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                                                                    EXHIBIT 10.1
                                    [FORM OF]
                           SPECIAL RETENTION AGREEMENT

               This Agreement is entered into as of the 7th day of December,
2001 (the "Effective Date") by and between KMART CORPORATION, a Michigan
corporation (the "Company"), and Janet Kelley (the "Executive");

               WHEREAS, the Executive is currently employed by the Company in
the position of SVP General Counsel; and

               WHEREAS, Executive and the Company have also entered into a
certain letter agreement dated March 2, 2001 providing for severance benefits to
the Executive (the "Severance Letter"); and

                             WHEREAS, the Executive and the Company desire to
enter into this Special Retention Agreement (the "Agreement") providing for
certain new and additional benefits to the Executive in replacement and
substitution of the terms and provisions of the Severance Letter;

               NOW, THEREFORE, the Parties agree as follows:

1. Definitions.

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

               (b) "Cause" shall mean termination of the Executive based on (i)
conduct which is a material violation of Company policy or which is fraudulent
or unlawful or which materially interferes with the ability of the Executive to
perform his duties, (ii) misconduct which results in damage or injury to the
Company, including damage to its reputation, or (iii) gross negligence in the
performance of, or willful failure to perform, the Executive's duties and
responsibilities.

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

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

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

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

               The foregoing to the contrary notwithstanding, if a Potential
Change in Control involves a transaction proposed by the Executive (or a group
which includes the Executive), either as a first proposal or a competing
proposal, and a Change in Control does occur (whether or not the transaction
constituting such Change of Control is the same transaction proposed by the
Executive and whether or not the Executive participates as an equity investor in
the acquiring entity in such transaction), then for purposes of this Agreement,
such Change in Control shall not be deemed to have occurred with respect to the
Executive.

               (d) "Constructive Termination" by the Executive shall mean
               voluntary termination by the Executive of employment based solely
               on and following the occurrence without the Executive's express
               consent of any of the

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               following: (i) a significant diminution by the Company of your
               role with the Company or a significant detrimental change in the
               nature and/or scope of your status with the Company or (ii) a
               reduction in the Executive's base salary unless such reduction is
               as part of an across-the-board salary reduction generally imposed
               on executives of the Company and in the case of (i) or (ii),
               other than for Cause or Disability. A Constructive Termination
               shall not be deemed to have occurred unless the Executive
               complies with the provisions of this paragraph. The Executive
               shall give written notice to Company at least forty-five (45)
               days before the date when he anticipates terminating employment
               stating his intention to terminate his employment on account of a
               Constructive Termination. Such notice shall state in detail the
               particular act or acts or failure or failures to act which
               constitute the grounds on which the proposed Constructive
               Termination is based and such grounds must have occurred within
               six months of the date on of the Executive's notice to the
               Company alleging that such act or acts or failure or failures to
               act constitute constructive termination. The Company shall have
               30 days after the date that such written notice has been given to
               the Company in which to cure such conduct and to avoid a
               constructive termination of the Executive pursuant to this
               Agreement.

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

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

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

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

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

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

               (g) "Target Bonus" shall mean an annual target bonus opportunity
of a percentage of the Executive's then-current Base Salary under the Company's
Annual Incentive Bonus Plan or any successor plan, such percentage to be
established by the Compensation and Incentives Committee of the Board of
Directors, payable if the performance goals established by the Committee for the
relevant year are met.

               2. Executive Loan. (a) As soon as practicable following the
effective date hereof, the Company will provide to the Executive a loan in the
principal amount of five hundred thousand Dollars ($500,000) (the "Loan"). The
Loan shall be due and payable on January 31, 2005 (the "Award Date") and shall
bear interest at the minimum rate necessary on the date the loan is extended to
avoid imputation of tax under Section 7872 of the Internal Revenue Code of 1986,
as amended. The Company and the Executive will enter into a full recourse,
unsecured promissory note with respect to the Loan, in the form attached hereto
as Exhibit A. Interest on the Loan accruing during the term of the Loan shall be
compounded annually and shall be deferred until the Award Date. The outstanding
principal and accrued interest under the Loan shall automatically and without
further action on the part of the Company or the Executive be forgiven in full
by the Company upon the occurrence of any of the following:

               (i) the Executive shall maintain employment with the Company
through the Award Date;

               (ii) the Executive's termination of employment from the Company
prior to the Award Date for any reason other than "Cause" or a voluntary
termination by the Executive;

               (iii) the Executive's death or Disability; or

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               (iv) the Executive's Constructive Termination (all of the
foregoing (i) to (iv) being collectively referred to herein as a "Loan
Forgiveness Event").

               (b) In the event of the Executive's termination of employment
prior to the Award Date under circumstances not constituting a Loan Forgiveness
Event, unpaid principal and accrued interest under the Loan shall be repayable
in full immediately upon such termination in accordance with the terms of the
promissory note. Any cash compensation then owed to the Executive by the
Company, as well as any cash funds or the fair market value of any vested shares
held in any of the Executive's accounts under any of the Company's nonqualified
benefit plans, may be offset against any amounts then owed by the Executive to
the Company with respect to the Loan; provided, however, that in the event there
is any dispute between the Company and the Executive as to whether the Loan is
repayable or shall be forgiven based on the underlying circumstances of
termination, no offset shall be applied by the Company until such dispute has
been finally resolved in accordance with the provisions of Section 8 hereof and
all amounts subject to offset shall be held by the Company pending such
resolution. For purposes of such offset, "fair market value" of the stock shall
be defined as the mean of the highest price and lowest price at which the stock
shall have been sold, regular way, on the date of termination of employment, as
reported on the Composite Transactions reporting system.

               (c) The Executive shall be solely responsible for his personal
tax liability arising as a result of the Loan and any forgiveness of principal
or interest under the Loan. Notwithstanding the foregoing, in the event that the
Internal Revenue Service determines at any time prior to the Award Date that
principal or interest under the Loan should be taken into account as taxable
income by the Executive at the time the Loan was entered into, any resulting
tax, including any resulting state and local taxes (collectively "Associated
Taxes"), and any related interest and penalties, will be either paid by the
Company or advanced to the Executive, at his election, when due. In addition,
the Company shall make additional payments to the Executive to hold him harmless
from: (i) any tax liabilities attributable to its payment of such related
interest and penalties (but not of the Associated Taxes), and (ii) any imputed
income associated with the interest-free component of the Executive's repayment
obligation (the "Hold Harmless Payments"). Should the Company wish to contest
with the IRS the accelerated inclusion of such income or any issue related to
penalties, interest or the Hold Harmless Payments, then the Executive shall
reasonably cooperate with the Company as to such contest, and at the time that
they are then due, the Company shall pay to the IRS (or at his election to the
Executive) the Associated Taxes, and any related interest and penalties, and to
the Executive, the Hold Harmless Payments. Any such Associated Taxes shall be
repaid by the Executive to the Company (without interest), either at the time
the Loan is otherwise repayable by the Executive, or at the time such loan is
forgiven in accordance with this Agreement, whichever is applicable.

               3. Termination of Employment.

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

               (i) the Executive's base salary through the month during which
termination occurred, plus any other amount earned (but not yet paid) at the
time of termination under any bonus plan of the Company; and

               (ii) monthly severance payments equal to the Executive's monthly
base salary at the time of termination which shall commence in the month
following termination and shall continue for [twelve / twenty-four] months;
provided, however, that the Executive agrees to make reasonable efforts to seek
(and to immediately notify the Company of) other employment, and the monthly
severance payments otherwise payable hereunder shall be reduced by compensation
paid or earned from other employment; and

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

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

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

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               (i) the Executive's base salary through the month during which
termination occurred,

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

               (iii) any other amount earned (but not yet paid) at the time of
termination under any other bonus or award plan of the Company;

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

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

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

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

               (i) the Executive's base salary through the month during which
termination occurred,

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

               (iii) any other amount earned (but not yet paid) at the time of
termination under any other bonus or award plan of the Company;

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

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

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

               (d) Termination of Employment Following a Change in Control. If,
               within two years following a Change in Control, the Executive's
               employment is terminated without Cause or there is a Constructive
               Termination, (in either event, a "CIC Termination") the Executive
               shall be entitled to:

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

               (ii) Base Salary, at the monthly rate in effect on the date of
termination of the Executive's employment (or in the event a reduction in Base
Salary is the basis for a Constructive Termination, then the Base Salary in
effect immediately prior to such reduction), payable each month for an
additional thirty six (36) months following such termination (the "Severance
Period");

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

               (iv) an amount equal to one-twelfth (1/12) of the Target Bonus
amount for the year in which termination occurs, payable each month over the
Severance Period;

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

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

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

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

               (ix) continued participation in all medical, dental,
hospitalization and life insurance coverage and in other employee welfare
benefit plans or programs in which he was participating on the date of the
termination of his employment until the end of the Severance Period; provided
that the Company's obligations under this clause (x) shall be reduced to the
extent that the Executive receives similar coverage and benefits under the plans
and programs of a subsequent employer: and provided, further, that (i) if the
Executive is precluded from continuing his participation in any employee benefit
plan or program as provided in this clause, he shall be provided with the
after-tax economic equivalent of the benefits provided under the plan or program
in which he is unable to participate for the period specified in this clause
(x), (ii) the economic equivalent of any benefit foregone shall be deemed to be
the lowest cost that would be incurred by the Executive in obtaining such
benefit himself on an individual basis, and (iii) payment of such after-tax
economic equivalent shall be made quarterly in advance;

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

               provided that all cash payments provided in this Section 3(d)
               shall be paid in a lump sum without any discount and all of such
               payments shall be grossed up to cover applicable federal, state
               and local income and excise taxes thereon, including, without
               limitation, any tax imposed by Section 4999 of the Code or any
               similar tax. In addition, immediately following a CIC
               Termination, all accrued or earned amounts that are not otherwise
               vested shall become fully vested, including without limitation,
               the Executive's accrued benefits under any supplemental
               retirement plan maintained by the Company. All accrued benefits
               under such plans shall be paid as a lump-sum cash payment, except
               for amounts, if any, payable to the Executive under the Company's
               tax qualified pension plan.

               4. Confidentiality, Co-operation and Non-Disparagement. (a)
During the term of employment and at all times thereafter, the Executive agrees
that he will not divulge to anyone or make use of any Confidential Information
except in the performance of the Executive's duties as an executive of the
Company or when legally required to do so (in which case, the Executive shall
give prompt written notice to the Company in order to allow the Company the
opportunity to object to or otherwise resist such disclosure). "Confidential
Information" shall mean any knowledge or information of any type relating to the
business of the Company or any of its subsidiaries or affiliates, as well as any
information obtained from customers, clients or other third parties, including
without limitation, all types of trade secrets and confidential commercial
information. Excluded from the definition of Confidential Information is
information (i) that is or becomes part of the public domain, other than through
the breach of this Agreement by the Executive or (ii) regarding the Company's
business or industry properly acquired by the Executive in the course of his
career as an executive in the Company's industry and independent of the
Executive's employment by the Company.

               (b) During the term of employment and thereafter, Executive shall
not disclose the existence or contents of this Agreement beyond what is
disclosed in the proxy statement or documents filed with the government unless
and to the extent such disclosure is required by law, by a governmental agency,
or in a document required by law to be filed with a governmental agency or in
connection with enforcement of the Executive's rights under this Agreement. In
the event that disclosure is so required, the Executive shall give prompt
written notice to the Company in order to allow the Company the opportunity to
object to or otherwise resist such requirement. This restriction shall not apply
to such disclosure by the Executive to members of his immediate family, the
Executive's tax, legal or financial advisors, any

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lender, or tax authorities, or to potential future employers to the extent
necessary, each of whom shall be advised not to disclose such information.

               (c) The Executive acknowledges that the Company has expended, and
will continue to expend, significant amounts of time, effort and money in the
procurement of its Confidential Information, that the Company has taken all
reasonable steps in protecting the secrecy of the Confidential Information, that
said Confidential Information is of critical importance to the Company and that
a violation of this Section 4 would seriously and irreparably impair and damage
the business of the Company.

                (d) The Executive agrees to cooperate with the Company, during
the term of employment and thereafter (including following the Executive's
termination of employment for any reason), by being reasonably available to
testify on behalf of the Company or any subsidiary or affiliate in any action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
and to assist the Company, or any subsidiary or affiliate, in any such action,
suit or proceeding, by providing information and meeting and consulting with the
Board or its representatives or counsel, or representatives or counsel to the
Company, or any subsidiary or affiliate, as reasonably requested. The Company
agrees to reimburse the Executive for all expenses actually incurred in
connection with his provision of testimony or assistance.

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

               5. Non-Competition.

               (a) During the Restriction Period (as defined in Section 5(c)
below), the Executive shall not engage in Competition with the Company or any
subsidiary or affiliate. "Competition" shall mean engaging in any activity for,
or being otherwise affiliated with, a Competitor of the Company or any
subsidiary or affiliate, whether directly or indirectly, as an employee,
consultant, principal, agent, officer, director, partner, shareholder (except as
a less than one percent shareholder of a publicly traded company) or otherwise.
For purposes of this Section 5, "Competitor" shall mean any and/or all of the
following: (i) Albertson's Inc., American Retail Group, Inc., American Stores
Company, Carrefour se, Fleming Companies, Inc., Kohl's Corporation, The May
Department Store Company, Montgomery Ward & Co., Inc., J.C. Penny Company, Royal
Ahold, Safeway, Inc., Sears, Roebuck and Co., Service Merchandise Company,
ShopKo Stores, Inc., Supervalue Inc., Target Corp., The Home Depot, Inc., Toys R
Us Inc., TJX Companies, Inc., and Wal-Mart Stores, Inc., and (ii) an entity or
enterprise whose business is in competition with the business of the Company
which operates retail stores selling general merchandise and/or food if at least
10 of such stores have an area of 50,000 or more square feet and at least 10 of
such stores with 50,000 or more square feet are within 25 miles of any one or
more Kmart stores.

               (b) In addition to all other remedies provided for hereunder, the
Executive agrees that if the Executive shall violate any of the provisions of
this Section 5, the Company shall be entitled to an accounting and repayment of
all profits, compensation, remuneration or other benefits that the Executive may
realize arising from or related to any such violation. The Parties agree and
acknowledge that the duration, scope and geographic area of the covenant not to
compete described in Section 5(a) are, fair, reasonable and necessary in order
to protect the good will and other legitimate interests of the Company, that
adequate compensation has been received by the Executive for such obligations
and that these obligations do not prevent the Executive from earning a
livelihood. If, however, for any reason any court determines under applicable
law that the provisions in this Section 5 pertaining to duration, scope and
geographic area in relation to non-competition are too broad or otherwise
unreasonable, that the consideration provided for hereunder is inadequate or
that the Executive has been prevented unlawfully from earning a livelihood
(together, such provisions being hereinafter referred to as "Restrictions"),
such Restrictions shall be interpreted, modified or rewritten, and such court is
hereby requested and authorized by the Parties to revise the Restrictions, to
include the maximum Restrictions as are valid and enforceable under applicable
law.

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               (c) For purposes of this Section 5, "Restriction Period" shall
mean the period beginning with the Effective Date and ending with the earlier of
(i) twelve (12) months after the Executive's termination of employment for any
reason and (2) the occurrence of a Change in Control.

               6. Non-Solicitation. During the period beginning with the
Effective Date and ending twelve (12) months following the termination of the
Executive's employment for any reason, the Executive shall not, directly or
indirectly, take or cause any of the following actions: recruit, solicit the
employment or services of, or induce employees of the Company or any subsidiary
or affiliate to terminate their employment, nor shall the Executive solicit or
encourage any of the Company's or any subsidiary's or affiliate's non-retail
customers, or any corporation or other entity in a joint venture relationship
(directly or indirectly) with the Company or any subsidiary or affiliate, to
terminate or diminish their relationship with the Company or any subsidiary or
affiliate or to violate any agreement with any of them.

               7. Remedies. If the Executive breaches any of the provisions
contained in Sections 4, 5 or 6 above, the Company shall have (a) the right to
immediately terminate all payments and benefits due under this Agreement and any
other outstanding compensation, stock awards or stock agreements, between the
Company and the Executive and (b) the right to seek injunctive relief. The
Executive acknowledges that such a breach of Sections 4, 5 or 6 would cause
irreparable injury and that money damages would not provide an adequate remedy
for the Company; provided, however, that the foregoing shall not prevent the
Executive from contesting the issuance of any injunction on the ground that no
violation or threatened violation of Section 4, 5 or 6 has occurred.

               8. Resolution of Disputes. Any controversy or claim of any kind
arising out of or relating to the Executive's employment with the Company, this
Agreement, any breach or asserted breach hereof, or questioning the validity and
binding effect hereof arising under or in connection with this Agreement or any
agreement executed pursuant hereto, other than seeking injunctive relief under
Section 7, including any claim in tort or for violation of any federal, state or
local statue, regulation, or ordinance providing protection against
discrimination, retaliation or interference of any kind, including
discrimination, retaliation or interference on account of race, color,
ethnicity, national origin, age, religion, gender, disability, other protected
characteristics, or protected activities of any kind, shall be resolved by
binding arbitration, by a neutral arbitrator selected from the Employment
Dispute panel of the American Arbitration Association and to be held at an
office closest to the Company's principal offices in accordance with the
Employment rules and procedures of the American Arbitration Association. The
arbitrator selected shall have no authority to modify or add to the terms of the
Agreement, provided however, the arbitrator shall have authority to provide any
other remedy provided by federal, state, or local law should Executive prove
such a claim. The arbitrator's decision shall be final and binding on the
Executive and the Company. Judgement upon the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof. All costs and expenses
of any arbitration or court proceeding (including fees and disbursements of
counsel) shall be borne by the respective party incurring such costs and
expenses, but the Company shall reimburse the Executive for such reasonable
costs and expenses in the event the Executive substantially prevails in such
arbitration or any court proceeding to enforce an award. Notwithstanding the
foregoing, following a Change in Control, all reasonable costs and expenses
(including fees and disbursements of counsel) incurred by the Executive pursuant
to this section 8 shall be paid on behalf of or reimbursed to the Executive
promptly by the Company, provided, however, that no reimbursement shall be made
of such expenses if and to the extent the arbitrator(s) determine(s) that any of
the Executive's litigation assertions or defenses were in bad faith or
frivolous.

               9. Effect of Agreement on Other Benefits. Except as specifically
provided in this Agreement, the existence of this Agreement shall not be
interpreted to preclude, prohibit or restrict the Executive's participation in
any other employee benefit or other plans or programs in which the Executive
currently participates. This Agreement supersedes and replaces in its entirety
the Severance Letter, which is hereby cancelled and rescinded.

               10. Assignability; Binding Nature. This Agreement shall be
binding upon and inure to the benefit of the Parties and their respective
successors, heirs and permitted assigns. No rights or obligations of the
Executive under this Agreement may be assigned or transferred by the Executive
other than the Executive's rights to compensation and benefits, which may be
transferred only by will or operation of law.

               11. Representation. The Company represents and warrants that it
is fully authorized and empowered to enter into this Agreement and that the
performance of its obligations under this Agreement will not violate any
agreement between it and any other person, firm or organization.

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               12. Entire Agreement. This Agreement contains the final and
entire understanding and agreement between the Parties concerning the subject
matter hereof and, as of the Effective Date, supersedes all prior agreements,
understandings, discussions, negotiations and undertakings, whether written or
oral, between the Parties with respect to the subject matter hereof.

               13. Amendment or Waiver. No provision in this Agreement may be
amended unless such amendment is agreed to in writing and signed by the
Executive and an authorized officer of the Company. Except as set forth herein,
no delay or omission to exercise any right, power or remedy accruing to either
Party shall impair any such right, power or remedy or shall be construed to be a
waiver of or an acquiescence to any breach hereof. No waiver by either Party of
any breach by the other Party of any condition or provision contained in this
Agreement to be performed by such other Party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by the Executive or an
authorized officer of the Company, as the case may be.

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

               15. Survivorship. The respective rights and obligations of the
Parties hereunder shall survive any termination of the Executive's employment to
the extent necessary to the intended preservation of such rights and
obligations.

               16. Governing Law/Jurisdiction. This Agreement shall be governed
by and construed and interpreted in accordance with the internal laws of
Michigan without reference to principles of conflicts of laws. Subject to
Section 8, the Company and the Executive hereby consent to the jurisdiction of
any or all of the following courts for purposes of resolving any dispute under
this Agreement: (i) the United States District Court of Detroit, Michigan or
(ii) the State of Michigan Courts of Oakland County, Michigan. The Company and
the Executive further agree that any service of process or notice requirements
in any such proceeding shall be satisfied if the rules of such court relating
thereto have been substantially satisfied. The Company and the Executive hereby
waive, to the fullest extent permitted by applicable law, any objection which it
or the Executive may now or hereafter have to such jurisdiction and any defense
of inconvenient forum.

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

               If to the Company:       Kmart Corporation
                                        3100 West Big Beaver Road
                                        Troy, MI 48084-3163
                                        Attention:  Vice President and Secretary
               If to the Executive:     Janet Kelley
                                        533 Wallace Street
                                        Birmingham, MI  48009

               18. Miscellaneous. The headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement. This Agreement
may be executed in two or more counterparts. The use of masculine pronouns shall
encompass feminine pronouns.

               IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the Effective Date.

                                     KMART CORPORATION
-----------------------------
Executive

                                     By:
                                        ------------------------
                                     Name: David P. Rots
                                           ---------------------
                                     Title: EVP and Chief Administrative Officer

                                       8<PAGE>
                                                                    EXHIBIT 10.2
EMPLOYMENT AGREEMENT

         THIS AGREEMENT, made and entered into as of June 3, 2002 (the
"Effective Date"), by and between Kmart Corporation, a Michigan corporation
(together with its successors and assigns permitted under this Agreement, the
"Company"), and William Underwood (the "Executive").

         WHEREAS, the Company desires to provide for the re-employment of the
Executive on the terms and conditions set forth herein, in the best interest of
the Company and its constituencies;

         WHEREAS, the Executive desires to be re-employed by the Company as
provided herein; and

         WHEREAS, the Executive and the Company desire to enter into this
Agreement to set forth the terms and conditions of the Executive's employment
with the Company;

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

                  1. Definitions.

                           (a)  "Bankruptcy Court" shall mean the United States
                                Bankruptcy Court for the Northern District of
                                Illinois.

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

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

                           (d) "Cause" shall mean (i) the Executive is convicted
of a felony involving moral turpitude or any other felony (other than motor
vehicle-related) and, in the case of such other felony, the Executive is unable
to show that the Executive (A) acted in good faith and in a manner the Executive
reasonably believed to be in the best interests of the Company and (B) had no
reasonable cause to believe the Executive's conduct was unlawful; or (ii) the
Executive engages in conduct that constitutes willful gross neglect or willful
misconduct in carrying out the Executive's duties under this Agreement,
resulting, in either case, in material harm to the Company, unless the Executive
believed in good faith that such act or nonact was in, or was not opposed to,
the best interests of the Company.

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

                           (f) "Constructive Termination" by the Executive shall
mean termination based on the occurrence without the Executive's express written
consent of any of the following: (i) a material diminution or adverse change in
the Executive's responsibilities, duties, authorities or any reduction in title,
other than for Cause or Disability; (ii) a reduction in the Executive's Base
Salary or Target Bonus (as defined in Section 5) other than for Cause or
Disability and other than as part of an across-the-board salary reduction
generally imposed on executives of the Company; (iii) the relocation of the
Company's principal office to a location more than 35 miles from Troy, Michigan;
or (iv) the failure of the Company to obtain the assumption in writing of its
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company on or prior to a merger, consolidation, sale or
similar transaction. The Executive shall further be required to comply with the
provisions of Section 9(d)(i) of this Agreement with respect to a Constructive
Termination.

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

                                       1

<PAGE>
                           (h) "Emergence" shall occur when a plan of
reorganization that is confirmed by the Bankruptcy Court becomes effective or
the Company otherwise emerges from Chapter 11, as a result of which the business
of the Company is maintained on an ongoing basis, whether maintained by the
Company, the debtor in possession or by an entity that has acquired all or
substantially all of the Company's or debtor in possession's assets.

                           (i) "IRS" shall mean the United States Internal
Revenue Service.

                           (j) "KERP" shall mean the Company's Key Employee
Retention Plan, as in effect from time to time, any successor thereto, or such
other emergence bonus program as may be approved by the Bankruptcy Court.

                           (k) "Restructuring Date" shall mean the date on which
any Emergence occurs.

                  2. Term of Employment. Subject to Section 9, the Company
hereby employs the Executive, and the Executive hereby accepts such employment,
for the period commencing on the Effective Date and ending on the second
anniversary thereof (the "Term of Employment"); provided, however, that the Term
of Employment shall be automatically extended for an additional year on each
anniversary of the Effective Date, unless written notice of non-extension is
provided by either Party to the other Party at least 30 days prior to any such
anniversary.

                  3. Position, Duties and Responsibilities.

                           (a) During the Term of Employment, the Executive
shall be employed and serve as the Executive Vice President, Kmart Sourcing &
Global Operations of the Company (or such other position or positions as may be
agreed upon in writing by the Executive and the Company), as directed by the
Board and/or the Chief Executive Officer ("CEO") consistent with such position.
The Executive shall report directly to the CEO. The Executive shall have all
authority commensurate with such position. The Executive shall devote
substantially all of the Executive's business time, attention and skill to the
performance of such duties and responsibilities, and shall use the Executive's
best efforts to promote the interests of the Company. The Executive shall not,
without the prior written approval of the Board, engage in any other business
activity which is in violation of policies established from time to time by the
Company.

                           (b) Anything herein to the contrary notwithstanding,
nothing shall preclude the Executive from (i) serving on the boards of directors
of a reasonable number of other corporations or the boards of a reasonable
number of trade associations and/or charitable organizations (subject to the
reasonable approval of the Board), (ii) engaging in charitable activities and
community affairs, and (iii) managing the Executive's personal investments and
affairs, provided that such activities do not materially interfere with the
proper performance of the Executive's duties and responsibilities as an
executive officer of the Company.

                           (c) The Executive shall perform the services
described herein primarily at the Company's headquarters. To that end, the
Company shall provide the Executive with office space and staff at its
headquarters in Troy, Michigan that are commensurate with the Executive's duties
hereunder.

                  4. Base Salary. During the Term of Employment, the Executive
shall be paid an annualized Base Salary, payable in accordance with the regular
payroll practices of the Company, in the amount of $485,000. The Base Salary
shall be reviewed no less frequently than annually for increase in the
discretion of the Board and/or the Committee. The Base Salary, including any
increase, shall not be decreased during the Term of Employment.

                  5. Annual Incentive Awards. During the Term of Employment, the
Executive shall be eligible for an annual target bonus ("Target Bonus") of 60%
of the Executive's then-current Base Salary under the annual performance bonus
portion of the KERP or, following the Restructuring Date, any other annual
cash-based incentive program of the Company, payable in any case if the
performance goals thereunder for the relevant fiscal year of the Company are
met. Payment of the annual performance bonus shall be made at the same time that
other senior-level executives receive such awards.

                  6. Emergence Bonus; Other Long-Term Incentive Programs. The
Executive shall be entitled to receive an incentive payment with respect to the
Emergence (such payment, the "Emergence Bonus"). The amount of the Emergence
Bonus and any other terms and conditions applicable thereto shall be determined
in connection with the

                                        2
<PAGE>
process during which the Company's plan of reorganization is developed and
finalized. Payment of the Emergence Bonus shall be made at the same time that
other senior-level executives receive their payment. Following Emergence, the
Executive shall participate in such long-term cash- and/or equity-based
incentive programs as the senior executives of the Company may participate from
time to time.

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

                  8. Reimbursement of Business and Other Expenses; Perquisites.

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

                           (b) During the Term of Employment, the Company shall
reimburse the Executive for reasonable personal financial (including tax)
counseling (other than legal fees) by a firm or consultant to be chosen by the
Executive, such reimbursement to be no more than the amount authorized under
Company policy in effect from time to time. The Company shall pay to or
reimburse the Executive up to $5,000 for reasonable legal fees incurred by the
Executive in connection with the negotiation and preparation of this Agreement.

                  9. Termination of Employment.

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

                                    (i)  Base Salary through the date of death;

                                    (ii) a prorated annual bonus for the year in
         which death occurs, based on the actual performance for such year, the
         amount of which prorated bonus, if any, shall be determined and paid
         promptly following the end of the year to which such bonus relates;

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

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

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

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

                                    (i) Base Salary through the date of
         termination;

                                    (ii) benefits to which the Executive is
         entitled pursuant to the Company's long-term disability plans and
         Executive Disability Plan;

                                       3
<PAGE>
                                    (iii) a prorated annual bonus for the year
         in which termination due to Disability occurs, based on the actual
         performance for such year, the amount of which prorated bonus, if any,
         shall be determined and paid promptly following the end of the year to
         which such bonus relates;

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

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

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

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

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

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

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

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

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

                                    (v) a termination for Cause shall not take
         effect unless the provisions of this paragraph (v) are complied with.
         The Executive shall be given written notice by the Board of the
         intention to terminate the Executive for Cause, such notice (A) to
         state in detail the particular act or acts or failure or failures to
         act that constitute the grounds on which the proposed termination for
         Cause is based and (B) to be given within six months of the Board
         learning of such act or acts or failure or failures to act. The
         Executive shall have 10 days after the date that such written notice
         has been given to the Executive in which to cure such conduct, to the
         extent such cure is possible. If the Executive fails to cure such
         conduct, the Executive shall then be entitled to a hearing before the
         Board. Such hearing shall be held within 15 days of notice to the
         Company by the Executive, provided the Executive requests such hearing
         within 10 days of the written notice from the Board of the intention to
         terminate the Executive for Cause. If, within five days following such
         hearing, the Executive is furnished written notice by the Board
         confirming that, the Board has determined, by majority vote at a
         meeting of the Board duly called and held as to which termination of
         the Executive is an agenda item, that grounds for Cause on the basis of
         the original notice exist, the Executive shall thereupon be terminated
         for Cause.

                           (d) Termination Without Cause; Constructive
Termination; Notice of Non-Extension.

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

                                       4
<PAGE>
         have 30 days after the date that such written notice has been given to
         the Company in which to cure such conduct, to the extent such cure is
         possible.

                                    (ii) In the event the Executive's employment
         is terminated (1) by the Company without Cause (other than due to
         Disability or death), (2) by reason of a Constructive Termination or
         (3) upon expiration of the Term of Employment following the Company's
         having given notice of non-extension of the Term of Employment, the
         Executive shall be entitled to:

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

                                             (B) Cash severance payments as set
                  forth below:

                                             (I) if such termination occurs (1)
                           on or prior to April 30, 2003 and prior to the Plan
                           Confirmation Date (as defined below) or (2) following
                           the Plan Confirmation Date (or in contemplation of
                           the Plan Confirmation Date in order to reduce the
                           amounts payable hereunder), promptly but in no event
                           later than 10 days following the effective date of
                           such termination, a cash lump sum payment equal to
                           the sum of (x) 300% of the Executive's Base Salary as
                           in effect immediately prior to the effective date of
                           such termination, plus (y) the Executive's Target
                           Bonus as in effect with respect to the year in which
                           such termination occurs;

                                             (II) if such termination (other
                           than a termination under clause (3) above) occurs
                           following April 30, 2003 but prior to the date (for
                           purposes of this Section 9(d), the "Plan Confirmation
                           Date") on which a confirmed plan of reorganization
                           (other than a Plan of Liquidation (as defined below))
                           is approved by the Bankruptcy Court, then (1)
                           promptly, but in no event later than 10 days,
                           following the effective date of such termination, a
                           cash lump sum payment equal to the sum of (x) the
                           Executive's Base Salary as in effect immediately
                           prior to the effective date of such termination plus
                           (y) the Executive's Target Bonus as in effect with
                           respect to the year in which such termination occurs
                           and (2) promptly, but in no event later than 10 days,
                           following the Plan Confirmation Date, an amount equal
                           to 200% of the Executive's Base Salary as in effect
                           immediately prior to the effective date of such
                           termination. For purposes of this Section 9(d)(ii), a
                           "Plan of Liquidation" means a chapter 11 plan (A)
                           under which less than 50% of the Debtors' operating
                           business continues as a going concern, and (B) which
                           does not result in a discharge of the Debtors under
                           11 U.S.C. ss. 1141; provided, that a "Plan of
                           Liquidation" shall not include any chapter 11 plan
                           that results in a discharge and more than 50% of the
                           Debtors' operating business continuing as a going
                           concern, either through a stand-alone chapter 11
                           plan, one or more sales of assets, an investment from
                           a third party, or any combination of the foregoing;
                           and

                                             (III) if the Executive's employment
                           is terminated under clause (3) above, promptly but in
                           no event later than 10 days following the effective
                           date of such termination, a cash lump sum payment
                           equal to 200% of the Executive's Base Salary as in
                           effect immediately prior to the effective date of
                           such termination;

                                             (C) a prorated annual bonus for the
                  year in which such termination occurs, based on the actual
                  performance for such year, the amount of which prorated bonus,
                  if any, shall be determined and paid promptly following the
                  end of the year to which such bonus relates;

                                       5
<PAGE>
                                             (D) the balance of any annual or
                  long-term cash incentive awards earned (but not yet paid)
                  pursuant to the terms of the applicable programs;

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

                                             (F) continued participation to the
                  extent provided in medical, dental, hospitalization and life
                  insurance coverage and in all other employee welfare plans and
                  programs (other than short-or long-term disability plans) in
                  which the Executive was participating on the date of
                  termination for a period of two years following the effective
                  date of the Executive's termination hereunder; provided, that
                  the Company's obligations under this clause (F) shall be
                  reduced to the extent that the Executive receives similar
                  coverage and benefits under the plans and programs of a
                  subsequent employer: and provided, further, that (x) if the
                  Executive is precluded from continuing the Executive's
                  participation in any employee benefit plan or program as
                  provided in this clause, the Executive shall be provided with
                  the after-tax economic equivalent of the benefits provided
                  under the plan or program in which the Executive is unable to
                  participate for the period specified in this clause (F) of
                  this Section 9(d)(ii), (y) the economic equivalent of any
                  benefit foregone shall be deemed to be the lowest cost that
                  would be incurred by the Executive in obtaining such benefit
                  himself on an individual basis, and (z) payment of such
                  after-tax economic equivalent shall be made quarterly in
                  advance; and

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

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

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

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

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

                           (i) Non-competition. The Executive agrees that any
right to receive any payments and/or benefits hereunder, other than Base Salary
and/or any pension, and/or any other compensation already earned by the
Executive and required to be paid by state law other than under this Agreement,
will cease and be immediately forfeited if the Executive breaches the provisions
of Section 10 below. The Executive agrees that any violation of the provisions
of Section 10 below will result in the immediate forfeiture of any rights to
exercise or receive stock options or restricted stock. The foregoing is in
addition to the rights of the Company under Section 10.

                                       6
<PAGE>
                           (j) Release of Claims. As a condition of the
Executive's entitlement to the payment and/or delivery of any of the severance
rights and benefits provided in this Section 9 (other than in the event of the
Executive's death), the Executive shall be required to execute and honor a
release of claims in the form reasonably requested by the Company.

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

                  10. Restrictive Covenants.

                           (a) Non-Compete. By and in consideration of the
substantial compensation and benefits provided by the Company hereunder, and
further in consideration of the Executive's exposure to the proprietary
information of the Company, the Executive agrees that the Executive shall not,
during the Term of Employment and for a period ending 24 months following
termination of employment for any reason, directly or indirectly own, manage,
operate, join, control, be employed by, or participate in the ownership,
management, operation or control of or be connected in any manner, including,
but not limited to, holding the positions of officer, director, shareholder,
consultant, independent contractor, employee, partner, or investor, with any
Competing Enterprise; provided, however, that the Executive may invest in
stocks, bonds or other securities of any corporation or other entity (but
without participating in the business thereof) if such stocks, bonds, or other
securities are listed for trading on a national securities exchange or
NASDAQ-National Market and the Executive's investment does not exceed 1% of the
issued and outstanding shares of capital stock, or in the case of bonds or other
securities, 1% of the aggregate principal amount thereof issued and outstanding.
For purposes of this Section 11, "Competing Enterprise" shall mean any and/or
all of the following: (i) Albertson's Inc., American Retail Group, Inc.,
Carrefour se, Fleming Companies, Inc., Kohl's Corporation, The May Department
Store Company, J.C. Penny Company, Royal Ahold, Safeway, Inc., Sears, Roebuck
and Co., ShopKo Stores, Inc., Supervalue Inc., Target Corp., The Home Depot,
Inc., Toys R Us Inc., TJX Companies, Inc., and Wal-Mart Stores, Inc., and (ii)
an entity or enterprise whose business is in competition with the business of
the Company which operates retail stores selling general merchandise and/or food
if at least 10 of such stores have an area of 50,000 or more square feet and at
least 10 of such stores with 50,000 or more square feet are within 25 miles of
any one or more Kmart stores.

                           (b) Nonsolicitation. By and in consideration of the
substantial compensation and benefits to be provided by the Company hereunder,
and further in consideration of the Executive's exposure to the proprietary
information of the Company, the Executive agrees that the Executive shall not,
during the Term of Employment and for a period of 24 months following
termination of employment for any reason, without the express prior written
approval of the Company, (i) directly or indirectly, in one or a series of
transactions, recruit, solicit or otherwise induce or influence any proprietor,
partner, stockholder, lender, director, officer, employee, sales agent, joint
venturer, investor, lessor, supplier, agent, representative or any other person
which has a business relationship with the Company, or had a business
relationship with the Company within the 24-month period preceding the date of
the incident in question, to discontinue, reduce or modify such employment,
agency or business relationship with the Company, or (ii) directly or
indirectly, employ or seek to employ (including through any employer of the
Executive) or cause any Competing Enterprise to employ or seek to employ any
person or agent who is then (or was at any time within six months prior to the
date the Executive or the Competing Enterprise employs or seeks to employ such
person) employed or retained by the Company.

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

                                       7
<PAGE>
expended, and will continue to expend, significant amounts of time, effort and
money in the procurement of its Confidential Information, that the Company has
taken all reasonable steps in protecting the secrecy of the Confidential
Information, that said Confidential Information is of critical importance to the
Company.

                           (d) Non-Disparagement. The Parties agree that, during
the term of employment and thereafter (including following the Executive's
termination of employment for any reason), neither Party will not make
statements or representations, or otherwise communicate, directly or indirectly,
in writing, orally, or otherwise, or take any action which may, directly or
indirectly, disparage the other Party or any subsidiary or affiliate thereof or
their respective officers, directors, employees, advisors, businesses or
reputations. Notwithstanding the foregoing, nothing in this Agreement shall
preclude either the Executive or the Company from making truthful statements or
disclosures that are required by applicable law, regulation or legal process.

                           (e) Cooperation. The Executive agrees to cooperate
with the Company, during the term of employment and thereafter (including
following the Executive's termination of employment for any reason), by being
reasonably available to testify on behalf of the Company or any subsidiary or
affiliate in any action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, and to assist the Company, or any subsidiary
or affiliate, in any such action, suit or proceeding, by providing information
and meeting and consulting with the Board or its representatives or counsel, or
representatives or counsel to the Company, or any subsidiary or affiliate, as
reasonably requested. The Company agrees to reimburse the Executive for all
expenses actually incurred in connection with the provision of testimony or
assistance (including attorneys' fees incurred in connection therewith) upon
submission of appropriate documentation to the Company.

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

                           (g) Continuing Operation. The provisions of this
Section 10 shall survive any termination of this Agreement and the Term of
Employment, and the existence of any claim or cause of action by the Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements of this Section.

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

                  11. Indemnification.

                           (a) The Company agrees that if the Executive is made
a party, or is threatened to be made a party, to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that the Executive is or was a director or employee of the
Company or is or was serving at the request of the Company as a director,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether or not the basis of such Proceeding is the Executive's alleged action in
an official capacity while serving as a director, employee or agent, the
Executive shall be indemnified and held harmless by the Company to the fullest
extent legally permitted or authorized by the Company's certificate of
incorporation or bylaws or resolutions of the Company's Board of Directors or,
if greater, by the laws of the State of Michigan against all cost, expense,
liability and loss (including, without limitation, attorney's fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Executive in connection
therewith, and such indemnification shall continue as to the Executive even if
the Executive

                                       8
<PAGE>
has ceased to be a director, employee or agent of the Company or other entity
and shall inure to the benefit of the Executive's heirs, executors and
administrators. The Company shall advance to the Executive all reasonable costs
and expenses incurred by the Executive in connection with a Proceeding within 20
days after receipt by the Company of a written request for such advance. Such
request shall include an undertaking by the Executive to repay the amount of
such advance if it shall ultimately be determined that the Executive is not
entitled to be indemnified against such costs and expenses.

                           (b) Neither the failure of the Company (including its
board of directors, independent legal counsel or stockholders) to have made a
determination prior to the commencement of any Proceeding concerning payment of
amounts claimed by the Executive under Section 11(a) above that indemnification
of the Executive is proper because the Executive has met the applicable standard
of conduct, nor a determination by the Company (including its board of
directors, independent legal counsel or stockholders) that the Executive has not
met such applicable standard of conduct, shall create a presumption that the
Executive has not met the applicable standard of conduct.

         The Company agrees to continue and/or maintain a directors and
         officers' liability insurance policy covering the Executive to the same
         extent the Company provides such coverage for its other executive
         officers and directors and for not less than the amounts in effect for
         its other executive officers and directors.

                  12. Assignability; Binding Nature. This Agreement shall be
binding upon and inure to the benefit of the Parties and their respective
successors, heirs (in the case of the Executive) and assigns. No rights or
obligations of the Company under this Agreement may be assigned or transferred
by the Company except that such rights or obligations may be assigned or
transferred pursuant to a merger or consolidation in which the Company is not
the continuing entity, or the sale or liquidation of all or substantially all of
the assets of the Company, provided that the assignee or transferee is the
successor to all or substantially all of the assets of the Company and such
assignee or transferee assumes the liabilities, obligations and duties of the
Company, as contained in this Agreement, either contractually or as a matter of
law. The Company further agrees that, in the event of a sale or reorganization
transaction as described in the preceding sentence, it shall take whatever
action it legally can in order to cause such assignee or transferee to expressly
assume the liabilities, obligations and duties of the Company hereunder. No
rights or obligations of the Executive under this Agreement may be assigned or
transferred by the Executive other than the Executive's rights to compensation
and benefits, which may be transferred only by will or operation of law, except
as otherwise provided herein.

                  13. Miscellaneous Provisions.

                           (a) This Agreement contains the final and entire
understanding and agreement between the Parties concerning the subject matter
hereof and supersedes all prior representations, agreements, discussions,
negotiations and undertakings, whether written or oral, between the Parties with
respect thereto; provided, however, that this Agreement shall not supersede any
separate written commitments by the Company with respect to indemnification.

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

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

                           (d) The respective rights and obligations of the
Parties hereunder shall survive any termination of the Executive's employment to
the extent necessary to the intended preservation of such rights and
obligations.

                           (e) The Executive shall be entitled, to the extent
permitted under any applicable law, to select and change a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
the Executive's death by giving the Company written notice thereof. In the event
of the Executive's death or a judicial

                                       9
<PAGE>
determination of the Executive's incompetence, reference in this Agreement to
the Executive shall be deemed, where appropriate, to refer to the Executive's
beneficiary, estate or other legal representative.

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

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

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

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

                  15. Resolution of Disputes. Prior to the Restructuring Date,
any disputes arising under or in connection with this Agreement shall be settled
in the Bankruptcy Court. Thereafter, any disputes arising under or in connection
with this Agreement shall be resolved by binding arbitration, to be held in
Detroit, Michigan in accordance with the rules and procedures of the American
Arbitration Association. Judgment upon the award rendered by the arbitrator(s)
may be entered in any court having jurisdiction thereof. All costs and expenses
of any arbitration or court proceeding (including fees and disbursements of
counsel) shall be borne by the respective Party incurring such costs and
expenses, but the Company shall reimburse the Executive for such reasonable
costs and expenses in the event the Executive substantially prevails in such
arbitration or court proceeding. Notwithstanding the foregoing, the Company
shall be entitled to seek equitable relief pursuant to Section 10(f) hereof
without otherwise waiving the right to exclusive arbitration of all other
disputes.

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

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

                  If to the Executive:           William Underwood
                                                 Executive Vice President, Kmart
                                                  Sourcing & Global Operations
                                                 c/o Kmart Corporation
                                                 3100 West Big Beaver Road
                                                 Troy, MI 48084-3163

                  With a copy to:     [_______________]

                                       10
<PAGE>
               IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date first set forth above.
                                KMART CORPORATION

                                By: ____________________________
                                Title:

                                William Underwood

                                       11

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