10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended May 5, 2007

Or

¨ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

Commission file number 000-51217

SEARS HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	20-1920798
(State of Incorporation)	(I.R.S. Employer Identification No.)
3333 Beverly Road, Hoffman Estates, Illinois	60179
(Address of principal executive offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (847) 286-2500

Indicate by check mark whether the Registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and [2] has been subject to such filing requirements for the past 90 days.

Yes    x            No    ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer    x    Accelerated filer    ¨    Non-accelerated filer    ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    ¨            No    x

As of May 25, 2007, the Registrant had 152,492,175 common shares, $0.01 par value, outstanding.

SEARS HOLDINGS CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

13 Weeks Ended May 5, 2007 and April 29, 2006

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income (Unaudited) for the 13 Weeks Ended May 5, 2007 and April 29, 2006	1
	Condensed Consolidated Balance Sheets (Unaudited) as of May 5, 2007, April 29, 2006 and February 3, 2007	2
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 13 Weeks Ended May 5, 2007 and April 29, 2006	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	31
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 6.	Exhibits	E-1

SEARS HOLDINGS CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	13 Weeks Ended
millions, except per share data	May 5, 2007			April 29, 2006
REVENUES
Merchandise sales and services	$	11,702		$	11,998
COSTS AND EXPENSES
Cost of sales, buying and occupancy		8,417			8,665
Selling and administrative		2,634			2,721
Depreciation and amortization		263			289
Gain on sales of assets		(5	)		(17	)
Restructuring charges		—			9
Total costs and expenses		11,309			11,667
Operating income		393			331
Interest and investment income		(40	)		(40	)
Interest expense		73			83
Other income		(6	)		(8	)
Income before income taxes and minority interest		366			296
Income taxes		143			118
Minority interest		7			(2	)
NET INCOME	$	216		$	180
EARNINGS PER COMMON SHARE
Basic earnings per share	$	1.40		$	1.14
Diluted earnings per share	$	1.40		$	1.14
Basic weighted average common shares outstanding		153.8			158.0
Diluted weighted average common shares outstanding		153.9			158.0

See accompanying notes.

1

SEARS HOLDINGS CORPORATION

Condensed Consolidated Balance Sheets

	(Unaudited)
millions, except per share data	May 5, 2007			April 29, 2006			February 3, 2007
ASSETS
Current assets
Cash and cash equivalents	$	3,413		$	3,182		$	3,968
Accounts receivable		814			811			847
Merchandise inventories		10,323			9,581			9,907
Prepaid expenses and other current assets		421			409			372
Deferred income taxes		289			590			312
Total current assets		15,260			14,573			15,406
Property and equipment, net		8,928			9,490			9,132
Goodwill		1,714			1,797			1,692
Tradenames and other intangible assets		3,413			3,453			3,437
Other assets		375			578			399
TOTAL ASSETS	$	29,690		$	29,891		$	30,066
LIABILITIES
Current liabilities
Short-term borrowings	$	98		$	134		$	94
Current portion of long-term debt and capitalized lease obligations		734			215			613
Merchandise payables		3,536			3,634			3,312
Income taxes payable		2			427			359
Other current liabilities		3,430			3,873			3,965
Unearned revenues		1,091			1,053			1,073
Other taxes		537			646			636
Total current liabilities		9,428			9,982			10,052
Long-term debt and capitalized lease obligations		2,669			3,510			2,849
Pension and postretirement benefits		1,486			2,392			1,648
Minority interest and other liabilities		3,196			2,633			2,803
Total Liabilities		16,779			18,517			17,352
SHAREHOLDERS’ EQUITY
Preferred stock, 20 shares authorized; no shares outstanding		—			—			—
Common stock $0.01 par value; 500 shares authorized; 154, 156, and 154 shares outstanding, respectively		2			2			2
Capital in excess of par value		10,402			10,264			10,393
Retained earnings		3,898			2,378			3,688
Treasury stock—at cost		(1,452	)		(1,057	)		(1,437	)
Accumulated other comprehensive income (loss)		61			(213	)		68
Total Shareholders’ Equity		12,911			11,374			12,714
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	29,690		$	29,891		$	30,066

See accompanying notes.

2

SEARS HOLDINGS CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	13 Weeks Ended
millions	May 5, 2007			April 29, 2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	216		$	180
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		263			289
Curtailment gain on Sears Canada’s post-retirement benefit plans		(27	)		—
Loss on total return swaps, net		21			—
Gain on sales of assets		(5	)		(17	)
Change in operating assets and liabilities (net of acquisitions and dispositions):
Deferred income taxes		(90	)		(81	)
Merchandise inventories		(409	)		(517	)
Merchandise payables		220			176
Income and other taxes		(463	)		(123	)
Other operating assets		28			12
Other operating liabilities(1) (2)		(144	)		(265	)
Net cash used in operating activities		(390	)		(346	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired		—			(277	)
Proceeds from sales of property and investments		18			30
Purchases of property and equipment		(113	)		(80	)
Change in collateral on total return swaps, net		15			—
Cash settlements on total return swaps, net		(40	)		—
Net cash used in investing activities		(120	)		(327	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt issuances		—			260
Repayments of long-term debt		(51	)		(385	)
Increase (decrease) in short-term borrowings, primarily 90 days or less		4			(44	)
Purchase of treasury stock		(1	)		(413	)
Net cash used in financing activities		(48	)		(582	)
Effect of exchange rate changes on cash and cash equivalents		3			(3	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(555	)		(1,258	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		3,968			4,440
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,413		$	3,182
SUPPLEMENTAL DISCLOSURE ABOUT NON-CASH INVESTING AND FINANCING ACTIVITIES:
Bankruptcy related settlements resulting in the receipt of treasury stock	$	15		$	—
Supplemental Cash Flow Data:
(1)Income taxes paid		227			232
(2)Cash interest paid		59			58

See accompanying notes.

3

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Sears Holdings Corporation (“Holdings,” “we,” “us,” “our” or the “Company”) is the parent company of Kmart Holding Corporation (“Kmart”) and Sears, Roebuck and Co. (“Sears”). Holdings was formed as a Delaware corporation in 2004 in connection with the merger of Kmart and Sears (the “Merger”), which was completed on March 24, 2005. We are a broadline retailer with approximately 2,300 full-line and 1,100 specialty retail stores in the United States operating through Kmart and Sears and approximately 370 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (“Sears Canada”), a 70%-owned subsidiary.

These interim unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The retail business is seasonal in nature, and we generate a high proportion of our revenues and operating cash flows during the fourth quarter of our fiscal year, which includes the holiday season. These interim financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007. Certain prior period amounts have been reclassified to conform to the current interim period presentation.

NOTE 2 – BORROWINGS

Total borrowings were as follows:

millions	May 5, 2007		April 29, 2006		February 3, 2007
Short-term borrowings:
Unsecured commercial paper	$	98	$	134	$	94
Long-term debt, including current portion:
Notes and debentures outstanding		2,624		2,873		2,662
Capitalized lease obligations		779		852		800
Total borrowings	$	3,501	$	3,859	$	3,556

Credit Agreement

We have a $4.0 billion, five-year credit agreement (the “Credit Agreement”) in place as a potential funding source for general corporate purposes and which includes a $1.5 billion letter of credit sublimit. The Credit Agreement, which has an expiration date of March 2010, is a revolving credit facility under which Sears Roebuck Acceptance Corp. (“SRAC”) and Kmart Corporation are the borrowers. The Credit Agreement is guaranteed by Holdings and certain of our direct and indirect subsidiaries and is secured by a first lien on our domestic inventory, credit card accounts receivable and the proceeds thereof. Availability under the Credit Agreement is determined pursuant to a borrowing base formula, based on domestic inventory levels, subject to certain limitations. As of May 5, 2007, we had $232 million of letters of credit outstanding under the Credit Agreement with $3.8 billion of availability remaining under the Credit Agreement. There were no direct borrowings under the facility during the 13-week period ended May 5, 2007. The Credit Agreement does not contain provisions that would restrict borrowings or letter of credit issuances based on material adverse changes or credit ratings.

4

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Letter of Credit Agreement

We also have a letter of credit agreement (the “LC Agreement”) with a commitment amount of up to $1.0 billion. The LC Agreement, which is renewable annually upon agreement of the parties, is scheduled to renew in July 2007. As of May 5, 2007, there were $685 million of letters of credit outstanding under the LC Agreement.

Cash Collateral

Under the terms of the LC Agreement, we have the ability to post cash, inventory or other letters of credit, including letters of credit issued under the Credit Agreement, as collateral. However, the Credit Agreement prohibits us from using inventory as collateral under the LC Agreement. The cash collateral account is subject to a pledge and security agreement pursuant to which if we elect to post cash collateral, we must maintain cash in an amount equal to 100.5% of the face value of letters of credit outstanding. We had $688 million posted as collateral under the LC Agreement as of May 5, 2007. We continue to classify the cash collateral posted under the terms of the LC Agreement as cash and cash equivalents due to our ability to substitute these letters of credit with letters of credit under the Credit Agreement, which does not require cash collateral, and our ability to provide letters of credit under the Credit Agreement as collateral. There are no provisions in the LC Agreement that would restrict issuances based on credit ratings, but issuances could be restricted under certain circumstances based on a material adverse change.

We also post cash collateral for certain self-insurance programs. We continue to classify the cash collateral posted for self-insurance programs as cash and cash equivalents due to our ability to substitute letters of credit for the cash at any time at our discretion. As of May 5, 2007, we had $32 million posted as collateral for self-insurance programs.

Orchard Supply Hardware LLC (“OSH LLC”) Credit Agreement

In fiscal 2005, OSH LLC entered into a five-year, $130 million senior secured revolving credit facility (the “OSH LLC Facility”), which includes a $25 million letter of credit sublimit. The OSH LLC Facility is available for OSH LLC’s general corporate purposes and is secured by a first lien on substantially all of OSH LLC’s non-real estate assets. Availability under the OSH LLC Facility is determined pursuant to a borrowing base formula based on inventory and accounts and credit card accounts receivable, subject to certain limitations. As of May 5, 2007, there were $10 million in borrowings outstanding under the OSH LLC Facility and $3 million in outstanding letters of credit.

NOTE 3 – DERIVATIVE FINANCIAL INSTRUMENTS

Foreign Currency Forwards

As of May 5, 2007, we had a series of foreign currency forward contracts outstanding with a total Canadian notional value of $1.0 billion and with a weighted-average remaining life of 0.6 years. A total of $950 million in Canadian notional value of these contracts was designated and qualified as hedges of the foreign currency exposure of our net investment in Sears Canada, and the remaining $50 million Canadian notional value are amounts for which hedge accounting has not been applied. The aggregate fair value of the forward contracts as of May 5, 2007, negative $5 million, has been recorded as a liability on our condensed consolidated balance sheet. An offsetting amount of $5 million was recorded as a component of other comprehensive income for those contracts for which hedge accounting was applied, and a nominal loss was recorded in our condensed consolidated income statement as a component of other income for these contracts for which hedge accounting was not applied.

5

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Total Return Swaps

We, from time to time, invest our surplus cash in various securities and financial instruments, including total return swaps, which are derivative contracts that synthetically replicate the economic return characteristics of one or more underlying marketable equity securities. In exchange for receiving the return tied to the position underlying a total return swap, we pay a floating rate of interest tied to LIBOR on the notional amount of the contract. The fair value of a total return swap is based on the quoted market price of the underlying position and changes in fair value of the total return swaps are recognized currently in earnings. During the 13-week period ended May 5, 2007, we recognized $21 million of investment losses related to these total return swaps. As of May 5, 2007, the total return swaps had an aggregate notional amount of $345 million and a fair value of $15 million. The aggregate fair value of the total return swaps has been recorded as a current receivable on our condensed consolidated balance sheet as of May 5, 2007. These investments are highly concentrated and involve substantial risks. Accordingly, our financial position and quarterly and annual results of operations may be positively or negatively materially affected based on the timing, magnitude and performance of these investments.

Under the terms of the transactions with the respective counterparties, we are required to post cash collateral of up to 25 percent of the notional amount of the underlying total return swap position, plus the amount of any unrealized losses on the positions. As of May 5, 2007, the collateral balance held by our counterparties, based on our total return swaps’ aggregate notional amount of $345 million, was $65 million and was recorded as a current receivable on our condensed consolidated balance sheet.

NOTE 4 – INTEREST AND INVESTMENT INCOME

The following table sets forth the components of interest and investment income as reported in our condensed consolidated statements of income. We have reclassified previously reported amounts for interest income and other investment income to conform to current-period presentation.

	13 Weeks Ended
millions	May 5, 2007			April 29, 2006
Interest income on cash and cash equivalents	$	37		$	36
Total return swap losses		(21	)		—
Other investment income		24			4
Total	$	40		$	40

Interest Income on Cash and Cash Equivalents

We recorded interest income of $37 million and $36 million for the 13-week periods ended May 5, 2007 and April 29, 2006, respectively, primarily related to interest earned on cash and cash equivalents. These cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the date of purchase. Our invested cash may include, from time to time, investments in, but not limited to, commercial paper, U.S. federal, state and municipal government securities, floating-rate notes, repurchase agreements and money market funds. All invested cash amounts are readily available to us.

Total Return Swap Income

As discussed in Note 3, we, from time to time, invest our surplus cash in various securities and financial instruments, including total return swaps. We recognized $21 million of pre-tax investment losses related to total

6

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

return swaps for the 13-week period ended May 5, 2007. We did not employ the use of total return swaps during the first quarter of fiscal 2006.

Other Investment Income

Other investment income primarily includes income generated by (and sales of investments in) certain real estate joint ventures and other equity investments in which we do not have a controlling interest. During the 13-week period ended May 5, 2007, other investment income included a $20 million dividend received on our cost method investment in Sears Mexico.

NOTE 5 – BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES

The following reconciles basic weighted average common shares outstanding to diluted weighted average shares outstanding.

	13 Weeks Ended
millions	May 5, 2007	April 29, 2006
Basic weighted average common shares	153.8	158.0
Dilutive effect of stock options	0.1	—
Diluted weighted average common shares	153.9	158.0

NOTE 6 – CLAIMS RESOLUTION AND BANKRUPTCY-RELATED SETTLEMENTS

Claims Resolution

On May 6, 2003, Kmart Corporation (the “Predecessor Company”), a predecessor operating company of Kmart, emerged from reorganization proceedings under Chapter 11 of the federal bankruptcy laws pursuant to the terms of a plan of reorganization (the “Plan of Reorganization”). The Predecessor Company is a direct, wholly owned subsidiary of Kmart and an indirect, wholly owned subsidiary of Holdings.

We have made significant progress in the reconciliation and settlement of various classes of claims associated with the discharge of the Predecessor Company’s liabilities subject to compromise pursuant to the Plan of Reorganization. Differences between claim amounts filed and our estimates are being investigated and resolved through the claims resolution process. Since June 30, 2003, the first distribution date established in the Plan of Reorganization, approximately 29.7 million shares of the 31.9 million shares set aside for distribution have been distributed to holders of Class 5 claims, and approximately $7 million and $4 million in cash has been distributed to the holders of Class 6 and to the holders of Class 7 claims, respectively. Further, we pro-rated approximately $5 million from the settlement that the Creditor Trust received to holders of class 4, 5, 6, 8, 10 and 11 claims. As we were unable to determine the ultimate amount of allowed claims until the claims resolution process was largely completed, a distribution reserve for Class 5 claim settlements was established. At February 3, 2007, our distribution reserve for Class 5 claim settlements was 5 percent of the total shares expected to be distributed. Based on the Class 5 claims resolved to date, we believe that the ultimate amount of the allowed Class 5 claims will be less than the $4.3 billion provided for in the Plan of Reorganization. As such, the Class 5 distribution reserve of 5 percent was distributed to the allowed Class 5 creditors during the quarter ended May 5, 2007. The remaining shares left over after all Class 5 claims are ultimately settled will be distributed to the Class 5 creditors in proportion to their allowed claims.

7

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Bankruptcy-Related Settlements

We recognized recoveries of $6 million for the 13-week period ended May 5, 2007, from vendors who had received cash payments for pre-petition obligations (critical vendor claims) or preference payments. In conjunction with these recoveries and other bankruptcy settlements entered into this quarter, we were assigned 39,265 shares of common stock (weighted average price of $186.17 per share) with an approximate value of $8 million. Furthermore, we received an additional 74,348 common shares this quarter for bankruptcy settlements entered into in previous periods from the distribution of the Class 5 distribution reserve described above. The transactions are recorded at the market value of the common shares at the time of the settlement agreement (weighted average price of $97.96) for a total of $7 million.

NOTE 7 – SHAREHOLDERS’ EQUITY

Share Repurchase Program

During the first quarter of 2007, we did not repurchase any shares of our common stock through our share repurchase program, although we received 113,613 shares of our common stock during the quarter in connection with bankruptcy-related settlements and acquired 7,002 shares of our common stock from associates to meet withholding tax requirements from the vesting of restricted stock. As of May 5, 2007, we had remaining authorization to repurchase $604 million of common shares under our existing share repurchase program approved by our Board of Directors. The repurchase program has no stated expiration date and the remaining shares may be purchased in the open market, through self-tender offers or through privately negotiated transactions.

Comprehensive Income and Accumulated Other Comprehensive Income (Loss)

The following table shows the computation of comprehensive income:

	13 Weeks Ended
millions	May 5, 2007			April 29, 2006
Net income	$	216		$	180
Other comprehensive loss:
Pension liability adjustment		16			—
Foreign currency translation adjustments		(24	)		(8	)
Total other comprehensive loss		(8	)		(8	)
Total comprehensive income	$	208		$	172

The following table displays the components of accumulated other comprehensive income (loss):

millions	May 5, 2007			April 29, 2006			February 3, 2007
Currency translation adjustments	$	(17	)	$	(26	)	$	6
Minimum pension liability, net of tax		—			(187	)		—
Pension and postretirement adjustments, net of tax		78			—			62
Accumulated other comprehensive income (loss)	$	61		$	(213	)	$	68

8

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NOTE 8 – BENEFIT PLANS

Pension and Postretirement Benefit Plans

We provide benefits to certain associates who are eligible under various defined benefit pension plans, contributory defined benefit pension plans and other post-retirement plans, primarily retiree medical benefits. The following table summarizes the components of total net periodic benefit expense for our retirement plans:

	13 Weeks Ended
millions	May 5, 2007			April 29, 2006
Components of net periodic expense:
Benefits earned during the period	$	3		$	11
Interest costs		95			108
Expected return on plan assets		(96	)		(107	)
Net periodic expense	$	2		$	12

Sears Canada Curtailment Gain

In February 2007, Sears Canada announced amendments to its post-retirement programs including the introduction of a defined contribution component to its pension plan and the discontinuation of retiree medical, dental and life benefits for those Sears Canada associates who will not have achieved eligibility for such benefits by December 31, 2008. The amendments to the post-retirement programs generated a curtailment gain and reduction to the benefit plan obligation in the amount of $27 million during the 13-week period ended May 5, 2007.

Contributions

During the 13-week period ended May 5, 2007, we made total contributions of $78 million to our domestic pension plans. We expect to make contributions of $115 million over the remainder of fiscal 2007.

NOTE 9 – INCOME TAXES

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the financial reporting and tax basis of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of or all of the deferred tax asset will not be realized.

Effective at the beginning of fiscal 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainties in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”). The impact upon adoption was to decrease retained earnings by $6 million and to increase our accruals for uncertain tax positions by a corresponding amount. In accordance with FIN 48, we increased goodwill and accruals for uncertain tax positions by $13 million to reflect the measurement of uncertain tax positions associated with previous business acquisitions, and increased capital in excess of par value and decreased accruals for uncertain tax positions by $2 million to reflect measurement of an uncertain tax position related to Predecessor Company pre-petition income tax liabilities. In accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code,” resolution of these matters results in a direct credit to capital in excess of par value within shareholders’ equity.

9

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

After implementation of FIN No. 48, we had gross unrecognized tax benefits of $408 million. Of this amount, $89 million would, if recognized, affect our effective tax rate, with the remaining amount being comprised of unrecognized tax benefits related to gross temporary differences and prior business combinations or any other indirect tax benefits. We expect that our unrecognized tax benefits could decrease in the range of $0 million to $81 million over the next 12 months for federal and state tax positions related to prior business dispositions due to both the expiration of the statute of limitations for certain jurisdictions as well as expected settlements.

Interest and penalties associated with uncertain tax positions are recognized as components of the provision for income tax expense. Our accrual for interest was $95 million upon adoption of FIN 48.

We file income tax returns in both the United States and various foreign jurisdictions. The Internal Revenue Service (“IRS”) has recently commenced an audit of the Holdings federal income tax return for the fiscal year 2005 and the Sears federal income tax returns for the fiscal years 2004 and 2005 through the date of Merger. The IRS has completed its examination of the Sears federal income tax returns for the fiscal years 2002 and 2003, and we are working with the IRS to resolve certain matters arising from this exam. In addition, Holdings and Sears are subject to various state, local and foreign income tax examinations for the fiscal years 2001—2005 and Kmart is subject to such examinations for the fiscal years 2003—2005.

In connection with the Merger, deferred tax assets of $350 million were recorded related to state net operating losses (“NOLs”) of Sears. A valuation allowance of $330 million was recorded with respect to this deferred tax asset. As a result, we recognized a net deferred tax asset of $20 million in conjunction with the purchase price allocation related to the Merger. During fiscal 2006, we recorded an additional $2 million valuation allowance with respect to the deferred tax asset and decreased the NOL deferred tax asset by $3 million, resulting in a NOL deferred tax asset of $347 million and a valuation allowance of $332 million at the end of fiscal 2006. In the first quarter of fiscal 2007, we decreased our NOL deferred tax asset by $205 million and decreased our valuation allowance by a corresponding amount due to the implementation of FIN 48. As a result, we have a NOL deferred tax asset of $142 million and a valuation allowance of $127 million at the end of the first quarter of fiscal 2007. We will continue to assess the likelihood of realization of these state deferred tax assets and will reduce the valuation allowance on such assets in the future if it becomes more likely than not that the net deferred tax assets will be utilized. To the extent that these valuation allowances are reversed in the future, such effects would be recorded as a decrease to goodwill.

10

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NOTE 10 – SUMMARY OF SEGMENT DATA

We have three reportable segments: Kmart, Sears Domestic and Sears Canada. Sears Canada’s results are reported to us on a one-month lag. Therefore, the results of operations for the 13-week periods ended May 5, 2007 and April 29, 2006 include operating results for Sears Canada for the periods from December 31, 2006 to March 31, 2007 and January 1, 2006 to April 1, 2006, respectively.

	For the 13 Weeks Ended
	May 5, 2007
millions	Kmart			Sears					Sears Holdings
				Domestic		Canada
Merchandise sales and services	$	4,015		$	6,660	$	1,027		$	11,702
Cost and expenses
Cost of sales, buying and occupancy		3,055			4,629		733			8,417
Selling and administrative		840			1,578		216			2,634
Depreciation and amortization		26			206		31			263
(Gain) loss on sales of assets		(1	)		1		(5	)		(5	)
Total costs and expenses		3,920			6,414		975			11,309
Operating income	$	95		$	246	$	52		$	393
Total assets	$	7,511		$	19,337	$	2,842		$	29,690

	For the 13 Weeks Ended
	April 29, 2006
millions	Kmart			Sears					Sears Holdings
				Domestic		Canada
Merchandise sales and services	$	4,254		$	6,697	$	1,047		$	11,998
Cost and expenses
Cost of sales, buying and occupancy		3,241			4,661		763			8,665
Selling and administrative		855			1,620		246			2,721
Depreciation and amortization		15			240		34			289
Gain on sales of assets		(17	)		—		—			(17	)
Restructuring charges		4			—		5			9
Total costs and expenses		4,098			6,521		1,048			11,667
Operating income (loss)	$	156		$	176	$	(1	)	$	331
Total assets	$	7,126		$	19,752	$	3,013		$	29,891

11

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NOTE 11 – SUPPLEMENTAL FINANCIAL INFORMATION

Other current liabilities as of May 5, 2007, April 29, 2006 and February 3, 2007 consisted of the following:

millions	May 5, 2007		April 29, 2006		February 3, 2007
Payroll and benefits payable	$	362	$	345	$	535
Outstanding checks in excess of funds on deposit		310		409		353
Current portion of self-insurance reserves		357		466		370
Accrued expenses		1,110		1,358		1,256
Other		1,291		1,295		1,451
Total	$	3,430	$	3,873	$	3,965

Minority interest and other liabilities as of May 5, 2007, April 29, 2006 and February 3, 2007 consisted of the following:

millions	May 5, 2007		April 29, 2006		February 3, 2007
Unearned revenues	$	931	$	897	$	928
Self-insurance reserves		807		675		772
Minority interest		199		260		169
Other		1,259		801		934
Total	$	3,196	$	2,633	$	2,803

NOTE 12 – LEGAL PROCEEDINGS

Pending against Sears and certain of its officers and directors are a number of lawsuits, described below, that relate to Sears’ former credit card business and public statements about it. We believe that all of these claims lack merit and, except as noted below, are defending against them vigorously.

• In re: Sears, Roebuck and Co. ERISA Litigation—On and after November 15, 2002, several actions were filed in the United States District Court for the Northern District of Illinois against Sears, certain officers and directors, and alleged fiduciaries of Sears’ 401(k) Savings Plan (the “Plan”), seeking damages and equitable relief under the Employee Retirement Income Security Act of 1974 (“ERISA”). The plaintiffs purport to represent participants in the Plan, and allege breaches of fiduciary duties under ERISA in connection with the Plan’s investment in Sears’ common shares and alleged communications made to Plan participants regarding Sears’ financial condition. The Court has consolidated these actions and certified the consolidated action as a class action. Pursuant to an agreement dated February 13, 2007, defendants agreed to settle the matter. We expect that the Court will enter an Order and Final Judgment as to the consolidated action with Sears’ final payment due to plaintiffs shortly thereafter. In agreeing to the settlement, defendants did not admit any wrongdoing and denied committing any violation of law. Defendants agreed to the settlement solely to eliminate the uncertainties, burden and expense of further protracted litigation. The settlement is not expected to have a material adverse effect on annual results of operations, financial position, liquidity or capital resources of the Company.

• Marilyn Clark, derivatively on behalf of Sears, Roebuck and Co. v. Alan J. Lacy, et al.—On October 23, 2002, a purported derivative suit was filed in the Supreme Court of the State of New York

12

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

(the “New York Court”) against Sears (as a nominal defendant) and certain current and former directors seeking damages on behalf of Sears. The complaint purports to allege a breach of fiduciary duty by the directors with respect to Sears’ management of its credit business. Two similar suits were subsequently filed in the Circuit Court of Cook County, Illinois (the “Illinois State Court”), and a third was filed in the United States District Court for the Northern District of Illinois. The New York Court derivative suit was dismissed on June 21, 2004. A New York appellate court affirmed the dismissal on December 6, 2005, and the time for further appeal has expired. The two Illinois State Court derivative suits were dismissed on September 30, 2004. The order of dismissal became final on December 1, 2004, and the time to appeal has expired. The defendant directors filed a motion to dismiss the Illinois federal court action on May 22, 2006. In lieu of a response, plaintiffs filed an amended complaint seeking to correct various procedural deficiencies in their original pleading and adding Sears Holdings Corporation as a defendant. Defendants’ response to the amended complaint is due on June 18, 2007.

• Thomas G. Ong for Thomas G. Ong IRA, et al. v. Sears, Roebuck & Co., et al.—On June 17, 2003, an action was filed in the United States District Court for the Northern District of Illinois against Sears and certain officers, purportedly on behalf of a class of all persons who, between June 21, 2002 and October 17, 2002, purchased the 7% notes that SRAC issued on June 21, 2002. Pursuant to a subsequently filed amended complaint, plaintiffs named as additional defendants certain former Sears officers not originally named, SRAC and several investment banking firms which had acted as underwriters for SRAC’s March 18, May 21 and June 21, 2002 notes offerings. The complaint purports to allege violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and, as against the individual defendants, violations of §20(a) of the Exchange Act. The complaint purports to allege that defendants made a number of false and misleading statements in one or more prospectuses for debt securities offerings and in SEC filings and other public statements, concerning the adequacy of reserves for uncollectible accounts, and the condition of Sears’ former credit business, among other things. Plaintiffs filed and then withdrew a motion for class certification. Plaintiffs’ renewed motion for class certification is due on June 22, 2007. Discovery is underway.

Following the announcement of the Merger on November 17, 2004, several actions have been filed relating to the transaction. These lawsuits are in their preliminary stages, and defendants have not yet been required to respond to certain of the complaints. We believe that all of these claims lack merit and intend to defend against them vigorously.

• William Fischer, individually and on behalf of all others similarly situated v. Sears, Roebuck and Co., et al.—Three actions were filed and then consolidated in the Circuit Court of Cook County, Illinois. These actions assert claims on behalf of a purported class of Sears’ stockholders against Sears and certain of its officers and directors, together with Kmart, Edward S. Lampert, William C. Crowley and other affiliated entities, alleging breach of fiduciary duty in connection with the Merger and seeking damages. The plaintiffs allege that the Merger favors interested defendants by awarding them disproportionate benefits, and that the defendants failed to take appropriate steps to maximize the value of a merger transaction for Sears’ stockholders. On September 7, 2006, plaintiffs filed a notice of appeal of the court’s August 8, 2006 order dismissing plaintiffs’ amended complaint. Briefing on the appeal has been completed. The case has not been set for oral argument.

• Maurice Levie, individually and on behalf of all others similarly situated v. Sears, Roebuck & Co., et al.—One action has been filed in the United States District Court for the Northern District of Illinois. This action asserts claims under the federal securities laws on behalf of a purported class of Sears’ stockholders against Sears and Alan J. Lacy, for allegedly failing to make timely disclosure of merger

13

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

discussions with Kmart during the period September 9 through November 16, 2004, and seeks damages. The court appointed a lead plaintiff and lead counsel, and an amended complaint was filed on March 11, 2005. The amended complaint names Edward S. Lampert and ESL Partners, L.P. as additional defendants, and purports to assert claims on behalf of sellers of Sears stock during the period September 9 through November 16, 2004. The defendants have answered the amended complaint. On October 2, 2006, plaintiffs filed their motion for class certification, the briefing on which has been completed. Meanwhile, the parties have commenced written discovery.

Effective May 11, 2005, Sears terminated for cause its Master Services Agreement (the “Agreement”) with Computer Sciences Corporation (“CSC”). CSC had been providing information technology infrastructure support services, including desktops, servers, and systems to support Sears-related websites, voice and data networks and decision support technology to Sears and its subsidiaries under the 10-year Agreement entered into in June 2004. CSC disputes Sears’ assertion that grounds for termination for cause existed and claims that, as a result of terminating this Agreement, Sears is liable to CSC for damages. On December 12, 2006, both Sears and CSC filed separate Statements of Claim and Demands for Arbitration with the American Arbitration Association seeking to resolve their dispute. The arbitration panel has been selected and has set the matter for a bifurcated hearing, the first phase of which is set to commence on October 15, 2007. Meanwhile, the parties have commenced written discovery.

In Capital Factors v. Kmart Corporation, the United States District Court for the Northern District of Illinois ruled that the Bankruptcy Court did not have the authority to authorize the payment of pre-petition claims of certain trade vendors by the Company. An appeal of the ruling and subsequent motions for rehearing were denied. In order to satisfy its fiduciary responsibility to pursue claims against the critical vendors during the pendency of the appeal, in January 2004 the Company filed suit against a total of 1,189 vendors that received these payments seeking to recover in excess of $174 million paid to the critical vendors. To date, Kmart has settled approximately 1,120 critical vendor claims for a total recovery the Company values at approximately $80 million.

As previously reported in Kmart’s Annual Report on Form 10-K for its fiscal year ended January 26, 2005, the staff of the Securities and Exchange Commission has been investigating, and the U.S. Attorney for the Eastern District of Michigan has undertaken an inquiry into, the manner in which Kmart recorded vendor allowances before a change in accounting principles at the end of fiscal 2001 and the disclosure of certain events bearing on the Predecessor Company’s liquidity in the fall of 2001. Kmart has cooperated with the SEC and the U.S. Attorney’s office with respect to these matters, which are ongoing.

On August 23, 2005, the SEC filed a complaint in the United States District Court for the Eastern District of Michigan against the Predecessor Company’s former chief executive officer and its former chief financial officer alleging that they misled investors about the Predecessor Company’s liquidity and related matters in the months preceding its bankruptcy in violation of federal securities law. The complaint seeks permanent injunctions, disgorgement with interest, civil penalties and officer and director bars. Kmart is not named as a defendant in the action. In its press release announcing the filing of the complaint, the SEC stated that its Kmart investigation is continuing.

In re: Sears Holdings Corporation Securities Litigation—In May and July 2006, two putative class action lawsuits, which each name as defendants Sears Holdings Corporation and Edward Lampert, were filed in United States District Court for the Southern District of New York, purportedly on behalf of a class of persons that sold shares of Kmart Holding Corporation stock on or after May 6, 2003 through June 4, 2004. The plaintiffs in each

14

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

case allege that Kmart’s Plan of Reorganization and Disclosure Statement filed on January 24, 2003 and amended on February 25, 2003 misrepresented Kmart’s assets, particularly its real estate holdings, as evidenced by the prices at which Kmart subsequently sold certain of its stores in June 2004 to Home Depot and Sears. The plaintiffs seek damages for alleged misrepresentations. On December 19, 2006, the Court consolidated the actions. Plaintiffs have filed their consolidated complaint and Sears’ response is due on July 20, 2007.

AIG Annuity Insurance Company, et al. v. Sears, Roebuck and Co.—On October 12, 2004, an action was filed against Sears in the District Court, 192nd Judicial District, Dallas County, Texas by several holders of certain bonds issued by Sears from 1991 through 1993. Plaintiffs purport to allege under theories of breach of contract and misrepresentation, that Sears prematurely redeemed the bonds in 2004 following Sears’ sale of the credit business in 2003. On February 2, 2007, a jury in the case reached a verdict against Sears and the Court subsequently awarded plaintiffs $61,453,826 plus post-judgment interest. Plaintiffs have filed a motion for pre-judgment interest and Sears has filed a motion for a new trial, both of which are set for ruling on June 5, 2007.

We are subject to various other legal and governmental proceedings, many involving litigation incidental to our businesses. Some matters contain class action allegations, employment claims, environmental and asbestos exposure allegations and other consumer-based claims, each of which may seek compensatory, punitive or treble damage claims (potentially in large amounts) or as well as other types of relief. In addition, certain of these proceedings are in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. In accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” we accrue an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated and we do not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. Because litigation outcomes are inherently unpredictable, these assessments often involve a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. While the consequences of certain unresolved proceedings are not presently determinable, an adverse outcome from certain matters could have a material adverse effect on our earnings in any given reporting period. However, in the opinion of our management after consulting with legal counsel, and taking into account insurance and reserves, the ultimate liability is not expected to have a material adverse effect on our financial position, liquidity or capital resources.

During the first quarter of fiscal 2007, we recorded a $30 million legal settlement gain received in relation to a contract dispute. We have recorded the $30 million gain as a reduction to selling and administrative expense in the condensed consolidated statement of income for the 13 weeks ended May 5, 2007.

NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted the provisions of FIN 48 effective February 4, 2007. The impact upon adoption was to decrease our beginning retained earnings by approximately $6 million. See Note 9 for further information regarding the impact of adopting FIN 48.

15

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2008. We are currently evaluating the impact, if any, the adoption of SFAS No. 157 will have on our financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans,” which changes the recognition and disclosure provisions and measurement date requirements for an employer’s accounting for defined benefit pension and other postretirement plans. The recognition and disclosure provisions require an employer to (1) recognize the funded status of a benefit plan—measured as the difference between plan assets at fair value and the benefit obligation—in its statement of financial position, (2) recognize as a component of other comprehensive income (OCI), net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, and (3) disclose in the notes to financial statements certain additional information. SFAS No. 158 does not change the amounts recognized in the income statement as net periodic benefit cost. As required by SFAS No. 158, we adopted the recognition and disclosure provisions of the Statement as of February 3, 2007, and accordingly recognized the funded status of our defined benefit pension and other postretirement plans and provided the required additional disclosures. The adoption of these provisions of SFAS No. 158 did not have any material impact on our consolidated results of operations or cash flows.

As required under the Statement, we will adopt the measurement-date requirements of SFAS No. 158 effective fiscal 2008. Under the measurement-date requirements, an employer is required to measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end. We currently measure our plan assets and obligations as of December 31st. We will adopt the change in measurement date by re-measuring plan assets and benefit obligations as of our fiscal year-end in fiscal 2008, pursuant to the transition requirements of SFAS No. 158. We are currently evaluating the impact, if any, the adoption of the measurement-date requirements of SFAS No. 158 will have on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 expands the scope of specific types of assets and liabilities that an entity may carry at fair value on its statement of financial position, and offers an irrevocable option to record the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, SFAS No. 159 will have on our financial statements.

16

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 5, 2007 and April 29, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 3, 2007.

OVERVIEW OF HOLDINGS

Holdings, the parent company of Kmart and Sears, was formed in connection with the March 24, 2005 Merger of these two companies. We are a broadline retailer with approximately 2,300 full-line and 1,100 specialty retail stores in the United States operating through Kmart and Sears and approximately 370 full-line and specialty retail stores in Canada operating through Sears Canada, a 70%-owned subsidiary. We currently conduct our operations in three business segments: Kmart, Sears Domestic and Sears Canada. The nature of operations conducted within each of these segments is discussed within the “Business Segments” section of Part I, Item 1 of our Annual Report on Form 10-K for the year ended February 3, 2007.

CONSOLIDATED RESULTS OF OPERATIONS

	13 Weeks Ended
millions, except per share data	May 5, 2007			April 29, 2006
REVENUES
Merchandise sales and services	$	11,702		$	11,998
COSTS AND EXPENSES
Cost of sales, buying and occupancy		8,417			8,665
Gross margin dollars		3,285			3,333
Gross margin rate		28.1	%		27.8	%
Selling and administrative		2,634			2,721
Selling and administrative expense as a percentage of total revenues		22.5	%		22.7	%
Depreciation and amortization		263			289
Gain on sales of assets		(5	)		(17	)
Restructuring charges		—			9
Total costs and expenses		11,309			11,667
Operating income		393			331
Interest and investment income		(40	)		(40	)
Interest expense		73			83
Other income		(6	)		(8	)
Income before income taxes and minority interest		366			296
Income taxes		143			118
Minority interest		7			(2	)
NET INCOME	$	216		$	180
EARNINGS PER COMMON SHARE
Diluted earnings per share	$	1.40		$	1.14
Diluted weighted average common shares outstanding		153.9			158.0

References to comparable store sales amounts within the following discussion include sales for all stores operating for a period of at least 12 full months, including remodeled and expanded stores, but excluding store relocations and format changes.

17

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 5, 2007 and April 29, 2006

Net Income and Earnings per Share Summary

For the quarter, we generated net income of $216 million ($1.40 per diluted share) in fiscal 2007, as compared to $180 million ($1.14 per diluted share) for the first quarter of fiscal 2006. Net income for both periods was impacted by certain significant items. The magnitude of such items may vary significantly from period to period and, thereby, have a disproportionate effect on the earnings reported for any given period, affecting the comparability of our financial performance. Accordingly, we consider the aggregate impact of these items, along with reported results, in reviewing and evaluating our financial performance.

The nature of these items and their impact on diluted earnings per share is set forth below:

	13 Weeks Ended
	May 5, 2007			April 29, 2006
Earnings per diluted share	$	1.40		$	1.14
Less:
Legal settlement gain		0.12			—
Sears Canada post-retirement benefit plans curtailment gain		0.11			—
Hurricane related recoveries		0.06			—
Dividend—investment in Sears Mexico		0.08			—
Total return swap losses		(0.08	)		—
Gain on sales of assets		0.01			0.06
Restructuring charges		—			(0.03	)
Earnings per diluted share excluding above items	$	1.10		$	1.11

During the first quarter of fiscal 2007, we recognized: 1) a $30 million gain ($18 million after tax or $0.12 per diluted share) related to the legal settlement of a contractual dispute, 2) a curtailment gain of $27 million ($16 million after tax or $0.11 per diluted share) related to certain amendments made to Sears Canada’s post-retirement benefit plans, 3) a gain of $15 million ($9 million after tax or $0.06 per diluted share) for insurance recoveries received on claims filed for certain of our property damaged by hurricanes during fiscal 2005, and 4) a $20 million ($12 million after tax or $0.08 per diluted share) dividend we received on our investment in Sears Mexico. These gains were partially offset by investment losses of $21 million ($13 million after tax or $0.08 per diluted share) incurred during the quarter on our total return swap investments (see the “Interest and Investment Income” section below for further details). In addition, the first quarter of fiscal 2007 included $5 million ($2 million after tax or $0.01 per diluted share) of gains on sales of assets, as compared to $17 million ($10 million after tax or $0.06 per diluted share) of such gains in the first quarter of fiscal 2006. The first quarter of fiscal 2006 also included restructuring charges of $9 million ($5 million after tax or $0.03 per diluted share) (see the “Restructuring Charges” section below for further details). Earnings per diluted share also benefited from lower average diluted shares outstanding during 2007 as compared with 2006.

Our quarterly net income increased primarily as a result of the aggregate impact of the above-noted items, as well as from improved operating results at Sears Canada and lower expenses at Sears Domestic. The impact of favorable performance in these areas was offset by reduced operating income within our Kmart business, where a decline in sales resulted in reduced gross margin dollars. Kmart’s operating income for the first quarter declined $61 million, or 39%, as compared to the first quarter of last year.

18

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 5, 2007 and April 29, 2006

Comparable Store Sales

Our fiscal 2007 first quarter was comprised of the 13-week period ended May 5, 2007, while our fiscal 2006 first quarter was comprised of the 13-week period ended April 29, 2006. This week shift in sales, while having a somewhat favorable impact on total revenues recorded during the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006, had no impact on the comparable store sales results reported herein. This is due to the fact that, for purposes of reporting comparable sales for the first quarter, weeks 1 through 13 of fiscal 2007 have been compared to weeks 2 through 14 of fiscal 2006, thereby eliminating the impact of the week shift.

Using this methodology, domestic comparable store sales declined 3.9% during the first quarter of fiscal 2007. Sears Domestic comparable store sales declined 3.4% for the quarter, while Kmart comparable store sales declined 4.4%. We believe these declines reflect both increased competition and the impact of external factors such as rising energy costs, a slower housing market and poor weather conditions during the latter part of the first quarter of fiscal 2007. Kmart experienced lower transaction volumes across most merchandise categories, most notably within home goods, health and beauty products, and food and consumables. Similarly, Sears Domestic recorded comparable store sales declines across most merchandise categories and formats, with a notable decline in home appliance sales, which we believe primarily reflects both a slower U.S. housing market and the impact of increased competition.

Total Revenues

For the quarter, total revenues declined $0.3 billion, or 2.5%, to $11.7 billion in fiscal 2007, as compared to $12.0 billion for the first quarter of fiscal 2006. This decline reflects the above-noted impact of lower comparable store sales partially offset by sales increases within both our Lands’ End and home services businesses. In addition, the week shift in reporting as detailed above had a favorable impact on total revenues for the first quarter of fiscal 2007 of approximately 0.5%. The largest sales decline for the quarter was recorded at Kmart, where revenues declined $239 million, or 5.6%, primarily as a result of the above-noted comparable store sales declines, as well as a decrease in the total number of Kmart stores in operation, which accounted for an approximate 1.4% decline in total Kmart sales for the first quarter of fiscal 2007.

Gross Margin

For the quarter, our gross margin as a percentage of merchandise sales and services revenue (“gross margin rate”) was 28.1% in fiscal 2007, as compared to 27.8% for the first quarter of fiscal 2006. Sears Canada’s improved margin performance, including better inventory management and less inventory shrinkage, was primarily responsible for the overall increase in gross margin rate. Sears Canada’s gross margin rate improved to 28.6% in the first quarter of fiscal 2007, as compared to 27.1% for the first quarter of fiscal 2006. Domestically, our gross margin rate remained largely unchanged from the first quarter of fiscal 2006: 28.0% for the current-year quarter as compared to 27.8% for the first quarter of fiscal 2006, as improvements in product margins were offset by lower expense leverage relative to buying and occupancy costs, and to a lesser degree, higher store utility and maintenance expenses. The increased gross margin rate was not sufficient to offset the negative gross margin dollar impact of sales declines.

Selling and Administrative Expenses

For the quarter, our selling and administrative expenses as a percentage of total revenues (“selling and administrative expense rate”) was 22.5% in fiscal 2007, as compared to 22.7% for the first quarter of fiscal 2006. The current year rate was favorably impacted by a number of the significant items noted above in the “Net Income and Earnings per Share Summary” section that were recorded within selling and administrative expenses,

19

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 5, 2007 and April 29, 2006

including the $30 million gain related to a legal settlement, the $27 million curtailment gain recorded in connection with changes made to Sears Canada’s benefit plans, and the $15 million gain related to insurance recoveries for certain Sears property damaged by hurricanes during fiscal 2005. Excluding these amounts, our selling and administrative expense rate for the first quarter of fiscal 2007 was 23.1%, primarily reflecting an increased rate at Kmart, where lower sales levels during the first quarter of fiscal 2007 reduced expense leverage.

Restructuring Charges

Restructuring charges of $9 million were recorded in the first quarter of fiscal 2006. Fiscal 2006 first quarter charges included $5 million recorded at Sears Canada for workforce reductions and ongoing restructuring efforts initiated during the second half of fiscal 2005, and $4 million recorded at Kmart for relocation assistance and employee termination-related costs associated with Holdings’ home office integration efforts, also initiated in fiscal 2005. There were no restructuring charges in the first quarter of fiscal 2007.

Operating Income

For the quarter, our operating income increased $62 million to $393 million in fiscal 2007, as compared to $331 million in the first quarter of fiscal 2006. This increase primarily reflects the above-noted $30 million legal settlement gain, the $27 million Sears Canada benefit curtailment gain, and the $15 million gain on hurricane-related insurance recoveries, all recorded during the first quarter of fiscal 2007, as well as improved operating results at Sears Canada and lower expenses at Sears Domestic, partially offset by lower operating income at Kmart.

Interest and Investment Income

We recorded $40 million in interest and investment income for both the first quarter of fiscal 2007 and the first quarter of fiscal 2006, primarily related to interest earned on our balances of surplus cash and cash equivalents. In addition, as noted above, interest and investment income for the first quarter of fiscal 2007 included both a pre-tax dividend of $20 million received in connection with our investment in Sears Mexico and pre-tax total return swap losses of $21 million. The total return swaps are derivative contracts that synthetically replicate the economic return characteristics of one or more underlying marketable equity securities. In exchange for receiving the return tied to the position underlying a total return swap, we pay a floating rate of interest tied to LIBOR on the notional amount of the contract. Changes in fair value of the total return swaps are recognized currently in earnings. We did not employ the use of total return swaps during the first quarter of fiscal 2006.

Interest Expense

We incurred $73 million in interest expense during the first quarter of fiscal 2007, as compared to $83 million in the first quarter of last year. The reduction reflects lower average outstanding borrowings.

Other Income

Other income is primarily comprised of bankruptcy-related recoveries. A total of $6 million in bankruptcy-related recoveries were recorded in the first quarter of fiscal 2007, as compared to $1 million in the first quarter of fiscal 2006. Bankruptcy-related recoveries represent amounts recognized from vendors who had received cash payment for pre-petition obligations.

Income Taxes

For the quarter, the effective tax rate was 39.1%, as compared to 39.9% in the first quarter of fiscal 2006, with the decrease primarily attributable to the favorable resolution of certain income tax matters subsequent to the first quarter in the prior year, which favorably impacted our effective income tax rate prospectively.

20

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 5, 2007 and April 29, 2006

SEGMENT OPERATIONS

The following discussion of our business segment results is organized into three segments: Kmart, Sears Domestic and Sears Canada.

Kmart

Kmart results and key statistics were as follows:

Kmart	13 Weeks Ended
millions, except number of stores	May 5, 2007			April 29, 2006
Merchandise sales and services	$	4,015		$	4,254
Cost of sales, buying and occupancy		3,055			3,241
Gross margin dollars		960			1,013
Gross margin rate		23.9	%		23.8	%
Selling and administrative		840			855
Selling and administrative expenses as a percentage of total revenues		20.9	%		20.1	%
Depreciation and amortization		26			15
Gain on sales of assets		(1	)		(17	)
Restructuring charges		—			4
Total costs and expenses		3,920			4,098
Operating income	$	95		$	156
Number of stores		1,388			1,400

Revenues

For the quarter, Kmart’s comparable store sales and total sales declined 4.4% and 5.6%, respectively. Kmart experienced lower transaction volumes across most categories, most notably within home goods, health and beauty products, and food and consumables. We believe the decline in comparable store sales reflects both increased competition and the negative impact of certain external factors, as noted above. In addition to these factors, the decline in total sales for the quarter also reflects a reduction in the number of Kmart stores in operation during fiscal 2007 relative to the same period last year. This reduction in stores accounted for an approximate 1.4% decline in total Kmart sales for the first quarter of fiscal 2007 as compared to the same period last year. The negative impact of these items was partially mitigated by the week shift in reporting as detailed above in the discussion of consolidated results, resulting in the above-noted 5.6% decline in total sales for the quarter.

Gross Margin

For the quarter, Kmart’s gross margin rate was 23.9% in fiscal 2007, as compared to 23.8% for the first quarter of fiscal 2006. The increase reflects improved gross margin rates across a number of merchandise categories, mainly as a result of greater utilization of direct-sourced merchandise and other cost improvements, largely offset by lower expense leverage relative to buying and occupancy costs and, to a lesser degree, higher store utility and maintenance expenses. As a percentage of total sales, Kmart’s buying and occupancy costs increased by approximately 70 basis points for the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006. Kmart’s gross margin rate improvement was not sufficient to offset the negative gross margin dollar impact of sales declines.

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Selling and Administrative Expenses

For the quarter, Kmart’s selling and administrative expense rate was 20.9% in fiscal 2007, as compared to 20.1% for the first quarter of fiscal 2006. The selling and administrative expense rate for fiscal 2007 included a $30 million legal settlement gain received in relation to a contract dispute. Excluding this gain, Kmart’s selling and administrative expense rate was 21.7% for the first quarter of fiscal 2007, with the increase over the fiscal 2006 first quarter rate primarily reflecting lower expense leverage due to lower sales levels during the first quarter of fiscal 2007.

Restructuring Charges

Kmart recorded restructuring charges of $4 million in the first quarter of fiscal 2006 for relocation assistance and employee termination-related costs incurred in connection with Holdings’ home office integration efforts initiated in fiscal 2005. There were no restructuring charges in the first quarter of fiscal 2007.

Operating Income

For the quarter, Kmart’s operating income decreased $61 million to $95 million in fiscal 2007, as compared to $156 million in the first quarter of fiscal 2006. The decline primarily reflects lower overall sales and the negative impact of lower sales levels on gross margin dollars. The decline also reflects, to a lesser degree, lower gains on sales of assets and higher depreciation and amortization expense, partially offset by the above-noted $30 million legal settlement and $4 million in restructuring costs recorded in the first quarter of fiscal 2006.

Sears Domestic

Sears Domestic results and key statistics were as follows:

Sears Domestic	13 Weeks Ended
millions, except number of stores	May 5, 2007			April 29, 2006
Merchandise sales and services	$	6,660		$	6,697
Cost of sales, buying and occupancy		4,629			4,661
Gross margin dollars		2,031			2,036
Gross margin rate		30.5	%		30.4	%
Selling and administrative		1,578			1,620
Selling and administrative expense as a percentage of total revenues		23.7	%		24.2	%
Depreciation and amortization		206			240
Loss on sales of assets		1			—
Total costs and expenses		6,414			6,521
Operating income	$	246		$	176
Number of :
Full-line Stores(1)		935			935
Specialty Stores		1,100			1,112
Total Domestic Sears Stores		2,035			2,047

⁽¹⁾ The period ended May 5, 2007 includes 861 Full-line stores and 74 Sears Essentials/Grand stores;

The period ended April 29, 2006 includes 864 Full-line stores and 71 Sears Essentials/Grand stores

Revenues

For the quarter, Sears Domestic’s comparable store sales declined 3.4%, while total sales were $6.7 billion for both the first quarter of fiscal 2007 and the first quarter of fiscal 2006. Comparable store sales declined across

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most categories and formats, with a notable decline in home appliance sales which we believe primarily reflects both a slower U.S. housing market and the impact of increased competition. The impact of lower comparable store sales on total sales results was mitigated by sales increases at both Lands’ End and within our home services business, as well as the favorable impact of the week shift in reporting as detailed above in the discussion of consolidated results.

Gross Margin

For the quarter, Sears Domestic’s gross margin rate was 30.5% in fiscal 2007, as compared to 30.4% in the first quarter of fiscal 2006. Gross margin rates improved across most hardline categories, at Lands’ End and within women’s apparel, offset by lower margin rates in other apparel categories (driven by increased markdowns and shrinkage levels), as well as lower expense leverage relative to buying and occupancy costs given lower sales levels during the first quarter of fiscal 2007. As a percentage of total sales, buying and occupancy costs increased by approximately 20 basis points for the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006.

Selling and Administrative Expenses

For the quarter, Sears Domestic’s selling and administrative expense rate was 23.7% in fiscal 2007, as compared to 24.2% for the first quarter of fiscal 2006. Total selling and administrative expenses declined $42 million, with the majority of the reductions stemming from reduced insurance expense and lower payroll and benefits costs, which accounted for approximately 30 and 20 basis points, respectively, of the overall improvement in the selling and administrative rate. The lower insurance expense primarily reflects a $15 million gain for insurance recoveries received on claims filed for certain property damaged by hurricanes during fiscal 2005. These recoveries accounted for approximately 20 basis points of the overall improvement in the selling and administrative expense rate as compared to the first quarter of fiscal 2006.

Operating Income

For the quarter, Sears Domestic’s operating income increased $70 million to $246 million in fiscal 2007, as compared to $176 million in the first quarter of fiscal 2006. The increase primarily reflects lower selling and administrative expenses (including the above-noted $15 million gain for insurance recoveries on hurricane-damaged property), lower depreciation and amortization, partially offset by lower total gross margin dollars generated as a result of lower overall sales levels.

Sears Canada

Sears Canada, a consolidated, 70%-owned subsidiary of Sears, conducts similar retail operations as Sears Domestic. The results of operations for Sears Canada are reported to Holdings on a one-month lag. Accordingly, the condensed consolidated statement of income for the 13-week period ended May 5, 2007 includes operating results for Sears Canada from December 31, 2006 through March 31, 2007, while the 13-week period ended April 29, 2006 includes operating results for Sears Canada from January 1, 2006 to April 1, 2006.

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Sears Canada	13 Weeks Ended
millions, except number of stores		May 5, 2007			April 29, 2006
Merchandise sales and services	$	1,027		$	1,047
Cost of sales, buying and occupancy		733			763
Gross margin dollars		294			284
Gross margin rate		28.6	%		27.1	%
Selling and administrative		216			246
Selling and administrative expense as a percentage of total revenues		21.0	%		23.5	%
Depreciation and amortization		31			34
Gain on sales of assets		(5	)		—
Restructuring charges		—			5
Total costs and expenses		975			1,048
Operating income (loss)	$	52		$	(1	)
Number of :
Full-line Stores		123			123
Specialty Stores		252			254
Total Sears Canada Stores		375			377

Revenues

For the quarter, Sears Canada’s total revenues declined 1.9% in fiscal 2007, as compared to the first quarter of fiscal 2006. The decline in total revenues primarily reflects the impact of lower service and other revenues, primarily lower product repair revenues, partially offset by increased merchandise sales. Sears Canada’s comparable store sales increased 1.6% for the first quarter of fiscal 2007, as higher sales in almost all categories offset softer sales in home décor and women’s wear.

Gross Margin

For the quarter, Sears Canada’s gross margin rate was 28.6% in fiscal 2007, as compared to 27.1% in the first quarter of fiscal 2006. The increase reflects improved inventory management and less inventory shrinkage, as well as the favorable impact of a stronger Canadian dollar on the cost of imported merchandise.

Selling and Administrative Expenses

For the quarter, Sears Canada’s selling and administrative expense rate was 21.0% in fiscal 2007, as compared to 23.5% in the first quarter of fiscal 2006. The selling and administrative expense rate for fiscal 2007 was favorably impacted by a $27 million curtailment gain recorded in connection with changes made to Sears Canada’s post-retirement benefit plans. In February 2007, Sears Canada announced amendments to its post-retirement programs including introduction of a defined contribution component to its pension plan and the discontinuation of retiree medical, dental and life benefits for those Sears Canada associates who will not have achieved eligibility for such benefits by December 31, 2008. Excluding the impact of this item, the selling and administrative expense rate was 23.7% for the first quarter of fiscal 2007.

Restructuring Charges

Sears Canada recorded restructuring charges of $5 million during the first quarter of fiscal 2006 in relation to costs incurred for productivity initiatives initiated in fiscal 2005 as previously noted. There were no restructuring charges in the first quarter of fiscal 2007.

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Operating Income

For the quarter, Sears Canada’s operating income increased $53 million to $52 million in fiscal 2007, as compared to a loss of $1 million in the first quarter of fiscal 2006. The increase primarily reflects lower selling and administrative expenses (including the above-noted $27 million curtailment gain) and, to a lesser degree, increased gross margin dollars, lower restructuring charges and depreciation and amortization expense, as well as increased gains on sales of assets.

ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION

Cash and Cash Equivalents

Our cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the date of purchase. Our cash and cash equivalents balances as of May 5, 2007 and February 3, 2007 are detailed in the following table.

millions	May 5, 2007		February 3, 2007
Domestic
Cash and equivalents	$	2,197	$	2,484
Cash posted as collateral		720		722
Credit card deposits in transit		145		117
Total domestic cash and cash equivalents		3,062		3,323
Sears Canada		351		645
Total cash and cash equivalents	$	3,413	$	3,968

We had cash and cash equivalents of $3.4 billion at May 5, 2007 as compared to $3.2 billion at April 29, 2006 and $4.0 billion at February 3, 2007. The decline in domestic cash and cash equivalents from February 3, 2007 primarily reflects increased merchandise inventories given seasonal shifts in our inventory levels in support of the spring/summer-selling season. At Canada, the decline primarily reflects lower merchandise payables and other accrued liabilities due to seasonality. Additionally, we spent $113 million on capital expenditures and made debt repayments of $47 million, net of new borrowings, during the first quarter of fiscal 2007.

We have posted cash collateral for certain outstanding letters of credit and self-insurance programs. Such cash collateral is classified within cash and cash equivalents given its ready availability to us as we have the ability to substitute letters of credit at any time for this cash collateral.

Credit card deposits in transit include deposits in-transit from banks for payments related to third-party credit card and debit card transactions, including those generated on the Sears Card and Sears MasterCard products.

We classify outstanding checks in excess of funds on deposit within other current liabilities and reduce cash and cash equivalents when these checks clear the bank on which they were drawn. Outstanding checks in excess of funds on deposit were $310 million and $353 million as of May 5, 2007 and February 3, 2007, respectively.

Investment of Available Capital

As previously disclosed in our Annual Report on Form 10-K for our fiscal year ended February 3, 2007, our Board of Directors has delegated authority to direct investment of our surplus cash to our Chairman, Edward S. Lampert, subject to various limitations that have been or may be from time to time adopted by the Board of

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Directors and/or Finance Committee of the Board of Directors. We, from time to time, invest our surplus cash in various securities and financial instruments, including total return swaps, which are derivative instruments that synthetically replicate the economic return characteristics of one or more underlying marketable equity securities. In exchange for receiving the return tied to the position underlying a total return swap, we pay a floating rate of interest tied to LIBOR on the notional amount of the contract. Under the terms of the transactions with the respective counterparties, we are required to post cash collateral of up to 25 percent of the notional amount of the underlying total return swap position, plus the amount of any unrealized losses on the positions. As of May 5, 2007, the collateral balance held by our counterparties, based on our total return swaps’ aggregate notional amount of $345 million, was $65 million and was recorded as a current receivable on our condensed consolidated balance sheet.

These investments are highly concentrated and involve substantial risks. Accordingly, our financial position and quarterly and annual results of operations may be positively or negatively materially affected based on the timing, magnitude and performance of these investments. Based on the aggregate notional amount of $345 million and a fair value of $15 million for such total return swaps as of May 5, 2007, an immediate hypothetical increase (or decrease) of 20 percent in the market value underlying the total return swaps outstanding would cause our quarterly pre-tax earnings to increase (or decrease) concurrently by $72 million. These estimates assume that the total return swap portfolio remains constant. The counterparties to these derivative instruments are large financial institutions.

Operating Activities

Holdings’ operating activities used approximately $0.4 billion in net cash during first quarter of fiscal 2007. For the first quarter of fiscal 2006, we used approximately $0.3 billion in net operating cash flows. Our primary source of operating cash flows is the sale of goods and services to customers, while the primary use of cash in operations is to fund the purchase of merchandise inventories.

Merchandise inventories at May 5, 2007 were approximately $10.3 billion, as compared to $9.6 billion as of April 29, 2006. The increase primarily reflects planned increases resulting from efforts aimed at improving in-stock levels and expanding product assortments this year as well as, acquisition of previously consigned pharmacy inventory at Kmart, earlier receipt of products and lower than forecast sales levels. Merchandise payables were $3.5 billion at May 5, 2007, as compared to $3.6 billion as of April 29, 2006.

Investing Activities

For the first quarter of fiscal 2007, we spent $113 million on capital expenditures compared to $80 million spent during the first quarter last year.

As discussed in the “Results of Operations” and “Investment of Available Capital” sections above, we entered into total return swaps starting in the third quarter of fiscal 2006. During the first quarter of fiscal 2007, we recognized $21 million in investment losses related to these swaps. Under the terms of the transactions with the respective counterparties, we are required to post cash collateral of up to 25 percent of the notional amount of the underlying total return swap position, plus the amount of any unrealized losses on the positions. As of May 5, 2007, the collateral balance held by our counterparties, based on our total return swaps’ aggregate notional amount of $345 million, was $65 million.

Financing Activities

The Board of Directors has authorized the repurchase of up to an aggregate of $2.0 billion of our common shares. We did not repurchase any of our common shares pursuant to the common share repurchase program during the first quarter of fiscal 2007, and as of May 5, 2007, we had $604 million of remaining authorization under the program.

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Our outstanding borrowings as of May 5, 2007, April 29, 2006 and February 3, 2007 were as follows:

millions	May 5, 2007		April 29, 2006		February 3, 2007
Short-term borrowings:
Unsecured commercial paper	$	98	$	134	$	94
Long-term debt, including current portion:
Notes and debentures outstanding		2,624		2,873		2,662
Capitalized lease obligations		779		852		800
Total borrowings	$	3,501	$	3,859	$	3,556

Liquidity

Our primary need for liquidity is to fund seasonal working capital requirements of our retail businesses, capital expenditures and for general corporate purposes. We believe that these needs will be adequately funded by our operating cash flows, credit terms from vendors, current balances in cash and cash equivalents and, to the extent necessary, borrowings under our various revolving credit facilities. At May 5, 2007, $3.8 billion was available under such facilities. While we expect to use these facilities as our primary funding source, we may also access the public debt markets on an opportunistic basis. Additionally, we may from time to time consider selective strategic transactions to create value and improve performance, which may include acquisitions, dispositions, restructurings, joint ventures and partnerships. Transactions of these types may result in material proceeds or cash outlays. See our Annual Report on Form 10-K for the fiscal year ended February 3, 2007 for additional information regarding our sources of liquidity.

Debt Ratings

The ratings of our domestic debt securities as of May 5, 2007 appear in the table below:

	Moody’s Investors Service	Standard & Poor’s Ratings Services	Fitch Ratings
Unsecured long-term debt	Ba2	BB+	BB
Unsecured commercial paper	NP	B-1	B

Credit Agreement

We have a $4.0 billion, five-year credit agreement (the “Credit Agreement”) in place as a potential funding source for general corporate purposes and which includes a $1.5 billion letter of credit sublimit. The Credit Agreement, which has an expiration date of March 2010, is a revolving credit facility under which Sears Roebuck Acceptance Corp. (“SRAC”) and Kmart Corporation are the borrowers. The Credit Agreement is guaranteed by Holdings and certain of our direct and indirect subsidiaries and is secured by a first lien on our domestic inventory, credit card accounts receivable and the proceeds thereof. Availability under the Credit Agreement is determined pursuant to a borrowing base formula, based on domestic inventory levels, subject to certain limitations. As of May 5, 2007, we had $232 million of letters of credit outstanding under the Credit Agreement with $3.8 billion of availability remaining under the Credit Agreement. There were no direct borrowings under the facility during the 13-week period ended May 5, 2007. The Credit Agreement does not contain provisions that would restrict borrowings or letter of credit issuances based on material adverse changes or credit ratings.

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Letter of Credit Agreement

We also have a letter of credit agreement (the “LC Agreement”) with a commitment amount of up to $1.0 billion. The LC Agreement, which is renewable annually upon agreement of the parties, is scheduled to renew in July 2007. As May 5, 2007, there were $685 million of letters of credit outstanding under the LC Agreement.

Cash Collateral

Under the terms of the LC Agreement, we have the ability to post cash, inventory or other letters of credit, including letters of credit issued under the Credit Agreement, as collateral. However, the Credit Agreement prohibits us from using inventory as collateral under the LC Agreement. The cash collateral account is subject to a pledge and security agreement pursuant to which if we elect to post cash collateral, we must maintain cash in an amount equal to 100.5% of the face value of letters of credit outstanding. We had $688 million posted as collateral under the LC Agreement as of May 5, 2007. We continue to classify the cash collateral posted under the terms of the LC Agreement as cash and cash equivalents due to our ability to substitute these letters of credit with letters of credit under the Credit Agreement, which does not require cash collateral, and our ability to provide letters of credit under the Credit Agreement as collateral. There are no provisions in the LC Agreement that would restrict issuances based on credit ratings, but issuances could be restricted under certain circumstances based on a material adverse change.

We also post cash collateral for certain self-insurance programs. We continue to classify the cash collateral posted for self-insurance programs as cash and cash equivalents due to our ability to substitute letters of credit for the cash at any time at our discretion. As of May 5, 2007, we had $32 million posted as collateral for self-insurance programs.

Orchard Supply Hardware LLC (“OSH LLC”) Credit Agreement

In fiscal 2005, OSH LLC entered into a five-year, $130 million senior secured revolving credit facility (the “OSH LLC Facility”), which includes a $25 million letter of credit sublimit. The OSH LLC Facility is available for OSH LLC’s general corporate purposes and is secured by a first lien on substantially all of OSH LLC’s non-real estate assets. Availability under the OSH LLC Facility is determined pursuant to a borrowing base formula based on inventory and accounts and credit card accounts receivable, subject to certain limitations. As of May 5, 2007, there were $10 million in borrowings outstanding under the OSH LLC Facility and $3 million in outstanding letters of credit.

Recent Accounting Pronouncements

In June 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted the provisions of FIN 48 effective February 4, 2007. The impact upon adoption was to decrease our beginning retained earnings by approximately $6 million.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not

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require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2008. We are currently evaluating the impact, if any, the adoption of SFAS No. 157 will have on our financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans,” which changes the recognition and disclosure provisions and measurement date requirements for an employer’s accounting for defined benefit pension and other postretirement plans. The recognition and disclosure provisions require an employer to (1) recognize the funded status of a benefit plan—measured as the difference between plan assets at fair value and the benefit obligation—in its statement of financial position, (2) recognize as a component of other comprehensive income (OCI), net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, and (3) disclose in the notes to financial statements certain additional information. SFAS No. 158 does not change the amounts recognized in the income statement as net periodic benefit cost. As required by SFAS No. 158, we adopted the recognition and disclosure provisions of the Statement as of February 3, 2007, and accordingly recognized the funded status of our defined benefit pension and other postretirement plans and provided the required additional disclosures. The adoption of these provisions of SFAS No. 158 did not have any material impact on our consolidated results of operations or cash flows.

As required under the Statement, we will adopt the measurement-date requirements of SFAS No. 158 effective fiscal 2008. Under the measurement-date requirements, an employer is required to measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end. We currently measure our plan assets and obligations as of December 31st. We will adopt the change in measurement date by re-measuring plan assets and benefit obligations as of our fiscal year-end in fiscal 2008, pursuant to the transition requirements of SFAS No. 158. We are currently evaluating the impact, if any, the adoption of the measurement-date requirements of SFAS No. 158 will have on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 expands the scope of specific types of assets and liabilities that an entity may carry at fair value on its statement of financial position, and offers an irrevocable option to record the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, SFAS No. 159 will have on our financial statements.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q and in other public announcements by us contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives. Statements preceded or followed by, or that otherwise include, the words “believes”, “expects”, “anticipates”, “intends”, “estimates”, “plans”, “forecast”, “is likely to” and similar expressions or future or conditional verbs such as “will”, “may” and “could” are generally forward-looking in nature and not historical facts. Such statements are based upon the current beliefs and expectations of Holdings’ management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the ability to attract, motivate and retain key executives and other associates; competitive conditions in the retail and related services industries; changes in consumer confidence, tastes, preferences and

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spending, including the impact of fuel costs and spending patterns, and the availability and level of consumer debt; marketplace demand for our proprietary brand products and the products of our key brand licensors; operational or financial difficulties at any of our key vendors; the successful execution of, and customer response to, strategic initiatives, including the full-line store and off-mall strategies, and the cross-merchandising of products and services, including Craftsman and Kenmore brand products, between the Kmart and Sears formats; the impact of seasonal buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty; our ability to successfully invest available capital; the pace of growth in store locations, which may be higher or lower than anticipated; the ability to successfully implement initiatives to improve inventory management and other capabilities; the possibility that new business and strategic options for one or more business segments will be identified, potentially including selective acquisitions, dispositions, restructurings, joint ventures and partnerships; trade restrictions, tariffs, and other factors potentially affecting the ability to do business with qualified vendors and access products in an efficient manner; unanticipated increases in paper, postage, printing or fuel costs; anticipated cash flow and the ability of us to maintain sufficient operating cash flow and liquidity; changes in interest rates; the outcome of pending and/or future legal proceedings and bankruptcy claims; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in pension plans; volatility in financial markets; changes in debt ratings, credit spreads and cost of funds; the terms and availability of debt financing and unexpected difficulties accessing the public debt markets; and general economic conditions and normal business uncertainty.

Certain of these and other factors are discussed in more detail in our filings with the Securities and Exchange Commission and the Annual Report on Form 10-K of Sears Holdings Corporation for the fiscal year ended February 3, 2007, which may be accessed through the Commission’s website at www.sec.gov.

While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forward-looking statements to speak only as of the time made and does not undertake to update or revise them as more information becomes available.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The nature of market risks faced by us at May 5, 2007 is the same as disclosed in our Annual Report on Form 10-K for the year ended February 3, 2007.

Interest Rate Risk

We manage interest rate risk through the use of fixed and variable-rate funding and interest rate derivatives. As of May 5, 2007, we had interest rate derivatives with a notional amount of $120 million, nominal fair value and a weighted average remaining life of 0.5 years. All debt securities and interest-rate derivative instruments are considered non-trading. As of May 5, 2007, 12% of our debt portfolio was variable rate. Based on the size of this variable rate debt portfolio at May 5, 2007, which totaled approximately $427 million, an immediate 100 basis point change in interest rates would have affected annual pretax funding costs by $4 million. These estimates do not take into account the effect on income resulting from invested cash or the returns on assets being funded. These estimates also assume that the variable rate funding portfolio remains constant for an annual period and that the interest rate change occurs at the beginning of the period.

Foreign Currency Risk

As of May 5, 2007, we had a series of foreign currency forward contracts outstanding, totaling $1.0 billion Canadian notional value and with a weighted average remaining life of 0.6 years, designed to hedge our net

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investment in Sears Canada against adverse changes in exchange rates. The aggregate fair value of the forward contracts as of May 5, 2007 was negative $5 million. A hypothetical 10% adverse movement in the level of the Canadian exchange rate relative to the U.S. dollar as of May 5, 2007, with all other variables held constant, would have resulted in a loss in the fair value of our foreign currency forward contracts of approximately $101 million as of May 5, 2007.

Equity Price Risk

We, from time to time, invest our surplus cash in various securities and financial instruments, including total return swaps, which are derivative contracts that synthetically replicate the economic return characteristics of one or more underlying marketable equity securities. In exchange for receiving the return tied to the position underlying a total return swap, we pay a floating rate of interest tied to LIBOR on the notional amount of the contract. The fair value of a total return swap is based on the quoted market price of the underlying position and changes in fair value of the total return swaps are recognized currently in earnings. We had total return swaps outstanding during fiscal 2007, and during the 13-week period ended May 5, 2007, we recognized $21 million of investment losses on these total return swaps. As of May 5, 2007, the total return swaps had an aggregate notional amount of $345 million and a fair value of $15 million.

These investments are highly concentrated and involve substantial risks. Accordingly, our financial position and quarterly and annual results of operations may be positively or negatively materially affected based on the timing, magnitude and performance of these investments. Based on the aggregate notional amount of $345 million and a fair value of $15 million for such total return swaps as of May 5, 2007, an immediate hypothetical increase (or decrease) of 20% in the market value underlying the total return swaps outstanding would cause our pre-tax earnings to increase (or decrease) concurrently by $72 million. These estimates assume that the total return swap portfolio remains constant.

Counterparties

We actively manage the risk of nonpayment by our derivative counterparties by limiting our exposure to individual counterparties based on credit ratings, value at risk and maturities. The counterparties to these instruments are major financial institutions with credit ratings of single-A or better. In certain cases, counterparty risk is also managed through the use of collateral in the form of cash or U.S. government securities.

Item 4. Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In addition, based on that evaluation, no changes in our internal control over financial reporting have occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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SEARS HOLDINGS CORPORATION

13 Weeks Ended May 5, 2007 and April 29, 2006

We are in the process of converting the information technology systems of the Sears Domestic and Kmart segments to a common platform. The objectives of the systems conversion are to establish a common set of processes and systems for Sears Domestic and Kmart and to improve the customer experience. The information technology conversion plan is expected to be completed over the next two years. For fiscal 2007, our information technology plan involves the conversions of a number of key financial systems, including the general ledger and stock ledger, among others. Such conversions involve significant changes to internal processes and internal controls over financial reporting. During the first quarter of fiscal 2007, we implemented a new common accounts payable system for Kmart and Sears Domestic based on enhancements made to Kmart’s existing accounts payable system and backend processes. While the conversion has proceeded to date without material adverse effects, the possibility exists that our conversion to new or common systems could adversely affect our disclosure controls and procedures or our results of operations in future periods. We have or are reviewing each system as it is being implemented and the controls affected by the implementation of the new systems, and are making appropriate changes to affected internal controls as we implement the new systems. We believe that the controls as modified are appropriate and functioning effectively.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On May 2, 2007, the Environmental Appeals Board of the U.S. Environmental Protection Agency entered a Final Order that incorporates a consent agreement pursuant to which Kmart agreed to pay an administrative fine in the amount of $102,422 to settle self-disclosed violations of federal clean water, hazardous waste, and emergency planning and preparedness regulations discovered by Kmart at 17 distribution centers in 13 states.

See Part I, Item 1, “Financial Statements —“Notes to Condensed Consolidated Financial Statements,” Note 6—“Claims Resolution and Bankruptcy-Related Settlements,” and Note 12—“Legal Proceedings,” for additional information regarding legal proceedings, which information is incorporated herein by this reference.

Item 2. Unregistered Sales of Equity Securities and Uses of Proceeds

The following table provides information about shares of common stock we acquired during the first quarter of fiscal 2007, including shares assigned to us as part of settlement agreements resolving claims arising from the Chapter 11 reorganization of Kmart Corporation. During the 13 weeks ended May 5, 2007, we did not repurchase any of our common shares under our common share repurchase program. The program was initially announced in fiscal 2005 with a total authorization by our Board of Directors of up to $1.0 billion. During fiscal 2006, the Board of Directors authorized the repurchase of up to an additional $1.0 billion of common stock for a total authorization of $2.0 billion. The program has no stated expiration date. As of May 5, 2007, we had $604 million of remaining authorization under the program.

	Total Number of Shares Purchased(1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Average Price Paid per Share for Publicly Announced Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
February 4, 2007 to March 3, 2007	19,200	$	180.32	—	$	—
March 4, 2007 to April 7, 2007	27,067		188.25	—		—
April 8, 2007 to May 5, 2007	74,348		97.96	—		—
Total	120,615	$	131.34	—	$	—	$	604,000,000

⁽¹⁾ Includes 7,002 shares acquired from associates to meet withholding tax requirements from the vesting of restricted stock. In addition, we recognized recoveries of $6 million in the quarter ended May 5, 2007 related to vendors who had received cash payments for pre-petition obligations (critical vendor claims) or preference payments. In conjunction with these recoveries and other bankruptcy settlements entered into this quarter, we were assigned 39,265 shares of common stock (weighted average price of $186.17 per share) with an approximate value of $8 million. Furthermore, we received an additional 74,348 common shares this quarter for bankruptcy settlements entered into in previous periods from the distribution of the Class 5 distribution reserve described in Note 6. The transactions are recorded at the market value of the common shares at the time of the settlement agreement (weighted average price of $97.96) for a total of $7 million.

From April 1, 2006 through March 27, 2007, approximately 5,700 shares of our common stock were inadvertently allocated to the plan accounts of 28 participants in the Kmart Retirement Savings Plan for Puerto Rico Employees and the Kmart Retirement Savings Plan for Manteno Distribution Center Union Employees. These shares may not have been registered under the Securities Act of 1933 (the “Act”) for sale to these plan participants. While all purchases by the trustee of the plans were made in the open market and in a manner consistent with the investment elections of the plan participants, because the shares may not have been registered, plan participants may have a right under the Act to rescind their purchases, generally through the first anniversary of the purchase giving rise to such right of rescission. The aggregate amount of interests in our

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common stock purchased from April 1, 2006 to March 27, 2007 by participants in the Kmart Retirement Savings Plan for Puerto Rico Employees and the Kmart Retirement Savings Plan for Manteno Distribution Center Union Employees was approximately $960,000. During this period, the Company’s common stock price ranged from a low of $130.65 per share (on April 3, 2006) to a high of $189.97 per share (on February 22, 2007). Based on the current market value of our common stock, we believe that it is unlikely that any participants, if eligible, would seek rescission. As of May 25, 2007, approximately 3,800 shares were held by plan participants, and we believe that no plan participants sold common stock at a loss. We intend to file a registration statement on Form S-8 to register shares of our common stock for sale under the two plans, and at such time, our common stock will be reestablished as an investment option under the two plans.

Item 4. Submission of Matters to a Vote of Security Holders

On May 4, 2007, we held our annual meeting of stockholders at our offices in Hoffman Estates, Illinois.

William C. Crowley, Edward S. Lampert, Aylwin B. Lewis, Steven T. Mnuchin, Richard C. Perry, Ann N. Reese, Emily Scott and Thomas J. Tisch were elected to the Board of Directors for one-year terms expiring at the 2008 annual meeting of stockholders. The management proposal approving the first amendment to the Sears Holdings Corporation Umbrella Incentive Program was passed. The stockholders also ratified the Audit Committee’s appointment of Deloitte & Touche LLP as independent auditors for 2007. No stockholder proposals were brought to a vote. The votes on matters were as follows:

1. Election of Directors

Name	For	Withheld
William C. Crowley	131,736,407	2,709,202
Edward S. Lampert	133,146,868	1,298,741
Aylwin B. Lewis	133,340,778	1,104,831
Steven T. Mnuchin	132,203,309	2,242,299
Richard C. Perry	133,603,490	842,118
Ann N. Reese	133,577,138	868,470
Emily Scott	133,587,658	857,950
Thomas J. Tisch	133,602,957	842,651

2. Approve the first amendment to the Sears Holdings Corporation Umbrella Incentive Program

For	Against	Abstain	Broker Non-Votes
116,476,965	829,719	494,927	16,643,998

3. Appointment of Deloitte & Touche LLP as independent auditors for 2007

For	Against	Abstain
133,878,295	135,825	431,489

Item 6. Exhibits

(a) Exhibits.

An Exhibit Index has been filed as part of this Report on Page E-1.

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SEARS HOLDINGS CORPORATION

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SEARS HOLDINGS CORPORATION (Registrant)
May 31, 2007	By	/s/    WILLIAM K. PHELAN
		William K. Phelan
		Vice President and Controller (Principal Accounting Officer and duly authorized officer of Registrant)

SEARS HOLDINGS CORPORATION

EXHIBIT INDEX

3.1	Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K, dated March 24, 2005, filed on March 24, 2005 (File No. 000-51217)).
3.2	Restated By-Laws (incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K, dated March 24, 2005, filed on March 24, 2005 (File No. 000-51217)).
*10.1	Registrant’s 2007 Annual Incentive Plan Document.
10.2	First Amendment to Sears Holdings Corporation Umbrella Incentive Program (incorporated by reference to Appendix A to Registrant’s Proxy Statement dated April 3, 2007 (File No. 000-51217)).
10.3	Sears Holdings Corporation 2007 Executive Long Term Incentive Program (incorporated by reference to Appendix A-1 to Registrant’s Proxy Statement dated April 3, 2007 (File No. 000-51217)).
*10.4	Form of Restricted Stock Award Agreement—Sears Holdings Corporation 2007 Executive Long Term Incentive Program.
*31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

E - 1

EX-10.1

EXHIBIT 10.1

SEARS HOLDINGS CORPORATION

2007 ANNUAL INCENTIVE PLAN

SECTION 1

GENERAL

1.1. Purpose. The Sears Holdings Corporation 2007 Annual Incentive Plan (the “AIP”) is a performance-based incentive program. The purpose of the AIP is to reward eligible employees of Sears Holdings Corporation (the “Company”), Sears Holdings Management Corporation, Sears, Roebuck and Co., Kmart Holding Corporation and their participating wholly owned subsidiaries (collectively referred to as “Employers”), for sustained Company fiscal performance. The AIP is established under, and constitutes a part of, the Sears Holdings Corporation Umbrella Incentive Program (the “UIP”), which UIP was previously approved by shareholders. Both (a) Awards structured to satisfy the requirements for “performance-based compensation” outlined in regulations issued under Section 162(m) of the Internal Revenue Code (“Code”), and (b) Awards not so structured, may be issued hereunder.

1.2. Operation, Administration and Definitions. The operation and administration of the AIP, including the Awards made under the AIP, shall be subject to the provisions of Section 7. Capitalized terms in the AIP shall be defined in the provision in which a term first appears or as set forth in Section 9.

1.3. Participating Employers. Each Employer whose eligible employee’s are covered by the AIP may be referred to herein as a “Participating Employer”. Participating Employers are listed on Appendix A.

SECTION 2

PARTICIPATION

2.1. Eligible Employee. Except as provided herein, the term “Eligible Employee” means all: (a) salaried employees and (b) corporate hourly employees, of the Company, an Employer or any wholly owned subsidiary, which is a Participating Employer. “Corporate hourly employees” refer to hourly employees employed at a “Support Center” (as defined in Section 9). Subject to the terms and conditions of the AIP, Corporate Compensation shall determine Eligible Employee status. Eligible Employees are “Participants” in the AIP. Notwithstanding the forgoing, Eligible Employee shall not include any Executive (as defined in Section 9) seconded to Sears Canada Inc. with respect to any portion of the applicable 2007 Fiscal Year (as such term is defined in Section 9) that such Executive is seconded to Sears Canada Inc.

2.2. New Hires; Changes in Status; Promotions and Demotions.

(a) New Hires. Corporate Compensation (or its authorized representative) shall determine whether and when an employee who is a new hire is an Eligible Employee. The terms and conditions of any Award for such an individual shall be (i) based on the Target Annual Incentive for the new hire’s incentive-eligible “Assignment” (as such term is defined in Section 9) and (ii) subject to a fraction, the numerator of which is the number of full days on active payroll (except as otherwise provided herein) during the Performance Period that the Eligible Employee was a Participant in the AIP and the denominator of which is the number of full days in the Performance Period.

2007 AIP

(b) Changes in Status. Corporate Compensation (or its authorized representative) shall determine whether and when an employee who has a change in status becomes or ceases to be an Eligible Employee during the Performance Period. The terms and conditions of any Award for such an individual shall be (i) based on the Target Annual Incentive for the incentive-eligible Assignment and (ii) subject to a fraction, the numerator of which is the number of full days on active payroll (except as otherwise provided herein) during the Performance Period that the Eligible Employee was a Participant in the AIP and the denominator of which is the number of full days in the Performance Period.

(c) Promotion. If a Participant is promoted, the Award for such an individual shall be based on a pro-ration, whereby the Target Annual Incentive for the new Assignment will apply to the remainder of the Performance Period and the Target Annual Incentive for the immediately preceding incentive-eligible Assignment will apply to the portion of the Performance Period immediately the effective date of the promotion, subject to subsection 3.2. Notwithstanding the foregoing, in no event will positive discretion be applied to any Award that has been designated as intended to meet the requirements of Code Section 162(m) (and the regulations issued thereunder) with respect to the Performance Period or as of the applicable Payment Date.

(d) Demotions. If a Participant is demoted, the Award for such an individual shall be based on a pro-ration, whereby the Target Annual Incentive for the new Assignment will apply to the remainder of the Performance Period and the Target Annual Incentive for the immediately preceding Assignment will apply to the portion of the Performance Period immediately preceding the effective date of the promotion, subject to subsection 3.2.

SECTION 3

ANNUAL INCENTIVE AWARDS

3.1. Annual Incentive Awards. Except as provided herein, Corporate Compensation shall determine, in its sole discretion, the “Target Annual Incentive” (as such term is defined herein) for each Assignment. Notwithstanding the forgoing, the “Compensation Committee” (as such term is defined in Section 9 below) shall approve the Target Annual Incentives and the Awards for Executive employees under its purview.

(a) A “Target Annual Incentive” shall refer to the percentage of a Participant’s rate of base pay during the Performance Period, which percentage shall be based on the Participant’s Assignment and the competitive market place.

(b) The “Target Incentive Award” shall consist of a commitment by the Company to distribute, at the time specified in, and in accordance with the applicable provisions of, Section 5 below, a dollar amount based on a Participant’s Target Annual Incentive and based on actual performance of the Company and the Participant, as compared to established performance goals described in Section 4 below. The Target Incentive Award shall be subject to pro-ration (if applicable) and certification of the calculation of the final Award amount by Corporate Compensation or the Compensation Committee, as applicable.

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2007 AIP

(c) The “Quarterly Incentive Award” shall refer to the portion of the Target Incentive Award for a “Retail Participant” (as such term is defined in Section 9) that is based on quarterly performance of the applicable retail unit, payable on the Quarterly Payment Dates (as such term is defined in subsection 5.1(b) below). Quarterly Incentive Awards are not structured to satisfy the requirements for “performance-based compensation” outlined in regulations issued under Code Section 162(m).

(d) The “Annual Incentive Award” shall refer to the final annual portion of a Participant’s Target Incentive Award payable on the Annual Payment Date (as such term is defined in subsection 5.1(a) below).

(e) Any Quarterly Incentive Award or Annual Incentive Award shall be satisfied by a distribution in accordance with Section 5 and subject to Sections 6 and 7.

3.2. Adjustments based on Assignment Changes during Performance Period. Notwithstanding anything in the AIP to the contrary, with respect to Awards that are not designated as intended to meet the requirements of “performance-based compensation” under Code Section 162(m) (and the regulations issued thereunder) and prior to the settlement of any Award, if the Target Annual Incentive for a new Assignment (including if due to promotion or demotion) is lower or higher than the Target Annual Incentive for a Participant’s immediately prior Assignment, the Participant’s Target Incentive Award may be to adjusted by Corporate Compensation or the Compensation Committee, as applicable, to ensure that the overall target cash compensation (i.e., the sum of base pay and Target Annual Incentive) for the new Assignment is comparable to the overall target cash compensation for the immediately prior Assignment.

3.3. Performance Period. The “Performance Period” refers to (a) with respect to the Annual Incentive Award, the applicable Fiscal Year and (b) with respect to the Quarterly Incentive Award, each three month period beginning as of the first day of the applicable Fiscal Year. The amount of an Award, if any, shall be determined following completion of the applicable Performance Period in accordance with this Section 3 and Section 4.

3.4. Pro-ration.

(a) The Annual Incentive Award, and any Quarterly Incentive Award, of a Participant who experiences a status change or position change, shall be pro-rated based on the number of days worked on active payroll in each AIP-eligible Assignment during the Performance Period.

(b) The Annual Incentive Award, and any Quarterly Incentive Award, of a Participant who experiences a demotion or promotion, shall be pro-rated based on the Target Annual Incentives and applicable rates of base pay in effect during the Performance Period, subject to Sections 2.2 and 3.2 above.

(c) The Annual Incentive Award, and any Quarterly Incentive Award, of a Participant who experiences an event described in Section 6, shall be pro-rated based upon a fraction, the numerator of which is the number of days worked on active payroll in an AIP-eligible Assignment during the Performance Period and the denominator of which is the number of days in the Performance Period.

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2007 AIP

SECTION 4

GOALS AND PERFORMANCE

4.1. Company Goals. The financial performance goals, which are approved by the Compensation Committee, shall include Threshold EBITDA, Target EBITDA and Maximum EBITDA levels of performance.

(a) AIP EBITDA. Subject to adjustment, if any, in accordance with subsection (f) of this Section 4.1, “AIP EBITDA” refers to earnings before interest, taxes, depreciation and amortization for the Performance Period computed as operating income appearing on the Company’s statement of operations for the applicable reporting period, other than Sears Canada (referred to as the “Domestic Company”), less depreciation and amortization and gains/(losses) on sales of assets. In addition, it is adjusted to exclude significant litigation or claim judgments or settlements (defined as matters which are $1 million or more); the effect of purchase accounting and changes in accounting methods; gains, losses and costs associated with acquisitions, divestitures and store closures; integration costs that are disclosed as merger related; and restructuring activities. If after March 15, 2007 (which is the date the Compensation Committee approved the design of the AIP), the Domestic Company acquires assets or an entity that has associated EBITDA (measured using the same principles as those described in the preceding provisions of this subsection (a) in its last full fiscal year prior to the acquisition, of greater than or equal to $100,000,000, any EBITDA associated with such assets or entity (after its acquisition) and during the Performance Period shall be disregarded in determining AIP EBITDA under this subsection (a).

(b) Threshold EBITDA. “Threshold EBITDA” reflects the minimum Company performance that must be achieved for any Annual Incentive Award to be paid, which is 90% of the target EBITDA for the immediately preceding Performance Period.

(c) Target EBITDA. Subject to adjustment, if any, in subsection (e), “Target EBITDA” refers to the target level of EBITDA, for the Performance Period, established by the Compensation Committee consistent with Company strategy, in accordance with subsection (a) above.

(d) Maximum EBITDA. “Maximum EBITDA” reflects a level of Company performance that significantly exceeds Company and shareholder expectations, which is 125% of the Target EBITDA.

(e) Adjustments to Target EBITDA. The AIP EBITDA incentive target contemplates that the Domestic Company remains approximately the same size over the period of the AIP. If, after March 15, 2007, the Domestic Company divests itself of assets or an entity that has associated EBITDA (measured using the same principles as those described in subsection (a) above) in its last full fiscal year prior to the divestiture of greater than or equal to $100,000,000, Target EBITDA for the Company’s fiscal year in which the divestiture occurs will be decreased by actual EBITDA of such assets or entity for the portion of such assets’ or entity’s last full fiscal year prior to the divestiture corresponding to the portion of the Company’s fiscal year (in which the divestiture occurs) remaining after the divestiture occurs; and Target EBITDA for each of the following fiscal years of the Company, if any, in the Performance Period will be decreased by the actual EBITDA of such assets or entity for such assets’ or entity’s last full fiscal year prior to the divestiture.

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2007 AIP

(f) Quarterly Incentive Award. Notwithstanding the foregoing, with respect to the Quarterly Incentive Award portion of the Target Incentive Award, Corporate Compensation shall establish different threshold, target and maximum goals.

4.2. Company Performance. Company performance is determined based on certain financial components including the following primary components: EBITDA, Merchandise Margin, other financial performance metrics; which shall be applied to a Participant based upon his or her Assignment.

(a) EBITDA Performance.

(i) Threshold Payout. Subject to Participant performance and Sections 5 and 6, if Threshold EBITDA is met, 60% of a Target Incentive Award shall be paid.

(ii) Target Payout. Subject to Participant performance and Sections 5 and 6, 100% of a Target Incentive Award shall be paid.

(iii) Maximum Payout. Subject to Participant performance and Sections 5 and 6, 150% of a Target Incentive Award shall be paid.

(iv) Adjustment. If EBITDA performance falls between the Threshold and the Target or the Target and the Maximum payout levels, the adjustment to an Award shall be determined by straight-line interpolation.

(b) Merchandise Margin. The Merchandise Margin is also taken into consideration. “Merchandise Margin” refers to internal margin as reported on the Company’s domestic internal operating statements, and generally consists of merchandise gross profit, vendor allowances/subsidy included in margin, return-to-vendor markouts, allocated 0% finance promotion costs, product quality costs and inventory shrink.

(c) Other Financial Performance Metrics. In addition to the performance measures described above, other financial measures have been established to measure the contribution or profit of different business units. The applicability of these other performance measures to a Participant will depend on his or her Assignment.

4.3. Participant Performance. Except as provided in subsection 4.3(c) below, Corporate Compensation or the Compensation Committee, as applicable, shall have the discretion to apply an individual performance modifier to a Participant’s Annual Incentive Award, which enables the Award to be modified, positively or negatively, based on individual Participant performance. Prior to payment of a Quarterly Incentive Award, Corporate Compensation shall determine and communicate whether an individual modifier shall apply to any, some or all quarters.

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2007 AIP

(a) Such individual modifier may be applied to modify a Participant’s Annual Incentive Award as follows:

Performance	Rating	Modifier
Exceeds Expectation	5	+ 0% to 25%
Above Average	4	+ 0% to 15%
Average	3	No adjustment
Below Average	2	- 25%
Poor Performance	1	- 100%

(b) Notwithstanding the forgoing, the sum of a Participant’s Annual Incentive Award and Quarterly Incentive Award shall not be modified above 150% of the sum of his or her Annual Incentive Award and Quarterly Incentive Award, in accordance with subsection 4.2(a)(iii).

(c) The individual modifier shall not apply to the portion of an Award attributable to any portion of the Performance Period during which a Participant holds a position of Senior Vice President or higher, and in no event will positive discretion be applied to any Award for a Participant who is a “covered employee” within the meaning of Code Section 162(m) (and the regulations issued thereunder) with respect to the Performance Period or as of the Payment Date.

4.4. Additional Requirements. All Annual Incentive Awards and Quarterly Incentive Awards awarded under the AIP are subject to the provisions of Sections 5, 6 and 7.

SECTION 5

DISTRIBUTION

5.1. Time of Payment. Subject to Sections 6 and 7, the Annual Incentive Awards and Quarterly Incentive Awards that are payable under the AIP, based on the Awards and payout formulas described at Sections 3 and 4, shall be distributed as follows:

(a) The Annual Incentive Award, other than Quarterly Incentive Award, shall be distributed within two and one-half (2 ¹/2) months of the close of the 2007 Fiscal Year; provided, however, that no distribution shall be made hereunder until after the Compensation Committee has certified the attainment of the performance goals and the Compensation Committee or Corporate Compensation, as appropriate, has determined the amount to be paid to each Participant. Notwithstanding anything herein to the contrary, such distributions shall be made no later than required by Code Section 409A to avoid treatment of the AIP as a deferred compensation plan under Code Section 409A. The date as of which payment is made in accordance with this subsection 5.1(a) is referred to herein as the “Annual Payment Date.”

(b) The Quarterly Incentive Award shall be distributed within sixty (60) days of the close of the applicable quarter, provided, however, that no distribution shall be made hereunder until after Corporate Compensation has certified the attainment of the performance goals. Notwithstanding the foregoing, any Quarterly Incentive Award payable with respect to the first two quarters of fiscal year 2007 shall be paid by October 1, 2007. The date as of which payment is made in accordance with this subsection 5.1(b) is referred to herein as the “Quarterly Payment Date.”

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2007 AIP

5.2. Form of Payment. Quarterly Incentive Awards and Annual Incentive Awards under the AIP shall be paid as a single, lump sum cash payment.

5.3. Termination of Employment and Other Provisions. All distributions are subject to the provisions of Sections 6 and 7, below.

SECTION 6

TERMINATION; LEAVE OF ABSENCE; REINSTATEMENT

Any Award payable under this Section 6 shall be payable in accordance with Section 5.

6.1. Termination. If a Participant incurs a termination of employment before the applicable Quarterly Payment Date or Annual Payment Date (as defined in Section 5.1 above), the effect of termination of employment on a Participant’s right to receive an Award under the AIP shall depend on the reason for the termination, as described in this subsection 6.1.

(a) Voluntary Termination or Involuntary Termination. In the event that prior to the applicable Quarterly Payment Date or Annual Payment Date of an Award, a Participant (i) voluntarily terminates employment (for any reason other than due to permanent and total disability, as defined in the Company’s long-term disability program, regardless of whether the Participant is covered by such program), (ii) is involuntarily terminated due to unit closing, reorganization, business exit, job elimination, or permanent layoff, or (iii) is involuntarily terminated for “Poor Performance” or with “Cause” prior to the applicable Payment Date of an Award, such Participant shall forfeit his or her Award. “Poor Performance” and “Cause” shall be as defined in the Participant’s severance agreement or other employment agreement, or if such term does not appear therein or a Participant does not have such an agreement with the Company, then as defined in Section 9.

(b) Disability. In the event that prior to the applicable Quarterly Payment Date or Annual Payment Date of an Award, a Participant suffers a permanent and total disability (as defined in the Company’s long-term disability program, regardless of whether the Participant is covered by such program) while employed by the Company or an Employer resulting in termination or retirement, subject to Section 7 below, such Participant shall be entitled to a distribution of the Award that would otherwise be payable to the Participant under Sections 3 and 4 above, pro-rated based upon a fraction, the numerator of which is the number of days worked on active payroll in an AIP-eligible Assignment during the Performance Period and the denominator of which is the number of days in the Performance Period.

(c) Death. In the event that a Participant dies while employed by a Participating Employer but prior to the applicable Quarterly Payment Date or Annual Payment Date of his or her Award, the estate of such Participant shall be entitled to a distribution of the Award, if any, payable in cash that would otherwise be payable to the Participant under Sections 3 and 4 above, pro-rated based upon a fraction, the numerator of which is the number of days worked on active payroll in an AIP-eligible Assignment during the Performance Period and the denominator of which is the number of days in the Performance Period.

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2007 AIP

6.2. Leave of Absence.

(a) General. In the event that a Participant is on an unpaid leave of absence any time during the Performance Period or at the time of the applicable Quarterly Payment Date or Annual Payment Date, subject to subsections (b) and (c) immediately below and Section 7, such Participant shall be entitled to a distribution of the Award that would otherwise be payable to the Participant under Sections 3 and 4 above, pro-rated based upon a fraction, the numerator of which is the number of days worked on active payroll in an AIP-eligible Assignment during the Performance Period and the denominator of which is the number of days in the Performance Period.

(b) Short-Term Disability. In the event that a Participant is on a leave of absence due to short-term disability (including, for purposes of the AIP, paid maternity leave) any time during the Performance Period, subject to subsection (c) below and Section 7), the period of the leave of absence shall be treated as time on active payroll and will be credited toward the determination of the Participant’s Award and the Participant shall be entitled to payment of the Award in accordance with Section 5, even if the Participant is on the short-term disability leave of absence as of the applicable Quarterly Payment Date or Annual Payment Date.

(c) Salary Continuation. In the event that a Participant is receiving salary continuation under a severance or non-compete agreement or a Company-sponsored transition pay or severance pay plan as of the applicable Quarterly Payment Date or Annual Payment Date, such Participant shall forfeit his or her Award.

6.3. Reinstatement. If a Participant who forfeited his or her Award as a result of a termination of employment is reinstated or rehired during the Performance Period, any Award attributable to the portion of the Performance Period prior to the termination of employment shall remain forfeited. Notwithstanding the foregoing, such a Participant shall be eligible for an Award based on a fraction, the numerator of which is the number of days worked on active payroll in an AIP-eligible Assignment on or after reinstatement or rehire during the Performance Period and the denominator of which is the number of days in the Performance Period.

SECTION 7

OPERATION AND ADMINISTRATION

7.1. Compensation Committee and Corporate Compensation.

(a) Compensation Committee. Notwithstanding subsection (b) immediately below, Corporate Compensation:

(i) Shall approve the Target Annual Incentives and the Awards for Executives under its purview;

(ii) Notwithstanding subsection (b) below, with respect to Executives under its purview, shall have the authority and discretion to establish the terms, conditions, restrictions, and other provisions of such Awards, and (subject to the restrictions imposed by Section 8) to amend, cancel, or suspend Awards, subject to the requirements of Code Section 162(m), if applicable;

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2007 AIP

(iii) May make additional changes to the AIP that it deems appropriate for the effective administration of the AIP; provided however, that these changes may not increase the benefits to which Participants may become entitled under the AIP nor change the pre-established measures in goals that have been approved, except as explicitly provided in the AIP; and

(iv) Shall be responsible for all other duties and responsibilities allocated to the Compensation Committee under the terms and conditions of the AIP.

(b) Corporate Compensation. Except as provided in subsection (a) immediately above, Corporate Compensation:

(i) Shall Determine the Target Annual Incentive for each Assignment;

(ii) Shall have the authority to control and manage the operation and administration of the AIP;

(iii) Shall be responsible for the day-to-day administration of the AIP, including without limitation the exception process described in Section 7.2 below;

(iv) Subject to the other provisions of the AIP, have the authority and discretion to determine the time or times of receipt of Awards, to establish the terms, conditions, restrictions, and other provisions of such Awards, and (subject to the restrictions imposed by Section 8) to amend, cancel, or suspend Awards, subject to the requirements of Code Section 162(m), if applicable; and

(v) Shall be responsible for all other duties and responsibilities allocated to Corporate Compensation under the terms and conditions of the AIP.

(c) Any determinations by the Compensation Committee or Corporate Compensation, as applicable regarding this AIP are binding on all Participants.

(d) Corporate Compensation and the Compensation Committee, as appropriate, shall have the authority and discretion to interpret the AIP, to establish, amend, and rescind any rules and regulations relating to the AIP and to make all other determinations that may be necessary or advisable for the administration of the AIP.

7.2. Incentive Exceptions. Corporate Compensation shall have the authority to receive and consider requests by Business Units of the Participating Employers for an exception to an established performance measures due to circumstances outside of the business unit’s control. Corporate Compensation may establish a procedure reviewing and approve or rejecting an exception. Corporate Compensation shall receive approval from the Chief Financial Officer and Senior Vice President of Human Resources of Sears Holdings Corporation before approving an exception request. Any exception determination shall be binding. In no event will positive discretion be applied to any Award that has been designated as intended to meet the requirements of Code Section 162(m) (and the regulations issued thereunder) with respect to the Performance Period or as of the Payment Date.

9

2007 AIP

7.3. Discretion. Notwithstanding Section 7.2 or anything in the AIP to the contrary, with respect to Awards that are not designated as intended to meet the requirements of “performance-based compensation” under Code Section 162(m) (and the regulations issued thereunder) and prior to the settlement of any Award, the Compensation Committee may change the pre-established measures and goals that have been approved for such Award and increase or reduce the amount of such Award.

7.4. Tax Withholding. All distributions under the AIP are subject to withholding of all applicable taxes.

7.5. Settlement of Awards. The obligation to make payments and distributions with respect to Awards shall be satisfied through delivery of cash. Satisfaction of any such obligations under an Award, which is sometimes referred to as the “settlement” of the Award, may be subject to such conditions, restrictions and contingencies as Corporate Compensation or the Compensation Committee, as appropriate, shall determine. Each Employer shall be liable for payment of cash due under the AIP with respect to any Participant to the extent that such benefits are attributable to the services rendered for that Employer by the Participant. Any disputes relating to liability of an Employer for cash payments shall be resolved by Corporate Compensation.

7.6. Transferability. Except as otherwise provided by Corporate Compensation, Awards under the AIP are not transferable except as designated by the Participant by will or by the laws of descent and distribution.

7.7. Form and Time of Elections. Unless otherwise specified herein, any election required or permitted to be made by any Participant or other person entitled to benefits under the AIP, and any permitted modification, or revocation thereof, shall be in writing filed with Corporate Compensation at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the AIP, as Corporate Compensation shall require.

7.8. Action by Company or Employer. Any action required or permitted to be taken under the AIP by the Company or any other Employer of the foregoing shall be by resolution of its board of directors, or by action of one or more members of the board of directors of such company (including a committee of the board) who are duly authorized to act for such board with respect to the applicable action, or (except to the extent prohibited by applicable law or applicable rules of any securities exchange or similar entity) by a duly authorized officer of such company.

7.9. Gender and Number. Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular.

7.10. Limitation of Implied Rights.

(a) Neither a Participant nor any other person shall, by reason of participation in the AIP, acquire any right in or title to any assets, funds or property of the Company or any Employer whatsoever, including, without limitation, any specific funds, assets, or other property which the Company or any Employer, in its sole discretion, may set aside in anticipation of a liability under the

10

2007 AIP

AIP. A Participant shall have only a contractual right to the cash, if any, payable under the AIP, unsecured by any assets of the Company or any Employer, and nothing contained in the AIP shall constitute a guarantee that the assets of the Company or any Employer shall be sufficient to pay any benefits to any person.

(b) The AIP does not constitute a contract of employment, and status as a Participant shall not give any Eligible Employee the right to be retained in the employ of the Company or any Employer, nor any right or claim to any benefit under the AIP, unless such right or claim has specifically accrued and vested under the terms of the AIP.

7.11. Evidence. Evidence required of anyone under the AIP may be by certificate, affidavit, document or other information, which the person charged with acting on such evidence considers pertinent and reliable, and which has been signed, made or presented by the proper party or parties.

7.12. Information to be Furnished. The Company and the Participating Employers shall furnish Corporate Compensation and the Compensation Committee with such data and information as it determines may be required for it to discharge its duties. The records of the Company and the Participating Employers as to an employee’s or Participant’s employment, termination of employment, leave of absence, reemployment, and compensation shall be conclusive on all persons unless determined to be incorrect. Participants and other persons entitled to benefits under the AIP must furnish Corporate Compensation or the Compensation Committee, as appropriate, such evidence, data or information as Corporate Compensation or the Compensation Committee considers desirable to carry out the terms of the AIP, subject to any applicable privacy laws.

SECTION 8

AMENDMENT AND TERMINATION

The Company may amend or terminate the AIP at any time and for any reason in its sole discretion. Notwithstanding the foregoing, no amendment may be made, without the consent of the shareholders of the Company, that would cause any Awards intended to meet the requirements of “performance-based compensation” under Code 162(m) and the regulations thereunder, to cease to be deductible under Code Section 162(m). Further, notwithstanding anything herein to the contrary, (a) no amendment shall be made that would cause the Plan not to comply with the requirements of Code Section 409A or any other applicable law or rule of any applicable securities exchange or similar entity, and (b) the AIP and any Award thereunder may be amended without Participant consent to the extent that Compensation Committee (or its authorized representative) determines such amendment necessary to cause the AIP or Award to comply with the requirements of Code Section 409A or any other applicable law or rule of any applicable securities exchange or similar entity.

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2007 AIP

SECTION 9

DEFINED TERMS

9.1. In addition to the other definitions contained herein, the following definitions shall apply:

(a) Assignment. The term “Assignment” refers to a Participant’s position or location and/or business unit. Corporate Compensation or the Compensation Committee, as appropriate, has determined the Target Annual Incentive for each Assignment.

(b) Award. The term “Award” refers to any Annual Incentive Award or Quarterly Incentive Award, as applicable, awarded under the AIP.

(c) Board. The term “Board” means the Board of Directors of the Company.

(d) Cause. The term “Cause” means (i) a material failure by a Participant (other than a failure resulting from employee’s incapacity due to a mental or physical disability) to perform the Participant’s duties and responsibilities, which failure is demonstrably willful and deliberate on the Participant’s part, is committed in bad faith or without reasonable belief that such failure is in the best interests of the Company and its affiliates and is not remedied in a reasonable period of time after receipt of written notice from the Company or its affiliate specifying such failure, (ii) the commission by the Participant of a felony, or a misdemeanor involving moral turpitude, or (iii) dishonesty or willful misconduct in connection with the Participant’s employment.

(e) Compensation Committee. The term “Compensation Committee” refers to the Compensation Committee of the Board of Directors of Sears Holdings Corporation.

(f) Corporate Compensation. The term “Corporate Compensation” refers to the function within the Human Resources Department of the Company (or its authorized representative) that is allocated the duties of administering the compensation arrangements sponsored by the Company.

(g) Code. The term “Code” means the Internal Revenue Code of 1986, as amended from time to time (and the regulations issued thereunder). A reference to any provision of the Code shall include reference to any successor provision of the Code (and the regulations issued thereunder).

(h) Executive. The term “Executive” refers to any employee of an Employer who holds a position of senior vice president position or higher, or any employee who is an executive officer under Section 16(b) of the Securities and Exchange Act of 1934.

(i) Fiscal Year. The term “Fiscal Year” refers to (i) with respect to Participants employed by the Company (including any Participating Employer other than Lands’ End, Inc.), the twelve (12) month period beginning on February 4, 2007 and ending on February 2, 2008 (i.e., the Saturday closest to January 31 of calendar year 2008), and (ii) with respect to Participants employed by Lands’ End, Inc., the twelve (12) month period beginning on February 3, 2007 and ending on February 1, 2008 (i.e., the Friday closest to January 31 of calendar year 2008).

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2007 AIP

(j) Poor Performance. The term “Poor Performance” means the circumstance in which a Participant receives a below-expectations rating in any primary performance category per the Company performance management system within six (6) months prior to the date that the Participant is terminated.

(k) Retail Participant. The term “Retail Participant” refers to each salaried store employee, excluding salaried employees in the pharmacy department.

(l) Support Center. For purposes of determining which corporate hourly employees are Eligible Employees under the AIP, the term “Support Center” refers to the following corporate locations: (i) Hoffman Estates, Illinois, (ii) Troy, Michigan, (iii) Dodgeville, Wisconsin (with respect to associates referred to as salaried non-exempt associates only), (iv) Tucker, Georgia, (v) Dallas, Texas, (vi) New York Design Center facilities in New York and (vii) SRAC in Wilmington, Delaware. “Support Center” also includes Kmart Corporation and Kmart Management Corporation management and salaried employees in the field but on a Support Center overhead account.

SECTION 10

EXPIRATION OF AIP

The AIP shall expire, subject to earlier termination pursuant to Section 8, on the date on which all Annual Incentive Awards and Quarterly Incentive Awards (if any) are paid in full in accordance with the provisions of the AIP.

[Remainder of page intentionally left blank.]

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2007 AIP

IN WITNESS WHEREOF, the Compensation Committee of the Board of Directors of Sears Holdings Corporation has caused this AIP to be executed effective as of the date first stated above, by the undersigned officer of Sears Holdings Corporation on this 2nd day of May, 2007.

SEARS HOLDINGS CORPORATION
By:	/s/ Robert D. Luse
	Robert D. Luse
Title:	SVP, Human Resources

14

SEARS HOLDINGS CORPORATION

2007 ANNUAL INCENTIVE PLAN

APPENDIX A

Participating Employers

(As of March 15, 2007)

1. Sears Holdings Corporation

2. Sears Holdings Management Corporation

3. Sears, Roebuck and Co.

a. Including Lands’ End, Inc.

b. Excluding Orchard Supply Hardware Stores Corporation

4. Kmart Holding Corporation

a. Kmart Management Corporation

b. Kmart Corporation

EX-10.4

EXHIBIT 10.4

SEARS HOLDINGS CORPORATION

RESTRICTED STOCK AWARD AGREEMENT

2007 Executive Long-Term Incentive Program

DATE

NAME

TITLE

By action of Sears Holdings Corporation (the “Company”) under the Sears Holdings Corporation 2007 Executive Long-Term Incentive Program (“LTIP”) and the Sears Holdings Corporation 2006 Stock Plan (the “Stock Plan”), you have been awarded restricted shares of Company stock, as detailed below. These shares have restrictions attached to them. You are restricted from selling these shares until the vesting dates have occurred. Once you are a holder of restricted shares, you are entitled to voting rights on the shares, subject to the limits described below. (You will not be a holder of the restricted shares awarded to you under the LTIP unless or until the stockholders approve the First Amendment to the Sears Holdings Corporation Umbrella Incentive Program (“UIP”), under which the LTIP is established.) Additionally, in the event that the Company were to declare a dividend, you would also be entitled to dividend rights on the shares, subject to the limits described below.

Date of Grant	Grant Value	Grant Price	Restricted Shares Granted (1)	Vesting Dates
	$	$		See Below

⁽¹⁾ Rounded down to nearest whole share

Vesting Dates

Restricted shares will vest based on when the performance goal of the LTIP is achieved. Your shares will be forfeited if you leave the company before the vesting dates, subject to the termination-related exceptions described below.

Performance Goal is achieved during fiscal years 2007, 2008, or 2009

If the market value of the restricted shares granted, based on the closing share price on the last business day of fiscal year 2009, is greater than the grant value stated above, a portion of the total restricted shares granted equal to the grant value divided by the closing share price on the last business day of fiscal year 2009, rounded down to the nearest whole share, will vest within two and one-half months after fiscal year end 2009 (i.e., the “2009 initial payment date”); provided that you are actively employed on the 2009 initial payment date. Remaining restricted shares will vest in two equal installments on the subsequent payment dates following the 2010 and 2011 fiscal years, respectively (i.e., two and one half months after the close of the fiscal year), if you are actively employed on such payment dates. Notwithstanding the forgoing, if you meet one of the termination-related exceptions after the 2009 initial payment date, you will be paid your remaining restricted shares as soon as administratively feasible after such termination date.

If the market value of the restricted shares granted, based on the closing share price on the last business day of fiscal year 2009, is less than or equal to your grant value stated above, all restricted shares will vest within two and one half months after the fiscal year end 2009; provided you are actively employed on such payment date.

Performance Goal is achieved during fiscal year 2010,

but not in fiscal years 2007, 2008, or 2009

Upon determination that the performance goal was not achieved in fiscal years 2007, 2008, or 2009, one half of the restricted shares granted will forfeit effective as of the last day of fiscal year 2009. The remaining restricted shares may vest as described below.

If the market value of the remaining restricted shares, based on the closing share price on the last business day of fiscal year 2010, is greater than the grant value stated above, a portion of the total restricted shares granted equal to the grant value divided by the closing share price on the last business day of fiscal year 2010, rounded down to the nearest whole share, will vest within two and one-half months after fiscal year end 2010 (i.e., the “2010 initial payment date”); provided that you are actively employed on the 2010 initial payment date. Any remaining shares will vest on the subsequent payment date following the 2011 fiscal year (i.e., two and one half months after the close of the fiscal year) if you are actively employed on such payment date. Notwithstanding the forgoing, if you meet one of the termination-related exceptions after the 2010 initial payment date, you will be paid your remaining restricted shares as soon as administratively feasible after such termination date.

If the market value of remaining restricted shares, based on the closing share price on the last business day of fiscal year 2010, is less than or equal to your grant value stated above, all restricted shares will vest within two and one half months after the fiscal year end 2010; provided you are actively employed on such payment date.

Termination of Employment

In the event that you voluntarily terminate your employment with the Company (other than for retirement or good reason) or if you are involuntarily terminated with cause or due to poor performance, you will forfeit any outstanding restricted shares, in accordance with the LTIP. If, after the applicable initial payment date (i.e., the 2009 or 2010 initial payment date) and before a subsequent payment date with respect to any remaining shares, you terminate your employment due to (a) retirement, (b) death, (c) disability, (d) a voluntary termination for good reason or (e) an involuntary termination for job elimination and without cause, in accordance with the LTIP, you will be deemed to be vested in the remaining unvested shares, and the shares will be paid to you as soon as administratively feasible after such termination date.

Tax and Ownership Rights

At the time you vest in any of your restricted shares, the value of the vested shares is taxable as wages. The Company will require you to pay withholding taxes due at the time your shares vest, which taxes will be payable in cash, or at the Compensation Committee’s option may be payable in shares equal to the taxes due at the time the shares vest. The attached prospectus provides more tax information, as well as an overview of your restricted grant.

Restricted shares may not be sold, transferred, pledged or otherwise assigned and shall, except to the extent exchangeable for unrestricted common shares of the Company as hereinafter provided, be automatically canceled upon termination of your employment with the Company and its wholly-owned subsidiaries unless you meet one of the termination-related exceptions described above.

Your restricted shares shall be exchangeable for unrestricted common shares of the Company on the vesting date.

No physical certificates for your restricted shares will be issued to you. Instead, your restricted shares will be evidenced by certificates held by or on behalf of the Company, in book-entry form, or otherwise, as determined by the Company. As a holder of restricted shares, you are otherwise entitled to all the rights (including voting and dividend rights) of a holder of an equivalent number of unrestricted common shares of the Company, subject to the terms of the Stock Plan and this Agreement. Specifically, you are entitled to voting rights on the restricted shares and, in the event that the Company were to declare a dividend, you are entitled to receive dividends paid with respect to the restricted shares. You will not be entitled to voting or dividend rights with respect to record dates occurring before the date the restricted shares were issued to you (following stockholder approval of the First Amendment to the UIP) nor with respect to record dates occurring on or after the date, if any, on which you forfeit the restricted shares.

Under existing laws and regulations, in general, the fair market value of the shares granted hereunder on the date such shares become exchangeable for unrestricted common shares of the Company will be subject to federal income tax at ordinary rates and to social security tax and their respective withholding requirements, and may be subject to state and local taxes and withholding requirements. If the Company withholds shares equal to any required withholding from the shares that will become exchangeable for unrestricted common shares of the Company, such shares shall be valued at their fair market value on the date such shares become exchangeable for unrestricted common shares of the Company. The fair market value of common shares of the Company on any date shall be the reported closing price on that date for such shares on the principal securities exchange or market on which the shares are then listed or admitted to trading or, if the Company’s common shares are not traded on that date, on the next preceding date on which Stock was traded.

If you are an officer of the Company who is subject to Section 16(b) of the Securities Exchange Act of 1934, any shares withheld to satisfy such tax withholding requirements may be subject to certain restrictions and reporting requirements.

This award is subject to all of the terms and conditions of the LTIP and Stock Plan, and it is subject to adjustment as provided in the LTIP and Stock Plan.

Sears Holdings Corporation

/s/ Robert D. Luse

Robert D. Luse

SVP, Human Resources

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Aylwin B. Lewis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sears Holdings Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 31, 2007

/S/ AYLWIN B. LEWIS

Aylwin B. Lewis

Chief Executive Officer and President

Sears Holdings Corporation

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, William C. Crowley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sears Holdings Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 31, 2007

/s/ WILLIAM C. CROWLEY

William C. Crowley

Executive Vice President,

Chief Financial Officer and Chief

Administrative Officer

Sears Holdings Corporation

EX-32

EXHIBIT 32

CERTIFICATION

Pursuant to 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

Each of the undersigned, Aylwin B. Lewis, Chief Executive Officer and President of Sears Holdings Corporation (the “Company”) and William C. Crowley, Executive Vice President, Chief Financial Officer and Chief Administrative Officer of the Company, has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 5, 2007 (the “Report”).

Each of the undersigned hereby certifies that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 31, 2007

/s/ AYLWIN B. LEWIS

Aylwin B. Lewis

Chief Executive Officer and President

/s/ WILLIAM C. CROWLEY

William C. Crowley

Executive Vice President, Chief Financial

Officer and Chief Administrative Officer