EXECUTION COPY

                              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.


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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
Restricted Stock shall vest as to 100% of the grant in the event the Executive's
employment is terminated (i) by the Company without Cause (other than due to
Disability or death), (ii) by reason of a Constructive Termination, or (iii)
upon expiration of the Term of Employment following the Company's having given a
notice of non-extension of the Term of Employment.

            6. Annual Incentive Awards. During the Term of Employment, the
Executive shall be eligible for an annual target bonus ("Target Bonus") of 75%
of his then-current Base Salary under the annual cash-based incentive program of
the Company (or its affiliate, if


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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 actual bonus,
if any, earned by the Executive for fiscal year 2003 shall 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. Starting with the three-year
performance period that begins on February 1, 2004, the Executive shall be
eligible to participate in the KMART Long Term Incentive Plan ("LTIP"). While
awards granted under the LTIP are subject to the provisions of the LTIP and the
discretion of the Compensation Committee, the Parties anticipate that such
awards will provide for the payment (in common stock and/or cash) of an amount
equal to the average annual salary and target bonuses paid to the Executive
during a three-year performance period, payable at or about the conclusion of
the third fiscal year in the performance period (commencing, therefore, with a
payment at or about the conclusion of fiscal year 2006), if the Company meets or
exceeds its cumulative EBITDA target for that three-year period.

            8. 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 those made available only to the CEO) or to
its employees generally (on terms consistent, respectively, with those offered
to the Company's other senior-level executives and/or 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.

            9. Reimbursement of Business and Other Expenses: Perquisites;
Vacations.

                  (a) The Executive is authorized to incur reasonable expenses
in carrying out his duties and responsibilities under this Agreement and the
Company shall promptly reimburse him for all reasonable business expenses
incurred in connection with carrying out the business of the Company and its
affiliates, 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.

                  (c) During the Term of Employment, the Executive shall be
entitled to four weeks' paid vacation per year.


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            10. Termination of Employment.

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

                        (i) Base Salary through the date of death;

                        (ii) an amount equal to a prorated annual incentive
      award 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 or its affiliates.

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

                        (i) Base Salary through the date of termination;

                        (ii) through the Company's long-term disability plans or
      otherwise, an amount equal to 60% of the Base Salary for the period
      beginning on the date of termination through the Executive's attainment of
      age 65;

                        (iii) an amount equal to a prorated annual incentive
      award 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 or its affiliates.


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            In no event shall a termination of the Executive's employment for
Disability occur unless the Party terminating his employment gives written
notice to the other Party in accordance with Section 17 below.

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

                        (i) Base Salary through the date of the termination of
      his 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) an amount equal to a prorated annual incentive
      award 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;

                        (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 or programs of the Company or its affiliates;

                        (vi) a termination for Cause shall not take effect
      unless the provisions of this paragraph (vi) are complied with. The
      Executive shall be given written notice by the Holding Corp. Board of the
      intention to terminate him 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 Holding Corp. 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 he fails to cure such conduct, the Executive shall then be
      entitled to a hearing before the Holding Corp. Board. Such hearing shall
      be held within 15 days of notice to the Company by the Executive, provided
      he requests such hearing within 10 days of the written notice from the
      Holding Corp. Board of the intention to terminate his employment for
      Cause. If, within five days following such hearing, the Executive is
      furnished written notice by the Holding Corp. Board confirming that the
      Holding Corp. Board has determined, by majority vote at a meeting of the
      Holding Corp. 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, he shall thereupon be terminated for Cause.

                  (d) Termination Without Cause; Constructive Termination.


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                        (i) A Constructive Termination shall not take effect
      unless the provisions of this paragraph 10(d)(i) are complied with. The
      Company shall be given written notice by the Executive of the intention to
      terminate his 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 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
      a 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) 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 over the remaining months of the Term of
            Employment or 12 months, whichever period is longer (the "Severance
            Period"); provided, however, that the Company's obligations under
            this clause (B) shall be reduced on a dollar-for-dollar basis (but
            not below zero) to the extent that the Executive earns fees, salary
            or wages from a subsequent employer (including those arising from
            self-employment) during the Severance Period;

                              (C) an amount equal to a prorated annual incentive
            award 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;

                              (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;


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                              (F) continued participation during the Severance
            Period in medical, dental, hospitalization and life insurance
            coverage and in all other employee welfare plans and programs (other
            than disability plans and programs) in which he was participating on
            the date of termination; 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 Company determines that the Executive is precluded from
            continuing his participation in any employee benefit plan or program
            as provided in this clause on account of his employment status or
            for any other reason, 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 (F) of this Section 10(d); (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 through payment of COBRA
            continuation coverage premiums or by other means, and (z) payment of
            such after-tax economic equivalent shall be made quarterly in
            advance;

                              (G) all Restricted Stock granted to the Executive
            shall become fully vested and the restrictions thereon, as set forth
            in Section 5, shall lapse; and

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

      The Executive agrees to notify the Company immediately upon subsequent
      employment (including self-employment) so that the Company may determine
      and administer the offsets provided under subparagraphs (B) and (F) of
      this Section 10(d)(ii).

                  (e) Voluntary Termination. In the event of a termination of
employment by the Executive on his 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 10(c) above for a termination for
Cause. A voluntary termination under this Section 10(e) shall be effective upon
30 days' prior written notice to the Company and shall not be deemed a breach of
this Agreement.

                  (f) Mitigation; No Offset. In the event of any termination of
employment under this Section 10, the Executive shall be obligated to seek other
employment. There shall be no offset against amounts due the Executive under
this Agreement on account of any


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remuneration attributable to any subsequent employment that he may obtain except
as specifically provided in this Section 10.

                  (g) Nature of Payments. Any amounts due under this Section 10
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, he shall not be entitled
to any payments or benefits from the Company or its affiliates, other than as
provided herein, or any payments by the Company or its affiliates on account of
any claim by him 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 under any
employee benefit plan of the Company or its affiliates which provides benefits
after termination of employment (as set forth above and incorporated herein).

                  (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 11.
The Executive agrees that any violation of the provisions of Section 11 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 11.

                  (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 10 (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.

            11. 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 and its affiliates, the Executive agrees that he shall not, during the
Term of Employment and for a period ending 12 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


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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 any of their parents and/or
subsidiaries that are engaged in retail operations, and/or (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 and its
affiliates hereunder, and further in consideration of the Executive's exposure
to the proprietary information of the Company and its affiliates, the Executive
agrees that he shall not, during the Term of Employment and for a period of 12
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 any of its
subsidiaries or affiliates, or had a business relationship with the Company or
any of its subsidiaries or affiliates 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 such
subsidiary(ies) or affiliate(s), 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 or any of its subsidiaries or affiliates.

                  (c) Confidential Information. During the Term of Employment
and at all times thereafter, Executive agrees that he will not divulge to anyone
or make use of any Confidential Information except in the performance of his
duties as an executive of Holding Corp. or 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
he will return to the Company, immediately upon termination, any and all
documents, records or reports (including electronic information) that contain
any Confidential


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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 business or industry of the
Company or any of its subsidiaries or affiliates 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. The Executive
acknowledges that the Company and its affiliates have expended, and will
continue to expend, significant amounts of time, effort and money in the
procurement of its Confidential Information, that the Company and its affiliates
have taken all reasonable steps in protecting the secrecy of the Confidential
Information, that said Confidential Information is of critical importance to the
Company and its affiliates.

                  (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): (i) 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,
disparage the Company or any subsidiary or affiliate or their respective
officers, directors, employees, advisors, businesses or reputations; and (ii)
the officers of the Company will not make any 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 Executive.
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 Holding Corp. Board or the Board or their 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 (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 11 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 threat
of said 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


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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 11
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 11(a) or 11(b) continue to bind the Executive, he will
provide written notice of the terms and provisions of this Section 11 to any
prospective employer.

            12. 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 he is or was a director or employee of the Company or any of its
affiliates 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 Board 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 he 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 him
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 he is not entitled to be indemnified against such costs and
expenses.

                  (b) Neither the failure of the Company (including the Board or
the Holding Corp. Board or their respective 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
12(a) above that indemnification of the Executive is proper because he has met
the applicable standard of conduct, nor a determination by the Company
(including the Board or the Holding Corp. Board or their respective 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.


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<PAGE>
            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.

            13. 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 his rights to compensation and benefits, which may be transferred
only by will or operation of law, except as otherwise provided herein.

            14. 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 authorized by the Holding Corp. Board or the Committee and 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.


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<PAGE>
                  (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 determination of his incompetence, reference in
this Agreement to the Executive shall be deemed, where appropriate, to refer to
his 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.

                  (i) Notwithstanding any provision of this Agreement to the
contrary, any action to be taken by the Board shall require the concurrence of
the Holding Corp. Board.

            15. 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 16, 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 in 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.

            16. Resolution of Disputes. Any disputes arising under or in
connection with this Agreement shall be resolved by binding arbitration, to be
held in the metropolitan area of Company headquarters 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 he
substantially prevails in such arbitration or court proceeding. Notwithstanding
the foregoing, the Company shall be entitled to seek equitable relief pursuant
to Section 11(f) hereof in a Court of competent jurisdiction without otherwise
waiving the right to exclusive arbitration of all other disputes.

            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


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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 Management Corporation
                                      3100 West Big Beaver Road
                                      Troy, MI  48084-3163
                                      Attention: Chief Executive Officer

            With a copy to:           James E. Defebaugh, Esquire
                                      Senior Vice President, Deputy General
                                         Counsel & Chief Compliance Officer
                                      Kmart Management Corporation
                                      3100 W. Big Beaver Road
                                      Troy, MI 48084

            If to the Executive:      James Donlon
                                      6935 South Fairways Drive
                                      Clarkston, MI 48348

            With a copy to:           donlonsj@aol.com

            18. Approvals. Except with respect to the Company's obligations
under Section 9(d), the effectiveness of this Agreement shall be subject to the
approval of this Agreement by the Holding Corp. Board. The Company agrees to
seek such approval no later than the first meeting of the Board that takes place
following the Effective Date. Absent such approval by the Holding Corp. Board,
this Agreement shall not be effective except with respect to the Company's
obligations under Section 9(d).

            19. Additional Payments. If any payment or benefit received or to be
received by the Executive (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company or any affiliate) (all
such payments and benefits, excluding the Gross-Up Payment (as hereinafter
defined), being hereinafter called "Total Payments") will be subject (in whole
or part) to any excise tax (the "Excise Tax") imposed under section 4999 of the
Internal Revenue Code of 1986, as amended, then the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment taxes and Excise
Tax upon the Gross-Up Payment, shall be equal to the Total Payments.


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            IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date first set forth above.

                                          KMART MANAGEMENT CORPORATION

                                          By:
                                              ----------------------------------
                                          Title: Chief Executive Officer


                                          --------------------------------------


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Source: OneCLE Business Contracts.