1981 Stock Option Plan - Kmart Corp.


                                KMART CORPORATION
                             1981 STOCK OPTION PLAN

     1. Purpose. The Kmart Corporation 1981 Stock Option Plan (the "Plan") is
intended as an incentive and to encourage ownership in the Company's Common
stock (the "Stock") by certain key employees of Kmart Corporation (the
"Company") and its Subsidiaries (corporations of which a majority of the stock
is owned directly or indirectly by the Company) in order to increase their
proprietary interest in the Company's success and to assure their continuation
as employees.

     2. Administration. The Plan shall be administered by the Compensation and
Incentives Committee (the "Committee") consisting of not less than two directors
of the Company appointed by its Board of Directors. Members of the Committee
shall serve at the pleasure of, and vacancies occurring in the membership of the
Committee shall be filled through appointment by, the Board of Directors. No
person may be a member of the Committee if he or she has been within one year
prior to his or her appointment to the Committee or at any time during service
on the Committee allocated Stock or granted Stock options or Stock appreciation
rights pursuant to the Plan or any other plan of the Company or any of its
Subsidiaries to the extent such allocation or grant would cause such person to
fail to be "disinterested person" under subsection (c)(2) of Rule 16-b-3 under
the Securities Exchange Act of 1934, as amended, as such Rule may be amended
from time to time ("Rule 16b-3"); provided, however, that membership on the
Committee shall not affect or impair any rights of a member with respect to any
Stock allocated or Stock options or Stock appreciation rights granted to him
when he was not a member of the Committee.

     The Committee shall keep minutes of its meetings. A majority of the
Committee shall constitute a quorum thereof and the acts of a majority of the
members present at any meeting of the Committee at which a quorum is present,
or acts approved in writing by the entire Committee, shall be the acts of the
Committee.

     The Committee may make such rules and regulations and establish such
procedure for the administration of the Plan as it deems appropriate. The
interpretation and application of the Plan or of any term or condition of an
option granted under the Plan or of any rule, regulation or procedure, and any
other matter relating to or necessary to the administration of the Plan, shall
be determined by the Committee, and any such determinations shall be final and
binding upon all persons.

     3. Stock. Shares of Stock to be optioned or issued under the Plan may be
either authorized and unissued shares or issued shares which shall have been
reacquired by the Company, provided that the total amount of Stock on which
options may be granted or which may be issued under the Plan shall not exceed
12,000,000 shares. Such number of shares is subject to adjustment in accordance
with the provisions of Section 6 hereof. No option may be granted under the Plan
to an employee who owns more than five percent (5%) of the Company's outstanding
Stock. In the event that any outstanding option or portion thereof expires or is
terminated for any reason, the shares of Stock allocable to the unexercised
portion of such option may again be subjected to an option or be issued under
the Plan.

     4. Award of Options. The Committee may grant options to purchase Stock to
officers and other key employees of the Company or its Subsidiaries, including
directors who are full time employees. The Committee shall have the discretion,
in accordance with the provisions of the Plan, to determine to whom an option is
granted, the number of shares of Stock optioned and the terms and conditions of
the option. In making such determinations, the Committee shall consider the
position and responsibilities of the employee, the nature and value to the
Company of his services and accomplishments, his present and potential
contribution to the success of the Company, and such other factors as the
Committee may deem relevant.

     Each option granted under the Plan shall be designated by the Committee at
the time of grant as either an incentive stock option (an "Incentive" option) or
a non-qualified stock option (a "Non-Qualified" option). An Incentive option is
intended to meet the requirements of Section 422A of the Internal Revenue Code.
The aggregate Fair Market Value (determined at the time the option is granted)
of the Stock as to which Incentive options granted after 1986 are exercisable
for the first time by the optionee during any calendar year shall not exceed
$100,000 (within the meaning of Section 422A of the Internal Revenue Code).


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     Options granted under the Plan shall be subject to and governed by the
provisions of the Plan and by the terms and conditions set forth in Section 5
hereof and by such other terms and conditions, not inconsistent with the Plan,
as shall be determined by the Committee.

     The date on which an option shall be granted shall be the date that the
optionee, the number or shares of Stock optioned and the terms and conditions of
the option are determined by the Committee, provided, however, that if an option
or any term or condition of an option is rejected or not accepted by an optionee
or if an option is not granted in accordance with the provisions of the Plan,
such option shall be deemed to have not been granted and shall be of no effect.
Each option shall be evidenced by a Stock Option Agreement in such form as the
Committee may from time to time approve.

     5. Terms and Conditions of Options. 
        A. Option Price. In the case of each option granted under the Plan, the
option price shall not be less than the Fair Market Value of the Stock on the
date of grant of such option. (Fair Market Value for purposes of the Plan shall
be deemed to be the mean of the highest price and lowest price at which the
Stock shall have been sold, regular way, on the date in question or on the next
preceding day on which there were such sales of Stock if no such sales shall
have been made on the date in question, as reported on the Composite
Transactions reporting system.)

        B, Period of Option and When Exercisable.
          (i)   An option granted under the Plan may not be exercised after the 
earlier of (a) the date specified by the Committee, which shall he a maximum of 
ten years from date of grant as to an Incentive option and a maximum of ten 
years and two days from date of grant as to a Non-Qualified option, or (b) the 
applicable time limit specified in paragraph (iii) of this Section 5B. Any 
option not exercised within the aforementioned time periods shall automatically 
terminate at the expiration of such period.

          (ii)  An option granted with a maximum exercise period of more than 
two years to an optionee who is less than 63 years of age, may not be exercised
prior to two years from the date of grant, except that this limitation shall be
removed if termination of employment of the optionee results from death or
total and permanent disability as defined in the Company's Retirement Pension
Plan, or in the event of a Change of Control of the Company, or if and to the
extent the Committee may so determine in its discretion. An option granted to an
optionee who is 63 years of age or older, or the maximum exercise period of
which is two years or less, is not subject to the limitation contained in this
paragraph (ii). Change of Control shall be deemed to have occurred if: (a) any
party or group acquires (or obtains the right to acquire) beneficial ownership
of 33% or more of the Company's outstanding Stock, (b) there shall occur a
change in the composition of a majority of the Company's Board of Directors
within any period of three consecutive years which change was not approved by a
majority of the Board of Directors as constituted immediately prior to the
commencement of such three-year period, or (c) the stockholders of the Company
approve an agreement or plan of consolidation or merger under which the Company
would not be the surviving corporation, or approve a transfer or disposition of
all or substantially all of the Company's assets or a plan of complete
liquidation or dissolution of the Company.

          (iii) An option may he exercised by an optionee only while such
optionee is in the employ of the Company or a Subsidiary or within three months
thereafter, and only if any limitation upon the right to exercise such option
under paragraph (ii) of this Section 5B has expired or been removed prior to
termination of employment and exercise is not otherwise precluded hereunder;
provided, however if at the date of termination of employment (other than
termination due to death) the optionee has ten or more years of full-time
service with the Company or a Subsidiary or if termination of employment results
from total and permanent disability as defined in the Company's Employee Pension
Plan, such three-month period shall be extended to three years (except that for
options granted prior to May 27, 1986. The three-month period shall only be
extended in the event of total and permanent disability and then only to twelve
months); and provided further, if termination of employment results from death,
such three-month period shall be extended to twelve months.

          (iv)  In the event of the total and permanent disability of an
optionee as defined in the Company's Employee Pension Plan, an option which is
otherwise exercisable may be exercised by the optionee's legal representative or
guardian. In the event of the death of the optionee, either before or after
termination of employment, an option which is otherwise exercisable may be
exercised by the person or persons whom the optionee shall have designated in
writing on forms prescribed by and filed with the Committee ("Beneficiaries"),
or, if no such designation has been made, by the person or persons to whom the
optionee's rights shall have passed by Will or the laws of descent and
distribution ("Successors"). The Committee may require an indemnity and/or such
evidence or other assurances as it may deem necessary in connection with an
exercise by a legal representative, guardian, Beneficiary or Successor.

          (v)   Notwithstanding anything contained herein to the contrary, all
rights with respect to all options of an optionee are subject to the conditions
that the optionee not engage or have engaged (a) in fraud, 


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dishonesty, conduct in violation of Company policy or similar acts at any time
while in the employ of the Company or a Subsidiary, or (b) in activity directly
or indirectly in competition with any business of the Company or a Subsidiary,
or in other conduct inimical to the best interests of the Company or a
Subsidiary, following the optionee's termination of employment. If it is
determined by the Committee (either before or after termination of employment of
an optionee) that there has been a failure of any such conditions, all options
and all rights with respect to all options granted to such optionee shall
immediately terminate and be null and void.

        C.  Exercise and Payment. Subject to the provisions of Section 5B, an
option may he exercised by notice (in the form prescribed by the Committee) to
the Company specifying the number of shares to be purchased. Payment for the
number of shares of Stock purchased upon the exercise of an option shall be made
in full at the price provided for in the applicable Stock Option Agreement. Such
purchase price shall be paid by the delivery to the Company of cash (including
check or similar draft) in United States dollars or whole shares of Stock, or a
combination thereof. Shares of Stock used in payment of the purchase price shall
be valued at their Fair Market Value as of the date notice of exercise is
received by the Company. Any shares of Stock delivered to the Company shall be
in such form as is acceptable to the Company.

        D.  Successive Options. An Incentive Option granted prior to 1987 shall
not be exercisable while there is outstanding any prior Incentive option granted
to the same optionee.

        E.  Transferability. Except as otherwise determined by the Committee in
its discretion, no option or any rights with respect thereto shall be subject to
any debts or liabilities of an optionee. Options may, however, be transferred or
assigned to charitable trusts, family members, or family trusts by the
optionee's execution of such form and at such time as prescribed by the
Committee. Additionally, any Stock issued to an optionee hereunder may at the
request of the optionee be issued in the name of the optionee and one other
person, as joint tenants with right of survivorship and not as tenants in
common, or in the name of a trust for the benefit of the optionee or for the
benefit of the optionee and others. An option may, after the death or total and
permanent disability as defined in the Company's Employee Pension Plan of an
optionee, also be exercised pursuant to paragraph (iv) of Section 5B herein. In
order to continue to meet the requirements of Code Section 422A, however,
Incentive options may not be assignable or transferable except by will or the
laws of descent and distribution, nor be exercisable during the optionee's
lifetime other than by him or her, nor shall Stock be issued in the name of one
other than the optionee.

        F.  Employment. No provision of the Plan, nor any term or condition of
any option, nor any action taken by the Committee, the Company or a Subsidiary
pursuant to the Plan, shall give or be construed as giving an optionee any right
to be retained in the employ at the Company or any Subsidiary, or affect or
limit in any way the right of the Company or any Subsidiary to terminate the
employment of any optionee.

         G. Termination of Option by Optionee. An optionee may at any time 
elect, in a written notice filed with the Committee, to terminate a
Non-Qualified option with respect to any number of shares as to which such
option shall not have been exercised.

     6.  Recapitalization. The aggregate number of shares of Stock on which
options may be granted or which may be issued under the Plan, the number of
shares covered by each outstanding option, and the price per share in each
option, shall all be proportionately adjusted for any increase or decrease in
the number of issued shares of Stock of the Company resulting from a subdivision
or consolidation of shares or any other capital adjustment, the payment of a
stock dividend, or other increase or decrease in such shares effected without
receipt of consideration by the Company. Subject to any required action by
stockholders, if a new option is substituted (or the option granted hereunder,
or an assumption of the option granted hereunder is made, by reason of a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the option granted hereunder shall pertain to and
apply to the securities to which a holder of the number of shares of Stock
subject to the option would have been entitled.

     7.  Term of Plan. No Stock option shall be granted under the Plan after
August 17, 1991. Options granted prior thereto, however, may extend beyond such
date and the provisions of the Plan shall continue to apply thereto.

     8.  Application of Funds. The proceeds received by the Company from the 
sale of Stock pursuant to options granted under the Plan will be used for
general corporate purposes.

     9.  No Obligation to Exercise Option. The granting or acceptance of an
option shall impose no obligation upon the optionee to exercise such an option.

     10. Rights as a Stockholder. An optionee shall have no rights as a
stockholder with respect to shares of 


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Stock covered by his option until the date of issuance to him of a certificate
evidencing such shares of Stock after the exercise of such option and payment in
full of the purchase price. No adjustment will be made for dividends or other
rights for which the record date is prior to the date such certificate is
issued.

        11. Amendments. The Board of Directors of the Company may from time to
time alter, amend, suspend or discontinue the Plan, except that stockholder
approval is required with respect to any amendment which would (i) increase the
number of shares of Stock on which options may be granted or which may be issued
under the Plan, (ii) materially increase the benefits accruing to optionees
under the Plan, or (iii) materially modify the provisions of the Plan relating
to eligibility to be granted an option.

        The Plan, each option under the Plan and the grant and exercise thereof,
and the obligation of the Company to sell and issue shares under the Plan shall
be subject to all applicable laws, rules, regulations and governmental and
stockholder approvals, and the Committee may make such amendment or modification
thereto as it shall deem necessary to comply with any such laws, rules and
regulations or to obtain any such approvals.

        12. Effectiveness of Plan. The Plan was adopted by the Board of
Directors on August 18, 1981 and became effective on May 25, 1982 upon approval
by stockholders. The Plan was amended by action of the Board of Directors on
Match 25, 1986, which action was approved by stockholders on May 27, 1986. The
Plan was further amended by action of the Board of Directors on July 21, 1987
and September 1, 2000.

        13. Severability. If any provision of the Plan, or any term or condition
of any option granted or Stock Option Agreement or form executed or to be
executed thereunder, or any application thereof to any person or circumstances
is invalid or would result in an Incentive option failing to meet the
requirements of Section 422A of the Internal Revenue Code, such provision, term,
condition or application shall to that extent be void (or, in the discretion of
the Committee, such provision, term or condition may be amended so as to avoid
such invalidity or failure), and shall not affect other provisions, terms or
conditions or applications thereof, and to this extent such provisions, terms
and conditions are severable.




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