KMART HOLDING CORPORATION



                       9.00% CONVERTIBLE SUBORDINATED NOTE



$1,322,559.00                   Due May 6, 2004                   Troy, Michigan

                                                                    May 6, 2003



                  Unless converted pursuant to Section 5 hereof, Kmart Holding

Corporation, a Delaware corporation (the "Borrower"), hereby unconditionally

promises to pay to the order of ESL Institutional Partners, L.P. ("ESL

Institutional"), a Delaware limited partnership (ESL Institutional, its

successors or assigns, as applicable, "Holder"), in lawful money of the United

States of America and in immediately available funds, the principal amount of

ONE MILLION THREE HUNDRED TWENTY-TWO THOUSAND FIVE HUNDRED FIFTY-NINE AND NO/100

DOLLARS ($1,322,559.00) (the "Loan") on either (a) May 6, 2004, or (b) upon

notice from Holder to Borrower prior to March 6, 2004 of Holder's election to

extend the maturity date of this Note, May 6, 2006 (such applicable date, the

"Maturity Date") (if repayment of the Loan is not permitted on the applicable

maturity date set forth in subclause (a) or (b) of this paragraph under the

Subordination Agreement, then the Loan shall become payable on demand on the

first day permissible under the Subordination Agreement); and to pay interest at

the time, in the form and at the rate set forth herein on the unpaid principal

amount hereof, for the period commencing May 6, 2003 until such principal amount

shall be paid in full. This Convertible Subordinated Note (as amended,

supplemented, extended, restated, renewed, refunded, replaced, refinanced,

increased in amount or otherwise modified, in each case from time to time and

whether in whole or in part, this "Note") evidences the unpaid principal amount

of the Loan together with all accrued and unpaid interest thereon (collectively,

and together with all other amounts payable under this Note, the "Obligations").



                  The Holder agrees to make the Loan on the date hereof subject

to and in accordance with the terms and conditions hereof. All capitalized terms

not otherwise defined herein shall have the meaning given to them in the

Investment Agreement, dated as of January 24, 2003, among Borrower, ESL

Investments, Inc. ("ESL") and the other parties thereto (as amended, restated,

supplemented, modified or waived from time to time, the "Investment Agreement").

This Note is issued to Holder as the designee of ESL in accordance with and

subject to the following terms and conditions:



         1.       INTEREST.



                  (a)      The outstanding principal amount of the Loan shall

accrue interest from the date hereof until all payments hereunder have been

irrevocably paid in full or this Note has been converted as provided in Section

5 hereof at a per annum rate equal at all times to the lesser of (i) the maximum

lawful rate of interest in



{PAGE}



effect at such time under "applicable law" (as defined below), and (ii) nine

percent (9%), compounded semi-annually; provided, however, that in the event the

Borrower fails to repay the principal amount of this Note, or any interest

thereon, when due and such failure to pay continues for five (5) days, then the

interest rate on any amount not paid when due shall be eleven percent (11%),

compounded semi-annually. Interest shall be calculated on the basis of a year of

360 days and shall accrue on the outstanding principal amount of this Note and,

to the extent permitted by law, on any accrued but unpaid interest thereon that

has been compounded until all payments hereunder have been irrevocably paid in

full or the Note has been converted as provided in Section 5. Except as

otherwise provided herein, accrued and unpaid interest hereunder shall, subject

to the terms of the Subordination Agreement, be due and payable semi-annually on

the last Business Day of the months of January and July, with the first such

payment being payable on July 31, 2003.



                  (b)      It is expressly stipulated and agreed to be the

intent of the Holder and the Borrower to, at all times, conform to and contract

in strict compliance with applicable usury laws from time to time in effect. All

agreements between the Holder and the Borrower, including, without limitation,

this Note, are hereby limited by the provisions of this Section 1(b) which shall

override and control all such agreements, whether now existing or hereafter

arising and whether written or oral. In no way, nor in any event or contingency

(including, but not limited to, prepayment, default, demand for payment or

acceleration of maturity), shall the interest taken, reserved, contracted for,

charged, chargeable, received or collected under this Note exceed the maximum

nonusurious amount permitted by applicable law (the "Maximum Amount"). If, from

any possible construction of any agreement, document or instrument (including,

without limitation, this Note), interest would otherwise be payable in excess

of, or is adjudicated to be payable in excess of, the Maximum Amount, any such

construction shall be subject to the provisions of this Section 1(b), and, ipso

facto, such agreement, document or instrument shall be reformed and the interest

payable shall be reduced to the Maximum Amount, without the necessity of

execution of any amendment or new document. If the Holder shall ever receive

anything of value that is characterized as interest under applicable law and

that would apart from this provision be in excess of the Maximum Amount, an

amount equal to the amount that would have been excessive interest shall,

without penalty, be applied first to the reduction of the outstanding principal

amount of this Note, and second to the reduction of any other amounts due and

payable under this Note, and not to the payment of interest, or promptly

refunded to the Borrower or the other payor thereof if and to the extent such

amount that would have been excessive exceeds such unpaid principal amount or

such other amounts. The right to accelerate maturity of this Note or any other

indebtedness does not include the right to accelerate any interest that has not

otherwise accrued on the date of such acceleration, and the Holder does not

intend to take, reserve, contract for, charge, receive or collect any unearned

interest in the event of acceleration. All interest paid or agreed to be paid to

the Holder shall, to the extent permitted by applicable law, be amortized,

prorated, allocated and spread throughout the full stated term (including any

renewal or extension) of the indebtedness to which it relates so that the amount

of interest thereon does not exceed the Maximum Amount. As used in this Section

1(b), the term "applicable law" shall mean the laws of the State of Delaware or

the federal laws of the United States, whichever laws allow the greater

interest, applicable to commercial loans as such laws now exist or may be

changed or amended or come into effect in the future.



         2.       PAYMENTS.



                  (a)      All payments of principal and interest with respect

to this Note shall be made on the due date thereof no later than 3:00 p.m., New

York, New York time, in immediately available funds in lawful money of the

United States of America (without any counterclaim, offset or deduction

whatsoever and free and clear of, and without withholding or deduction for or on

account of, any present or future taxes, levies, imposts, duties, charges or

fees of any nature), to the Holder by wire transfer (and pursuant to specific

instructions to be supplied by the Holder prior to the date of the first such

payment). All payments (including all prepayments) hereunder received by the

Holder shall be applied first to the payment of accrued and unpaid interest

hereunder and only thereafter to the outstanding principal balance of this Note.

Any payment received by the Holder after 3:00 p.m., New York, New York time, on

any day, will be deemed to have been received on the next following "Business

Day" (as hereinafter defined). "Business Day" means any day on which banks are

not authorized to be closed for business in New York, New York.



                  (b)      Holder and any individual or entity ("Person") to

which the Holder sells, assigns, grants a participation in, or otherwise

transfers, part or all of its interest in this Note agree that on the date the

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