EMPLOYMENT AGREEMENT



         THIS AGREEMENT, made and entered into on May 6, 2003, by and between

Kmart Management Corporation, a Michigan corporation (together with its

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

Harold Lueken (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.



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                           (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.



                           (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; or (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. 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 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 May 12, 2003.



                           (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 first 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 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,

General Counsel of the Company and shall have the title of Senior Vice

President, General Counsel of Holding Corp. (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) and be responsible for the management of the legal

function of Holding Corp. and the Company, as directed by the Holding Corp.

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

consistent with such positions. The Executive shall report directly to the CEO.

The Executive shall have all authority commensurate



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with such positions. 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 $450,000. 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.       Make-Whole Payment. The Company shall pay to the

Executive, within 10 days following the Effective Date, a lump sum amount equal

to $25,000 in respect of compensation from the Executive's previous employer

that will be forfeited as a result of the Executive's ceasing to be employed by

his previous employer.



                  6.       Annual Incentive Awards. During the Term of

Employment, the Executive shall be eligible for an annual target bonus ("Target

Bonus") of 61% of his then-current Base Salary under the annual cash-based

incentive program of the Company (or its affiliate, if applicable) payable if

the performance goals thereunder for the relevant fiscal year are met. Payment

of the annual bonus shall be made at the same time that other senior-level

executives receive their incentive awards. The Company agrees that the actual

bonus, if any, earned by the Executive for fiscal year 2003 shall not be subject

to pro-ration by reason of the Executive's not having been employed by the

Company for the entire fiscal year.



                  7.       Long-Term Incentive Programs. The Executive shall

participate in such long-term cash- and/or equity-based incentive programs as

the senior executives of the Company participate from time to time.

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