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 3, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    x Accelerated filer    ¨ Non-accelerated filer    ¨ Smaller reporting company    ¨

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 23, 2008, the registrant had 132,013,524 common shares, $0.01 par value, outstanding.

SEARS HOLDINGS CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

13 Weeks Ended May 3, 2008 and May 5, 2007

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations (Unaudited) for the 13 Weeks Ended May 3, 2008 and May 5, 2007	1
	Condensed Consolidated Balance Sheets (Unaudited) as of May 3, 2008, May 5, 2007 and February 2, 2008	2
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 13 Weeks Ended May 3, 2008 and May 5, 2007	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	32
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	33
Item 6.	Exhibits	34

SEARS HOLDINGS CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	13 Weeks Ended
millions, except per share data	May 3, 2008			May 5, 2007
REVENUES
Merchandise sales and services	$	11,068		$	11,747
COSTS AND EXPENSES
Cost of sales, buying and occupancy		8,045			8,437
Selling and administrative		2,815			2,644
Depreciation and amortization		248			262
Gain on sales of assets		(32	)		(5	)
Total costs and expenses		11,076			11,338
Operating income (loss)		(8	)		409
Interest and investment income		(11	)		(40	)
Interest expense		66			73
Other (income) loss		1			(5	)
Income (loss) before income taxes and minority interest		(64	)		381
Income tax expense (benefit)		(28	)		148
Minority interest		20			10
NET INCOME (LOSS)	$	(56	)	$	223
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share	$	(0.43	)	$	1.45
Diluted earnings (loss) per share	$	(0.43	)	$	1.45
Basic weighted average common shares outstanding		131.7			153.8
Diluted weighted average common shares outstanding		131.7			153.9

See accompanying notes.

1

SEARS HOLDINGS CORPORATION

Condensed Consolidated Balance Sheets

	(Unaudited)						February 2, 2008
millions, except per share data	May 3, 2008			May 5, 2007
ASSETS
Current assets
Cash and cash equivalents	$	1,413		$	3,506		$	1,622
Accounts receivable		943			840			744
Merchandise inventories		10,309			10,349			9,963
Prepaid expenses and other current assets		434			431			438
Deferred income taxes		34			293			35
Total current assets		13,133			15,419			12,802
Property and equipment, net		8,698			8,943			8,863
Goodwill		1,668			1,714			1,686
Tradenames and other intangible assets		3,343			3,413			3,353
Other assets		496			383			693
TOTAL ASSETS	$	27,338		$	29,872		$	27,397
LIABILITIES
Current liabilities
Short-term borrowings	$	809		$	98		$	162
Current portion of long-term debt and capitalized lease obligations		410			738			242
Merchandise payables		3,681			3,587			3,487
Income taxes payable		—			8			54
Other current liabilities		3,424			3,465			3,971
Unearned revenues		1,110			1,093			1,121
Other taxes		537			562			525
Total current liabilities		9,971			9,551			9,562
Long-term debt and capitalized lease obligations		2,289			2,681			2,606
Pension and postretirement benefits		1,176			1,488			1,258
Minority interest and other long-term liabilities		3,332			3,213			3,304
Total Liabilities		16,768			16,933			16,730
SHAREHOLDERS’ EQUITY
Preferred stock, 20 shares authorized; no shares outstanding		—			—			—
Common stock $0.01 par value; 500 shares authorized; 132, 154, and 132 shares outstanding, respectively		1			2			1
Capital in excess of par value		10,415			10,402			10,419
Retained earnings		4,453			3,908			4,509
Treasury stock—at cost		(4,361	)		(1,452	)		(4,331	)
Accumulated other comprehensive income		62			79			69
Total Shareholders’ Equity		10,570			12,939			10,667
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	27,338		$	29,872		$	27,397

See accompanying notes.

2

SEARS HOLDINGS CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	13 Weeks Ended
millions	May 3, 2008			May 5, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(56	)	$	223
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		248			262
Curtailment gain on Sears Canada’s post-retirement benefit plans		—			(27	)
Loss on total return swaps, net		—			21
Gain on sales of assets		(32	)		(5	)
Other non-cash items affecting earnings		6			—
Change in operating assets and liabilities (net of acquisitions and dispositions):
Deferred income taxes		(68	)		(88	)
Merchandise inventories		(368	)		(411	)
Merchandise payables		206			251
Income and other taxes		(110	)		(366	)
Other operating assets		81			7
Other operating liabilities(1)(2)		(424	)		(61	)
Net cash used in operating activities		(517	)		(194	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and investments		44			18
Purchases of investments		(13	)		—
Purchases of property and equipment		(178	)		(111	)
Change in collateral on total return swaps, net		—			15
Cash settlements on total return swaps, net		—			(40	)
Net cash used in investing activities		(147	)		(118	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt issuances		5			—
Repayments of long-term debt		(136	)		(51	)
Increase in short-term borrowings, primarily 90 days or less		646			4
Purchase of treasury stock		(40	)		(1	)
Net cash provided by (used in) financing activities		475			(48	)
Effect of exchange rate changes on cash and cash equivalents		(20	)		27
NET DECREASE IN CASH AND CASH EQUIVALENTS		(209	)		(333	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		1,622			3,839
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,413		$	3,506
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, net of refunds		132			226
(2) Cash interest paid		54			59

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 1,200 specialty retail stores in the United States operating through Kmart and Sears and approximately 380 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 2, 2008. Certain prior period amounts have been reclassified to conform to the current interim period presentation.

NOTE 2 – CHANGES IN ACCOUNTING PRINCIPLE

Change in Sears Canada Year End

During the fourth quarter of 2007, Sears Canada changed its fiscal year end from the Saturday nearest to December 31^st to the Saturday nearest to January 31^st. Prior to this change, Sears Canada’s results were consolidated into the consolidated results of Holdings on a one-month lag. While our historical policy of consolidating the results of Sears Canada on a one-month lag was considered acceptable, we believe elimination of the one-month reporting lag is preferable because it allows a full seasonal cycle, including the liquidation of holiday merchandise, for Sears Canada to be included in the results of Holdings. Furthermore, Sears Canada’s fiscal year end is now aligned with the fiscal year end of Holdings.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections—A Replacement of Accounting Principles Board (“APB”) Opinion No. 20 and SFAS No. 3,” changes in accounting policy are to be reported through retrospective application of the new policy to all prior financial statement periods presented. Accordingly, our financial statements for periods prior to 2007 have been adjusted to reflect the period-specific effects of applying this change. This change resulted in a one-month shift backwards of periods previously reported for Sears Canada. The impact of this change in accounting policy was not material to our consolidated financial position, results of operations or cash flows for fiscal 2007 or our condensed consolidated financial statements for the quarter ended May 5, 2007.

4

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NOTE 3 – BORROWINGS

Total borrowings were as follows:

millions	May 3, 2008		May 5, 2007		February 2, 2008
Short-term borrowings:
Unsecured commercial paper	$	144	$	98	$	145
Secured borrowings		665		—		17
Long-term debt, including current portion:
Notes and debentures outstanding		1,974		2,637		2,099
Capitalized lease obligations		725		782		749
Total borrowings	$	3,508	$	3,517	$	3,010

Credit Agreement

We have a $4.0 billion, five-year credit agreement (the “Credit Agreement”) in place as a funding source for general corporate purposes, 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 3, 2008, we had $650 million of borrowings and $1.0 billion of letters of credit outstanding under the Credit Agreement with $2.4 billion of availability remaining under the Credit Agreement. The $650 million in borrowings, borrowed in the first quarter of fiscal 2008, are classified within short-term borrowings on our condensed consolidated balance sheet as of May 3, 2008 as we intend to repay the entire amount within the next 12 months. As of May 30, 2008, borrowings on the Credit Agreement have been reduced to $400 million. The Credit Agreement does not contain provisions that would restrict borrowings or letter of credit issuances based on material adverse changes or credit ratings.

The majority of the letters of credit outstanding under the Credit Agreement, and Letter of Credit Agreement discussed below, are used to provide collateral for our insurance programs.

Letter of Credit Agreement

We also have a letter of credit agreement (the “LC Agreement”), which is a 364-day secured facility with a commitment amount of up to $1.0 billion. This agreement provides solely for the issuance of letters of credit and does not provide for direct borrowings. The current term of the LC Agreement, which is renewable annually upon agreement of the parties, is scheduled to end in July 2008. On April 14, 2008, Bank of America, N.A., as Issuing Bank under the LC Agreement, advised us that it would not agree to renew the LC Agreement under its existing terms. At May 3, 2008, $2 million in letters of credit were outstanding under the LC Agreement as compared to $741 million in letters of credit outstanding at February 2, 2008. We had $2 million posted as collateral under the LC Agreement as of May 3, 2008.

Cash Collateral

We post cash collateral for certain self-insurance programs which we continue to classify 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 3, 2008, we had $15 million posted as collateral for self-insurance programs.

5

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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 3, 2008, there were $15 million in borrowings outstanding under the OSH LLC Facility and $3 million in outstanding letters of credit. The $15 million in borrowings have been classified within short-term borrowings on our condensed consolidated balance sheet as of May 3, 2008 as we intend to repay the entire outstanding amount of this borrowing within the next 12 months.

NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS

Foreign Currency Forwards

As of May 3, 2008, we had a series of foreign currency forward contracts outstanding with a total Canadian notional value of $400 million and with a weighted-average remaining life of 0.2 years. These contracts have been designated and qualify as hedges of the foreign currency exposure of our net investment in Sears Canada. Accordingly, the aggregate fair value of the forward contracts as of May 3, 2008, negative $13 million, has been recorded as a liability on our condensed consolidated balance sheet, with an offsetting amount, net of tax, recorded as a component of other comprehensive income. Certain of our currency forward contracts require collateral be posted in the event our liability under such contracts reaches a predetermined threshold. No cash was posted as collateral under these contracts as of May 3, 2008.

Sears Canada Foreign Exchange Collars & Contracts

Sears Canada mitigates the risk of currency fluctuations on offshore merchandise purchases denominated in U.S. currency by purchasing U.S. dollar denominated forward contracts for a portion of its expected requirements at the time of placement. Since Holdings’ functional currency is the U.S. dollar, the Company is not directly exposed to the risk of exchange rate changes due to Sears Canada’s merchandise purchases. As such, the Company has recorded a mark to market fair value gain of $1 million in other income.

Total Return Swap Investment

We, from time to time, invest our surplus cash in various securities and financial instruments, including total return swaps, which are derivative instruments designed to synthetically replicate the economic return characteristics of one or more underlying marketable equity securities. Such investments may be highly concentrated and involve substantial risks. We had no total return swaps outstanding as of May 3, 2008. We recognized investment losses of $21 million on total return swaps for the 13-week period ended May 5, 2007.

SFAS No. 157, “Fair Value Measurements”

On February 3, 2008, we adopted SFAS No. 157, “Fair Value Measurements.” The adoption of SFAS No. 157 is currently limited to financial instruments and to non-financial derivatives as, in February 2008, the FASB issued FSP No. 157-2, which delayed the effective date of SFAS No. 157 for one year for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.

6

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure requirements about fair value measurements. Under SFAS No. 157, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. The fair value definition under SFAS No. 157 focuses on an exit price, which is the price that would be received by Holdings to sell an asset or paid to transfer a liability versus an entry price, which would be the price paid to acquire an asset or received to assume a liability. Although SFAS No. 157 does not require additional fair value measurements, it applies to other accounting pronouncements that require or permit fair value measurements.

We determine fair value of financial assets and liabilities based on the following fair value hierarchy, as prescribed by SFAS No. 157, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:

Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide ongoing pricing information.

Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.

Level 3 inputs—unobservable inputs for the asset or liability.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115,” which permits entities to elect to measure many financial instruments and certain other items at fair value. For Holdings, SFAS No. 159 was effective as of February 3, 2008 and had no impact on amounts presented for periods prior to the effective date. We do not currently have any financial assets or financial liabilities for which the provisions of SFAS No. 159 have been elected. However, in the future, we may elect to measure certain financial instruments at fair value in accordance with this standard.

The following table provides the fair value measurement amounts for assets and liabilities recorded on our condensed consolidated balance sheet at fair value at May 3, 2008:

millions	Total Fair Value Amounts at May 3, 2008			Level 1		Level 2			Level 3
Investments in equity securities(1)	$	23		$	23	$	—		$	—
Foreign currency contracts(2)		(12	)		—		(12	)		—
Total	$	11		$	23	$	(12	)	$	—

⁽¹⁾ Included within Other assets on the condensed consolidated balance sheet.

⁽²⁾ Included within Prepaid expenses and other current assets and Other current liabilities on the condensed consolidated balance sheet.

7

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Valuation methods of the fair value measurements disclosed above are as follows:

Investments in equity securities: Investments in equity securities are typically valued at the closing price in the principal active market as of the last business day of the quarter. Principal active markets for equity prices include published exchanges such as NASDAQ and the New York Stock Exchange. We do not adjust prices to reflect for after-hours market activity. Our investments in equity securities are valued using Level 1 measurements.

Derivative contracts: The fair values of derivative assets and liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple inputs including interest rates, prices and indices to generate pricing and volatility factors, which are used to value the position. The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Our derivative instruments are valued using Level 2 measurements.

NOTE 5 – INTEREST AND INVESTMENT INCOME

The following table sets forth the components of interest and investment income as reported in our condensed consolidated statements of operations.

	13 Weeks Ended
millions	May 3, 2008		May 5, 2007
Interest income on cash and cash equivalents	$	9	$	37
Total return swap loss		—		(21	)
Other investment income		2		24
Total	$	11	$	40

Interest Income on Cash and Cash Equivalents

We recorded interest income of $9 million and $37 million for the 13-week periods ended May 3, 2008 and May 5, 2007, 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 Loss

As discussed in Note 4, from time to time, we have invested in various securities and financial instruments, including total return swaps. We recognized investment losses of $21 million on total return swaps for the 13-week period ended May 5, 2007. We had no total return swaps outstanding as of or during the quarter ended May 3, 2008.

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.

8

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NOTE 6 – 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 29.8 million shares of the 31.9 million shares set aside for distribution have been distributed to holders of Class 5 claims, and approximately $9 million and $4 million in cash has been distributed to the holders of Class 6 and 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 first quarter of fiscal 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.

NOTE 7 – SHAREHOLDERS’ EQUITY

Share Repurchase Program

During the 13-week period ended May 3, 2008, we repurchased 0.4 million of our common shares at a total cost of $40 million, or an average price of $94.19 per share, under our share repurchase program. As of May 3, 2008, we had $143 million of remaining authorization under our common share repurchase program. The share repurchase program, authorized by our Board of Directors, has no stated expiration date and share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods.

Subsequent Event

On May 28, 2008 our Board of Directors approved the repurchase of up to an additional $500 million of the Company’s common shares. This authorization, when added to the $143 million remaining as of May 3, 2008 under previous authorizations, provides us with a current aggregate authorization of $643 million.

9

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Comprehensive Income (Loss) and Accumulated Other Comprehensive Income

The following table shows the computation of comprehensive income (loss):

	13 Weeks Ended
millions	May 3, 2008			May 5, 2007
Net income (loss)	$	(56	)	$	223
Other comprehensive income (loss):
Pension and postretirement adjustments, net of taxes		—			16
Cumulative translation adjustments		(7	)		4
Total other comprehensive income (loss)		(7	)		20
Total comprehensive income (loss)	$	(63	)	$	243

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

millions	May 3, 2008			May 5, 2007			February 2, 2008
Currency translation adjustments	$	(55	)	$	(2	)	$	(49	)
Cumulative unrealized derivative gain		2			3			3
Pension and postretirement adjustments, net of tax		115			78			115
Accumulated other comprehensive income	$	62		$	79		$	69

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 3, 2008			May 5, 2007
Components of net periodic expense:
Benefits earned during the period	$	7		$	3
Interest costs		109			95
Expected return on plan assets		(107	)		(96	)
Net periodic expense	$	9		$	2

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 resulted in 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 3, 2008, we made total contributions of $76 million to our domestic pension plans. We anticipate making aggregate contributions of $165 million over the remainder of fiscal 2008.

10

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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 Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainties in Income Taxes—an Interpretation of FASB Statement No. 109.” 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,” any resolution of these matters results in a direct credit to capital in excess of par value within shareholders’ equity.

As of the first quarter of fiscal 2008, we had gross unrecognized tax benefits of $433 million. Of this amount, $116 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. During the quarter, we reduced gross unrecognized tax benefits by $21 million. Of this reduction, $20 million related to state tax settlements relating to pre-Merger periods. We expect that our unrecognized tax benefits could decrease up to $36 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 completion of tax audits and expected related settlements.

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. As of May 3, 2008, the total amount of interest and penalties recognized on our condensed consolidated balance sheet was $99 million. The total amount of interest and penalties recognized in our condensed consolidated statement of operations for the first quarter of fiscal 2008 was $1 million.

We file income tax returns in both the United States and various foreign jurisdictions. The U.S. Internal Revenue Service (“IRS”) has 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 the Merger. The IRS has completed its examination of 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.

At the end of fiscal 2007, we had a state net operating loss (“NOL”) deferred tax asset of $273 million and a valuation allowance of $185 million. In the first quarter of fiscal 2008, there was no change to the state NOL deferred tax asset and our valuation allowance. 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 relate to pre-Merger periods, and are reversed in the future, such effects would be recorded as a decrease to goodwill.

11

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. During the fourth quarter of 2007, Sears Canada changed its fiscal year end from the Saturday nearest December 31^st to the Saturday nearest January 31^st. This change has been retrospectively applied to all prior year amounts included in the following segment results. See Note 2 for further information on the impact of this change.

	For the 13 Weeks Ended
	May 3, 2008
millions	Kmart			Sears						Sears Holdings
				Domestic			Canada
Merchandise sales and services	$	3,733		$	6,100		$	1,235		$	11,068
Costs and expenses
Cost of sales, buying and occupancy		2,866			4,329			850			8,045
Selling and administrative		856			1,654			305			2,815
Depreciation and amortization		33			183			32			248
(Gain) loss on sales of assets		(1	)		1			(32	)		(32	)
Total costs and expenses		3,754			6,167			1,155			11,076
Operating income (loss)	$	(21	)	$	(67	)	$	80		$	(8	)
Total assets	$	6,379		$	17,516		$	3,443		$	27,338

	For the 13 Weeks Ended
	May 5, 2007
millions	Kmart			Sears					Sears Holdings
				Domestic		Canada
Merchandise sales and services	$	4,015		$	6,660	$	1,072		$	11,747
Costs and expenses
Cost of sales, buying and occupancy		3,055			4,629		753			8,437
Selling and administrative		840			1,578		226			2,644
Depreciation and amortization		26			206		30			262
(Gain) loss on sales of assets		(1	)		1		(5	)		(5	)
Total costs and expenses		3,920			6,414		1,004			11,338
Operating income	$	95		$	246	$	68		$	409
Total assets	$	7,511		$	19,337	$	3,024		$	29,872

In January 2008 we announced that we would implement a new organizational structure and operating model designed to simplify the way our business lines are managed. While we have begun the process of transforming the Company to this new model, it will take some time to build the processes and information systems necessary to support the structure. We continue to assess the impact our new organizational structure will have on the business segment information used by our management to operate Holdings on an on-going basis.

12

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NOTE 11 – SUPPLEMENTAL FINANCIAL INFORMATION

Other current liabilities as of May 3, 2008, May 5, 2007 and February 2, 2008 consisted of the following:

millions	May 3, 2008		May 5, 2007		February 2, 2008
Payroll and benefits payable	$	358	$	367	$	367
Outstanding checks in excess of funds on deposit		290		310		405
Current portion of self-insurance reserves		368		358		377
Customer deposits		369		391		371
Accrued expenses		628		775		930
Other		1,411		1,264		1,521
Total	$	3,424	$	3,465	$	3,971

Minority interest and other liabilities as of May 3, 2008, May 5, 2007 and February 2, 2008 consisted of the following:

millions	May 3, 2008		May 5, 2007		February 2, 2008
Unearned revenues	$	928	$	933	$	945
Self-insurance reserves		819		807		802
Minority interest		326		211		313
Other		1,259		1,262		1,244
Total	$	3,332	$	3,213	$	3,304

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.

• 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 (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 “Federal Court”). 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 Federal Court derivative suit was dismissed without prejudice on April 18, 2008.

• 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

13

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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 Securities Exchange Act of 1934 (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. The parties have settled the matter and on May 1, 2008, the Court granted final approval of the settlement. 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 Company previously established a reserve for the expected settlement and it will not have a material adverse effect on our annual results of operations, financial position, liquidity or capital resources.

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 with the Illinois Appellate Court of the Circuit Court’s August 8, 2006 order dismissing plaintiffs’ amended complaint. Pursuant to an order dated December 21, 2007, the Appellate Court affirmed the Circuit Court’s dismissal of plaintiffs’ amended complaint. Plaintiffs then petitioned the Illinois Supreme Court for leave to appeal the dismissal, which the Supreme Court subsequently denied without prejudice. Plaintiffs then filed an amended petition for leave to appeal to the Supreme Court, which the Supreme Court denied.

• 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 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 July 17, 2007, the Court granted in part and denied in part plaintiffs’ motion for class certification, certifying a class of Sears stockholders who sold shares of Sears stock between September 9, 2004 and November 16, 2004, excluding short sellers who covered their positions during the class period. On September 24, 2007, the Seventh Circuit Court of Appeals denied defendants’ petition for leave to appeal the class certification order. Merits discovery is underway.

14

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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 S. 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 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. The plaintiffs have filed their consolidated complaint. On April 15, 2008, the Court denied without prejudice defendants’ motion to dismiss. Merits discovery is underway.

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 million plus post-judgment interest. Sears then filed a notice of appeal and on April 16, 2008, the appellate court heard oral argument on the appeal. The parties await a ruling from the appellate court.

We are a defendant in several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried associates who allege various wage and hour violations and unlawful termination practices. The complaints generally seek unspecified monetary damages, injunctive relief, or both. Further, certain of these proceedings are in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. One of these class-action lawsuits described above is Moldowan, et al. v. Sears, Roebuck and Company, et al., a lawsuit filed on August 12, 2004 in the Superior Court of the State of California, County of Sonoma in which plaintiffs allege that Sears failed to pay them for all hours worked and otherwise failed to pay them correctly for work performed in accordance with California law. Plaintiffs seek monetary damages in an unspecified amount, together with attorneys’ fees, interest, statutory penalties and punitive damages. Plaintiffs’ motion for class certification is fully briefed and a hearing on the motion has not been scheduled pending settlement discussions between the parties which are ongoing.

15

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

We are subject to various other legal and governmental proceedings, many involving litigation incidental to our businesses. Some matters contain class action allegations, 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 accordance with SFAS 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.

NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” which revised SFAS No. 141, “Business Combinations.” SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. SFAS No. 141(R) will have a significant impact on the accounting for transaction costs, restructuring costs as well as the initial recognition of contingent assets and liabilities assumed during a business combination. The provisions of SFAS No. 141(R) are applied prospectively from the date of adoption, except for adjustments to a previously acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the measurement period, which are recorded as a component of income tax expense in the period of adjustment, rather than goodwill. We have not yet assessed the impact this statement will have on our financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” See Note 4 for further discussion regarding our adoption of SFAS No. 157 in the first quarter of 2008.

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

16

SEARS HOLDINGS CORPORATION

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

obligations as of December 31. 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.” See Note 4 for further discussion regarding our adoption of SFAS No. 159 in the first quarter of 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin (“ARB”) No. 51.” SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. Before SFAS No. 160 was issued, limited guidance existed for reporting noncontrolling interests and many companies reported such interest as a liability in its balance sheet under the heading “Minority Interest.” SFAS No. 160 requires companies to report noncontrolling interests of consolidated subsidiaries as a component of equity in the consolidated statement of financial position. As a result, upon adoption of this Statement, Holdings will reclassify its noncontrolling interest in Sears Canada and OSH (which represents 30% and 19.9% of the subsidiaries’ ownership, respectively) from its current classification within the long-term liabilities section of Holdings’ condensed consolidated balance sheet to classification within the shareholders’ equity section.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161 expands the disclosure requirements of SFAS No. 133 to require entities to make qualitative disclosures regarding objectives and strategies for using derivatives, quantitative disclosures regarding fair value amounts of and gains and losses on derivative instruments, and disclosures regarding credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008 and we plan to adopt this standard beginning in the first quarter of fiscal 2009. As this statement relates only to disclosure requirements, we do not expect it to have a material impact on our financial condition or operating results.

17

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 3, 2008 and May 5, 2007

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 2, 2008.

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 1,200 specialty retail stores in the United States operating through Kmart and Sears and approximately 380 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 2, 2008.

CONSOLIDATED RESULTS OF OPERATIONS

	13 Weeks Ended
millions, except per share data	May 3, 2008			May 5, 2007
REVENUES
Merchandise sales and services	$	11,068		$	11,747
COSTS AND EXPENSES
Cost of sales, buying and occupancy		8,045			8,437
Gross margin dollars		3,023			3,310
Gross margin rate		27.3	%		28.2	%
Selling and administrative		2,815			2,644
Selling and administrative expense as a percentage of total revenues		25.4	%		22.5	%
Depreciation and amortization		248			262
Gain on sales of assets		(32	)		(5	)
Total costs and expenses		11,076			11,338
Operating income (loss)		(8	)		409
Interest and investment income		(11	)		(40	)
Interest expense		66			73
Other (income) loss		1			(5	)
Income (loss) before income taxes and minority interest		(64	)		381
Income tax expense (benefit)		(28	)		148
Minority interest		20			10
NET INCOME (LOSS)	$	(56	)	$	223
EARNINGS (LOSS) PER COMMON SHARE
Diluted earnings (loss) per share	$	(0.43	)	$	1.45
Diluted weighted average common shares outstanding		131.7			153.9

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.

18

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 3, 2008 and May 5, 2007

Net Income (Loss) and Earnings (Loss) per Share Summary

For the quarter, we recorded a net loss of $56 million ($0.43 loss per diluted share) in fiscal 2008, as compared to net income of $223 million ($1.45 per diluted share) for the first quarter of fiscal 2007. The net loss for the first quarter of fiscal 2008 was predominately due to a significant decline in gross margin dollars, as well as an increase in selling and administrative expenses. The negative impact of these factors, as well as a decline in interest and investment income, on our fiscal 2008 results was only partially offset by declines in both interest expense, given lower average outstanding borrowings and an income tax benefit, given our pre-tax loss position in fiscal 2008.

For the quarter, we reported an operating loss of $8 million in fiscal 2008, as compared to operating income of $409 million in the first quarter of fiscal 2007, mainly due to lower gross margin generated at both Kmart and Sears Domestic. We generated $3.0 billion in total gross margin in the first quarter of 2008 as compared to $3.3 billion in the first quarter last year. Our gross margin rate decreased by approximately 90 basis points to 27.3% reflecting increased promotional activity to clear merchandise. Our sales and gross margin results continue to be challenged by increased competition and unfavorable economic conditions including a weak housing market, as well as the impact on our customers of the increased costs of consumer staples such as food and gas. Given that we do not expect any significant near-term improvement in the overall retail environment, we believe that our sales and gross margin for the balance of fiscal 2008 will likely continue to be pressured by the above-noted unfavorable economic factors.

Net income (loss) for the first quarter of both years was also impacted by certain significant items, including the aforementioned total return swap loss. 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 3, 2008			May 5, 2007
Earnings (loss) per diluted share	$	(0.43	)	$	1.45
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 loss		—			(0.08	)
Gain on sales of assets		0.10			0.01
		0.10			0.30
Earnings (loss) per diluted share excluding above items	$	(0.53	)	$	1.15

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

19

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 3, 2008 and May 5, 2007

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. 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 $32 million ($13 million after tax or $0.10 per diluted share) of such gains in the first quarter of fiscal 2008, mainly related to the sale of Sears Canada’s Calgary store.

Comparable Store Sales and Total Revenues

Domestic comparable store sales declined 8.6% for the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007. Sears Domestic comparable store sales declined 9.8% for the first quarter of fiscal 2008 while Kmart comparable store sales declined 7.1% for the quarter. We experienced lower comparable store sales across most merchandise categories and formats at both Kmart and Sears Domestic for the first quarter of fiscal 2008. For the quarter, notable comparable store sales declines were recorded in home appliances, apparel and lawn and garden (at both Kmart and Sears Domestic), within health and beauty (Kmart) and in tools (Sears Domestic), partially offset by sales increases within home electronics (most notably at Sears Domestic). As noted above, we believe that our overall comparable store sales declines reflect increased competition, the negative impact of unfavorable economic conditions, such as a weak housing market and the impact on our customers of increased costs of consumer staples such as food and gas, during the first quarter of 2008.

For the quarter, total revenues declined $679 million, or 5.8%, to $11.1 billion in fiscal 2008, as compared to $11.7 billion for the first quarter of fiscal 2007. The first quarter decline primarily reflects the above-noted impact of lower domestic comparable store sales, partially offset by sales increases at Sears Canada, primarily reflecting the impact of favorable exchange rates, as the Canadian dollar strengthened in fiscal 2008.

Gross Margin

For the quarter, we generated $3.0 billion in total gross margin in fiscal 2008, as compared to $3.3 billion in the first quarter of fiscal 2007. The total decline was made up of declines at both Kmart and Sears Domestic, offset by an increase at Sears Canada. As noted above, the reductions reflect the negative gross margin impact of lower overall sales, as well as a decline in our overall gross margin as a percentage of total revenues (our “gross margin rate”). As a percentage of total revenues, our gross margin rate declined 0.9% to 27.3% in the first quarter of fiscal 2008, as compared to 28.2% for the first quarter of fiscal 2007. Reduced leverage of buying and occupancy costs, given lower overall sales levels in fiscal 2008, accounted for approximately 0.2% of the total 0.9% decline in our gross margin rate for the quarter. The remaining 0.7% decline was attributable to declines in gross margin rates across a number of merchandise categories at both Kmart and Sears Domestic, with the most significant overall decline being recorded at Sears Domestic. Sears Domestic’s gross margin rate declined to 29.0% in the first quarter of fiscal 2008, as compared to 30.5% for the first quarter of fiscal 2007. Home appliances and tools, respectively, had the greatest impact of any individual merchandise categories on the overall first quarter rate decline at Sears Domestic. The rate declined within both categories due to increased promotional markdown activity as a result of the intense competition for consumer business.

Selling and Administrative Expenses

For the quarter, our selling and administrative expenses as a percentage of total revenues (“selling and administrative expense rate”) was 25.4% in fiscal 2008 as compared to 22.5% for the first quarter of fiscal 2007. The prior year rate, in part, reflects the net favorable impact of certain significant items, noted previously in the “Net Income (Loss) and Earnings (Loss) per Share Summary” section, that were recorded within selling and administrative expenses in fiscal 2007, including the $30 million gain related to a legal settlement, $27 million curtailment gain recorded in connection with changes made to Sears Canada’s benefit plans and the $15 million

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gain related to insurance recoveries for certain Sears property damaged by hurricanes during fiscal 2005. Excluding these items, selling and administrative expenses increased $99 million as compared to first quarter last year, of which $52 million related to Sears Canada and $47 million related to domestic operations. The increase in Sears Canada was primarily due to changes in foreign currency exchange rates.

The $47 million increase in domestic selling and administrative expense reflects higher marketing and display costs ($70 million), increased legal costs ($14 million) and additional investment in multi-channel and online capabilities ($10 million), partially offset by cost reductions in other areas. The higher marketing cost is attributable to a reallocation of our annual marketing spend to the first quarter of 2008 as compared to those allocated during the first quarter of 2007.

Operating Income (Loss)

For the quarter, the Company reported an operating loss of $8 million in fiscal 2008, as compared to operating income of $409 million in the first quarter of fiscal 2007, mainly due to lower gross margin generated at both Kmart and Sears Domestic. As noted above, in addition to the decline in gross margin we also had an increase in selling and administrative expenses for the quarter.

Interest and Investment Income

We earned $11 million in interest and investment income for the first quarter of fiscal 2008, as compared to $40 million for the first quarter of fiscal 2007. As explained in Note 5 to the financial statements above, the prior year interest and investment income included investment losses of $21 million on total return swaps and a $20 million dividend received on our cost method investment in Sears Mexico. The first quarter decrease in fiscal 2008 was primarily due to lower levels of interest income due to reduced cash and cash equivalent balances. There were no total return swaps outstanding as of or during the quarter ended May 3, 2008.

Interest Expense

We incurred $66 million in interest expense during the first quarter of fiscal 2008, as compared to $73 million in the first quarter of last year. The reduction was attributable to lower average borrowings outstanding during the quarter.

Other Income (Loss)

Other income (loss) 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. Bankruptcy-related recoveries represent amounts collected from vendors who had received cash payment for pre-petition obligations.

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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 3, 2008			May 5, 2007
Merchandise sales and services	$	3,733		$	4,015
Cost of sales, buying and occupancy		2,866			3,055
Gross margin dollars		867			960
Gross margin rate		23.2	%		23.9	%
Selling and administrative		856			840
Selling and administrative expense as a percentage of total revenues		22.9	%		20.9	%
Depreciation and amortization		33			26
Gain on sales of assets		(1	)		(1	)
Total costs and expenses		3,754			3,920
Operating income (loss)	$	(21	)	$	95
Number of stores		1,382			1,388

Comparable Store Sales and Total Revenues

For the quarter, Kmart’s comparable store sales and total sales declined 7.1% and 7.0%, respectively. Kmart experienced lower transaction volumes across most merchandise categories. For the quarter, notable comparable store sales declines were recorded within home electronics, apparel, health and beauty, and lawn and garden, partially offset by comparable store sales increases in home entertainment. We believe the overall decline in comparable store sales reflects both increased competition and the negative impact of certain external factors, as noted above in the discussion of consolidated results.

In addition to the impact of comparable store sales declines, the decline in total sales for the quarter also reflects a reduction in the number of Kmart stores in operation during fiscal 2008 relative to the same period last year. Though no Kmart locations closed during the first quarter of fiscal 2008, a number closed during fiscal 2007 which were open during part or all of the first quarter of fiscal 2007, thereby benefiting total sales recorded during the first quarter of fiscal 2007.

Gross Margin

For the quarter, Kmart generated $867 million in total gross margin in fiscal 2008, as compared to $960 million in the first quarter of fiscal 2007, with the $93 million decline reflecting the negative gross margin impact of lower overall sales, as well as a decline in Kmart’s gross margin rate. For the quarter, Kmart’s gross margin rate was 23.2% in fiscal 2008, as compared to 23.9% for the first quarter of fiscal 2007, a decline of 0.7% as a percentage of total revenues. Reduced leverage of buying and occupancy costs, given lower overall sales levels, accounted for approximately 0.5% of the total 0.7% decline, with the remaining 0.2% decline attributable to gross margin rate declines across a number of merchandise categories, most notably in apparel. As noted above, Kmart’s apparel gross margin rate decreased mainly due to increased incremental markdown activity taken to clear 2007 fall and winter apparel as a result of the intense competition for consumer business.

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Selling and Administrative Expenses

For the quarter, Kmart’s selling and administrative expense rate was 22.9% in fiscal 2008, as compared to 20.9% for the first quarter of fiscal 2007. 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. Total selling and administrative expenses increased $16 million for the quarter, mainly as the result of the aforementioned legal settlement gain received in the first quarter of fiscal 2007. The current year selling and administrative rate increased, primarily reflecting lower expense leverage resulting from lower overall sales levels.

Operating Income (Loss)

For the quarter, Kmart recorded an operating loss of $21 million in fiscal 2008, as compared to operating income of $95 million in the first quarter of fiscal 2007, a decline of $116 million. As discussed above, the first quarter decline primarily reflects the negative gross margin impact of lower sales levels, as well as a decline in Kmart’s gross margin rate for the first quarter. In addition to the above-noted decline in gross margin, the decline reflects, to a lesser degree, the impact of higher depreciation and amortization expense and the above-noted $30 million legal settlement gain in the first quarter of fiscal 2007.

Sears Domestic

Sears Domestic results and key statistics were as follows:

Sears Domestic	13 Weeks Ended
millions, except number of stores	May 3, 2008			May 5, 2007
Merchandise sales and services	$	6,100		$	6,660
Cost of sales, buying and occupancy		4,329			4,629
Gross margin dollars		1,771			2,031
Gross margin rate		29.0	%		30.5	%
Selling and administrative		1,654			1,578
Selling and administrative expense as a percentage of total revenues		27.1	%		23.7	%
Depreciation and amortization		183			206
Loss on sales of assets		1			1
Total costs and expenses		6,167			6,414
Operating income (loss)	$	(67	)	$	246
Number of :
Full-line Stores(1)		933			935
Specialty Stores		1,166			1,100
Total Domestic Sears Stores		2,099			2,035

⁽¹⁾ The period ended May 3, 2008 includes 858 Full-line stores and 75 Sears Essentials/Grand stores;

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

Comparable Store Sales and Total Revenues

For the quarter, Sears Domestic’s comparable store sales and total sales declined 9.8% and 8.4%, respectively, with notable declines in apparel, particularly women’s apparel, tools and lawn and garden. For the first quarter, comparable store sales performance within home appliances, while still negative relative to the same quarter in

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fiscal 2007, was largely in line with Sears Domestic’s overall comparable store sales decline for the quarter. Decreased sales performance within these areas was partially offset by comparable store sales increases within Sears Domestic’s home electronics business for the first quarter of fiscal 2008, primarily reflecting continued market demand for flat-panel televisions.

Gross Margin

For the quarter, Sears Domestic generated $1.8 billion in total gross margin in fiscal 2008, as compared to $2.0 billion in the first quarter of fiscal 2007, with the $0.2 billion decline primarily reflecting the negative margin impact of lower overall sales levels, as well as a decline in Sears Domestic’s gross margin rate for the quarter. Sears Domestic’s gross margin rate was 29.0% during the first quarter of 2008, as compared to 30.5% in the first quarter of fiscal 2007, a decline of 1.5% as a percentage of total revenues. The 1.5% decline was attributable to gross margin rate declines across a number of merchandise categories, most notably home appliances. The decline in gross margin rate for home appliances was predominately due to increased promotional markdowns as a result of the difficult economic environment and intense competition for consumer business. Declines in gross margin were partially offset by gross margin rate increases in the apparel category, mainly as a result of increased usage of lower-cost, direct-source merchandise. The favorable impact on total gross margin dollars derived from this effort, however, was more than offset by the negative impact of lower overall apparel sales, which resulted in the generation of lower overall apparel gross margin dollars.

Selling and Administrative Expenses

For the quarter, Sears Domestic’s selling and administrative expense rate was 27.1% in fiscal 2008, as compared to 23.7% for the first quarter of fiscal 2007. The selling and administrative expense rate for fiscal 2007 included a $15 million gain for insurance recoveries received on claims filed for certain property damaged by hurricanes during fiscal 2005. Excluding this gain, Sears Domestic’s selling and administrative expense rate was 23.9% for the first quarter of fiscal 2007. Sears Domestic’s overall selling and administrative expenses increased $76 million in fiscal 2008, reflecting higher legal settlements and marketing spend. As noted above, a significant portion of the increase in selling and administrative expenses relates to a reallocation of our annual marketing spend to the first quarter of 2008 as compared to the first quarter of 2007. The higher marketing costs during the first quarter were due to the launch of the “Sears Reimagine You” campaign, greater use of emerging media advertising and increased promotional ads. The Company expects that marketing costs will be lower than last year for the remainder of fiscal 2008.

Operating Income (Loss)

For the quarter, Sears Domestic recorded an operating loss of $67 million in fiscal 2008, as compared to operating income of $246 million in the first quarter of fiscal 2007, a decline of $313 million. The decrease primarily reflects lower total gross margin dollars generated as a result of lower overall sales levels and a decline in gross margin rate and, to a lesser degree, a $76 million increase in selling and administrative expenses, offset by $23 million less in depreciation and amortization expense.

Sears Canada

Sears Canada, a consolidated, 70%-owned subsidiary of Sears, conducts similar retail operations as Sears Domestic. During the fourth quarter of 2007, Sears Canada changed its fiscal year end from the Saturday nearest December 31^st to the Saturday nearest January 31^st. This change has been retrospectively applied to prior year amounts as required by SFAS No. 154, “Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20 and SFAS No. 3.” See Note 2 of Notes to Condensed Consolidated Financial Statements for further explanation of this change.

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Sears Canada results and key statistics were as follows:

Sears Canada	13 Weeks Ended
millions, except number of stores	May 3, 2008			May 5, 2007
Merchandise sales and services	$	1,235		$	1,072
Cost of sales, buying and occupancy		850			753
Gross margin dollars		385			319
Gross margin rate		31.2	%		29.8	%
Selling and administrative		305			226
Selling and administrative expense as a percentage of total revenues		24.7	%		21.1	%
Depreciation and amortization		32			30
Gain on sales of assets		(32	)		(5	)
Total costs and expenses		1,155			1,004
Operating income	$	80		$	68
Number of :
Full-line Stores		122			123
Specialty Stores		257			252
Total Sears Canada Stores		379			375

Total Revenues

Sears Canada’s total revenues increased 15.2% for the first quarter of fiscal 2008 as compared to the same period last year. The increase in total revenues primarily reflects the impact of favorable exchange rates, as the Canadian dollar strengthened in the last half of fiscal 2007 and continued to strengthen in fiscal 2008. Excluding the impact of foreign-exchange rate changes, sales were relatively flat for the first quarter.

Gross Margin

For the quarter, Sears Canada’s gross margin rate was 31.2% in fiscal 2008, as compared to 29.8% in the first quarter of fiscal 2007. Total gross margin dollars increased $66 million for the first quarter of fiscal 2008 as compared to the same periods last year. The increase was primarily due to improved inventory management during 2008, as well as a decrease in promotional activities and improved terms in Sears Canada’s vendor agreements.

Selling and Administrative Expenses

For the quarter, Sears Canada’s selling and administrative expense rate was 24.7% in fiscal 2008, as compared to 21.1% in the first quarter of fiscal 2007. For the first quarter, the selling and administrative expense rate in 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 23.6% for the first quarter of fiscal 2007.

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Operating Income

Sears Canada’s operating income increased $12 million for the first quarter of fiscal 2008 with the increase reflecting increased gross margin dollars and gains on sales of assets, partially offset with increased selling and administrative expenses. As noted above, selling and administrative expenses benefited from a curtailment gain of $27 million in the first quarter of fiscal 2007. During the first quarter of fiscal 2008, Sears Canada benefited from a $32 million gain from the sale of its Calgary downtown full-line store.

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 3, 2008, May 5, 2007 and February 2, 2008 are detailed in the following table.

millions	May 3, 2008		May 5, 2007		February 2, 2008
Domestic
Cash and equivalents	$	495	$	2,197	$	577
Cash posted as collateral		17		720		29
Credit card deposits in transit		144		145		137
Total domestic cash and cash equivalents		656		3,062		743
Sears Canada		757		444		879
Total cash and cash equivalents	$	1,413	$	3,506	$	1,622

We had cash and cash equivalents of $1.4 billion at May 3, 2008 as compared to $3.5 billion at May 5, 2007 and $1.6 billion at February 2, 2008. The $209 million net decline in cash and cash equivalents since the end of fiscal 2007 primarily reflects $517 million of cash used in operating activities, capital expenditures of $178 million and total long-term debt payments (net of new borrowings) of approximately $131 million. These amounts were partially offset by a $646 million increase in short-term borrowings, as further detailed in the “Financing Activities” section below.

At various times, 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.

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 $290 million, $307 million and $405 million as of May 3, 2008, May 5, 2007 and February 2, 2008, respectively.

Operating Activities

Holdings used approximately $517 million in operating cash flows during the first quarter of fiscal 2008, as compared to $194 million in the first quarter of fiscal 2007. 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.

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Merchandise inventories at May 3, 2008 and May 5, 2007 were $10.3 billion. Merchandise payables were $3.7 billion at May 3, 2008, as compared to $3.6 billion as of May 5, 2007. Domestic inventory levels declined from $9.5 billion at May 5, 2007 to $9.4 billion at May 3, 2008. Sears Canada’s inventory levels increased from $0.8 billion at May 5, 2007 to $0.9 billion at May 3, 2008. The increase in Sears Canada’s inventory is primarily due to the change in exchange rates. As we expect difficult economic conditions to persist in the near term, we intend to manage our inventories throughout the year with the goal of further reducing our domestic merchandise inventories to better align current levels with expected sales

Investing Activities

For the first quarter of fiscal 2008, we used $178 million of cash on capital expenditures as compared to $111 million used during the first quarter of fiscal 2007. In addition, we recognized $21 million in investment losses related to total return swaps during the first quarter of fiscal 2007. There were no total return swaps outstanding as of May 3, 2008.

Financing Activities

For the first quarter of fiscal 2008, we repurchased 0.4 million of our common shares at a total cost of $40 million under our share repurchase program. As of May 3, 2008, we had $143 million of remaining authorization under our common share repurchase program. The share repurchase program has no stated expiration date and share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods. We did not repurchase any of our common shares pursuant to the common share repurchase program during the first quarter of fiscal 2007.

As discussed in Note 7, our Board of Directors approved the repurchase of up to an additional $500 million of the Company’s common shares on May 28, 2008. This authorization, when added to the $143 million remaining as of May 3, 2008 under previous authorizations, provides us with a current aggregate authorization of $643 million. The Company may, as we deem necessary, utilize funds available under our $4.0 billion Credit Agreement (as defined and discussed below), to repurchase shares according to our current authorization.

During the first quarter of fiscal 2008, we utilized a portion of the total availability under our $4.0 billion Credit Agreement to meet seasonal working capital needs associated with the period preceding the spring-summer selling season while, at the same time, continuing to invest in our stores and repurchase our stock. Accordingly, as of May 3, 2008, we had $665 million in secured line of credit borrowings outstanding, including $650 million borrowed under the $4.0 billion Credit Agreement. The entire $650 million in Credit Agreement borrowings are expected to be repaid within the next twelve months, and therefore, have been classified within short-term borrowings on our condensed consolidated balance sheet as of May 3, 2008.

Our outstanding borrowings as of May 3, 2008, May 5, 2007 and February 2, 2008 were as follows:

millions	May 3, 2008		May 5, 2007		February 2, 2008
Short-term borrowings:
Unsecured commercial paper	$	144	$	98	$	145
Secured borrowings		665		—		17
Long-term debt, including current portion:
Notes and debentures outstanding		1,974		2,637		2,099
Capitalized lease obligations		725		782		749
Total borrowings	$	3,508	$	3,517	$	3,010

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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 3, 2008, $2.4 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 2, 2008 for additional information regarding our sources of liquidity.

Debt Ratings

The ratings of our domestic debt securities as of May 3, 2008 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-2	B

Credit Agreement

We have a $4.0 billion, five-year credit agreement (the “Credit Agreement”) in place as a funding source for general corporate purposes, 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 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 3, 2008, we had $650 million of borrowings and $1.0 billion of letters of credit outstanding under the Credit Agreement with $2.4 billion of availability remaining under the Credit Agreement. The $650 million in borrowings, borrowed in the first quarter of fiscal 2008, are classified within short-term borrowings on our condensed consolidated balance sheet as of May 3, 2008, as we intend to repay the entire amount within the next 12 months. As of May 30, 2008, borrowings on the Credit Agreement have been reduced to $400 million. The Credit Agreement does not contain provisions that would restrict borrowings or letter of credit issuances based on material adverse changes or credit ratings.

The majority of the letters of credit outstanding under the Credit Agreement and Letter of Credit Agreement, discussed below, are used to provide collateral for our insurance programs.

Letter of Credit Agreement

We also have a letter of credit agreement (the “LC Agreement”), which is a 364-day secured facility with a commitment amount of up to $1.0 billion. This agreement provides solely for the issuance of letters of credit and does not provide for direct borrowings. The current term of the LC Agreement, which is renewable annually upon agreement of the parties, is scheduled to end in July 2008. On April 14, 2008, Bank of America, N.A., as Issuing Bank under the LC Agreement, advised us that it would not agree to renew the LC Agreement under its existing terms. At May 3, 2008, $2 million in letters of credit were outstanding under the LC Agreement as compared to $741 million in letters of credit outstanding at February 2, 2008. We had $2 million posted as collateral under the LC Agreement as of May 3, 2008.

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Cash Collateral

We post cash collateral for certain self-insurance programs which we continue to classify 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 3, 2008, we had $15 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 3, 2008, there were $15 million in borrowings outstanding under the OSH LLC Facility and $3 million in outstanding letters of credit. The $15 million in borrowings have been classified within short-term borrowings on our condensed consolidated balance sheet as of May 3, 2008 as we intend to repay the entire outstanding amount of this borrowing within the next 12 months.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” which revised SFAS No. 141, “Business Combinations.” SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. SFAS No. 141(R) will have a significant impact on the accounting for transaction costs, restructuring costs as well as the initial recognition of contingent assets and liabilities assumed during a business combination. The provisions of SFAS No. 141(R) are applied prospectively from the date of adoption, except for adjustments to a previously acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the measurement period, which are recorded as a component of income tax expense in the period of adjustment, rather than goodwill. We have not yet assessed the impact this statement will have on our financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” See Note 4 for further discussion regarding our adoption of SFAS No. 157 in the first quarter of 2008.

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

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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 31. 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.” See Note 4 for further discussion regarding our adoption of SFAS No. 159 in the first quarter of 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. Before SFAS No. 160 was issued, limited guidance existed for reporting noncontrolling interests and many companies reported such interest as a liability in its balance sheet under the heading “Minority Interest.” SFAS No. 160 requires companies to report noncontrolling interests of consolidated subsidiaries as a component of equity in the consolidated statement of financial position. As a result, upon adoption of this Statement, Holdings will reclassify its noncontrolling interest in Sears Canada and OSH (which represents 30% and 19.9% of the subsidiaries’ ownership, respectively) from its current classification within the long-term liabilities section of Holdings’ condensed consolidated balance sheet to classification within the shareholders’ equity section.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161 expands the disclosure requirements of SFAS No. 133 to require entities to make qualitative disclosures regarding objectives and strategies for using derivatives, quantitative disclosures regarding fair value amounts of and gains and losses on derivative instruments, and disclosures regarding credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008 and we plan to adopt this standard beginning in the first quarter of fiscal 2009. As this statement relates only to disclosure requirements, we do not expect it to have a material impact on our financial condition or operating results.

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: our ability to offer merchandise and services that our customers want, including our proprietary brand products; our ability to successfully implement initiatives to improve inventory management and other capabilities; competitive conditions in the retail and related services industries; the impact of seasonal

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buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty; general economic conditions and normal business uncertainty, changes in consumer confidence, tastes, preferences and spending, including the impact of fuel costs and spending patterns, the availability and level of consumer debt, and unanticipated increases in our costs; our dependence on sources outside the United States for significant amounts of our merchandise; our extensive reliance on computer systems to process transactions, summarize results and manage our business; our reliance on third parties to provide us with services in connection with the administration of certain aspects of our business; our ability to properly implement and realize the expected benefits from our new organizational structure and operating model; our ability to attract, motivate and retain key executives and other associates; the outcome of pending and/or future legal proceedings, including product liability claims and bankruptcy claims, including proceedings with respect to which the parties have reached a preliminary settlement; and our ability to successfully invest available capital.

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 2, 2008, 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 3, 2008 is the same as disclosed in our Annual Report on Form 10-K for the year ended February 2, 2008.

Interest Rate Risk

We manage interest rate risk through the use of fixed and variable-rate funding and interest rate derivatives. As of May 3, 2008, we had interest rate derivatives with a notional amount of $120 million, nominal fair value and a weighted average remaining life of 0.6 years. All debt securities and interest-rate derivative instruments are considered non-trading. As of May 3, 2008, 32% of our debt portfolio was variable rate. Based on the size of this variable rate debt portfolio at May 3, 2008, which totaled approximately $1.1 billion, an immediate 100 basis point change in interest rates would have affected annual pretax funding costs by $11 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 3, 2008, we had a series of foreign currency forward contracts outstanding, totaling $400 million Canadian notional value and with a weighted average remaining life of 0.2 years, designed to hedge our net investment in Sears Canada against adverse changes in exchange rates. The aggregate fair value of the forward contracts as of May 3, 2008 was negative $13 million. A hypothetical 10% adverse movement in the level of the Canadian exchange rate relative to the U.S. dollar as of May 3, 2008, with all other variables held constant, would have resulted in a loss in the fair value of our foreign currency forward contracts of approximately $44 million as of May 3, 2008. Certain of our currency forward contracts require collateral be posted in the event our liability under such contracts reaches a predetermined threshold. No cash was posted as collateral under these contracts as of May 3, 2008.

31

SEARS HOLDINGS CORPORATION

13 Weeks Ended May 3, 2008 and May 5, 2007

Sears Canada mitigates the risk of currency fluctuations on offshore merchandise purchases denominated in U.S. currency by purchasing U.S. dollar denominated forward contracts for a portion of its expected requirements at the time of placement. As of May 3, 2008 the value of these contracts is not material to Holdings’ financial condition or results of operations.

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 officers 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 officers 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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 103 of SEC Regulation S-K requires that we disclose legal proceedings to which the Company and a governmental authority is a party and that arise under laws dealing with the discharge of materials into the environment or the protection of the environment, if the proceeding reasonably involves potential monetary sanctions of $100,000 or more. Disclosure also is required as to any such proceedings known by us to be contemplated by governmental authorities. In that connection, we note that we have received an administrative subpoena from the District Attorney of the County of Ventura, California, seeking information and documents primarily concerning our handling of hazardous waste in Ventura County and in California generally. We are cooperating with California state and county authorities in connection with this matter. In addition, we are a party to administrative actions brought by the California Air Resources Board (CARB) that allege that Kmart sold certain non-food items (windshield wiper fluid and portable fuel containers) that do not comply with applicable regulations. The parties are currently negotiating toward a resolution of this matter.

See Part I, Item 1, “Financial Statements—Notes to Condensed Consolidated Financial Statements,” Note 6—“Claims Resolution,” 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 Use of Proceeds

The following table provides information about shares of common stock we acquired during the first quarter of fiscal 2008. During the 13 weeks ended May 3, 2008, we repurchased 0.4 million of our common shares at a total cost of $40 million under our common share repurchase program. As of May 3, 2008, we had $143 million of remaining authorization under the program.

	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program(1)	Average Price Paid per Share for Publicly Announced Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
February 3, 2008 to March 1, 2008	—	$	—	—	$	—
March 2, 2008 to April 5, 2008	425,084		94.19	425,084		94.19
April 6, 2008 to May 3, 2008	—		—	—		—
Total	425,084	$	94.19	425,084	$	94.19	$	143,000,000

⁽¹⁾ Our common share repurchase program was initially announced on September 14, 2005 with a total authorization by our Board of Directors of up to $500 million. Subsequently, we announced that our Board of Directors authorized the repurchase of up to an additional $500 million of common stock on each of October 14, 2005, April 5, 2006 and September 12, 2006, $1.0 billion of common stock on July 10, 2007, $1.5 billion of common stock on August 13, 2007, and $500 million of common stock on May 29, 2008 for a total authorization since inception of the program of $5.0 billion. The program has no stated expiration date.

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

On May 5, 2008 (in our second quarter, fiscal 2008), we held our annual meeting of stockholders at our offices in Hoffman Estates, Illinois.

William C. Crowley, Edward S. Lampert, Steven T. Mnuchin, Richard C. Perry, Ann N. Reese, Kevin B. Rollins, Emily Scott and Thomas J. Tisch were elected to the Board of Directors for one-year terms expiring at the 2009

33

annual meeting of stockholders. The stockholders also ratified the Audit Committee’s appointment of Deloitte & Touche LLP as independent auditors for 2008. A stockholder proposal regarding a majority vote shareholder committee was defeated. The votes on matters were as follows:

SEARS HOLDINGS CORPORATION

1. Election of Directors

Name	For	Withheld
William C. Crowley	121,759,538	1,105,271
Edward S. Lampert	121,686,327	1,178,482
Steven T. Mnuchin	121,687,737	1,177,072
Richard C. Perry	121,782,940	1,081,869
Ann N. Reese	121,689,431	1,175,378
Kevin B. Rollins	121,799,269	1,065,540
Emily Scott	121,804,320	1,060,490
Thomas J. Tisch	121,790,559	1,074,251

2. Appointment of Deloitte & Touche LLP as independent auditors for 2008

For	Against	Abstain
121,903,060	356,779	604,969

3. Shareholder proposal regarding a majority vote shareholder committee

For	Against	Abstain	Broker Non-Votes
2,412,874	107,959,965	864,843	11,627,127

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 30, 2008	By	/s/    WILLIAM K. PHELAN
		William K. Phelan Senior Vice President, Controller and Treasurer (Principal Accounting Officer and duly authorized officer of Registrant)

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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	Sears Holdings Corporation 2008 Annual Incentive Plan Document.
*10.2	Sears Holdings Corporation 2008 Executive Long Term Incentive Program.
10.3	Form of 2005 LTIP, 2006 LTIP and 2008 LTIP Award Agreement (incorporated by reference to Exhibit 10.45 to Registrant’s 2006 10-K) (File No. 000-51217).
*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

2008 ANNUAL INCENTIVE PLAN

SECTION 1

GENERAL

1.1. Purpose. The Sears Holdings Corporation 2008 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 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 (as defined in Section 9) 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. The effective date of the AIP is April 22, 2008, which is the date the Compensation Committee (as defined in Section 9) adopted the AIP (the “Effective Date”).

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 any Employer, including the Company, which is a Participating Employer. “Corporate hourly employees” refer to hourly employees employed at a Support Center. Subject to the terms and conditions of the AIP, the Senior Corporate Compensation Executive (as defined in Section 9) shall determine Eligible Employee status, except as determined by the Compensation Committee in accordance with subsection 7.1. Eligible Employees are “Participants” in the AIP.

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

(a) New Hires. The Senior Corporate Compensation Executive, the Compensation Committee, or an authorized representative of either, as applicable, 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 position 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 (as defined in subsection 3.1) 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.

2008 AIP

(b) Changes in Status. The Senior Corporate Compensation Executive or the Compensation Committee, as applicable, 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 position 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 position will apply to the remainder of the Performance Period and the Target Annual Incentive for the immediately preceding incentive-eligible position will apply to the portion of the Performance Period immediately preceding 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 payment date (as defined under subsection 5.1).

(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 incentive-eligible position (if any) will apply only to the remainder of the Performance Period and the Target Annual Incentive for the immediately preceding incentive-eligible position will apply only 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, the Senior Corporate Compensation Executive shall determine, in its sole discretion, the “Target Annual Incentive” (as defined herein) for each Participant. Notwithstanding the forgoing, the Compensation Committee shall approve the Target Annual Incentives and the Awards for Executives (as defined in Section 9) 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 may be reflected as a percentage of base pay or flat dollar amount.

(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 the Senior Corporate Compensation Executive or the Compensation Committee, as applicable.

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2008 AIP

(c) The “Annual Incentive Award” shall refer to the final annual portion of a Participant’s Target Incentive Award payable on the payment date (as defined in subsection 5.1 below).

(d) Any 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 Status 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 incentive-eligible position (including if due to promotion or demotion) is lower or higher than the Target Annual Incentive for a Participant’s immediately prior position, the Participant’s Target Incentive Award may be to adjusted by the Senior Corporate Compensation Executive 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 position is comparable to the overall target cash compensation for the immediately prior position.

3.3. Performance Period. The “Performance Period” refers to the applicable Fiscal Year (as defined in Section 9). The amount of an Award, if any, shall be determined following completion of the Performance Period in accordance with this Section 3 and Section 4.

3.4. Pro-ration.

(a) The Annual 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 incentive-eligible position during the Performance Period.

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

(c) The Annual 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 incentive-eligible position during the Performance Period and the denominator of which is the number of days in the Performance Period.

SECTION 4

GOALS AND PERFORMANCE

4.1. Company Goals. The financial performance goals, which are approved by the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, shall include the following levels of performance.

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2008 AIP

(a) EBITDA

(i) AIP EBITDA. Subject to adjustment, if any, in accordance with paragraph (iv) of this subsection 4.1(a), “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) including the costs related thereto; 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 the Effective Date, 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 paragraph (i)) 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 paragraph (i).

(ii) Threshold EBITDA. “Threshold EBITDA” reflects the minimum Company performance that must be achieved for any Annual Incentive Award to be paid, which shall be equal to ninety percent (90%) of the Target EBITDA.

(iii) Target EBITDA. Subject to adjustment, if any, in paragraph (iv) immediately below, “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 paragraph (i) above of this subsection 4.1(a).

(iv) Adjustments to Target EBITDA. The AIP EBITDA incentive target contemplates that the Domestic Company remains approximately the same size over the Performance Period. If, after the beginning of the Performance Period, Domestic Company divests itself of assets or an entity that has associated EBITDA (measured using the same principles as those described in paragraph (i) above of this subsection 4.1(a)) in its last full fiscal year prior to the divestiture of greater than or equal to $100,000,000, Target EBITDA for the Performance Period 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 Performance Period (in which the divestiture occurs) remaining after the divestiture occurs.

(b) Merchandise Margin.

(i) Merchandise Margin. The Merchandise Margin may also be taken into consideration. Merchandise Margin may apply as a Company goal as well as a goal specific to a particular business unit. The applicability of this performance measure to a Participant will depend on his or her Assignment. “Merchandise Margin” refers to internal margin as reported

4

2008 AIP

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 zero percent (0%) finance promotion costs, product quality costs and inventory shrink.

(ii) Threshold Merchandise Margin. “Threshold Merchandise Margin” reflects the minimum gross margin that must be achieved with respect to Awards that include as a measurement Merchandise Margin, which shall be equal to ninety six point seven percent (96.7%) of the Target Merchandise Margin.

(iii) Target Merchandise Margin. “Target Merchandise Margin” refers to the target level of Merchandise Margin, for the Performance Period, established by the Compensation Committee, consistent with Company strategy, in accordance with paragraph (i) above of this subsection 4.1(b).

4.2. Company Performance. Company performance is determined based on certain financial measurements including the following primary measurements: EBITDA and Merchandise Margin, 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, sixty percent (60%) of a Target Incentive Award shall be paid.

(ii) Target Payout. Subject to Participant performance and Sections 5 and 6, if Target EBITDA is met, one hundred percent (100%) of a Target Incentive Award shall be paid.

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

(iv) Subject to Participant performance and Sections 5 and 6, if EBITDA performance exceeds the Target, a percentage of the Target Incentive Award shall be paid equal to one hundred percent (100%) plus two percent (2%) for each one percent (1%) by which EBITDA performance exceeds Target EBITDA. There is no maximum payout percentage.

(b) Merchandise Margin Performance.

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

(ii) Target Payout. Subject to Participant performance and Sections 5 and 6, if Target Merchandise Margin is met, one hundred percent (100%) of a Target Incentive Award shall be paid.

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2008 AIP

(iii) If Merchandise Margin performance falls between the Threshold and the Target payout levels, the adjustment to an Award shall be determined by straight-line interpolation.

(iv) Subject to Participant performance and Sections 5 and 6, if Merchandise Margin performance exceeds the Target, a percentage of the Target Incentive Award shall be paid equal to one hundred percent (100%) plus six point zero six percent (6.06%) for each one percent (1%) by which Merchandise Margin performance exceeds Target Merchandise Margin. There is no maximum payout percentage.

(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 threshold and target amounts and related payout percentages for these other financial measures are established utilizing the EBITDA or Merchandise Margin criteria, as described in subsection 4.1 above and this subsection 4.2. Notwithstanding the foregoing, for certain Participants a different threshold performance percentage (than those provided for under subsection 4.1) may apply based upon such Participants’ business unit. The applicability of any other performance measure referred to in this paragraph (c) to a Participant will depend on his or her Assignment.

4.3. Participant Performance. Except as provided in subsection 4.3(b) below, the Senior Corporate Compensation Executive 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.

(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) 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 (as defined under subsection 5.1).

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2008 AIP

4.4. Additional Requirements. All Annual 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 that are payable under the AIP, based on the Awards and payout formulas described at Sections 3 and 4, shall be distributed immediately after the Compensation Committee has certified the attainment of the performance goals and the Compensation Committee or the Senior Corporate Compensation Executive, as appropriate, has determined the amount to be paid to each Participant, which shall in no event be later than the date which is two and one-half (2 ¹/2) months after the last day of the 2008 Fiscal Year. 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 is referred to herein as the “payment date.”

5.2. Form of Payment. An Annual Incentive Award shall generally be satisfied by a single, lump sum cash payment to the Participant, provided, however, that, at the discretion of the Committee, the Company may elect, by such deadline as specified under uniform and nondiscriminatory rules established by the Committee, to satisfy such Annual Incentive Award by payment of shares of Company common stock (“Stock”) in lieu of cash, or a combination of cash and shares of Stock. The number of shares of Stock shall be equal to (i) the amount of the Award to be paid in stock in accordance with this subsection 5.2, divided by (ii) the Fair Market Value of a share of Stock, on the principal securities exchange or market on which the shares are then listed or admitted, on the business day immediately preceding the date of distribution or, if the Stock is not traded on that date, on the next preceding date on which Stock was traded; provided that issuance of any shares of Stock in accordance with this subsection 5.2 shall be contingent on the availability of shares of Stock under any shareholder-approved plan of the Company providing for the issuance of Stock in satisfaction of the Awards hereunder (which in no event shall be an employee stock purchase plan).

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

SECTION 6

TERMINATION OF EMPLOYMENT; LEAVE OF ABSENCE; REINSTATEMENT

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

6.1. Termination of Employment. If a Participant incurs a termination of employment before the 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 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) or (ii) is involuntarily terminated for any reason (other than death) prior to the payment date of an Award, such Participant shall forfeit his or her Award, except as prohibited by law.

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2008 AIP

(b) Disability. In the event that prior to the 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 full days worked on active payroll in an incentive-eligible position 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 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 full days worked on active payroll in an incentive-eligible position during the Performance Period and the denominator of which is the number of full days in the Performance Period (or the number of days remaining in the Performance Period after the individual is assigned to an incentive-eligible position).

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 payment date, subject to paragraphs (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 full days worked on active payroll in an incentive-eligible position 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 paragraphs (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 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 payment date, such Participant shall forfeit his or her Award.

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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 incentive-eligible position on or after the date of 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 Senior Corporate Compensation Executive.

(a) Compensation Committee. Notwithstanding paragraph (b) immediately below, the Compensation Committee:

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

(ii) Notwithstanding paragraph (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, including without limitation the financial performance goals and the performance measures for each such Executive’s Assignment in accordance with Section 4, 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;

(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 or 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) Senior Corporate Compensation Executive. Except as provided in paragraph (a) immediately above, the Senior Corporate Compensation Executive:

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

(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

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

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

(d) The Senior Corporate Compensation Executive 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. The Senior Corporate Compensation Executive 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. The Senior Corporate Compensation Executive may establish a procedure for reviewing and approving or rejecting an exception. Any exception determination shall be binding. In no event will positive discretion be applied, by the Compensation Committee or the Senior Corporate Compensation Executive, 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 (as defined under subsection 5.1).

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 or the Senior Corporate Compensation Executive, as applicable, 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 may be satisfied through cash payments, the delivery of shares of Stock, or a combination thereof, as provided under subsection 5.2, subject, in the case of settlement in shares, to the terms of the stock plan under which the Stock is issued. 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 the Senior Corporate Compensation Executive or the Compensation Committee, as appropriate, shall determine. Each Employer shall be liable for payment of an Award 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 payment of an Award shall be resolved by the Senior Corporate Compensation Executive or the Compensation Committee, as appropriate.

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7.6. Transferability. Except as otherwise provided by the Senior Corporate Compensation Executive, 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 the Senior Corporate Compensation Executive at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the AIP, as the Senior Corporate Compensation Executive 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 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 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 the Senior Corporate Compensation Executive and the Compensation Committee with such data and information as it determines may be required for it to discharge its duties.

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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 the Senior Corporate Compensation Executive or the Compensation Committee, as appropriate, such evidence, data or information as the Senior Corporate Compensation Executive 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 AIP 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 the 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.

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 the performance measure(s) (under subsection 4.2) that have been assigned by the Senior Corporate Compensation Executive or the Compensation Committee, as appropriate, to a Participant, based upon position or location and/or business unit. Assignment also includes the weight of each performance measure assigned to the Participant.

(b) Award. The term “Award” or “Awards” refers to any Annual Incentive Award(s) awarded under the AIP.

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

(d) 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).

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(e) 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.

(f) Fair Market Value. The term “Fair Market Value” shall mean the reported closing price of a share of Stock on the principal securities exchange or market on which the Stock is then listed or admitted to trading.

(g) Fiscal Year. The capitalized 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 3, 2008 and ending on January 31, 2009 (i.e., the Saturday closest to January 31 of calendar year 2009), and (ii) with respect to Participants employed by Lands’ End, Inc., the twelve (12) month period beginning on February 2, 2008 and ending on January 30, 2009 (i.e., the Friday closest to January 31 of calendar year 2009).

(h) Senior Corporate Compensation Executive. The term “Senior Corporate Compensation Executive” refers to the Senior Vice President of Human Resources (i.e., the most senior human resources officer of the Company), or if he or she has explicitly delegated his or her duties with respect to the AIP, as provided herein, then the Senior Corporate Compensation Executive shall refer to such authorized representative to whom the duties of administering the AIP have been delegated.

(i) Support Center. For purposes of determining which 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, (iv) Tucker, Georgia, (v) Dallas, Texas, (vi) New York Design Center facilities in New York, (vii) SHIP in Longwood, Florida, and (viii) SRAC in Wilmington, Delaware.

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 (if any) are paid in full in accordance with the provisions of the AIP.

[Remainder of page intentionally left blank.]

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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 5th day of May, 2008.

SEARS HOLDINGS CORPORATION
By:	/s/ William R. Harker
	William R. Harker
Title:	SVP, HR, General Counsel and Corporate Secretary

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SEARS HOLDINGS CORPORATION

2008 ANNUAL INCENTIVE PLAN

APPENDIX A

Participating Employers

(As of April 22, 2008)

1. Sears Holdings Corporation

2. Sears Holdings Management Corporation

3. Sears, Roebuck and Co.

• Excluding Orchard Supply Hardware Stores Corporation

4. Kmart Holding Corporation

EX-10.2

EXHIBIT 10.2

SEARS HOLDINGS CORPORATION

2008 LONG-TERM INCENTIVE PROGRAM (LTIP)

SECTION 1

GENERAL

1.1. Purpose. The Sears Holdings Corporation 2008 Long-Term Incentive Program (the “LTIP”) is a performance-based program. The LTIP is designed to motivate the executive leadership of Sears Holdings Corporation (the “Company”) or Sears Holdings Management Corporation, Sears, Roebuck and Co., Kmart Holding Corporation and their Subsidiaries (as defined in Section 8) (collectively referred to as “Subsidiaries”), to achieve significant, lasting change that successfully positions the Company for future growth. Performance goals under the LTIP align Participants’ financial incentives with the financial goals of the Company. Awards (as defined in Section 8) under the LTIP are designed to vary commensurately with achieved performance. 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 Section 162(m)”), and (b) Awards not so structured, may be issued hereunder. The effective date of the LTIP is April 22, 2008, which is the date the Compensation Committee (as defined in Section 8) adopted the LTIP (the “Effective Date”).

1.2. Operation, Administration, and Definitions. The operation and administration of the LTIP, including the Awards made under the LTIP, shall be subject to the provisions of Section 6 (relating to operation and administration). Capitalized terms in the LTIP shall be defined as set forth in the LTIP (including as defined in Section 8). The LTIP is established under, and constitutes a part of, the Sears Holdings Corporation Umbrella Incentive Program (the “UIP”).

SECTION 2

PARTICIPATION

2.1. Eligible Employee. The term “Eligible Employee” means those salaried employees of the Company or a Subsidiary who (a) hold a position of divisional vice president (or equivalent) or higher, as determined by the Senior Corporate Compensation Executive (as defined in Section 8), and (b) are designated as Eligible Employees by the Senior Corporate Compensation Executive or the Compensation Committee, as applicable. Subject to the terms and conditions of the LTIP, the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, shall determine and designate, from time to time, from among the Eligible Employees, those persons who shall be granted one or more Awards under the LTIP, and thereby become “Participants” in the LTIP. The Senior Corporate Compensation Executive shall make eligibility determinations under this Section 2 with respect to all Eligible Employees other than those who are executives for whom compensation matters are under the purview of the Compensation Committee.

2008 LTIP

2.2. New Hires and Promotions to Eligible Employee Status. The Senior Corporate Compensation Executive or the Compensation Committee, as applicable, may designate as Participants those employees whom the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, determines have been newly hired or promoted into the group of Eligible Employees identified in subsection 2.1(a) above, after the Effective Date, provided that the terms and conditions of Awards to such individuals shall be subject to (a) a fraction, the numerator of which is the number of full days remaining in the Performance Period (as described in subsection 3.2) after the Eligible Employee’s date of hire, or promotion, as applicable, and the denominator is the number of full days in the Performance Period, and (b) if Awards to such individuals are intended to meet the requirements of Code Section 162(m), such other adjustments as the Compensation Committee deems necessary or desirable to qualify such Awards as “performance-based compensation” for purposes of Code Section 162(m). The term “performance-based compensation”, as referred to herein, shall have the meaning ascribed to it under Code Section 162(m) and the regulations thereunder.

2.3. Demotions from Eligible Employee Status. If a Participant is demoted below a position of divisional vice president, as of the date of such demotion, the individual will no longer be a Participant, will be deemed to have forfeited any unvested portion of his or her Award, and will receive no LTIP distribution under Section 4.

2.4 Other Changes in Status. If a Participant is promoted after the Effective Date, the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, may make a second Target Cash Incentive Award (as defined in subsection 3.1) to such individual and the total amount payable to such individual shall be based on a pro-ration, whereby the Target Cash Incentive Award for the new position will apply to the remainder of the Performance Period and the Target Cash Incentive Award for the immediately preceding incentive-eligible position will apply to the portion of the Performance Period immediately preceding the effective date of the promotion. 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 payment date (as defined in subsection 4.1). If a Participant is demoted, but is still an Eligible Employee, the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, may make a second Target Cash Incentive Award to such individual and the total Award for such an individual shall be based on a pro-ration, whereby the Target Cash Incentive for the new position will apply only to the remainder of the Performance Period and the Target Cash Incentive for the immediately preceding position will apply only to the portion of the Performance Period immediately preceding the effective date of the promotion, and in either case an Award will only be paid if the target for the full Performance Period is met.

SECTION 3

CASH INCENTIVE AWARDS

3.1. Target Cash Incentive Awards. After the Effective Date, the Senior Corporate Compensation Executive or the Compensation Committee (at one or more meetings of the Compensation Committee), as applicable, may award “Target Cash Incentive Awards” (as defined in subsection 3.1(a) below) to each Participant designated by the Senior Corporate Compensation Executive or the Compensation Committee (at such meeting), as applicable, in an amount determined by the applicable entity in its sole discretion. In connection with such Awards, the Senior Corporate Compensation Executive or the

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Compensation Committee, as applicable, shall establish “Target LTIP EBITDA” and “Threshold LTIP EBITDA” (each as defined in subsection 3.3 below), provided, however, that Threshold LTIP EBITDA shall be expressed as a percentage of Target LTIP EBITDA. The Senior Corporate Compensation Executive shall make the determinations referred to in this Section 3 with respect to all Participants other than those who are executives for whom compensation matters are under the purview of the Compensation Committee.

(a) A Target Cash Incentive Award shall, at the date of grant, consist of a commitment by the Company to distribute, at the time specified in, and in accordance with the provisions of, Section 4 below, as applicable, an amount equal to the Participant’s Target Cash Incentive Award multiplied by the applicable Award Multiple set forth in subsection 3.4 below, subject to approval of the final award amount by the Senior Corporate Compensation Executive or Compensation Committee, as applicable, (the “Cash Incentive Award”) and to the provisions of subsection 6.4.

(b) A Cash Incentive Award shall generally be satisfied by a distribution in cash to the Participant, provided, however, that, at the discretion of the Compensation Committee, the Company may elect, by such deadline as specified under uniform and nondiscriminatory rules established by the Compensation Committee, to satisfy such Cash Incentive Award by payment of shares of Company common stock (“Stock”) in lieu of cash, or a combination of cash and shares of Stock. The number of shares of Stock shall be equal to (i) the amount of the Award to be paid in stock in accordance with this paragraph (b), divided by (ii) the Fair Market Value of a share of Stock, on the principal securities exchange or market on which the shares are then listed or admitted, on the business day immediately preceding the date of distribution or, if the Stock is not traded on that date, on the next preceding date on which Stock was traded; provided that issuance of any shares of Stock in accordance with this subsection 3.1(b) shall be contingent on the availability of shares of Stock under any shareholder-approved plan of the Company providing for the issuance of Stock in satisfaction of the Awards hereunder (which in no event shall be an employee stock purchase plan).

3.2. Performance Period. The “Performance Period” shall be the Company’s 2008, 2009 and 2010 Fiscal Years; provided that, in the case of an employee who is newly hired or promoted into the group of Eligible Employees after the Effective Date, the Performance Period shall be such shorter period as established by the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, subject to the requirements of Code Section 162(m), if applicable. The amount of the Cash Incentive Award shall be determined at the completion of the Performance Period in accordance with subsection 3.1 above and subsection 4.1 below.

3.3. “LTIP EBITDA.”

(a) LTIP EBITDA. Subject to adjustment, if any, in accordance with subsection (d) of this subsection 3.3, “LTIP 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

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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) including the costs related thereto; 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 the Effective Date, 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 3.3(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 LTIP EBITDA under this subsection 3.3(a).

(b) Target LTIP EBITDA. Subject to adjustment, if any, in paragraph (d), “Target LTIP EBITDA” refers to the target level of LTIP EBITDA, established by the Compensation Committee in accordance with subsection 3.1 above, for the Performance Period.

(c) Threshold LTIP EBITDA. Subject to adjustment, if any, in paragraph (d), “Threshold LTIP EBITDA” refers to a level of LTIP EBITDA, for the Performance Period, established by the Compensation Committee, which shall be equal to ninety percent (90%) of Target LTIP EBITDA and, if exactly achieved, shall generate an Award Multiple (described in subsection 3.4 below) of sixty percent (60%).

(d) Adjustments to Target LTIP EBITDA. The LTIP EBITDA incentive target contemplates that the Domestic Company does not make any significant acquisitions or divestitures over the period of the LTIP. If after the Effective Date the Domestic Company divests itself of assets or an entity that has associated EBITDA (measured using the same principles as those described in subsection 3.3(a)) in its last full fiscal year prior to the divestiture of greater than or equal to $100,000,000, Target LTIP 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 LTIP 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.

3.4. “Award Multiple.” The Award Multiple shall be as outlined below:

(a) if LTIP EBITDA is one hundred percent (100%) of Target LTIP EBITDA, the Award Multiple shall be one hundred percent (100%);

(b) if LTIP EBITDA is equal to Threshold LTIP EBITDA, the Award Multiple shall be sixty percent (60%);

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(c) if LTIP EBITDA is greater than Threshold LTIP EBITDA, but less than Target LTIP EBITDA, the Award Multiple shall be a whole percentage between sixty percent (60%) and one hundred percent (100%), determined by interpolation on a straight line basis relative to such LTIP EBITDA, Threshold LTIP EBITDA and Target LTIP EBITDA amounts, and rounded down to the nearest whole percentage;

(d) if LTIP EBITDA is less than Threshold LTIP EBITDA, the Award Multiple shall be zero (0); and

(e) if LTIP EBITDA is greater than Target LTIP EBITDA, the Award Multiple shall be a percentage equal to one hundred (100%) plus two percent (2%) for each one percent (1%) by which LTIP EBITDA exceeds Target LTIP EBITDA, and rounded down to the nearest whole percentage.

3.5. Limitation on Individual Awards. Notwithstanding anything herein to the contrary, the total Cash Incentive Award paid to any Participant for the Performance Period pursuant to the LTIP shall in no event exceed $15 million.

3.6. Additional Requirements. All Cash Incentive Awards awarded under the LTIP (and any Stock or cash otherwise distributable pursuant thereto) are subject to the provisions of Sections 4, 5 and 6.

SECTION 4

DISTRIBUTION

4.1. General. Subject to Sections 5 and 6, the cash or shares of Stock, if any, that result from the payout formula described at Section 3 shall be distributed, in a single lump sum, as soon as practicable after the first Compensation Committee meeting occurring on or after the LTIP EBITDA results for the Company’s 2010 Fiscal Year are available to the Compensation Committee, which shall in no event be later than the date that is two and one-half (2 ¹/2) months after the last day of the 2010 Fiscal Year. Notwithstanding anything herein to the contrary, no distribution shall be made hereunder until after the Compensation Committee has certified the attainment of the performance goals and, with respect to Participants under its purview, approved the amount to be paid to each Participant. The Senior Corporate Compensation Executive shall be responsible for approving the amount payable to all other Participants. The date as of which payment is made in accordance with this subsection 4.1 is referred to herein as the “payment date.”

4.2. Termination of Employment and Other Provisions. All distributions are subject to the provisions of Sections 5 and 6 below.

SECTION 5

TERMINATION OF EMPLOYMENT

The effect of termination of employment on a Participant’s right to receive a Cash Incentive Award (whether payable in cash or Stock) depends on the reason for the termination, as described below.

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5.1 Termination of Employment.

(a) Voluntary Termination or Involuntary Termination. In the event that 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) or (ii) is involuntarily terminated for any reason (other than death) prior to the payment date (as defined in subsection 4.1 above) of his or her Award, such Participant shall forfeit all of his or her Award.

(b) Disability. In the event that, prior to the payment date (as defined in subsection 4.1 above) of his or her 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 a Subsidiary, resulting in termination or retirement, subject to Section 6 below, such individual shall be entitled to a distribution in an amount equal to the Cash Incentive Award, if any, that would otherwise be payable to the Participant under subsection 3.1 above, pro-rated through the date of termination in accordance with subsection 5.2 below; provided, however, that in no event shall a Participant receive any payment hereunder unless (i) LTIP EBITDA for the period from the inception of the Performance Period through the last completed full month that occurs on or preceding the Participant’s date of termination is equal to or greater than Target LTIP EBITDA, pro-rated through the date of termination in accordance with subsection 5.2 below, (ii) LTIP EBITDA is equal to or greater than Target LTIP EBITDA for the Performance Period, and (iii) as of his date of termination, the Participant had been employed by one or more of the Company or a Subsidiary, for at least twelve (12) months of the Performance Period applicable to such individual.

(c) Death. In the event that a Participant dies while employed by the Company or a Subsidiary and prior to the payment date for his or her Award, his or her Target Cash Incentive Award shall be pro-rated through the date of death, in accordance with subsection 5.2 below, and, subject to Section 6 below, his or her estate shall be entitled to receive a Cash Incentive Award, equal to his or her prorated Target Cash Incentive Award and payable in cash; provided, however, that in no event shall a payment be made with respect to a deceased Participant hereunder unless as of his date of death, (i) LTIP EBITDA for the period from the inception of the Performance Period through the last completed full month that occurs on or preceding the Participant’s date of death is equal to or greater than Target LTIP EBITDA, prorated through the date of death in accordance with subsection 5.2 below, (ii) LTIP EBITDA is equal to or greater than Target LTIP EBITDA for the Performance Period, and (iii) he had been employed by one or more of the Company or a Subsidiary, for at least twelve (12) months of the Performance Period applicable to such individual.

5.2. Pro-rations. Any pro-ration of a Cash Incentive Award, Target Cash Incentive Award, or Target LTIP EBITDA, as applicable, under this Section 5 shall be based on a fraction, the numerator of which is the number of full months during the Performance Period in which the Participant was a Participant in the LTIP, and the denominator of which is the full number of months in the Performance Period, as adjusted at subsections 2.2 and 2.4, if applicable.

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SECTION 6

OPERATION AND ADMINISTRATION

6.1. Compensation Committee and Senior Corporate Compensation Executive. The authority to control and manage the operation and administration of the LTIP shall be vested in the Compensation Committee and the Senior Corporate Compensation Executive, as provided herein.

(a) Compensation Committee. Notwithstanding paragraph (b) immediately below, the Compensation Committee:

(i) Shall approve the Target Cash Incentive Award and the Awards for Participants under its purview;

(ii) Notwithstanding paragraph (b) below, with respect to Participants 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 subsection 6.4 and Section 7) to amend, cancel, or suspend Awards; provided, however (and subject to the requirements of Code Section 162(m), if applicable) that to the extent the Compensation Committee determines that the restrictions imposed by the LTIP preclude the achievement of the material purposes of the Awards in jurisdictions outside the United States, the Compensation Committee shall have the authority and discretion to modify those restrictions as the Compensation Committee determines to be necessary or appropriate to conform to applicable requirements or practices of jurisdictions outside of the United States;

(iii) May make additional changes that it deems appropriate for the effective administration of the LTIP, subject to subsection 6.4 and provided that these changes may not increase the benefits to which Participants may become entitled under the LTIP, nor change the pre-established measures or goals that have been approved; and

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

(b) Senior Corporate Compensation Executive. Except as provided in paragraph (a) immediately above, the Senior Corporate Compensation Executive:

(i) Shall Determine the Target Cash Incentive Award and the Awards for Participants that are not under the Compensation Committee’s purview;

(ii) Notwithstanding paragraph (a) above, 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 subsection 6.4 and Section 7) to amend, cancel, or suspend Awards;

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(iii) Shall have the authority to control and manage the operation and administration of the LTIP with respect to Participants that are not under the Compensation Committee’s purview and except as otherwise provided in this LTIP;

(iv) Shall be responsible for the day-to-day administration of the LTIP except as otherwise provided in this LTIP; and

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

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

(d) Any determinations by the Compensation Committee or the Senior Corporate Compensation Executive, as applicable, regarding this LTIP are binding on all Participants.

6.2. Source of Awards. In the case of Awards under the LTIP that are settled in shares of Stock, such shares shall be distributed under a stock plan adopted by the Company and approved by the shareholders thereof that provides for the issuance of Stock in satisfaction of Awards hereunder, (which in no event shall be an employee stock purchase plan.) In the event of any conflict between this document and such stock plan, the provisions of the stock plan shall govern.

6.3. Delegation by Compensation Committee. Except to the extent prohibited by applicable law or the applicable rules of a securities exchange or similar entity, or would cause Awards designated as intended to constitute performance-based compensation under Code Section 162(m) to not satisfy the requirements thereunder, the Compensation Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. The Compensation Committee may revoke any such allocation or delegation at any time.

6.4. Negative Discretion. Notwithstanding anything in the LTIP to the contrary, prior to the settlement of any Cash Incentive Award, the Compensation Committee (or the Senior Corporate Compensation Executive with respect to Participants who are not under the purview of the Compensation Committee) may (a) reduce the amount of such Award, or the number of shares of Stock or amount of cash to be delivered in connection with such Award, and (b) 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, may change the pre-established measures in goals that have been approved for such Award and increase the amount of such Award or the number of shares of stock or amount of cash to be delivered in connection with such Award.

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2008 LTIP

6.5. General Restrictions. Delivery of shares of Stock under the LTIP, in satisfaction of a Cash Incentive Award, shall be subject to the following:

(a) Notwithstanding any other provision of the LTIP, the Company shall have no obligation to deliver any shares of Stock or make any other distribution of benefits under the LTIP unless such delivery or distribution complies with all applicable laws (including, without limitation, the requirements of the Securities Act of 1933), and the applicable requirements of any securities exchange or similar entity.

(b) To the extent that the LTIP provides for issuance of Stock certificates to reflect the issuance of shares of Stock, the issuance may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the applicable rules of any exchange or similar entity.

6.6. Tax Withholding. All distributions under the LTIP are subject to withholding of all applicable taxes, and the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, may condition the delivery of any shares or other benefits under the LTIP on satisfaction of the applicable withholding obligations. To the extent permitted by the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, such withholding obligations may be satisfied (a) through cash payment by the Participant; (b) through the surrender of shares of Stock which the Participant already owns (provided, however, that to the extent shares described in this paragraph (b) are used to satisfy more than the minimum statutory withholding obligation, as described below, then, except as otherwise provided by the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, payments made with shares of Stock in accordance with this paragraph (b) shall be limited to shares held by the Participant for not less than six months prior to the payment date (or such other period of time as the Company’s accountants may require)); or (c) through the surrender of shares of Stock to which the Participant is otherwise entitled under the LTIP, provided, however, that such shares under this paragraph (c) may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).

6.7. Settlement of Awards. The obligation to make payments and distributions with respect to Awards may be satisfied through cash payments, the delivery of shares of Stock, or a combination thereof, as provided under subsections 3.1(b) and 4.1), subject, in the case of settlement in shares, to the terms of the stock plan under which the Stock is issued. 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 the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, shall determine. Each Subsidiary shall be liable for payment of an Award due under the LTIP with respect to any Participant to the extent that such benefits are attributable to the services rendered for that Subsidiary by the Participant. Any disputes relating to liability of a Subsidiary for payment of an Award shall be resolved by the Senior Corporate Compensation Executive or the Compensation Committee, as applicable.

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2008 LTIP

6.8. Transferability. Except as otherwise provided by the Compensation Committee, Awards under the LTIP are not transferable except as designated by the Participant by will or by the laws of descent and distribution (including Awards originally determined by the Senior Corporate Compensation Executive).

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

6.10. Agreement With Company. Any Award under the LTIP shall be subject to such terms and conditions, not inconsistent with the LTIP, as the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, shall, in its sole discretion, prescribe. The terms and conditions of any Award to any Participant shall be reflected in such form of written (including electronic) document as is determined by the Compensation Committee. A copy of such document shall be provided to the Participant, and the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, may, but need not, require that the Participant sign a copy of such document. Such document is referred to as an “Award Agreement” regardless of whether any Participant signature is required.

6.11. Action by Company or Subsidiary. Any action required or permitted to be taken under the LTIP by the Company, Sears Holdings Management Corporation, Sears Roebuck and Co., Kmart Holding Corporation or any Subsidiary, if any, 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.

6.12. 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.

6.13. Limitation of Implied Rights.

(a) Neither a Participant nor any other person shall, by reason of participation in the LTIP, acquire any right in or title to any assets, funds or property of the Company or any Subsidiary whatsoever, including, without limitation, any specific funds, assets, or other property which the Company or any Subsidiary, in its sole discretion, may set aside in anticipation of a liability under the LTIP. A Participant shall have only a contractual right to the cash or Stock, if any, payable under the LTIP, unsecured by any assets of the Company or any Subsidiary, and nothing contained in the LTIP shall constitute a guarantee that the assets of the Company or any Subsidiary shall be sufficient to pay any benefits to any person.

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2008 LTIP

(b) The LTIP does not constitute a contract of employment, and selection as a Participant shall not give any participating employee the right to be retained in the employ of the Company or any Subsidiary, nor any right or claim to any benefit under the LTIP, unless such right or claim has specifically accrued under the terms of the LTIP. Except as otherwise provided in the LTIP, no Award under the LTIP shall confer upon the holder thereof any rights as a shareholder of the Company prior to the date on which the individual fulfills all conditions for receipt of such rights.

6.14. Evidence. Evidence required of anyone under the LTIP 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.

6.15. Information to be Furnished to the Senior Corporate Compensation Executive or the Compensation Committee. The Company and the Subsidiaries shall furnish the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, with such data and information as it determines may be required for it to discharge its duties. The records of the Company and the Subsidiaries, 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 LTIP must furnish the Senior Corporate Compensation Executive or the Compensation Committee, as applicable, such evidence, data or information as such entity considers desirable to carry out the terms of the LTIP, subject to any applicable privacy laws.

6.16. Corporate Transaction. In the event of a corporate transaction involving the Company (including without limitation, any Stock dividend, Stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, sale of assets or subsidiaries, combination or exchange of shares), the Compensation Committee may adjust Awards to preserve but in no event increase the benefits or potential benefits of the Awards (including Awards originally determined by the Senior Corporate Compensation Executive); provided, however, that no such adjustment may be made to the extent such adjustment would cause Awards that are designated as intended to constitute “performance-based compensation” under Code Section 162(m) and the regulations issued thereunder, to cease to qualify as “performance-based compensation” under Code Section 162(m). Actions permitted under the preceding sentence by the Compensation Committee may include any adjustments that the Compensation Committee determines to be equitable (which may include, without limitation, (a) replacement of Awards with other Awards which the Compensation Committee determines have comparable value and which are based on stock of a company resulting from the transaction, and (b) cancellation of the Award in return for cash payment of the current value of the Award, determined as though the Award is fully vested at the time of the payment.)

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2008 LTIP

SECTION 7

AMENDMENT AND TERMINATION

The Board or Compensation Committee may, at any time, amend or terminate the LTIP, or any Award, provided that no amendment or termination may, in the absence of written consent to the change by the affected Participant (or, if the Participant is not then living, the affected beneficiary), adversely affect the rights of any Participant or beneficiary under any Award granted under the LTIP prior to the date such amendment is adopted by the Board (or the Compensation Committee, if applicable), and no amendment may be made, without the consent of the shareholders of the Company, that would cause any Awards designated as 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). Notwithstanding anything herein to the contrary, (i) no amendment shall be made that would cause the LTIP 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 (ii) the LTIP and any Award thereunder may be amended without Participant consent to the extent that the Compensation Committee determines such amendment necessary to cause the LTIP 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.

SECTION 8

DEFINED TERMS

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

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

(a) Award. The term “Award” or “Awards” means any Cash Incentive Award(s), whether settled in cash or Stock.

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

(c) Code. The term “Code” means the Internal Revenue Code of 1986, as amended. A reference to any provision of the Code shall include reference to any successor provision of the Code.

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

(e) Fair Market Value. The term “Fair Market Value” shall mean the reported closing price of a share of Stock on the principal securities exchange or market on which the Stock is then listed or admitted to trading.

(f) Fiscal Year. The term “Fiscal Year” shall mean the twelve (12) month period beginning on February 3, 2008, and thereafter the twelve (12) month period beginning on the Saturday closest to January 31 of each of calendar year 2009 and 2010.

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2008 LTIP

(g) Senior Corporate Compensation Executive. The term “Senior Corporate Compensation Executive” refers to the Senior Vice President of Human Resources (i.e., the most senior human resources officer of the Company), or if he or she has explicitly delegated his or her duties with respect to the LTIP, as provided herein, then the Senior Corporate Compensation Executive shall refer to such authorized representative to whom the duties of administering the LTIP have been delegated.

(h) Subsidiary. The term “Subsidiary” or “Subsidiaries” refers to any company during any period in which it is a “subsidiary corporation” (as that term is defined in Section 424(f) of the Code) with respect to the Company.

SECTION 9

EXPIRATION OF LTIP

The LTIP shall expire, subject to earlier termination pursuant to Section 7, on the date on which all Cash Incentive Awards (if any) are paid in full in accordance with the provisions of the LTIP (or, if earlier, on the date that the Compensation Committee determines that the LTIP EBITDA is less than Threshold LTIP EBITDA.)

[Remainder of page intentionally left blank.]

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2008 LTIP

IN WITNESS WHEREOF, the Compensation Committee of the Board of Directors of Sears Holdings Corporation has caused this LTIP to be executed effective as of the date first stated above, by the undersigned officer of Sears Holdings Corporation on this 5th day of May, 2008.

SEARS HOLDINGS CORPORATION
By:	/s/ William R. Harker
	William R. Harker
Title:	SVP, HR, General Counsel and Corporate Secretary

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EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, W. Bruce Johnson, 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 30, 2008

/s/ W. Bruce Johnson

W. Bruce Johnson

Interim Chief Executive Officer and President

Sears Holdings Corporation

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, J. Miles Reidy, 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 30, 2008

/s/ J. Miles Reidy

J. Miles Reidy

Executive Vice President and

Chief Financial 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, W. Bruce Johnson, Interim Chief Executive Officer and President of Sears Holdings Corporation (the “Company”) and J. Miles Reidy, Executive Vice President and Chief Financial 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 3, 2008 (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 30, 2008

/s/ W. Bruce Johnson

W. Bruce Johnson

Interim Chief Executive Officer and President

/s/ J. Miles Reidy

J. Miles Reidy

Executive Vice President and

Chief Financial Officer