UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Check one

[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2004 or
[ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		for the quarterly period ended December 31, 2004 or


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 000-50160

HECHINGER LIQUIDATION TRUST

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		52-7230151 (I.R.S. Employer Identification No.)
Delaware		52-7230151
405 East Gude Drive, Suite 206, Rockville, Maryland (Address of principal executive offices)		20850 (Zip Code)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
405 East Gude Drive, Suite 206, Rockville, Maryland		20850
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (301) 838-4311

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ~~[X]~~ þ No ~~[ ]~~o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ~~[ ]~~ o No ~~[X]~~þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ~~[X]~~ þ No ~~[ ]~~o

HECHINGER LIQUIDATION TRUST INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED ~~JUNE~~DECEMBER 3031, 2004

Description	Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Statements of Net Assets in Liquidation		3
Unaudited Statements of Changes in Net Assets in Liquidation		4
Unaudited Statements of Cash Receipts and Disbursements		5
Notes to Unaudited Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2118
Item 4. Controls and Procedures		2118
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings		2119
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		2219
Item 3. Defaults Upon Senior Securities		2219
Item 4. Submission of Matters to a Vote of Security Holders		2220
Item 5. Other Information		2220
Item 6. Exhibits and Reports on Form 8-K		22
Item 6. Exhibits		20
SIGNATURES		2321
INDEX TO EXHIBITS		2422

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Hechinger Liquidation Trust Unaudited Statements of Net Assets in Liquidation ~~($ in thousands)~~

	As of		As of
	June 30,		September 30,
	2004		2003
Assets
Cash and cash equivalents
Designated as available for distribution to holders of impaired claims	$	2,994	$	7,136
Reserved		21,839		24,288
Restricted		9,569		9,730
Other		11,164		5,683
Total cash and cash equivalents		45,566		46,837
Preference receivables (net of costs of recovery of $898 and $1,491, respectively)		3,569		5,955
Other assets		316		1,503
Total assets		49,451		54,295
Liabilities
Claims payable
Unimpaired claims payable		5,442		11,044
Convenience claims payable		2		22
Uncashed claims checks		128		377
Distributions payable to holders of allowed impaired claims		218		665
Estimated costs of liquidation
Wind-down reserve		3,961		5,151
Litigation reserve		2,184		2,460
Total liabilities		11,935		19,719
Net Assets in Liquidation	$	37,516	$	34,576

($ in thousands)


	As of		As of
	December 31, 2004		September 30, 2004

Assets
Cash and cash equivalents
Cash designated as available for distribution	$	3,034	$	3,388
Reserved cash		19,871		21,471
Restricted cash		9,340		9,312
Other cash		1,697		204


Total cash and cash equivalents		33,942		34,375

Preference receivables (net of costs of recovery of $332 and $1,029, respectively)		2,074		3,149
Other assets		124		160


Total assets		36,140		37,684


Liabilities
Unimpaired and convenience claims payable		2,937		2,970
Uncashed claims checks		175		142
Distributions payable		227		228
Estimated costs of liquidation
Wind-down reserve		2,773		3,518
Litigation reserve		1,508		2,384


Total liabilities		7,620		9,242


Net Assets in Liquidation	$	28,520	$	28,442

See accompanying notes to unaudited financial statements.

Hechinger Liquidation Trust Unaudited Statements of Changes in Net Assets in Liquidation ~~($ in thousands)~~

	For the three months ended
	June 30, 2004		June 30, 2003
Increase/(decrease) in Net Assets in Liquidation
Decrease in estimated fair value of unimpaired claims payable	$	3,806	$	1,576
Increase in estimated fair value of preference receivables, net		447		4,123
Increase in estimated costs of liquidation:
Litigation reserve		—		(3,000	)
Interest income		65		112
Other increases		63		105
Increase in Net Assets in Liquidation before distributions authorized		4,381		2,916
Distributions authorized		134		14,053
Net increase/(decrease) in Net Assets in Liquidation after distributions authorized		4,247	(	11,137	)
Net Assets in Liquidation at beginning of period		33,269		43,761
Net Assets in Liquidation at end of period	$	37,516	$	32,624

($ in thousands)

	For the nine months ended
	For the quarter			For the quarter
	June 30, 2004			June 30, 2003
	ended			ended
Increase/(decrease) in Net Assets in Liquidation
	December 31, 2004			December 31, 2003
Decrease in estimated fair value of unimpaired claims payable	$	3,806		$	1,912
Increase in Net Assets in Liquidation
Increase in estimated fair value of preference receivables, net	$	~~3,537~~—		$	53,~~311~~750
Increase in estimated costs of liquidation:
Decrease in estimated fair value of unimpaired and convenience claims payable		23			—
Wind-down reserve		(1,540	)		—
Interest income		121			63
Litigation reserve		(2,000	)		(3,000	)
Other increases		13			40
Interest income		191			412
Net increase in Net Assets in Liquidation before distributions authorized		157			3,853
Other increases		835			348
Distributions authorized		( 79	)		( 1,426	)
Increase in Net Assets in Liquidation before distributions authorized		4,829			4,983
Net increase in Net Assets in Liquidation after distributions authorized		78			2,427
Distributions authorized		1,889			16,541
Net Assets in Liquidation at beginning of period		28,442			34,576
Net increase/(decrease) in Net Assets in Liquidation after distributions authorized		2,940		(	11,558	)
Net Assets in Liquidation at end of period	$	28,520		$	37,003
Net Assets in Liquidation at beginning of period		34,576			44,182
Net Assets in Liquidation at end of period	$	37,516		$	32,624

See accompanying notes to unaudited financial statements.

Hechinger Liquidation Trust Unaudited Statements of Cash Receipts and Disbursements ~~($ in thousands)~~

	For the nine months ended
	June 30, 2004			June 30, 2003
Cash receipts
Preference collections, before costs of recovery	$	7,294		$	10,071
Interest income		191			412
Other receipts		832			1,575
Total cash receipts		8,317			12,058
Cash disbursements
Costs of liquidation
Legal and professional fees
Litigation		2,276			2,884
Preference recoveries		1,371			1,779
Trust operations		1,319			1,224
Operating expenses		1,411			2,008
Unimpaired and convenience claims		626			2,282
Reissued/(voided) claims checks, net		249			(237	)
Total cash disbursements		7,252			9,940
Increase in cash and cash equivalents before distributions paid		1,065			2,118
Distributions paid		2,336			19,606
Decrease in cash and cash equivalents		(1,271	)	(	17,488	)
Cash and cash equivalents at beginning of period		46,837			62,641
Cash and cash equivalents at end of period	$	45,566		$	45,153

($ in thousands)


	For the quarter			For the quarter
	ended			ended
	December 31, 2004			December 31, 2003

Cash receipts
Preference collections, before costs of recovery	$	1,772		$	1,239
Interest income		121			64
Other receipts		49			40

Total cash receipts		1,942			1,343


Cash disbursements
Costs of liquidation
Legal and professional fees
Litigation		875			1,490
Preference recoveries		697			490
Liquidation Trust operations		237			720
Operating expenses		508			600
Unimpaired and convenience claims		11			126
Reissued/(voided) claims checks, net		(33	)		127

Total cash disbursements		2,295			3,553


Decrease in cash and cash equivalents before distributions paid		(353	)		(2,210	)

Distributions paid		80			1,666


Decrease in cash and cash equivalents		(433	)		(3,876	)

Cash and cash equivalents at beginning of period		34,375			46,837


Cash and cash equivalents at end of period	$	33,942		$	42,961

See accompanying notes to unaudited financial statements.

Hechinger Liquidation Trust
Notes to Unaudited Financial Statements

1. Background and Basis of Presentation

Background

Hechinger Liquidation Trust (the “Liquidation Trust”) was established effective October 26, 2001 (the “Effective Date”) in accordance with the Revised First Amended Consolidated Plan of Liquidation (the “Plan”) for Hechinger Investment Company of Delaware, Inc. and affiliates (the “Debtors”), confirmed by the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) by an order dated October 5, 2001.

The Liquidation Trust has no authority to engage in any trade or business. The purpose of the Liquidation Trust is to (i) liquidate any and all remaining assets of the Debtors; (ii) pursue causes of action assigned to the Liquidation Trust, including preference, fraudulent conveyance and other avoidance actions; (iii) resolve, either consensually or through litigation, all disputed claims asserted against the Debtors (“Disputed Claims”), pursuant to the Plan; and (iv) make all distributions required under the Plan (“Distributions”), and payments to holders of claims allowed under the terms of the Plan (“Allowed Claims” and, together with the Disputed Claims, the “Claims”). The Liquidation Trust will terminate upon the earlier of (a) the fulfillment of its purpose by the liquidation of all of its assets and the distribution of the proceeds of the liquidation thereof in accordance with the Plan, or (b) by October 26, 2005, unless the Bankruptcy Court approves an extension of the term.

Pursuant to the Bankruptcy Code, certain types of Allowed Claims will be paid in full under the Plan. Such Claims are therefore referred to as “Unimpaired Claims.” The Plan defines which types of Claims are paid in full.

The Liquidation Trust exists primarily for the benefit of the majority of claimants who will not be repaid in full for the amounts the Debtors owed them as of the bankruptcy filing. These Claims are referred to as “Impaired Claims” because the rights of the claimants have been impaired by the Debtors’ bankruptcy. Each holder of an Allowed Claim in the Plan’s Class 4A (Senior Unsecured Claims), Class 4B (General Unsecured Claims), and Class 5 (Subordinated Debentures Claims) (each a “Class”) is deemed to hold a pro rata beneficial interest (the “Beneficial Interests”) in the Liquidation Trust based upon the amount of their Allowed Impaired Claim as compared to the total amount of all Impaired Claims ultimately Allowed. When and to the extent Disputed Impaired Claims become Allowed Impaired Claims, holders of such Claims become holders of Beneficial Interests in accordance with the Plan.

The holders of Beneficial Interests receive all remaining net proceeds of the Liquidation Trust, if any, after the expenses and all creditors of the Liquidation Trust, including Allowed Unimpaired and Convenience Claims (certain small Claims to be paid at 7.5% of their Allowed amounts in accordance with the Plan) are paid, and all contingencies are resolved. Holders of each Class of Beneficial Interests (i.e., each Class of Impaired Claims) have the same rights, except with respect to payment of Distributions.

~~During~~ Through ~~August~~December ~~2002~~31, ~~the~~2004, ~~Bankruptcy Court authorized~~ the Liquidation Trust to ~~make~~has anauthorized ~~initial~~Distributions ~~Distribution~~ to holders of Beneficial Interests (i.e., to holders of Allowed Impaired Claims), ~~at the rate~~ of 48.~~515~~1% of the Allowed amount of the Impaired Claims., ~~The~~and ~~Liquidation Trust also~~ established a reserve of 48.~~515~~1% of the estimated amount of Disputed Impaired Claims, ~~using~~ based on the estimated ~~value~~amount of such Claims approved by the Bankruptcy Court for reserve purposes. ~~During June 2003,~~ (the ~~Liquidation Trust made a second interim Distribution at the rate of 2.058%, and increased the reserve for each remaining~~ “Disputed Impaired ~~Claim~~Claims ~~based on the cumulative 6~~Reserve”).~~573% Distribution~~ ~~rate.~~

Basis of Presentation

The Liquidation Trust’s financial statements have been prepared using the liquidation basis of accounting. Under this method of accounting, the ~~Statements~~ of Net Assets in Liquidation reflect all assets and liabilities, including the projected total cost of liquidating the assets and winding down the affairs of the Liquidation Trust, at estimated fair value. Unimpaired Claims, to be paid in full, are reflected in the Statements of Net Assets in ~~Liquidation~~ ~~as liabilities at estimated aggregate settlement amounts. Convenience Claims are also recorded as liabilities, at their estimated payment amount. The Statements of Changes in Net Assets in~~ Liquidation ~~primarily~~ reflect ~~any authorized Distributions to holders of Beneficial Interests and~~ ~~changes~~all ~~in the estimated fair value of the Liquidation Trust’s~~ assets ~~and~~ ~~liabilities. The Liquidation Trust’s fiscal year ends on September 30.~~

~~The accompanying unaudited financial statements reflect all adjustments,~~6 consisting only of normal recurring adjustments that are, in the opinion of the Liquidation Trustee, necessary for a fair statement of the results for the interim periods presented. Such financial statements and these notes thereto should be read in conjunction with the audited Liquidation Trust financial statements as of September 30, 2003 and September 30, 2002, and for the periods from October 1, 2002 through September 30, 2003 and from October 26, 2001 (Effective Date) through September 30, 2002, and the notes thereto.

and liabilities, including the projected total cost of liquidating the assets and winding down the affairs of the Liquidation Trust, at estimated fair value. Unimpaired Claims, to be paid in full, are reflected in the Statements of Net Assets in Liquidation as liabilities at estimated aggregate settlement amounts. The unpaid amount of the authorized Distributions to holders of Allowed Impaired Claims is also reflected as a liability. The Statements of Changes in Net Assets in Liquidation primarily reflect any authorized Distributions to holders of Beneficial Interests and changes in the estimated fair value of the Liquidation Trust’s assets and liabilities. The Liquidation Trust’s fiscal year ends on September 30.

The accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments that are, in the opinion of the Liquidation Trustee, necessary for a fair statement of the results for the interim periods presented. Such financial statements and these notes thereto should be read in conjunction with the audited Liquidation Trust financial statements as of September 30, 2004 and September 30, 2003, and for the fiscal years ended September 30, 2004 and September 30, 2003, and for the period from October 26, 2001 (Effective Date) through September 30, 2002, and the notes thereto.

The amounts shown in this document are rounded and are therefore approximate.

~~Certain~~ Convenience ~~amounts~~Claims payable shown in the ~~unaudited~~ financial statements as of September 30, ~~2003~~ ~~and~~2004 ~~for~~have been ~~the~~combined ~~nine~~with ~~months~~Unimpaired ~~ended~~Claims ~~June 30,~~payable ~~2003 have been reclassified~~ to conform to ~~the~~their presentation ~~for~~in the ~~current~~December 31, 2004 ~~period~~financial statements.

2. Significant Accounting Policies

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires the Liquidation Trustee to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results are likely to differ from those estimates and those differences may be significant.

Cash and Cash Equivalents

The Liquidation Trust considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Liquidation Trust holds substantially all cash balances in operating and investment accounts in excess of federally insured limits. Cash is ~~classified~~ classified as: ~~Designated~~cash designated as ~~Available~~available for ~~Distribution~~distribution, toreserved ~~Holders~~cash, ofrestricted ~~Impaired Claims~~cash, ~~Reserved,~~ ~~Restricted,~~ and other ~~Other~~cash (see Note 3).

Taxes

The Liquidation Trust is intended to qualify as a liquidating trust for federal income tax purposes, and therefore should be taxable as a grantor trust. The holders of Beneficial Interests are treated as grantors; accordingly, their pro rata share of all items of income, gain, loss, ~~deduction~~ deduction and credit ~~are~~is included in the income tax returns of the holders of Beneficial Interests.

The Liquidation Trust pays applicable taxes on the taxable net income and gain allocable to holders of Disputed ~~General~~Impaired ~~Unsecured~~ Claims on behalf of such holders. ~~and,~~When ~~when~~ such Disputed Claims are ultimately resolved, holders whose Disputed Claims were determined to be Allowed Claims receive Distributions from the Liquidation Trust net of taxes, if any, which the Liquidation Trust previously paid on their behalf.

The Liquidation Trust incurs no taxable income or gain on its own behalf; therefore, no tax provision is recorded in the financial statements of the Liquidation Trust.

~~3. Cash~~7

3. Cash ~~is invested in highly liquid investments with a maturity of three months or less,~~ and inCash ~~accordance with Section 345 of the Bankruptcy Code or as~~Equivalents ~~otherwise permitted by order of the Bankruptcy Court. Under the terms of the~~ ~~Plan, the Liquidation Trust is not required to segregate funds for reserves.~~

Cash ~~Designated~~is asinvested ~~Available~~in ~~for~~highly ~~Distribution~~liquid toinvestments ~~Holders~~with ofa ~~Impaired Claims~~maturity ~~(“Available~~of ~~Cash”)~~three ismonths ~~designated~~or toless, ~~assure~~and ~~the availability of funds for~~in ~~payment~~accordance towith ~~holders~~Section 345 of ~~Impaired~~the ~~Claims~~Bankruptcy ~~who~~Code ~~have~~or ~~not~~as ~~received~~otherwise ~~their Distributions.~~permitted ~~The~~by ~~amount~~order ~~pertaining~~of to the ~~reserve for Disputed Impaired~~ ~~Claims~~Bankruptcy isCourt. ~~based~~Under on the ~~estimated~~terms ~~amount~~ of ~~Disputed Impaired Claims approved by~~ the ~~Bankruptcy~~Plan, ~~Court pursuant to~~ the ~~Reserve~~Liquidation ~~Order.~~Trust ~~Available~~is ~~Cash does~~ not ~~include~~ ~~Reserved~~required ~~Cash,~~to ~~Restricted~~segregate funds ~~Cash,~~for orreserves ~~Other~~(see ~~Cash,~~Note ~~each further described below~~10).

Cash designated as available for distribution (“Available Cash”) is designated to assure the availability of funds for payment to holders of Impaired Claims who have not received their Distributions. As such, Available Cash includes Distributions payable (see Note 8) and the Disputed Impaired Claims Reserve (see Note 10). Available Cash does not include reserved cash, restricted cash, or other cash, each further described below.

Available Cash consists of:

	As of		As of
($ in thousands)	~~June~~December 3031, 2004		September 30, ~~2003~~2004
Distributions payable	$	~~218~~227	$	~~665~~228
Reserve for remaining
Reserve for remaining disputed impaired claims at 8.1%		2,807		3,160
Disputed Impaired Claims at 6.573%		2,776		6,471
Total available cash	$	3,034	$	3,388
Total Available Cash	$	2,994	$	7,136

Reserved ~~Cash~~ cash is held by the Liquidation Trust to assure payment of the ~~Liquidation~~ Liquidation Trust’s obligations in accordance with the Plan. Under the terms of the Plan, ~~Reserved~~reserved ~~Cash~~cash is intended to provide for (a) operating expenses of the Liquidation Trust, (b) estimated payments to holders of Allowed Unimpaired and Convenience Claims in accordance with the Plan, and (c) payments which may become necessary if and as Disputed Unimpaired Claims become Allowed, or if ~~certain~~ certain specific contingencies should occur. See Note 10 for details of specific reserves and their related amounts.

Restricted ~~Cash~~cash consists of cash held as collateral for a letter of credit ~~(see~~ ~~Note 6)~~ and cash held in an escrow account. Subsequent to December 31, 2004, $7.4 million of restricted cash was released to other cash following a reduction in the letter of credit to a balance of $1.6 million, which resulted from settlement of the related secured Claim (see Note 6).

Other cash ~~Cash~~ is cash and cash equivalents not designated to a specific reserve or fund, which the Liquidation Trustee may designate from time to time as required for reserves or as additional Available Cash for Distributions. As a result of the change in restricted cash described above, the balance in other cash increased by $7.4 million subsequent to December 31, 2004. There can be no assurance as to the timing and amount, if any, of an additional interim Distribution. The amount of a Distribution, if any, would depend on various factors, including the Liquidation Trustee’s determination of the amount of cash needed to assure funding of the Liquidation Trust’s remaining litigation until its ultimate resolution.

4. Preference Receivables

The Liquidation Trust’s preference receivables are reflected in the accompanying Statements of Net Assets in Liquidation at their estimated fair value of $32.61 million, net of estimated costs of recovery of $0.93 million, for 39 the sole remaining preference ~~cases~~recovery action being actively pursued and for settlement collections in progress atas ~~June~~of December 3031, 2004; and $63.01 million, net of estimated costs of recovery of $1.50 million, for 9010 preference ~~cases~~recovery actions being actively pursued and for settlement collections in progress atas of September 30, ~~2003~~2004. Estimated costs of recovery accrued as of September 30, 2004 and paid during the quarter ended December 31, 2004 include $0.2 million of fees for two expert reports prepared for preference recovery action trials.

The Liquidation Trust originally assigned no value to certain of the largest potential preference cases until fact-finding and initial negotiation indicated that some collection was likely. During the nine months ended June 30, 2004, the last remaining such preference case was settled for $3.8 million and the settlement collected in full.

The Liquidation Trust originally assigned no value to certain of the largest potential preference cases until fact-finding and initial negotiation indicated that some collection was likely. During the quarter ended December 31, 2003, the last remaining such preference case was settled for $3.8 million, resulting in an increase in the estimated fair value of preference receivables of that amount.

The fair value of Liquidation Trust assets is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. The eventual net realizable value of preference receivables is likely to differ from their estimated net fair value and these differences may be significant.

5. Other Assets

Other assets consist of ~~various~~ receivables from various former vendors, service providers, and others. ~~Prior~~Other ~~to June 30, 2004, other~~ assets ~~included~~ aare ~~$1.2 million~~reported ~~receivable~~at ~~from~~estimated anet ~~group~~fair ofvalue, ~~insurance~~based ~~companies~~on ~~commonly known~~either asthe ~~Kemper~~amount ~~Insurance Company~~ paid (~~“Kemper”),~~generally ~~the~~in ~~insurer for~~ the ~~Debtors’ workers’~~form ~~compensation claims for a number~~ of ~~years,~~cash ~~which was subject to offset as collateral for certain Insurance Claims (see Note 6~~deposits). ~~During~~or the ~~quarter ended~~estimated ~~June 30,~~recoverable ~~2004~~amount, ~~Kemper~~whichever ~~provided~~is ~~the~~more determinable. ~~Liquidation~~The ~~Trust~~eventual ~~with~~net ~~documents asserting~~realizable ~~that~~value ~~this~~of ~~collateral~~these ~~had~~assets ~~been~~is ~~applied~~likely ~~against~~to ~~the~~differ ~~Insurance~~from ~~Claims.~~their ~~Accordingly,~~estimated ~~the~~net ~~Liquidation~~fair ~~Trust~~value ~~has~~and ~~applied~~these ~~the~~differences ~~receivable~~may ~~against~~be ~~the related Claim liability~~significant.

~~Other assets are reported at estimated net fair value, based on either the amount paid (generally in the form of cash deposits) or the estimated recoverable amount, whichever is more determinable~~6. ~~The~~Unimpaired ~~eventual net realizable value of these assets is likely to differ from their estimated net fair value~~ and ~~these~~Convenience ~~differences~~Claims ~~may be significant.~~Payable

6. Unimpaired Claims payable represents the estimated aggregate settlement amount of Unimpaired Claims against the Debtors prior to the Effective Date of the Plan, which will be paid out at 100% of their Allowed amount. Such Claims ~~Payable~~are valued at the Liquidation Trust’s best estimate of the amount that will ultimately be allowed. Convenience Claims, also included in this classification, are not significant.

Unimpaired ~~Claims~~and ~~payable~~Convenience ~~represents the estimated aggregate settlement amount of Unimpaired~~ Claims ~~against~~payable ~~the~~consists ~~Debtors prior to the Effective Date~~ of: ~~the Plan, which will be paid out at 100% of their Allowed amount. Such Claims~~ ~~are valued at the Liquidation Trust’s best estimate of the amount that will ultimately be allowed.~~

Unimpaired Claims payable consists of:


	As of		As of
($ in thousands)	December 31, 2004		September 30, 2004

Allowed unimpaired claims	$	2,935	$	1,339


Estimated fair value of disputed unimpaired claims
Kemper claim, net		—		1,600
Other disputed unimpaired claims		—		29


Total estimated fair value of disputed unimpaired claims		—		1,629

Convenience claims		2		2


Total	$	2,937	$	2,970


Number of disputed unimpaired claims		8		9

	As of		As of
($ in thousands)	June 30, 2004		September 30, 2003
Allowed Claims	$	1,485	$	1,392
Estimated fair value of Disputed Claims
Kemper Claim		3,925		9,002
Other Disputed Claims		32		650
Total Unimpaired Claims payable	$	5,442	$	11,044
Reserved or restricted value of Disputed Claims
Kemper Claim (restricted amount)	$	8,839	$	9,002
Other Disputed Claims (reserved amount)		337		1,075
Total	$	9,176	$	10,077
Number of Disputed Claims		10		22

The largest remaining Unimpaired Claim is a secured Claim asserted by a group of insurance companies collectively referred to as Kemper Insurance Company (“Kemper”) for payment of certain workers’ compensation claims against the Debtors (the “Kemper Claim”). The Liquidation Trust recorded the estimated net fair value of the Kemper Claim at $1.6 million as of December 31, 2004 and September 30, 2004. This value was based on an agreement reached between Kemper and the Liquidation Trust during December 2004 to settle the Kemper Claim for $1.7 million, offset by a $0.1 million prepayment held by a third-party claims administrator. The Kemper Claim was therefore included with Allowed Unimpaired Claims as of December 31, 2004 and with Disputed Unimpaired Claims as of September 30, 2004. Subsequent to December 31, 2004, the letter of credit securing the Kemper Claim was reduced to $1.6 million.

~~For~~ Pursuant to the ~~purpose~~Plan, ofcertain ~~establishing~~fees ~~adequate~~and ~~reserves,~~expenses ~~the~~which ~~value~~Kmart ofCorporation ~~Disputed Claims~~(“Kmart”) ~~was~~incurred ~~estimated~~in connection bywith the ~~Liquidation~~Debtors’ ~~Trust~~bankruptcy ~~and~~filing ~~approved~~were byallowed ~~the~~as ~~Bankruptcy~~an Unimpaired Claim. Allowed ~~Court~~Unimpaired inClaims anas ~~order~~of ~~establishing~~December 31, ~~the~~2004 ~~amounts~~and ofSeptember 30, ~~Disputed~~2004 ~~Claims~~include ~~Reserves.~~this Claim, which has not ~~Secured~~yet ~~Claims~~been ~~are,~~substantiated inby ~~effect,~~Kmart ~~reserved~~as ~~for~~required by the ~~restrictions~~Plan, onat ~~the~~its ~~related collateral~~estimated amount of $1.3 million.

The largest remaining Disputed Unimpaired Claim is a secured Claim asserted by Kemper (the “Kemper Claim”) for payment of certain liability claims against the Debtors (the “Insurance Claims”). Kemper has not provided the Liquidation Trust with sufficient information to determine the fair value of each of the Insurance Claims. Therefore, the Liquidation Trust valued the Kemper Claim in Unimpaired Claims payable at the full amount of the irrevocable cash-collateralized letter of credit held by Kemper to assure payment of the Insurance Claims. As a result, the Kemper Claim was valued at $9.0 million as of September 30, 2003.

In The amount ~~December 2003,~~asserted by the ~~Liquidation~~holders ~~Trust~~of ~~filed a complaint in~~ the ~~Bankruptcy~~ ~~Court~~remaining ~~requesting, among~~ other ~~things,~~Disputed ~~that~~Unimpaired ~~the~~Claims ~~Bankruptcy Court fix~~is ~~the~~insignificant ~~amount~~as of ~~the~~December 31, ~~Kemper~~2004 ~~Claim~~ and ~~compel the return of excess collateral~~September 30, ~~deposits~~ ~~and other amounts held by Kemper to the Liquidation Trust (see Note 12)~~2004. ~~During~~The ~~May 2004, Kemper provided documents to the~~ Liquidation Trust ~~indicating~~ ~~(a)~~ anticipates that ~~Kemper~~each ~~had applied certain deposits and other cash collateral previously recorded as assets~~ of ~~the~~these ~~Liquidation~~Claims ~~Trust~~will ~~(see~~be ~~Note~~expunged ~~5) against~~or ~~the~~waived; ~~Insurance Claims~~accordingly, ~~and~~no ~~(b) that~~liability ~~after~~has ~~application~~been ~~of such~~recorded ~~collateral,~~with ~~Kemper~~respect ~~estimated~~to the remaining ~~collateral~~Disputed ~~required~~Unimpaired ~~to secure the Insurance~~ Claims atas ~~$3.9 million. The Liquidation Trust has therefore reduced its estimate~~ of ~~the value of the Kemper Claim to the $3.9~~December ~~million~~31, ~~collateral estimate~~2004.

The ultimate value of the Insurance Claims could be higher or lower than Kemper’s current collateral estimate. This collateral estimate is neither an offer by Kemper to settle the Kemper Claim nor an amount at which the Liquidation Trust believes this Claim should or will be settled. Kemper has not agreed or offered to reduce the letter of credit. The ultimate fair value of this Claim is likely to differ from its estimated fair value and the difference may be significant.

Unimpaired Claims are valued by reviewing the facts available to the Liquidation Trust, including the Debtors’ records and information submitted by the claimants, and estimating the ultimate settlement value of the Claims. The fair value of Unimpaired Claims payable is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. However, no assurance can be given as to the ultimate allowance, disallowance or settlement of the remaining Disputed Unimpaired Claims, individually or in the aggregate.

7. Uncashed Claims Checks

Pursuant to the Plan, any Claims payments and Distributions which remain uncashed for 90 days following their issuance date are forfeited to the Liquidation Trust for Distribution to other holders of Allowed Claims. Pending a final order from the Bankruptcy Court, the Liquidation Trust has treated such items as a liability. Such checks may be reissued upon request of the payee, subject to applicable fees.

8. Distributions Payable

Distributions payable primarily represents 68.~~573~~1% of the Allowed amount of Impaired Claims for which the Liquidation Trust had not yet paid Distributions. as of December 31, 2004 and September A30, 2004, respectively. As of these dates, a number of holders of such Allowed Claims, while otherwise eligible for Distributions, had either not yet provided all ~~the~~ information necessary for payment, or were subject to an offsetting claim by the Liquidation Trust which had not yet been resolved. Until all such issues are resolved, the holder of an Allowed Claim may not receive a Distribution.

9. Estimated Costs of Liquidation

The Wind-down Reserve and Litigation Reserve described below together constitute the estimated costs of liquidation in the accompanying Statements of Net Assets in Liquidation.

Under the Plan, the Liquidation Trust was required to establish and fund a reserve to pay administration costs and costs of holding and liquidating the Liquidation Trust’s assets (the “Wind-down Reserve”). ~~The~~Substantially ~~resolution~~all of ~~preference~~ ~~receivables~~the ~~and~~day-to-day ~~other~~operations ~~litigation,~~of ~~including~~ the ~~Kemper~~Liquidation ~~Complaint,~~Trust are ~~and~~planned ~~the~~to ~~related~~cease ~~Claims,~~in isthe ~~expected~~near tofuture; ~~extend~~however, ~~into~~provision ~~2005,~~has ~~followed~~been bymade for certain necessary administrative, legal and accounting processes to be completed thereafter. The Liquidation Trust believes the Wind-down Reserve of $4.0 million as of June 30, 2004 is sufficient to cover the projected total costs of operating the Liquidation Trust, consisting mainly of personnel and professional fees, through ~~its anticipated termination~~December 2005.

Pursuant to the Plan, the Liquidation Trust also established and funded a reserve to pay the costs of pursuing certain actions referred to as the Bondholder Action and the Committee Action (the “Litigation Reserve”). ~~In March 2004,~~The ~~the~~amount ~~court~~of ~~ruled~~the inLitigation ~~favor~~Reserve as of ~~the~~December 31, ~~defendants~~2004 and September 30, ~~against~~2004 is intended to fund the ~~Liquidation~~ ~~Trust~~pursuit inof the Bondholder Action through an appeal and the Committee Action through trial (see Note 12). In ~~April 2004,~~accordance with the procedures set forth in the Plan, increases in the Litigation Reserve require approval. The Liquidation Trust ~~filed~~is in the process of obtaining such approval with respect to an ~~appeal~~increase ~~from~~of ~~this~~$0.6 million, ~~ruling~~which was included in the Litigation Reserve balance as of December 31, 2004 and September 30, 2004.

The fair value of the estimated costs of liquidation is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. Actual costs are likely to differ from the estimated costs and these differences may be significant.

Also in April 2004, the Committee Action was assigned to the judge who presided in the Bondholder Action, who has set a briefing schedule for summary judgment and other motions and has scheduled the Committee Action for trial in August 2005. The Liquidation Trust believes the Litigation Reserve balance of $2.2 million as of June 30, 2004 is sufficient to cover the estimated total costs of pursuing an appeal of the Bondholder Action and the trial in the Committee Action scheduled for August 2005.

The fair value of the estimated costs of liquidation is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known.

10. Bankruptcy Reserves Required

Reserves, other than those funded by ~~Restricted~~restricted ~~Cash~~cash, or included in Available Cash, consist of:

	As of		As of
($ in thousands)	~~June~~December 3031, 2004		September 30, ~~2003~~2004
Liability Reserves
Wind-down (net of related escrow of $278)	$	32,~~683~~495	$	43,~~873~~240
Litigation		21,~~184~~508		2,~~460~~384
Unimpaired Claims (net of applicable letter of credit collateral of $3,925 and $9,002, respectively (see Note 6))		1,517		2,042
Unimpaired and convenience claims (excluding secured claim (see Note 6))		1,337		1,370
Uncashed Claims checks		128		377
Uncashed claims checks		175		142
Convenience Claims		2		22
Total liability reserves		5,515		7,136
Total Liability Reserves		7,514		9,774
Contingency Reserves
Fleet		11,000		11,000
Excess Disputed Unimpaired Claims		305		425
Excess disputed unimpaired claims		329		309
Preference settlement Claims		20		89
Preference settlement claims		27		26
Minimum reserve		3,000		3,000
Total Contingency Reserves		14,325		14,514
Total contingency reserves		14,356		14,335
Total Reserves	$	21,839	$	24,288
Total reserves	$	19,871	$	21,471

The Fleet ~~reserve~~Reserve, established pursuant to a stipulated order between Fleet Retail Finance Inc. (“Fleet”) and the Liquidation Trust, is likely to be drawn upon if Fleet, as a defendant in the Committee Action and the Bondholder Action, should ultimately prevail in one or both of such actions. No liability has been accrued in connection with the Fleet ~~reserve~~Reserve because the ~~Liquidation~~ Liquidation Trust has appealed the adverse ~~order~~decision and judgment in the Bondholder Action (see ~~Note~~ Note 12), ~~and~~ does not ~~believe~~consider Fleet ~~will~~likely to ultimately prevail in either of these actions, and has no access to information to estimate the amount, if any, that Fleet may validly assert against the Fleet Reserve.

11 The Liquidation Trust also maintains the Disputed Impaired Claims Reserve, which, as an equity reserve, is designated as part of Available Cash (see Note 3), for Distribution to holders of Disputed Impaired Claims should such Claims become Allowed. The reserve for the remaining Disputed Impaired Claims is determined based on the then current cumulative Distribution rate and on the estimated amount of remaining Disputed Impaired Claims.

11. Impaired Claims

The Liquidation Trust’s estimate of Impaired Claims consists of:

	As of		As of
($ in thousands)	~~June~~December 3031, 2004		September 30, ~~2003~~2004
Allowed Claims	$	702,629	$	674,508
Allowed impaired claims	$	705,008	$	704,015
Estimated fair value of Disputed Claims		40,968		84,219
Estimated fair value of disputed impaired claims		18,911		20,798
Total estimated Impaired Claims	$	743,597	$	758,727
Total estimated impaired claims	$	723,919	$	724,813
Asserted value of Disputed Claims	$	66,277	$	128,213
Asserted value of disputed impaired claims	$	58,316	$	64,068
Number of Disputed Claims		61		172
Number of disputed impaired claims		31		47

~~No assurance can be given as to the ultimate allowance, disallowance or~~11 settlement of the remaining Disputed Impaired Claims, individually or in the aggregate. The decrease in estimated fair value from September 30, 2003 to June 30, 2004 resulted primarily from (i) the settlement of a number of lease rejection Claims at less than the previously estimated amounts and (ii) vendor waivers of Claims, which had previously been included in the fair value estimate, as a result of preference settlement negotiations.

No assurance can be given as to the ultimate allowance, disallowance or settlement of the remaining Disputed Impaired Claims, individually or in the aggregate.

12. Contingencies

The Kemper Complaint

In December 2003, the Liquidation Trust filed a complaint against Kemper and various related entities (the “Kemper Complaint”). In the Kemper Complaint, which arises under various insurance policies that the Debtors purchased from Kemper, the Liquidation Trust seeks, among other things, an estimate under Section 502(c) of the Bankruptcy Code of the aggregate loss amounts owed by the Liquidation Trust for the Insurance Claims, a reduction in the letter of credit securing the amount owed by the Liquidation Trust with respect to such Insurance Claims, and the return of excess collateral, deposits and other amounts held by Kemper to the Liquidation Trust. Kemper holds an irrevocable cash-collateralized letter of credit with a balance of $8.8 million and $9.0 million as of June 30, 2004 and September 30, 2003, respectively, to secure payment of the Insurance Claims.

In the Kemper Complaint, the Liquidation Trust alleges that its estimated liability for the Insurance Claims is less than $1.0 million, substantially lower than the letter of credit balance and other amounts held by Kemper. Kemper’s response to the Complaint disputes the Liquidation Trust’s estimates. During May 2004, Kemper provided documents to the Liquidation Trust indicating (a) that Kemper had applied certain deposits and other cash collateral previously recorded as assets of the Liquidation Trust against the Insurance Claims, and (b) that after application of such collateral, Kemper estimated the remaining collateral required to secure the Insurance Claims at $3.9 million.

The ultimate value of the Insurance Claims could be higher or lower than Kemper’s current collateral estimate. This collateral estimate is neither an offer by Kemper to settle the Kemper Claim nor an amount at which the Liquidation Trust believes this Claim should or will be settled. Kemper has not agreed or offered to reduce the letter of credit. Discovery in the proceeding is expected to continue at least through the balance of the fiscal year. The trial is scheduled for March 2005. The Liquidation Trust cannot predict with any certainty the outcome of the litigation or the amount or range of potential recoveries.

The Bondholder Action

In March 2004, following a non-jury trial held in October 2003, the ~~United~~ ~~States District~~ Court ~~for the District of Delaware~~ issued an opinion ~~and~~ and order (collectively, “the Decision”) in the Bondholder Action, ~~which the Liquidation Trust is pursuing against Fleet and General Electric Credit Corp. (“GECC”),~~ directing the entry of judgment in favor ~~of Fleet~~the ~~and GECC~~defendants. In April 2004, the Liquidation Trust filed an appeal from the ~~Decision~~ Decision and related judgment. ~~There~~The ~~can~~Liquidation beTrust noand ~~assurance~~the ofdefendants each completed the ~~outcome~~filing of ~~the~~ appeal briefs during September 2004. The Court of Appeals has not heard oral argument and no date for such argument has yet been set. The timing of a ruling is unknown. Also see the discussion of the Fleet ~~reserve~~Reserve in Note 10.

The Committee Action

In April 2004, the Committee Action was assigned to the judge who presided in the Bondholder Action, who has ~~set~~scheduled athe ~~briefing~~Committee ~~schedule~~Action for trial in August 2005. During December 2004 and January 2005, the Court heard oral argument on motions, including motions for summary judgment, ~~and~~filed ~~other~~by ~~motions~~various ~~and~~defendants. ~~has~~The ~~scheduled~~timing ~~the~~of ~~Committee~~a ~~Action~~decision ~~for~~on ~~trial~~defendants’ inmotions ~~August 2005~~is unknown.

The various defendants are vigorously opposing these actions. There is no assurance that the Liquidation Trust will prevail on the claims asserted in the Committee Action and in the appeal of the Bondholder Action. The Liquidation Trust cannot predict with any certainty the outcome of the litigation or the amount or range of potential recoveries.

The Kemper Complaint

During December 2004, Kemper and the Liquidation Trust reached an agreement to settle Kemper’s secured Claim, for unliquidated workers’ compensation claims against the Debtors, for the net amount of $1.6 million (see Note 6). Kemper also agreed to reduce the letter of credit collateralizing its Claim to $1.6 million, and to release a $12.0 million bond held as additional security, which bond constitutes most of the largest remaining Disputed Impaired Claim.

The Liquidation Trust’s claims against Kemper for the return of excess collateral, deposits and other amounts due to the Liquidation Trust remain unresolved. The trial with respect to the unresolved matters is scheduled for March 2005. Any recovery will further reduce the settlement amount for Kemper’s Claim. The Liquidation Trust cannot predict with any certainty the outcome of the litigation or the amount or range of potential recoveries.

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

Reference is made to the unaudited financial statements of the Liquidation Trust as of ~~June~~ December 3031, 2004 and September 30, ~~2003~~2004 and for the ~~three~~quarters ~~months and nine months~~ ended ~~June~~December 3031, 2004 and ~~June 30~~December 31, 2003, and the notes thereto (the “Unaudited Liquidation Trust Financial Statements”), included as ~~in Part~~Item I1. of this Form 10-Q. The following information concerning the Liquidation Trust’s financial performance and condition should be read in conjunction with the audited Liquidation Trust financial statements as of September 30, ~~2003~~2004 and September 30, ~~2002~~2003, and for the ~~periods~~fiscal years ~~from~~ended ~~October~~September 130, ~~2002~~2004 ~~through~~and September 30, 2003, and for the period from October 26, 2001 (Effective Date) through September 30, 2002, and the notes thereto.

The Unaudited Liquidation Trust Financial Statements have been prepared on the same basis as the audited Liquidation Trust financial statements, using the liquidation basis of accounting, and, in the opinion of the Liquidation Trustee, contain all adjustments, consisting of normal recurring ~~adjustments~~ adjustments necessary for a fair presentation of the Liquidation Trust’s results for such periods. The Liquidation Trust’s results for the ~~three~~quarter ~~months~~ ended ~~June~~December 3031, 2004 are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year. All amounts are rounded and are therefore approximate.

I. Accounting Policies and Estimates

The following discussion and analysis of the Liquidation Trust’s changes in net assets in liquidation, cash receipts and disbursements, and net assets in liquidation is based on the Unaudited Liquidation Trust Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the ~~liquidation~~ liquidation basis of accounting. During preparation of these financial statements, the ~~Liquidation~~ Liquidation Trustee is required to make certain estimates and assumptions which affect the reported amounts of assets and liabilities in liquidation at estimated fair value, including estimates and assumptions concerning resolution of disputed claims, resolution of current and potential litigation, and the fair value, and related disclosure, of contingent assets and liabilities. On an ongoing basis, the Liquidation Trustee evaluates and updates these estimates and assumptions based on historical experience and on various other assumptions the Liquidation Trustee believes are reasonable ~~under~~ under the circumstances. Actual results may differ from these estimates and different assumptions would lead to different estimates.

The Liquidation Trust’s critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Liquidation Trust’s annual report on Form 10-K for the year ended September 30, ~~2003~~2004.

II. Changes in Net Assets in Liquidation

Significant financial activities of the Liquidation Trust during the periods reflected below include Distributions ~~authorized~~ and ~~payments~~Claims ~~to claimants of various Classes~~payments, ~~settlement~~resolution of Claims asserted, pursuit of preference recovery ~~receivables~~actions and other litigation, and carrying out the liquidation activities of the Liquidation Trust.

Net assets in liquidation are subject to material change when either (a) Distributions to holders of Allowed Impaired Claims are authorized, or (b) estimates of the fair value of the Liquidation Trust’s assets and/or liabilities change. Both the authorization of Distributions and changes in estimates are non-cash changes. These changes are shown in the Liquidation Trust’s Statements of Changes in Net Assets in Liquidation and are discussed below.

Most cash transactions, on the other hand, such as collection of receivables and payments of liabilities and Distributions, cause offsetting changes in the associated components of assets and liabilities, but do not change net assets in liquidation. The Liquidation Trust’s Statements of Cash Receipts and Disbursements show the results of these transactions, which are also discussed later under the heading “Cash Receipts and Disbursements.”

The following table summarizes the significant changes in net assets in liquidation for the periods as indicated:

	For the three months ended
	For the quarter ended
($ in thousands)	~~June~~December 3031, 2004			~~June~~December 3031, 2003
Distributions authorized	$	(~~134~~79	)	$	(141,~~053~~426	)
Changes in estimates – increase/(decrease) in net assets in liquidation:
Changes in estimates – increase in preference receivables, net		—			3,750
Unimpaired claims payable		3,806			1,576
Net other increases		157			103
Preference receivables		447			4,123
Net increase in net assets in liquidation	$	78		$	2,427
Costs of liquidation:
Litigation reserve		—			(3,000	)
Net other increases		128			217
Net increase/(decrease) in net assets in liquidation	$	4,247		$	(11,137	)

	For the nine months ended
($ in thousands)	June 30, 2004			June 30, 2003
Distributions authorized	$	(1,889	)	$	(16,541	)
Changes in estimates – increase/(decrease) in net assets in liquidation:
Unimpaired claims payable		3,806			1,912
Preference receivables		3,537			5,311
Costs of liquidation:
Wind-down reserve		(1,540	)		—
Litigation reserve		(2,000	)		(3,000	)
Net other increases		1,026			760
Net increase/(decrease) in net assets in liquidation	$	2,940		$	(11,558	)

A. Distributions authorized

~~The~~ No ~~primary~~new ~~difference~~interim ~~between~~Distribution ~~Distributions~~was authorized during the ~~three months~~quarter ~~and the nine months~~ ended ~~June~~December 3031, 2004 ~~and~~ or during the ~~three~~quarter ~~months and the nine months~~ ended ~~June~~December 3031, 2003. ~~was~~Distributions at the ~~second~~ ~~interim~~rate ~~Distribution~~ of 28.~~058~~1%, ~~authorized~~totaling ~~during~~$0.1 million, ~~June 2003~~were toauthorized ~~all holders~~during ofthe ~~Allowed~~quarter ~~Impaired~~ended ~~Claims~~December 31, ~~whose~~2004 ~~Claims~~to ~~totaled~~holders of $~~663.~~1.0 million as of ~~June 30,~~Impaired ~~2003.~~Claims Innewly ~~addition,~~allowed during the period. Distributions at the ~~aggregate~~ rate of 6.573%, totaling $1.4 million, were authorized ~~to holders of a significantly lower amount of Impaired Claims newly allowed~~ during the ~~three~~quarter ~~months and the nine months~~ ended ~~June~~December 3031, ~~2004 than~~2003 ~~during~~to ~~the~~holders ~~three~~of ~~months~~$21.7 million ~~and~~of ~~the~~Impaired ~~nine~~Claims ~~months~~newly ~~ended~~allowed ~~June 30,~~during ~~2003,~~the ~~because, as~~period. As a result of the ongoing Claims resolution process, fewer Impaired Claims remain to be resolved as of each successive period.

B. Changes in estimates — estimated fair value of preference receivables

~~1. Estimated~~There was no change in estimate related to the fair value of ~~unimpaired~~preference ~~claims~~receivables ~~payable~~during the quarter ended December 31, 2004, because the largest remaining cases have been settled at their estimated value as of September 30, 2004.

~~Claims~~ The ~~liabilities are recorded at~~ estimated ~~aggregate~~fair ~~settlement~~value ~~amounts, which requires estimates~~ of ~~claims~~preference ~~resolution~~receivables ~~results.~~increased ~~Claims are evaluated~~ by ~~reviewing~~ ~~the~~$3.8 million ~~facts~~during ~~available to~~ the quarter ~~Liquidation~~ended ~~Trust~~December 31, ~~including~~2003. ~~the~~The ~~Debtors’ records~~increase ~~and~~was ~~information~~due ~~submitted~~to by the ~~claimants, and estimating the ultimate~~ settlement ~~amount~~ of ~~each~~the ~~Claim~~last ~~based on currently available information. The~~remaining ~~fair~~large ~~value~~preference ofcase ~~Unimpaired Claims payable is reassessed at least quarterly and adjustments~~ to ~~estimated~~which ~~fair values are reflected in~~ the ~~period~~Liquidation inTrust ~~which~~had ~~they become~~not ~~known.~~previously Asassigned a ~~result of the ongoing Claims resolution process~~value, ~~fewer Disputed Unimpaired Claims remain~~ as ~~of each successive valuation date, and~~ the ~~Liquidation~~case ~~Trust~~was ~~becomes~~not ~~more~~previously ~~familiar~~sufficiently ~~with~~developed ~~the~~to ~~validity of each remaining Disputed Unimpaired Claim~~value.

~~The estimated fair value of Unimpaired Claims payable decreased by $3~~C.~~8 million~~ ~~during~~Net ~~the~~other ~~nine months ended June 30, 2004, compared to a decrease of~~increases ~~$1.9 million during the nine months ended June 30, 2003.~~

~~The change in estimated fair value of Unimpaired Claims payable during the~~ Net ~~three~~other ~~months~~increases ~~and~~consist ~~the nine months ended June 30, 2004 results~~ primarily ~~from the Liquidation Trust receiving more information related to the largest remaining Disputed Unimpaired Claim. This Claim is a secured Claim asserted by a group~~ of ~~insurance~~interest ~~companies~~income ~~commonly~~from ~~known as Kemper Insurance Company (“Kemper”) (~~the ~~“Kemper Claim”) for payment of certain liability claims against the Debtors (the “Insurance Claims”). Kemper did not provide the~~ Liquidation Trust ~~with~~’s ~~sufficient~~cash ~~information to determine the fair value of each of the Insurance~~and ~~Claims. Therefore, the Liquidation Trust valued the Kemper Claim in Unimpaired Claims payable at the full amount of the irrevocable~~ cash~~-collateralized~~ ~~letter of credit held by Kemper to assure payment of the Insurance Claims~~equivalents. ~~As a~~ ~~result, the Kemper Claim was valued at $9.0 million as of September 30, 2003.~~

~~During May 2004, Kemper provided documents to the Liquidation Trust~~14 indicating (a) that Kemper had applied certain deposits and other cash collateral previously recorded as assets of the Liquidation Trust against the Insurance Claims, and (b) that after application of such collateral, Kemper estimated the remaining collateral required to secure the Insurance Claims at $3.9 million. As of June 30, 2004, therefore, the Liquidation Trust netted the previously recorded receivable of $1.2 million against the related estimated Claim liability, and then reduced its estimate of the remaining value of the Kemper Claim to the $3.9 million collateral estimate. The ultimate value of the Insurance Claims could be higher or lower than Kemper’s current collateral estimate. This collateral estimate is neither an offer by Kemper to settle the Kemper Claim nor an amount at which the Liquidation Trust believes this Claim should or will be settled.

Adjustments in the estimated fair value of Unimpaired Claims payable for the three months and the nine months ended June 30, 2003 resulted from the Liquidation Trust’s periodic evaluation of various claims.

2. Estimated fair value of preference receivables

The estimated fair value of net preference receivables increased by $3.5 million during the nine months ended June 30, 2004, compared to an increase of $5.3 million during the nine months ended June 30, 2003.

The increase in the estimated fair value of preference receivables during the nine months ended June 30, 2004 resulted from favorable preference case settlements, partially offset by an increase in estimated expenses to collect. During the three months ended December 31, 2003, a $3.8 million settlement was reached in a preference case to which the Liquidation Trust had not previously assigned a value, as the case was not previously sufficiently developed to value (see below). During the three months ended March 31, 2004, the Liquidation Trust increased its estimate of the costs of prosecuting the remaining preference actions, which are the most difficult and contentious cases, including the engagement of experts, by $0.7 million, decreasing the estimated fair value of net preference receivables. An increase of $0.4 million in the estimated fair value of preference receivables during the three months ended June 30, 2004 was primarily based on the Liquidation Trust’s ongoing collections in excess of previously estimated amounts.

The increase in the estimated fair value of preference receivables for the nine months ended June 30, 2003 was based on two main factors:

i)		The Liquidation Trust originally assigned no value to certain of the largest potential preference cases until fact-finding and initial negotiation indicated that some collection was likely. During the period from October 1, 2002 through June 30, 2003, some of these cases were settled and others were more fully developed by entering into the fact-finding and initial negotiation processes, resulting in increases in estimates of $1.8 million.
ii)		Based on the Liquidation Trust’s aggregate collections experience to date, which was favorable compared to the previous estimate, the Liquidation Trust increased the estimated fair value of the cases remaining open as of June 30, 2003 by $3.5 million.

A total of $4.1 million of this increase was recorded during the three months ended June 30, 2003, based on the Liquidation Trust’s settlement and collections experience, the maturity of the cases, and the progress of the fact-finding and negotiation process during that period.

3. Costs of liquidation

The estimated costs of liquidation, representing the projected costs of operating the Liquidation Trust through its termination, consist of the Wind-down Reserve and the Litigation Reserve. These costs, which include personnel, facilities and professional fees, among other things, are based on various assumptions regarding the number of employees, the use of professionals (particularly in connection with continuing claims resolution and litigation), the anticipated termination date of the Liquidation Trust, and other matters. These estimates are reviewed and updated based on changes in the circumstances of the Liquidation Trust, particularly in the scheduling of the litigation the Liquidation Trust is pursuing.

During the three months ended June 30, 2004, no such changes in estimate were required based on the status and progress of the Liquidation Trust. However, several events during the three months ended March 31, 2004 caused the Liquidation Trust to revise its estimates of the costs of winding down its operations and prosecuting the actions provided for in the Litigation Reserve:

• The December 2003 filing of a complaint against Kemper and various related entities (the “Kemper Complaint”) did not result in a negotiated settlement; therefore estimated costs for counsel and experts were planned through the scheduled March 2005 trial. • A number of the trials in preference actions scheduled during spring 2004 were postponed in the Bankruptcy Court. • As a result, the resolution of the remaining Claims, final Distributions and other wind-down matters were expected to extend well into 2005. Certain limited operations of the Liquidation Trust must continue until these matters have been addressed.

Therefore, the Wind-down Reserve was increased by $1.5 million during the three months ended March 31, 2004.

The Litigation Reserve was established to cover the costs of the Bondholder Action and of the Committee Action, for which a trial is now scheduled in August 2005. In March 2004, the court ruled in favor of the defendants and against the Liquidation Trust in the Bondholder Action. In April 2004, the Liquidation Trust filed an appeal from this ruling.

As of December 31, 2003, an assessment of future increased funding of the Litigation Reserve, if any, was deferred pending a decision in the Bondholder Action. Based on a review of the Bondholder Action ruling and any potential implications for the Committee Action, and of the Liquidation Trust’s alternatives in these matters, the Litigation Reserve was increased by $2.0 million during the three months ended March 31, 2004, in accordance with the procedures set forth in the Plan.

With respect to the three months and nine months ended June 30, 2003, the Litigation Reserve was increased by $3.0 million during June 2003 as a result of a higher than planned level of activity and duration of litigation, primarily in connection with the Committee Action. The initial plan for the case did not anticipate the number and scope of discovery requests, depositions, and motions, and various delays in scheduling and proceeding with the case. Additionally, the defenses raised by the defendants required expenditures, at levels not originally anticipated for experts in insolvency and valuation. In addition, the trial date for the Committee Action, originally expected to be in late 2002, had, at that time, been deferred to January 2004.

During the nine months ended June 30, 2003, there were no changes in the status of the Liquidation Trust that would require a revision of the estimated costs reflected in the Wind-down Reserve.

III. Cash Receipts and Disbursements

The following table summarizes the cash receipts and disbursements for the periods as indicated:

	For the nine months ended
	For the quarter ended
($ in thousands)	~~June~~December 3031, 2004			~~June~~December 3031, 2003
Cash receipts:
Cash receipts
Preference collections	$	7,294		$	10,071
Preference collections, before costs of recovery	$	1,772		$	1,239
Other receipts		~~1,023~~170			~~1,987~~104
Total cash receipts		81,~~317~~942			121,~~058~~343
Cash disbursements:
Cash disbursements
Legal and professional fees:
Legal and professional fees
Litigation		~~2,276~~875			21,~~884~~490
Preference recoveries		~~1,371~~697			~~1,779~~490
Liquidation Trust operations		~~1,319~~237			~~1,224~~720
Operating expenses		~~1,411~~508			~~2,008~~600
Claims paid, net		875			2,045
Claims payments		11			126
Total cash disbursements		7,252			9,940
Reissued/(voided) claims checks, net		(33	)		127
Distributions paid		2,336			19,606
Total cash disbursements		2,295			3,553
Net cash outflow	$	(1,271	)	$	(17,488	)
Distributions paid		80			1,666
Net cash outflow	$	(433	)	$	(3,876	)

A. Cash receipts

Most of the cash receipts are from collections of preference receivables, which have been ongoing since the preference actions were filed in mid-2001. ~~Cash~~ ~~receipts~~Preference collections during the quarter ~~nine months~~ ended ~~June~~December 3031, 2004 were ~~significantly lower~~higher than during the ~~nine~~quarter ~~months~~ ended ~~June~~December 3031, 2003,. ~~both because the~~The ~~remaining~~increase ~~preference~~is ~~cases~~primarily ~~are~~because ~~the~~of ~~most~~three ~~difficult~~substantial ~~and~~preference ~~contentious~~recovery ~~cases~~actions ~~and~~(totaling $1.4 ~~therefore~~million), ~~are~~among ~~settled more slowly~~others, ~~and because~~which ~~the~~were ~~number~~settled ofimmediately ~~remaining~~prior ~~preference~~to ~~cases~~trial ~~available~~and tocollected ~~settle has~~during ~~decreased~~the ~~significantly~~quarter asended aDecember 31, ~~result of ongoing preference settlement efforts~~2004.

17 During the quarter ended December 31, 2003, on the other hand, no trial calendar had been set, and therefore settlements, especially significant settlements, proceeded more slowly absent the pressure of trial dates. However, there were 90 preference cases being actively pursued as of September 30, 2003, compared to 10 as of September 30, 2004. Therefore, more cases were settled and collected during the quarter ended December 31, 2003 than during the quarter ended December 31, 2004. Cash receipts from collections of preference receivables are expected to decline significantly, subsequent to the quarter ending March 31, 2005.

Likewise, other receipts, mainly resulting from settlement of various amounts which were owed to the Debtors, have declined over time, because the number and significance of open matters decreases as of each successive period.

B. Legal and professional fees

Legal and professional fees reflect the activity level in various areas of the Liquidation Trust’s responsibilities.

The litigation fees paid for the Bondholder Action and the Committee Action during the ~~nine months~~ quarter ended ~~June~~December 3031, 2004 were ~~somewhat~~significantly less than those paid during the ~~nine~~quarter ~~months~~ ended ~~June 30, 2003. During the nine months ended~~December ~~June 30~~31, 2003~~, the Committee Action case was in the discovery phase, incurring significant fees for counsel and experts~~. Fees ~~related~~paid ~~to the Committee Action case, adjourned~~ during ~~September 2003 pending~~ the ~~outcome~~quarter ~~of the Bondholder Action trial, declined substantially during the nine months~~ ended ~~June~~ December 3031, 2004. ~~This decrease was offset by an increase in fees~~ related to filing the Liquidation ~~October 2003~~Trust’s ~~trial~~appeal briefs in the Bondholder Action, aand ~~matter~~to ~~which~~defending ~~was~~various ~~relatively~~motions, ~~less~~including motions ~~active~~for ~~during the nine months ended June 30, 2003.~~summary

~~While preference recovery fees declined as an absolute amount, preference~~15 recovery fees during the nine months ended June 30, 2004 were higher, relative to the applicable preference collections, than during the nine months ended June 30, 2003. Cases resulting in $3.8 million in preference collections during the nine months ended June 30, 2004 and $2.7 million in preference collections during the nine months ended June 30, 2003 were handled by counsel for Liquidation Trust operations, and the related expense was included in the Statements of Cash Receipts and Disbursements under “Legal and professional fees – Liquidation Trust operations” as incurred, rather than in preference recovery fees. The fees for all other preference settlements are contingent, and are set at a declining rate (generally ranging from 35% to 7% of collections) for larger cases. In contrast with the smaller, more expensive cases settled during the nine months ended June 30, 2004, a number of large cases were settled during the nine months ended June 30, 2003. Additionally, during the nine months ended June 30, 2004, the Liquidation Trust incurred significant fees and expenses for two expert reports in preparation for upcoming preference action trials.

~~Legal~~judgment, ~~and~~filed ~~professional~~by ~~fees~~defendants ~~for~~in ~~Liquidation~~the ~~Trust~~Committee ~~operations~~Action. ~~include~~Fees ~~all legal,~~paid ~~accounting,~~during ~~and~~the ~~other~~quarter ~~support~~ended December 31, ~~services~~2003 ~~except~~related ~~for~~to the ~~services~~higher ~~of counsel~~activity ~~prosecuting~~level ~~the~~of ~~Bondholder Action and~~ the ~~Committee~~October 2003 ~~Action,~~trial and ~~the firm pursuing preference collections on a contingency~~post-~~fee basis. The increase~~trial briefs in ~~fees for Liquidation Trust operations during~~ the ~~nine~~Bondholder ~~months ended June 30~~Action, ~~2004,~~ as ~~compared~~well toas ~~the~~discovery ~~nine~~and ~~months~~trial ~~ended~~preparation ~~June 30~~for, ~~2003,~~and ~~results from~~defending ~~increased~~various ~~legal~~motions ~~fees~~related ~~associated~~to, ~~with certain preference case settlements (see~~ the ~~$3.8 million~~Committee ~~and $2~~Action.~~7 million~~ inThe ~~collections~~Committee ~~noted above)~~Action, ~~and~~now ~~fees associated~~scheduled ~~with~~for ~~the~~trial ~~Kemper Complaint~~in August 2005, ~~offset~~had inbeen ~~part~~scheduled byfor atrial ~~general decrease~~ in ~~the~~ ~~number~~January 2004, ~~and~~prior ~~type~~to ofits ~~open~~adjournment ~~matters~~during September 2003.

Preference recovery fees during the quarter ended December 31, 2004 were comparable, as a percentage of preference collections, to such fees during the quarter ended December 31, 2003. The collection fees for most preference settlements are contingent, and are set at a declining rate (generally ranging from 35% to 7% of collections) for larger cases. In contrast with the smaller, more expensive cases settled during the quarter ended December 31, 2003, several large cases were settled during the quarter ended December 31, 2004, decreasing collection fees relative to collections. Offsetting the relative decrease in collection fees, during the quarter ended December 31, 2004, the Liquidation Trust incurred $0.2 million of fees for two expert reports in preparation for preference action trials.

Legal and professional fees for Liquidation Trust operations include all legal, accounting, and other support services except for the expenses of prosecuting the Bondholder Action and the Committee Action, and expenses related to preference collections pursued on a contingency-fee basis. Certain of the largest preference claims suits were handled by Liquidation Trust counsel on an hourly basis and the related fees included in Liquidation Trust operations. The higher fees for Liquidation Trust operations during the quarter ended December 31, 2003 as compared to the quarter ended December 31, 2004 resulted primarily from legal fees associated with a preference case settled during the quarter ended December 31, 2003 for $3.8 million (see II., B. “Changes in estimates,” above).

C. Operating expenses

Operating expenses during the ~~nine~~quarter ~~months~~ ended ~~June~~December 3031, 2004 were substantially lower than those during the ~~nine~~quarter ~~months~~ ended ~~June~~December 3031, 2003, primarily because, during the ~~number~~quarter ofended December 31, 2003, the Liquidation Trust ~~employees~~made ~~decreased~~a lump sum pre-payment of rent for office space. In ~~significantly~~contrast, ~~between~~following ~~the~~a ~~two~~July 2004 ~~periods~~relocation of its offices, ~~resulting~~the Liquidation inTrust ~~lower~~paid ~~payroll~~rent ~~expense~~monthly on smaller and less expensive office and document warehouse space during the quarter ended December 31, 2004.

D. Claims payments

Payments of Unimpaired Claims were ~~significantly~~ lower during the ~~nine months~~quarter ended ~~June~~December 3031, 2004 than during the ~~nine~~quarter ~~months~~ ended ~~June~~December 3031, 2003 because, as a result of the ongoing Claims resolution process, fewer Unimpaired Claims remain to be resolved and paid as of each successive period.

E. Distributions paid

Distributions paid depend primarily on the amount of Allowed Impaired Claims, including Claims newly allowed, and on the Distributions authorized from time to time. AnNo ~~initial~~new ~~Distribution~~interim Distribution was authorized ~~during~~or ~~August 2002 at~~paid aduring ~~rate~~the ofquarter ~~4.515%~~ended December 31, ~~and~~2004 aor ~~second interim Distribution~~ during ~~June 2003~~the atquarter ~~the~~ended ~~rate~~December 31, ~~of 2~~2003.~~058%.~~ During the ~~nine~~quarter ~~months~~ ended ~~June~~December 3031, ~~2003~~2004, holders of ~~substantially~~ ~~all Allowed Impaired Claims, valued at~~ $~~663~~1.1 million, ~~received the second interim Distribution at the rate~~ of ~~2.058% of the~~ Allowed ~~amount of~~ ~~their~~Impaired Claims. Noreceived ~~new~~payments ~~interim~~at ~~Distribution was authorized or paid during~~ the ~~nine~~ ~~months~~cumulative ~~ended~~Distribution ~~June 30,~~rate ~~2004.~~of ~~In addition~~8.1%, while during ~~both~~ the ~~nine months~~ ~~ended~~quarter ~~June 30, 2004 and the nine months~~ ended ~~June~~December 3031, 2003, holders of ~~newly~~ $25.9 million of Allowed Impaired Claims received payments at the then cumulative Distribution rate of 6.573%. In general, as a result of the ongoing Claims resolution process, fewer Impaired Claims remain to be resolved, and topaid ~~receive their accumulated Distributions,~~ as of each successive period.

IV. Net Assets in Liquidation

A. Assets

The Liquidation Trust’s cash and cash equivalents balance of $4533.69 million and $4634.84 million as of ~~June~~December 3031, 2004 and September 30, ~~2003~~2004, respectively, is classified as either (a) cash designated as available for distribution (“Available Cash”), (b) ~~Reserved~~reserved cash, (c) ~~Restricted~~restricted cash or (d) ~~Other~~ other cash.

Available Cash is designated to assure the availability of funds for payment to holders of Impaired Claims who have not received authorized Distributions. The required amount of Available Cash of $3.0 million as of ~~June 30~~December 31, 2004 was based primarily on the cumulative Distribution rate of 68.~~573~~1%, for $31.09 million of Allowed but unpaid Impaired Claims plus $4235.91 million of ~~Disputed~~ Disputed Impaired Claims (at their estimated value for reserve purposes). The required amount of Available Cash of $73.14 million as of September 30, ~~2003~~2004 was also based primarily on the cumulative Distribution rate of 68.~~573~~1%, for $91.3 9 million of Allowed but unpaid Impaired Claims plus $9839.4 5 million of Disputed Impaired Claims (at their estimated value for reserve purposes). The value of Disputed Claims, for the purpose of establishing adequate reserves, was estimated by the Liquidation Trust and approved by the Bankruptcy Court in an order establishing the amounts of Disputed Claims Reserves.

Reserved ~~Cash~~cash is held by the Liquidation Trust to assure payment of the Liquidation Trust’s obligations. Under the terms of the Plan, ~~Reserved~~reserved ~~Cash~~cash is intended to provide for (a) operating expenses of the Liquidation Trust, (b) estimated payments to holders of Allowed Unimpaired and Convenience Claims in accordance with the Plan, and (c) payments which may become necessary if and as as Disputed Unimpaired Claims become allowed, or if certain specific contingencies should occur. Reserved ~~Cash~~cash decreased by $21.46 million from September 30, ~~2003~~ 2004 to ~~June~~December 3031, 2004, to a balance of $2119.89 million, primarily as a result of decreases in the Wind-down and ~~Unimpaired~~Litigation ~~Claims reserves~~Reserves, as discussed below ~~and itemized in Note 10 to the Unaudited Liquidation Trust Financial Statements filed herein~~.

~~As of June 30, 2004,~~ Restricted ~~Cash~~cash of $9.63 million related primarily to a letter of credit collateralizing a secured Claim asserted by a group of insurance companies collectively referred to as Kemper Insurance Company (“Kemper”) (the “Kemper Claim”). ~~discussed~~Subsequent to December 31, 2004, $7.4 million of restricted cash was released to other cash following a reduction in ~~“Liabilities~~the letter of credit to a balance of $1.6 million,” ~~below~~which resulted from the settlement of the Kemper Claim.

Other ~~assets~~cash, ~~decreased~~which byis ~~$1.2 million~~not ~~from~~designated ~~September 30~~to a specific reserve or fund, ~~2003~~increased toprimarily ~~June~~as a result of preference collections during the quarter ended December 3031, 2004,. toAs a ~~balance~~result of the change in restricted cash described above, the balance in other cash increased by $07.3 4 million, subsequent ~~because~~to ~~Kemper~~December 31, ~~provided~~2004. ~~documents~~The toLiquidation ~~the~~Trustee may ~~Liquidation~~designate ~~Trust~~other ~~asserting~~cash ~~that~~from ittime ~~had~~to ~~applied~~time ~~certain~~as ~~deposits~~required ~~and~~for ~~other~~reserves ~~cash~~or as ~~collateral~~additional ~~previously~~Available ~~recorded~~Cash asfor ~~assets~~Distributions. ofThere ~~the~~can ~~Liquidation~~be ~~Trust~~no assurance ~~against~~as to the timing and amount, if any, of an additional ~~Insurance~~interim ~~Claims~~Distribution. The amount of a Distribution, if any, would depend on various factors, including the Liquidation ~~Trust~~Trustee’s determination ~~recorded~~of the ~~application~~amount of ~~such amounts,~~cash ~~decreasing~~needed ~~other~~to ~~assets~~assure ~~and~~funding ~~decreasing~~of the Liquidation ~~estimated~~Trust’s ~~Kemper~~remaining ~~Claim~~litigation until its ultimate ~~accordingly~~resolution.

19 Preference receivables, net of costs of recovery, decreased by $1.1 million, to a balance of $2.0 million as of December 31, 2004, compared to September 30, 2004, primarily due to ongoing preference collections. Collections of preference receivables totaled $1.8 million, and costs to collect, including significant non-recurring expert fees, totaled $0.7 million.

Preference receivables, net of costs of recovery, decreased by $2.4 million from September 30, 2003 to June 30, 2004, to a balance of $3.6 million, primarily due to ongoing preference collections. Collections of preference receivables accrued as of September 30, 2003 totaled $3.5 million, and costs to collect totaled $1.4 million. In addition, the Liquidation Trust increased its estimated costs to collect, generally related to expert fees incurred in preparation for upcoming preference action trials, offset in part by favorable preference case settlements. Collections during the period also included a $3.8 million settlement agreed to, recorded and collected during the nine months ended June 30, 2004, as discussed in “Changes in estimates”, above, which therefore had no net effect on the balance of preference receivables as of September 30, 2003 and as of June 30, 2004.

B. Liabilities

~~Unimpaired~~ Estimated ~~Claims~~costs ~~payable as~~ of ~~June 30,~~liquidation ~~2004~~decreased ~~consisted~~by ~~of Disputed Unimpaired Claims with an estimated fair value of~~ $~~3.9 million and Allowed but unpaid Unimpaired Claims totaling $~~1.56 million~~. The remaining Disputed Unimpaired Claims~~, ~~estimated~~to ~~at $3.9 million, consist of 10 Claims either estimated for reserve purposes or collateralized with restricted cash in~~ a ~~total~~ ~~amount~~balance of $94.23 million. ~~Most~~as of ~~this amount consists of a Claim filed by~~ ~~Kemper~~December 31, ~~relating~~2004, compared to ~~certain~~September 30, ~~insurance claims~~2004. The ~~Kemper~~decrease ~~Claim~~ is ~~secured~~due byto ~~a letter~~disbursements ~~of credit, and its fair value was previously estimated at the~~totaling ~~outstanding letter of credit balance~~$0.7 million ~~This~~from ~~Claim’s~~the ~~estimated~~Wind-down ~~value~~Reserve ~~was~~and ~~reduced to~~ $30.9 million ~~as of June 30, 2004, based on additional information received~~ from ~~Kemper (see “Changes in estimates,” above). If~~ the ~~remaining~~Litigation ~~Disputed Unimpaired Claims, excluding the Kemper Claim, were to be allowed at their reserved amounts, net assets in liquidation would not be materially reduced~~Reserve.

Estimated costs of liquidation decreased by $1.5 million from September 30, 2003 to June 30, 2004, to a balance of $6.1 million. The decrease is due to disbursements totaling $2.7 million from the Wind-down Reserve and $2.3 million from the Litigation Reserve, partially offset by increases of $1.5 million to the Wind-down Reserve and $2.0 million to the Litigation Reserve, as discussed in “Changes in estimates”, above.

C. Contingency reserves

The most significant component in contingency reserves is the Fleet ~~reserve~~ Reserve, established at a total of $11.0 million pursuant to a stipulated order between Fleet Retail Finance Inc. (“Fleet”) and the Liquidation Trust. The Fleet ~~reserve~~Reserve is likely to be drawn upon if Fleet, as a defendant in the Committee Action and the Bondholder Action, should ultimately prevail in one or both of such actions. No liability has been ~~accrued~~recorded in connection with the Fleet ~~reserve~~ Reserve because the Liquidation Trust has appealed the adverse ~~order~~decision and judgment in the ~~Bondholder Action and does not believe Fleet will ultimately~~ ~~prevail in either of the Actions.~~

Bondholder Action, does not consider Fleet likely to ultimately prevail in either of these Actions, and has no access to information to estimate the amount, if any, that Fleet may validly assert against the Fleet Reserve.

V. Contingencies

The Liquidation Trust is pursuing litigation against various parties, in particular the cases described as the Bondholder Action, the Committee Action, and the Kemper Complaint, as described in “Legal Proceedings,” below. The Liquidation Trust cannot predict with any certainty the ultimate outcome of any of the litigation or the amount or range of potential recoveries.

VI. Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements about the business, financial condition and prospects of the Liquidation Trust. The actual results of the Liquidation Trust could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including, without limitation, the Liquidation Trust’s success in in securing claims settlements on the terms currently contemplated in ongoing negotiations and in other estimates of settlement value, the effect of substantial delays in settling contingent assets and liabilities, resulting in a prolonged period of liquidation, economic conditions, changes in tax and other government rules and regulations applicable to the Liquidation Trust and other risks. These risks are beyond the ability of the Liquidation Trust to control, and in many cases, the Liquidation Trust cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by any forward-looking statements included in this Form 10-Q. When used in this quarterly report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates” and other similar expressions as they relate to the Liquidation Trust or the Liquidation Trustee are intended to identify forward-looking statements.

actual results to differ materially from those indicated by any forward-looking statements included in this Form 10-Q. When used in this quarterly report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates” and other similar expressions as they relate to the Liquidation Trust or the Liquidation Trustee are intended to identify forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Liquidation Trust does not hold any market risk sensitive instruments.

Item 4. Controls and Procedures

The Liquidation Trust has designed and maintains disclosure controls and procedures to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and regulations. These controls and procedures are also designed to ensure that such information is communicated to the Liquidation Trustee, to allow him to make timely decisions about required disclosures.

The Liquidation Trust, including the Liquidation Trustee, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Liquidation Trustee concluded that the Liquidation Trust’s disclosure controls and procedures are effective as of ~~June~~December 3031, 2004.

There has been no change in the Liquidation Trust’s internal control over financial reporting that occurred during the Liquidation Trust’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Liquidation Trust’s internal control over financial reporting.

The Liquidation Trust’s internal controls over financial reporting will be subject to audit as of September 30, 2005. The requirements of the Sarbanes – Oxley Act of 2002 have been taken into account in planning for the future administrative requirements of the Liquidation Trust. In addition to the Liquidation Trustee, the Liquidation Trust had 4 employees as of December 31, 2004. In the near future, the Liquidation Trust expects to cease much of its day-to-day operations and to minimize staffing accordingly, which may result in deficiencies in internal accounting controls related to a lack of segregation of duties.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Further background information about the following cases is disclosed in Part I, Item 3 – Legal Proceedings, of the Liquidation Trust’s Form 10-K ~~filed December 22,~~for ~~2003, and in Part II, Item 1 – Legal Proceedings, of~~ the ~~Liquidation~~ ~~Trust’s~~fiscal ~~Form~~year ~~10-Q~~ended ~~filed February~~September 1330, 2004.

~~Cases~~Federal ~~before the United States District~~ Court Cases

The Bondholder Action

~~The~~ In ~~Bondholder~~March 2004, ~~Action~~following ~~trial~~a ~~was~~non-jury trial held in October 2003., Inthe ~~March 2004~~ Court issued an opinion and order (collectively, “the Decision”) in the Bondholder Action, directing the entry of judgment in favor of ~~Fleet~~the ~~and GECC~~defendants. In April 2004, the Liquidation Trust filed an appeal tofrom the Decision and related judgment. ~~There~~The ~~can~~Liquidation beTrust noand ~~assurance~~the ofdefendants each completed the ~~outcome~~filing of ~~the~~ appeal briefs during September 2004. The Court of Appeals has not heard oral argument and no date for such argument has yet been set. The timing of a ruling is unknown.

The Committee Action

~~The~~ In ~~trial~~April 2004, of the Committee Action, ~~previously scheduled for January 2004,~~ was ~~adjourned~~assigned into ~~September 2003~~the ~~without~~judge awho ~~new~~presided ~~date,~~in ~~pending~~ the ~~outcome of the~~ Bondholder Action, ~~trial.~~who Inhas ~~April 2004,~~scheduled the Committee Action ~~was~~for ~~assigned~~trial ~~to the~~in ~~judge~~August 2005. ~~who~~During ~~presided~~December 2004 inand January 2005, the ~~Bondholder~~Court ~~Action,~~heard ~~who~~oral ~~has~~argument ~~set~~on amotions, ~~briefing schedule~~including motions for summary judgment, filed ~~and~~by ~~other~~various ~~motions~~defendants. ~~and~~The ~~has~~timing ~~scheduled~~of ~~the~~a ~~Committee Action~~decision ~~for~~on ~~trial~~defendants’ inmotions ~~August 2005~~is unknown.

21Bankruptcy Court Case

~~Cases~~ The ~~before~~Kemper ~~the Bankruptcy Court~~Complaint

In During December ~~2003~~2004, ~~the Liquidation Trust filed the~~ Kemper ~~Complaint.~~and In the ~~Kemper~~ ~~Complaint, which arises under various insurance policies that the Debtors purchased from Kemper, the~~ Liquidation Trust ~~seeks,~~reached ~~among other things,~~ an ~~estimate~~ ~~under~~agreement ~~Section~~to ~~502(c)~~settle ~~of the Bankruptcy Code of the aggregate loss~~Kemper’s ~~amounts~~secured ~~owed~~Claim, ~~by the Liquidation Trust~~ for unliquidated workers’ compensation claims against the Debtors ~~(the “Insurance Claims”)~~, afor ~~reduction in~~ the ~~letter~~net amount of ~~credit~~$1.6 million. ~~securing~~Kemper ~~the~~also ~~amount~~agreed ~~owed by the Liquidation Trust with respect~~ to ~~such~~reduce ~~Insurance Claims, and~~ the ~~return~~letter of ~~excess~~credit ~~collateral, deposits~~collateralizing ~~and other amounts held by Kemper to the Liquidation Trust. In the Kemper Complaint, the Liquidation Trust alleges that~~ its ~~estimated liability~~ ~~for~~Claim ~~the~~to ~~Insurance Claims is less than~~ $1.0 6 million, ~~substantially lower than the letter of credit balance~~ and ~~other amounts held by Kemper. Kemper’s response~~ to ~~the~~release ~~Complaint~~a ~~disputes the Liquidation Trust’s estimates~~$12. ~~(Also~~0 million ~~see~~bond ~~“Changes~~held inas ~~Estimates~~additional –security, ~~Estimated~~which ~~fair value of unimpaired~~bond ~~claims~~constitutes ~~payable”~~most ~~above.) Discovery in the proceeding is expected to continue at least through the balance~~ of the ~~fiscal~~largest ~~year.~~remaining ~~The~~Disputed ~~trial~~Impaired ~~is scheduled for March 2005~~Claim. ~~The Liquidation Trust cannot predict with any certainty the~~ ~~outcome of the litigation or the amount or range of potential recoveries.~~

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

Subsequent to June 30, 2004, the Liquidation Trustee informed the Committee which represents the interests of the beneficiaries of the Liquidation Trust that he intends to authorize a third interim Distribution of approximately 1 None.5% ~~of the amount of Impaired Claims to holders of Allowed Impaired Claims. The~~ ~~Distribution is expected to be authorized and made by September 2004.~~

~~Also~~Item ~~subsequent to June 30, 2004 and as part of the wind-down of its operations, the Liquidation Trust prepared to close its 9,000 square-foot records warehouse and moved from its previous~~ 6~~,000 square-foot leased office to a 1,500 square-foot office at a significantly reduced rent~~. Exhibits

Item 6. Exhibits and Reports on Form 8-K


Exhibit
Number		Document

31.1		Certification by Liquidation Trustee

32.1		Liquidation Trustee’s Certification Pursuant to 18 U.S.C. Section 1350

~~(a) Exhibits~~20

Exhibit Number		Document
31.1		Certification by Trustee pursuant to Rule 13a-14(a) and 15d-14(a) under the Exchange Act
32.1		Liquidation Trustee’s Certification Pursuant to 18 U.S.C. Section 1350

SIGNATURES

~~(b) Reports~~ Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on ~~Form 8-K~~its behalf by the undersigned, thereunto duly authorized.

None.


	HECHINGER LIQUIDATION TRUST
Date: February 14, 2005	By:	/s/ Conrad F. Hocking
	Name:		Conrad F. Hocking
	Title:		Liquidation Trustee

2221

~~SIGNATURES~~INDEX TO EXHIBITS FORM 10-Q

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the~~Exhibit No. ~~Registrant has duly caused this report to be signed on its behalf by the~~ ~~undersigned, thereunto duly authorized.~~

	HECHINGER LIQUIDATION TRUST
Date: August 13, 2004	By:	/s/ Conrad F. Hocking
	Name:	Conrad F. Hocking
	Title:	Liquidation Trustee

31.1 Certification by Liquidation Trustee

2331.1 Liquidation Trustee’s Certification Pursuant to 18 U.S.C. Section 1350

~~INDEX TO EXHIBITS~~22 ~~FORM 10-Q~~

Exhibit No.

31.1		Certification by Trustee pursuant to Rule 13a-14(a) and 15d-14(a) under the Exchange Act
32.1		Liquidation Trustee’s Certification Pursuant to 18 U.S.C. Section 1350

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