<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


X  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
-- EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 2001
                               --------------

                                       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 1, 2001, 496,962,413 shares of Common Stock of Kmart were
outstanding.



                                       1


<PAGE>   2

                                      INDEX



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

                   Consolidated Statements of Operations--                             3
                   13 and 26 weeks ended August 1, 2001 and
                   July 26, 2000

                   Consolidated Balance Sheets--                                       4
                   August 1, 2001, July 26, 2000 and
                   January 31, 2001

                   Consolidated Statements of Cash Flows--                             5
                   26 weeks ended August 1, 2001 and
                   July 26, 2000

                   Notes to Consolidated Financial                                   6 - 8
                   Statements

Item 2.            Management's Discussion and Analysis of Results of               9 - 12
                   Operations and Financial Condition

PART II            OTHER INFORMATION


Item 4.            Submission of Matters to a Vote of Security Holders              13 - 14

Item 6.            Exhibits and Reports on Form 8-K                                   14

                   Signatures                                                         15

</TABLE>



                                       2


<PAGE>   3


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                        13 WEEKS ENDED                        26 WEEKS ENDED
                                                                   ------------------------------       ----------------------------
                                                                      AUGUST 1,         JULY 26,           AUGUST 1,       JULY 26,
                                                                        2001             2000                2001            2000
                                                                   --------------   -------------       -------------    -----------
<S>                                                                <C>                 <C>              <C>              <C>
Sales                                                                $  8,917          $  8,998          $ 17,255          $ 17,193
Cost of sales, buying and occupancy                                     7,058             7,518            13,667            14,012
                                                                     --------          --------          --------          --------
Gross margin                                                            1,859             1,480             3,588             3,181
Selling, general and administrative expenses                            1,787             2,101             3,430             3,682
Charges for BlueLight.com and other                                        92              --                 115              --
                                                                     --------          --------          --------          --------
Income (loss) before interest, income taxes and dividends
     on convertible preferred securities of subsidiary trust              (20)             (621)               43              (501)
Interest expense, net                                                      88                65               171               134
Income tax benefit                                                        (25)             (250)              (31)             (232)
Dividends on convertible preferred securities of subsidiary
 trust, net of income taxes of $6, $6, $12 and $12,
 respectively                                                              12                12                23                23
                                                                     --------          --------          --------          --------
Net loss                                                             $    (95)         $   (448)         $   (120)         $   (426)
                                                                     ========          ========          ========          ========

Basic (loss) per common share:                                       $  (0.19)         $  (0.93)         $  (0.24)         $  (0.87)
                                                                     ========          ========          ========          ========


Diluted (loss) per common share:                                     $  (0.19)         $  (0.93)         $  (0.24)         $  (0.87)
                                                                     ========          ========          ========          ========


Basic weighted average shares (millions)                                490.6             481.3             489.6             481.8
Diluted weighted average shares (millions)                              563.7             541.8             560.1             544.4
</TABLE>




          See accompanying Notes to Consolidated Financial Statements.






                                       3
<PAGE>   4


                                KMART CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                              (DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
                                                                                          (UNAUDITED)
                                                                                 -------------------------------
                                                                                   AUGUST 1,        JULY 26,          JANUARY 31,
                                                                                    2001              2000              2001
                                                                                 ---------------  --------------  ----------------
<S>                                                                           <C>                 <C>             <C>
Current Assets:
    Cash and cash equivalents                                                   $   420             $   333             $   401
    Merchandise inventories                                                       6,869               6,586               6,412
    Other current assets                                                            885                 753                 811
                                                                                -------             -------             -------
Total current assets                                                              8,174               7,672               7,624

Property and equipment, net                                                       6,836               6,351               6,557
Other assets and deferred charges                                                   339                 397                 449
                                                                                -------             -------             -------
Total Assets                                                                    $15,349             $14,420             $14,630
                                                                                =======             =======             =======

Current Liabilities:
   Long-term debt due within one year                                           $   116             $    38             $    68
   Trade accounts payable                                                         2,295               2,488               2,287
   Accrued payroll and other liabilities                                          1,177               1,145               1,257
   Taxes other than income taxes                                                    261                 268                 187
                                                                                -------             -------             -------
Total current liabilities                                                         3,849               3,939               3,799

Long-term debt and notes payable                                                  2,980               1,742               2,084
Capital lease obligations                                                           902                 975                 943
Other long-term liabilities                                                         666               1,003                 834
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, $904 and $898, respectively)                                              887                 891                 887
Common stock, $1 par value, 1,500,000,000 shares authorized;
    496,962,413, 480,098,675 and 486,509,736 shares issued,
    respectively                                                                    497                 480                 487
Capital in excess of par value                                                    1,670               1,551               1,578
Retained earnings                                                                 3,898               3,839               4,018
                                                                                -------             -------             -------
Total Liabilities and Shareholders' Equity                                      $15,349             $14,420             $14,630
                                                                                =======             =======             =======

</TABLE>




          See accompanying Notes to Consolidated Financial Statements.



                                       4
<PAGE>   5


                                KMART CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                            26 WEEKS ENDED
                                                                                  --------------------------------
                                                                                      AUGUST 1,          JULY 26,
                                                                                       2001               2000
                                                                                  ---------------    -------------
<S>                                                                             <C>                <C>
CASH FLOW FROM OPERATING ACTIVITIES
      Net loss from continuing operations                                           $  (120)             $  (426)
      Adjustments to reconcile net loss from continuing operations
         to net cash (used for) provided by operating activities:
           Restructuring, impairments and employee severance                            115                  740
           Depreciation and amortization                                                413                  395
           Equity loss in BlueLight.com                                                  46                   25
           Cash used for store closings and other charges                               (60)                 (33)
           (Increase) decrease in inventories                                          (452)                 150
           Increase in trade accounts payable                                             2                  284
           Deferred income taxes and taxes payable                                       16                 (329)
           Changes in other assets and liabilities                                      (69)                (137)
                                                                                    -------              -------
      Net cash (used for) provided by continuing operations                            (109)                 669
      Net cash used for discontinued operations                                         (45)                 (60)
                                                                                    -------              -------
Net cash (used for) provided by operating activities                                   (154)                 609
                                                                                    -------              -------

CASH FLOW FROM INVESTING ACTIVITIES
      Capital expenditures                                                             (651)                (379)
      Investment in BlueLight.com                                                       (45)                 (10)
                                                                                    -------              -------
Net cash used for investing activities                                                 (696)                (389)
                                                                                    -------              -------

CASH FLOW FROM FINANCING ACTIVITIES
      Proceeds from issuance of debt                                                  1,191                 --
      Issuance of common shares                                                          28                   26
      Purchase of convertible preferred securities of subsidiary trust                 --                    (80)
      Purchase of common shares                                                        --                    (56)
      Payments on debt                                                                 (273)                 (45)
      Payments on capital lease obligations                                             (41)                 (39)
      Payments of dividends on preferred securities of subsidiary trust                 (36)                 (37)
                                                                                    -------              -------
Net cash provided by (used for) financing activities                                    869                 (231)
                                                                                    -------              -------

Net increase (decrease) in cash and cash equivalents                                     19                  (11)
Cash and cash equivalents, beginning of year                                            401                  344
                                                                                    -------              -------
Cash and cash equivalents, end of period                                            $   420              $   333
                                                                                    =======              =======

</TABLE>







          See accompanying Notes to Consolidated Financial Statements.


                                       5

<PAGE>   6

                                KMART CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. BASIS OF PRESENTATION

         These interim unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC"), and, in the opinion of management, reflect all
adjustments (which include normal recurring adjustments) necessary for a fair
statement of the results for the interim periods. These consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in our 2000 Annual Report on Form 10-K filed for the
fiscal year ended January 31, 2001.

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

2. 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 consolidated
financial statements. Inventories valued on LIFO at August 1, 2001, July 26,
2000 and January 31, 2001 were $194 million, $202 million and $194 million
lower, respectively, than the amounts that would have been reported under the
first-in, first-out method.

3. RESTRUCTURING OF BLUELIGHT.COM

         We recorded a $92 million charge ($73 million after-tax) related to our
e-commerce site, BlueLight.com, this quarter, comprised of $41 million for the
impairment of our investment in BlueLight.com and $51 million for the
restructuring of our e-commerce business. These charges are included in the line
Charges for BlueLight.com and other in the Consolidated Statements of
Operations.

         Based upon the changing environment for internet businesses,
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")
are now wholly owned subsidiaries of Kmart, which will allow us to execute our
restructuring plan. The purchase price of the additional interest was $85
million, with $69 million being satisfied through the issuance of 6.1 million
unregistered shares of Kmart common stock and $16 million paid in cash. Based
upon the revised cash flow projections for the business, we recorded a $41
million charge to write-down our investment in BlueLight.com in accordance with
the Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."

         Of the $51 million restructuring charge, $29 million 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 are in the headquarters of BlueLight.com, and will not be
utilized in the restructured operations. This charge was also recorded in
accordance with SFAS No. 121. Liabilities for lease terminations, contract
terminations and other costs totaling $22 million 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. No costs were paid and charged against the
liability during the quarter.

         We expect to complete our plan by year-end, with the majority of steps
being completed in the third quarter.



                                       6

<PAGE>   7

                                KMART CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

         After the application of the provisions of SFAS No. 121, as described
above, we had remaining long-lived assets with an estimated fair value of $2.5
million, which will be depreciated over their remaining estimated useful life of
2.5 years.

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

OTHER CHARGES

         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 million
($15 million, net of tax) which is included in our statement of operations in
the line Charges for BlueLight.com and other. The charge includes 130 employees
that accepted the VERP offer, with costs aggregating $6 million. The remaining
220 employees were severed and given post-employment benefits including
severance, outplacement services, continuation of healthcare benefits and other
benefits totaling $17 million. Our year-to-date cash payments associated with
these actions were $14 million. An additional $5 million will be paid to
employees in accordance with the terms of the related severance agreements.
Benefit payments to employees accepting the VERP are paid from the Kmart
Employee Pension Plan, except certain payments for highly compensated employees
whom we pay directly.

EFFECTIVE TAX RATE

         The effective tax rates for the 13 and 26-week periods ended August 1,
2001 were 23.1% and 24.2%, respectively. The actual tax rates are lower than the
expected effective tax rates as we are precluded from recording a tax benefit
from the write down of the BlueLight.com investment that is still maintained by
us.

4 COMMON STOCK REPURCHASE PROGRAM

         In July 2001, we terminated the common stock repurchase program that
was initiated in April 1999. We repurchased approximately 22 million shares of
common stock during 1999 and 2000 at a cost of approximately $255 million under
the program.

5. OTHER COMMITMENTS AND CONTINGENCIES

Lease Guarantees

         As of August 1, 2001, we had outstanding guarantees for real property
leases of certain former subsidiaries as follows:

<TABLE>
<CAPTION>
                                       Present Value of            Gross
                                          Future Lease             Future
($ Millions)                          Obligations @ 7%      Lease Obligations
                                    ---------------------   --------------------
<S>                                 <C>                     <C>
       The Sports Authority ("TSA")               $192               $325
       Borders Group                                92                156
       OfficeMax                                    71                104
                                                  ----               ----
       Total                                      $355               $585
                                                  ====               ====
</TABLE>

         The possibility of having to honor our contingent obligations is
dependent upon the future operating results of the former subsidiaries. Should a
reserve be required, it would be recorded at the time the obligation was
determined to be both probable and estimable.

         Our rights and obligations with respect to our guarantee of TSA,
OfficeMax and Borders Group leases are governed by Lease Guaranty,
Indemnification and Reimbursement Agreements dated as of November 23, 1994,
November 9, 1994 and May 24, 1995, respectively, as may be amended from time to
time.




                                       7

<PAGE>   8

                                KMART CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Other
         There are various claims, lawsuits and pending actions incident to our
operations. It is the opinion of management that the ultimate resolution of
these matters will not have a material adverse effect on our liquidity,
financial position or results of operations.

























                                       8

<PAGE>   9


ITEM 2.

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

DESCRIPTION OF NON-COMPARABLE ITEMS

         During fiscal year 2000 and for the first six months of fiscal 2001, we
have instituted a number of strategic actions to improve our operations. These
actions are summarized below:

CHARGE FOR BLUELIGHT.COM

         As a result of the changing environment for internet businesses,
management's revised future cash flow projections and the potential need for
significant additional cash advances, we adopted a multi-step plan to
substantially restructure the operations of BlueLight.com.

          At the end of July, we acquired the remaining 40% interest in
BlueLight.com, giving us control of the entity. To acquire the 40% interest, we
issued $69 million in shares of Kmart common stock and paid $16 million in cash
for a total purchase price of $85 million.

          As a result of these activities, we recorded a $92 million charge ($73
million after-tax) this quarter. $41 million of the charge related to the
impairment of our investment in Bluelight.com. This charge was recorded based
upon our revised cash flow projections for the business.

         Of the $51 million restructuring charge, $29 million 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 are in the headquarters of BlueLight.com, and will not be
utilized in the restructured operations. This charge was recorded in accordance
with SFAS No. 121. Liabilities for lease terminations, contract terminations and
other costs totaling $22 million 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. No costs were paid and charged against the liability during the
quarter.

         These charges are included in the line Charges for BlueLight.com and
other in the Consolidated Statements of Operations. As a result of the
transaction, the results of BlueLight.com's operations are fully consolidated in
our financial statements commencing July 31, 2001.

         During the third quarter, we continued executing our restructuring
plan. Forty-nine employees at the BlueLight.com headquarters were severed in
August. We also contracted with a third party to outsource the hosting of our
site, fulfillment of e-commerce orders and all related customer service. We are
continuing to exit the operations in San Francisco and complete our
restructuring. We plan on substantially completing the plan by the end of the
third quarter, with full completion by the end of the year.

CHARGE FOR EMPLOYEE SEVERANCE AND VERP

         During the first quarter of 2001, we realigned our organization around
our three strategic imperatives: to dramatically improve retail execution to
achieve World Class Execution throughout our business, to create a Customer
Centric Culture so our behaviors are linked to serving our customers, and to
aggressively pursue Sales and Marketing Opportunities to define a market
position differentiating Kmart from our competitors. As a result of our
realignment, our workforce was reduced by 350 employees in the first quarter
through a voluntary early retirement program ("VERP") and other employee
separations. The total cost of the realignment aggregated $23 million ($15
million, net of tax) which is included in our statement of operations in the
line Charges for BlueLight.com and other. The charge relates to 130 employees
that accepted the VERP offer, with costs aggregating $6 million. The remaining
220 employees were severed and given post-employment benefits including
severance, outplacement services, continuation of healthcare benefits and other
benefits totaling $17 million. Cash payments associated with these actions have
aggregated $14 million. An additional $5 million will be paid to employees in
accordance with the terms of the related severance agreements. Benefit payments
to employees accepting the VERP are paid from the Kmart Employee Pension Plan,
except certain payments for highly compensated employees whom we pay directly.




                                       9

<PAGE>   10


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

2000 STRATEGIC ACTIONS CHARGE

         In the second quarter of 2000, we announced a series of strategic
actions aimed at strengthening financial performance by achieving improvements
in return on invested capital. These actions included deciding to close certain
Kmart and Kmart Supercenter stores, accelerating certain inventory reductions
and redefining our information technology strategy. As a result of these
actions, we recorded a pre-tax charge of $740 million ($471 million after tax)
during the second quarter of 2000. $365 million of the charge was included in
Cost of sales, buying and occupancy in the Consolidated Statement of Operations
and $375 million of the charge was included in Selling, general and
administrative expenses in the Consolidated Statement of Operations.

ANALYSIS OF OPERATIONS EXCLUDING NON-COMPARABLE ITEMS

Following is a table segregating operating income excluding noncomparable items
from operating income as reported in the Consolidated Statements of Operations:

<TABLE>
<CAPTION>
                                                                              13 WEEKS                          26 WEEKS
                                                                   -------------------------------  -----------------------------
      ($ MILLIONS)                                                    AUGUST 1,        JULY 26,        AUGUST 1,         JULY 26,
                                                                         2001             2000            2001             2000
                                                                   --------------   --------------  --------------   ------------
<S>                                                                <C>              <C>             <C>              <C>
      SALES                                                              $ 8,917          $ 8,998        $ 17,255        $ 17,193

      COST OF SALES, BUYING AND OCCUPANCY                                  7,058            7,153          13,667          13,647
                                                                   --------------   --------------  --------------   ------------

      GROSS MARGIN                                                         1,859            1,845           3,588           3,546

      SELLING, GENERAL AND ADMINISTRATIVE                                  1,787            1,726           3,430           3,307
                                                                   --------------   --------------  --------------   ------------

      OPERATING INCOME EXCLUDING NONCOMPARABLE ITEMS                          72              119             158             239

      CHARGE FOR BLUELIGHT.COM                                                92                -              92               -
      CHARGE FOR EMPLOYEE SEVERANCE AND VERP                                   -                -              23               -
      STRATEGIC ACTIONS CHARGE                                                 -              740               -             740
                                                                   --------------   --------------  --------------   ------------

      OPERATING INCOME AS REPORTED                                       $   (20)         $  (621)        $    43        $   (501)
                                                                   ==============   ==============  ==============   ============

      COMPARABLE SALES %                                                     1.0%             0.7%            1.3%            0.3%

</TABLE>


         SALES decreased 0.9% and increased 0.4% for the 13 and 26 weeks ended
August 1, 2001, respectively, versus the same period of the previous year.
Comparable store sales increased 1.0% and 1.3% for the 13 and 26 weeks ended
August 1, 2001, respectively. Divisions showing particular strength on a
year-to-date basis included pharmacy, beauty and health care, home entertainment
and food and consumables. We opened 12 stores and closed 4 stores during the 26
weeks ended August 1, 2001. A weekly report of our sales performances at our
over 2100 retail stores is available by phone at (248) 463-1040 or (248)
614-0480. Information is also available at our website www.bluelight.com.

         GROSS MARGIN, as a percentage of sales, was 20.8% and 20.5% for the 13
weeks ended August 1, 2001 and July 26, 2000, respectively. For the 26 week
period ended August 1, 2001 and July 26, 2000, respectively, gross margin, as a
percentage of sales, was 20.8% and 20.6%. The increase in gross margin is due to
a solid performance in reducing merchandise shrinkage, which offsets the price
reductions attributable to our BlueLight Always program.




                                       10

<PAGE>   11

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

         SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES, as a percentage
of sales, were 20.0% and 19.2% for the 13 weeks ended August 1, 2001 and July
26, 2000, respectively. For the 26-week periods ended August 1, 2001 and July
26, 2000, respectively, SG&A expenses, as a percentage of sales, were 19.9% and
19.2%. The increase is due primarily to the investment in store labor, which is
partially offset by reductions in net advertising costs.

         OPERATING INCOME for the 13 weeks ended August 1, 2001 was $72 million,
or 0.8% of sales, as compared to $119 million, or 1.3% of sales, for the same
period of the prior year. For the 26 week period ended August 1, 2001 operating
income was $158 million, or 0.9% of sales, as compared to $239 million, or 1.4%
of sales, for the comparable period of the previous year.

         NET INTEREST EXPENSE for the 13 weeks ended August 1, 2001 and July 26,
2000 was $88 million and $65 million, respectively. For the 26 week period ended
August 1, 2001 and July 26, 2000 net interest expense was $171 million and $134
million, respectively. Net interest expense increased as a result of the
issuance in January 2001 of $400 million of 9.375% Notes due January 2006, the
issuance in June 2001 of $430 million of 9 7/8% Notes due June 2008 and
increased borrowings under our Revolving Credit Agreement ("Revolver"). See
"Liquidity and Financial Condition".

LIQUIDITY AND FINANCIAL CONDITION

         Our primary sources of working capital are cash flows from operations
and borrowings under our credit facilities. We had working capital of $4,325,
$3,733 and $3,825 million at August 1, 2001, July 26, 2000 and January 31, 2001,
respectively. Working capital fluctuates in relation to profitability, seasonal
inventory levels net of trade accounts payable (net inventory) and the level of
store openings and closings. There were $764 million borrowings outstanding
under our $1.6 billion Revolver at the end of the second quarter of fiscal 2001.
There were no borrowings under our existing credit facilities at the end of
second quarter 2000.

         Net cash used for operating activities for the 26 weeks ended August 1,
2001 was $154 million as compared to net cash provided by operating activities
of $609 million for the same period in 2000. The decrease in cash provided by
operating activities as compared to the same period of the prior year was
primarily the result of lower net earnings, excluding non-comparable items, and
higher inventory purchases. Inventory increased by $457 million during the first
26 weeks of fiscal year 2001 due to normal seasonal inventory fluctuations, to
support our growing beauty and health care and consumables and edibles product
lines, and to improve our overall in-stock position.

         Net cash used for investing activities was $696 million for the 26
weeks ended August 1, 2001 compared to $389 million for the same period in 2000.
The increase in cash used for investing activities was primarily due to higher
capital expenditures for point-of-sale equipment, new Kmart Supercenter stores
and our investment in BlueLight.com.

         Net cash provided by financing activities was $869 million for the 26
weeks ended August 1, 2001 compared to net cash used for financing activities of
$231 million for the comparable period in 2000. The increase in cash provided
was primarily the result of the issuance of $430 million of 9 7/8% Notes due
June 2008 and increased borrowings under the Revolver, partially offset by the
paydown of Collateralized Mortgage Backed Securities in July.

         In July 2001, we terminated the common stock repurchase program that
was initiated in April 1999. We repurchased approximately 22 million shares of
common stock at a cost of approximately $255 million under the program.

         We believe that current financing arrangements will be sufficient to
meet our liquidity needs for operations and capital demands.



                                       11


<PAGE>   12

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

OTHER MATTERS

Lease Guarantees

         We have guaranteed leases for properties operated by certain former
subsidiaries including Borders Group, Inc., OfficeMax, Inc., and The Sports
Authority, Inc. The present value of the lease obligations we guaranteed is
approximately $355 million. The possibility of having to honor our contingent
obligations is dependent upon the future operating results of these former
subsidiaries.

Other

         There are various claims, lawsuits and pending actions incident to our
operations. It is the opinion of management that the ultimate resolution of
these matters will not have a material adverse effect on our liquidity,
financial position or results of operations.


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This quarterly report, as well as other verbal or written statements or reports
made by or on behalf of the Company, may contain or may incorporate material by
reference which includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. 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. Actual events and results may materially
differ from anticipated results described in such statements. Our ability to
achieve such results is subject to certain risks and uncertainties, including,
but not limited to:

-    general economic and weather conditions, including those which affect
     buying patterns of our customers,
-    changes in consumer spending and our ability to anticipate buying patterns
     and implement appropriate inventory strategies,
-    the availability and the cost of various sources of capital,
-    competitive pressures and other third party actions,
-    inability to timely acquire desired goods and/or fulfill labor needs at
     planned costs,
-    ability to successfully implement business strategies and otherwise execute
     planned changes in various aspects of the business,
-    regulatory and legal developments, and
-    other factors affecting business beyond our control.

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 made by or on behalf of the Company speak only as of the
date of this report, or if not contained herein, as of the date when made, and
the Company does not undertake to update these risk factors.




                                       12

<PAGE>   13


PART II. OTHER INFORMATION

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

The following information is furnished with respect to the 2001 Annual Meeting
of Stockholders of Kmart Corporation:

(a)      The Annual Meeting was held on May 15, 2001.

(b)      All nominees for director as listed in Kmart's proxy statement dated
         April 4, 2001 were elected. The directors whose terms of office
         continued after the meeting are also listed in the proxy statement.

(c)      Proposal 1

         Election of the following directors:

<TABLE>
<CAPTION>
     -------------------------- --------------------- ---------------------- -----------------------------------
              Nominee            Year When Term of          Votes for                Votes to Withhold
                                   Office Expires          the Nominee         Authority to Vote for Nominee
     -------------------------- --------------------- ---------------------- -----------------------------------
<S>                             <C>                   <C>                    <C>
     Lilyan H. Affinito                 2004               374,322,006                   46,660,738
     -------------------------- --------------------- ---------------------- -----------------------------------
     Richard G. Cline                   2004               374,772,516                   46,210,228
     -------------------------- --------------------- ---------------------- -----------------------------------
     Charles C. Conaway                 2002               374,749,090                   46,233,654
     -------------------------- --------------------- ---------------------- -----------------------------------
     Willie D. Davis                    2004               374,322,553                   46,660,191
     -------------------------- --------------------- ---------------------- -----------------------------------
     Joseph P. Flannery                 2004               374,474,371                   46,508,373
     -------------------------- --------------------- ---------------------- -----------------------------------
     Richard J. Statuto                 2003               376,137,284                   44,845,460
     -------------------------- --------------------- ---------------------- -----------------------------------
</TABLE>

         A plurality of the votes cast were in favor of all nominees, and they
         were therefore elected.

         Proposal 2

         The votes cast with respect to the proposal to ratify the appointment
         of PricewaterhouseCoopers LLP as independent accountants to examine the
         books and records of Kmart for fiscal 2001 were as follows:

<TABLE>
<S>                                             <C>
                              -------------    ----------------
                                       For         409,022,723
                              -------------    ----------------
                                   Against           9,100,265
                              -------------    ----------------
                                   Abstain           2,859,756
                              -------------    ----------------
</TABLE>

         A majority of the votes cast were in favor of proposal 2, and it was
         therefore passed.

         Proposal 3

         The votes cast with respect to the proposal that Kmart endorse the
         CERES Principles as a reasonable and beneficial component of our
         corporate commitment to be publicly accountable for environmental
         performance were as follows:

<TABLE>
<S>                                            <C>
                              -------------    ----------------
                                       For          27,707,514
                              -------------    ----------------
                                   Against         261,497,931
                              -------------    ----------------
                                   Abstain          16,052,302
                              -------------    ----------------
                                   No Vote         115,724,997
                              -------------    ----------------
</TABLE>

         Less than 7% of the outstanding shares of common stock voted in favor
         of the proposal, and it was therefore not passed.

         Proposal 4

         The votes cast with respect to the stockholder proposal re: vendor
         standards were as follows:

<TABLE>
<S>                                            <C>
                              -------------    ----------------
                                       For          22,621,750
                              -------------    ----------------
                                   Against         274,135,146
                              -------------    ----------------
                                   Abstain           8,500,851
                              -------------    ----------------
                                   No Vote         115,724,997
                              -------------    ----------------
</TABLE>

                                       13


<PAGE>   14


PART II. OTHER INFORMATION (CONTINUED)

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)

         Less than 7% of the outstanding shares of common stock voted in favor
         of the proposal, and it was therefore not passed.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

         Exhibit  10 - Amendment to Employment Agreement with Charles C. Conaway
         Exhibit  10.1 - Amended and Restated Kmart Corporation Annual Incentive
                         Bonus Plan
         Exhibit  11 - Statement re: Computation of Per Share Earnings


(b)      Reports on Form 8-K:

         We filed a Current Report on Form 8-K dated August 1, 2001 to report,
         under Item 5, that Kmart Corporation issued a press release announcing
         the purchase of BlueLight.com and related charge to earnings and to
         furnish, under item 7, a copy of the press release.











                                       14

<PAGE>   15


                                   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:                     August 23, 2001
                                                  Kmart Corporation
                                   ---------------------------------------------
                                                    (Registrant)


                         By:                  /s/ Charles C. Conaway
                                   ---------------------------------------------
                                                Charles C. Conaway
                                            CHAIRMAN OF THE BOARD AND
                                             CHIEF EXECUTIVE OFFICER

                                                /s/ Mark Schwartz
                                   ---------------------------------------------
                                                  Mark Schwartz
                                                  PRESIDENT AND
                                             CHIEF OPERATING OFFICER

                                               /s/ Jeffrey N. Boyer
                                   ---------------------------------------------
                                                 Jeffrey N. Boyer
                                           EXECUTIVE VICE PRESIDENT AND
                                             CHIEF FINANCIAL OFFICER
                                   (Principal Financial and Accounting Officer)






                                       15

<PAGE>   16
                                 Exhibit Index


Exhibit No.              Description
-----------              -----------

Exhibit 10               Amendment to Employment Agreement with Charles C.
                         Conaway


Exhibit 10.1             Amended and Restated Kmart Corporation Annual
                         Incentive Bonus Plan


Exhibit 11               Statement re: Computation of per Share Earnings