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

                                   FORM 10-Q/A
                                 AMENDMENT NO. 1



  X      QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
-----    EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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)


                 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)

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

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

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

As of August 28, 2002, 502,471,545 shares of Common Stock of Kmart Corporation
were outstanding.

<PAGE>



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

                Condensed Consolidated Statements of Operations --
                (Unaudited) (Restated) 13 and 26 weeks
                ended July 31, 2002 and August 1, 2001                                           4

                Condensed Consolidated Balance Sheets --
                (Unaudited) (Restated) July 31, 2002, August
                1, 2001 and January 30, 2002                                                     5

                Condensed Consolidated Statements of Cash Flows --
                (Unaudited) (Restated) 26 weeks ended July
                31, 2002 and August 1, 2001                                                      6

                Notes to Condensed Consolidated Financial                                        7-27
                Statements (Unaudited)

Item 2.         Management's Discussion and Analysis of Results of Operations and                28-47
                Financial Condition

Item 3.         Quantitative and Qualitative Disclosures about Market Risk                        48

Item 4.         Controls and Procedures                                                           49

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


Item 3.         Defaults Upon Senior Securities                                                   50

Item 5.         Other Information                                                                 50

Item 6.         Exhibits and Reports on Form 8-K                                                 50-51

                Signatures                                                                        52

                Certifications                                                                   53-54

</TABLE>

                                       2

<PAGE>
                                EXPLANATORY NOTE

         The purpose of this Amendment No. 1 to Quarterly Report on Form 10-Q/A
is to restate the unaudited financial statements of Kmart Corporation and its
subsidiaries ("Kmart," "we," "us" or "our") for the 13 and 26 week periods ended
July 31, 2002 and prior periods presented 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 ("SEC") on September 16, 2002. Upon review of
the aggregate impact of these adjustments, Kmart 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. This
Amendment No. 1 to our Quarterly Report on Form 10-Q/A should be read in
conjunction with Amendment No. 1 to our Annual Report on Form 10-K/A for our
fiscal year ended January 30, 2002, to be filed with the SEC on January 14,
2003.

         We have amended and restated in its entirety each Item of our Quarterly
Report on Form 10-Q for the 13 and 26 week periods ended July 31, 2002 to
reflect these adjustments. Except as otherwise expressly noted herein, this
Amendment No. 1 to Quarterly Report on Form 10-Q/A does not reflect events
occurring after the September 16, 2002 filing of our Quarterly Report on Form
10-Q for the 13 and 26 week periods ended July 31, 2002 or modify or update the
disclosures set forth in that Quarterly Report on Form 10-Q in any way, except
as required to reflect the effects of the restatement of our financial
statements for the 13 and 26 week periods presented or deemed necessary in
connection with the completion of restated financial statements.

         The Items of our Quarterly Report on Form 10-Q for the 13 and 26 week
periods ended July 31, 2002 which are amended and restated herein are:

1.       Part I, Item 1 - Financial Statements, has been restated.

2.       Part I, Item 2 - Management's Discussion and Analysis of Financial
         Condition and Results of Operations, has been revised.

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

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

         The remaining Items contained within this Amendment No. 1 to our
Quarterly Report on Form 10-Q/A consist of all other Items originally contained
in our Quarterly Report on Form 10-Q for the 13 and 26 week periods ended July
31, 2002 in the form filed with the SEC on September 16, 2002. 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 Quarterly Report on Form 10-Q/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 Quarterly Report on Form
10-Q, including but not limited to our Quarterly Report on Form 10-Q for the 13
and 39 week periods ended October 30, 2002.


                                       3
<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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


<TABLE>
<CAPTION>
                                                                                            (AS RESTATED - SEE NOTE 1)
                                                                                 ---------------------------------------------------
                                                                                     13 WEEKS ENDED             26 WEEKS ENDED
                                                                                 -----------------------     -----------------------
                                                                                 JULY 31,      AUGUST 1,     JULY 31,      AUGUST 1,
                                                                                   2002          2001          2002          2001
                                                                                 --------      --------      --------      --------
<S>                                                                              <C>           <C>           <C>           <C>
Sales                                                                            $  7,519      $  8,917      $ 15,158      $ 17,254
Cost of sales, buying and occupancy                                                 6,204         7,209        13,225        13,988
                                                                                 --------      --------      --------      --------

Gross margin                                                                        1,315         1,708         1,933         3,266
Selling, general and administrative expenses                                        1,607         2,021         3,377         3,715
Equity income (loss) in unconsolidated subsidiaries                                    14            (8)           19           (24)
Charges for BlueLight.com and other                                                    15            92            15           115
                                                                                 --------      --------      --------      --------

Loss before interest, reorganization items, income taxes and dividends
   on convertible preferred securities of subsidiary trust                           (293)         (413)       (1,440)         (588)
Interest expense, net (contractual interest for 13 and 26 weeks
   ended July 31, 2002 was $100 and $202, respectively)                                32            88            65           171
Reorganization items, net                                                               4             -           278             -
Income tax benefit                                                                      -          (153)          (12)         (235)
Dividends on convertible preferred securities of subsidiary trust, net of
   income taxes of $0, $6, $0 and $12, respectively (contractual dividend for 13
   and 26 weeks ended July 31, 2002 was $18 and $35 net of tax, respectively)           -            12             -            23
                                                                                 --------      --------      --------      --------

Net loss from continuing operations                                                  (329)         (360)       (1,771)         (547)

Gain from discontinued operations                                                      36             -            36             -
                                                                                 --------      --------      --------      --------

Net loss                                                                         $   (293)     $   (360)     $ (1,735)     $   (547)
                                                                                 ========      ========      ========      ========

Basic/Diluted loss per common share from continuing operations                   $  (0.65)     $  (0.73)     $  (3.52)     $  (1.12)

Basic/Diluted gain per common share from discontinued operations                     0.07             -          0.07             -
                                                                                 --------      --------      --------      --------

Basic/Diluted loss per common share                                              $  (0.58)     $  (0.73)     $  (3.45)     $  (1.12)
                                                                                 ========      ========      ========      ========


Basic/Diluted weighted average shares (millions)                                    502.7         490.6         502.8         489.6
</TABLE>

     See accompanying Notes to Condensed Consolidated Financial Statements.



                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                         (AS RESTATED-SEE NOTE 1)
                                                                                   ------------------------------------
                                                                                        (UNAUDITED)
                                                                                   -----------------------
                                                                                   JULY 31,      AUGUST 1,  JANUARY 30,
                                                                                     2002          2001         2002
                                                                                   --------      --------     --------
<S>                                                                                <C>           <C>          <C>
ASSETS

Current Assets
    Cash and cash equivalents                                                      $  1,003      $    420     $  1,245
    Merchandise inventories                                                           5,284         6,825        5,796
    Other current assets                                                                618           718          800
                                                                                   --------      --------     --------
TOTAL CURRENT ASSETS                                                                  6,905         7,963        7,841

Property and equipment, net                                                           5,866         6,797        6,093
Other assets and deferred charges                                                       247           516          249
                                                                                   --------      --------     --------
TOTAL ASSETS                                                                       $ 13,018      $ 15,276     $ 14,183
                                                                                   ========      ========     ========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Long-term debt due within one year                                              $      -      $    116     $      -
   Accounts payable                                                                   1,438         2,489           89
   Accrued payroll and other liabilities                                                653         1,235          420
   Taxes other than income taxes                                                        244           261          143
                                                                                   --------      --------     --------
TOTAL CURRENT LIABILITIES                                                             2,335         4,101          652

Long-term debt and notes payable                                                          -         2,980          330
Capital lease obligations                                                               682           902          857
Other long-term liabilities                                                             175           968          132
                                                                                   --------      --------     --------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE                                           3,192         8,951        1,971

LIABILITIES SUBJECT TO COMPROMISE                                                     7,445             -        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
    $898, $898 and $898, respectively)                                                  889           887          889
Common stock, $1 par value, 1,500,000,000 shares authorized;
    502,659,192, 496,962,413 and 503,294,515 shares outstanding,
    respectively                                                                        503           497          503
Capital in excess of par value                                                        1,694         1,670        1,695
(Accumulated deficit) retained earnings                                                (705)        3,271        1,032
                                                                                   --------      --------     --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                         $ 13,018      $ 15,276     $ 14,183
                                                                                   ========      ========     ========
</TABLE>

     See accompanying Notes to Condensed Consolidated Financial Statements.



                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                               (AS RESTATED-SEE NOTE 1)
                                                                               ------------------------
                                                                                    26 WEEKS ENDED
                                                                               ------------------------
                                                                               JULY 31,       AUGUST 1,
                                                                                 2002            2001
                                                                               -------         -------
<S>                                                                            <C>             <C>
Cash Flows From Operating Activities
      Net loss                                                                 $(1,735)        $  (547)
      Adjustments to reconcile net loss to net cash provided by
         (used for) operating activities:
                Gain from discontinued operations                                  (36)              -
                Restructuring, impairments and other charges                       827             115
                Reorganization items, net                                          278               -
                Depreciation and amortization                                      375             413
                Equity (income) loss in unconsolidated subsidiaries                (19)             24
                Dividends received from Meldisco                                    45              51
                Changes in Operating Assets and Liabilities:
                  Increase in inventories                                         (156)           (469)
                  Increase in accounts payable                                     703             287
                  Deferred income taxes and taxes payable                          (10)           (225)
                  Other assets                                                      84             202
                  Other liabilities                                                123             100
                Cash used for store closings and other charges                    (131)           (105)
                                                                               -------         -------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES                               348            (154)
                                                                               -------         -------

NET CASH USED FOR REORGANIZATION ITEMS                                             (50)              -
                                                                               -------         -------

CASH FLOWS FROM INVESTING ACTIVITIES
      Capital expenditures                                                        (126)           (651)
      Investment in BlueLight.com                                                    -             (45)
                                                                               -------         -------
NET CASH USED FOR INVESTING ACTIVITIES                                            (126)           (696)
                                                                               -------         -------

CASH FLOWS FROM FINANCING ACTIVITIES
      Proceeds from issuance of debt                                                 -           1,194
      Payments on debt                                                            (349)           (273)
      Debt issuance costs                                                          (30)             (3)
      Payments on capital lease obligations                                        (35)            (41)
      Payments of dividends on preferred securities of subsidiary trust              -             (36)
      Issuance of common shares                                                      -              28
                                                                               -------         -------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES                              (414)            869
                                                                               -------         -------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                           (242)             19
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                     1,245             401
                                                                               -------         -------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                       $ 1,003         $   420
                                                                               =======         =======
</TABLE>

     See accompanying Notes to Condensed Consolidated Financial Statements.



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

1.       RESTATEMENT OF CURRENT AND PRIOR PERIODS

                  As part of the review and preparation of the Quarterly Report
         on Form 10-Q for the third quarter ended October 30, 2002, Kmart
         Corporation and its subsidiaries ("Kmart," "we," "us" or "our")
         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 the new, as well as the previously
         disclosed and recorded adjustments, we concluded that restating our
         historical financial statements was appropriate because the aggregate
         impact was material to the current estimate our 2002 fiscal year
         results.

                  The tables below show the results of the restatements on
         reported results for the 13 and 26 week periods presented in this
         Amendment No. 1 to our Quarterly Report on Form 10-Q/A, which relate
         primarily to:

         a)       Lease accrual adjustments - An understatement 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 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 previously disclosed in the
                  Quarterly Report on Form 10-Q for the second quarter 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 previously
                  disclosed in the Quarterly Report on Form 10-Q for the second
                  quarter 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.


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

                  The summary of the effects of the restatement on the 13 and 26
         week periods ended July 31, 2002 and August 1, 2001 are presented in
         the tables below.



<TABLE>
<CAPTION>
                                                                       13 Weeks Ended July 31, 2002
                                     -----------------------------------------------------------------------------------------------
                                                                            Adjustments
                                                 -------------------------------------------------------------------
                                            As          Lease         Accounts
                                        previously     accrual         payable       Inventory       Vendor                   As
                                         reported*    adjustments    adjustments       loads       allowances     Other     restated
                                     -----------------------------------------------------------------------------------------------
<S>                                     <C>           <C>            <C>             <C>            <C>           <C>       <C>
Sales                                     $7,519          $-              $-             $-            $-           $-       $7,519
Cost of sales, buying
   and occupancy                          $6,226         ($5)            $16           ($27)          ($2)         ($4)      $6,204
                                     -----------------------------------------------------------------------------------------------
Gross margin                              $1,293          $5            ($16)           $27            $2           $4       $1,315
Selling, general and administrative
   expenses                               $1,644          $-              $-           ($22)           $-         ($15)      $1,607
Operating (loss) income                    ($352)         $5            ($16)           $49            $2          $19        ($293)
Reorganization items, net                    $13          $-              $-            $ -            $-          ($9)          $4
Net (loss) income from continuing
   operations                              ($397)         $5            ($16)           $49            $2          $28        ($329)
Gain from discontinued operations
                                             $20          $-             $-             $ -            $-          $16          $36
                                     -----------------------------------------------------------------------------------------------
Net (loss) income                          ($377)         $5           ($16)            $49            $2          $44        ($293)
                                     ===============================================================================================
Basic/Diluted (loss) earnings from
   continuing operations                  ($0.79)      $0.01          ($0.03)         $0.10            $-        $0.06       ($0.65)
Basic/Diluted gain from discontinued
   operations                              $0.04          $-              $-             $-            $-        $0.03        $0.07
                                     -----------------------------------------------------------------------------------------------
Basic/Diluted (loss) earnings per
   common share                           ($0.75)       $0.01         ($0.03)         $0.10            $-        $0.09       ($0.58)
                                     ===============================================================================================



<CAPTION>
                                                                         26 Weeks Ended July 31, 2002
                                     -----------------------------------------------------------------------------------------------
                                                                               Adjustments
                                                     -----------------------------------------------------------------
                                           As          Lease        Accounts
                                       previously     accrual        payable         Inventory       Vendor                   As
                                       reported*    adjustments    adjustments         loads       allowances     Other    restated
                                     -----------------------------------------------------------------------------------------------
<S>                                     <C>           <C>            <C>             <C>            <C>           <C>       <C>
Sales                                    $15,158          $-              $-             $-            $-           $-      $15,158
Cost of sales, buying
   and occupancy                         $13,242         ($2)            $26           ($35)          ($9)          $3      $13,225
                                     -----------------------------------------------------------------------------------------------
Gross margin                              $1,916          $2            ($26)           $35            $9          ($3)      $1,933
Selling, general and administrative
   expenses                               $3,435          $-              $-           ($21)           $-         ($37)      $3,377
Operating (loss) income                  ($1,515)         $2            ($26)           $56            $9          $34      ($1,440)
Net (loss) income continuing
operations                               ($1,846)         $2            ($26)           $56            $9          $34      ($1,771)
Gain from discontinued
   operations                                $20          $-              $-             $-            $-          $16          $36
                                     -----------------------------------------------------------------------------------------------
Net (loss) income                        ($1,826)         $2            ($26)           $56            $9          $50      ($1,735)
                                     ===============================================================================================
Basic/Diluted (loss) earnings from
   continuing operations                  ($3.67)         $-          ($0.05)         $0.11         $0.02        $0.07       ($3.52)
Basic/Diluted gain from
   discontinued operations                 $0.04          $-              $-             $-            $-        $0.03        $0.07
                                     -----------------------------------------------------------------------------------------------
Basic/Diluted (loss) earnings per
   common share                           ($3.63)         $-          ($0.05)         $0.11         $0.02        $0.10       ($3.45)
                                     ===============================================================================================
</TABLE>

* - As previously reported on Form 10-Q for the quarter ended July 31, 2002
    filed on September 16, 2002.



                                        8


<PAGE>


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


<TABLE>
<CAPTION>
                                                                      13 Weeks Ended August 1, 2001
                                     -----------------------------------------------------------------------------------------------
                                                                               Adjustments
                                                    -------------------------------------------------------------------
                                            As           Lease         Accounts
                                        previously      accrual        payable       Inventory      Vendor                     As
                                        reported**    adjustments    adjustments       loads      allowances      Other     restated
                                     -----------------------------------------------------------------------------------------------
<S>                                     <C>            <C>           <C>             <C>            <C>           <C>        <C>
Sales                                     $8,917          $-            $  -             $-           $ -          $ -       $8,917
Cost of sales, buying
   and occupancy                          $7,253          $1             $11            ($6)         ($24)        ($26)      $7,209
                                     -----------------------------------------------------------------------------------------------
Gross margin                              $1,664         ($1)           ($11)            $6           $24          $26       $1,708
Selling, general and
   administrative expenses                $2,004          $-              $-             $1            $-          $16       $2,021

Operating (loss) income                    ($440)        ($1)           ($11)            $5           $24          $10        ($413)

(Benefit from) provision for
  Income taxes                             ($163)         $-             ($4)            $2            $9           $3        ($153)
                                     -----------------------------------------------------------------------------------------------
Net (loss) income                          ($377)        ($1)            ($7)            $3           $15           $7        ($360)
                                     ===============================================================================================
Basic/Diluted (loss) earnings per
   common share                           ($0.77)         $-          ($0.01)         $0.01         $0.03        $0.01       ($0.73)
                                     ===============================================================================================




<CAPTION>
                                                                      26 Weeks Ended August 1, 2001
                                     -----------------------------------------------------------------------------------------------
                                                                               Adjustments
                                                    -------------------------------------------------------------------
                                           As           Lease         Accounts
                                       previously      accrual        payable        Inventory       Vendor                    As
                                        reported**   adjustments    adjustments        loads       allowances     Other     restated
                                     -----------------------------------------------------------------------------------------------
<S>                                     <C>            <C>           <C>             <C>            <C>         <C>        <C>
Sales                                    $17,254          $-              $-             $-            $-           $-      $17,254
Cost of sales, buying
   and occupancy                         $14,087          $2             $15           ($21)         ($64)        ($31)     $13,988
                                     -----------------------------------------------------------------------------------------------
Gross margin                             $ 3,167         ($2)           ($15)           $21           $64          $31       $3,266
Selling, general and
   administrative expenses               $ 3,716          $-              $-             $2            $-          ($3)      $3,715

Operating (loss) income                    ($688)        ($2)           ($15)           $19           $64          $34        ($588)

(Benefit from) provision for
   income taxes                            ($272)        ($1)            ($5)            $7           $23          $13        ($235)
                                     -----------------------------------------------------------------------------------------------
Net (loss) income                          ($610)        ($1)           ($10)           $12           $41          $21        ($547)
                                     ===============================================================================================
Basic/Diluted (loss) earnings per
   common share                           ($1.25)         $-          ($0.02)         $0.03         $0.08        $0.04       ($1.12)
                                     ===============================================================================================
</TABLE>


         ** - As previously reported on Form 10-Q/A for the quarter ended
              August 1, 2001 filed on June 12, 2002.


                                       9


<PAGE>

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



         The following is a summary of the effects of the restatement on our
unaudited Consolidated Balance Sheets for all amounts that changed by 5% or more
for the periods ended July 31, 2002, August 1, 2001 and January 30, 2002,
respectively.

<TABLE>
<CAPTION>
                                                        As
                                                    previously            As
                                                     reported         restated
                                                --------------     -------------
<S>                                                  <C>               <C>
July 31, 2002*
  Other long-term liabilities                          $127              $175
  Accumulated deficit                                 ($565)            ($705)

August 1, 2001**
  Other assets and deferred charges                    $447              $516
  Other long-term liabilities                          $920              $968

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
</TABLE>


         * - As previously reported in the Form 10-Q for the quarter ended
             July 31, 2002 filed on September 16, 2002.
         ** - As previously reported in the Form 10-Q/A for the quarter ended
              August 1, 2001 filed on June 12, 2002.
         *** - As previously reported in the Form 10-K for the fiscal year ended
               January 30 , 2002 filed on May 15, 2002.



                                       10

<PAGE>

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



2.       BASIS OF PRESENTATION

         General

                  These interim unaudited Condensed 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 unaudited Condensed 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, net, except for those
         required to be reported as discontinued operations in conformity with
         Statement of Financial Accounting Standards ("SFAS") No. 144
         "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
         No. 144") in the unaudited Condensed Consolidated Statements of
         Operations. Cash used for reorganization items is disclosed separately
         in the unaudited Condensed Consolidated Statements of Cash Flows.

                  These interim unaudited Condensed Consolidated Financial
         Statements have been prepared in accordance with the rules and
         regulations of the SEC. Accordingly, they do not include all of the
         information and footnotes required by accounting principles generally
         accepted in the United States of America for complete financial
         statements. In the opinion of management, all adjustments (which
         include normal recurring adjustments) considered necessary for a fair
         presentation have been included. Operating results for the 26 week
         period ended July 31, 2002 are not necessarily indicative of the
         results that may be expected for the 2002 fiscal year ending January
         29, 2003. These unaudited Condensed Consolidated Financial Statements
         should be read in conjunction with the audited Consolidated Financial
         Statements and the notes thereto included in Amendment No. 1 to our
         Annual Report on Form 10-K/A for the fiscal year ended January 30,
         2002, to be filed with the SEC on January 14, 2002.

         Reclassifications

                  Certain reclassifications of prior period financial statements
         have been made to conform to the current interim period presentation.

3.       RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

                  In June 2001, the Financial Accounting Standards Board
         ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement
         Obligations," which requires that the fair value of a liability for an
         asset retirement obligation be recognized in the period in which it is
         incurred if a reasonable estimate of fair value can be made. The
         associated asset retirement costs would be capitalized as part of the
         carrying amount of the long-lived asset and depreciated over the life
         of the asset. The liability is accreted at the end of each period
         through charges to interest expense. If the obligation is settled for
         other than the carrying amount of the liability, a gain or loss on
         settlement will be recognized. The provisions of SFAS No. 143 will be
         effective for our fiscal year beginning January 30, 2003. We have not
         yet determined the impact, if any, of the adoption of SFAS No. 143.

                  We are currently reviewing SFAS No. 145, "Rescission of FASB
         Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
         Technical Corrections," which was issued in May 2002. The statement
         rescinds FASB No. 4, "Reporting Gains and Losses from Extinguishment of
         Debt," and an amendment of that statement, FASB No. 64,
         "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." As
         a result, gains and losses from extinguishment of debt will no longer
         be aggregated and classified as an extraordinary item, net of related
         income tax effect, in the statement of operations. Instead, such gains
         and losses will be classified as extraordinary items only if they meet
         the criteria of unusual or infrequently occurring items. SFAS No. 145
         also requires that gains and losses from debt extinguishments, which
         were classified as extraordinary items in prior periods, be
         reclassified to continuing operations if they do not meet the criteria
         for extraordinary items. The provisions related to this portion of the
         statement are required to be applied in fiscal years beginning after
         May 15, 2002, with earlier application encouraged.



                                       11


<PAGE>

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


                  In June 2002, the FASB issued SFAS No. 146, "Accounting for
         Exit or Disposal Activities." SFAS No. 146 addresses significant issues
         regarding the recognition, measurement, and reporting of costs
         associated with exit and disposal activities, including restructuring
         activities that are currently accounted for pursuant to the guidance
         that the Emerging Issues Task Force ("EITF") set forth in EITF Issue
         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 scope of SFAS No. 146 also
         includes (1) costs related to terminating a contract that is not a
         capital lease and (2) termination benefits that employees who are
         involuntarily terminated receive under the terms of a one-time benefit
         arrangement that is not an ongoing benefit arrangement, or an
         individual deferred compensation contract. SFAS No. 146 will be
         effective for exit or disposal activities that are initiated after
         December 31, 2002.

4.       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. The DIP Credit Facility
         was amended and approved by the Court on August 29, 2002, to provide
         additional flexibility under the financial covenant contained therein
         that requires certain minimum levels of cumulative earnings before
         interest, taxes, depreciation, amortization and other charges
         ("EBITDA"). The DIP Credit Facility requires that we maintain certain
         other financial covenants and restrict liens, indebtedness, capital
         expenditures, dividend payments and sales of assets.

                  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 July 24, 2002, the Court approved our
         request to extend the period during which we have the exclusive right
         to file a plan of reorganization and the period in which we have the
         exclusive right to solicit acceptances with respect to any plan we may
         timely file until February 28, 2003 and April 22, 2003, respectively.
         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
         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.

                                       12
<PAGE>

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



                  The United States Trustee has appointed an unsecured creditors
         committee, a financial institutions committee and an equity holders
         committee. These 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 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
         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 and
         the statements of financial affairs are subject to further amendment or
         modification. The deadline for creditors to file proofs of claim with
         the court-appointed claims agent was July 31, 2002, with certain
         limited exceptions for extensions granted by the Court. 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 has commenced 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 numerous 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 store closure and 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, (iv) the
         extension of time to assume or reject leases, (v) implementation of
         uniform procedures for resolving or otherwise liquidating our numerous
         pre-petition personal injury actions, (vi) implementation of uniform
         procedures for resolving or otherwise liquidating numerous mechanics
         and materialmen's liens, (vii) approval of standing bidding procedures
         to be utilized in connection with asset sales, (viii) authority to
         compromise or settle certain classes of deminimis controversy and allow
         claims without further court approval, (ix) approval of procedures to
         sell certain deminimis assets free and clear of liens, claims and
         encumbrances and to pay market rate broker commissions in connection
         with such sales without further court approval and (x) assumption of
         agreements with our key brand partners.

                  On September 11, 2002, the United States Trustee filed an
         amended notice of appointment for the official committee of financial
         institutions pursuant to which two holders of Kmart's bond debt were
         added to the financial institutions committee. These holders, ESL
         Investments and Third Avenue Value Fund, have indicated to us that they
         have acquired a significant amount of our pre-petition balance sheet
         debt and are actively participating in the statutory committee process
         and the Chapter 11 cases.



                                       13

<PAGE>



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


                  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.

                  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 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.

                  At this time, it is not possible to predict the effect of the
         Chapter 11 reorganization on our financial position, business, various
         creditors and security holders or when, or if, we are able to emerge
         from Chapter 11.

                  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.

                  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.


                                       14


<PAGE>


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



5.       2002 COST REDUCTION INITIATIVE

                  On August 19, 2002, we announced a cost reduction initiative
         aimed at realigning our organization to reflect our current business
         needs following the completion of the 283 store closures. We eliminated
         approximately 400 positions at our corporate headquarters and
         approximately 50 positions nationally that provide corporate support.
         As a result of the job eliminations we recorded a charge of $15. The
         charge includes severance, outplacement services and continuation of
         healthcare benefits in accordance with the severance plan provisions of
         our Key Employee Retention Plan ("KERP"), which was approved by the
         Court in March 2002. This charge is included in Charges for
         BlueLight.com and other in our unaudited Condensed Consolidated
         Statements of Operations.

6.       DISCONTINUED OPERATIONS

                  During the second quarter of fiscal year 2002, we recorded a
         non-cash credit of $36 to reduce reserves for our remaining lease
         obligations for the Builder's Square, Inc., Hechinger Company, Pace
         Membership Warehouse, Inc. and Furr's Restaurants locations. The $36
         credit primarily relates to adjustments to our estimated allowable
         claims for the lease obligations.

7.       REORGANIZATION ITEMS, NET

                  Reorganization items, net represent amounts we incurred as a
         direct result of our Chapter 11 filing and are presented separately in
         the unaudited Condensed Consolidated Statements of Operations. For the
         13 and 26 week periods ended July 31, 2002, respectively, the following
         amounts have been recorded:



<TABLE>
<CAPTION>
                                                               13 Weeks       26 Weeks
                                                                 Ended          Ended
                                                              ----------      ---------
<S>                                                             <C>            <C>
              2002 store closings                                $(10)          $ 218
              Professional fees                                    29              67
              Employee costs                                       37              63
              Settlement of pre-petition liabilities              (29)            (34)
              Sale of pharmacy lists                               (1)            (18)
              Interest income                                      (5)             (9)
              Lease auction                                        (2)             (2)
              Other                                               (15)             (7)
                                                            ----------      ---------
               Reorganization items, net                          $ 4           $ 278
                                                            ==========      =========
</TABLE>

                  The following paragraphs provide additional information
         relating to costs that were recorded in the line Reorganization items,
         net in our unaudited Condensed Consolidated Statement of Operations for
         the 13 and 26 week periods ended July 31, 2002:

         2002 store closings

                  On March 20, 2002, the Court approved the closure of 283
         stores. Stores were selected by evaluating the market and financial
         performance of every store and the terms of every lease. Candidates for
         closure were stores that did not meet our financial requirements for
         ongoing operations. All of the stores were closed as of June 2, 2002.

                  The results of operations of stores that have been closed are
         reported in discontinued operations in accordance with SFAS No. 144
         when a) the operations and cash flows of the stores have been (or will
         be) eliminated from our ongoing operations and b) we will not have any
         significant continuing involvement in the operations of the stores
         after the closure.

                  We have evaluated the 283 stores closed during the second
         quarter and determined that in substantially all the cases, the
         operations and cash flows of the store will not be eliminated from our
         ongoing operations. The results of

                                       15


<PAGE>

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




         operations of the limited number of stores that were considered to be
         discontinued operations, based upon both quantitative and qualitative
         factors, were not considered to be material for separate presentation
         in the unaudited Condensed Consolidated Statement of Operations.

                  As a result of our conclusion that the 283 stores should be
         reported in continuing operations, for the 13 and 26 week periods
         ending July 31, 2002, we recorded ($10) and $218, respectively, for
         expenses related to store closings in fiscal year 2002 to
         Reorganization items, net. We charged $228 to the closed store reserve
         for allowable claims related to lease terminations and other costs and
         reclassified $144 of capital lease obligations to the closed store
         reserve during the first quarter of fiscal 2002. During the second
         quarter of fiscal 2002, we recorded a credit of $10 to adjust our
         estimated allowable claims. The closed store reserve is included in the
         line Liabilities subject to compromise in our unaudited Condensed
         Consolidated Balance Sheet as of July 31, 2002. The reserve for
         estimated costs was recorded in accordance with EITF 94-3. See Note 15
         for a summary of reserve activity.

         Professional fees

                  For the 13 and 26 week periods ended July 31, 2002, we
         recorded $29 and $67, respectively, for professional fees. Professional
         fees include financial, legal, real estate and valuation services
         directly associated with our reorganization process.

         Employee costs

                  In March 2002, we received Court approval to implement the
         KERP which provides cash incentives and certain benefits to key members
         of our salaried management team. The retention program provisions of
         the KERP are expected to encourage employees to continue their
         employment with Kmart through the reorganization process. For the 13
         and 26 week periods ended July 31, 2002, we recorded charges of $37 and
         $63, respectively, for the KERP bonuses and retention bonuses for
         associates in our 283 stores that were closed.

         Settlement of pre-petition liabilities

                  For the 13 and 26 week periods ended July 31, 2002, we
         recorded gains of $29 and $34, respectively, representing the
         difference between the settlement value of certain pre-petition
         obligations and the amounts recorded for allowable claims, primarily
         related to lease termination agreements between Kmart and its
         landlords.

         Lease auction

                  Kmart and certain subsidiaries entered into several Asset
         Purchase and Designation Rights Agreements ("Agreements") with Kimco
         Realty Corporation, Schottenstein Stores Corporation and Klaff Realty,
         LP and other purchasers ("Purchasers"), in accordance with the bidding
         procedures order entered on May 10, 2002. Under the terms of the
         Agreements we have agreed to sell to the Purchasers either the
         designation rights with respect to, or our interest in, 57 leaseholds
         for closed stores. During the designation period, as defined under the
         Agreements, the Purchasers of designation rights shall have the sole,
         exclusive and continuing right to select, identify and designate (i)
         which leases shall be assumed and assigned or subleased, and to whom
         and (ii) which properties shall be excluded from the transaction.

                  In consideration for the leasehold and designation rights
         acquisitions, the Purchasers are obligated to pay $46, of which $12 was
         paid in cash during the second quarter of fiscal 2002. The remaining
         $34 is to be paid as the Purchaser receives net proceeds from the sale
         or assignment of the properties, but not later than December 31, 2002.
         The Purchasers are responsible for paying all carrying costs related to
         such properties during the designation period, in accordance with the
         Agreements. In addition, we may be entitled to additional proceeds in
         the event that designation rights transactions exceed a specified level
         of proceeds.

                  A pro-rata portion of the guaranteed proceeds of $46 will be
         recognized into income at either the effective date of the property
         assignment or termination, when we are informed by the Purchasers of
         their intention to exclude certain leaseholds from future assignments
         or terminations, or upon expiration of the designation rights period.
         At the time we are legally released as the primary obligor under the
         lease agreement, the allowed claim amount established in connection
         with the Court's approval of our plan to close and reject the lease
         will be reversed. Both the income from the sale of the


                                       16


<PAGE>

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


         designation rights and the reversal of the allowed claim amount are
         reported in the unaudited Condensed Consolidated Statement of
         Operations as reorganization items.

                  During the second quarter of fiscal 2002, two leases have been
         terminated and one has been excluded, resulting in the recognition of
         $2 of proceeds from the sale of designation rights. The remaining funds
         received have been deferred and will be recognized in our unaudited
         Condensed Consolidated Statement of Operations as the performance
         criteria associated with these funds are completed.

         Other reorganization items

                  For the 13 and 26 week periods ended July 31, 2002, we
         recorded gains of $1 and $18 for the sale of pharmacy lists and $5 and
         $9 for interest income earned on excess cash balances, respectively. We
         also recorded credits of $15 and $7 for the 13 and 26 week periods
         ended July 31, 2002, respectively, primarily to adjust our estimated
         allowable lease obligation claims.

8.       MARKDOWNS FOR INVENTORY LIQUIDATION

                  For the 13 and 26 week periods ended July 31, 2002, we
         recorded charges of $27 and $785, respectively, to write-down inventory
         liquidated at our 283 closing stores to net realizable value, given the
         accelerated liquidation strategy. This charge is included in Cost of
         sales, buying and occupancy in the unaudited Condensed Consolidated
         Statements of Operations.

                  For the year, $348 of the charge was recorded relating to the
         write-down of inventory initially existing at the closing stores to its
         estimated selling value in connection with liquidation sales in the 283
         stores. During the liquidation sale the actual markdowns required to
         liquidate the inventory were lower than expected. As a result, in the
         second quarter, we recorded a credit of $36 to adjust our estimate. In
         addition, $117 of the charge related to liquidation fees and expenses
         associated with the disposition of inventory through the liquidation
         sales at the 283 closing stores, of which $9 was recorded in the second
         quarter.

                  The remaining $320 was recorded relating to the acceleration
         of markdowns on approximately 107,000 stock keeping units ("SKUs"), the
         majority of which were transferred from our remaining open stores to
         the 283 closing stores and included in the liquidation sales. The
         liquidation of these SKUs required higher markdowns than anticipated,
         accordingly, an adjustment of $54 was recorded in the second quarter of
         2002. The SKUs that were not transferred from our remaining open stores
         to the closing stores as part of the liquidation sales are no longer
         carried as part of our product assortment in our remaining open stores
         and have been further reduced to their adjusted net realizable value.



                                       17

<PAGE>


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



                  The following table summarizes the components of the charge
         for markdowns for inventory liquidation during the 26 week period ended
         July 31, 2002:

<TABLE>
<CAPTION>
                                                                 Writedown                          Accelerated
                                                               of Inventory                           Markdown
                                                                in the 283       Liquidator             of
                                                                  Closing         fees and         Discontinued
                                                                   Stores         Expenses             SKUs           Total
                                                               -------------    -------------      -------------  -------------
<S>                                                             <C>               <C>                <C>           <C>
              First Quarter                                           $ 384           $ 108              $ 266         $ 758

              Second Quarter
                 Adjustments for actual selling values                  (36)              -                 54            18
                 Additional fees and expenses                             -               9                  -             9
                                                               -------------    -------------      -------------  -------------
              Total                                                   $ 348           $ 117              $ 320         $ 785
                                                               =============    =============      =============  =============
</TABLE>


9.       COMPREHENSIVE LOSS

                  Comprehensive loss represents net loss, adjusted for the
         effect of other items that are recorded directly to shareholders'
         equity. In the current quarter we recorded an adjustment to
         shareholders' equity in accordance with SFAS No. 115, "Accounting for
         Certain Investments in Debt and Equity Securities," of $2 to reduce the
         value of our investment in certain equity securities to current market
         value. Comprehensive loss and net loss are equivalent for all other
         periods presented.


10.      INTEREST EXPENSE, NET

                  Interest income of $1 and $2 is included in the line Interest
         expense, net in the unaudited Condensed Consolidated Statements of
         Operations for each of the 13 and 26 week periods ended July 31, 2002,
         respectively. Interest income of $2 and $3 is included in the line
         Interest expense, net in the unaudited Condensed Consolidated
         Statements of Operations for each of the 13 and 26 week periods ended
         August 1, 2001, respectively. Interest income earned as a result of
         excess cash balances due to the Chapter 11 filing are recorded in the
         line Reorganization items, net in the unaudited Condensed Consolidated
         Statements of Operations, see Note 7.

                  As of the Petition Date, we ceased accruing interest on
         unsecured pre-petition debt classified as Liabilities subject to
         compromise in our unaudited Condensed Consolidated Balance Sheets in
         accordance with SOP 90-7. Interest at the stated contractual amount on
         unsecured debt that was not charged to results of operations for the 13
         and 26 week periods ended July 31, 2002 was approximately $68 and $137,
         respectively.

11.      RELATED PARTY DISCLOSURE

                  Commencing March 2002, Kmart engaged various services of JA&A
         Services, a consulting firm, whose Chairman and another Principal hold
         executive officer positions within Kmart. Specifically, their Chairman,
         Albert A. Koch, currently serves as our Chief Financial Officer, and
         another Principal, Edward G. Stenger, currently serves as our
         Treasurer. For the 13 and 26 week periods ended July 31, 2002, we
         recorded expenses for such services totaling $7 and $9, respectively.
         Fees paid to the firm aggregated approximately $1 and $2 for the 13 and
         26 week periods ended July 31, 2002, respectively, for services
         rendered under the consulting agreement. In addition to hourly fees and
         expenses, JA&A Services will also receive an annual performance fee of
         0.75% of EBITDA for each year services are rendered under terms of the
         agreement.



                                       18

<PAGE>

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



12.      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
         the Debtors. 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 and
         capital lease obligations, all pre-petition liabilities have been
         classified as Liabilities subject to compromise in the unaudited
         Condensed Consolidated Balance Sheets. 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 was July 31, 2002. Amounts that we have recorded may be different
         than amounts filed by our creditors. The number and amount of allowable
         claims cannot be presently ascertained. An estimated 45,000 claims were
         filed as of July 31, 2002 of an estimated 1.1 million notices sent to
         constituents. The claims reconciliation process may result in
         adjustments to allowable claims.

                  The following table summarizes the components of Liabilities
         subject to compromise in our unaudited Condensed Consolidated Balance
         Sheets as of July 31, 2002 and as of January 30, 2002:

<TABLE>
<CAPTION>
                                                                  (as restated -        (as restated
                                                                    see Note 1)        - see Note 1)
                                                                     July 31,           January 30,
                                                                       2002                 2002
                                                                  ----------------     ---------------

<S>                                                               <C>                  <C>
                  Debt and notes payable                                   $3,327              $3,346
                  Accounts payable                                          2,493               3,153
                  Closed store reserves                                       731                 484
                  General liability and workers compensation                  288                 312
                  Other liabilities                                           261                 454
                  Pension obligation                                          185                 195
                  Taxes payable                                               160                 149
                                                                  ----------------     ---------------
                     Total liabilities subject to compromise               $7,445              $8,093
                                                                  ================     ===============
</TABLE>


                  Following is a reconciliation of the changes in Liabilities
         subject to compromise for the period from the Petition Date through
         July 31, 2002:


<TABLE>
<CAPTION>
                                                                                                (as restated -
                                                                                                 see Note 1)
                                                                                                 Cumulative
                                                                                               since Petition
                                                                                                     Date
                                                                                             ------------------
<S>                                                                                            <C>
Balance, Petition Date                                                                              $8,585
First day court orders authorizing payment of employee wages, benefits and
   other employee obligations, sales and use taxes and payments to
   critical vendors                                                                                   (833)
Adjustment to general liability and workers compensation accruals                                     (174)
Adjustments to closed store reserves                                                                   107
Revisions to estimated allowed claim amounts                                                           (56)
Court order authorizing payment of additional trade accounts payable                                   (59)
Gain on settlement of pre-petition liabilities                                                         (61)
Other                                                                                                  (64)
                                                                                           ------------------
Balance, end of period                                                                              $7,445
                                                                                           ==================
</TABLE>

                                       19


<PAGE>


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


13.      EMPLOYEE SEVERANCE AND VERP

                  During the first quarter of 2001, our workforce was reduced by
         350 employees through a voluntary early retirement program ("VERP") and
         other employee separations. The total cost of the realignment
         aggregated $23 ($15, net of tax), which is included in our unaudited
         Condensed Consolidated Statement of Operations in the line item Charges
         for BlueLight.com and other. The charge related 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. Of the charge, $19 was reserved for
         and paid out of our general corporate assets, including benefits for
         highly-compensated employees accepting the VERP offer, and the
         remaining $4 was paid out of the Kmart Employee Pension Plan. See Note
         15 for a summary of reserve activity.

14.      RESTRUCTURING OF BLUELIGHT.COM

                  We recorded a $92 charge ($73, net of tax) related to our
         e-commerce site, BlueLight.com, in the second quarter of fiscal 2001,
         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 Charges for BlueLight.com and other in our
         unaudited Condensed Consolidated Statements of Operations.

                  Based upon the changing environment for the internet
         businesses, in which the ability for such businesses to raise capital
         was 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, principally through the purchase of all
         outstanding common and preferred stock of BlueLight.com, Inc., a
         holding company. 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 our restructuring
         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 in the second quarter of
         fiscal 2001 a $41 charge to write-down our investment in BlueLight.com
         to fair value in accordance with SFAS No. 144. Fair value was
         determined using the present value of estimated future cash flows. 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 issued to SOFTBANK and other
         investors were cancelled.

                  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 were not 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 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. See Note 15 for a summary of reserve activity.

                  The results of BlueLight.com's operations were fully
         consolidated in our financial statements commencing July 31, 2001.




                                       20


<PAGE>


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



15.      RESTRUCTURING RESERVE ACTIVITY

                  The following table provides information regarding reserve
         activity during the 26 week periods ended July 31, 2002 and August 1,
         2001, respectively, for the fiscal year 2000 strategic actions charge,
         the fiscal year 2001 employee severance and VERP charge, the fiscal
         year 2001 BlueLight.com restructuring charge, the fiscal year 2001
         supply chain restructuring charge and the fiscal year 2002 store
         closings charge. Reserves established in connection with the fiscal
         2002 store closings charge are comprised of $228 relating to lease
         rejections. Please refer to Amendment No. 1 to our Annual Report on
         Form 10-K/A for the fiscal year ended January 30, 2002, to be filed
         with the SEC on January 14, 2002, for a discussion of the 2001
         supply chain restructuring and 2000 strategic actions charges. The
         liabilities aggregated $437 and $185 at July 31, 2002 and August 1,
         2001, respectively.

<TABLE>
<CAPTION>
                                                                                 26 Weeks Ended
                                         ------------------------------------------------------------------------------------------
                                                             July 31,                                    August 1,
                                                               2002                                        2001
                                         --------------------------------------------------- --------------------------------------
                                                           2001         2001        2000          2001         2001        2000
                                          2002 store     BlueLight    Supply      Strategic       VERP/      BlueLight   Strategic
                                           Closings       .com         Chain       Actions     Severance      .com        Actions
                                         ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S>                                      <C>          <C>          <C>          <C>          <C>          <C>          <C>
Balance, beginning of year                  $    -        $    18    $    11     $     98       $    -       $     -      $   177

Additions charged to operations                 228             -          2            -           19            22            -
Reclassifications                               144             -          -            -            -             -            -
                                         ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total additions                                 372             -          2            -           19            22            -

Reductions:
  Cash payments:
    Lease obligations                            17             -          -            5            -             -           19
    Employee costs                                -             -          5            -           14             -            -
    Contractual obligations                       -             1          -            -            -             -            -
    Other costs                                   -             -          -            -            -             -            -
Non-cash reductions:
    Adjustments                                  14             -          -            2            -             -            -
    Pre-petition liability settlements           15             -          5            -            -             -            -
                                         ------------ ------------ ------------ ------------ ------------ ------------ ------------

Balance, end of period                      $   326       $   17     $     3     $     91       $    5       $    22      $   158
                                         ============ ============ ============ ============ ============ ============ ============
</TABLE>





16.      INVENTORIES AND COST OF MERCHANDISE SOLD

                  A substantial portion of our inventory is accounted for using
         the last-in, first-out ("LIFO") method. Since LIFO costs can only be
         determined at the end of each fiscal year when inflation rates and
         inventory levels are finalized, estimates are used for LIFO purposes in
         the interim unaudited Condensed Consolidated Financial Statements.
         Inventories valued on LIFO at July 31, 2002, August 1, 2001 and January
         30, 2002 were $269, $194 and $269 lower, respectively, than the amounts
         that would have been reported under the first-in, first-out method.




                                       21

<PAGE>

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



17.      INVESTMENTS IN AFFILIATED RETAIL COMPANIES

         Meldisco

                  All Kmart footwear departments are operated under a license
         agreement with the Meldisco subsidiaries of Footstar, Inc. ("FTS"),
         substantially all of which are 49% owned by Kmart and 51% owned by FTS.

                  The following table summarizes net sales, gross margin and net
         income for the 13 and 26 week periods ended July 31, 2002 and August
         1, 2001.


<TABLE>
<CAPTION>
                                             13 Weeks Ended             26 Weeks Ended
                                         ----------------------     -----------------------
                                         July 31,    August 1,       July 31,    August 1,
                                            2002       2001            2002        2001
                                         ----------------------     -----------------------
<S>                                       <C>         <C>             <C>         <C>
              Net sales                        $290        $323            $596        $611
              Gross margin                      142         160             280         296
              Net income                         23          29              39          47
</TABLE>


         BlueLight.com

                  On July 31, 2001, we acquired the remaining 40% interest in
         BlueLight.com, and BlueLight.com's operations were fully consolidated
         into our financial statements. The following table summarizes net
         sales, gross margin and net loss for the 13 and 26 week periods ended
         August 1, 2001. See Note 14.

<TABLE>
<CAPTION>
                                            August 1, 2001
                                       ------------------------
                                         13 Weeks    26 Weeks
                                          Ended        Ended
                                       ------------ -----------
<S>                                       <C>          <C>
              Net sales                       $ 4          $  8
              Gross margin                      -             1
              Net loss                        (25)          (55)
</TABLE>


         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 worked together to
         wind-down 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. This matter did not have a material
         adverse affect on our liquidity, financial position or results of
         operations for the 26 weeks ended July 31, 2002.



                                       22

<PAGE>

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



18.      LOSS PER SHARE

                  Net loss per common share is computed as follows:

<TABLE>
<CAPTION>
                                                        (as restated - see Note 1)           (as restated - see Note 1)
                                                   ---------------------------------    ---------------------------------
                                                            13 Weeks Ended                       26 Weeks Ended
                                                   ---------------------------------    ---------------------------------
                                                      July 31,         August 1,          July 31,          August 1,
                                                        2002              2001              2002               2001
                                                   --------------    ---------------    -------------     ---------------

<S>                                                    <C>              <C>               <C>               <C>
    Net loss from continuing operations                  $(329)             $(360)         $(1,771)            $  (547)
    Gain from discontinued operations                       36                  -               36                   -
                                                   --------------    ---------------    -------------     ---------------
    Net loss                                             $(293)             $(360)         $(1,735)            $  (547)
                                                   ==============    ===============    =============     ===============

 Basic/Diluted weighted average shares
    outstanding                                          502.7              490.6            502.8               489.6

    Basic/Diluted loss per common share:
     Net loss from continuing operations                $(0.65)           $ (0.73)         $ (3.52)            $ (1.12)
     Gain from discontinued operations                    0.07                  -             0.07                   -
                                                   --------------    ---------------    -------------     ---------------
    Basic/Diluted loss per common share                 $(0.58)           $ (0.73)         $ (3.45)            $ (1.12)
                                                   ==============    ===============    =============     ===============
</TABLE>

                  We calculate loss per share in accordance with SFAS No. 128,
         "Earnings Per Share." In all periods presented net losses were
         incurred, therefore dilutive common stock equivalents were not used in
         the calculation of earnings per share as they would have an
         anti-dilutive effect. Options to purchase 51.4 million and 60.0 million
         shares of common stock at prices ranging from $4.86 to $26.03 and $5.34
         to $26.03 were excluded from the calculations for the 13 and 26 week
         periods ended July 31, 2002 and August 1, 2001, respectively. The
         calculations also exclude the effect of trust convertible preferred
         securities. For the 13 and 26 week periods ended July 31, 2002 and
         August 1, 2001, respectively, diluted shares outstanding exclude
         approximately 59.9 million common shares from potential conversion of
         certain trust convertible preferred securities due to their
         anti-dilutive effect.

19.      INCOME TAXES

                  In the fourth quarter of fiscal 2001, we recorded a valuation
         allowance against our net deferred tax assets in accordance with SFAS
         No. 109, "Accounting for Income Taxes," as realization of such assets
         in future years is uncertain.

                  We have continued to maintain a valuation allowance against
         our net deferred tax assets, and accordingly, we have not recognized
         any tax benefit from our losses in fiscal 2002. The $12 tax benefit
         recorded in the first quarter of fiscal 2002 relates primarily to
         amounts now refundable to Kmart as a result of the Job Creation and
         Worker Assistance Act of 2002 which was enacted in the first quarter of
         fiscal 2002.

20.      OTHER COMMITMENTS AND CONTINGENCIES

         Contingent Liabilities


                  As of July 31, 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 $72 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



                                       23


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



         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 July 31, 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 of
                                         Future Lease             Gross Future
                                       Obligations @ 7%        Lease Obligations
                                    ---------------------    --------------------

<S>                                     <C>                      <C>
The Sports Authority, Inc.                 $ 176                    $ 298
Borders Group, Inc.                           85                      144
OfficeMax, Inc.                               62                       90
                                         ----------               ----------

Total                                      $ 323                    $ 532
                                         ==========               ==========
</TABLE>




         Bankruptcy 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 unaudited Condensed 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 operations of such non-filing subsidiaries are not
         considered material to the unaudited Condensed 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
         Note 4.

         Legal Proceedings

                  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 litigations. On
         August 15, 2002, an amended consolidated complaint was filed that
         enlarged the class of persons on whose behalf the action was brought to
         include purchasers of Kmart securities between March 13, 2001 and May
         15, 2002, and added Jeffrey N. Boyer, Mark S. Schwartz, Matthew F.
         Hilzinger, Martin E. Welch III and PricewaterhouseCoopers LLP as
         defendants.

                  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


                                       24

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

         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 Kmart's bankruptcy and,
         based on our initial investigations, we believe that we have 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. Kmart 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 effect on our liquidity, financial position or results of
         operations.

                  In addition to the foregoing, there are numerous 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.

         Investigative Matters

                  Kmart has been provided with copies of anonymous letters sent
         to the SEC, our auditors, directors, legal counsel and others
         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, and with our three statutory committees, with respect to
         their investigations of these matters. The staff of the SEC has
         expressed concerns with respect to the manner in which we recorded
         vendor allowances prior to the change in accounting principle at the
         end of fiscal 2001, as well as the Staff's intention to continue to
         pursue its investigation of these matters. The bar date with respect to
         the filing of claims by the SEC has been extended to October 29, with
         our consent. In addition, in July of 2002 The United States House
         Energy and Commerce Committee (the "House Committee") requested that
         numerous public companies, including Kmart, provide documentation
         regarding certain governance matters. We are cooperating with the House
         Committee with respect to their inquiry.

         Events Subsequent to Filing of Original 10-Q

                  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

                                       25
<PAGE>


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


         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. See "Internal
         Investigation - Developments Since Filing of 2001 Form 10-K- Vendor
         Allowance Matters - Premature Recognition of Vendor Allowances" in the
         section entitled "Management's Discussion and Analysis and Results of
         Operations and Financial Condition" for a description of the impact of
         the premature recording of certain vendor allowances on Kmart's audited
         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.

         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.

                  On May 29, 2002, the Court authorized our business
         relationship with Sesame Workshop. Motions were approved allowing Kmart
         to assume our license agreement with Sesame Workshop for Sesame Street
         infants and children's apparel.

                  On July 24, 2002 the Court approved our motion allowing Kmart
         to assume our license agreement for our proprietary Route 66 apparel
         line.

                                       26

<PAGE>

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


21.      SUBSEQUENT EVENTS


                  On August 29, 2002, we received approval from our lenders and
         the Court for an amendment to the agreement governing our $2 billion
         DIP Credit Facility. The amendment, which received consents from all of
         the participants in our DIP syndicate, adjusts the covenant requiring a
         minimum cumulative level of EBITDA over specified periods to provide
         Kmart with additional flexibility and to better reflect our sales
         performance since the commencement of our Chapter 11 reorganization
         case.




                                       27


<PAGE>



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

                  This Form 10-Q/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,
         -    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.


                                       28

<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

                  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.

                  The following discussion and analysis should be read in
         conjunction with the audited Consolidated Financial Statements and
         Notes to Consolidated Financial Statements in Item 8. Financial
         Statements and Supplementary Data, of Amendment No. 1 to our Annual
         Report on Form 10-K/A for our fiscal year ended January 30, 2002, to be
         filed with the SEC on January 14, 2003.

         RESTATEMENT OF PRIOR PERIODS

                  As part of the review and preparation of the Quarterly Report
         on Form 10-Q for the third quarter ended October 30, 2002, Kmart
         Corporation and its subsidiaries ("Kmart," "we," "us" and "our")
         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 Exchange Commission ("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
         historical financial statements was appropriate because the aggregate
         impact was material to the current estimate our fiscal year 2002
         results.

                  The tables below show the results of the restatements on
         reported losses for the 13 and 26 week periods presented in this
         Amendment No. 1 to our Quarterly Report on Form 10-Q/A, which relate
         primarily to:

         a)       Lease accrual adjustments - An understatement 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 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 previously disclosed in the
                  Quarterly Report on Form 10-Q for the second quarter 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 previously
                  disclosed in the Quarterly Report on Form 10-Q for the second
                  quarter ended July 31, 2002, of vendor allowance transactions
                  in fiscal year 2000 and prior fiscal years.

                                       29
<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)



                  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.

                  A summary of the effects of the restatement on reported
         earnings for prior fiscal years is presented in the table below.

<TABLE>
<CAPTION>
                                                                                             Impact on
                                                                                             retained
                                                           Income (Expense)                  earnings
                                              ------------------------------------------------------------
                                                 Fiscal         Fiscal         Fiscal       January 30,
                                                  2001           2000           1999           1999
                                              ------------------------------------------------------------
<S>                                               <C>            <C>             <C>             <C>
Lease accrual adjustments                           ($5)           ($4)           ($10)            ($37)
Accounts payable program                           ($42)           ($9)            ($1)            $  -
Inventory loads                                     ($7)          ($12)           ($21)            ($17)
Vendor allowances                                   $94           ($52)           ($33)            ($28)
Other items                                         $47            $39              $4            ($135)
                                              ------------------------------------------------------------
Pre-tax impact of restatement                       $87           ($38)           ($61)           ($217)
Provision for (benefit) from income taxes
                                                   $115           ($14)           ($22)            ($79)
                                              ------------------------------------------------------------
Total impact of restatement                        ($28)          ($24)           ($39)           ($138)
                                              ============================================================
</TABLE>


                                       30

<PAGE>



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         The summary of the effects of the restatement on the 13 and 26 weeks
         ended July 31, 2002 and August 1, 2001, respectively, are presented in
         the tables below.

<TABLE>
<CAPTION>
                                                                      13 Weeks Ended July 31, 2002
                                     -----------------------------------------------------------------------------------------------
                                                                              Adjustments
                                                   -------------------------------------------------------------------
                                            As           Lease         Accounts
                                        previously      accrual         payable       Inventory      Vendor                   As
                                        reported*     adjustments    adjustments        loads      allowances     Other     restated
                                     -----------------------------------------------------------------------------------------------
<S>                                      <C>            <C>           <C>             <C>            <C>         <C>        <C>
Sales                                     $7,519          $-              $-             $-            $-           $-       $7,519
Cost of sales, buying
   and occupancy                          $6,226         ($5)            $16           ($27)          ($2)         ($4)      $6,204
                                     -----------------------------------------------------------------------------------------------
Gross margin                              $1,293          $5            ($16)           $27            $2           $4       $1,315
Selling, general and
   administrative expenses                $1,644          $-              $-           ($22)           $-         ($15)      $1,607
Operating (loss) income                    ($352)         $5            ($16)           $49            $2          $19        ($293)
Reorganization items, net                    $13          $-              $-             $-            $-          ($9)          $4
Net (loss) income from continuing
   operations                              ($397)         $5            ($16)           $49            $2          $28        ($329)
Gain from discontinued operations
                                             $20          $-              $-             $-            $-          $16          $36
                                     -----------------------------------------------------------------------------------------------
Net (loss) income                          ($377)         $5            ($16)           $49            $2          $44        ($293)
                                     ===============================================================================================
Basic/Diluted (loss) earnings from
   continuing operations                  ($0.79)      $0.01          ($0.03)         $0.10            $-        $0.06       ($0.65)
Basic/Diluted gain from
   discontinued operations                 $0.04          $-              $-             $-            $-        $0.03        $0.07
                                     -----------------------------------------------------------------------------------------------
Basic/Diluted (loss) earnings per
   common share                           ($0.75)      $0.01          ($0.03)         $0.10            $-        $0.09       ($0.58)
                                     ===============================================================================================




<CAPTION>
                                                                     26 Weeks Ended July 31, 2002
                                     -----------------------------------------------------------------------------------------------
                                                                              Adjustments
                                                   -------------------------------------------------------------------
                                           As           Lease         Accounts
                                       previously      accrual        payable        Inventory       Vendor                    As
                                        reported*    adjustments    adjustments        loads       allowances      Other    restated
                                     -----------------------------------------------------------------------------------------------
<S>                                     <C>            <C>           <C>              <C>            <C>          <C>        <C>
Sales                                    $15,158          $-              $-             $-            $-           $-      $15,158
Cost of sales, buying
   and occupancy                         $13,242         ($2)            $26           ($35)          ($9)          $3      $13,225
                                     -----------------------------------------------------------------------------------------------
Gross margin                              $1,916          $2            ($26)           $35            $9          ($3)      $1,933
Selling, general and
   administrative expenses                $3,435          $-              $-           ($21)           $-         ($37)      $3,377
Operating (loss) income                  ($1,515)         $2            ($26)           $56            $9          $34      ($1,440)
Net (loss) income from continuing
   operations                            ($1,846)         $2            ($26)           $56            $9          $34      ($1,771)
Gain from discontinued
   operations                                $20          $-              $-             $-            $-          $16          $36
                                     -----------------------------------------------------------------------------------------------
Net (loss) income                        ($1,826)         $2            ($26)           $56           $ 9          $50      ($1,735)
                                     ===============================================================================================
Basic/Diluted (loss) earnings from
   continuing operations                  ($3.67)        $ -          ($0.05)         $0.11         $0.02        $0.07       ($3.52)
Basic/Diluted gain from
   discontinued operations                 $0.04         $ -              $-             $-            $-        $0.03        $0.07
                                     -----------------------------------------------------------------------------------------------
Basic/Diluted (loss) earnings per
   common share                           ($3.63)        $ -          ($0.05)         $0.11         $0.02        $0.10       ($3.45)
                                     ===============================================================================================
</TABLE>

* - As previously reported in the Form 10-Q for the quarter ended July 31, 2002
    filed on September 16, 2002.

                                       31
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                      13 Weeks Ended August 1, 2001
                                     -----------------------------------------------------------------------------------------------
                                                                               Adjustments
                                                    ------------------------------------------------------------------
                                           As          Lease         Accounts
                                       previously     accrual         payable      Inventory        Vendor                    As
                                       reported**   adjustments     adjustments      loads        allowances     Other     restated
                                     -----------------------------------------------------------------------------------------------
<S>                                  <C>            <C>             <C>            <C>           <C>           <C>         <C>
Sales                                    $8,917          $-              $-            $-              $-          $-       $8,917
Cost of sales, buying
   and occupancy                         $7,253          $1             $11           ($6)           ($24)       ($26)      $7,209
                                     -----------------------------------------------------------------------------------------------
Gross margin                             $1,664         ($1)           ($11)           $6             $24         $26       $1,708
Selling, general and
   administrative expenses               $2,004          $-              $-            $1              $-         $16       $2,021

Operating (loss) income                   ($440)        ($1)           ($11)           $5             $24         $10        ($413)

(Benefit from) provision for
  income taxes                            ($163)         $-             ($4)           $2              $9          $3        ($153)
                                     -----------------------------------------------------------------------------------------------
Net (loss) income                         ($377)        ($1)            ($7)           $3             $15          $7        ($360)
                                     ===============================================================================================

Basic/Diluted (loss) earnings per
   common share                          ($0.77)         $-          ($0.01)        $0.01          $0.03       $0.01        ($0.73)
                                     ===============================================================================================
</TABLE>


<TABLE>
<CAPTION>

                                                                      26 Weeks Ended August 1, 2001
                                     -----------------------------------------------------------------------------------------------
                                                                               Adjustments
                                                    ------------------------------------------------------------------
                                           As          Lease         Accounts
                                       previously     accrual         payable      Inventory        Vendor                    As
                                       reported**   adjustments     adjustments      loads        allowances     Other     restated
                                     -----------------------------------------------------------------------------------------------
<S>                                  <C>            <C>             <C>            <C>           <C>           <C>         <C>
Sales                                   $17,254            $-            $-            $-              $-          $-      $17,254
Cost of sales, buying
   and occupancy                        $14,087            $2           $15          ($21)           ($64)       ($31)     $13,988
                                     -----------------------------------------------------------------------------------------------
Gross margin                            $ 3,167           ($2)         ($15)          $21             $64         $31       $3,266
Selling, general and
   administrative expenses              $ 3,716            $-            $-            $2              $-        ($ 3)      $3,715

Operating (loss) income                   ($688)          ($2)         ($15)          $19             $64         $34        ($588)

(Benefit from) provision for
income taxes                              ($272)          ($1)          ($5)           $7             $23         $13        ($235)
                                     -----------------------------------------------------------------------------------------------

Net (loss) income                         ($610)          ($1)         ($10)          $12             $41         $21        ($547)
                                     ===============================================================================================

Basic/Diluted (loss) earnings per
   common share                          ($1.25)           $-        ($0.02)        $0.03           $0.08       $0.04       ($1.12)
                                     ===============================================================================================
</TABLE>


       ** - As previously reported in the Form 10-Q/A for the quarter
            ended August 1, 2001 filed on June 12, 2002.



                                       32
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


                  The following is a summary of the effects of the restatement
         on our unaudited Consolidated Balance Sheets for all amounts that
         changed by 5% or more for the period ended July 31, 2002, August 1,
         2001 and January 30, 2002, respectively.


<TABLE>
<CAPTION>
                                                        As
                                                    Previously              As
                                                     Reported            Restated
                                                    ----------           --------
<S>                                                <C>                  <C>
July 31, 2002*
  Other long-term liabilities                            $127              $175
  Accumulated deficit                                  ($565)             ($705)

August 1, 2001**
  Other assets and deferred charges                      $447               $516
  Other long-term liabilities                            $920               $968

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
</TABLE>


         * - As previously reported in the Form 10-Q for the quarter ended
             July 31, 2002 filed on September 16, 2002.
         ** - As previously reported in the Form 10-Q/A for the quarter ended
              August 1, 2002 filed on June 12, 2002.
         *** - As previously reported in the Form 10-K for the year ended
               January 30, 2002 filed on May 15, 2002.

         OVERVIEW

                  On January 22, 2002 ("Petition Date"), Kmart ("Kmart," "we,"
         "us" or "our") 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."

                  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 pre-petition contractual obligations generally may not
         be enforced against Kmart. In addition, under the Bankruptcy Code we
         may assume or reject executory contracts and unexpired leases, subject
         to approval of the Court and our satisfaction of certain other
         requirements. Parties affected by these rejections may file claims
         against the debtor 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.

                  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; in addition, the timing of such
         actions may be other than currently planned by Kmart. If the Debtors
         fail to file a plan of reorganization during the exclusivity period
         described above (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 reorganization cannot become effective until 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.





                                       33
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


                  On March 20, 2002, the Court approved the closure of 283
         stores, or approximately 13% of our 2,114 stores. Stores were selected
         by evaluating the market and financial performance of every store and
         the terms of every lease. Candidates for closure were stores that did
         not meet our financial requirements for ongoing operations.
         Renegotiation of lease terms was also explored to improve store
         profitability and to avoid the need for closure. Shortly after
         receiving Court approval we commenced store closing sales, which were
         completed by June 2, 2002. Approximately 22,000 associates were
         impacted by the closures.

                  On April 4, 2002, we announced that we had contracted with a
         firm to assist in the disposition of the leases for the 283 stores.
         Under the agreement, the firm assisted 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.

                  On June 18, 2002, we completed an auction, in which 57 out of
         the 283 store leases for the closed stores were sold. On June 28, 2002,
         the Court approved the auction and we were authorized to sell one lease
         and designation rights on 56 leases for consideration totaling $46. We
         may be entitled to additional proceeds in the event that our
         designation rights purchasers of 54 leases achieve a certain level of
         proceeds on their sale of these leases. Designation rights allow the
         purchasers to put the leases back to Kmart prior to any assignment of
         such lease. If a lease is put back to Kmart, we retain the option of
         rejecting the lease in Court with no obligation to return the proceeds.
         Of the 56 leases that we were authorized to sell designation rights,
         one has been assigned, two have been terminated and transactions on 4
         have been excluded. In addition, pursuant to the auction and bidding
         procedures, we entered into lease termination agreements for 10 of the
         283 leases for the aggregate amount of $2 and the waiver of certain
         leasehold and rejection damages claims. There was no successful bidder
         on the remaining leases.

                  Our common stock is listed on the New York, Pacific and
         Chicago Stock Exchanges. There are a number of continuing requirements
         that must be satisfied in order for a company's stock to remain
         eligible for quotation on the New York Stock Exchange ("NYSE"). These
         requirements include maintaining a minimum bid price of one dollar. On
         July 10, 2002, we received notification from the NYSE that we were not
         in compliance with this requirement over the previous 30 consecutive
         trading days as required for continued listing. To regain compliance
         with the listing requirements, our common stock must maintain a minimum
         bid price of one dollar for ten consecutive trading days at anytime
         within six months following such notice. The NYSE has informed Kmart
         that if we have not demonstrated compliance with this requirement we
         could be subject to trading suspension and delisting. We cannot give
         assurances that we will regain compliance in a timely fashion or at
         all. If we fail to satisfy the continued listing requirements of the
         NYSE, we anticipate that our common stock would be eligible to trade on
         the Over the Counter Bulletin Board or in the "pink sheets" maintained
         by the National Quotation Bureau, Inc. Reference is made to our Form
         10-Q for the 13 and 39 week periods ended October 30, 2002, filed with
         the SEC on December 23, 2002, for further information regarding this
         matter.

                  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.




                                       34
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


         ANALYSIS OF OPERATIONS EXCLUDING NON-COMPARABLE ITEMS DESCRIBED BELOW

                  The following tables segregate non-comparable items from
         operating income as reported in the unaudited Condensed Consolidated
         Statements of Operations:

<TABLE>
<CAPTION>
                                                                                   (as restated)
                                                           --------------------------------------------------------------
                                                                   13 Weeks Ended                 26 Weeks Ended
                                                           ------------------------------  ------------------------------
                                                           July 31, 2002  August 1, 2001   July 31, 2002  August 1, 2001
                                                           -------------  ---------------  -------------  ---------------
<S>                                                        <C>            <C>              <C>            <C>
Sales                                                           $ 7,519          $ 8,917       $ 15,158         $ 17,254

Cost of sales, buying and occupancy                               6,170            7,209         12,415           13,988
                                                           -------------  ---------------  -------------  ---------------

Gross margin                                                      1,349            1,708          2,743            3,266

Selling, general and administrative expenses                      1,605            2,021          3,375            3,715

Equity income (loss) in unconsolidated subsidiaries                  14               (8)            19              (24)
                                                           -------------  ---------------  -------------  ---------------

Operating loss before non-comparable items                         (242)            (321)          (613)            (473)

Non-comparable items:

2002 cost reduction initiative                                       15                -             15                -

2002 inventory markdowns                                             27                -            785                -

Accelerated depreciation                                              9                -             27                -

Charge for BlueLight.com                                                              92              -               92

Charge for employee severance and VERP                                -                -              -               23
                                                           -------------  ---------------  -------------  ---------------

Operating loss before reorganization items, net                  $ (293)          $ (413)      $ (1,440)          $ (588)
                                                           =============  ===============  =============  ===============

Same-store sales %                                               (11.0%)            1.0%         (11.4%)            1.3%
</TABLE>



                  Management uses operating loss 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 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, and after adjustment for non-comparable
         items, the previously reported amounts for gross margin, as a
         percentage sales, were 17.6% and 18.0% for the 13 and 26 weeks ended
         July 31, 2002, respectively, and 18.7% and 18.4% for the 13 and 26
         weeks ended August 1, 2001, respectively; Selling, general and
         administrative expenses ("SG&A"), as a percentage of sales, were 21.8%
         and 22.6% for the 13 and 26 weeks ended July 31, 2002, respectively,
         and 22.5% and 21.5% for the 13 and 26 weeks ended August 1, 2001,
         respectively; and Operating losses, as a percentage of sales, were
         (4.0%) and (4.5%) for the 13 and 26 weeks ended July 31, 2002,
         respectively, and 3.9% and 3.3% for the 13 and 26 weeks ended August 1,
         2001, respectively.

                  SAME-STORE SALES AND TOTAL SALES decreased (11.0%) and
         (15.7%), respectively, for the 13 week period ended July 31, 2002 and
         (11.4%) and (12.1%), respectively, for the 26 week period ended July
         31, 2002, as compared to the comparable periods in the prior year. The
         decrease in same-store sales is primarily due to, among other factors,
         lower sales transactions brought on by negative customer experiences
         due to poor in-stock levels worsened by our filing for reorganization
         under Chapter 11. Same-store sales include sales of all stores open,
         that have been open for greater than




                                       35
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


         13 full months. The decrease in total sales is attributable to the
         decrease in same-store sales and the closure of 283 stores during the
         second quarter of fiscal 2002.

                  GROSS MARGIN decreased $359 to $1,349, for the 13 week period
         ended July 31, 2002, from $1,708 for the 13 week period ended August 1,
         2001 and decreased $523 to $2,743, for the 26 week period ended July
         31, 2002, from $3,266 for the 26 week period ended August 1, 2001. The
         decrease in gross margin for the 13 and 26 week periods ended July 31,
         2002, is primarily attributable to the decrease in sales. Gross margin,
         as a percent of sales, decreased to 17.9% from 19.2% for the 13 week
         period ended July 31, 2002 as compared to the same period from the
         previous year. The decrease in gross margin, as a percent of sales for
         the 13 week period ended July 31, 2002, is primarily attributable to an
         increase in clearance markdowns, shrinkage and store rent, partially
         offset by a decrease in sales of food and consumables, which carry
         lower margins, increased markon on regular sales as a result of the
         reduction in the BlueLight Always program and a decrease in promotional
         markdowns. For the 26 week period ended July 31, 2002, gross margin, as
         a percent of sales, decreased to 18.1% from 18.9%. The decrease in
         gross margin, as a percent of sales is primarily attributable to an
         increase in shrinkage, decreased vendor allowances due to erosion in
         supplier confidence brought on by the effects of the bankruptcy filing
         and an increase in store rent as a percentage of sales, partially
         offset by a decrease in sales of food and consumables, which carry
         lower margins.

                  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") includes
         advertising costs (net of co-op recoveries of $95 in fiscal 2002 and
         $69 in fiscal 2001) and decreased $416 for the 13 week period ended
         July 31, 2002 compared to the same period from the previous year. For
         the 13 week period ended July 31, 2002, SG&A was $1,605, or 21.3% of
         sales, as compared to $2,021, or 22.7% of sales, for the 13 week period
         ended August 1, 2001. SG&A, including advertising costs (net of co-op
         recoveries of $164 in fiscal 2002 and $161 in fiscal 2001) decreased
         $340 for the 26 week period ended July 31, 2002 compared to the same
         period from the previous year. For the 26 week period ended July 31,
         2002, SG&A was $3,375, or 22.3% of sales, as compared to $3,715, or
         21.5% of sales, for the 26 week period ended August 1, 2001. The
         decrease in SG&A for the 13 and 26 week periods ended July 31, 2002, as
         compared to the previous year is primarily attributable to decreases in
         expenses for general liability claims due to a second quarter 2001
         adjustment of $167 for general liability reserves to actuarial
         findings, lower payroll and benefits due to the closure of 283 stores
         in the second quarter of fiscal 2002, lower employee bonus accruals,
         lower utilities expense due to the closure of 283 stores and a decrease
         in rates, and lower depreciation expense due to the SFAS 144 impairment
         charge recorded in the fourth quarter of fiscal 2001. The increase in
         SG&A, as a percent of sales, for the 26 week period ended July 31, 2002
         is primarily attributable to the decrease in total sales compared to
         the same period from the previous year.

                  OPERATING LOSS for the 13 week period ended July 31, 2002 was
         ($242), or (3.2%) of sales, as compared to operating loss of ($321), or
         (3.6%) of sales, for the same period of the prior year. Operating loss
         for the 26 week period ended July 31, 2002 was ($613), or (4.0%) of
         sales, as compared to operating loss of ($473), or (2.7%) of sales, for
         the same period of the previous year. The increase in operating loss
         for the 26 week period ended July 31, 2002, is attributable to lower
         sales and a lower gross margin rate, partially offset by a decrease in
         SG&A expenses as discussed above. Conversely, operating results for the
         13 week period ended July 31, 2002 improved by $79 primarily related to
         a decrease in general liability expenses discussed above.

                  NET INTEREST EXPENSE for the 13 week period ended July 31,
         2002 and August 1, 2001 was $32 and $88, respectively. Included in net
         interest expense for the 13 week period ended July 31, 2002 and August
         1, 2001, is interest income of $1 and $2, respectively. Net interest
         expense for the 26 week period ended July 31, 2002 and August 1, 2001
         was $65 and $171, respectively. Included in net interest expense for
         the 26 week period ended July 31, 2002 and August 1, 2001 is interest
         income of $2 and $3, respectively.

                  EFFECTIVE INCOME TAX rate was (0.0%) and (30.5%) for the 13
         week period ended July 31, 2002 and August 1, 2001, respectively. For
         the 26 week periods ending July 31, 2002 and August 1, 2001, the
         effective income tax rate was (0.7%) and (31.0%), respectively. In the
         fourth quarter of fiscal 2001, we recorded a valuation allowance
         against our net deferred tax assets, in accordance with SFAS No. 109,
         "Accounting for Income Taxes," as realization of such assets in future
         years is uncertain. We have continued to maintain a valuation allowance
         against our net deferred tax assets, and accordingly, we have not
         recognized any tax benefit from our losses in fiscal 2002. The $12 tax
         benefit recorded in the first quarter of fiscal 2002 relates primarily
         to amounts now refundable to Kmart as a result of the Job Creation and
         Worker Assistance Act of 2002 which was enacted in the first quarter of
         fiscal 2002.




                                       36
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         LIQUIDITY AND FINANCIAL CONDITION

                  Shortly after the Petition Date, in conjunction with our
         filing under Chapter 11, we entered into a $2 billion
         debtor-in-possession financing facility ("DIP Credit Facility"). On the
         Petition Date, the Court gave interim approval authorizing borrowings
         up to $1.15 billion of the DIP Credit Facility for the payment of
         certain pre-petition claims and the funding of working capital and
         other general operating needs. 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. The DIP Credit
         Facility requires that we maintain certain financial covenants and
         restrict liens, indebtedness, capital expenditures, dividend payments
         and sale of assets. On August 29, 2002 we received approval from our
         lenders and the Court for an amendment to certain covenants in the
         agreement governing our DIP Credit Facility. As of July 31, 2002, we
         were in compliance with the amended DIP Credit Facility financial
         covenants. Following the Petition Date, we have utilized cash flows
         from operations and the DIP Credit Facility as our primary sources of
         working capital. As of July 31, 2002 we had utilized $400 of the DIP
         Credit Facility for letters of credit issued for ongoing import
         purchasing operations, contractual and regulatory purposes. Total
         availability under the DIP Credit Facility as of July 31, 2002 is $1.50
         billion.

                  As of July 31, 2002, there were $393 and $652 borrowings
         outstanding under our $400 credit facility and $1.1 billion credit
         facility, respectively. These borrowings are included in Liabilities
         subject to compromise in our unaudited Condensed Consolidated Balance
         Sheet as of July 31, 2002.

                  Net cash provided by operating activities for the 26 week
         period ended July 31, 2002 was $348 as compared to net cash used for
         operating activities of $154 for the same period in 2001. The increase
         in cash provided by operating activities as compared to the same period
         of the prior year was primarily the result of an increase in accounts
         payable, partially offset by lower net earnings, excluding
         non-comparable items. The increase in accounts payable is attributable
         to the bankruptcy filing as pre-petition indebtedness was stayed.

                  Net cash used for investing activities was $126 for the 26
         week period ended July 31, 2002 compared to $696 for the same period in
         2001. The decrease in cash used for investing activities was primarily
         due to restrictions on capital expenditures mandated by our DIP Credit
         Facility.

                  Net cash used for financing activities was $414 for the 26
         week period ended July 31, 2002 compared to net cash provided by
         financing activities of $869 for the comparable period in 2001. The
         decrease in cash provided by financing activities in fiscal 2002 as
         compared to fiscal 2001 is primarily attributable to our bankruptcy
         filing for reorganization under Chapter 11. As of the Petition Date,
         pre-petition indebtedness was stayed resulting in substantial increases
         in cash balances during fiscal 2002. During the first two quarters of
         fiscal 2002, we have paid off $349 of borrowings outstanding at fiscal
         year end 2001 relating to our DIP Credit Facility and certain other
         pre-petition liabilities. In contrast, during the first 26 weeks of
         fiscal 2001, we borrowed $764 under our $1.6 billion credit facility
         and issued $430 of 9 7/8% Notes due June 2008 to finance our
         operations, and to paydown certain Collateralized Mortgage Backed
         Securities in July 2001.

                  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


                                       37
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)



         the credit extended by our vendors. Since our filing for reorganization
         under Chapter 11, most of our vendors have resumed normal trade terms.
         As of July 24, 2002, we had, on average, 24 days of payables
         outstanding. 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.

                  The liquidity section of MD&A should be read in conjunction
         with the Quarterly Report on Form 10-Q for the 13 and 39 week periods
         ended October 30, 2002, filed with the SEC on December 23, 2002.

         DESCRIPTION OF NON-COMPARABLE ITEMS

                  During the 26 week periods ended July 31, 2002 and August 1,
         2001, respectively, we have instituted certain restructuring actions to
         improve our operations. A more detailed description of these
         non-comparable items is as follows:

         2002 Cost Reduction Initiative

                  On August 19, 2002, we announced a cost reduction initiative
         aimed at realigning our organization to reflect our current business
         needs following the completion of the 283 store closures. We eliminated
         approximately 400 positions at our corporate headquarters and
         approximately 50 positions nationally that provided corporate support.
         As a result of the job eliminations we recorded a charge of $15. The
         charge includes severance, outplacement services and continuation of
         healthcare benefits in accordance with our Key Employee Retention Plan
         ("KERP"), which was approved by the Court in March 2002. This charge is
         included in Charges for BlueLight.com and other in our unaudited
         Condensed Consolidated Statements of Operations.

         Markdowns for inventory liquidation

                  For the 13 and 26 week periods ended July 31, 2002, we
         recorded charges of $27 and $785, respectively, to write-down inventory
         liquidated at our 283 closing stores to net realizable value. This
         charge is included in Cost of sales, buying and occupancy in the
         unaudited Condensed Consolidated Statements of Operations.

                  For the year, $348 of the charge was recorded relating to the
         write-down of inventory initially existing at the closing stores to its
         estimated selling value in connection with liquidation sales in the 283
         stores. During the liquidation sale the actual markdowns required to
         liquidate the inventory were lower than expected. As a result, in the
         second quarter, we recorded a credit of $36 to adjust our estimate. In
         addition, $117 of the charge related to liquidation fees and expenses
         associated with the disposition of inventory through the liquidation
         sales at the 283 closing stores, of which $9 was recorded in the second
         quarter.

                  The remaining $320 was recorded relating to the acceleration
         of markdowns on approximately 107,000 stock keeping units ("SKUs"), the
         majority of which were transferred from our remaining open stores to
         the 283 closing stores and included in the liquidation sales. The
         liquidation of these SKUs required higher markdowns than anticipated,
         accordingly, an adjustment of $54 was recorded in the second quarter of
         2002. The SKUs that were not transferred from our remaining open stores
         to the closing stores as part of the liquidation sales are no longer
         carried as part of our product assortment in our remaining open stores
         and have been further reduced to their adjusted net realizable value.





                                       38
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)



                  The following table summarizes the components of the charge
         for markdowns for inventory liquidation during the 26 week period ended
         July 31, 2002:

<TABLE>
<CAPTION>
                                                   Writedown                        Accelerated
                                                  of Inventory                        Markdown
                                                   in the 283       Liquidator           of
                                                    Closing          Fees and       Discontinued
                                                     Stores          Expenses           SKUs          Total
                                                 --------------    -------------------------------------------
<S>                                              <C>               <C>             <C>              <C>
First Quarter                                             $ 384           $ 108              $ 266       $ 758

Second Quarter
   Adjustments for actual selling values                   (36)               -                 54          18
   Additional fees and expenses                               -               9                  -           9
                                                 --------------    ------------     --------------  ----------
Total                                                     $ 348           $ 117              $ 320       $ 785
                                                 ==============    ============     ==============  ==========
</TABLE>


         Accelerated depreciation

                  On September 6, 2001, we announced that we would restructure
         certain aspects of our supply chain operations. Part of the
         restructuring included implementing new real-time distribution software
         across our supply chain improving product flow and efficiency.
         Completion of the implementation is expected by mid 2004. The existing
         supply chain software will continue to be utilized until replaced in
         2004. Depreciation has been accelerated to reflect the revised
         remaining useful lives. We recorded a charge of $5 and $9 for the 13
         and 26 week periods ended July 31, 2002, respectively, related to the
         accelerated depreciation for these assets. For the 13 and 26 week
         period ended July 31, 2002, $2 of the charge is included in SG&A and $3
         and $7 of the charge is included in Cost of sales, buying and
         occupancy, respectively, in the unaudited Condensed Consolidated
         Statements of Operations.

                  In the fourth quarter of fiscal 2001 we recorded a non-cash
         charge for the impairment of long-lived assets in accordance with SFAS
         No. 144. Included in the charge was the write-down to fair value of
         long-lived assets at our 283 stores for which we received Court
         approval to close. Depreciation on the remaining asset values were
         accelerated to reflect the revised useful lives and the assets were
         fully-depreciated by the end of the second quarter of fiscal 2002. We
         recorded charges of $4 and $18 for the 13 and 26 week periods ended
         July 31, 2002, respectively, related to the accelerated depreciation on
         these assets. The charges are included in Cost of sales, buying and
         occupancy in the unaudited Condensed Consolidated Statements of
         Operations.

         BlueLight.com

                  We recorded a $92 charge ($73, net of tax) related to our
         e-commerce site, BlueLight.com, in the second quarter of fiscal 2001,
         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 Charges for BlueLight.com and other in our
         unaudited Condensed Consolidated Statements of Operations.

                  Based upon the changing environment for internet businesses,
         in which the ability for such businesses to raise capital was
         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.
         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 our restructuring 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 fair value in accordance SFAS No.
         144. Fair value was determined using the present value of estimated
         future cash flows. In connection with the acquisition, the return of
         capital put rights were terminated, the $62.5 liability




                                       39
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


         was relieved, and the 4.4 million warrants for Kmart common stock
         issued to SOFTBANK and other investors were cancelled.

                  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 were not 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 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. See Note 15 of the unaudited Condensed
         Consolidated Financial Statements presented herein for a summary of
         reserve activity.

                  The results of BlueLight.com's operations were fully
         consolidated in our financial statements commencing July 31, 2001.

         Employee severance and VERP

                  During the first quarter of 2001, our workforce was reduced by
         350 employees through a voluntary early retirement program ("VERP") and
         other employee separations. The total cost of the realignment
         aggregated $23 ($15, net of tax), which is included in our unaudited
         Condensed Consolidated Statement of Operations for the quarter ended
         August 1, 2001 in the line item Charges for BlueLight.com and other.
         The charge relates 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. Of the charge, $19 was reserved for and was paid out of
         our general corporate assets, including benefits for highly-compensated
         employees accepting the VERP offer, and the remaining $4 was paid out
         of the Kmart Employee Pension Plan.









                                       40
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


         REORGANIZATION ITEMS, NET

                  Reorganization items, net represent amounts we incurred as a
         direct result of Chapter 11 and are presented separately in the
         unaudited Condensed Consolidated Statements of Operations. For the 13
         and 26 week periods ended July 31, 2002, respectively, the following
         have been recorded:

<TABLE>
<CAPTION>
                                                              13               26
                                                             Weeks            Weeks
                                                             Ended            Ended
                                                            --------       ----------
              <S>                                           <C>            <C>
              2002 store closings                             $ (10)            $ 218
              Professional fees                                   29               67
              Employee costs                                      37               63
              Settlement of pre-petition liabilities            (29)             (34)
              Sale of pharmacy lists                             (1)             (18)
              Interest income                                    (5)              (9)
              Lease auction                                      (2)              (2)
              Other                                             (15)              (7)
                                                            --------       ----------
               Reorganization items, net                       $   4            $ 278
                                                            ========       ==========
</TABLE>

                  The following paragraphs provide additional information
         relating to costs that were recorded in the line Reorganization items,
         net in our unaudited Condensed Consolidated Statement of Operations for
         the 13 and 26 week periods ended July 31, 2002:

         2002 store closings

                  On March 20, 2002, the Court approved the closure of 283
         stores. Stores were selected by evaluating the market and financial
         performance of every store and the terms of every lease. Candidates for
         closure were stores that did not meet our financial requirements for
         ongoing operations. All of the stores were closed as of June 2, 2002.

                  The results of operations of stores that have been closed are
         reported in discontinued operations in accordance with SFAS No. 144,
         "Accounting for the Impairment or Disposal of Long-Lived Assets," when
         a) the operations and cash flows of the stores have been (or will be)
         eliminated from our ongoing operations and b) we will not have any
         significant continuing involvement in the operations of the stores
         after the closure.

                  We have evaluated the 283 stores closed during the second
         quarter and determined that in substantially all the cases, the
         operations and cash flows of the store will not be eliminated from our
         ongoing operations. The results of operations of the limited number of
         stores that were considered to be discontinued operations, based upon
         both quantitative and qualitative factors, were not considered to be
         material for separate presentation in the unaudited Condensed
         Consolidated Statement of Operations.

                  As a result of our conclusion that the 283 stores should be
         reported in continuing operations, for the 13 and 26 week periods
         ending July 31, 2002, we recorded ($10) and $218, respectively, for
         expenses related to store closings in fiscal year 2002 to our
         Reorganization items, net. We charged $228 to our closed store reserve
         for allowable claims related to lease terminations and other costs and
         reclassified $144 of capital lease obligations to the closed store
         reserve during the first quarter of fiscal 2002. During the second
         quarter of fiscal 2002, we recorded a credit of $10 to adjust our
         estimated allowable claims. The closed store reserve is included in the
         line Liabilities subject to compromise in our unaudited Condensed
         Consolidated Balance Sheet as of July 31, 2002. The reserve for
         estimated costs was recorded in accordance with EITF 94-3. See Note 15
         for a summary of reserve activity.




                                       41
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         Professional fees

                  For the 13 and 26 week periods ended July 31 2002, we recorded
         $29 and $67, respectively, for professional fees. Professional fees
         include financial, legal, real estate and valuation services directly
         associated with our reorganization process.

         Employee costs

                  In March 2002, we received Court approval to implement our
         KERP which provides cash incentives and certain benefits to key members
         of our salaried management team. The retention program provisions of
         KERP are expected to encourage employees to continue their employment
         with Kmart through the reorganization process. For the 13 and 26 week
         periods ended July 31, 2002, we recorded charges of $37 and $63,
         respectively, for the KERP bonuses and retention bonuses for associates
         in our 283 stores that were closed.

         Settlement of pre-petition liabilities

                  For the 13 and 26 week periods ended July 31, 2002, we
         recorded gains of $29 and $34, respectively, representing the
         difference between the settlement value of certain pre-petition
         obligations and the amounts recorded for allowable claims, primarily
         related to lease termination agreements between Kmart and its
         landlords.

         Lease auction

                  Kmart and certain subsidiaries entered into several Asset
         Purchase and Designation Rights Agreements ("Agreements") with Kimco
         Realty Corporation, Schottenstein Stores Corporation and Klaff Realty,
         LP and other purchasers ("Purchasers"), in accordance with the bidding
         procedures order entered on May 10, 2002. Under the terms of the
         Agreements we have agreed to sell to the Purchasers either the
         designation rights with respect to, or our interest in, 57 leaseholds
         for closed stores. During the designation period, as defined under the
         Agreements, the Purchasers of designation rights shall have the sole,
         exclusive and continuing right to select, identify and designate (i)
         which leases shall be assumed and assigned or subleased, and to whom
         and (ii) which properties shall be excluded from the transaction.

                  In consideration for the leasehold and designation rights
         acquisitions, the Purchasers are obligated to pay $46, of which $12 was
         paid in cash during the second quarter of fiscal 2002. The remaining
         $34 is to be paid as the Purchaser receives net proceeds from the sale
         or assignment of the properties, but not later than December 31, 2002.
         The Purchasers are responsible for paying carrying costs related to
         such properties during the designation period, in accordance with the
         Agreements. In addition, we may be entitled to additional proceeds in
         the event that designation rights transactions exceed a specified level
         of proceeds.

                  A pro-rata portion of the guaranteed proceeds of $46 will be
         recognized into income at either the effective date of the property
         assignment, when we are informed by the Purchasers of their intention
         to exclude certain leaseholds from future assignments, upon termination
         of the lease or upon expiration of the designation rights period. At
         the time we are legally released as the primary obligor under the lease
         agreement, the allowed claim amount established in connection with the
         Court's approval of our plan to close and reject the lease shall be
         reversed. Both the income from the sale of the designation rights and
         the reversal of the allowed claim amount are reported in the unaudited
         Condensed Statement of Operations as reorganization items.

                  During the second quarter of fiscal 2002, two leases have been
         terminated and one has been excluded, resulting in the recognition of
         $2 of proceeds from the sale of designation rights. The remaining funds
         received have been deferred and will be recognized in our unaudited
         Condensed Consolidated Statement of Operations as the performance
         criteria associated with these funds are completed.





                                       42
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


         Other reorganization items

                  For the 13 and 26 week periods ended July 31, 2002, we
         recorded gains of $1 and $18 for the sale of pharmacy lists and $5 and
         $9 for interest income earned on excess cash balances, respectively. We
         also recorded credits of $15 and $7 for the 13 and 26 week periods
         ended July 31, 2002, respectively, primarily to adjust our estimated
         allowable lease obligation claims.

         DISCONTINUED OPERATIONS

                  During the second quarter of fiscal year 2002, we recorded a
         non-cash credit of $36 to reduce reserves for our remaining lease
         obligations for the Builder's Square, Inc., Hechinger Company, Pace
         Membership Warehouse, Inc. and Furr's Restaurants locations. The $36
         credit primarily relates to adjustments to our estimated allowable
         claims for the lease obligations.

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

                  The following sets forth developments that have occurred since
         the filing of Kmart's Annual Report on Form 10-K for fiscal year 2001,
         dated May 15, 2002 (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 13 week period ended
         July 31, 2002 that we filed with the SEC on September 16, 2002. In
         addition, we recently became aware of vendor allowances received from a
         vendor in the aggregate amount of $14 which had previously been
         recognized in our fiscal year 2000 fourth quarter 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 historical financial statements for
         these adjustments




                                       43
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


                  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.

         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 in Management's Discussion and
         Analysis in the Original 2001 10-K and to be contained in Amendment No.
         1 to our Annual Report on Form 10-K/A for our fiscal year ended January
         30, 2002, to be filed with the SEC on January 14, 2003.




                                       44
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


         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 was characterized in Management's
         Discussion and Analysis of our 2001 10-K 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 our Original 2001 10-K, 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.

                  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, 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 lower
         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.




                                       45
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (CONTINUED)
        (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)


         OTHER MATTERS

         Contingent Liabilities

                  As of July 31, 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 $72 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 July 31, 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 of
                                              Future Lease           Gross Future
                                            Obligations @ 7%       Lease Obligations
                                           -----------------       -----------------
<S>                                       <C>                     <C>
The Sports Authority, Inc.                      $ 176                   $ 298
Borders Group, Inc.                                85                     144
OfficeMax, Inc.                                    62                      90
                                              ----------              ----------

Total                                           $ 323                   $ 532
                                              ==========              ==========
</TABLE>




         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.

                  On May 29, 2002, the Court authorized our business
         relationship with Sesame Workshop. Motions were approved allowing Kmart
         to assume our license agreement with Sesame Workshop for Sesame Street
         infants and children's apparel.

                  On July 24, 2002 the Court approved our motion allowing Kmart
         to assume our license agreement for our proprietary Route 66 apparel
         line.

                  Our key brand partners will continue to be a key element in
         our merchandising and marketing initiatives. As a result, a decline in
         the demand for our key brands or their failure to achieve or maintain
         broad market acceptance, could have a material effect on our results of
         operations.





                                       46
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION - (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 all parties would 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. This matter has not
         had a material adverse affect on our liquidity, financial position or
         results of operations








                                       47
<PAGE>



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



         At July 31, 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.








                                       48
<PAGE>



ITEM 4. CONTROLS AND PROCEDURES


         We have implemented certain enhancements, or are in the process of
enhancing internal controls relating to vendor allowance transactions and
inventory control. Our actions related to vendor allowances include, among
others, revising the vendor allowance transaction reporting form, providing
additional training to employees concerning financial reporting obligations with
an emphasis on vendor allowance transactions, establishing additional internal
committees to review, on a regular basis, our efforts in this area and providing
additional management oversight of vendor allowances.

         With respect to inventory control, we have consolidated the
responsibility for merchandise planning and replenishment functions under one
executive, implemented a policy requiring that disposition strategies be
prepared for all items not designated for future replenishment,
developed/improved a number of exception reports to enhance our ability to
prevent and/or identify potential inventory valuation issues, and have
established a cross-functional senior management team to regularly review
inventory control issues.

         Additionally, we recently conducted mandatory training on our Code of
Conduct and have appointed new management over our internal audit department.

         We also intend to conduct a review of our internal control procedures
with a view towards making improvements as deemed appropriate.






                                       49
<PAGE>

PART II.  OTHER INFORMATION

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         As a result of its Chapter 11 filing, Kmart has not made principal or
interest payments on unsecured indebtedness incurred prior to January 22, 2002.
In addition, Kmart is not permitted to pay dividends on its trust convertible
preferred securities. The dividend arrearage on the trust convertible securities
from December 18, 2001 through July 31, 2002 is approximately $36 million.

ITEM 5.  OTHER INFORMATION

         Kmart has made the following executive officer changes since the filing
of its Annual Report on Form 10-K for the 2001 fiscal year, filed on May 15,
2002:

         William D. Underwood was appointed Executive Vice President, Kmart
Sourcing and Global Operations, effective as of June 3, 2002. Kmart has entered
into an employment agreement with Mr. Underwood. Previously, he was Senior Vice
President, Global Operations, Corporate Brands and Quality Assurance before
retiring from Kmart in May of 1999.

         Randy L. Allen has assumed a new position with Kmart. Effective as of
July 15, 2002, Ms. Allen assumed the role of Senior Vice President, Strategic
Planning and Business Initiatives. The terms of her employment have been amended
to reflect her new non-executive officer position. Previously, she was Executive
Vice President, Strategic Initiatives and Chief Diversity Officer.

         In addition to the executive officers set forth in the Annual Report on
Form 10-K for the 2001 fiscal year, James E. Defebaugh, IV, serves as Senior
Vice President, Chief Compliance Officer and Secretary. Mr. Defebaugh was
appointed to his current position as of March 11, 2002. Previously, he was Vice
President, Associate General Counsel and Secretary.

         The employment of Cecil B. Kearse, Executive Vice-President,
Merchandising, was terminated effective May 31, 2002. Kmart notified Mr. Kearse
that it was reserving the right to determine its rights and obligations under
Mr. Kearse's employment agreement.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

         Exhibit  4.1 - Amendment to $2 Billion Senior Secured
                        Debtor-in-Possession Financing Facility, effective
                        August 23, 2002 (incorporated by reference to Exhibit
                        4.1 to Kmart's Quarterly Report on Form 10-Q for the
                        quarter ended July 31, 2002 filed on September 16,
                        2002).
         Exhibit 10.1 - Janet G. Kelley Form of 2001 Special Retention
                        Agreement (incorporated by reference to Exhibit 10.1 to
                        Kmart's Quarterly Report on Form 10-Q for the quarter
                        ended July 31, 2002 filed on September 16, 2002).
         Exhibit 10.2 - William D. Underwood 2002 Employment Agreement
                        (incorporated by reference to Exhibit 10.2 to Kmart's
                        Quarterly Report on Form 10-Q for the quarter ended July
                        31, 2002 filed on September 16, 2002).
         Exhibit 10.3 - Janet G. Kelley Promissory Note (incorporated by
                        reference to Exhibit 10.3 to Kmart's Quarterly Report on
                        Form 10-Q for the quarter ended July 31, 2002 filed on
                        September 16, 2002).
         Exhibit 99.1 - CEO Certification pursuant to Section 906 of the
                        Sarbanes-Oxley Act of 2002.
         Exhibit 99.2 - CFO Certification pursuant to Section 906 of the
                        Sarbanes-Oxley Act of 2002.

(b)      Reports on Form 8-K: We filed the following Current Reports on Form 8-K
         with the SEC during the 13 weeks ended July 31, 2002:

         1.       May 9, 2002 - Notice of Filing, dated May 6, 2002, of slides
                  presented at the Section 341 Meeting of Creditors on May 2,
                  2002, and the slides presented at the Section 341 Meeting of
                  Creditors on May 2, 2002.
         2.       May 23, 2002 - Monthly Operating Report for the period from
                  March 28, 2002 to May 1, 2002, as filed with the Bankruptcy
                  Court.
         3.       June 21, 2002 - Monthly Operating Report for the period from
                  May 2, 2002 to May 29, 2002, as filed with the Bankruptcy
                  Court.
         4.       July 22, 2002 - Monthly Operating Report for the period from
                  May 30, 2002 to June 26, 2002, as filed with the Bankruptcy
                  Court.




                                       50
<PAGE>

                                   SIGNATURES

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

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





                  Date:                        January 14, 2003
                                               Kmart Corporation
                                ----------------------------------------------
                                                 (Registrant)


                  By:                     /s/ James B. Adamson
                             -------------------------------------------------
                                             James B. Adamson
                                      CHAIRMAN OF THE BOARD AND CHIEF
                                             EXECUTIVE OFFICER
                                       (Principal Executive Officer)

                                             /s/ A. A. Koch
                             -------------------------------------------------
                                                A. A. Koch
                                          CHIEF FINANCIAL OFFICER
                                       (Principal Financial Officer)

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





                                       51
<PAGE>

                                 CERTIFICATIONS

CEO Certification

I, James B. Adamson, certify that:

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

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

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

     Date: January 14, 2003



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









                                       52
<PAGE>

CFO Certification

I, Albert A. Koch, certify that:

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

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

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

     Date: January 14, 2003




/s/ Albert A. Koch
-----------------------
Albert A. Koch
Chief Financial Officer





                                       53
<PAGE>


                                 Exhibit Index
                                 -------------

Exhibit
  No.                           Description
-------                         -----------
 99.1          CEO Certification pursuant to Section 906 of the Sarbanes-Oxley
               Act of 2002.
 99.2          CEO Certification pursuant to Section 906 of the Sarbanes-Oxley
               Act of 2002.