<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 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>

                                      INDEX

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

                                         Consolidated Statements of Operations --                                  4
                                         13 and 26 weeks ended August 1, 2001 (restated) and
                                         July 26, 2000

                                         Consolidated Balance Sheets --                                            5
                                         August 1, 2001 (restated), July 26, 2000 and
                                         January 31, 2001

                                         Consolidated Statements of Cash Flows --                                  6
                                         26 weeks ended August 1, 2001 (restated) and
                                         July 26, 2000

                                         Notes to Consolidated Financial Statements                             7 - 12

Item 2.                                  Management's Discussion and Analysis of Results of                    13 - 20
                                         Operations and Financial Condition

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

Item 4.                                  Submission of Matters to a Vote of Security Holders                      21

Item 6.                                  Exhibits and Reports on Form 8-K                                         22

                                         Signatures                                                               23

</TABLE>


                                       2
<PAGE>


                              Explanatory Statement


         On January 22, 2002 ("Petition Date"), subsequent to the initial filing
of our Quarterly Report on Form 10-Q for the 13 and 26 weeks ended August 1,
2001, Kmart and 37 of its U.S. subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the federal bankruptcy laws ("Bankruptcy
Code" or "Chapter 11") in the United States Bankruptcy Court for the Northern
District of Illinois ("Court"). The reorganization is being jointly administered
under the caption "In re Kmart Corporation, et al. Case No. 02 B 02474." 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, 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 this time, it is not possible to predict the effect of the Chapter
11 reorganization on our business, various creditors and security holders or
when we will be able to exit Chapter 11. Our future results are dependent upon
our confirming and implementing, on a timely basis, a plan of reorganization. A
more detailed description of the bankruptcy filing and its effect on Kmart is
set forth in Kmart's Annual Report on Form 10-K for the fiscal year ended
January 30, 2002 filed with the Securities Exchange Commission ("SEC") on May
15, 2002.

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

         Additionally, in January 2002, Kmart announced that we had received an
anonymous letter sent to the SEC, our auditors and directors expressing concern
with respect to various matters. Accordingly, the Board of Directors instructed
that an internal investigation be undertaken under the supervision of the Audit
Committee by outside legal counsel, with the assistance of independent
accounting advisors. Based on the results of the investigation to date, as well
as the results of our new management team's review of Kmart's accounting
policies and methods, we concluded that (1) an adjustment should be made with
respect to the accounting for up-front consideration in a transaction from a
vendor which more appropriately should have been deferred and recognized over
the life of the contract and (2) the recording of additional general liability
reserves in the fourth quarter was more appropriately designated as a second
quarter event.

         Our financial statements for the 13 and 26 weeks ended August 1, 2001
have been restated herein to reflect the change in accounting method and the
foregoing adjustments. The pro forma effect of the change in accounting method
on the financial statements for the 13 and 26 weeks ended July 26, 2000 is also
presented herein.

                                       3
<PAGE>

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,                       AUGUST 1,
                                                                    2001                            2001
                                                                 (RESTATED,       JULY 26,       (RESTATED,        JULY 26,
                                                                 SEE NOTE 1)        2000         SEE NOTE 1)        2000
                                                                  -------           ----         -----------        ----
<S>                                                            <C>             <C>             <C>             <C>
Sales                                                             $  8,917        $  8,998        $ 17,254        $ 17,193
Cost of sales, buying and occupancy                                  7,253           7,518          14,087          14,012
                                                                  --------        --------        --------        --------
Gross margin                                                         1,664           1,480           3,167           3,181
Selling, general and administrative expenses                         2,012           2,101           3,740           3,682
Charges for BlueLight.com and other                                     92              --             115              --
                                                                  --------        --------        --------        --------
Loss before interest, income taxes and dividends
    on convertible preferred securities of subsidiary trust           (440)           (621)           (688)           (501)
Interest expense, net                                                   88              65             171             134
Income tax benefit                                                    (163)           (250)           (272)           (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                                                          $   (377)       $   (448)       $   (610)       $   (426)
                                                                  ========        ========        ========        ========

Basic/Diluted loss per common share                               $  (0.77)       $  (0.93)       $  (1.25)       $  (0.87)
                                                                  ========        ========        ========        ========

Basic/Diluted weighted average shares (millions)                     490.6           481.3           489.6           481.8
Pro forma amounts assuming the new accounting policy
was applied retroactively:
   Net loss                                                       $   (377)       $   (520)       $   (610)       $   (621)
                                                                  ========        ========        ========        ========
   Basic/Diluted loss per common share                            $  (0.77)       $  (1.08)       $  (1.25)       $  (1.27)
                                                                  ========        ========        ========        ========
</TABLE>


          See accompanying Notes to Consolidated Financial Statements.

                                       4
<PAGE>
                                KMART CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                  (UNAUDITED)
                                                                            ----------------------
                                                                             AUGUST 1,
                                                                               2001
                                                                            (RESTATED,    JULY 26,     JANUARY 31,
                                                                            SEE NOTE 1)     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                                                         659           753           811
                                                                             -------       -------       -------
Total current assets                                                           7,948         7,672         7,624

Property and equipment, net                                                    6,836         6,351         6,557
Other assets and deferred charges                                                339           397           449
                                                                             -------       -------       -------
Total Assets                                                                 $15,123       $14,420       $14,630
                                                                             =======       =======       =======

Current Liabilities:
    Long-term debt due within one year                                       $   116       $    38       $    68
    Trade accounts payable                                                     2,591         2,488         2,287
    Accrued payroll and other liabilities                                        891         1,145         1,257
    Taxes other than income taxes                                                261           268           187
                                                                             -------       -------       -------
Total current liabilities                                                      3,859         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                                                      920         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                                                              3,408         3,839         4,018
                                                                             -------       -------       -------
Total Liabilities and Shareholders' Equity                                   $15,123       $14,420       $14,630
                                                                             =======       =======       =======

</TABLE>


          See accompanying Notes to Consolidated Financial Statements.


                                       5

<PAGE>


                                KMART CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                   26 WEEKS ENDED
                                                                              -------------------------
                                                                               AUGUST 1,
                                                                                 2001
                                                                               (RESTATED,     JULY 26,
                                                                              SEE NOTE 1)       2000
                                                                              -----------     --------
<S>                                                                        <C>            <C>
CASH FLOW FROM OPERATING ACTIVITIES
      Net loss from continuing operations                                     $  (610)       $  (426)
      Adjustments to reconcile net loss from continuing operations
         to net cash (used for) provided by operating activities:
           Restructuring, impairments and other charges                           115            740
           Depreciation and amortization                                          413            395
           Equity loss in BlueLight.com                                            46             25
           Cash used for store closings                                           (60)           (33)
           (Increase) decrease in inventories                                    (452)           150
           Increase in trade accounts payable                                     298            284
           Deferred income taxes and taxes payable                               (225)          (329)
           Changes in other assets and liabilities                                366           (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.



                                       6

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

1.   RESTATEMENT OF FINANCIAL STATEMENTS

         On January 22, 2002, subsequent to the initial filing of our Quarterly
     Report on Form 10-Q for the 13 and 26 weeks ended August 1, 2001, Kmart and
     37 of its U.S. subsidiaries 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"). A more detailed discussion of our Chapter
     11 filing is included in our Annual Report on Form 10-K for the fiscal year
     ended January 30, 2002.

         Given our bankruptcy filing in the fourth quarter, the increased
     uncertainty relating to vendor rebates and allowances ("allowances") in the
     fourth quarter and the corresponding difficulty in reliably estimating such
     amounts in the future, we concluded that it would be preferable to change
     our accounting method for interim recognition of such cost recoveries from
     vendors.

         For interim reporting periods in fiscal 2000, as well as with respect
     to the interim reporting periods in fiscal 2001 which were previously
     reported, 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 ("the plan") as determined by historical
     experience and current understandings with our vendors. These amounts were
     supplemented by allowances obtained that were not contemplated in such
     plan. While many agreements are finalized throughout the year, significant
     activity occurs in the fourth quarter to finalize outstanding agreements
     and collect allowances.

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

         Embedded in the accounting change that gives effect to the change in
     interim financial reporting for allowances is an adjustment for an
     indeterminate amount of supplemental or "incremental" allowances that were
     initially recorded in the first three quarters of fiscal 2001 prior to
     having been documented, or otherwise deemed appropriate, pursuant to our
     historical policy. Kmart concluded that it is not practicable to determine
     the impact on prior quarters. It should be noted, however, that the
     restated interim information reflects such allowances only to the extent
     they are supported by formal agreements or otherwise deemed appropriate in
     the quarter recognized.

         Additionally, in January 2002, Kmart announced that we had received an
     anonymous letter sent to the Securities and Exchange Commission ("SEC"),
     our auditors and directors expressing concern with respect to various
     matters. Accordingly, the Board of Directors instructed that an internal
     investigation be undertaken under the supervision of the Audit Committee by
     outside legal counsel, with the assistance of independent accounting
     advisors. Based on the results of the investigation to date, as well as the
     results of our new management team's review of Kmart's accounting policies
     and methods, we concluded that (1) an adjustment should be made with
     respect to up-front consideration in a single transaction from a vendor
     which more appropriately should have been deferred and recognized over the
     life of the contract and (2) the recording of additional general liability
     reserves in the fourth quarter was more appropriately designated as a
     second quarter event. Accordingly, adjustments were made for such
     transactions, including restatements of previously reported quarterly
     financial statements for fiscal 2001.

         Our financial statements for the 13 and 26 weeks ended August 1, 2001
     have been restated to reflect the change in accounting method and the
     foregoing adjustments. The pro forma effect of the change in accounting
     method on the financial statements for the 13 and 26 weeks ended July 26,
     2000 is also presented herein.

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

         The following table illustrates the effects of the accounting change
     and adjustments on the financial statements for the 13 and 26 weeks ended
     August 1, 2001.

<TABLE>
<CAPTION>
                                                                13 Weeks Ended August 1, 2001
                                       -----------------------------------------------------------------------------
                                                                Adjustments
                                                       ----------------------------
                                                                                          Change in
                                        As previously     Up-front         General       accounting
                                          reported     consideration      liability        method       As restated
                                          --------     -------------      ---------        ------       -----------
<S>                                    <C>             <C>             <C>             <C>             <C>
Sales                                     $  8,917        $      0        $      0        $      0        $  8,917
Cost of sales, buying and occupancy       $  7,058        $     42        $      0        $    153        $  7,253
                                          --------        --------        --------        --------        --------
Gross margin                              $  1,859        ($    42)       $      0        ($   153)       $  1,664
Selling, general and
    administrative expenses               $  1,787        $      0        $    167        $     58        $  2,012

Operating loss                            ($    20)       ($    42)       ($   167)       ($   211)       ($   440)
Net loss                                  ($    95)       ($    28)       ($   112)       ($   142)       ($   377)
                                          ========        ========        ========        ========        ========
Basic/Diluted loss per
    common share                          ($  0.19)       ($  0.06)       ($  0.23)       ($  0.29)       ($  0.77)
                                          ========        ========        ========        ========        ========
<CAPTION>

                                                                26 Weeks Ended August 1, 2001
                                       -----------------------------------------------------------------------------
                                                                Adjustments
                                                       ----------------------------
                                                                                          Change in
                                        As previously    Up-front          General        accounting
                                          reported     consideration      liability         method      As restated
                                          --------     -------------      ---------         ------      -----------
<S>                                    <C>             <C>             <C>             <C>             <C>
Sales                                     $ 17,254        $      0        $      0        $      0        $ 17,254
Cost of sales, buying and occupancy       $ 13,666        $     42        $      0        $    379        $ 14,087
                                          --------        --------        --------        --------        --------
Gross margin                              $  3,588        ($    42)       $      0        ($   379)       $  3,167
Selling, general and
    administrative expenses               $  3,430        $      0        $    167        $    143        $  3,740
Operating (loss) income                   $     43        ($    42)       ($   167)       ($   522)       ($   688)
Net loss                                  ($   120)       ($    28)       ($   112)       ($   350)       ($   610)
                                          ========        ========        ========        ========        ========
Basic/Diluted loss per
     common share                         ($  0.25)       ($  0.06)       ($  0.23)       ($  0.71)       ($  1.25)
                                          ========        ========        ========        ========        ========
</TABLE>

2.   BASIS OF PRESENTATION

         These interim unaudited consolidated financial statements have been
     prepared in accordance with the rules and regulations of the 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 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.

                                       8
<PAGE>

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

3.  LOSS PER SHARE

<TABLE>
<CAPTION>
                                                 13 Weeks Ended                    26 Weeks Ended
                                           -----------------------------     -----------------------------
                                            August 1,                         August 1,
                                              2001                              2001
                                           (Restated,                        (Restated,
                                           see Note 1)    July 26, 2000      see Note 1)     July 26, 2000
                                           -----------    -------------      -----------     -------------
<S>                                      <C>              <C>              <C>              <C>
Net Loss                                    $  (377)         $  (448)         $  (610)         $  (426)
Add: Discount on redemption of
  preferred securities, net                      --               --               --                9
                                            -------          -------          -------          -------
Adjusted net loss available to
  common shareholders                       $  (377)         $  (448)         $  (610)         $  (417)

Basic/Diluted weighted average
  shares (millions)                           490.6            481.3            489.6            481.8
                                            =======          =======          =======          =======

Basic/Diluted loss per common share         $ (0.77)         $ (0.93)         $ (1.25)         $ (0.87)
                                            =======          =======          =======          =======

</TABLE>

         In each period, certain outstanding stock options were excluded from
     the computation of diluted earnings per share because they would have been
     anti-dilutive. As of August 1, 2001, options to purchase 60.0 million
     shares of common stock at prices ranging from $5.34 to $26.03 were excluded
     from the 13 and 26 week calculations. As of July 26, 2000, options to
     purchase 47.3 million shares of common stock at prices ranging from $5.34
     to $26.03 were excluded from the 13 and 26 week calculations. These
     calculations also exclude the effect of trust convertible preferred
     securities and written put options. For the 13 and 26 week periods ended
     August 1, 2001, 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. For the
     13 and 26 week periods ended July 26, 2000, diluted shares outstanding
     exclude approximately 60.3 million common shares from potential conversion
     of certain trust convertible preferred securities due to their
     anti-dilutive effect. For the 13 and 26 week period ended July 26, 2000,
     diluted shares outstanding exclude approximately 0.2 million and 0.6
     million common shares, respectively, from the potential conversion of
     written put options due to their anti-dilutive effect. And, 0.0 million
     shares and 1.5 million shares of redeemed trust convertible preferred
     securities were excluded from the calculation for the 13 and 26 weeks ended
     July 26, 2000, respectively.

4.   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, $202 and $194 lower,
     respectively, than the amounts that would have been reported under the
     first-in, first-out method.

5.   RESTRUCTURING OF BLUELIGHT.COM

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

                                       9

<PAGE>


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

         Based upon the changing environment for internet businesses, in which
     the ability for internet businesses to raise capital is 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")
     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, with $69 being satisfied through the issuance of 6.1 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 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." Fair value was determined using the present value of estimated future
     cash flows.

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

         Of the $51 restructuring charge, $29 related to assets impaired as a
     result of the restructuring. These assets represent furniture and fixtures,
     leasehold improvements, and computer software and hardware, the majority of
     which 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 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.

         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, which will be depreciated over their remaining estimated useful life
     of 2.5 years.

         Subsequent to the initial filing of this Quarterly Report on Form 10-Q,
     we early adopted SFAS No. 144, "Accounting for the Impairment or Disposal
     of Long-Lived Assets," retroactively for all periods in fiscal 2001. The
     charge described herein was not affected by this retroactive adoption.

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

6.   OTHER CHARGES

         During the first quarter of 2001, we realigned our organization and
     reduced our workforce by 350 employees through a voluntary early retirement
     program ("VERP") and other employee separations. The total cost of the
     realignment aggregated $23 ($15, net of tax) which is included in our
     unaudited Condensed Consolidated Statement of Operations for the quarter
     ended May 2, 2001 in the line item Charge for employee severance and VERP.
     Of the charge, $19 was reserved for and will be paid out of our general
     corporate assets, the remaining $4 will be paid out of the Kmart Employee
     Pension Plan. 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. Our first quarter cash payments in fiscal 2001 associated with these
     actions were $9.


                                       10
<PAGE>
                                KMART CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

7.   COMPREHENSIVE LOSS

         Comprehensive loss represents net loss, adjusted for the effect of
     other items that are recorded directly to shareholders' equity. Net loss
     and comprehensive loss are equivalent for all periods presented.

8.   EFFECTIVE TAX RATE

         The effective tax rates for the 13 and 26 week periods ended August 1,
     2001, as restated, were 30.9% and 31.7%, 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.

9.   COMMON STOCK REPURCHASE PROGRAM

         In July 2001, we terminated the common stock repurchase program that
     was initiated in April 1999. Under the program we repurchased approximately
     22 million shares of common stock during 1999 and 2000 at a cost of
     approximately $255. We also terminated the trust convertible preferred
     securities repurchase program that was initiated in February 2000. Under
     the program we repurchased approximately 2 million shares of trust
     convertible securities at a cost of approximately $84.

10.  INVESTMENT IN AFFILIATED RETAIL COMPANIES

         MELDISCO

         For the 13 week period ended August 1, 2001, Meldisco had net sales of
     $323, gross profit of $160 and net income of $29. For the 13 week period
     ended July 26, 2000, Meldisco had net sales of $332, gross profit of $162
     and net income of $30.

         For the 26 week period ended August 1, 2001, Meldisco had net sales of
     $611, gross profit of $296 and net income of $47. For the 26 week period
     ended July 26, 2000, Meldisco had net sales of $641, gross profit of $304
     and net income of $49.

         BLUELIGHT.COM

         For the 13 week period ended August 1, 2001, BlueLight.com had net
     sales of $4, no gross profit, and a net loss of $25. For the 13 week period
     ended July 26, 2000, BlueLight.com had net sales of $1, gross profit of $1
     and a net loss of $14.

         For the period from February 1, 2001 to July 31, 2001, BlueLight.com
     had net sales of $8, gross profit of $1 and a net loss of $55. For the 26
     week period ended July 26, 2000, BlueLight.com had net sales of $1, gross
     profit of $1 and a net loss of $37.

         BlueLight.com's operations were fully consolidated into our financial
     statements commencing July 31, 2001.

11.  NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
     Combinations," effective for all business combinations initiated after June
     30, 2001. This statement also applies to all business combinations
     accounted for using the purchase method for which the date of acquisition
     is July 1, 2001 or thereafter. Also, in June 2001, the FASB issued SFAS No.
     142, "Goodwill and Other Intangible Assets," and SFAS No. 143, "Accounting
     for Asset Retirement Obligations," effective for fiscal years beginning
     after December 15, 2001. The adoption of SFAS No. 141 and SFAS No. 142 are
     not expected to have a material impact on our earnings or financial
     position.

                                       11
<PAGE>
                                KMART CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

         We are currently assessing the impact that the application of the
     provisions of SFAS No. 143 will have on our Consolidated Financial
     Statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for
     the Impairment or Disposal of Long-Lived Assets," effective for fiscal
     years beginning after December 15, 2001. Subsequent to the initial filing
     of this Quarterly Report on Form 10-Q, we early adopted the provisions of
     SFAS No. 144. There was no effect on the financial statements for the
     current 13 and 26 weeks ended August 1, 2001.

12.  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
                                     Future Lease           Lease
                                   Obligations @ 7%      Obligations
                                   ----------------      -----------
<S>                               <C>                    <C>
The Sports Authority, Inc.               $192               $325
Borders Group, Inc.                        92                156
OfficeMax, Inc.                            71                104
                                         ----               ----
Total                                    $355               $585
                                         ====               ====
</TABLE>

         Kmart's contingent obligation is dependent on the future operating
     results of the guarantees and is subject to settlement under a plan of
     reorganization to be voted upon by creditors and equity holders and
     approved by the court. 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 The Sports
     Authority, Inc., OfficeMax, Inc. and Borders Group, Inc. 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.

         OTHER

         We are a party to a substantial number of claims, lawsuits, and pending
     actions, most of which are routine and all of which are incidental to our
     business. Some matters involve claims for large amounts of damages as well
     as other relief. The Company assesses the likelihood of potential losses on
     an ongoing basis and when they are considered probable and reasonably
     estimable, records an estimate of the ultimate outcome. If there is no
     single point estimate of loss that is considered more likely than others,
     an amount representing the low end of the range of possible outcomes is
     recorded. Although the final consequences of these proceedings are not
     presently determinable, in the opinion of management, they are not expected
     to have a material adverse effect on our liquidity, financial position or
     results of operations.


                                       12
<PAGE>
                                KMART CORPORATION
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
                               FINANCIAL CONDITION
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

ITEM  2.

CHANGE IN ACCOUNTING POLICY AND OTHER ADJUSTMENTS

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

         Embedded in the accounting change that gives effect to the change in
interim financial reporting for allowances is an adjustment for an indeterminate
amount of supplemental or "incremental" allowances that were initially recorded
in the first three quarters of fiscal 2001 prior to having been documented, or
otherwise deemed appropriate, pursuant to our historical policy. Kmart concluded
that it is not practicable to determine the impact on prior quarters. It should
be noted, however, that the restated interim information reflects such
allowances only to the extent they are supported by formal agreements or
otherwise deemed appropriate in the quarter recognized.

         Additionally, in January 2002, Kmart announced that we had received an
anonymous letter sent to the Securities and Exchange Commission ("SEC"), our
auditors and directors expressing concern with respect to various matters.
Accordingly, the Board of Directors instructed that an internal investigation be
undertaken under the supervision of the Audit Committee by outside legal
counsel, with the assistance of independent accounting advisors. Based on the
results of the investigation to date, as well as the results of our new
management team's review of Kmart's accounting policies and methods, we
concluded that (1) an adjustment should be made with respect to the accounting
for up-front consideration in a transaction from a vendor which more
appropriately should have been deferred and recognized over the life of the
contract and (2) the recording of additional general liability reserves in the
fourth quarter was more appropriately designated as a second quarter event.
Accordingly, adjustments were made for such transactions, including restatements
of previously reported quarterly financial statements for fiscal 2001 as
reflected herein.

                                       13
<PAGE>

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

         The following table illustrates the effects of the accounting change
and adjustments on the financial statements for the 13 and 26 weeks ended August
1, 2001.

<TABLE>
<CAPTION>
                                                                     13 Weeks Ended August 1, 2001
                                          -----------------------------------------------------------------------------------
                                                                     Adjustments
                                                           -----------------------------
                                                                                                 Change in
                                          As previously      Up-front           General          accounting
                                            reported       consideration       liability           method         As restated
                                            --------       -------------       ---------           ------         -----------
<S>                                      <C>               <C>               <C>               <C>               <C>
Sales                                       $  8,917          $      0          $      0          $      0          $  8,917
Cost of sales, buying and occupancy         $  7,058          $     42          $      0          $    153          $  7,253
                                            --------          --------          --------          --------          --------
Gross margin                                $  1,859          ($    42)         $      0          ($   153)         $  1,664
Selling, general and
    administrative expenses                 $  1,787          $      0          $    167          $     58          $  2,012
Operating loss                              ($    20)         ($    42)         ($   167)         ($   211)         ($   440)
Net loss                                    ($    95)         ($    28)         ($   112)         ($   142)         ($   377)
                                            ========          ========          ========          ========          ========
Basic/Diluted loss per
    common share                            ($  0.19)         ($  0.06)         ($  0.23)         ($  0.29)         ($  0.77)
                                            ========          ========          ========          ========          ========

<CAPTION>

                                                                     26 Weeks Ended August 1, 2001
                                          -----------------------------------------------------------------------------------
                                                                     Adjustments
                                                           -----------------------------
                                                                                                  Change in
                                          As previously      Up-front           General          accounting
                                            reported       consideration       liability           method         As restated
                                            --------       -------------       ---------           ------         -----------
<S>                                      <C>               <C>               <C>               <C>               <C>
Sales                                       $ 17,254          $      0          $      0          $      0          $ 17,254
Cost of sales, buying and occupancy         $ 13,666          $     42          $      0          $    379          $ 14,087
                                            --------          --------          --------          --------          --------
Gross margin                                $  3,588          ($    42)         $      0          ($   379)         $  3,167
Selling, general and
    administrative expenses                 $  3,430          $      0          $    167          $    143          $  3,740
Operating (loss) income                     $     43          ($    42)         ($   167)         ($   522)         ($   688)
Net loss                                    ($   120)         ($    28)         ($   112)         ($   350)         ($   610)
                                            ========          ========          ========          ========          ========
Basic/Diluted loss per
    common share                            ($  0.25)         ($  0.06)         ($  0.23)         ($  0.71)         ($  1.25)
                                            ========          ========          ========          ========          ========

</TABLE>

                                       14
<PAGE>
                                KMART CORPORATION
        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

         The following table segregates operating (loss) income excluding
non-comparable items from operating loss as reported in the Consolidated
Statements of Operations, including pro forma disclosures for the effect of the
change in accounting method related to fiscal year 2000:

<TABLE>
<CAPTION>
                                                 13 WEEKS                                           26 WEEKS
                               ----------------------------------------------     ----------------------------------------------
                                  AUGUST 1,                                          AUGUST 1,
                                    2001          JULY 26,      JULY 26, 2000          2001          JULY 26,      JULY 26, 2000
($ MILLIONS)                   (AS RESTATED)        2000         (PRO FORMA)      (AS RESTATED)        2000         (PRO FORMA)
                               -------------        ----         -----------      -------------        ----         -----------
<S>                           <C>              <C>              <C>              <C>              <C>              <C>
SALES                            $  8,917         $  8,998         $  8,998         $ 17,254         $ 17,193         $ 17,193

 COST OF SALES,
  BUYING AND OCCUPANCY              7,253            7,153            7,227           14,087           13,647           13,846
                                 --------         --------         --------         --------         --------         --------

GROSS MARGIN                        1,664            1,845            1,771            3,167            3,546            3,347

SELLING, GENERAL AND
  ADMINISTRATIVE                    2,012            1,726            1,759            3,740            3,307            3,398
                                 --------         --------         --------         --------         --------         --------

OPERATING (LOSS) INCOME
  EXCLUDING NON-COMPARABLE
    ITEMS                            (348)             119               12             (573)             239              (51)

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

OPERATING LOSS                   $   (440)        $   (621)        $   (728)        $   (688)        $   (501)        $   (791)
                                 ========         ========         ========         ========         ========         ========

SAME-STORE SALES %                    1.0%             0.7%             0.7%             1.3%             0.3%             0.3%

NET LOSS PER SHARE,
  INCLUDING NON-COMPARABLE
   ITEMS                         $  (0.90)        $  (1.29)        $  (1.51)        $ (1.41)#        $ (1.04)#        $  (1.64)
                                 ========         ========         ========         ========         ========         ========

</TABLE>

         The information set forth below relating to Gross margin; Selling,
general and administrative expenses; and Operating loss compares restated
results for fiscal year 2001 with results, prepared on a pro forma basis giving
effect to the change in accounting method, for the comparable periods in fiscal
year 2000.

         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.

         GROSS MARGIN, decreased $107 to $1,664 for the 13 weeks ended August 1,
2001. Gross margin decreased $180 to $3,167 for the 26 weeks ended August 1,
2001. Gross margin, as a percentage of sales, was 18.7% and 19.7% 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 18.4% and 19.5%. The decrease in Gross margin, as a
percentage of sales, is due primarily to price reductions from our BlueLight
Always campaign, and to increased sales, as a percentage of total sales, of food
and consumables which have a lower margin.

                                       15
<PAGE>
                                KMART CORPORATION
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
                         FINANCIAL CONDITION - CONTINUED
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

         The pro forma effect of the change in accounting on the interim results
for fiscal year 2000 was to increase cost of goods sold by $74 and $199 for the
13 and 26 weeks ended July 26, 2000, respectively, and thereby reduce Gross
margin, as a percentage of sales, from 20.5% to 19.7% for the 13 week period
ended July 26, 2000 and from 20.6% to 19.5% for the 26 week period ended July
26, 2000.

         SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES increased $253 to
$2,012 for the 13 weeks ended August 1, 2001 and increased $342 to $3,740 for
the 26 weeks ended August 1, 2001, respectively. SG&A, as a percentage of sales,
were 22.6% and 19.6% 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 21.7% and 19.8%. The
increase is due primarily to an increase in public liability reserves, an
investment in store labor, an increase in utility expenses, and significant
equity losses from our BlueLight.com subsidiary.

         The pro forma effect of the change in accounting on the interim results
for fiscal year 2000 was to increase SG&A by $33 and $91 for the 13 and 26 weeks
ended August 1, 2001, respectively.

         OPERATING LOSS for the 13 weeks ended August 1, 2001 was $348, or 3.9%
of sales, as compared to operating income of $12, or 0.1% of sales, for the same
period of the prior year. For the 26 week period ended August 1, 2001 operating
loss was $573, or 3.3% of sales, as compared to $51, or 0.3% of sales, for the
comparable period of the previous year.

         The pro forma effect of the change in accounting on the interim results
for fiscal year 2000 was to decrease operating income by $107 to $12 for the 13
weeks ended July 26, 2000, and by $290 to an operating loss of $51 for the 26
weeks ended July 26, 2000.

         NET INTEREST EXPENSE for the 13 weeks ended August 1, 2001 and July 26,
2000 was $88 and $65, respectively. For the 26 week periods ended August 1, 2001
and July 26, 2000 net interest expense was $171 and $134, respectively. Net
interest expense increased as a result of the issuance in January 2001 of $400
of 9.375% Notes due January 2006, the issuance in June 2001 of $430 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 $4,089,
$3,733 and $3,825 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 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 as compared to net cash provided by operating activities of $609
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 $452 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 for the 26 weeks ended
August 1, 2001 compared to $389 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.

                                       16
<PAGE>



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

         Net cash provided by financing activities was $869 for the 26 weeks
ended August 1, 2001 compared to net cash used for financing activities of $231
for the comparable period in 2000. The increase in cash provided was primarily
the result of the issuance of $430 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 and the trust convertible preferred securities
repurchase program initiated in February 2000. We repurchased approximately 22
million shares of common stock at a cost of approximately $55 and $200 in fiscal
years 2000 and 1999, respectively. Under the trust convertible preferred
securities repurchase program, we repurchased approximately 2 million shares of
trust convertible securities at a cost of approximately $84.

         On January 22, 2002 ("Petition Date"), subsequent to the initial filing
of our Quarterly Financial Report for the 13 and 26 weeks ended August 1, 2001,
Kmart and 37 of its U.S. subsidiaries 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"). 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, the evaporation of the surety bond
market and erosion of supplier confidence. Other factors include 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 this time, it is not possible to predict the effect of the Chapter
11 reorganization on our business, various creditors and security holders or
when we will be able to exit Chapter 11. Our future results are dependent upon
our confirming and implementing, on a timely basis, a plan of reorganization. A
more detailed description of the bankruptcy filing and its effect on the Company
is set forth in the Company's Annual Report on Form 10-K for the fiscal year
ended January 30, 2002.

SEASONALITY

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

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 in shares of Kmart common stock and paid $16 in cash for a total
purchase price of $85. In connection with the acquisition, the return of capital
put rights were terminated, the related $62.5 liability was relieved, and the
4.4 million warrants for Kmart common stock issued to SOFTBANK (currently Mobius
Venture Capital) and other investors were cancelled.

                                       17
<PAGE>



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

          As a result of these activities, we recorded a $92 charge ($73
after-tax) this quarter. $41 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 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 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 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. Subsequent
to the initial filing of this Quarterly Report on Form 10-Q, we adopted SFAS No.
144 retroactively to all periods in fiscal year 2001. The charge described
herein was not affected by the adoption of SFAS No. 144.

         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 ($15, 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. The remaining 220 employees were severed
and given post-employment benefits including severance, outplacement services,
continuation of healthcare benefits and other benefits totaling $17. Cash
payments associated with these actions have aggregated $14. An additional $5
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.

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 ($471 after tax) during the second quarter of
2000. $365 of the charge was included in Cost of sales, buying and occupancy in
the Consolidated Statement of Operations and $375 of the charge was included in
Selling, general and administrative expenses in the Consolidated Statement of
Operations.


                                       18
<PAGE>


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

OTHER MATTERS

         OTHER ADJUSTMENTS

         Included in 2001 operating results are adjustments to our asset and
liability accounts that reduced operating results reported in 2001 by $15 in the
first quarter and $21 in the second quarter. These adjustments were recorded
when identified by the Company in the ordinary course of events and
substantially relate to prior years.

         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. Kmart's contingent obligation is dependent on the future
operating results of the guarantees and is subject to settlement under a plan of
reorganization to be voted upon by creditors and equity holders and approved by
the court.

         OTHER

         We are a party to a substantial number of claims, lawsuits, and pending
actions, most of which are routine and all of which are incidental to our
business. Some matters involve claims for large amounts of damages as well as
other relief. The Company assesses the likelihood of potential losses on an
ongoing basis and when they are considered probable and reasonably estimable,
records an estimate of the ultimate outcome. If there is no single point
estimate of loss that is considered more likely than others, an amount
representing the low end of the range of possible outcomes is recorded. Although
the final consequences of these proceedings are not presently determinable, in
the opinion of management, they are not expected to have a material adverse
effect on our liquidity, financial position or results of operations.


                                       19
<PAGE>



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

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 the following:

General Factors
-    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.

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 prosecuted by it from time to time,
-    our ability to develop, prosecute, 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 obtain and maintain normal terms with vendors and service
     providers,
-    our ability to maintain contracts that are critical to our operations,
-    the potential adverse impact of the Chapter 11 cases on our liquidity or
     results of operations, and
-    our ability to fund and execute our business plan.

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

         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 value for their
interests. Because of such possibilities, the value of the common stock is
highly speculative. Accordingly, we urge that appropriate caution be exercised
with respect to existing and future investments in any of these liabilities
and/or securities.



                                       20
<PAGE>


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>
                                 Year When Term of          Votes for                Votes to Withhold
          Nominee                  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>

                                       21


<PAGE>

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 (A) (incorporated by reference to
                         Exhibit 10 to Kmart's Quarterly Report on Form 10-Q for
                         the quarter ended August 1, 2001 filed on August 23,
                         2001)

                         Exhibit 10.1 - Amended and Restated Kmart Corporation
                         Annual Incentive Bonus Plan (A) (incorporated by
                         reference to Exhibit 10.1 to Kmart's Quarterly Report
                         on Form 10-Q for the quarter ended August 1, 2001 filed
                         on August 23, 2001)

                         Exhibit 18 - Preferability Letter from
                         PricewaterhouseCoopers LLP (incorporated by reference
                         to Exhibit 18 to Kmart's Annual Report on Form 10-K for
                         the fiscal year ended January 30, 2002 filed on May 15,
                         2002)

         (A) This document is a management contract or compensation plan.

(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.



                                       22
<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:                    June 12, 2002
                                                        Kmart Corporation
                                              ----------------------------------
                                                           (Registrant)


                                 By:                     /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)









                                       23