EMPLOYMENT AGREEMENT



      THIS AGREEMENT, made and entered into on January 1, 2004, by and between

Kmart Management Corporation, a Michigan corporation (together with its

successors and assigns permitted under this Agreement, the "Company"), and James

Donlon (the "Executive").



      WHEREAS, the Company desires that the Executive become employed by the

Company and provide services to the Company and Holding Corp. (as hereinafter

defined), in the best interest of the Company and its affiliates and

constituencies;



      WHEREAS, the Executive desires to be 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 services 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. The following definitions shall apply to this

Agreement in its entirety.



                  (a) "Base Salary" shall mean the salary granted to the

Executive pursuant to Section 4.



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



                  (c) "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 he (A) acted in good faith and in a manner he reasonably believed to be in

the best interests of the Company and its affiliates and (B) had no reasonable

cause to believe his conduct was unlawful; or (ii) the Executive engages in

conduct that constitutes willful gross neglect or willful misconduct in carrying

out his duties under this Agreement, resulting, in either case, in material harm

to the Company or its affiliates, 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 and its affiliates.



                  (d) "Committee" shall mean the Compensation and Incentives

Committee of the Holding Corp. Board or any other committee of the Holding Corp.

Board performing similar functions.

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                  (e) "Constructive Termination" by the Executive shall mean

termination, during the Term of Employment, 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 6) 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 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; or (iv) the relocation of the

current headquarters of the Company that would require the relocation of the

Executive during the first two years of his employment. The Executive shall

further be required to comply with the provisions of Section 10(d)(i) of this

Agreement with respect to a Constructive Termination.



                  (f) "Disability" shall mean the Executive's inability, with or

without a reasonable accommodation, 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.



                  (g) "Effective Date" shall mean the date on which the

Executive first reports to the Company's headquarters to commence employment

with the Company. The Executive will use his best efforts to commence employment

with the Company as soon as possible, and will commence employment with the

Company by January 1, 2004.



                  (h) "Holding Corp." shall mean Kmart Holding Corporation, a

Delaware corporation and the Company's parent corporation.



                  (i) "Holding Corp. Board" shall mean the board of directors of

Holding Corp.



            2. Term of Employment. Subject to Holding Corp. Board approval as

set forth in Section 18 and subject to termination pursuant to Section 10, the

Company shall employ the Executive, and the Executive hereby accepts such

employment, for the period commencing on the Effective Date and ending on the

third anniversary thereof (the "Term of Employment"); provided, however, that

the Term of Employment shall be automatically extended for additional one-year

periods on each subsequent annual anniversary of the Effective Date, unless

written notice of non-extension is provided by either Party to the other Party

at least 60 days prior to any such anniversary.



            3. Position, Duties and Responsibilities.



                  (a) During the Term of Employment, the Executive shall be

employed by the Company and shall serve as Senior Vice President, Chief

Financial Officer (or such other position or positions as may be agreed upon in

writing by the Executive and Holding Corp. and/or the Company, as applicable).

The Executive shall have all authority commensurate with the position of Senior

Vice President, Chief Financial Officer, subject to the direction of the Holding

Corp. Board, the Board and/or the Chief Executive Officer ("CEO") of the

Company.





2

{PAGE}

The Executive shall report directly to the CEO. The Executive shall devote

substantially all of his business time, attention and skill to the performance

of such duties and responsibilities, and shall use his best efforts to promote

the interests of the Company and its affiliates. The Executive shall not,

without the prior written approval of the Holding Corp. Board, engage in any

other business activity which is in violation of policies established from time

to time by the Company or its affiliates.



                  (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 Holding Corp. Board), (ii) engaging in charitable activities and

community affairs, and (iii) managing his personal investments and affairs,

provided that such activities do not materially interfere with the proper

performance of his duties and responsibilities as an executive officer of

Holding Corp. and the Company.



                  (c) The Executive shall perform his services hereunder

primarily at the Company's headquarters. To that end, the Company shall provide

the Executive with office space and staff at its headquarters that are

commensurate with his 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 $550,000. The Base Salary

shall be reviewed no less frequently than annually for increase in the

discretion of the Holding Corp. Board and/or the Committee. The Base Salary,

including any increase, shall not be decreased during the Term of Employment.



            5. Restricted Stock Equity -Grant. As an inducement material to the

Executive's agreement to enter into employment with the Company, and subject to

the approval of the Committee comprised of a majority of independent directors

or a majority of the Holding Corp.'s independent directors, within 14 days after

the Effective Date, the Executive shall receive a grant of restricted Holding

Corp. stock having a fair market value of $500,000 on the date of grant (the

"Restricted Stock") which Restricted Stock may not be sold, pledged or otherwise

transferred until the Restricted Stock becomes vested, in accordance with the

provisions of this Section 5. The Restricted Stock shall vest as to one-third

(1/3) of such grant at 12:01 a.m. on the date after the end of fiscal year 2004,

as to an additional one-third (1/3) of such grant at 12:01 a.m. on the date

after the end of fiscal year 2005, and as to the final one-third (1/3) of such

grant at 12:01 a.m. on the date after the end of fiscal year 2006, conditioned

upon the Executive's continued employment with the Company as of each vesting

date. Notwithstanding the foregoing, the interest of the Executive in the

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