7, which does not significantly change the
application of accounting principles generally accepted in the United States;
however, it does require that the financial statements for periods including and
subsequent to filing the Chapter 11 petition distinguish transactions and events
that are directly associated with the reorganization from the ongoing operations
of the business.

     Cash:  Cash and cash equivalents include all highly liquid investments with
maturities of three months or less. Included are temporary investments of $0 and
$71, at year end 2001 and 2000, respectively, and receivables for credit card
sales transactions of $79 and $69 at year end 2001 and 2000, respectively. Also
included in cash and cash equivalents at January 30, 2002 is $29 million of
restricted cash.

     Merchandise Inventories:  Inventories are stated at the lower of cost or
market, primarily using the retail method. The last-in, first-out ("LIFO")
method, utilizing internal inflation indices, was used to determine the cost for
$5,525, $6,091 and $6,677 of inventory as of fiscal year end 2001, 2000 and
1999, respectively. Inventories valued on LIFO were $269, $194 and $202 lower
than amounts that would have been reported using the first in, first out
("FIFO") method at fiscal year end 2001, 2000 and 1999, respectively. We
recorded a LIFO charge of $75 in 2001 and credits of $8 and $47 in 2000 and
1999, respectively.

     Property and Equipment:  Property and equipment are recorded at cost.
Additions and betterments are capitalized and include expenditures that
materially extend the useful lives of existing facilities and equipment.
Maintenance and repairs that do not materially improve or extend the lives of
the respective assets are expensed as incurred.

     Long-lived Assets:  Long-lived assets consist primarily of land, buildings,
furniture and equipment and leasehold improvements. The recoverability of the
carrying value of long-lived assets to be held and used is evaluated at the
store level based on an analysis of operating results and consideration of other
significant

                                        42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

events or changes in the business environment. If a store asset group has
indications of impairment, we will evaluate whether impairment exists on the
basis of undiscounted expected future cash flows from operations before interest
over the remaining useful life of the primary asset. If impairment exists, the
carrying amount of the long-lived assets is reduced to its estimated fair value.
Assets to be disposed of are reported at the lower of carrying amount or fair
value less the cost to sell.

     Capitalized Software Costs:  Costs associated with the acquisition or
development of software for internal use are capitalized and amortized using the
straight-line method over the expected useful life of the software, which ranges
from 3 to 7 years.

     Depreciation and Amortization:  Depreciation and amortization, including
depreciation of property held under capital leases, are computed based upon the
estimated useful lives of the respective assets using the straight-line method
for financial statement purposes and accelerated methods for tax purposes. The
general range of lives are 25 to 50 years for buildings, 5 to 25 years for
leasehold improvements, 3 to 17 years for furniture and fixtures and 3 to 5
years for computer systems and equipment.

     Financial Instruments:  Cash and cash equivalents, trade accounts payable
and accrued liabilities are reflected in our financial statements at cost, which
approximates fair value. The fair value of our debt and other financial
instruments is discussed in Note 8.

     Derivative Instruments and Hedging Activities:  The provisions of Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the effective date
FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," (collectively "SFAS No. 133")
became effective for Kmart on February 1, 2001. We do not engage in hedging
transactions or invest in derivative instruments. Accordingly, the provisions of
SFAS No. 133 do not have a material impact on our Consolidated Financial
Statements.

     Self-insurance:  We self-insure or retain a portion of the exposure for
losses related to workers compensation and general liability costs. It is our
policy to record our self-insurance reserves, as determined actuarially, based
upon claims filed and an estimate of claims incurred but not yet reported.

     Revenue Recognition:  We recognize revenue from the sale of merchandise at
the time the merchandise is sold, net of anticipated returns. We defer the
recognition of layaway sales and profit until the period the merchandise is
delivered to the customer. Our deferred revenue is recorded in Accrued payroll
and other liabilities in the Consolidated Balance Sheets. As a result of
adopting Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), we recorded a one-time, after-tax earnings reduction of
$7, or $0.01 per share, in the fourth quarter of 1999 to reflect the cumulative
effect of the accounting change related to the modification of accounting for
layaway sales. Prior to the adoption of SAB 101, layaway sales and profits were
recognized at the time the merchandise was placed in layaway.

     Vendor Rebates and Allowances:  Periodic payments from vendors in the form
of buydowns, volume or other purchase discounts that are evidenced by signed
agreements are reflected in the carrying value of the inventory when earned and
as a component of Cost of sales, buying and occupancy as the merchandise is
sold. Up-front consideration received from vendors linked to purchases or other
commitments is initially deferred and amortized ratably over the life of the
contract or as performance of the activities specified by the vendor to earn the
fee is completed. Allowances are included as a component of Cost of sales,
buying and occupancy and as reductions in advertising expense in Selling,
general and administrative expenses. See Note 22 for a discussion of the change
in accounting method for interim recognition of cost recoveries from vendors
adopted in fiscal 2001.

     Pre-Opening Costs:  The costs of start-up activities are expensed in the
period in which they occur.

                                        43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     Advertising Costs:  Advertising costs, net of co-op recoveries from vendors
of $427, $633 and $603 for fiscal years 2001, 2000 and 1999, respectively, are
expensed as incurred and amounted to $623, $508 and $460 in 2001, 2000 and 1999,
respectively. These costs are included in Selling, general and administrative
expenses in the Consolidated Statements of Operations.

     Income Taxes:  Deferred income taxes are provided for temporary differences
between financial statement and taxable income. We accrue U.S. and foreign taxes
payable on our pro rata share of the earnings of subsidiaries, except with
respect to earnings that are intended to be permanently reinvested, or expected
to be distributed free of additional tax by operation of relevant statutes
currently in effect, and by utilization of available tax credits and deductions.
In accordance with SFAS No. 109 "Accounting for Income Taxes," we have recorded
a full valuation allowance on net deferred tax assets as realization of such
assets in future years is uncertain. See Note 17.

     Stock Option Plans:  Kmart accounts for its stock option plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. See Note 21.

     Use of Estimates:  The preparation of the Consolidated Financial Statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results,
particularly with respect to matters impacted by the proceedings under Chapter
11, could differ from those estimates.

     Reclassifications:  Certain reclassifications of prior year amounts have
been made to conform to the current presentation.

     New Accounting Pronouncements:  In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets," effective for all business
combinations initiated after June 30, 2001 and for fiscal years beginning after
December 15, 2001, respectively. SFAS No. 141 eliminates the pooling of
interests method of accounting for business combinations, with limited
exceptions, for transactions initiated prior to July 1, 2001, and broadens the
criteria for recording intangible assets separate from goodwill. We do not
expect that the application of the provisions of SFAS No. 141 will have a
material impact to our Consolidated Financial Statements. Under the provisions
of SFAS No. 142, the nonamortization provisions and annual impairment tests of
goodwill will have no impact on Kmart. Also, in June 2001, the FASB issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
the accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 will be effective for Kmart on January 30, 2003. We are currently assessing
the impact that the application of the provisions of SFAS No. 143 will have on
our Consolidated Financial Statements. In August 2001, the FASB issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and establishes a single
accounting approach for measuring impairment of long-lived assets, including a
segment of a business accounted for as a discontinued operation whether sold or
disposed of by other means. We adopted the provisions of SFAS No. 144 as of the
beginning of fiscal 2001, and adoption had no material impact on our
consolidated financial results. See Note 6 for a discussion of impairment
charges recorded in accordance with SFAS No. 144.

4)  INTEREST ON PRE-PETITION DEBT

     Included in the line Interest expense, net in the Consolidated Statements
of Operations is interest income of $4, $17 and $23 for fiscal years 2001, 2000
and 1999, respectively. On the Petition Date we stopped

                                        44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

accruing interest on all unsecured pre-petition debt in accordance with SOP
90-7. Contractual interest expense not accrued or recorded on certain
pre-petition debt totaled $8 in fiscal 2001.

5)  REORGANIZATION ITEMS, NET

     Reorganization items, net represent amounts we incurred as a result of the
Chapter 11 proceedings in accordance with SOP 90-7. The amounts for
Reorganization items, net in the Consolidated Statements of Operations include a
charge of $8 for professional services, a credit of $17 for the reduction of
lease obligations due to the rejection of closed store leases not classified as
discontinued operations and a credit of $174 for the reduction of our estimated
obligation for general liability claims.

6)  RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES

  LONG LIVED ASSET IMPAIRMENT

     Due to below-plan sales and earnings performance in the fourth quarter, our
filing under Chapter 11 and planned actions under such filings, we performed a
recoverability test on our long-lived assets. In conjunction with this analysis
we recorded a non-cash charge of $971 in accordance with SFAS No. 144. This
charge is included in the Restructuring, impairment and other charges line in
the Consolidated Statements of Operations.

     Of the $971 charge, $921 relates to long-lived assets in our store
locations. We reviewed assets on a store-level basis, which is the lowest level
of assets for which there are identifiable cash flows. The carrying amount of
the store asset groups were compared to the related expected undiscounted future
cash flows to be generated by those assets over the estimated remaining useful
life of the primary asset. Cash flows were projected for each store based upon
historical results and estimates of future performance. In cases where the
expected future cash flows were less than the carrying amounts of the assets,
those stores were considered impaired and the asset group was written down to
fair value. Fair value represents appraised value or is estimated based on sales
values of similar assets sold in recent transactions.

     We performed an additional assessment of assets that were not included in
the above store analysis. We recorded charges totaling $50 for capital projects
that were cancelled, due to capital expenditure restrictions in our DIP Credit
Facility.

  SUPPLY CHAIN OPERATIONS

     On September 6, 2001, we announced that we would restructure certain
aspects of our supply chain infrastructure, including the reconfiguration of our
distribution center network and implementation of new operating software across
our supply chain. Completion of these actions is expected by the end of the
third quarter of 2003. In conjunction with these actions, we recorded special
charges totaling $163 during 2001.

     We recorded a $93 charge related to the planned disposal of supply chain
software and hardware and other assets that will no longer be utilized, in
accordance with SFAS No. 144. As certain other components of our supply chain
software will continue to be utilized until replaced, depreciation will be
accelerated to reflect the revised useful lives and these assets will be fully
amortized by the end of the third quarter in 2003. We recorded a charge of $23
related to the accelerated depreciation on these assets during fiscal 2001. The
expected incremental depreciation aggregates $13 in fiscal 2002 and $5 in fiscal
2003. A $47 charge was provided for lease terminations and contractual
employment obligations for staff reductions of 956 employees at our distribution
centers in accordance with EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The majority of the
employees were severed in the fourth quarter of fiscal year 2001, with the
remaining employees to be severed in the first quarter of fiscal year 2002.
During the fourth quarter $6 was paid and charged to reserves for lease
terminations and contractual employment obligations.

                                        45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Additionally, we reversed through Reorganization items $30 of this charge to
reduce the lease termination reserve to the amount of the allowed claim amount
under the Bankruptcy Code.

     The following table summarizes the significant components and presentation
in the Consolidated Statements of Operations of the charge for restructuring our
supply chain operations during 2001.

<Table>
<Caption>
                                                            COST OF SALES,
                                                              BUYING AND
                                                              OCCUPANCY      SG&A   TOTAL
                                                            --------------   ----   -----
<S>                                                         <C>              <C>    <C>
Lease obligations.........................................       $37         $--    $ 37
Accelerated depreciation of software......................        23          --      23
Asset impairments.........................................         5          88      93
Contractual employment obligations........................        10          --      10
                                                                 ---         ---    ----
  Total...................................................       $75         $88    $163
                                                                 ===         ===    ====
</Table>

  BLUELIGHT.COM

     We recorded a $92 charge related to our e-commerce site, BlueLight.com, in
the second quarter comprised of $41 for the impairment of our investment in
BlueLight.com and $51 for the restructuring of our e-commerce business. These
charges are included in the line Restructuring, impairment and other charges in
the Consolidated Statements of Operations.

     As a result of the changed environment for internet businesses, in which
their ability to raise capital became restricted, management's revised future
cash flow projections and the potential need for significant additional cash
advances, we adopted a multi-step plan to substantially restructure the
operations of BlueLight.com. The initial step was executed by acquiring the
remaining 40% interest in BlueLight.com, LLC through the purchase of all
outstanding common and preferred stock of BlueLight.com, Inc., a holding
company, and certain limited liability company interests not then owned by us.
BlueLight.com, Inc. and BlueLight.com, LLC (hereinafter together or
individually, "BlueLight.com") then became wholly owned subsidiaries of Kmart,
which allowed us to execute the subsequent steps of our plan. The purchase price
of the additional interest was $85, with $69 being satisfied through the
issuance of 6.1 million unregistered shares of Kmart common stock and $16 paid
in cash. Based upon the revised cash flow projections for the business, we
recorded a $41 charge to write-down our investment in BlueLight.com to estimated
fair value in accordance with SFAS No. 144. Fair value was estimated using the
present value of estimated future cash flows.

     In conjunction with the transaction, the return of capital puts for $62.5
and the 4.4 million warrants for Kmart stock originally granted to SOFTBANK
Venture Capital (currently Mobius Venture Capital) and other investors,
previously disclosed, were terminated. The $62.5 liability for the return of
capital puts, recorded due to the uncertainties surrounding a start-up operation
in the highly competitive e-commerce industry, was relieved.

     Of the $51 restructuring charge, $29 related to assets impaired as a result
of the restructuring. These assets represent furniture and fixtures, leasehold
improvements, and computer software and hardware, the majority of which were
located in the headquarters of BlueLight.com, and have not been utilized in the
restructured operations. These assets were reduced to the lower of carrying
amount or fair value less cost to sell in accordance with SFAS No. 144. Fair
value was determined using the present value of estimated future cash flows.
Liabilities for lease terminations, contract terminations and other costs
totaling $22 were established in accordance with EITF 94-3 as a result of the
decision to exit the BlueLight.com headquarters building and outsource certain
aspects of our overall e-commerce business, including fulfillment, technology
and customer service. During fiscal 2001, $5 was paid and charged against the
reserves. After the application of the provisions of SFAS No. 144, as described
above, we had remaining long-lived assets with an estimated fair value of $2.5,
which are being depreciated over their remaining estimated useful life of 2.5
years.

                                        46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     During the remainder of 2001, we continued executing our restructuring
plan, including formally communicating to 114 employees at the BlueLight.com
headquarters expected severance dates and the severance benefit amount they
would receive upon termination. In conjunction with this communication, we
recorded an additional $5 charge to provide for these costs, $4 of which has
been paid and charged against the reserve. These charges are included in the
line Restructuring, impairment and other charges in the Consolidated Statements
of Operations. Ninety-eight employees were terminated during the second half of
fiscal 2001. We also outsourced the hosting of our site, fulfillment of
e-commerce orders and all related customer service.

  EMPLOYEE SEVERANCE AND VERP

     During the first quarter of 2001, we realigned our organization and reduced
our workforce by 350 employees through a voluntary early retirement program
("VERP") and other employee separations. The total cost of the realignment
aggregated $23, which is included in our Consolidated Statements of Operations
in the line Restructuring, impairment and other charges. The charge relates, in
part, to 130 employees that accepted the VERP offer with costs aggregating $6.
The remaining 220 employees were severed and given post-employment benefits
including severance, outplacement services, continuation of healthcare benefits
and other benefits totaling $17. All benefits associated with the employee
severance and VERP charge have been paid as of January 30, 2002.

  2000 STRATEGIC ACTIONS

     During the second quarter of fiscal year 2000, we announced a series of
strategic actions aimed at strengthening financial performance by achieving
improvements in return on invested capital. These actions included deciding to
close certain Kmart stores and Kmart Supercenters, accelerating certain
inventory reductions and redefining our information technology strategy.

     As a result of these initiatives, we recorded charges totaling $728 ($463
after-tax). During fiscal year 2001, $42 was paid and charged to the reserve. In
connection with the bankruptcy filing we reduced the reserve, recording a
non-cash adjustment of $37 for the rejection of certain leases associated with
the 2000 strategic actions charge to reduce the reserve to the allowed claim
amount under the Bankruptcy Code. The following table summarizes the significant
components of the charge for strategic actions taken during fiscal year 2000 and
the presentation in our Statements of Operations:

<Table>
<Caption>
                                          COST OF SALES,
                                            BUYING AND
                                            OCCUPANCY       SG&A    TOTAL
                                          --------------   ------   -----
<S>                                       <C>              <C>      <C>
Store closings:
  Lease obligations and maintenance.....       $ --         $191    $191
  Asset impairments.....................         --           97      97
  Inventory write-downs.................         75           --      75
Inventory reductions....................        290           --     290
Information technology..................         --           60      60
Contractual employment obligations......         --           15      15
                                               ----         ----    ----
Total...................................       $365         $363    $728
                                               ====         ====    ====
</Table>

  RESERVE ACTIVITY

     The following table provides information regarding liabilities established,
with respect to the fiscal year 2000 strategic actions charge, the fiscal year
2001 employee severance and VERP charge, the fiscal 2001

                                        47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

BlueLight.com restructuring charge and the fiscal year 2001 supply chain charge.
The liabilities aggregated $127 and $177 at January 30, 2002 and January 31,
2001, respectively.

<Table>
<Caption>
                                                 FISCAL YEAR 2001                FISCAL YEAR 2000
                                    ------------------------------------------   ----------------
                                      2001        2001       2001      2000            2000
                                      VERP/     BLUELIGHT   SUPPLY   STRATEGIC      STRATEGIC
                                    SEVERANCE     .COM      CHAIN     ACTIONS        ACTIONS
                                    ---------   ---------   ------   ---------   ----------------
<S>                                 <C>         <C>         <C>      <C>         <C>
Balance, beginning of year........     $--         $--       $--       $177            $ --
Additions charged to earnings.....      19          27        47                        218
Reductions:
  Cash payments:
     Lease obligations............                   1         1         42              14
     Employee costs...............      19           4         5
     Contractual obligations......                   3                                   15
     Other costs..................                   1
  Non-cash reductions:
     Adjustments..................                            30         37              12
                                       ---         ---       ---       ----            ----
Balance, end of year..............     $--         $18       $11       $ 98            $177
                                       ===         ===       ===       ====            ====
</Table>

7)  LIABILITIES SUBJECT TO COMPROMISE

     Under bankruptcy law, actions by creditors to collect indebtedness we owe
prior to the Petition Date are stayed and certain other pre-petition contractual
obligations may not be enforced against Kmart and 37 of its U.S. subsidiaries.
We have received approval from the Court to pay certain pre-petition liabilities
including employee salaries and wages, benefits and other employee obligations.
Except for secured debt, employee payroll and benefits, sales and use taxes and
capital lease obligations, all pre-petition liabilities have been classified as
Liabilities subject to compromise, in the fiscal year 2001 Consolidated Balance
Sheet. Adjustments to the claims may result from negotiations, payments
authorized by Court order, additional rejection of executory contracts including
leases, or other events.

     Pursuant to an order of the Court we mailed notices to all known creditors
that the deadline for filing proofs of claim with the Court is July 31, 2002.
Amounts that we have recorded may be different than amounts filed by our
creditors. The number and amount of allowed claims cannot be presently
ascertained.

     The following table summarizes the components of the liabilities included
in the line Liabilities subject to compromise in our Consolidated Balance Sheet
as of January 30, 2002.

<Table>
<Caption>
                                                               (AS RESTATED --
                                                                 SEE NOTE 1)
                                                               ---------------
                                                                  YEAR END
                                                                    2001
                                                               ---------------
<S>                                                            <C>
Debt and notes payable......................................       $3,346
Accounts payable............................................        3,153
Closed store reserves.......................................          484
Other liabilities...........................................          454
Public liability and workers compensation...................          312
Pension obligation..........................................          195
Taxes payable...............................................          149
                                                                   ------
Liabilities subject to compromise...........................       $8,093
                                                                   ======
</Table>

                                        48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

8)  LONG-TERM DEBT AND DEBT PAYABLE

<Table>
<Caption>
                                           FISCAL YEAR    INTEREST    YEAR END   YEAR END
                  TYPE                      MATURITY       RATES        2001       2000
                  ----                     -----------   ----------   --------   --------
<S>                                        <C>           <C>          <C>        <C>
DIP Credit Facility......................     2004        Floating    $   330     $   --
Credit facilities........................     2002        Floating      1,064         --
Debentures...............................  2004-2023     7.8%-12.5%     1,995      1,567
Medium-term notes........................  2002-2020       7%-9%          223        269
CMBS.....................................     2002        Floating         --        270
Mortgage notes...........................  2005-2019     7.0%-12.8%        64         46
                                                                      -------     ------
Total....................................                               3,676      2,152
Less amounts subject to compromise.......                              (3,346)        --
Less current portion of long-term debt...                                  --        (68)
                                                                      -------     ------
Long-term debt and notes payable.........                             $   330     $2,084
                                                                      =======     ======
</Table>

     On January 25, 2002, the Court authorized borrowings up to $1.15 billion of
the DIP Credit Facility for the payment of permitted pre-petition claims,
working capital needs, letters of credit and other general corporate purposes.
On March 6, 2002, the Court approved the entire $2 billion DIP Credit Facility.
Debt issuance costs associated with the DIP Credit Facility totaled $71 and are
being amortized through its maturity in April 2004. The DIP Credit Facility is a
revolving credit facility in which Kmart is the borrower and the rest of the
debtors are guarantors. The DIP Credit Facility is collateralized by first liens
on substantially all of our assets (subject to valid and unavoidable
pre-petition liens and certain other permitted liens). Borrowings under the DIP
Credit Facility can be denominated in U.S. dollars bearing interest at the Prime
Rate plus 2.5% per annum, or at Kmart's option, in Eurodollars bearing interest
at the LIBOR rate plus 3.5% per annum. The DIP Credit Facility requires that we
maintain certain financial covenants and restricts future liens, indebtedness,
capital expenditures, dividend payments and sale of assets.

     Prior to the Petition Date, our primary sources of working capital had been
cash flows from operations and borrowings under our $1.1 billion credit facility
("Credit Facility") and $400 credit facility ("364-day Facility"). On June 15,
2001, we sold in an underwritten offering $430 of 9 7/8% Notes due June 2008.
Interest was payable semiannually on June 15 and December 15. On January 30,
2001, we sold in an underwritten offering $400 of 9.375% Notes due February 1,
2006 ("Notes"). Interest was payable semi-annually on February 1 and August 1.
We used the proceeds from the notes for the paydown of certain collateralized
mortgage backed securities and other general corporate purposes. The various
facilities contain certain affirmative and negative covenants customary to these
types of agreements. Due to the proceedings under Chapter 11, we are in default
on our debt agreements, with the exception of the DIP Credit Facility. While
operating under Chapter 11, we are prohibited from paying interest on unsecured
pre-petition debts. We ceased accruing interest on all unsecured long-term debt
subject to compromise in accordance with SOP 90-7. The estimated fair market
value of debentures included in long-term debt classified in Liabilities subject
to compromise, was approximately $817 at the end of fiscal year 2001. Fair
market value for medium term notes classified in Liabilities subject to
compromise cannot be reasonably estimated at year end 2001. The estimated fair
market value of long-term debt was $2,016 at fiscal year end 2000. The estimated
fair market value was based on the quoted market prices for the same or similar
issues or on the current rates offered to Kmart for debt of the same remaining
maturities. There were $400, $664 and $330 of borrowings outstanding under our
364-day Credit Facility, Credit Facility and DIP Credit Facility, respectively,
at the end of fiscal year 2001.

     The contractual principal maturities of long-term debt for the five years
subsequent to 2001 are: 2002 -- $1,151; 2003 -- $53; 2004 -- $661; 2005 -- $113;
2006 -- $615 and 2007 and later -- $1,083. Cash paid for interest was $205, $285
and $262 in 2001, 2000 and 1999, respectively.

                                        49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

9)  DISCONTINUED OPERATIONS AND DISPOSITIONS

     Discontinued operations primarily relate to Builder's Square, Inc.
("Builder's Square"). On June 11, 1999, Hechinger Company ("Hechinger"), which
had previously acquired substantially all of the operating assets of Builder's
Square, filed for Chapter 11 bankruptcy protection. In the second quarter of
1999, we recorded a charge of $354 ($230 after tax) which reflected our best
estimate of the impact of Hechinger's default on lease obligations for up to 117
former Builder's Square locations, which are guaranteed by Kmart. The charge did
not reflect an amount, if any, which we may ultimately recover on account of any
claims previously filed by Kmart or an amount, if any, which may be sought by
others against Kmart. In connection with Kmart's bankruptcy filing, we recorded
a non-cash credit of $166 for the reduction of our obligation due to the
rejection of leases for the Builder's Square, Hechinger, Pace and Furr's
locations to reduce the reserves to the amount of the estimated allowed claim
under the Bankruptcy Code.

10)  PROPERTY AND EQUIPMENT

<Table>
<Caption>
                                                              (AS RESTATED -- SEE NOTE 1)
                                                                        YEAR END
                                                              ----------------------------
                                                                 2001             2000
                                                              -----------      -----------
<S>                                                           <C>              <C>
Land........................................................    $   410          $   389
Buildings...................................................      1,097            1,064
Leasehold improvements......................................      3,055            2,644
Furniture and fixtures......................................      5,763            5,730
Construction in progress....................................        189              245
                                                                -------          -------
                                                                 10,514           10,072
Property under capital lease................................      1,727            1,835
                                                                -------          -------
                                                                 12,241           11,907
Less:
Accumulated depreciation and amortization...................     (4,977)          (4,289)
Accumulated depreciation on capital leases..................     (1,171)          (1,096)
                                                                -------          -------
Total.......................................................    $ 6,093          $ 6,522
                                                                =======          =======
</Table>

     The following table provides a breakdown of the number of stores leased
compared to owned:

<Table>
<Caption>
                                                               FISCAL YEAR
                                                              -------------
                                                              2001    2000
                                                              -----   -----
<S>                                                           <C>     <C>
Number of U.S. Kmart stores owned...........................    133     121
Number of U.S. Kmart stores leased..........................  1,981   1,984
                                                              -----   -----
                                                              2,114   2,105
                                                              =====   =====
</Table>

11)  INVESTMENTS IN AFFILIATED RETAIL COMPANIES

  MELDISCO

     All Kmart footwear departments are operated under a license agreement with
the Meldisco subsidiaries of FTS, substantially all of which are 49% owned by
Kmart and 51% owned by FTS. Income earned under various agreements was $255,
$270 and $245 in 2001, 2000 and 1999, respectively. We received dividends

                                        50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

from Meldisco in 2001, 2000 and 1999 of $51, $44 and $38, respectively.
Unremitted earnings included in consolidated retained earnings were $46, $51 and
$44 at year end 2001, 2000 and 1999, respectively.

<Table>
<Caption>
                                                                   FISCAL YEAR
                                                             ------------------------
MELDISCO INFORMATION                                          2001     2000     1999
--------------------                                         ------   ------   ------
<S>                                                          <C>      <C>      <C>
Net sales..................................................  $1,209   $1,291   $1,212
Gross profit...............................................     561      592      544
Net income.................................................      92      105       91
Inventory..................................................     130      118      138
Other current assets.......................................      62      101       63
                                                             ------   ------   ------
Total assets...............................................     192      219      201
Current liabilities........................................      37       50       47
                                                             ------   ------   ------
Net assets.................................................  $  155   $  169   $  154
                                                             ======   ======   ======
Kmart's Share of Equity....................................  $   76   $   82   $   74
                                                             ======   ======   ======
</Table>

  BLUELIGHT.COM

     On July 31, 2001, we acquired the remaining 40% interest in BlueLight.com
through the purchase of all outstanding common and preferred stock of
BlueLight.com, Inc., a holding company, and certain limited liability company
interests not owned by Kmart, at which time BlueLight.com became a wholly-owned
subsidiary of Kmart. The results of BlueLight.com's operations are fully
consolidated in our financial statements commencing July 31, 2001. For the
period from February 1, 2001 to July 31, 2001, BlueLight.com had net sales of $8
million, gross profit of $1 million and a net loss of $55 million.

<Table>
<Caption>
                                                              FISCAL YEAR
                                                              ------------
BLUELIGHT.COM INFORMATION                                     2000    1999
-------------------------                                     -----   ----
<S>                                                           <C>     <C>
Net sales...................................................  $  26   $--
Gross profit................................................    (10)   --
Net loss....................................................   (120)   (5)
Inventory...................................................     14    --
Other current assets........................................     21    62
Total assets................................................     66    63
Current liabilities.........................................     48     5
Net assets..................................................  $  17   $58
                                                              =====   ===
Kmart's Share of Equity.....................................  $  10   $34
                                                              =====   ===
</Table>

  PENSKE

     In November 1995, we sold our auto service center business to Penske Auto
Centers, Inc., a corporation controlled by Penske Corporation ("Penske"). In
connection with the sale, Kmart and Penske entered into a multi-year master
sublease agreement for the auto service center locations that are operated by
Penske and Penske Auto Centers. We entered an agreement effective January 1,
2000 with Penske under which we acquired a 22 percent interest in Penske LLC, an
entity formed to own and operate the Penske Auto Centers. In January 2001, Kmart
and Penske entered into an agreement to increase our interest in Penske LLC from
22 percent to 36 percent. Our investment in Penske LLC is accounted for under
the equity method and has no carrying value at January 30, 2002. See Note 23
regarding the wind-down of the Penske Auto Centers operations.

                                        51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

12)  OTHER COMMITMENTS AND CONTINGENCIES

  GUARANTEES

     As of January 30, 2002, we had (i) guaranteed obligations for real property
leases of certain current and former subsidiaries of Kmart including, but not
limited to, The Sports Authority, Inc., OfficeMax, Inc. and Borders Group, Inc.,
some of which leases have been assigned pre-petition; (ii) contingent liability
under real property leases assigned by Kmart pre-petition; and (iii) guaranteed
$82 of indebtedness of other parties related to certain of our leased properties
financed by industrial revenue bonds. Our rights and obligations with respect to
our guarantee of leases of the former subsidiaries The Sports Authority, Inc.,
Office Max, Inc., and Borders Group, Inc., which are detailed below, are
governed by Lease Guarantee, Indemnification and Reimbursement Agreements dated
as of November 23, 1994, November 9, 1994 and May 24, 1995, respectively, as
they may be amended from time to time. Kmart's contingent obligations, described
above, which are not reflected in our financial statements, are dependent on the
future performance by the parties whose obligations we guarantee and are subject
to settlement under a plan of reorganization to be voted upon by creditors and
equity holders and approved by the Court.

     As of January 30, 2002, our outstanding guarantees for real property leases
of The Sports Authority, Inc., Office Max, Inc., and Borders Group, Inc. were as
follows:

<Table>
<Caption>
                                                              PRESENT
                                                              VALUE AT
                                                                 7%      GROSS LEASE
                                                              --------   -----------
                                                                2001     2001   2000
                                                              --------   ----   ----
<S>                                                           <C>        <C>    <C>
The Sports Authority........................................    $184     $312   $341
Borders Group, Inc. ........................................      89      150    163
OfficeMax...................................................      66       97    111
                                                                ----     ----   ----
Total.......................................................    $339     $559   $615
                                                                ====     ====   ====
</Table>

  LEGAL PROCEEDINGS

     Kmart has been provided with copies of anonymous letters sent to the
Securities and Exchange Commission ("SEC"), our auditors, directors and legal
counsel expressing concern with respect to various matters. The letters purport
to be sent by certain of our employees. The letters have been referred to the
Audit Committee, which has engaged outside counsel to review and investigate the
matters set forth in the letters. We are cooperating with the SEC and the U. S.
Attorney's office for the Eastern District of Michigan with respect to their
investigations of these matters.

     Since February 21, 2002, five separate purported class actions have been
filed on behalf of purchasers of Kmart common stock between May 17, 2001 and
January 22, 2002, inclusive, naming Charles Conaway as CEO and Chairman of the
Board of Kmart as the sole defendant. The complaints filed in the United States
District Court for the Eastern District of Michigan, allege that Mr. Conaway
made material misstatements or omissions during the alleged class period that
inflated the trading prices of Kmart's common stock and seek, among other
things, damages under Section 10b-5 of the Securities and Exchange Act of 1934.
Kmart is not a defendant.

     Kmart is involved in discussions with the United States Attorney for the
District of Puerto Rico regarding a criminal investigation arising out of the
alleged actions of certain of our employees following the 1998 Hurricane
Georges.

     On March 18, 2002, a purported class action was filed in the United States
District Court for the Eastern District of Michigan on behalf of participants or
beneficiaries of the Kmart Corporation Retirement Savings Plan against various
officers and directors of Kmart alleging breach of fiduciary duty under ERISA
for

                                        52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

excessive investment in company stock; failure to provide complete and accurate
information about Kmart common stock and failure to provide accurate information
regarding our financial condition. Class action allegations are also made for
current and former employees who participate in the Kmart Corporation Retirement
Savings Plan. Kmart is not a defendant.

     On April 26, 2002, a lawsuit was filed in the United States District Court
for the Eastern District of Michigan on behalf of three limited partnerships
that purchased stock of BlueLight.com, a subsidiary of Kmart, naming Charles C.
Conaway, as CEO and Chairman of the Board of Kmart, as the sole defendant. The
Complaint alleges that Mr. Conaway breached his fiduciary duty, took certain
actions and made certain misrepresentations that induced plaintiffs to exchange
their BlueLight.com stock for Kmart stock and prevented plaintiffs from
realizing the market value of their stock. The complaint also alleges violations
of Section 10b-5 of the Securities and Exchange Act of 1934 and Section 410 of
the Michigan Uniform Securities Act. Kmart is not a defendant in this
litigation.

     Kmart is a defendant in six putative class actions and one multi-plaintiff
case pending in California, all relating to our classification of assistant
managers and various other employees as "exempt" employees under the federal
Fair Labor Standards Act and the California Labor Code and our alleged failure
to pay overtime wages as required by these laws. These seven wage-and-hour cases
were all filed during 2001 and are currently pending in the U.S. District Court
for the Eastern District of California (Henderson v. Kmart), the U.S. District
Court for the Central District of California (Gulley v. Kmart, the
multi-plaintiff case, which was originally brought in state court) and the
Superior Courts of the State of California for the Counties of Alameda, Los
Angeles and Riverside (Panossian v. Kmart, Wallace v. Kmart, Pierce v. Kmart,
Hancock v. Kmart, Pryor v. Kmart). If all of these cases were determined
adversely to Kmart, the resulting damages would have a material adverse impact
on our results of operations and financial condition. However, there have been
no class certifications, all of the cases are stayed as a result of the
Company's bankruptcy and, based on our initial investigations, we believe that
the Company has numerous defenses to each of these claims. As a result, we are
currently unable to quantify the financial exposure of these cases.

     We are a party to a substantial number of other claims, lawsuits, and
pending actions, most of which are routine and all of which are incidental to
our business. Some matters involve claims for large amounts of damages as well
as other relief. The Company assesses the likelihood of potential losses on an
ongoing basis and when they are considered probable and reasonably estimable,
records 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. Although
the final consequences of these proceedings are not presently determinable, in
the opinion of management, they are not expected to have a material adverse
affect on our liquidity, financial position or results of operations.

     In addition to the foregoing, there are numerous other matters filed with
the Court in our reorganization proceedings by creditors, landlords or other
third parties related to our business operations or the conduct of our
reorganization activities. Although none of these individual matters which have
been filed to date have had or are expected to have a material adverse effect on
Kmart, our ability to successfully manage the reorganization process and develop
an acceptable reorganization plan could be negatively impacted by adverse
determinations by the Court on certain of these matters.

  OTHER

     Minimum royalty payments in certain vendor contracts for the five years
subsequent to 2001 are: 2002 -- $65; 2003 -- $87; 2004 -- $84; 2005 -- $81;
2006 -- $84 and 2007 and later -- $90.

                                        53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

13)  LIABILITIES

     Accrued payroll and other liabilities and Other long-term liabilities
included in the Consolidated Balance Sheets consist of the following:

<Table>
<Caption>
                                                           (AS RESTATED -- SEE NOTE 1)
                                                        ---------------------------------
                                                                    YEAR END
                                                        ---------------------------------
                                                             2000              2001
                                                        ---------------   ---------------
                                                                  LONG-             LONG-
                                                        CURRENT   TERM    CURRENT   TERM
                                                        -------   -----   -------   -----
<S>                                                     <C>       <C>     <C>       <C>
Closed store reserves.................................   $ --     $ --    $  252    $561
Accrued payroll and related liabilities...............    168       --       315      --
Deferred income taxes.................................     --       --       180      --
Income taxes payable..................................     40       --        73      --
Current portion of capital lease obligation...........     84       --        85      --
Other liabilities.....................................    128      132       786     322
                                                         ----     ----    ------    ----
Total.................................................   $420     $132    $1,691    $883
                                                         ====     ====    ======    ====
</Table>

     As discussed in Note 7, all pre-petition liabilities except for secured
debt, employee payroll and benefits, sales and use taxes and capital lease
obligations, have been classified as Liabilities subject to compromise.

14)  LEASES

     We conduct operations primarily in leased facilities. Kmart store leases
are generally for terms of 25 years with multiple five-year renewal options that
allow us the option to extend the life of the lease up to 50 years beyond the
initial noncancelable term. In certain Kmart leased facilities, selling space
has been sublet to other retailers, including Olan Mills, Inc., Penske LLC, and
the Meldisco subsidiaries of FTS.

<Table>
<Caption>
                                                                 MINIMUM LEASE
                                                                  COMMITMENTS
                                                              -------------------
AS OF JANUARY 30, 2002                                        CAPITAL   OPERATING
----------------------                                        -------   ---------
<S>                                                           <C>       <C>
Fiscal Year:
  2002......................................................  $  234     $   728
  2003......................................................     224         705
  2004......................................................     209         669
  2005......................................................     188         603
  2006......................................................     156         574
  Later years...............................................   1,232       6,355
                                                              ------     -------
Total minimum lease payments................................   2,243       9,634
Less-minimum sublease income................................      --      (1,991)
                                                              ------     -------
Net minimum lease payments..................................   2,243     $ 7,643
                                                                         =======
Less:
  Estimated executory costs.................................    (619)
  Amount representing interest..............................    (683)
                                                              ------
                                                                 941
Current.....................................................     (84)
                                                              ------
Long-term...................................................  $  857
                                                              ======
</Table>

                                        54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     Under the Bankruptcy Code we may assume or reject executory contracts,
including lease obligations. Therefore, the commitments shown below may not
reflect actual cash outlays in the future periods. See Note 23, Subsequent
Events.

<Table>
<Caption>
                                                              (AS RESTATED -- SEE NOTE 1)
                                                              ---------------------------
RENT EXPENSE                                                   2001      2000      1999
------------                                                  -------   -------   -------
<S>                                                           <C>       <C>       <C>
Minimum rentals.............................................   $ 771     $ 777     $ 794
Percentage rentals..........................................      39        46        41
Less-sublease rentals.......................................    (248)     (257)     (253)
                                                               -----     -----     -----
Total.......................................................   $ 562     $ 566     $ 582
                                                               =====     =====     =====
</Table>

15)  SHARE REPURCHASE PROGRAMS

     In July 2001, we terminated the common stock repurchase program that was
initiated in April 1999. Under the program we repurchased approximately 22
million shares of common stock at a cost of approximately $55 and $200 in fiscal
years 2000 and 1999, respectively. We also terminated the trust convertible
preferred securities repurchase program that was initiated in February 2000.
Under the program we repurchased approximately 2 million shares of trust
convertible securities during fiscal year 2000 at a cost of approximately $84.

16)  CONVERTIBLE PREFERRED SECURITIES

     In June 1996, a trust sponsored and wholly owned by Kmart issued to the
public 20,000,000 trust convertible preferred securities ("Preferred
Securities"). The proceeds from the sale of the Preferred Securities, together
with the proceeds of a sale of common trust securities to Kmart, were used to
purchase from Kmart 7 3/4% subordinated convertible debentures due June 15,
2016. The debentures are the sole asset of the trust.

     The Preferred Securities accrue and pay cash distributions quarterly at a
rate of 7 3/4% per annum. We have guaranteed, on a subordinated basis,
distributions and other payments due on the Preferred Securities. We have
stopped accruing distributions on the Preferred Securities in accordance with
SOP 90-7. Contractual distributions for fiscal year 2001 on the Preferred
Securities were $72.

     The Preferred Securities are convertible at the option of the holder at any
time at the rate of 3.3333 shares of Kmart common stock for each Preferred
Security, and are mandatorily redeemable upon repayment of the debentures,
either at maturity on June 15, 2016, or upon their earlier redemption. The
debentures became callable at our option beginning June 15, 1999.

     During fiscal year 2000 we repurchased approximately 2 million shares of
Preferred Securities at a cost of approximately $84. For purposes of computing
earnings per share ("EPS"), the discount on the repurchase, net of tax, was
added to net income to arrive at income available to common shareholders.

     Based on the quoted market prices, fair value of the Preferred Securities
was approximately $130 and $714 as of fiscal year end 2001 and 2000,
respectively.

                                        55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

17)  INCOME TAXES

<Table>
<Caption>
                                                               (AS RESTATED -- SEE NOTE 1)
                                                              -----------------------------
INCOME (LOSS) BEFORE INCOME TAXES                               2001        2000      1999
---------------------------------                             ---------   --------   ------
<S>                                                           <C>         <C>        <C>
U.S. .......................................................   $(2,569)    $ (407)    $931
Foreign.....................................................        27         37       28
                                                               -------     ------     ----
Total.......................................................   $(2,542)    $ (370)    $959
                                                               =======     ======     ====
</Table>

<Table>
<Caption>
INCOME TAX PROVISION (BENEFIT)                                 2001     2000    1999
------------------------------                                -------   -----   ----
<S>                                                           <C>       <C>     <C>
Current:
  Federal...................................................  $   (29)  $(149)  $133
  State and local...........................................       --       2     17
  Foreign...................................................       10      14     11
                                                              -------   -----   ----
                                                                  (19)   (133)   161
Deferred:
  Federal...................................................       22     (18)   148
  State.....................................................       (3)      3      6
                                                              -------   -----   ----
Total.......................................................  $    --   $(148)  $315
                                                              =======   =====   ====
</Table>

<Table>
<Caption>
EFFECTIVE TAX RATE RECONCILIATION                            2001      2000      1999
---------------------------------                            -----     -----     ----
<S>                                                          <C>       <C>       <C>
Federal income tax rate....................................  (35.0)%   (35.0)%   35.0%
State and local taxes, net of federal tax benefit..........   (1.0)%     1.0%     1.4%
Tax credits................................................    0.1%     (1.9)%   (0.7)%
Equity in net income of affiliated companies...............   (0.5)%    (3.8)%   (1.2)%
Valuation allowance........................................   37.3%       --%      --%
Other......................................................   (0.9)%    (0.3)%   (1.7)%
                                                             -----     -----     ----
                                                                --%    (40.0)%   32.8%
                                                             =====     =====     ====
</Table>

                                        56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                              (AS RESTATED -- SEE NOTE 1)
                                                              ---------------------------
                                                                       YEAR END
                                                              ---------------------------
DEFERRED TAX ASSETS AND LIABILITIES                              2001              2000
-----------------------------------                           ----------          -------
<S>                                                           <C>                 <C>
Deferred tax assets:
  Federal benefit for state and foreign taxes...............   $    34             $ 45
  Discontinued operations...................................        90              196
  Accruals and other liabilities............................       292              117
  Property and equipment....................................        99               --
  Capital leases............................................       115               81
  Store closings............................................        60               90
  Credit carryforwards......................................       258              240
  NOL carryforwards.........................................       369                5
  Other.....................................................        52               30
                                                               -------             ----
Total deferred tax assets...................................     1,369              804
Valuation allowance.........................................    (1,032)              --
                                                               -------             ----
Net deferred tax assets.....................................   $   337             $804
Deferred tax liabilities:
  Inventory.................................................       306              397
  Property and equipment....................................        --              381
  Other.....................................................        31               32
                                                               -------             ----
Total deferred tax liabilities..............................       337              810
                                                               -------             ----
Net deferred tax liabilities................................   $    --             $ (6)
                                                               =======             ====
</Table>

     We have recorded a full valuation allowance on net deferred tax assets, in
accordance with SFAS No. 109, "Accounting for Income Taxes," as realization of
such assets in future years is uncertain. At January 30, 2002, we have unused
net operating loss ("NOL") carryforwards of approximately $986. The federal tax
benefits of these NOL carryforwards will expire in 2021 and the state tax
benefits will predominantly expire between 2016 and 2021. Additionally, we have
available foreign tax credit carryforwards of approximately $89 which would
expire in 2002 ($15), 2003 ($19), 2004 ($17), 2005 ($20) and 2006 ($18); general
business tax credit carryforwards of approximately $60 which would expire in
2011 ($7), 2017 ($7), 2018 ($10), 2019 ($11), 2020 ($14) and 2021 ($11) and
alternative minimum tax ("AMT") credit carryforwards of approximately $109 which
may be carried forward indefinitely.

     In 2001, the Internal Revenue Service completed its examination of Kmart's
federal income tax returns through 1998. We believe that adequate tax accruals
have been provided for all years.

     On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 was
enacted. This law allows NOL carrybacks arising in taxable years ending 2001 and
2002 to offset 100% of a taxpayer's alternative minimum taxable income. As such,
Kmart anticipates filing amended carryback claims, which will result in
additional AMT refunds of $13.

     Cash (received) paid for income taxes was $(79), $50 and $59 in 2001, 2000
and 1999, respectively.

                                        57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

18)  EARNINGS PER SHARE

<Table>
<Caption>
                                                              (AS RESTATED -- SEE NOTE 1)
                                                             -----------------------------
                                                               2001       2000      1999
                                                             ---------   -------   -------
<S>                                                          <C>         <C>       <C>
Net (loss) income from continuing operations...............   $(2,612)    $(268)    $ 594
Discount on redemption of Preferred Securities, net........        --        10        --
                                                              -------     -----     -----
Net (loss) income from continuing operations available to
  common shareholders......................................    (2,612)     (258)      594
Discontinued operations....................................       166        --      (230)
                                                              -------     -----     -----
Net (loss) income available to common shareholders.........   $(2,446)    $(258)    $ 364
                                                              =======     =====     =====
Preferred dividends........................................   $    --     $  --     $  50
                                                              =======     =====     =====
</Table>

<Table>
<Caption>
                                                              2001     2000     1999
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Basic weighted average shares..............................   494.1    482.8    491.7
Dilutive effect of stock options...........................      --       --      3.3
Convertible preferred securities...........................      --       --     66.7
                                                             ------   ------   ------
Diluted weighted average shares............................   494.1    482.8    561.7
                                                             ======   ======   ======
Basic (loss) earnings per share:
  Net (loss) income from continuing operations available to
     common shareholders...................................  $(5.29)  $(0.53)  $ 1.21
  Discontinued operations..................................    0.34       --    (0.47)
                                                             ------   ------   ------
  Net (loss) income available to common shareholders.......  $(4.95)  $(0.53)  $ 0.74
                                                             ======   ======   ======
Diluted (loss) earnings per share:
  Net (loss) income from continuing operations available to
     common shareholders...................................  $(5.29)  $(0.53)  $ 1.15
  Discontinued operations..................................    0.34       --    (0.41)
                                                             ------   ------   ------
Net (loss) income available to common shareholders.........  $(4.95)  $(0.53)  $ 0.74
                                                             ======   ======   ======
</Table>

     In fiscal years 2001 and 2000, all outstanding stock options were excluded
from the computation of diluted earnings per share because they would have been
anti-dilutive. For fiscal year 2001, options to purchase 60.0 million shares of
common stock at prices ranging from $4.86 to $26.03 were excluded from the
calculations. For fiscal year 2000, options to purchase 46.3 million shares of
common stock at prices ranging from $5.34 to $26.03 were excluded from the
calculations. The calculations also exclude the effect of Preferred Securities.
For fiscal years 2001 and 2000, diluted shares outstanding exclude approximately
59.9 million common shares from potential conversion of certain Preferred
Securities due to their anti-dilutive effect. For fiscal year 2000 diluted
shares outstanding exclude approximately 0.2 million shares from the potential
conversion of written put options due to their anti-dilutive effect.

19)  PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS

     In the first quarter of 2001, we announced a Voluntary Early Retirement
Program ("VERP") for certain Kmart associates at the Kmart Resource Center over
the age of 49 with at least 10 years of service as of May 7, 2001. Of the 539
Kmart associates eligible for the program, 130 accepted the early retirement
offer, and we recorded a pre-tax charge of $6. Payouts under this program were
funded from the Kmart Employee Pension Plan except for certain payments to
highly compensated employees, which were paid directly. Prior to

                                        58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

1996, Kmart had defined benefit pension plans covering eligible associates who
met certain requirements of age, length of service, and hours worked per year.
Effective January 31, 1996, the pension plans were frozen, and associates no
longer earn additional benefits under the plans.

     The plan's assets consist primarily of equity and fixed income securities.
Contributions to the plans were not required for fiscal years 2001, 2000 and
1999. Total consolidated pension income was $72, $71 and $68 in 2001, 2000 and
1999, respectively.

     The $195 liability reported in the fiscal year 2001 Consolidated Balance
Sheet has been included as a component of Liabilities subject to compromise
pending final resolution of an allowed claim that may be filed by the Pension
Benefit Guaranty Corporation.

     The following tables summarize the change in benefit obligation, change in
plan assets, funded status, amounts recognized and actuarial assumptions for our
employee pension plans. We have non-qualified plans for directors and officers
which were partially funded as of years ended 2001 and 2000. Benefits under the
plans totaled $36 and $32 at the end of 2001 and 2000, respectively, which have
been accrued in the Consolidated Balance Sheets. Plan assets totaled $16 and $15
as of year end 2001 and 2000, respectively.

<Table>
<Caption>
                                                                 YEAR END
                                                              ---------------
                                                               2001     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Change in benefit obligation:
  Benefit obligation at beginning of year...................  $1,974   $1,944
  Interest costs............................................     144      142
  VERP......................................................       5       --
  Actuarial gain (loss).....................................      84       (6)
  Benefits paid including VERP..............................    (122)    (106)
                                                              ------   ------
  Benefit obligation at end of year.........................  $2,085   $1,974
                                                              ======   ======
Change in plan assets:
  Fair value of plan assets at beginning of year............  $2,141   $2,105
  Actual return on plan assets..............................    (129)     142
  Benefits paid including VERP..............................    (122)    (106)
                                                              ------   ------
  Fair value of plan assets at end of year..................  $1,890   $2,141
                                                              ======   ======
</Table>

<Table>
<Caption>
                                                                 YEAR END
                                                              ---------------
                                                               2001     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Funded status...............................................  $ (195)  $  167
Unrecognized net loss (gain)................................     369      (53)
Unrecognized transition asset...............................     (33)     (40)
                                                              ------   ------
Prepaid benefit cost........................................     141       74
  Accumulated other comprehensive income....................    (336)      --
                                                              ------   ------
  (Accrued liability) prepaid benefit cost recognized in the
     Consolidated Balance Sheets............................  $ (195)  $   74
                                                              ======   ======
Weighted-average assumptions
  Discount rate.............................................    7.25%    7.50%
  Expected return on plan assets............................    9.50%   10.00%
</Table>

                                        59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                                    YEAR END
                                                              ---------------------
                                                              2001    2000    1999
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Components of Net Periodic Benefit (Income)/Expense
  Interest costs............................................  $ 144   $ 142   $ 141
  Expected return on plan assets............................   (209)   (206)   (202)
  Amortization of unrecognized transition asset.............     (7)     (7)     (7)
                                                              -----   -----   -----
  Net periodic benefit......................................  $ (72)  $ (71)  $ (68)
                                                              =====   =====   =====
</Table>

     Full time associates who have worked 10 years and who have retired after
age 55 have the option of participation in Kmart's medical plan until age 65.
The plan is contributory, with retiree contributions adjusted annually. The
accounting for the plan anticipates future cost-sharing changes that are
consistent with our expressed intent to increase the retiree contribution rate
annually. The accrued post-retirement benefit costs were $40 and $47 at the end
of 2001 and 2000, respectively.

20)  RETIREMENT SAVINGS PLAN

     The Retirement Savings Plan provides that associates of Kmart who have
completed 1,000 hours of service within a twelve month period can invest from 1%
to 16% of their earnings in their choice of various investments. For each dollar
the participant contributed up to 6% of earnings, we contributed an additional
50 cents which was invested in the Employee Stock Ownership Plan. In February
2002, the Employee Stock Ownership Plan provision was removed and the Employer
Match Contribution could be directed at the discretion of the participant.

     The Retirement Savings Plan also had a profit sharing feature whereby we
would make contributions based on profits, with minimum yearly contributions
required of $30. The profit sharing feature was discontinued in 2001. Our total
expense related to the Retirement Savings Plan was $39, $73 and $94 in 2001,
2000 and 1999, respectively.

21)  STOCK OPTION PLANS

     We use the intrinsic value method of accounting for our stock option and
restricted stock plans in accordance with APB No. 25. Since stock options were
granted at exercise prices equal to the market prices on the grant date, no
compensation cost has been recognized for stock options granted under our stock
based compensation plans.

     Had the compensation cost for our stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
of FAS No. 123 "Accounting for Stock-Based Compensation," net (loss) income and
net (loss) income per share would have been the pro forma amounts shown below.

<Table>
<Caption>
                                                             (AS RESTATED -- SEE NOTE 1)
                                                             ---------------------------
                     PRO FORMA INCOME                          2001      2000      1999
                     ----------------                        --------   -------   ------
<S>                                                          <C>        <C>       <C>
Net (loss) income -- as reported...........................  $(2,446)   $ (268)   $ 364
EPS -- as reported.........................................    (4.95)    (0.53)    0.74
Net (loss) income -- pro forma.............................   (2,501)     (303)     337
EPS -- pro forma...........................................    (5.06)    (0.63)    0.69
</Table>

                                        60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     To determine these amounts, the fair value of each stock option has been
estimated on the date of the grant using a Black-Scholes option-pricing model
with a dividend yield of 0%. Options generally vest over 3 years on a
straight-line basis with a term of 10 years.

<Table>
<Caption>
                                                           2001      2000      1999
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Expected volatility.....................................   0.4435    0.4672    0.4506
Risk-free interest rates................................     4.84      6.43      4.93
Expected life in years..................................        5         5         5
Weighted-average fair value per share...................  $  3.84   $  3.90   $  7.90
</Table>

<Table>
<Caption>
                 STOCK OPTION PLANS (000'S)                   SHARES   OPTION PRICE
                 --------------------------                   ------   ------------
<S>                                                           <C>      <C>
January 26, 2000
  Outstanding...............................................  27,893   $7.00-$26.03
  Granted...................................................  22,026   $5.34-$ 9.59
  Exercised.................................................    (103)  $7.81-$ 7.81
  Forfeited.................................................  (3,561)  $6.84-$26.03
                                                              ------
January 31, 2001
  Outstanding...............................................  46,255   $5.34-$26.03
  Granted...................................................  20,763   $4.86-$13.18
  Exercised.................................................  (1,235)  $5.91-$12.13
  Forfeited.................................................  (5,810)  $4.86-$26.03
                                                              ------
January 30, 2002
  Outstanding...............................................  59,973   $4.86-$26.03
  Exercisable...............................................  31,653   $5.34-$26.03
  Available for grant.......................................  23,273
</Table>

     The following table summarizes information about stock options outstanding
as of January 30, 2002:

<Table>
<Caption>
                          OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                   ----------------------------------   ----------------------
                    NUMBER OF    WEIGHTED                NUMBER OF    WEIGHTED
                     SHARES       AVERAGE    WEIGHTED     SHARES      AVERAGE
    RANGE OF       OUTSTANDING   REMAINING   AVERAGE    EXERCISABLE   EXERCISE
 EXERCISE PRICE      (000'S)       LIFE       PRICE       (000'S)      PRICE
 --------------    -----------   ---------   --------   -----------   --------
<S>                <C>           <C>         <C>        <C>           <C>
$ 4.86 to $10.00     35,358         7.8       $ 7.93      11,164       $ 8.31
$10.01 to $15.00     14,901         5.5       $11.81      11,595       $12.23
$15.01 to $26.03      9,714         5.3       $16.99       8,894       $16.94
$ 4.86 to $26.03     59,973         6.8       $10.36      31,653       $12.17
</Table>

22)  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

  RESTATEMENT OF FISCAL 2001 AND PRIOR PERIOD FINANCIAL STATEMENTS

     As discussed in Note 1, as part of the review and preparation of the
Quarterly Report on Form 10-Q for the third quarter ended October 30, 2002, we
identified certain adjustments that were recorded out-of-period, while others
were previously identified and described in our Quarterly Report on Form 10-Q
for the second quarter ended July 31, 2002, filed with the SEC on September 16,
2002. Upon review of the aggregate impact of the new, as well as the previously
disclosed and recorded adjustments, we concluded that restating our financial
statements for the fiscal years ended January 30, 2002, January 31, 2001 and
January 26, 2000 was appropriate because the aggregate impact of these
adjustments was material to the current estimate of our

                                        61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

2002 fiscal year results. These adjustments are reflected in the "As Restated"
tables below. The "pro forma" table for fiscal year 2000 reflects the pro forma
impact of the change in interim accounting methodology for vendor allowances,
which is described below.

     Following is a summary of the effects of the restatements discussed above,
as well as the change in accounting method, and the pro forma effect of the
change in accounting method on the comparable quarterly periods of fiscal year
2001 described below:

<Table>
<Caption>
                                                           AS PREVIOUSLY REPORTED
                                                  ----------------------------------------
                                                   FIRST      SECOND     THIRD     FOURTH
                                                  QUARTER*   QUARTER*   QUARTER*   QUARTER
                                                  --------   --------   --------   -------
<S>                                               <C>        <C>        <C>        <C>
2001:
Sales...........................................   $8,337     $8,917     $8,019    $10,878
Cost of sales, buying and occupancy.............    6,834      7,253      6,434      9,415
Selling, general and administrative expenses....    1,712      2,004      1,837      2,035
(Benefit from) provision for income taxes.......     (109       (163)      (118)       275
Continuing net loss.............................     (233)      (377)      (235)    (1,742)
Discontinued operations.........................       --         --         --        169
                                                   ------     ------     ------    -------
Net loss........................................   $ (233)    $ (377)    $ (235)   $(1,573)
                                                   ======     ======     ======    =======
Net loss per share, basic
  Continuing net loss...........................   $(0.48)    $(0.77)    $(0.47)   $ (3.49)
  Discontinued operations.......................       --         --         --       0.34
                                                   ------     ------     ------    -------
  Net loss......................................   $(0.48)    $(0.77)    $(0.47)   $ (3.15)
                                                   ======     ======     ======    =======
Net loss per share, diluted
  Continuing net loss...........................   $(0.48)    $(0.77)    $(0.47)   $ (3.49)
  Discontinued operations.......................       --         --         --       0.34
                                                   ------     ------     ------    -------
  Net loss......................................   $(0.48)    $(0.77)    $(0.47)   $ (3.15)
                                                   ======     ======     ======    =======
</Table>

---------------

* As previously reported in quarterly reports Form 10-Q filed on June 12, 2002.

                                        62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                                 AS RESTATED
                                                    -------------------------------------
                                                     FIRST    SECOND     THIRD    FOURTH
                                                    QUARTER   QUARTER   QUARTER   QUARTER
                                                    -------   -------   -------   -------
<S>                                                 <C>       <C>       <C>       <C>
2001:
Sales.............................................  $8,337    $8,917    $8,019    $10,878
Cost of sales, buying and occupancy...............   6,779     7,209     6,463      9,402
Selling, general and administrative expenses......   1,694     2,021     1,831      2,042
(Benefit from) provision for income taxes.........     (82)     (153)     (127)       362
Continuing net loss...............................    (187)     (360)     (249)    (1,816)
Discontinued operations...........................      --        --        --        166
                                                    ------    ------    ------    -------
Net loss..........................................  $ (187)   $ (360)   $ (249)   $(1,650)
                                                    ======    ======    ======    =======
Net loss per share, basic Continuing net loss.....  $(0.38)   $(0.73)    (0.50)   $ (3.64)
  Discontinued operations.........................      --        --        --       0.33
                                                    ------    ------    ------    -------
  Net loss........................................  $(0.38)   $(0.73)   $(0.50)   $ (3.31)
                                                    ======    ======    ======    =======
Net loss per share, diluted
  Continuing net loss.............................  $(0.38)   $(0.73)   $(0.50)   $ (3.64)
  Discontinued operations.........................      --        --        --       0.33
                                                    ------    ------    ------    -------
  Net loss........................................  $(0.38)   $(0.73)   $(0.50)   $ (3.31)
                                                    ======    ======    ======    =======
Common stock price
  High............................................  $10.66    $12.13    $13.16    $  6.85
  Low.............................................    8.42     10.10      5.74       0.70
</Table>

<Table>
<Caption>
                                                           AS PREVIOUSLY REPORTED
                                                  ----------------------------------------
                                                   FIRST      SECOND     THIRD     FOURTH
                                                  QUARTER*   QUARTER*   QUARTER*   QUARTER
                                                  --------   --------   --------   -------
<S>                                               <C>        <C>        <C>        <C>
2000:
Sales...........................................   $8,195     $8,998     $8,199    $11,636
Cost of sales, buying and occupancy.............   $6,494     $7,518     $6,518    $ 9,128
Selling, general and administrative expenses....   $1,581     $2,101     $1,697    $ 2,023
(Benefit from) provision for income taxes.......   $   18     $ (250)    $  (31)   $   129
Net income (loss)...............................   $   22     $ (448)    $  (67)   $   249
Net income (loss) per share, basic..............   $ 0.06     $(0.93)    $(0.14)   $  0.51
Net income(loss) per share, diluted.............   $ 0.06     $(0.93)    $(0.14)   $  0.48
</Table>

---------------

* As previously reported in quarterly reports Form 10-Q filed on June 12, 2002.

                                        63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                                 AS RESTATED
                                                    -------------------------------------
                                                     FIRST    SECOND     THIRD    FOURTH
                                                    QUARTER   QUARTER   QUARTER   QUARTER
                                                    -------   -------   -------   -------
<S>                                                 <C>       <C>       <C>       <C>
2000:
Sales.............................................  $8,195    $8,998    $8,199    $11,636
Cost of sales, buying and occupancy...............  $6,468    $7,508    $6,497    $ 9,259
Selling, general and administrative expenses......  $1,585    $2,097    $1,666    $ 2,018
(Benefit from) provision for income taxes.........  $   26    $ (245)   $  (12)   $    83
Net income (loss).................................  $   36    $ (439)   $  (34)   $   169
Net income (loss) per share, basic................  $ 0.07    $ 0.91)   $(0.07)   $  0.35
Net income(loss) per share, diluted...............  $ 0.07    $(0.91)   $(0.07)   $  0.34
</Table>

<Table>
<Caption>
                                                                  PRO FORMA
                                                    -------------------------------------
                                                     FIRST    SECOND     THIRD    FOURTH
                                                    QUARTER   QUARTER   QUARTER   QUARTER
                                                    -------   -------   -------   -------
<S>                                                 <C>       <C>       <C>       <C>
2000:
Sales.............................................  $8,195    $8,998    $8,199    $11,636
Cost of sales, buying and occupancy...............  $6,593    $7,581    $6,574    $ 8,984
Net income (loss).................................  $  (87)   $ (511)   $ (110)   $   440
Net (loss) income per share, basic................  $(0.18)   $(1.06)   $(0.23)   $  0.91
Net (loss) income per share, diluted..............  $(0.18)   $(1.06)   $(0.23)   $  0.84

Common stock price
  High............................................  $10.06    $ 8.63    $ 7.50    $  8.75
  Low.............................................    7.94      6.75      5.75       5.06
</Table>

 RESTATEMENT OF QUARTERLY FINANCIAL INFORMATION FOR FISCAL 2001

     Prior to the filing of the Original 2001 10-K, we determined to restate our
previously reported quarterly financial statements based upon the results of our
internal investigation. We had concluded that (1) an adjustment should be made
with respect to the accounting for up-front consideration in a transaction from
a vendor which more appropriately should have been deferred and recognized over
the life of the contract and (2) the recording of additional general liability
reserves in the fourth quarter was more appropriately designated as a second
quarter event. Accordingly, adjustments were made for such transactions,
including restatements of previously reported quarterly financial statements.
The first item resulted in a net reduction to operating results in the second
quarter of $42 ($28 after-tax), or $.06 per share, and an increase in third
quarter operating results of $15 ($10 after-tax), or $.02 per share, resulting
in a net reduction to results of operations for fiscal year 2001 of $27, or $.04
per share. The second item increased general liability reserves in the second
quarter, rather than the fourth quarter, by approximately $167 ($112 after-tax),
or $.23 per share, through a charge to Selling, general and administrative
(S,G&A) expenses.

     Also prior to the filing of the Original 2001 10-K, we had concluded that
it would be preferable to change our accounting method for interim recognition
of cost recoveries from vendors due to our bankruptcy filing and the increased
uncertainty relating to allowances and the corresponding difficulty in reliably
estimating such amounts in the future.

     For interim reporting periods in fiscal 2000 and prior, our policy was to
record allowances not yet subject to a written agreement during the first three
quarters of a fiscal year based upon our estimate of annual allowances (our
"plan") as determined by historical experience and current understandings with
our vendors. These amounts were supplemented by allowances obtained that were
not contemplated in such plan. While

                                        64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

many agreements are finalized throughout the year, significant activity occurs
in the fourth quarter to finalize outstanding agreements and collect allowances.

     During the fourth quarter of fiscal 2001, we adopted a new accounting
policy effective as of February 1, 2001, for interim financial reporting only,
requiring that cost recoveries from vendors be recognized only when a formal
agreement for such amount has been obtained and the underlying activity for
which the amount was provided has been performed. This change in methodology
does not affect the results that otherwise would have been reported for the full
fiscal year, but rather affects the interim recognition of allowances during the
year. We believe our new method is preferable because it provides higher
precision, better verifiability, reduced reliance on estimates and is consistent
with an analogous application of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." While this change in method was adopted in
the fourth quarter of fiscal 2001, generally accepted accounting principals
required the restatement of the first three quarters of fiscal 2001 to reflect
this change.

     In light of the foregoing, we filed amendments to our Quarterly Reports on
form 10-Q/A for the first three quarters of fiscal 2001 in order to restate the
unaudited Condensed Consolidated Financial Statements for the quarterly periods
reflected therein. Accordingly, these adjustments are included in the "As
Previously Reported" tables above.

     Embedded in the accounting change that gives effect to the change in
interim financial reporting for allowances is an adjustment for an indeterminate
amount of supplemental or "incremental" allowances that were initially recorded
in the first three quarters prior to having been documented, or otherwise deemed
appropriate, pursuant to our historical policy. It should be noted however,
that, as described below, the interim information, as previously restated to
give effect to the change in methodology, reflects such allowances only to the
extent they are supported by formal agreements or otherwise deemed appropriate
in the quarter recognized.

     During the Fall of 2002 and in response to inquiries from the staff of the
SEC, we reviewed our historical practices for the recording of allowances prior
to the adoption in the fourth quarter of fiscal year 2001 of a new accounting
policy, effective February 1, 2001, for the interim financial reporting of
vendor allowances. The effect of these practices, as described above, relates
only to Kmart's interim financial statements.

     As part of its review of allowances, the current management of Kmart
observed that the total level of allowances originally recorded during the first
three quarters of fiscal year 2001 appeared high, given the challenges that
faced the business in fiscal year 2001 and the fact that sales failed to
increase as originally contemplated in Kmart's business plan. In that regard, it
was noted that had Kmart recorded allowances during the first three quarters of
fiscal year 2001 at rates which corresponded to more historical rates, Kmart
would have recorded fewer allowances.

     During the first three quarters of fiscal year 2001, we characterized and
recorded as incremental allowances $110, $163 and $50, respectively. We
selectively identified for review certain of such allowances that had been
characterized and recorded as incrementals prior to the adoption of the new
accounting policy. Of those reviewed, the amount of allowances which appeared to
be questionable, other than those previously disclosed, were $27, $42 and $23,
respectively. The questions about these allowances relate to, among other
things, the failure to have appropriate signed documentation in place, the
failure to have adequate records demonstrating that the allowance was
collectible or the failure to otherwise comply with our historical policies.
Based on the investigation, it appears that some of these allowances may have
been reported in error in the quarterly financial statements. Given, however,
that our review of allowances was selective, as well as the difficulties of
confirming on a retroactive basis whether an incremental allowance is
supplemental to the plan, we cannot exclude the possibility that there may be
additional incremental allowances in fiscal year 2001 which could be subject to
question.

                                        65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

     Any errors, as described in the preceding paragraph, concerning the
recording of allowances that were reflected in our fiscal year 2001 interim
unaudited financial statements prior to the change in accounting policy were no
longer reflected in our restated financial statements as filed with the SEC on
May 15, 2002 as part of the Original 2001 Form 10-K. This results from the
change in accounting methodology, given that under the new accounting policy
there is no longer a distinction between planned and incremental allowances, no
allowances are recognized absent a formal agreement and the recording of
allowances is no longer based on a plan.

     Earnings per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year. In the
fourth quarter of fiscal year 2001, we recorded charges for impairments of $971
in accordance with SFAS No. 144, a valuation allowance on deferred tax assets of
$1,032 in accordance with SFAS No. 109, an increase in the LIFO reserve of $75,
a credit of $183 for reorganization items for amounts directly resulting from
the Chapter 11 proceedings and a credit of $166 for reversals of rejected lease
reserves of discontinued operations.

23)  SUBSEQUENT EVENTS

  STORE CLOSINGS

     On March 20, 2002, the Court approved the closure of 283 stores, or
approximately 13% of our 2,114 stores. The closures include 270 Kmart discount
stores and 12 Kmart Supercenters in 40 states, and 1 Kmart store in Puerto Rico.
Stores were selected by evaluating the market and financial performance of every
store and the terms of every lease. Candidates for closure were stores, which
did not meet our financial requirements for ongoing operations. Renegotiating
lease terms was also explored to improve store profitability and avoid the need
for closure.

     Shortly after receiving Court approval, we commenced store-closing sales,
which are expected to continue for approximately two to three months.
Approximately 22,000 associates will be impacted by the closures. Associates
have been notified and received information about the benefits and other
resources available to them.

     On April 4, 2002, we announced that we had contracted with firms to assist
in the disposition of leases for these stores. Under the agreement, the firms
will assist our internal real estate staff in identifying retailers and
investors interested in an assignment and landlords interested in terminations
of the leases for the closing stores. Leases which are not marketed will be
rejected shortly after the completion of the related store-closing sales. As a
result of these store closings, Kmart expects to record a total charge in the
range of $1.1 billion to $1.3 billion. Of this amount, approximately $500 was
included in the long-lived asset impairment charge recorded in the fourth
quarter of 2001, and $600 to $800 related primarily to exit costs to be incurred
for lease rejections and severance, and markdowns taken on inventory in
connection with liquidation sales, will be recorded in the first quarter of
2002. In conjunction with the store closing sales, we will also transfer and
liquidate additional inventory from the remaining stores, for which we expect a
charge in the first quarter of 2002 for approximately $250

  KEY BRAND PARTNERS

     On March 20, 2002, the Court authorized our business relationships with
several key brand partners. Motions were approved allowing Kmart to assume our
license agreements with Martha Stewart Living Omnimedia, Inc. for Martha Stewart
Everyday home, garden, colors, baby, kitchen, keeping and decorating products,
along with candles and accessories; Jaclyn Smith G.H. Production, Inc. for
Jaclyn Smith women's apparel, jewelry and accessories; Kathy Ireland World Wide,
Inc. for Kathy Ireland women's apparel, accessories and exercise equipment;
Disney Enterprises, Inc. for Disney apparel for infants and children; and Joe
Boxer Licensing, LLC. for JOE BOXER apparel, accessories and home furnishings.

                                        66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

  PENSKE

     On April 9, 2002, we reached an agreement with Penske Corporation, Penske
Auto Centers, Inc., and Penske Auto Centers, LLC (collectively "Penske") whereby
Penske and Kmart will work together to achieve an orderly wind-down of
operations at auto service centers at more than 563 Kmart stores in 44 states
following Penske's unilateral decision to close the business as of April 6,
2002. We do not expect this matter to have a material adverse affect on our
liquidity, financial position or results of operations.

  KEY EXECUTIVE RETENTION PLAN

     In March 2002, we received court approval to implement our Key Employee
Retention Plan ("KERP") which provides cash incentives and certain benefits to
key members of our salaried management team. The KERP is expected to encourage
employees to continue their employment with Kmart through the reorganization
process.

     There are three components to the KERP; the annual performance plan, stay
bonus and severance plan. The annual performance plan provides a cash bonus
based on achieving corporate-wide financial goals. The stay bonus provides
periodic cash incentives to stay with Kmart during the entire reorganization
process. The severance plan provides cash and benefits in case of involuntary
termination due to restructuring or job elimination.

                                        67
<PAGE>

                               KMART CORPORATION

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                        FISCAL YEARS 2001, 2000 AND 1999
(DOLLARS IN MILLIONS)

<Table>
<Caption>
                                                 (AS RESTATED --
                                                   SEE NOTE 1)
                                                 ---------------                             (AS RESTATED --
                                                    ADDITIONS      ADDITIONS                   SEE NOTE 1)
                                   BALANCE AT      CHARGED TO      CHARGED TO                ---------------
                                   BEGINNING     COST, EXPENSES,     OTHER                   BALANCE AT END
DESCRIPTION                        OF PERIOD        REVENUES        ACCOUNTS    DEDUCTIONS      OF PERIOD
-----------                       ------------   ---------------   ----------   ----------   ---------------
<S>                               <C>            <C>               <C>          <C>          <C>
Allowance for Doubtful Accounts:
2001............................      $ 96            $ 74            $ --         $121          $   49
2000............................       123             166              --          193              96
1999............................        88              58              --           23             123
Allowance for Deferred Tax
  Assets:
2001............................      $ --            $914            $118         $ --          $1,032
2000............................        --              --              --           --              --
</Table>

                                        68
<PAGE>

MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL STATEMENTS

     Management is responsible for the preparation of our Consolidated Financial
Statements and related information appearing in this report. These financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America on a consistent basis applying certain
estimates and judgments based upon currently available information and
management's view of current conditions and circumstances. On this basis, we
believe that these financial statements reasonably present our financial
position and results of operations.

     To fulfill our responsibility, we maintain comprehensive systems of
internal controls designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with established
procedures. The concept of reasonable assurance is based upon recognition that
the cost of the controls should not exceed the benefit derived. We believe our
system of internal controls provide this reasonable assurance.

     We have adopted a code of conduct to guide our management in the continued
observance of high ethical standards of honesty, integrity, and fairness in the
conduct of business and in accordance with the law. Compliance with the
guidelines and standards is periodically reviewed and is acknowledged by all
management associates.

     Our Board of Directors has an Audit Committee consisting solely of outside
directors. The duties of the Audit Committee include keeping informed of the
financial condition of Kmart and reviewing our financial policies and
procedures, our internal accounting controls, and the objectivity of our
financial reporting. Both our independent accountants and the internal auditors
have free access to the Audit Committee and meet with the Audit Committee
periodically, with and without management present.

JAMES B. ADAMSON
Chief Executive Officer

A.A. KOCH
Chief Financial Officer

                                        69
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and
Board of Directors of
Kmart Corporation

In our opinion, the consolidated financial statements listed in the accompanying
index, after the restatement described in Note 1, present fairly, in all
material respects, the financial position of Kmart Corporation and its
subsidiaries at January 30, 2002 and January 31, 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
January 30, 2002, in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of Kmart's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

The accompanying consolidated financial statements have been prepared assuming
that Kmart Corporation will continue as a going concern, which contemplates
continuity of Kmart's operations and realization of its assets and payments of
its liabilities in the ordinary course of business. As more fully described in
the notes to the consolidated financial statements, on January 22, 2002, Kmart
Corporation filed a voluntary petition for reorganization under Chapter 11 of
the United States Bankruptcy Code. The uncertainties inherent in the bankruptcy
process and Kmart's recurring losses from operations raise substantial doubt
about Kmart Corporation's ability to continue as a going concern. Kmart
Corporation is currently operating its business as a Debtor-in-Possession under
the jurisdiction of the Bankruptcy Court, and continuation of Kmart as a going
concern is contingent upon, among other things, the confirmation of a Plan of
Reorganization, Kmart's ability to comply with all debt covenants under the
existing debtor-in-possession financing agreement, and Kmart Corporation's
ability to generate sufficient cash from operations and obtain financing sources
to meet its future obligations. If no reorganization plan is approved, it is
possible that Kmart's assets may be liquidated. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the outcome of these
uncertainties.

As discussed in Note 1 to the consolidated financial statements, the Company
restated its January 30, 2002, January 31, 2001 and January 26, 2000 financial
statements.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

Detroit, Michigan
May 15, 2002, except as to the effect of the
  matters described in Note 1, which is
  as of January 14, 2003

                                        70
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES

None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 DIRECTORS OF THE REGISTRANT

JAMES B. ADAMSON, 54

Chairman of the Board and Chief Executive Officer of Kmart. Former Chairman,
Advantica Restaurant Group (formerly Flagstar Corporation) (food services and
restaurant franchises). Previously served as Chief Executive Officer and
President, Denny's Inc. and as Chief Executive Officer, Chief Operating Officer
and Retail President of Burger King Corporation. Has served as a director of
Kmart Corporation since 1996.

LILYAN H. AFFINITO, 70

Former Vice Chairman of the Board of Maxxam Group Inc. (forest products
operations, real estate management and development and aluminum production).
Director of Caterpillar, Inc. Has served as a director of Kmart since 1990.

RICHARD G. CLINE, 67

Chairman, Hawthorne Investors, Inc. (management advisory services and private
investments). Previously served as Chairman and Chief Executive Officer and as
Chairman, President and Chief Executive Officer of Nicor, Inc. (natural gas
distribution and containerized shipping) and as Chairman, Hussmann
International, Inc. (refrigerated merchandising equipment). Director of Ryerson
Tull, Inc. and PepsiAmericas, Inc. Chairman and Trustee of Northern Funds and
Northern Institutional Funds. Has served as a director of Kmart since 1995.

WILLIE D. DAVIS, 67

President of All Pro Broadcasting, Inc. (radio stations). Director of Alliance
Bank, Bassett Furniture Industries, Incorporated, Checkers, Inc., The Dow
Chemical Company, Johnson Controls, Inc., MGM Mirage, Inc., MGM, Inc., Sara Lee
Corporation, Strong Funds and Wisconsin Energy Corporation. Has served as a
director of Kmart since 1986.

JOSEPH P. FLANNERY, 70

Chairman of the Board, President and Chief Executive Officer of Uniroyal
Holding, Inc. (investment management company). Director of ArvinMeritor, Inc.,
Ingersoll Rand Company, Newmont Mining Corporation and The Scotts Company. Has
served as a director of Kmart since 1985.

ROBERT D. KENNEDY, 69

Former Chairman and Chief Executive Officer of Union Carbide Corporation
(chemicals and plastics manufacturer). Director of Chase Industries, Inc.,
Hercules, Inc., International Paper, Inc. and Sunoco, Inc. Has served as a
director of Kmart since 1996.

ROBIN B. SMITH, 62

Chairman and Chief Executive Officer of Publishers ClearingHouse (distribution
of publications). Previously served as President and Chief Executive Officer of
Publishers ClearingHouse. Director of BellSouth Corp. and of Prudential
Investments mutual funds. Has served as a director of Kmart since 1996.

THOMAS T. STALLKAMP, 55

Vice Chairman and Chief Executive Officer, MSX International (provider of
technology based business systems and services). Previously served as Vice
Chairman and as President of DaimlerChrysler Corporation

                                        71
<PAGE>

and as President of Chrysler Corporation. Director of Baxter International, Inc.
Has served as a director of Kmart since 1999.

RICHARD J. STATUTO, 44

President and Chief Executive Officer of St. Joseph Health Systems (provider of
hospital, physician, homecare, wellness and insurance services). Previously
served as Chief Operating Officer and Vice President of Marketing and Planning
of St. Joseph Health Systems. Also Vice-Chairman of Christus Health. Has served
as a director of Kmart since 2001.

     The following were the Executive Officers of the Registrant as of May 1,
2002.

JAMES B. ADAMSON, 54

See above.

RANDY L. ALLEN, 54

Executive Vice President, Strategic Initiatives and Chief Diversity Officer. Ms.
Allen assumed her current position in 2001. Prior thereto she was the Executive
Vice President, Chief Planning and Information Officer for Kmart from 2000 to
2001; a partner at Deloitte & Touche from 1996 to 2000; Chief Administrative and
Information Officer at Phillips Van Heusen Corporation from 1993 to 1996.

JULIAN C. DAY, 49

President and Chief Operating Officer. Mr. Day joined Kmart under his current
title on March 11, 2002. Prior thereto he was the Executive Vice President and
Chief Operating Officer at Sears Roebuck, Inc. from 1999 to 2002; Executive Vice
President and Chief Financial Officer at Safeway, Inc. from 1993 to 1998; and
President and Chief Executive Officer of Bradley Printing Company from 1991 to
1992.

RONALD B. HUTCHISON, 52

Executive Vice President, Chief Restructuring Officer. Mr. Hutchison joined
Kmart under his current title on January 17, 2002. Prior thereto he was the
Executive Vice President, Chief Financial Officer at Advantica Restaurant Group
from 1995 to 2002; and Vice President, Treasurer/Taxes at Leaseway Corporation
from 1980 to 1995.

CECIL B. KEARSE, 49

Executive Vice President, Merchandising. Mr. Kearse assumed his current position
in 2000. Prior thereto he held the following positions at Kmart: Senior Vice
President and General Merchandise Manager, Home from 1997 to 2000; Vice
President, Merchandise Presentation and Communication from 1996 to 1997.

JANET G. KELLEY, 49

Executive Vice President and General Counsel. Ms. Kelley assumed her current
position in 2002. She joined Kmart in 2001 as Senior Vice President and General
Counsel. Ms. Kelley previously served as Vice President and Senior Counsel at
The Limited, Inc. from 1999 to 2001. Ms. Kelley held the following positions at
Sunbeam Corporation: General Counsel from 1998 to 1999; Vice President from 1996
to 1998; and Associate General Counsel from 1995 to 1996.

ALBERT A. KOCH, 59

Chief Financial Officer. Mr. Koch joined Kmart under his current title on March
11, 2002 pursuant to an agreement between Kmart and JA&A Services, LLC, an
affiliate of Jay Alix & Associates. Prior thereto he held the following
positions at Jay Alix and Associates: Chairman from 2001 to the present and
Managing Principal from 1995 to 2001.

                                        72
<PAGE>

MICHAEL T. MACIK, 55

Executive Vice President, Human Resources. Mr. Macik joined Kmart under his
current title on April 9, 2002. Prior thereto he was the Executive Vice
President, Chief Operating Officer at Right Management Associates from 2001 to
2002 and the Vice President, Human Resources at Kmart from 1992 to 2001.

RICHARD J. NOECHEL, 33

Vice President, Controller. Mr. Noechel assumed his current position in 2001.
Prior thereto he was the Divisional Vice President, Financial Reporting at Kmart
in 2001; Senior Manager International Accounting at DaimlerChrysler Corporation
from 2000 to 2001; Forecast Team Leader at DaimlerChrysler Corporation from 1998
to 2000; Accounting Research Specialist at Chrysler Corporation from 1997 to
1998; and a manager at Price Waterhouse LLP from 1996 to 1997.

EDWARD J. STENGER, 44

Treasurer. Mr. Stenger joined Kmart under his current title on March 11, 2002
pursuant to an agreement between Kmart and JA&A Services, LLC, an affiliate of
Jay Alix & Associates. Prior thereto he held the following positions at Jay Alix
& Associates: Co-Managing Director from 2000 to 2002 and a Principal from 1992
to 2000.

     As of January 30, 2002, the following individuals served as executive
officers. The employment of these individuals was terminated after fiscal 2001.

CHARLES C. CONAWAY, Chief Executive Officer

ANTHONY D'ONOFRIO, Executive Vice President, Global Systems Capability and Chief
Supply Chain Officer

JOHN T. MCDONALD, JR., Executive Vice President, Chief Financial Officer

DAVID ROTS, Executive Vice President, Chief Administrative Officer

                                        73
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth information concerning total compensation
paid to Kmart's Chief Executive Officer during fiscal 2001 and the four other
most highly compensated executive officers of Kmart who served in such
capacities as of January 30, 2002 (the "named executive officers") for services
rendered to Kmart during each of the last three fiscal years, if applicable.
Pursuant to the SEC rules, the table also sets forth information concerning the
compensation of former executive officers of Kmart who are also deemed by SEC
rules to be named executive officers for fiscal 2001.

<Table>
<Caption>
                                                                                       LONG-TERM
                                          ANNUAL COMPENSATION                        COMPENSATION
                          ---------------------------------------------------   -----------------------
                                                                                SECURITIES   RESTRICTED
NAME AND                                                       OTHER ANNUAL     UNDERLYING     STOCK         ALL OTHER
PRINCIPAL POSITION(1)     YEAR(2)   SALARY(3)     BONUS(4)    COMPENSATION(5)   OPTIONS(6)   AWARDS(7)    COMPENSATION(8)
---------------------     -------   ----------   ----------   ---------------   ----------   ----------   ---------------
<S>                       <C>       <C>          <C>          <C>               <C>          <C>          <C>
C. Conaway..............   2001     $1,475,000   $        0     $  238,559      4,000,000    $        0     $2,042,200
Former Chief Executive     2000        943,056    8,087,890        446,913      4,000,000     4,692,950              0
Officer
D. Rots.................   2001     $  520,834   $        0     $  470,027        716,000    $1,750,000     $   26,152
Former Executive           2000        263,750      738,900        408,556        373,000       578,985        770,009
Vice President, Chief
Administrative Officer
R. Allen................   2001     $  515,000   $  150,000     $   13,000        170,000    $1,500,000     $   12,489
Executive Vice             2000        188,870      275,000              0        100,000       513,000        513,300
President, Strategic
Initiatives & Chief
Diversity Officer
C. Kearse...............   2001     $  495,500   $        0     $   13,315        702,000    $2,000,000     $   28,122
Executive Vice President   2000        422,250      125,000              0        219,900       229,140      1,063,244
Merchandising              1999        360,000      262,210              0         80,000        56,958         25,651
A. D'Onofrio............   2001     $  456,864   $        0     $  584,820        715,000    $1,750,000     $   25,524
Former Executive           2000        124,541      225,000         19,579        100,000       120,600        761,035
Vice President Global
Systems Capability &
Chief Supply Chain
Officer
M. Schwartz.............   2001     $  706,250   $        0     $3,721,327        825,000    $3,000,000     $3,031,448
Former President and       2000        243,182    1,783,196        272,358        225,000       518,250      1,026,679
Chief Operating Officer
J. Boyer................   2001     $  284,091   $  300,000     $  187,142        120,000    $1,500,000     $  583,620
Former Executive Vice
President and Chief
Financial Officer
</Table>

---------------

(1) Employment terminated -- Mr. Conaway -- 3/11/02; Mr. Rots -- 3/25/02; Mr.
    D'Onofrio -- 3/25/02; Mr. Schwartz -- 1/15/02; Mr. Boyer -- 11/9/01.

(2) Only one of the officers was employed for the full 3-year period.

(3) At the election of the officers, up to 100% of salary may be deferred
    pursuant to Kmart's Management Deferred Compensation and Restoration Plan.

(4) Ms. Allen's 2001 bonus consists of a $150,000 signing bonus which was the
    second installment of her original $300,000 signing bonus; Mr. Boyer's 2001
    bonus consists of a $100,000 signing bonus, payable when employment
    commenced on May 7, 2001, and a $200,000 guaranteed bonus.

(5) The dollar amounts under "Other Annual Compensation" include: Reimbursement
    of Housing and Temporary Living Costs plus associated tax gross-up -- Mr.
    Conaway -- $109,197 (2001), $414,076 (2000); Mr. Rots -- $1,288 (2001),
    $313,924 (2000); Mr. D'Onofrio -- $70,098 (2001), $15,682

                                        74
<PAGE>

    (2000); Mr. Schwartz -- $1,202,347 (2001), $232,459 (2000); Mr.
    Boyer -- $161,548 (2001); Non-Business Use of Company Plane plus associated
    tax gross-up -- Mr. Conaway -- $97,838 (2001), $24,337 (2000); Mr.
    Rots -- $38,278 (2001), $23,501 (2000); Ms. Allen -- $1,933 (2001); Mr.
    D'Onofrio -- $3,897 (2000); Mr. Schwartz -- $69,096 (2001), $39,899 (2000);
    Other amounts reimbursed for the payment of taxes -- Mr. Conaway -- $13,888
    (2001); Mr. Rots -- $422,185 (2001), $28,631 (2000); Ms. Allen -- $4,804
    (2001); Mr. Kearse -- $6,078 (2001); Mr. D'Onofrio -- $505,722 (2001); Mr.
    Schwartz -- $2,434,616 (2001); Mr. Boyer -- $18,934 (2001).

(6) The stock options (other than options for 3,000,000 shares granted to Mr.
    Conaway) were granted under the 1997 Long-Term Equity Compensation Plan or
    the 1992 Stock Option Plan.

(7) As of January 30, 2002, the number of shares and value of all restricted
    stock held by the named executive officers were as follows: Mr.
    Conaway -- 615,000/$854,850; Mr. Rots -- 127,147/$176,734; Ms.
    Allen -- 240,745/$334,636; Mr. Kearse -- 20,000/$27,800; Mr. Schwartz's and
    Mr. Boyer's shares were canceled in connection with their terminations. The
    shares granted in fiscal 2001 to Messrs. Rots, Kearse, D'Onofrio and
    Schwartz were canceled in December, 2001 in connection with their entering
    into new employment agreements.

(8) The dollar amounts for fiscal year 2001 set forth under "All Other
    Compensation" include: Value of Life Insurance Premiums  -- Mr.
    Conaway -- $1,205; Mr. Rots -- $424; Ms. Allen -- $1,439; Mr. Kearse --
    $1,175; Mr. D'Onofrio -- $639; Mr. Schwartz -- $542; Mr. Boyer -- $287;
    Company Contributions to Retirement Savings Plan and/or Management Deferred
    Compensation and Restoration Plan -- Mr. Conaway -- $40,995; Mr.
    Rots -- $25,728; Ms. Allen -- $11,050; Mr. Kearse -- $26,947; Mr.
    D'Onofrio -- $24,885; Mr. Schwartz -- $16,875; Other Compensation -- Mr.
    Conaway -- $2,000,000 amount paid pursuant to employment contract
    attributable to amounts foregone from previous employment; Mr.
    Schwartz -- $3,014,031 amount of loan forgiveness; Mr. Boyer -- $500,000
    payment in connection with execution of his Confidentiality, Non-competition
    and Non-solicitation Agreement and severance of $83,333.

OPTION GRANTS IN FISCAL YEAR 2001

<Table>
<Caption>
                        NUMBER OF     % OF TOTAL
                         OPTIONS      OPTIONS TO
                       GRANTED IN    EMPLOYEES IN                                            HYPOTHETICAL
        NAME           FISCAL 2001   FISCAL 2001    EXERCISE PRICE(1)   EXPIRATION DATE(2)     VALUE(3)
        ----           -----------   ------------   -----------------   ------------------   ------------
<S>                    <C>           <C>            <C>                 <C>                  <C>
C. Conaway...........   1,500,000        7.22%           $ 8.55               2/7/11         $ 5,721,196
C. Conaway...........   2,500,000       12.04%           $10.15              5/16/11         $11,213,693
D. Rots..............     191,000        0.91%           $ 8.55               2/7/11         $   728,499
D. Rots..............     525,000        2.52%           $ 4.86               1/8/12         $ 1,364,174
R. Allen.............     170,000        0.81%           $ 8.55               2/7/11         $   648,402
C. Kearse............     177,000        0.85%           $ 8.55               2/7/11         $   675,101
C. Kearse............     525,000        2.52%           $ 4.86               1/8/12         $ 1,364,174
A. D'Onofrio.........     190,000        0.91%           $ 8.55               2/7/11         $   724,685
A. D'Onofrio.........     525,000        2.52%           $ 4.86               1/8/12         $ 1,364,174
M. Schwartz..........     300,000        1.44%           $ 8.55               2/7/11         $ 1,144,239
M. Schwartz..........     525,000        2.52%           $ 4.86               1.8.12         $ 1,364,174
J. Boyer.............     120,000        0.57%           $10.61               5/8/11         $   559,950
</Table>

---------------

(1) All options were granted at a price equal to 100% of the market value of the
    Kmart common stock on the applicable date of grant. The exercise price may
    be paid in cash, previously owned shares or a combination of both.

(2) Options have a term of ten years and one day and will become exercisable in
    three equal annual installments commencing one year from date of grant,
    other than the January 7, 2002 options granted to

                                        75
<PAGE>

    Messrs. Rots, Kearse, D'Onofrio and Schwartz with an exercise price of
    $4.86, which will begin vesting by January 31, 2004 upon achievement of
    performance goals.

(3) Any value of Kmart common stock underlying the options will depend on the
    value, if any, ascribed to Kmart common stock in any plan of reorganization
    which may be confirmed. As described earlier, Kmart believes that, in light
    of the bankruptcy, the value of Kmart common stock is highly speculative.
    Accordingly, Kmart is not presently ascribing to any value to the above
    options. Nevertheless, in order to comply with SEC rules, this column sets
    forth the estimated present value of the options granted during fiscal year
    2001 on the date of grant using the Black-Scholes option pricing model based
    upon the following assumptions: an estimated time until exercise of 5 years;
    a 5-year stock price volatility rate of .4273098 for options granted on
    February 6, 2001, .4204622 for options granted on May 7, 2001 and May 15,
    2001, and .5722765 for options granted on January 7, 2002, respectively; a
    dividend yield of 0.00%; and no adjustment for non-transferability or
    forfeiture.

OPTION EXERCISES AND VALUES FOR FISCAL YEAR 2001

     The table below shows the value at January 30, 2002 of options held by each
of the named executive officers. None of the named executive officers exercised
stock options during fiscal year 2001.

<Table>
<Caption>
                                        NUMBER OF UNEXERCISED           VALUE OF UNEXERCISED
                                          OPTIONS AT 1/30/02       IN-THE-MONEY OPTIONS AT 1/30/02
NAME                                  EXERCISABLE/NONEXERCISABLE    EXERCISABLE/NONEXERCISABLE(1)
----                                  --------------------------   -------------------------------
<S>                                   <C>                          <C>
C. Conaway..........................    750,000/7,250,000                       $0/0
D. Rots.............................     92,334/996,666                         $0/0
R. Allen............................        0/270,000                           $0/0
C. Kearse...........................     299,327/875,299                        $0/0
A. D'Onofrio........................        0/815,000                           $0/0
M. Schwartz(2)......................           0/0                              $0/0
J. Boyer............................        120,000/0                           $0/0
</Table>

---------------

(1) Option value based on a per share value of $1.39.

(2) Options were canceled in connection with an execution of a Separation and
    General Release.

PENSION PLANS

     The accrual of benefits under Kmart's tax-qualified Employee Pension Plan
and Supplemental Pension Benefit Plan was frozen as of January 31, 1996.
Therefore, service after January 31, 1996 is not recognized for benefit
accumulation purposes, but is recognized for vesting purposes. Kmart's
Supplemental Pension Benefit Plan provides benefits to the extent that ERISA
limits the pension to which an employee would otherwise be entitled under the
Employee Pension Plan absent such limitation. Of the named executive officers,
only Mr. Kearse is eligible to receive benefits under Kmart's frozen Employee
Pension and Supplemental Pension Benefit Plans. Mr. Kearse has 27 years of
service under the Plans after age 21. His estimated accrued benefit under the
combined Plans and under the "final average compensation formula" is $3,001.78
per month at age 65. This amount is based on the pension being paid during his
lifetime and would be reduced on an actuarial equivalent basis in the event of a
survivor benefit or optional form of payment. The "final average compensation
formula" is 1.50% of the average of the officer's best five compensation years
prior to January 31, 1996 multiplied by years of service after age 21 and prior
to January 31, 1996 up to 35 years minus 2% of the applicable Social Security
benefit for each year of services up to 30 years.

     Kmart has also adopted a Supplemental Executive Retirement Plan for the
purpose of providing income to executive officers of Kmart who retire prior to
age 65 or who are hired by Kmart later in their careers, whom the Board of
Directors approves as eligible to receive benefits under the Plan. Benefits are
determined by the Board based on the position, responsibilities and rate of
compensation of the employee, benefit payable or which would have been payable
under other plans and such other factors as the Board may deem relevant.

                                        76
<PAGE>

     Kmart has also adopted a Special Supplemental Executive Retirement Plan to
provide supplemental retirement income to certain senior officers and other key
executives designated by the Compensation & Incentives Committee of the Board.
Participants who retire at or after age 60 are entitled to receive an annual
benefit equal to 5 percent of "Final Average Compensation" multiplied by the
number of years of participation in the plan (up to a maximum of 10). Benefits
become vested at the rate of 50% (after 3 years of participation), 75% (after 4
years of participation) and 100% (after 5 or more years of participation).
Participants who retire between ages 55 and 60 can begin receiving their vested
benefits, but the benefits will be reduced at the rate of 6 percent per year to
reflect commencement prior to age 60. Final Average Compensation means the
average of the participant's highest base pay plus bonus for any three years (or
lesser period of employment). Messrs. Conaway, Rots, Boyer and Schwartz are the
only individuals to have been designated as participants in this plan. Since
none of these executives had accrued any vested benefits at the time of their
termination of employment, their accrued benefits have been forfeited.

DIRECTOR COMPENSATION

     Generally, for fiscal year 2001, directors who were not employees of Kmart
or its subsidiaries received an annual retainer of $50,000, with no additional
amount payable for attending meetings. Fifty percent (and at the election of the
director, up to 100%) of the annual retainer was paid in Common Stock in lieu of
cash payments to the Directors Stock Plan. In addition, under the Directors
Stock Plan, restricted stock units, which are distributed as shares of Common
Stock upon termination of Board service, are accrued for a period of time equal
to the director's Board service, but no more than ten years, in an amount equal
to 50% of the annual retainer plus, for Committee chairpersons, an amount equal
to 10% of the annual retainer. Commencing January 23, 2002, the stock portion of
the annual retainer was eliminated (i.e. the annual retainer will be $25,000 in
cash); non-employee directors will be entitled to $2,000 for each Board or
Committee meeting attended; no further awards will be made under the Director
Stock Plan; and Committee chairpersons will receive an additional cash retainer
of $10,000 per year.

     Under Kmart's Deferred Compensation Plan for Non-Employee Directors and the
Directors Stock Plan, a director may elect to defer all or any portion of his or
her compensation for services as a director which is payable in cash or Common
Stock. Under these Plans, deferred cash amounts earn interest at a rate
equivalent to the ten-year U.S. Treasury Note rate plus 5%, and deferred shares
of Common Stock are credited with an amount equal to any dividends payable on
such shares, which are converted on a quarterly basis to additional shares.

     In addition, on February 6, 2001, each of Kmart's non-employee directors
received an option grant pursuant to the Directors Stock Plan, which entitles
them to purchase 12,700 shares of Common Stock. This option vests in three equal
installments on each of the first three anniversaries of the date of grant and
has a per share exercise price of $8.55.

     Effective January 1, 1996, benefits under Kmart's Directors Retirement Plan
were terminated with respect to new directors and the accrual of future benefits
for existing directors was terminated. Non-employee directors who served on the
Board prior to December 31, 1995 and who served at least five years are entitled
to benefits under the Plan. Upon retirement from the Board, such directors will
receive an annual benefit equal to the annual retainer at the time of retirement
for a period equal to the director's accrual years under the frozen Plan, not to
exceed ten years. Mrs. Affinito and Messrs. Davis and Flannery have vested
benefits under the frozen Directors Retirement Plan.

     Directors who are employees of Kmart or its subsidiaries do not receive the
above compensation or benefits.

     Mr. Adamson was appointed Chairman of the Board of Directors as of January
17, 2002 and entered into a services agreement with Kmart effective as of that
date that provides for fees and other compensatory items, pursuant to which Mr.
Adamson agreed to forego any other compensation described above that he may
otherwise have been entitled to receive as a non-employee director. This
agreement is more fully described at "Chairman and Executive Officers Services
and Employment Arrangements." This service agreement has

                                        77
<PAGE>

been superseded by the employment agreement between Kmart and Mr. Adamson,
described at "Chairman and Executive Officer Services and Employment
Arrangements -- Post Fiscal Year End Developments."

CHAIRMAN AND EXECUTIVE OFFICER SERVICES AND EMPLOYMENT ARRANGEMENTS

  JAMES ADAMSON SERVICES AGREEMENT

     Mr. Adamson was appointed to the position of Chairman of the Board of Kmart
effective as of January 17, 2002. In connection with his appointment, Kmart
entered into a services agreement with Mr. Adamson as of that date, subject to
Court approval, which provided for annual fees of $1 million and has a term
ending on the earlier of the date on which Kmart emerged from bankruptcy as an
ongoing business (which may be referred to herein as the "emergence date") or
April 30, 2004. This agreement provided that Mr. Adamson would provide services
to Kmart as its Chairman of the Board, with overall responsibility for managing
and implementing Kmart's restructuring initiatives and assisting Mr. Conaway in
connection with Kmart's merchandising and marketing functions. Under this
agreement, and, with Court approval, Mr. Adamson was paid an inducement payment
equal to $2.5 million, grossed up for income and other taxes, which amount was
subject to repayment on a pro-rata basis if his services were terminated prior
to January 31, 2003 either by Kmart for cause or because of Mr. Adamson's
voluntary resignation (other than by reason of a breach by Kmart of a material
provision of the services agreement). Mr. Adamson's services agreement provided
for a "success payment" of a maximum of $4 million relating to Kmart's emergence
from bankruptcy as an on-going business; the maximum success payment would be
made if the emergence date occurred on or prior to July 31, 2003 and would be
reduced on a daily basis until no success payment would be made if the emergence
date occurred following April 30, 2004. The services agreement also provided for
certain benefits, such as reimbursement for travel expenses and the provision by
Kmart of suitable housing for Mr. Adamson and his spouse in the Detroit
metropolitan area. These benefits would be "grossed-up" by Kmart to compensate
for the imposition of any taxes on Mr. Adamson with respect to these benefits.
Under the services agreement, Kmart established a $10 million letter of credit
for the purpose of satisfying Kmart's obligations.

     Effective March 11, 2002, Mr. Adamson was appointed to the position of
Chairman of the Board and Chief Executive Officer of Kmart. In connection with
his appointment, he entered into an employment agreement with Kmart, described
below at "Post Fiscal Year End Developments". The employment agreement was
subject to Court approval, which was received on April 23, 2002, and supersedes
the services agreement.

  EXECUTIVE OFFICER EMPLOYMENT ARRANGEMENTS

     The following employment agreements and other arrangements with respect to
Kmart's named executive officers are described as in effect as of January 30,
2002, subject, where applicable, to acceptance or rejection by Kmart in
accordance with federal bankruptcy laws.

     Mr. Conaway.  Kmart entered into an employment agreement with Mr. Conaway
as of May 30, 2000, which was amended during May 2001 and during November 2001.
This agreement has a term ending on May 30, 2005, subject to automatic annual
one-year extensions, commencing on May 20, 2004, and provides for an annual
salary of at least $1.4 million and an annual target bonus opportunity of at
least 125% of his then-current annual salary based on the attainment of
performance goals. Mr. Conaway is also eligible under this agreement for annual
option grants during the term of his employment with a target value equal to
400% of his base salary, such grants to be made based upon the achievement of
performance goals established by the Compensation Committee. In connection with
the May 2001 amendment to his employment agreement, Kmart made a retention loan
to Mr. Conaway in the principal amount of $5 million, the terms of which are set
forth at "Transactions with Executive Officers". Mr. Conaway's agreement also
provides for payment over time of approximately $5 million in cash and $10
million in shares of restricted stock to compensate Mr. Conaway for amounts that
he was required to forego from his prior employer in order to accept employment
with Kmart in 2000.

     Mr. Conaway's employment agreement provides that if his employment is
terminated by Kmart during the term of the agreement other than for cause or
disability or if he terminates under a constructive
                                        78
<PAGE>

termination, he will be entitled to receive monthly severance payments equal to
his monthly base salary at the time of termination, plus 1/12th of the annual
on-plan bonus for the year in which termination occurs, which payments will be
made during a severance period of 36 months, but may be paid in a lump sum at
Kmart's discretion (such payments, the "severance payments"). If his employment
is terminated under these circumstances within two years of a change in control
of Kmart, he will be entitled to receive a lump sum payment equal to the
severance payments. Payments to Mr. Conaway will be "grossed-up" to compensate
for the imposition of any golden parachute excise taxes. Under this agreement,
Mr. Conaway is subject to 18-month post-termination non-competition and
non-solicitation covenants.

     Kmart amended and restated Mr. Conaway's employment agreement as of January
21, 2002, subject to Court approval. The terms of the restated agreement remain
substantially similar to those in effect prior to such restatement, except as
follows: (i) the definition of "constructive termination" was narrowed to take
into account the appointment of Mr. Adamson as the Chairman of the Board; (ii)
the maturity date of his loan was revised (as set forth below, at "Transactions
with Executive Officers") and (iii) the remaining installments of the payments
to be made in respect of foregone compensation, totaling approximately $6.5
million, would be paid to Mr. Conaway in a cash lump sum if he was still
employed by Kmart on July 31, 2003, provided that this amount would be paid
earlier if Mr. Conaway's employment was terminated prior to July 31, 2003 either
by Kmart without cause, because of Mr. Conaway's death or disability, or if Mr.
Conaway terminated his employment for one of the following reasons: his salary
was reduced or was not paid; Kmart's principal office was relocated; someone was
appointed to a position at Kmart that was equal with Mr. Conaway's position; or
if Mr. Conaway was not elected to, or was removed from, the position of Kmart's
Chief Executive Officer.

     Mr. Conaway's employment with Kmart was terminated effective March 11,
2002. The terms of his separation agreement from Kmart are set forth below,
under "Post Fiscal Year End Developments". In connection with his termination of
employment, Mr. Conaway's employment agreement, as amended and restated as of
January 21, 2002, was withdrawn from the Court approval process.

     Messrs, Kearse, D'Onofrio and Rots.  Kmart entered into an employment
agreement with each of Messrs. Kearse, D'Onofrio and Rots effective December 3,
2001, which agreements superseded and replaced Kmart's earlier Confidentiality,
Non-competition and Non-solicitation Agreements with each of these executives.
Each of the employment agreements has a term ending on January 31, 2006, subject
to automatic annual one-year extensions, commencing on December 3, 2002. In
addition to providing for salary and participation in Kmart's annual incentive
plan and option programs, each of the agreements provides for a retention loan
by Kmart of $2.5 million, the terms of which loans are set forth at
"Transactions with Executive Officers". In addition to eligibility to be granted
options during the term of employment, each of the agreements also provides for
the grant of an initial option to the executive to purchase 525,000 shares of
Kmart common stock, the vesting of which is subject to the attainment of
performance goals. Mr. Kearse's and Mr. Rots's agreements each provide for the
continued deferral of cash awards ($1,000,000 with respect to Mr. Kearse and
$750,000 with respect to Mr. Rots), which amounts were originally granted
pursuant to the terms of the Confidentiality, Non-competition and
Non-solicitation Agreements. When made, the distribution of the deferred amounts
will include a gross-up for income and other taxes incurred by the executive at
the time of distribution. Mr. D'Onofrio's agreement provides that a payment of
$750,000 previously made to Mr. D'Onofrio in connection with the execution of
his Confidentiality, Non-competition and Non-solicitation Agreement will be
subject to repayment if his employment is terminated prior to January 31, 2004;
if, however, he is employed on that date, he is entitled to be grossed-up with
respect to income and other taxes with respect to the payment of such amount. In
connection with entering into their December 2001 employment agreements, grants
of restricted stock made to each of Messrs. Kearse, D'Onofrio and Rots pursuant
to their Confidentiality, Non-competition and Non-solicitation Agreements were
cancelled and forfeited.

     If Messrs. Kearse's, D'Onofrio's or Rots's employment is terminated by
Kmart during the term of their respective employment agreements (other than for
cause or disability) or if the executive terminates under a constructive
termination, the executive will be entitled to receive monthly severance
payments equal to his monthly base salary at the time of termination, plus
1/12th of the annual target bonus for the year in which such termination occurs,
which payments will be made during a severance period of 36 months, but may be
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<PAGE>

paid in a lump sum at Kmart's discretion (such payments, the "severance
payments"). If the executive's employment is terminated without cause and within
two years of a change in control of Kmart, he would be entitled to receive a
lump sum payment equal to the severance payments. Payments to the executives
will be "grossed-up" to compensate for the imposition of any golden parachute
excise taxes. Under their respective employment agreements, each of Messrs.
Kearse, D'Onofrio, and Rots is subject to a 12-month post-termination
non-competition covenant and a 24-month post-termination non-solicitation
covenant.

     The employment agreements with Messrs. Kearse, D'Onofrio and Rots were
amended and restated as of January 21, 2002. The terms of each of these restated
agreements remain substantially similar to those in effect prior to such
restatement, except as follows: (i) the definition of "constructive termination"
was generally narrowed to take into account the appointment of Ronald Hutchison
as the Chief Restructuring Officer of Kmart and (ii) the maturity date of the
loans was revised (as set forth below, at "Transactions with Executive
Officers"). Mr. Rots's restated agreement further provides that he would be
entitled to terminate his employment under a constructive termination if, after
July 31, 2003, Mr. Conaway's employment was terminated by Kmart without cause or
by Mr. Conaway under a constructive termination. Pursuant to Mr. Rots' restated
employment agreement, the $750,000 deferred cash amount (which, together with a
gross-up for income and other taxes, had previously been distributed to Mr.
Rots) would be subject to repayment by Mr. Rots if his employment was terminated
prior to January 31, 2004, unless his employment was terminated prior to that
date either by Kmart without cause, because of Mr. Rots's death or disability,
if Mr. Rots terminated his employment because his salary had been reduced or had
not been paid or if he terminated his employment following the termination,
after July 31, 2003, of Mr. Conaway's employment, as described above. Mr.
Kearse's deferred amount generally will be forfeited or, if previously
distributed, will be subject to repayment by Mr. Kearse if his employment is
terminated prior to January 31, 2004, unless his employment is terminated prior
to that date either by Kmart without cause, because of Mr. Kearse's death or
disability, or if Mr. Kearse terminates his employment because his salary has
been reduced or has not been paid. In addition, the post-termination
non-competition period for each of these agreements was lengthened to 18 months.

     Both Mr. D'Onofrio's and Mr. Rots's employment with Kmart terminated
effective March 25, 2002. The terms of their respective separations from Kmart
are set forth below, under "Post Fiscal Year End Developments". The employment
agreements of Messrs. D'Onofrio and Rots, as amended and restated as of January
21, 2002, have been withdrawn from the Court approval process.

     Mr. Schwartz.  Kmart entered into an employment agreement with Mr. Schwartz
effective as of December 3, 2001. This agreement generally contains terms and
provisions substantially similar to those with respect to the December 3, 2001
employment agreements of Messrs. Kearse, D'Onofrio and Rots (including with
respect to the continued deferral of a $1 million cash award and the calculation
and payment of severance), except that Mr. Schwartz's retention loan from Kmart
was in the principal amount of $3 million.

     Mr. Schwartz's employment with Kmart terminated effective January 15, 2002,
pursuant to the terms of a Separation Agreement and General Release dated as of
such date. This agreement provides for, among other things, Mr. Schwartz's
release of Kmart with respect to all claims; his continuing obligation to comply
with the confidentiality, non-competition and non-solicitation covenants
contained in his employment agreement; the forgiveness of the $3 million
retention loan to Mr. Schwartz (described at "Transactions with Executive
Officers"); and associated tax gross-up payments. Mr. Schwartz received no
severance or other benefits in connection with the termination of his employment
with Kmart.

     Ms. Allen.  Ms. Allen was appointed to the position of Chief Information
Officer effective September 15, 2000, and, in connection with her appointment,
Kmart entered into a letter agreement effective as of September 14, 2000 (for
purposes of this paragraph, her "offer letter"), and a Confidentiality, Non-
competition and Non-solicitation Agreement effective as of December 4, 2000 and
a letter agreement describing certain severance benefits (for purposes of this
paragraph, her "non-competition agreement"). Ms. Allen's offer letter provides
for the payment of base salary and benefits, the opportunity to earn an annual
performance bonus, the amount of which is to be based on performance relative to
pre-established performance objectives, and the grant of stock options during
her employment. Ms. Allen's offer letter also provides for a cash hiring
incentive of $300,000, which amount is repayable to Kmart if Ms. Allen
voluntarily

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<PAGE>

terminates her employment within 2 years of her hiring date. As special
consideration for foregone income from her previous employer, Kmart granted to
Ms. Allen in September 2000, pursuant to the terms of her offer letter, shares
of restricted stock grant which are scheduled to vest on September 30 of each of
2002 and 2003, provided that certain conditions are met with respect to her
replacement at her previous employer, and an option grant of 100,000 shares,
which will become vested on September 30, 2003, provided she is employed by
Kmart at that time. Ms. Allen's non-competition agreement provides for perpetual
covenants with respect to confidentiality, cooperation with regard to Company
litigation and non-disparagement of Kmart, and for post-employment
non-competition and non-solicitation covenants lasting for 18 months following
the termination of her employment for any reason, provided that the
non-competition covenant will terminate earlier upon a change in control of
Kmart (as defined in her non-competition agreement). As consideration for her
entering into this non-competition agreement, Kmart granted to Ms. Allen
restricted stock valued at $1,500,000 on the date of grant, which shares will
vest subject to the attainment of certain performance goals, and paid to Ms.
Allen a lump sum cash payment of $500,000, which is repayable to Kmart if her
employment is terminated prior to January 31, 2004 unless the termination of her
employment is (i) by reason of her death, (ii) by Kmart without cause, (iii) by
Ms. Allen for good reason or (iv) within three years following a change in
control of Kmart (each term as defined in her non-competition agreement) for one
of the three reasons listed above. In addition, if the performance goals
relating to the restricted stock grant are met during her employment and at any
time prior to January 31, 2005, she is entitled to additional restricted stock
grants per applicable goal. Ms. Allen's severance agreement provides for cash
severance benefits in the form of salary continuation for a period of 24 months
following the termination of her employment with Kmart, if such termination is
by Kmart other than for cause or disability or if she terminates her employment
for good reason (each term as defined in her severance agreement). These
severance payments will be reduced by any compensation received by a subsequent
employer, and will cease if Ms. Allen violates the non-competition covenant in
her severance agreement during the one-year period following such a termination
of employment.

     Mr. Boyer.  Mr. Boyer was appointed to the position of Chief Financial
Officer effective May 7, 2001 and, in connection with his appointment, entered
into a letter agreement as of such date (for purposes of this paragraph, his
"offer letter"), a Confidentiality, Non-competition and Non-solicitation
Agreement effective as of May 21, 2001 (for purposes of this paragraph, his
"non-competition letter") and a letter agreement describing certain severance
benefits (for purposes of this paragraph, his "severance agreement"). The terms
of Mr. Boyer's offer letter are substantially similar to Ms. Allen's offer
letter, except that his inducement payment under the offer letter is $100,000;
his guaranteed bonus for the year 2001 was $200,000; he was designated as a
participant in Kmart's Special Supplemental Executive Retirement Plan; and his
initial option grant was for 120,000 shares. The terms of his non-competition
agreement and severance agreement are substantially similar to Ms. Allen's
non-competition agreement and severance agreement, respectively, including the
lump sum payment of $500,000 under the non-competition agreement.

     Mr. Boyer's employment with Kmart terminated effective November 9, 2001,
pursuant to the terms of a full and complete release of liability and severance
agreement, entered into between Kmart and Mr. Boyer as of November 23, 2001 (for
purposes of this paragraph, his "separation agreement"). Mr. Boyer's separation
agreement provides for his release of Kmart and its affiliates with respect to
all claims and his obligation to abide by covenants relating to confidentiality,
non-disparagement, cooperation with respect to Kmart litigation and, for one
year following termination, non-solicitation. As consideration for the release,
Kmart, among other things, agreed to (i) continue his base salary until December
31, 2003, (ii) pay an amount equal to $200,000 in respect of his guaranteed
bonus with respect to fiscal year 2001, (iii) allow Mr. Boyer to keep the
$500,000 payment made at the time he entered into his non-competition agreement,
(iv) cancel his obligation to repay the $100,000 that was paid to Mr. Boyer as
an inducement to commence employment with Kmart and (v) fully vest his stock
option on 120,000 shares. Pursuant to his separation agreement, the restricted
shares granted to Mr. Boyer in connection with entering into his non-competition
agreement were cancelled.

  POST FISCAL YEAR END DEVELOPMENTS

     The following discussion relates to (i) new appointments occurring before
or after the end of fiscal year 2001 with respect to executive officers
currently expected to be named executive officers with respect to fiscal

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<PAGE>

year 2002 and (ii) the termination of employment, following the end of fiscal
year 2001, of executive officers who are named executive officers with respect
to fiscal year 2001.

     Mr. Adamson's Appointment as Chief Executive Officer.  Mr. Adamson was
appointed by the Board of Directors to the position of the Chairman of the Board
and Chief Executive Officer as of March 11, 2002. In connection with his
appointment, Kmart entered into an employment agreement with Mr. Adamson,
effective as of March 11, 2002, subject to Court approval. Upon receipt of such
approval, which occurred on April 23, 2002, the employment agreement superseded
Mr. Adamson's services agreement with Kmart, described above under "James
Adamson Services Agreement". The employment agreement with Mr. Adamson provides
for a term of employment ending on April 30, 2004, provided that the term will
automatically extend for an additional year on each anniversary of the effective
date, unless earlier terminated as provided in the agreement. Mr. Adamson's
employment agreement provides for an annual base salary of $1.5 million and
participation in Kmart's annual bonus plan at a target bonus level equal to 125%
of his annual salary. During Kmart's chapter 11 case, Mr. Adamson's annual bonus
will be paid under Kmart's Key Employee Retention Program. Under the terms of
the employment agreement, Mr. Adamson will no longer be required to repay any
portion of the inducement payment paid pursuant to his services agreement. Mr.
Adamson's employment agreement provides for the payment of an emergence bonus,
the amount and other terms and conditions of which will be determined during the
process during which Kmart's plan of reorganization is developed and finalized.
Mr. Adamson's employment agreement provides for the continuation of certain
reasonable travel and housing benefits as were originally provided under his
services agreement, and for participation in Kmart's welfare and other benefit
plans made available to Kmart's senior executives in general.

     In the event of a termination of Mr. Adamson's employment either by Kmart
(other than for disability or cause) or by Mr. Adamson for good reason, Mr.
Adamson's employment agreement provides for the payment of cash severance as
follows:

     - if such termination occurs on or prior to April 30, 2003 and prior to the
       date on which a confirmed plan of reorganization (other than a plan of
       liquidation) is approved by the bankruptcy court (referred to as the
       "plan confirmation date"), a cash lump sum equal to the sum of 300% of
       Mr. Adamson's base salary and 100% of his target bonus in effect for the
       year of termination, minus the amount of the entire inducement payment
       paid pursuant to his services agreement;

     - if such termination occurs following April 30, 2003 but prior to the plan
       confirmation date, then an initial payment equal to Mr. Adamson's base
       salary and target bonus as in effect immediately prior to the time of
       termination would be made at the time of termination, and an additional
       payment equal to 200% of Mr. Adamson's base salary as in effect
       immediately prior to the time of termination would be made if and when
       the plan confirmation date occurred; or

     - if such termination occurs following the plan confirmation date (or in
       contemplation of the plan confirmation date in order to reduce the
       amounts payable under the employment agreement), a payment equal to 300%
       of his base salary as in effect immediately prior to the time of
       termination and 100% of his target bonus as in effect for the year in
       which termination occurs would be made at the time of termination.

     Following such a termination of employment, Mr. Adamson will also be
entitled to continued health and life insurance benefits for two years following
such a termination of employment, and full vesting and/or exercisability of
equity awards, deferred compensation and pension benefits. Payments to Mr.
Adamson will be "grossed-up" to compensate for the imposition of any golden
parachute excise taxes thereon. Following approval of the employment agreement
by the Court, the $10 million letter of credit that Kmart established for the
purpose of satisfying its obligations to Mr. Adamson was terminated. Mr.
Adamson's employment agreement provides for 12-month post-termination
non-competition and non-solicitation covenants.

     Appointment of Julian Day and Michael Macik.  Kmart appointed Julian Day to
the office of President and Chief Operating Officer effective April 9, 2002, and
appointed Michael Macik to the office of Executive Vice President, Human
Resources effective April 8, 2002. In connection with their appointments, Kmart
entered into employment agreements with each of Mr. Day and Mr. Macik. (Mr.
Day's agreement was

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<PAGE>

subject to and has received Court approval). Each of the employment agreements
provides for an initial term commencing on the effective date of employment and
ending April 30, 2004, provided that the term will be automatically extended for
an additional year on each anniversary of the effective date of the executive's
employment with Kmart, unless earlier terminated as provided in the agreements.
Each of the employment agreements provides for a lump sum inducement payment of,
in Mr. Day's case, $775,000 and in Mr. Macik's case, $425,000 and, in addition
to base salary and other benefits, provides for an annual target cash bonus
equal to, in Mr. Day's case, 100% of base salary and, in Mr. Macik's case, 60%
of base salary. Each of Mr. Day and Mr. Macik is entitled to receive a bonus in
connection with Kmart's emergence from bankruptcy. The amount of the emergence
bonus and the form in which it will be paid are to be determined in the process
of developing Kmart's plan of reorganization. Mr. Day's employment agreement
provides for reimbursement by Kmart with respect to temporary housing and
relocation expenses and for payment of certain amounts by Kmart (up to a maximum
of $1.5 million) in the event Mr. Day does not receive certain compensation
payments from his prior employer. Each of the executives will be entitled to
participate in the long-term cash and equity-based compensation programs that
Kmart may provide following its emergence from bankruptcy. The calculation of
cash severance payments and the timing of the payment of such amounts are
substantially similar to those described above with respect to Mr. Adamson's
employment agreement.

     Appointment of Ronald Hutchison.  The Board of Directors appointed Ronald
Hutchison to the office of Chief Restructuring Officer effective January 21,
2002. In connection with his appointment, Kmart entered into an employment
agreement with Mr. Hutchison, which has been approved by the Court. Mr.
Hutchison's agreement provides for a term commencing on the effective date of
employment and ending on the earlier of January 31, 2003, or the date on which
Kmart emerges from Chapter 11 as an ongoing business (for purposes of this
paragraph, the "emergence date"), provided that the term will be automatically
extended for an additional year unless Kmart delivers a written notice of
non-extension to Mr. Hutchison prior to December 31, 2002. The agreement
provides for a lump sum inducement payment of $250,000 and, in addition to base
salary and other benefits, provides for a lump sum emergence bonus of $1
million. In the event that Mr. Hutchison's employment is terminated by Kmart
other than for disability or cause or by Mr. Hutchison following a constructive
termination (each term as defined in the agreement), he is entitled to receive,
in addition to accrued but unpaid salary and benefits under Company benefit
plans, (i) a lump sum cash payment equal to his base salary as in effect on the
date of termination, (ii) if the emergence date occurs within 12 months
following such termination, a lump sum cash payment of $525,000 and (iii)
continued participation in welfare benefit plans for 12 months following such
termination. Payments to Mr. Hutchison will be "grossed-up" to compensate for
the imposition of any golden parachute excise taxes thereon. Mr. Hutchison's
agreement provides for customary confidentiality, non-disparagement and
cooperation covenants.

     Appointment of Albert Koch and Ted Stenger.  Mr. Koch was appointed to the
position of Chief Financial Officer, and Mr. Stenger was appointed to the
position of Treasurer, reporting to Mr. Koch, pursuant to the terms of a letter
agreement, effective March 10, 2002 (the "JAS Agreement"), entered into between
Kmart and JA&A Services, LLC ("JAS"), which is the employer of Messrs. Koch and
Stenger. Under this arrangement, Kmart will compensate JAS for Messrs. Koch and
Stenger's services at an hourly rate of $640 and $620, respectively. JAS is
entitled to review its billing rates effective January 1 of each year. The JAS
Agreement provides that Mr. Koch and Mr. Stenger will be entitled to the benefit
of indemnities provided by Kmart to its officers and directors. During the term
of the JAS Agreement, in addition to hourly fees and expenses, Kmart is
obligated to pay JAS an annual performance fee based on Kmart's EBITDA for each
year. If at any time prior to the earlier of (i) the second anniversary of the
effective date of the JAS Agreement or (ii) confirmation of a plan of
reorganization, new chief executive officers are employed and there is a
material change in the responsibilities or duties of Mr. Koch and Mr. Stenger
without JAS's consent, the JAS Agreement will terminate and JAS will be entitled
to a $2 million fee.

     Termination of Mr. Conaway's Employment.  Mr. Conaway's employment and
services as a director with Kmart terminated effective March 11, 2002, pursuant
to the terms of a separation agreement dated as of such date. This agreement
provides for, among other things, receipt by Mr. Conaway of a cash severance
payment equal to approximately $4 million and the waiver by Mr. Conaway of (i)
approximately $4.5 million

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<PAGE>

in additional severance and (ii) a $6.5 million lump sum payment attributable to
foregone compensation from his previous employer. In connection with the cash
severance payment, which was made in accordance with a Court order authorizing
Kmart to continue to make severance payments in connection with employment
termination generally, Mr. Conaway executed a release in favor of Kmart. This
agreement also acknowledges that, in accordance with the terms of the May 2001
promissory note evidencing the $5 million retention loan to Mr. Conaway
(described at "Transactions with Executive Officers"), the principal amount of
and accrued interest on such a loan were to be forgiven. The agreement also
provides for the following payments and benefits, which are subject to (and will
not be made without) Court approval and for which Mr. Conaway must execute an
additional release in favor of Kmart: tax gross-up payments associated with the
loan forgiveness provided for in the May 2001 promissory note; the continuation
until March 11, 2003 of certain health benefits, and the continuation until
September 11, 2002 of certain other benefits, such as residential security and
outplacement benefits. Pursuant to his separation agreement, Mr. Conaway will be
subject to non-competition and non-solicitation covenants for a period of 12
months following his termination. Upon execution of the separation agreement,
Mr. Conaway's employment agreement with Kmart, as amended and restated as of
January 21, 2002, described above at "Chairman and Executive Officer Services
and Employment Arrangements", was rescinded and revoked and such agreement was
withdrawn from the Court approval process.

     Termination of Messrs. D'Onofrio and Rots.  The employment of Messrs.
D'Onofrio and Rots terminated effective March 25, 2002. Kmart entered into
letter agreements with each of Messrs. D'Onofrio and Rots pursuant to which
Kmart agreed, on an interim basis, to continue to pay to these executives an
amount equal to their monthly salary and reserved the right to determine its
rights and obligations under their respective employment agreements. Kmart has
since determined to cease making monthly payments to Messrs. D'Onofrio and Rots.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  OWNERSHIP OF KMART COMMON STOCK

     The following table sets forth certain information concerning persons
which, to the knowledge of Kmart, own more than 5% of the outstanding Kmart
common stock.

<Table>
<Caption>
                                                                           PERCENT OF
                     NAME AND ADDRESS                          SHARES     COMMON STOCK
                     ----------------                        ----------   ------------
<S>                                                          <C>          <C>
Appaloosa Management L.P...................................  29,222,666       5.5%
David A. Tepper
26 Main Street, 1st Floor
Chatham, New Jersey 07928(1)
</Table>

---------------

(1) Information obtained from Schedule 13G as of March 4, 2002 filed with the
    SEC by Appaloosa Management L.P. and David A. Tepper. Mr. Tepper is the sole
    stockholder and president of Appaloosa Partners Inc. Appaloosa Partners Inc.
    is the general partner of, and Mr. Tepper owns a majority of the limited
    partnership interests of, Appaloosa Management L.P. Includes 28,447,666
    shares of Kmart common stock that can be acquired by conversion of
    8,534,300 73/4% Trust Convertible Preferred Securities.

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<PAGE>

OWNERSHIP OF KMART COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS

     The following table shows the Kmart common stock ownership of Kmart's
directors, the named executive officers and all of the directors and executive
officers of Kmart as a group, in each case as of January 30, 2002.

<Table>
<Caption>
                                                                           PERCENT OF
NAME                                                           SHARES     COMMON STOCK
----                                                          ---------   ------------
<S>                                                           <C>         <C>
James B. Adamson(1)(2)......................................     63,532        *
Lilyan H. Affinito(1)(2)....................................     68,273        *
Randy L. Allen.(2)..........................................    298,994        *
Jeff Boyer(2)...............................................    120,000        *
Richard G. Cline(1)(2)......................................     75,920        *
Charles C. Conaway(2).......................................  2,210,598        *
Willie D. Davis(2)..........................................     33,582        *
Anthony D'Onofrio(2)........................................     87,780        *
Joseph P. Flannery(1)(2)....................................     41,702        *
Cecil B. Kearse(2)..........................................    442,788        *
Robert D. Kennedy(1)(2)(3)..................................     54,534        *
David P. Rots(2)............................................    286,212        *
Mark S. Schwartz............................................     33,125        *
Robin B. Smith(1)(2)........................................     44,307        *
Thomas T. Stallkamp(1)(2)...................................     32,279        *
Richard J. Statuto(4).......................................      6,473        *
Directors and executive officers as a group (22
  persons)(1)-(4)...........................................  3,829,872        *
</Table>

---------------

 *  Directors and executive officers as a group owned less than 1% of the
    outstanding shares of Kmart common stock.

(1) Includes restricted Kmart common stock units accrued under the Directors
    Stock Plan as follows: Mr. Adamson -- 16,300 units; Ms. Affinito -- 15,194
    units; Mr. Cline -- 16,566 units; Mr. Flannery -- 1,515 units; Mr.
    Kennedy -- 16,300 units; Ms. Smith -- 14,686 units; and Mr.
    Stallkamp -- 7,816 units.

(2) Includes shares of Kmart common stock that can be acquired by exercise of
    stock options within 60 days of January 30, 2002, as follows: Mr.
    Adamson -- 13,634 shares; Ms. Affinito -- 13,634 shares; Ms. Allen -- 56,667
    shares; Mr. Cline -- 18,634 shares; Mr. Davis -- 13,634 shares; Mr.
    D'Onofrio -- 63,334 shares; Mr. Flannery -- 18,634 shares; Mr.
    Kearse -- 384,993 shares; Mr. Kennedy -- 13,634 shares; Mr. Rots -- 156,001
    shares; Ms. Smith -- 13,634 shares; Mr. Stallkamp -- 8,634 shares; and all
    directors and executive officers as a group -- 839,067 shares.

(3) Includes shares of Kmart common stock that can be acquired by conversion of
    Kmart Financing I Trust Convertible Preferred Stock as follows: Mr.
    Kennedy -- 1,000 shares; and all directors and executive officers as a
    group -- 1,000 shares.

(4) Mr. Statuto may be deemed to share voting and investment power as to 6,400
    shares of Kmart common stock owned by CHRISTUS Health of which he is Vice
    Chairman. If such additional shares were included, executive officers and
    directors as a group would be considered to beneficially own 3,836,272
    shares of Kmart common stock, or 0.8% of the Kmart common stock outstanding
    as of January 30, 2002. Mr. Statuto disclaims beneficial ownership of such
    shares.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  TRANSACTIONS WITH EXECUTIVE OFFICERS

     Pursuant to an amendment to his original May 2000 employment agreement,
Kmart made a full recourse retention loan to Mr. Conaway in the principal amount
of $5 million in May 2001. Pursuant to the

                                        85
<PAGE>

employment agreements entered into in Messrs. D'Onofrio, Kearse, Rots and
Schwartz, as well as to John T. McDonald, Jr. (former Chief Financial Officer),
in December 2001 in the aggregate principal amount of $2.5 million each (except
for Mr. Schwartz's loan, which was in the principal amount of $3 million). Mr.
McDonald's aggregate $2.5 million loan was to be made in two installments, one
in December 2001 and one in December, 2002. The loan originally to be made in
December 2002 was subsequently made in January 2002. These loans are hereinafter
referred to as the "Executive Loans." Each of the Executive Loans originally had
a term of approximately five years, accruing interest at 3.97% per year, payment
of which is deferred until the maturity date. When the executives' employment
agreements (other than Mr. Schwartz's agreement) were amended and restated in
January 2002, the maturity dates of each of the Executive Loans (other than Mr.
Schwartz's loan) were amended to January 31, 2004. Each of the Executive Loans
provides that it is to be forgiven in full on the maturity date if the executive
is employed by Kmart on that date, with earlier forgiveness in the event that
the executive is terminated (i) by Kmart without cause, (ii) because of death or
disability or (iii) voluntarily by the executive under a constructive
termination (in connection with the revision of the maturity date, a
constructive termination is limited in this instance to a reduction in base
salary or due to a failure by Kmart to pay the executive's base salary). Each
Executive Loan also provides that Kmart is obligated to "gross-up" the executive
with respect to income and other taxes incurred by the executive with respect to
loan forgiveness.

     In December 2001, Kmart also made full recourse retention loans to Messrs.
David Montoya (former SVP, Specialty Operations) and Gregg Treadway (former EVP,
Store Operations), each in the amount of $750,000, and to Ms. Janet Kelley (EVP,
General Counsel) in the amount of $500,000. The terms of these loans are
substantially similar to the Executive Loans described above, except that the
maturity date is January 31, 2005 and there is no tax "gross-up" obligation on
the part of Kmart in connection with any loan forgiveness. The employment of
Messrs. Montoya and Treadway terminated, effective March 22, 2002 and May 06,
2002, respectively.

     The loans to executive officers described above formed part of a broader
retention program pursuant to which Kmart made loans aggregating approximately
$30 million, as publicly disclosed in Exhibit 99.2 to Kmart's Form 8-K dated May
9, 2002. Kmart has not taken any corporate action since the commencement of the
Chapter 11 case to forgive any of these loans.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     a) The following documents are filed as part of this report

          1. Financial Statements

             Financial statements filed as part of this Form 10-K/A are listed
        under Part II, Item 8.

          2. Financial Statement Schedules

             Financial statement schedules filed as part of this Form 10-K/A are
        listed under Part II, Item 8.

             The separate financial statements and summarized financial
        information of majority-owned subsidiaries not consolidated and of 50%
        or less owned persons have been omitted because they are not required
        pursuant to conditions set forth in Rules 3-09 and 1-02(w) of Regulation
        S-X.

             All other schedules have been omitted because they are not required
        under the instructions contained in Regulation S-X because the
        information called for is contained in the financial statements and
        notes thereto.

          3. Exhibits

             See Exhibit Index included in this report.

                                        86
<PAGE>

                b) Reports on Form 8-K:

                    We filed a Current Report on Form 8-K dated January 22, 2002
               to report that Kmart Corporation and 37 of its U.S. subsidiaries
               filed voluntary petitions for relief under Chapter 11 of the
               United States Bankruptcy Code in the United States Court for the
               Northern District of Illinois Case No. 02-B02474, that James B.
               Adamson had been appointed Chairman of the Board, Mark Schwartz's
               employment as President and Chief Operating Officer had been
               terminated and Ron Hutchison had been appointed Chief
               Restructuring Officer and Executive Vice President and to file a
               copy of the press release.

                                        87
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on January 14, 2003.

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

                     KMART CORPORATION

                     By:      /s/ JAMES B. ADAMSON
                        -----------------------------------
                                 James B. Adamson
                             Chairman of the Board and
                              Chief Executive Officer
                           (Principal Executive Officer)

                     By:         /s/ A.A. KOCH
                        -----------------------------------
                                     A.A. Koch
                              Chief Financial Officer
                           (Principal Financial Officer)

                     By:     /s/ RICHARD J. NOECHEL
                        -----------------------------------
                                Richard J. Noechel
                           Vice President and Controller
                          (Principal Accounting Officer)

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant and in the capacities indicated, on January 14, 2003.

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

<Table>
<S>                                             <C>
           /s/ LILYAN H. AFFINITO                           /s/ ROBERT D. KENNEDY
---------------------------------------------   ---------------------------------------------
        Lilyan H. Affinito, Director                     Robert D. Kennedy, Director




            /s/ RICHARD G. CLINE                             /s/ ROBIN B. SMITH
---------------------------------------------   ---------------------------------------------
         Richard G. Cline, Director                       Robin B. Smith, Director




             /s/ WILLIE D. DAVIS                           /s/ THOMAS T. STALLKAMP
---------------------------------------------   ---------------------------------------------
          Willie D. Davis, Director                     Thomas T. Stallkamp, Director




           /s/ JOSEPH P. FLANNERY                          /s/ RICHARD J. STATUTO
---------------------------------------------   ---------------------------------------------
        Joseph P. Flannery, Director                    Richard J. Statuto, Director
</Table>

                                        88
<PAGE>

                                 CERTIFICATIONS

CEO CERTIFICATION

     I, James B. Adamson, certify that:

          1. I have reviewed this annual report on Form 10-K/A of Kmart
             Corporation;

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

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

Date: January 14, 2003

       /s/ JAMES B. ADAMSON
--------------------------------------
James B. Adamson
Chairman of the Board and
Chief Executive Officer

                                        89
<PAGE>

CFO CERTIFICATION

     I, Albert A. Koch, certify that:

          1. I have reviewed this annual report on Form 10-K/A of Kmart
             Corporation;

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

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

Date: January 14, 2003

        /s/ ALBERT A. KOCH
--------------------------------------
Albert A. Koch

                                        90
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
  EXHIBIT    NUMBER                           DESCRIPTION
  -------    ------                           -----------
<C>          <S>      <C>
       ****  (3a)     Restated Articles of Incorporation of Kmart Corporation
        PFH  (3b)     By-Laws of Kmart Corporation, as amended
        PFH  (4a)     $2 Billion Senior Secured Debtor-in-Possession Financing
                      Facility
       ****  (10c)    Kmart Corporation Directors Retirement Plan, as
                      amended[10d][A]
         **  (10d)    Kmart Corporation Performance Restricted Stock Plan, as
                      amended[10e][A]
      *****  (10e)    Kmart Corporation Deferred Compensation Plan for
                      Non-Employee Directors, as amended[A]
        ***  (10f)    Kmart Corporation 1992 Stock Option Plan, as amended[10g][A]
      *****  (10g)    Kmart Corporation Amended and Restated Directors Stock
                      Plan[A]
         **  (10h)    Form of Employment Agreement with Executive Officers[10j][A]
          *  (10i)    Kmart Corporation Supplemental Executive Retirement
                      Plan[10c][A]
        ***  (10j)    Amended and Restated Kmart Corporation Annual Incentive
                      Bonus Plan[10k][A]
        ***  (10k)    Amended and Restated Kmart Corporation Management Stock
                      Purchase Plan[10l][A]
        ***  (10l)    Supplemental Pension Benefit Plan[10m][A]
    *******  (10m)    Kmart Corporation 1997 Long-Term Equity Compensation
                      Plan[10n][A]
   ********  (10n)    Employment Agreement with Charles C. Conaway[10n][A]
     ******  (10o)    Amended and Restated Kmart Corporation Special Severance
                      Plan[A]
      *****  (10p)    Amended and Restated Kmart Corporation 1998 Management
                      Deferred Compensation and Restoration Plan [A]
        PFH  (10q)    Second Amendment to Employment Agreement with Charles C.
                      Conaway[A]
 **********  (10r)    Amendment to Employment Agreement with Charles C.
                      Conaway[10r][A]
 **********  (10s)    Amended and Restated Kmart Corporation Annual Incentive
                      Bonus Plan[10s][A]
***********  (10t)    Special Supplemental Executive Retirement Plan[10t][A]
  *********  (10v)    Supply Agreement between Kmart Corporation and Fleming
                      Companies, Inc.
        PFH  (10w)    James Adamson 2001 Services Agreement[A]
        PFH  (10x)    James Adamson 2002 Employment Agreement[A]
        PFH  (10y)    Anthony D'Onofrio Amended and Restated Employment
                      Agreement[A]
        PFH  (10z)    David Rots Amended and Restated Employment Agreement[A]
        PFH  (10aa)   Cecil Kearse Amended and Restated Employment Agreement[A]
        PFH  (10bb)   Mark Schwartz Separation Agreement and General Release[A]
        PFH  (10cc)   Charles Conaway 2001 Amended and Restated Employment
                      Agreement[A]
        PFH  (10dd)   Charles Conaway Separation Agreement[A]
        PFH  (10ee)   Ronald Hutchison 2002 Employment Agreement[A]
        PFH  (10ff)   Julian Day 2002 Employment Agreement[A]
        PFH  (10gg)   Mark Schwartz Confidentiality, Non-competition and
                      Non-solicitation Agreement[A]
        PFH  (10hh)   Randy L. Allen Confidentiality, Non-competition and
                      Non-solicitation Agreement[A]
        PFH  (10ii)   Cecil B. Kearse Confidentiality, Non-competition and
                      Non-solicitation Agreement[A]
</Table>

                                        91
<PAGE>

<Table>
<Caption>
  EXHIBIT    NUMBER                           DESCRIPTION
  -------    ------                           -----------
<C>          <S>      <C>
        PFH  (10jj)   David P. Rots Confidentiality, Non-competition and
                      Non-solicitation Agreement[A]
        PFH  (10kk)   Anthony B. D'Onofrio Confidentiality, Non-competition and
                      Non-solicitation Agreement[A]
        PFH  (10ll)   Jeff Boyer Confidentiality, Non-competition and
                      Non-solicitation Agreement[A]
        PFH  (10mm)   Randy L. Allen employment offer letter[A]
        PFH  (10nn)   Jeff Boyer employment offer letter[A]
        PFH  (10oo)   Jeff Boyer Full and Complete Release of Liability and
                      Severance Agreement
        PFH  (10pp)   Employment Agreement with Cecil Kearse[A]
        PFH  (10rr)   Employment Agreement with Tony D'Onofrio[A]
        PFH  (10ss)   Employment Agreement with Mark Schwartz[A]
        PFH  (10tt)   Employment Agreement with David Rots[A]
        PFH  (10uu)   Employment Agreement with Michael T. Macik[A]
        PFH  (10vv)   JA&A Services, LLC Agreement
        PFH  (10ww)   License Agreement between Kmart Corporation and Kmart of
                      Michigan, Inc.
         FH  (18)     Preferability letter from PricewaterhouseCoopers LLP
         FH  (21)     List of Significant Subsidiaries
         FH  (23)     Consent of Independent Accountants
         FH  (99a)    CEO Certification pursuant to Section 906 of the
                      Sarbanes-Oxley Act of 2002
         FH  (99b)    CFO Certification pursuant to Section 906 of the
                      Sarbanes-Oxley Act of 2002
</Table>

---------------

Notes:

          * Filed as Exhibits to the Form 10-K Report of the Registrant for the
            fiscal year ended January 27, 1993 (file number 1-327) and are
            incorporated herein by reference.

          ** Filed as Exhibits to the Form 10-K Report of the Registrant for the
             fiscal year ended January 26, 1994 (file number 1-327) and are
             incorporated herein by reference.

        *** Filed as Exhibits to the Form 10-K Report of the Registrant for the
            fiscal year ended January 25, 1995 (file number 1-327) and are
            incorporated herein by reference.

       **** Filed as Exhibits to the Form 10-K Report of the Registrant for the
            fiscal year ended January 31, 1996 (file number 1-327) and are
            incorporated herein by reference.

      ***** Filed as Exhibits to the Form 10-K Report of the Registrant for the
            fiscal year ended January 27, 1999 (file number 1-327) and are
            incorporated herein by reference.

     ****** Filed as part of the 1997 Proxy Statement and is incorporated herein
            by reference.

   ******* Filed as Form 8-K dated June 4, 1995 and is incorporated herein by
           reference.

   ******** Filed as an Exhibit to the Form 10-Q Report of the Registrant for
            the fiscal quarter ended October 28, 1998 (file number 1-327) and is
            incorporated herein by reference.

  ********* Filed as an Exhibit to the Form 10-Q Report of the Registrant for
            the fiscal quarter ended May 2, 2001 (file number 1-327) and is
            incorporated herein by reference.

 ********** Filed as an Exhibit to the Form 10-Q Report of the Registrant for
            the fiscal quarter ended August 1, 2001 (file number 1-327) and is
            incorporated herein by reference.

*********** Filed as Exhibits to the Form 10-Q Report of the Registrant for the
            fiscal quarter ended October 31, 2001 (file number 1-327) and is
            incorporated herein by reference.

        PFH Filed as Exhibits to the Form 10-K Report of the Registrant for the
            fiscal year ended January 30, 2002, filed with the Securities and
            Exchange Commission on May 15, 2002.

        FH  Filed herewith.

                                        92
<PAGE>

         [#] Exhibit numbers in the Form 10-K/A or 10-Q Reports for the periods
             indicated.

         [A] This document is a management contract or compensatory plan.

     In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K, various
instruments defining the rights of holders of long-term debt of the Registrant
are not being filed herewith because the total amount of securities authorized
under each such instrument does not exceed 10% of the total assets of the
Registrant.

     The Registrant agrees to furnish a copy to the Commission upon request of
the following instruments defining the rights of holders of long-term debt:

     Indenture dated as of February 1, 1985, between Kmart Corporation and The
Bank of New York, Trustee, as supplemented by the First Supplemental Indenture
dated as of March 1, 1991

          12 1/2% Debentures Due 2005

          8 3/8% Notes Due 2004

          8 1/8% Notes Due 2006

          7 3/4% Debentures Due 2012

          8 1/4% Notes Due 2022

          8 3/8% Debentures Due 2022

          7.95% Debentures Due 2023

          Fixed-Rate Medium-Term Notes (Series A, B, C, D)

          7 3/4% Trust Convertible Preferred Securities

                                        93