##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2003 or
|                                 |  |                                                                                                                                        
|[   ]                            |  | 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)                        |  | 52-7230151
(I.R.S. Employer Identification No.)
|                                                                               |  |                                                
|1801 McCormick Drive, Largo, Maryland
(Address of principal executive offices) |  | 20774
(Zip Code)                               

Registrants telephone number, including area code: (301) 883-4501

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] |  | No [   ]

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

|          |  |       
|--------- |  | ------
|Yes [   ] |  | No [X]

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] |  | No [   ]





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HECHINGER LIQUIDATION TRUST
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

|                                                                                              |                                                              |      |    |   | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---- | -- | - | 
|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 |                                                              |      | 10 |  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                              |      | 17 |  
|Item 4. Controls and Procedures                                                               |                                                              |      | 17 |  
|                                                                                              |                                                              |      |    |   | 
|PART II. OTHER INFORMATION:                                                                   |                                                              |      |    |  
|                                                                                              |                                                              |      |    |   | 
|Item 1. Legal Proceedings                                                                     |                                                              |      | 18 |  
|Item 2. Changes in Securities and Use of Proceeds                                             |                                                              |      | 18 |  
|Item 3. Defaults Upon Senior Securities                                                       |                                                              |      | 18 |  
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                              |      | 18 |  
|Item 5. Other Information                                                                     |                                                              |      | 18 |  
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                              |      | 18 |  
|                                                                                              |                                                              |      |    |   | 
|SIGNATURES                                                                                    |                                                              |      | 19 |  
|                                                                                              |                                                              |      |    |   | 
|INDEX TO EXHIBITS                                                                             |                                                              |      | 20 |  

2



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##### 



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,
|                          |                                                                                     |                                                                        |        | 2003     |        | 2002         
|                          |                                                                                     |                                                                        |        |          |        |              
|Assets                    |                                                                                     |                                                                        |        |          |        |               |        |       
|                          | Cash and cash equivalents                                                           |                                                                        |        |          |        |               |        |        |       
|                          |                                                                                     | Designated as available for distribution
to holders of impaired claims |        | $        | 8,981  |               |        | $      | 15,337 | 
|                          |                                                                                     | Reserved                                                               |        |          | 25,425 |               |        |        | 36,231 | 
|                          |                                                                                     | Restricted                                                             |        |          | 9,945  |               |        |        | 10,939 | 
|                          |                                                                                     | Other                                                                  |        |          | 802    |               |        |        | 134    | 
|                          |                                                                                     |                                                                        |        |          |        |               |        |        |        | 
|                          | Total cash and cash equivalents                                                     |                                                                        |        | 45,153   |        |               |        | 62,641 |       
|                          | Preference receivables, net of costs of
recovery of $1,918 and $2,860,
respectively |                                                                        |        | 7,075    |        |               |        | 10,042 |       
|                          | Other assets                                                                        |                                                                        |        | 1,503    |        |               |        | 2,507  |       
|                          |                                                                                     |                                                                        |        |          |        |               |        |        |        | 
|                          |                                                                                     | Total assets                                                           |        |          | 53,731 |               |        |        | 75,190 | 
|                          |                                                                                     |                                                                        |        |          |        |               |        |        |        | 
|Liabilities               |                                                                                     |                                                                        |        |          |        |               |        |       
|                          | Unimpaired claims payable                                                           |                                                                        |        | 11,749   |        |               |        | 15,452 |       
|                          | Convenience claims payable                                                          |                                                                        |        | 30       |        |               |        | 47     |       
|                          | Distribution payable to holders of
allowed impaired claims                          |                                                                        |        | 789      |        |               |        | 3,854  |       
|                          | Estimated costs of liquidation                                                      |                                                                        |        | 8,539    |        |               |        | 11,655 |       
|                          |                                                                                     |                                                                        |        |          |        |               |        |        |        | 
|                          |                                                                                     | Total liabilities                                                      |        |          | 21,107 |               |        |        | 31,008 | 
|                          |                                                                                     |                                                                        |        |          |        |               |        |        |        | 
|Net Assets in Liquidation |                                                                                     | $                                                                      | 32,624 |          |        | $             | 44,182 |       
|                          |                                                                                     |                                                                        |        |          |        |               |        |        |        | 

See accompanying notes to unaudited
financial statements.

3



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##### 



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

|                                                                        |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        |                |   | 
|----------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------ | ------- | -------------- | ------ | -------------- | ------ | --------------- | - | ---------------- | ------- | ------ | ------ | - | ------ | -------------- | - | 
|                                                                        |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        | For the period
|                                                                        |                                                                 |                    |         | For the period |        | For the period |        | For the period  |   | from            
|                                                                        |                                                                 |                    |         | from           |        | from           |        | from            |   | October 26, 2001
|                                                                        |                                                                 |                    |         | April 1, 2003  |        | April 1, 2002  |        | October 1, 2002 |   | (Effective Date)
|                                                                        |                                                                 |                    |         | through        |        | through        |        | through         |   | through         
|                                                                        |                                                                 |                    |         | June 30, 2003  |        | June 30, 2002  |        | June 30, 2003   |   | June 30, 2002   
|                                                                        |                                                                 |                    |         |                |        |                |        |                 |   |                 
|Increase/(decrease) in Net Assets in Liquidation                        |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        |               
|                                                                        | Decrease in estimated fair value of
unimpaired claims payable   |                    | $       | 1,576          |        |                | $      | 1,000           |   |                  | $       | 1,912  |        |   | $      | 3,142          |  
|                                                                        | Increase in estimated fair value of
preference receivables, net |                    |         | 4,123          |        |                |        | 666             |   |                  |         | 5,311  |        |   |        | 1,257          |  
|                                                                        | Interest income                                                 |                    |         | 112            |        |                |        | 323             |   |                  |         | 412    |        |   |        | 952            |  
|                                                                        | Other increases                                                 |                    |         | 105            |        |                |        | 59              |   |                  |         | 348    |        |   |        | 59             |  
|                                                                        | Increase in estimated costs of liquidation                      |                    |         | (3,000         | )      |                |        | (748            | ) |                  |         | (3,000 | )      |   |        | (1,746         | )
|                                                                        |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        |                |  
|Increase in Net Assets in Liquidation
before distribution               |                                                                 |                    | 2,916   |                |        |                | 1,300  |                 |   |                  | 4,983   |        |        |   | 3,664  |               
|                                                                        |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        |                |  
|Distribution to holders of allowed impaired claims                      |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        |               
|                                                                        | Distribution declared                                           |                    |         | 13,450         |        |                |        |                |   |                  |         | 13,450 |        |   |        |               |  
|                                                                        | Increase in distribution payable                                |                    |         | 603            |        |                |        |                |   |                  |         | 3,091  |        |   |        |               |  
|                                                                        |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        |                |  
|                                                                        |                                                                 | Total distribution |         |                | 14,053 |                |        |                 |  |                  |         |        | 16,541 |   |        |                |  | 
|                                                                        |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        |                |  
|Net (decrease)/increase in Net Assets in Liquidation
after distribution |                                                                 |                    | (11,137 | )              |        |                | 1,300  |                 |   |                  | (11,558 | )      |        |   | 3,664  |               
|                                                                       
|Net Assets in Liquidation at beginning of period                        |                                                                 |                    | 43,761  |                |        |                | 67,095 |                 |   |                  | 44,182  |        |        |   | 64,731 |               
|                                                                        |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        |                |  
|Net Assets in Liquidation at end of period                              |                                                                 | $                  | 32,624  |                |        | $              | 68,395 |                 |   | $                | 32,624  |        |        | $ | 68,395 |               
|                                                                        |                                                                 |                    |         |                |        |                |        |                 |   |                  |         |        |        |   |        |                |  

See accompanying notes to unaudited financial statements.

4



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

|                                                                          |                                                  |                             |                       |        |                 |       |                  |        |                |       | 
|------------------------------------------------------------------------- | ------------------------------------------------ | --------------------------- | --------------------- | ------ | --------------- | ----- | ---------------- | ------ | -------------- | ----- | 
|                                                                          |                                                  |                             |                       |        |                 |       |                  |        | For the period
|                                                                          |                                                  |                             |                       |        | For the period  |       | from            
|                                                                          |                                                  |                             |                       |        | from            |       | October 26, 2001
|                                                                          |                                                  |                             |                       |        | October 1, 2002 |       | (Effective Date)
|                                                                          |                                                  |                             |                       |        | through         |       | through         
|                                                                          |                                                  |                             |                       |        | June 30, 2003   |       | June 30, 2002   
|                                                                          |                                                  |                             |                       |        |                 |       |                 
|Cash receipts                                                             |                                                  |                             |                       |        |                 |       |                  |       
|                                                                          | Preference collections, before costs of recovery |                             | $                     | 10,071 |                 |       | $                | 10,361 |               
|                                                                          | Other receipts, net                              |                             |                       | 1,575  |                 |       |                  | 724    |               
|                                                                          | Interest income                                  |                             |                       | 412    |                 |       |                  | 952    |               
|                                                                          |                                                  |                             |                       |        |                 |       |                  |        |               
|                                                                          |                                                  | Total cash receipts         |                       |        | 12,058          |       |                  |        | 12,037         |      
|                                                                          |                                                  |                             |                       |        |                 |       |                  |        |               
|Cash disbursements                                                        |                                                  |                             |                       |        |                 |       |                  |       
|                                                                          | Costs of liquidation                             |                             |                       |        |                 |       |                  |        |               
|                                                                          |                                                  | Legal and professional fees |                       |        |                 |       |                  |        |                |      
|                                                                          |                                                  |                             | Litigation            |        |                 | 2,884 |                  |        |                | 2,184 | 
|                                                                          |                                                  |                             | Preference recoveries |        |                 | 1,779 |                  |        |                | 2,222 | 
|                                                                          |                                                  |                             | Trust operations      |        |                 | 1,224 |                  |        |                | 2,052 | 
|                                                                          |                                                  | Operating expenses          |                       |        | 2,008           |       |                  |        | 1,838          |      
|                                                                          | Unimpaired claims                                |                             |                       | 2,028  |                 |       |                  | 10,510 |               
|                                                                          | Convenience claims                               |                             |                       | 17     |                 |       |                  | 208    |               
|                                                                          |                                                  |                             |                       |        |                 |       |                  |        |               
|                                                                          |                                                  | Total cash disbursements    |                       |        | 9,940           |       |                  |        | 19,014         |      
|                                                                          |                                                  |                             |                       |        |                 |       |                  |        |               
|Increase/(decrease) in cash and cash equivalents
before distribution paid |                                                  |                             | 2,118                 |        |                 |       | (6,977           | )     
|                                                                         
|                                                                          | Distribution paid                                |                             |                       | 19,606 |                 |       |                  |       |               
|                                                                          |                                                  |                             |                       |        |                 |       |                  |        |               
|Decrease in cash and cash equivalents                                     |                                                  |                             | (17,488               | )      |                 |       | (6,977           | )     
|                                                                         
|Cash and cash equivalents at beginning of period                          |                                                  |                             | 62,641                |        |                 |       | 92,379           |       
|                                                                          |                                                  |                             |                       |        |                 |       |                  |        |               
|Cash and cash equivalents at end of period                                |                                                  | $                           | 45,153                |        |                 | $     | 85,402           |       
|                                                                          |                                                  |                             |                       |        |                 |       |                  |        |               

See accompanying notes to unaudited financial statements.

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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 its affiliates (the
Debtors), which had filed for bankruptcy under Chapter 11 of the United
States Code. The Plan was 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 is governed under the terms of a Liquidation Trust
Agreement.

The Liquidation Trust has no authority to engage in any trade or business.
All cash and other property of the Debtors were transferred to the Liquidation
Trust as of the Effective Date so that, pursuant to the Plan, the Liquidation
Trust may (i) liquidate any and all remaining assets of the Debtors; (ii)
pursue causes of action assigned to the Liquidation Trust; (iii) resolve,
either consensually or through litigation, all disputed claims asserted against
the Debtors (Disputed Claims); and (iv) make all distributions
(Distributions), and payments to holders of claims allowed pursuant to 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
the Liquidation Trusts purpose by the liquidation and distribution of its
assets 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 Claims will be paid in
full under the Plan, and therefore are also 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. 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) 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 liabilities 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 (see Note 9).

During August 2002, the Bankruptcy Court authorized the Liquidation Trust
to make an initial Distribution (the Initial Distribution) to holders of
Allowed Impaired Claims, at the rate of 4.515% of the Allowed amount of the
Impaired Claims. The Liquidation Trust also established a reserve of 4.515%
for Disputed Impaired Claims, using the estimated value 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 the remaining Disputed Impaired Claims based on the
cumulative 6.573% Distribution rate.

6



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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 Distributions paid to holders of Beneficial Interests and changes
in the estimated fair value of the Liquidation Trusts assets and liabilities.

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 Liquidation Trusts financial statements
and notes thereto as of September 30, 2002 and October 26, 2001 (Effective
Date), and for the period from October 26, 2001 (Effective Date) through
September 30, 2002.

All amounts herein are rounded and are therefore approximate.

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
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities. Actual
results are likely to differ from those estimates and those differences may be
significant.

3. Cash

Cash Designated as Available for Distribution to Holders of Impaired
Claims (Available Cash) is designated to assure the availability of funds for
payment to holders of Impaired Claims who have not received a Distribution. As
of June 30, 2003, the required amount of Available Cash was based on the
cumulative Distribution rate of 6.573%, for $12.0 million of Allowed but unpaid
Impaired Claims plus $124.6 million of Disputed Impaired Claims (at their
estimated value for reserve purposes). As of September 30, 2002, the required
amount of Available Cash was based on the Initial Distribution rate of 4.515%,
for $85.4 million of Allowed but unpaid Impaired Claims plus $254.3 million of
Disputed Impaired Claims (at their estimated value for reserve purposes).

Reserved Cash is held by the Liquidation Trust to assure payment of the
Liquidation Trusts obligations in accordance with the Plan. Under the terms
of the Plan, Reserved 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 specific contingencies should occur. See Note 8 for details of
specific reserves and their related amounts.

Restricted Cash consists of cash held as collateral for a letter of credit
and cash held in escrow accounts.

Other Cash is cash and cash equivalents that has not been designated to a
specific reserve or fund as of a particular date.

7



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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 $7.1 million, net of estimated costs of recovery of $1.9 million, for
approximately 200 preference cases being actively pursued at June 30, 2003; and
$10.0 million, net of estimated costs of recovery of $2.9 million, for
approximately 360 preference cases being actively pursued at September 30,
2002.

The estimated fair value of preference receivables was increased by $5.3
million during the period from October 1, 2002 through June 30, 2003 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. Subsequently, 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 during the period from
October 1, 2002 through June 30, 2003. As of June 30, 2003 only one such
case still has no assigned value because it is not sufficiently developed
to assign a reasonable estimate.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|ii) |  | Based on the Liquidation Trusts aggregate collections experience to
date, which is 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.                                                                                                                                                                                                                                                                                                                                                           

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. Unimpaired Claims Payable

As of
June 30, 2003, Unimpaired Claims payable was $11.7 million and
consisted of Disputed Unimpaired
Claims with an estimated fair value of $10.0 million and Allowed
but unpaid Unimpaired
Claims totaling $1.7 million. The 30 remaining Disputed Unimpaired Claims were
asserted or estimated for reserve purposes at $10.6 million. Most of this
amount consists of a Claim filed by Kemper Insurance Company relating to
certain insurance claims. The Kemper Claim is secured by a letter of credit,
and its fair value is estimated at the outstanding letter of credit balance of
$9.2 million as of June 30, 2003.

As of
September 30, 2002, Unimpaired Claims payable was $15.5 million
and included Disputed Unimpaired
Claims asserted or estimated for reserve purposes at $21.9 million and
estimated by the Liquidation Trust at $13.7 million, principally for the Kemper
Claim, as well as Allowed but unpaid Unimpaired Claims totaling $1.7 million.

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.

6. Distributions Payable

This liability represents authorized but unpaid Distributions to holders
of Allowed Impaired Claims. As of June 30, 2003, Distributions
payable was $0.8 million and
consisted of Distributions at the cumulative authorized rate of 6.573% for
$12.0 million of Allowed Impaired Claims. As of September 30, 2002,
Distributions payable was $3.9 million and consisted of the Initial Distribution at the rate of
4.515% for $85.4 million of Allowed Impaired Claims.

8



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##### 



Certain holders of Allowed Claims (both Unimpaired and Impaired) had
not yet provided the Trust with all information necessary for payment, or their
Claim was subject to an offset which had not yet been resolved. Until all such
issues are resolved, a claimant may not receive a Distribution or payment for
their Allowed Claim.

7. Estimated Costs of Liquidation

The Litigation Reserve and the Wind-down 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
the Wind-down Reserve to pay administration costs and costs of holding and
liquidating the Liquidation Trusts assets. The Wind-down reserve provides for
operations of the Liquidation Trust, consisting mainly of personnel, facilities
and professional fees, through its expected termination in early 2004.

Pursuant to the Plan, the Liquidation Trust also established a reserve
(the Litigation Reserve) of $3.0 million as of October 26, 2001 (Effective
Date) to pay the costs of pursuing certain actions, primarily those referred to
as the Bondholder Action and the Committee Action. The Litigation Reserve was
increased by $3.5 million during the period from October 26, 2001 (Effective
Date) through September 30, 2002. During the period from October 1, 2002
through June 30, 2003, the Liquidation Trust further increased the Litigation
Reserve by another $3.0 million.

Each of the increases in the Litigation Reserve has been based on the
Liquidation Trusts ongoing evaluation of the costs and potential benefits of
continuing the actions, and made in accordance with the procedures set forth in
the Plan. The Liquidation Trust believes that the $3.5 million remaining
balance in the Litigation Reserve as of June 30, 2003 is sufficient to cover
the costs of pursuing both actions through trial.

8. Bankruptcy Reserves Required

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

|                                                                                                                   |  |               |        |                    |  |   |        | 
|------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------ | ------------------ |  | - | ------ | 
|                                                                                                                   |  | As of         |        | As of             
|($ in thousands)                                                                                                   |  | June 30, 2003 |        | September 30, 2002
|                                                                                                                   |  |               |        |                   
|Liability
          Reserves                                                                                       |  |               |        |                    |  |   |        | 
|Wind-down
          (net of related escrow of $278)                                                                |  | $             | 4,765  |                    |  | $ | 7,998  | 
|Litigation                                                                                                         |  |               | 3,496  |                    |  |   | 3,379  | 
|Unimpaired
          Claims (net of collateralized letter of credit of $9,191 and $10,118,
          respectively) |  |               | 2,558  |                    |  |   | 5,334  | 
|Convenience
          Claims                                                                                       |  |               | 30     |                    |  |   | 47     | 
|                                                                                                                   |  |               |        |                    |  |   |        | 
|Total
          Liability Reserves                                                                                 |  |               | 10,849 |                    |  |   | 16,758 | 
|                                                                                                                   |  |               |        |                    |  |   |        | 
|Contingency
          Reserves                                                                                     |  |               |        |                    |  |   |        | 
|Fleet                                                                                                              |  |               | 11,000 |                    |  |   | 8,447  | 
|Excess
          Disputed Unimpaired Claims                                                                        |  |               | 567    |                    |  |   | 7,559  | 
|Minimum
          Reserve                                                                                          |  |               | 3,000  |                    |  |   | 3,000  | 
|Preference
          Vendors                                                                                       |  |               | 9      |                    |  |   | 60     | 
|Former
          Employees                                                                                         |  |               |       |                    |  |   | 407    | 
|                                                                                                                   |  |               |        |                    |  |   |        | 
|Total
          Contingency Reserves                                                                               |  |               | 14,576 |                    |  |   | 19,473 | 
|                                                                                                                   |  |               |        |                    |  |   |        | 
|Total
          Reserves                                                                                           |  | $             | 25,425 |                    |  | $ | 36,231 | 
|                                                                                                                   |  |               |        |                    |  |   |        | 

9



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Pursuant to a stipulated order between Fleet Retail Finance Inc. and the
Liquidation Trust, the Fleet Reserve was increased by $2.6 million to a total
of $11.0 million during the period from October 1, 2002 through June 30, 2003.
The Fleet Reserve is likely to be drawn upon if Fleet, as a defendant in the
Committee Action and the Bondholder Action, should prevail. No liability has
been accrued in connection with the Fleet Reserve because the Liquidation Trust
does not consider Fleet likely to prevail in either of these actions.

The $7.0 million decrease in the Excess Disputed Unimpaired Claims Reserve
from September 30, 2002 to June 30, 2003 resulted primarily from the Bankruptcy
Court approving several large Claims waivers negotiated in conjunction with
preference settlement negotiations.

In January 2003, the Former Employees Reserve was ordered released, as the
Former Employees appeal period from the related adverse ruling had expired.

9. Impaired Claims

As of June 30, 2003 and as of September 30, 2002, the Liquidation Trusts
estimate of the total fair value of Impaired Claims was $768.8 million and
$812.8 million, respectively. The fair value of Impaired Claims is reassessed
at least quarterly and adjustments to estimated fair values are reflected in
the period in which they become known. The decrease in estimated fair value
between September 30, 2002 and June 30, 2003 resulted primarily from (i) the
settlement of a number of lease rejection Claims at less than the originally
estimated amounts and (ii) vendor waivers of significant Claims which had
previously been included in the fair value estimate, as a result of preference
settlement negotiations.

Primarily as a result of the second interim Distribution at the rate of
2.058%, Distributions authorized for holders of Impaired Claims
totaled $16.5 million
during the period from October 1, 2002 through June 30, 2003. Cumulative
Distributions authorized from October 26, 2001 (Effective Date) through June 30, 2003,
including the Initial Distribution at the rate of 4.515% of the Allowed amount
of Impaired Claims, totaled $43.4 million. Of the $43.4 million, $19.5 million
was distributed to holders of Senior Unsecured Claims, $23.9 million to holders
of General Unsecured Claims, and none to holders of Subordinated Debentures
Claims, whose payment rights are subordinated to those of the holders of Senior
Unsecured Claims.

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 30, 2003 and September 30, 2002 and for the periods from
October 1, 2002 through June 30, 2003 and from October 26, 2001 (Effective
Date) through June 30, 2002, and the notes thereto (the Unaudited Liquidation
Trust Financial Statements), included in Part I 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, 2002 and October 26, 2001 (Effective
Date) 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 necessary for a fair
presentation of the Liquidation Trusts results for such periods. The
Liquidation Trusts results for the nine months ended June 30, 2003 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

10



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accepted in the United States of America and in accordance with the
liquidation basis of accounting. During preparation of these Financial
Statements, the Liquidation Trustee is required to make estimates and
assumptions which affect the reported amounts of assets and
liabilities in liquidation at
estimated fair value,
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
the circumstances. Actual results may differ from these estimates and
different assumptions would lead to different estimates.

II.     Changes in net assets in liquidation

Significant financial activities of the Liquidation Trust during the
periods reflected below include Distributions and payments to claimants of
various Classes, settlement of Claims asserted, pursuit of preference
receivables 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.

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

|                                                                         |                           |               |                     |               |                     |               |                     |               |                  |   |         |        |   |   |                     |        |  
|------------------------------------------------------------------------ | ------------------------- | ------------- | ------------------- | ------------- | ------------------- | ------------- | ------------------- | ------------- | ---------------- | - | ------- | ------ | - | - | ------------------- | ------ | -
|                                                                         |                           |               |                     |               |                     |               |                     |               |                  |   |         |        |   |   | For the period from
|                                                                         |                           |               | For the period from |               | For the period from |               | For the period from |               | October 26, 2001
|                                                                         |                           |               | April 1, 2003       |               | April 1, 2002       |               | October 1, 2002     |               | (Effective Date)
|                                                                         |                           |               | through             |               | through             |               | through             |               | through         
|($ in thousands)                                                         |                           | June 30, 2003 |                     | June 30, 2002 |                     | June 30, 2003 |                     | June 30, 2002
|                                                                         |                           |               |                     |               |                     |               |                     |              
|                                                                         |                           |               |                    
|Distributions                                                            |                           | $             | (14,053             | )             |                     | $             |                    |               |                  | $ | (16,541 | )      |   | $ |                    |       
|Changes in estimates 
increase (decrease) in
net assets in liquidation: |                           |               |                     |               |                     |               |                     |               |                  |   |         |        |   |   |                     |       
|                                                                         | Preference receivables    |               |                     | 4,123         |                     |               |                     | 666           |                  |   |         | 5,311  |   |   |                     | 1,257  |  
|                                                                         | Unimpaired claims payable |               |                     | 1,576         |                     |               |                     | 1,000         |                  |   |         | 1,912  |   |   |                     | 3,142  |  
|                                                                         | Costs of liquidation      |               |                     | (3,000        | )                   |               |                     | (748          | )                |   |         | (3,000 | ) |   |                     | (1,746 | )
|                                                                         |                           |               |                     |               |                     |               |                    
|Net change in estimates                                                  |                           |               | 2,699               |               |                     |               | 918                 |               |                  |   | 4,223   |        |   |   | 2,653               |       
|Net other increases                                                      |                           |               | 217                 |               |                     |               | 382                 |               |                  |   | 760     |        |   |   | 1,011               |       
|                                                                         |                           |               |                     |               |                     |               |                    
|Net (decrease)/increase
in net assets in liquidation                     |                           | $             | (11,137             | )             |                     | $             | 1,300               |               |                  | $ | (11,558 | )      |   | $ | 3,664               |       
|                                                                         |                           |               |                     |               |                     |               |                    

A.     Distributions

During June 2003, the Liquidation Trust notified the Bankruptcy Court that
it would make a second interim Distribution. Pursuant to this notice, the
Liquidation Trust declared a second interim Distribution of $13.5 million,
2.058% of the Allowed amount of Impaired Claims, to the holders of Allowed Impaired
Claims. The Liquidation Trust also increased its Distributions payable by an
additional $0.6

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million and $3.0 million for the period from April 1, 2003
through June 30, 2003 and for the period from
October 1, 2002 through June 30, 2003, respectively, representing
Distributions payable but not yet paid to holders of newly Allowed Impaired Claims.

The Initial Distribution was authorized by the Bankruptcy Court on August
9, 2002 and therefore no Distributions occurred during the periods from April
1, 2002 through June 30, 2002 and from October 26, 2001 (Effective Date)
through June 30, 2002.

B.     Preference receivables

The estimated fair value of preference receivables increased by $5.3
million during the period from October 1, 2002 through June 30, 2003, compared
to an increase of $1.3 million during the period from October 26, 2001
(Effective Date) through June 30, 2002.

The increase during the period from October 1, 2002 through 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. Subsequently, 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 during the period from
October 1, 2002 through June 30, 2003. As of June 30, 2003 only one such
case still has no assigned value because it is not sufficiently developed
to assign a reasonable estimate.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|ii) |  | Based on the Liquidation Trusts aggregate collections experience to
date, which is 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.                                                                                                                                                                                                                                                                                                                                                           

Based on its settlement and collections experience, the maturity of the
cases, and the progress of the fact-finding and negotiation process, the
Liquidation Trust increased its estimate of the fair value of preference
receivables by $4.1 million during the period from April 1, 2003 through June
30, 2003.

The increases in the estimated fair value of preference receivables for
the period from April 1, 2002 through June 30, 2002 and for the period from
October 26, 2001 (Effective Date) through June 30, 2002 were based on
preference receipts during the periods in excess of the amounts previously
estimated to be collectible as of October 26, 2001 (Effective Date).

The increases in the current periods through June 30, 2003 were
significantly greater than the increases in the prior periods through June 30,
2002 because, as of June 30, 2002, (i) none of the larger cases was
sufficiently developed to value, and (ii) not enough of the preference cases
estimated in the aggregate had been settled to substantiate a material increase
in the fair value estimate for the remaining cases.

C.     Unimpaired claims payable

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. The estimated fair value of the remaining Disputed
Unimpaired Claims was reduced by $1.9 million during the period from October 1,
2002 through June 30, 2003 and by $3.1 million during the period from October
26, 2001 (Effective Date) through June 30, 2002.

As a result of
the ongoing Claims resolution process, fewer Disputed Unimpaired Claims remain as of each

12



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successive valuation date, and the
Liquidation Trust becomes more familiar
with the validity of each
remaining Disputed Unimpaired Claim. Therefore, the Liquidation Trust was
better able to estimate the value of each remaining Disputed Claim as of
September 30, 2002 than as of October 26, 2001 (Effective
Date), and, as a result, changes in estimate during the period
from October 1, 2002 through June
30, 2003 were less than changes in estimate during the period from October
26, 2001 (Effective Date) through June 30, 2002.

D.     Costs of liquidation

The estimated costs of liquidation, representing the projected costs of
operating the Liquidation Trust through its termination, consists of the
Wind-down Reserve and the Litigation Reserve.

The Wind-down Reserve was previously based on estimates that the
Liquidation Trust would substantially complete all of its operations by early
2003. Subsequently, however, based in part on the pace and status of Claims
settlements, asset liquidations, and litigation, the estimated termination of
the Liquidation Trusts operations has been extended through early 2004.
Accordingly, the estimated costs of liquidation, excluding those costs accrued
in the Litigation Reserve (see below), were increased by a total of $1.7
million during the period from October 26, 2001 (Effective Date) through June
30, 2002, based on revised forecasts of operational requirements prior to the
termination of the Liquidation Trust. No such adjustment to the Wind-down
Reserve was deemed necessary during the period from October 1, 2002 through
June 30, 2003. As of June 30, 2003, the Liquidation Trust still expects to
terminate all or substantially all of its operations in early 2004 and believes
the reserve balance as of June 30, 2003 is sufficient for its operations.

The Litigation Reserve, due to the complexity and scale of the Committee
Action and the Bondholder Action, is difficult to forecast. During the period
from April 1, 2003 through June 30, 2003, the Litigation Reserve was increased
by $3.0 million as a result of a higher than planned level of activity and
duration, 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, is now scheduled for early 2004. The
trial date for the Bondholder Action is scheduled for October 2003. No such
adjustment was made during the period from October 26, 2001 (Effective Date)
through June 30, 2002 based on the then current activity in the
cases. The Liquidation Trust believes the reserve balance as of June
30, 2003 is sufficient to cover the costs of both actions through
trial.

E.     Other

The other increases were $0.8 million and $1.0 million for the period from
October 1, 2002 through June 30, 2003 and for the period from October 26, 2001
(Effective Date) through June 30, 2002, respectively. The other increases
consist primarily of interest income on the Liquidation Trusts cash and cash
equivalents.

13



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III.     Cash receipts and disbursements

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

|                         |                              |                       |         |                     |       |                  |        |                     |       | 
|------------------------ | ---------------------------- | --------------------- | ------- | ------------------- | ----- | ---------------- | ------ | ------------------- | ----- | 
|                         |                              |                       |         |                     |       |                  |        | For the period from
|                         |                              |                       |         | For the period from |       | October 26, 2001
|                         |                              |                       |         | October 1, 2002     |       | (Effective Date)
|                         |                              |                       |         | through             |       | through         
|($ in thousands)         |                              | June 30, 2003         |         | June 30, 2002      
|                         |                              |                       |         |                     |       |                 
|                         |                              |                       |        
|Cash receipts            |                              | $                     | 12,058  |                     |       | $                | 12,037 |                    
|Cash disbursements:      |                              |                       |         |                     |       |                  |        |                    
|                         | Legal and professional fees: |                       |         |                     |       |                  |        |                     |      
|                         |                              | Litigation            |         |                     | 2,884 |                  |        |                     | 2,184 | 
|                         |                              | Preference recoveries |         |                     | 1,779 |                  |        |                     | 2,222 | 
|                         |                              | Trust operations      |         |                     | 1,224 |                  |        |                     | 2,052 | 
|                         | Operating expenses           |                       |         | 2,008               |       |                  |        | 1,838               |      
|                         | Claim payments               |                       |         | 2,045               |       |                  |        | 10,718              |      
|                         |                              |                       |         |                     |       |                  |        |                    
|Total cash disbursements |                              |                       | 9,940   |                     |       |                  | 19,014 |                    
|                         |                              |                       |         |                     |       |                  |        |                    
|Distributions paid       |                              |                       | 19,606  |                     |       |                  |       |                    
|                         |                              |                       |         |                     |       |                  |        |                    
|Net cash outflow         |                              | $                     | (17,488 | )                   |       | $                | (6,977 | )                  
|                         |                              |                       |         |                     |       |                  |        |                    

A.     Cash receipts

Most of the cash receipts are from collection of preference receivables.
Preference collections have been ongoing and reasonably consistent since the
preference actions were filed in mid-2001.

B.     Legal and professional fees

Legal and professional fees reflect the activity level in various areas of
the Liquidation Trusts responsibilities. The litigation, primarily the Committee Action,
has become increasingly complex and more active during the period from October
1, 2002 through June 30, 2003 than in prior period.

Preference recovery fees have decreased during the period from October 1,
2002 through June 30, 2003 compared to the period from October 26, 2001
(Effective Date) through September 30, 2002, although preference receipts have
remained stable. The fees for preference settlements are contingent, and are
set at a declining rate for larger cases, a number of which were settled during
the current period.

Legal
fees for Liquidation Trust operations have decreased during the period from
October 1, 2002 through June 30, 2003 as compared to the period from October
26, 2001 (Effective Date) through September 30, 2002 because the number and
type of open matters is steadily growing smaller.

C.     Operating expenses

Operating expenses during the period from October 1, 2002 through June 30,
2003 were comparable to those during the period from October 26, 2001
(Effective Date) through June 30, 2002 given the respective lengths of those
periods. The number of Liquidation Trust employees has decreased during the
current period. However, the current-period decrease in payroll has been
offset, in part, by severance paid to the terminated employees.

14



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D.     Claims payments

Total Unimpaired Claims of $2.0 million and $10.5 million were paid during
the period from October 1, 2002 through June 30, 2003 and the period from
October 26, 2001 (Effective Date) through June 30, 2002, respectively.
Payments of Unimpaired Claims were significantly higher during the period from
October 26, 2001 (Effective Date) through June 30, 2002 than in the period from
October 1, 2002 through June 30, 2003 because $8.7 million of Unimpaired Claims
had been allowed as of October 26, 2001 (Effective Date), but payment was not
permitted until the Plan became effective. This $8.7 million of
Allowed Unimpaired
Claims, the majority of which were paid prior to September 30, 2002, were
primarily for professional fees, Claims settlements allowed in the Plan, and
employee Claims for unpaid vacation and severance.

E.     Distributions paid

The Liquidation Trust paid Distributions of $19.6 million during the
period from October 1, 2002 through June 30, 2003. Most of the payments
related to the second interim Distribution made during the period from April 1,
2003 through June 30, 2003. As the Initial Distribution was authorized by the
Bankruptcy Court on August 9, 2002, no Distributions occurred during the period
from October 26, 2001 (Effective Date) through June 30, 2002.

IV.     Net assets in liquidation

A.     Cash and cash equivalents and preference receivables

The Liquidation Trusts cash and cash equivalents balance of $45.2 million
and $62.6 million as of June 30, 2003 and September 30, 2002, respectively, is
classified as either (a) Available Cash, (b) Reserved, (c) Restricted or (d)
Other.

Available Cash decreased by $6.4 million from September 30, 2002 to June
30, 2003, to a balance of $9.0 million. This decrease is a result of
Distributions authorized and then paid. The required balance in Available Cash
increased by $16.2 million to reflect the 2.058% second interim Distribution
authorized in June 2003. This increase is offset by (1) payment of $19.6
million in Distributions, consisting primarily of $13.5 million in the second
interim Distribution to holders of Allowed Impaired Claims, as well as
the Initial Distribution at the rate of 4.515% for any newly Allowed Impaired
Claims, and (2) a net decrease of $2.9 million based on the resolution of a
number of previously Disputed Impaired Claims.

The required amount of Available Cash of $9.0 million as of June 30, 2003
was based on the cumulative Distribution rate of 6.573%, for $12.0 million of
Allowed but unpaid Impaired Claims plus $124.6 million of Disputed Impaired
Claims (at their estimated value for reserve purposes), compared to the
required amount of Available Cash of $15.3 million as of September 30, 2002
which was based on the Initial Distribution rate of 4.515%, for $85.4 million
of Allowed but unpaid Impaired Claims plus $254.3 million of Disputed Impaired
Claims (at their estimated value for reserve purposes).

Reserved Cash decreased by $10.8 million from September 30, 2002 to June
30, 2003, to a balance of $25.4 million, as a result of decreases in various
liability and contingency reserves, as discussed below and itemized in Note 8
to the Unaudited Liquidation Trust Financial Statements filed herein.

Restricted
Cash decreased by virtue of Claims payments totaling $1.0 million from
September 30, 2002 to June 30, 2003, to a balance of $9.9 million as of June
30, 2003. This balance primarily consists of the Kemper Claim discussed under
the heading Contingency, below.

Preference receivables, net of costs of recovery, decreased by $3.0
million from September 30, 2002 to June 30, 2003, to a balance of $7.1 million
primarily due to collections totaling $8.3 million, net of

15



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costs of recovery, and an increase in the estimated fair value of the
remaining preference receivables of $5.3 million. This increase in the
estimated fair value is discussed above.

B.     Liabilities

Unimpaired Claims payable decreased by $3.7 million from September 30,
2002 to June 30, 2003, to a balance of $11.7 million, primarily as a result of
Claims payments of $2.0 million and a decrease in the estimated fair value of
the remaining Unimpaired Claims payable of $1.9 million.

Distributions payable decreased by $3.1 million from September 30, 2002 to
June 30, 2003, to a balance of $0.8 million as a result of Distributions
authorized and then paid. Distributions payable increased by $13.5 million due
to the second interim Distribution authorized in June 2003 and by $3.1 million
with respect to newly Allowed Impaired Claims. These increases in
Distributions payable were offset by Distributions from Available Cash totaling
$19.6 million. As Disputed Impaired Claims become Allowed, the associated
Distribution is reflected in Distributions payable until paid. Distributions
payable of $0.8 million as of June 30, 2003 consisted of Distributions at the
cumulative authorized rate of 6.573% for $12.0 million of Allowed Impaired
Claims, compared to Distributions payable of $3.9 million as of September 30,
2002 which consisted of the Initial Distribution at the rate of 4.515% for
$85.4 million of Allowed Impaired Claims.

Estimated costs of liquidation decreased by $3.1 million from September
30, 2002 to June 30, 2003, to a balance of $8.5 million. Disbursements
totaling $3.2 million from the Wind-down Reserve and $2.9 million from the
Litigation Reserve reduced the accrual. Additionally, the estimated costs of
liquidation was increased by $3.0 million to reflect the increase necessary for
the Litigation Reserve as discussed above.

C.     Contingency Reserves

Contingency reserves decreased by $4.9 million from September 30, 2002 to
June 30, 2003, to a balance of $14.6 million (see Note 8 to the Unaudited Trust
Financial Statements). The most significant changes in contingency reserves
were as follows:



|i)  |  | The Fleet Reserve was increased by $2.6 million during the
period from October 1, 2003 to June 30, 2003, to a total of $11.0
million, pursuant to a stipulated order between Fleet Retail Finance
Inc. and the Liquidation Trust. The Fleet Reserve is likely to be
drawn upon if Fleet, as a defendant in the Committee Action and the
Bondholder Action, should prevail. No liability has been accrued in
connection with the Fleet Reserve because the Liquidation Trust does
not consider Fleet likely to prevail in either of these actions.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|ii) |  | The Excess Disputed Unimpaired Claims Reserve was decreased
by $7.0 million during the period from October 1, 2003 to June 30,
2003, primarily as a result of the Bankruptcy Court approving
several large Claims waivers negotiated in conjunction with
preference settlement negotiations.                                                                                                                                                                                                                                                     

V.     Contingency

Kemper Insurance Company, the insurer for the Debtors workers
compensation claims for a number of years, holds an irrevocable
cash-collateralized letter of credit with a balance of $9.2 million as of June
30, 2003, for payment of certain liability claims against the Debtors (the
Insurance Claims). Kemper and the Liquidation Trust have not established a
mutually agreeable basis for determining the fair value of the Insurance
Claims. The Liquidation Trust believes that the value of the Insurance Claims
is substantially lower than the collateral held by Kemper. Because the basis
for valuation has not been established, however, the Liquidation Trust has
continued to value the Kemper Claim in Unimpaired Claims payable at the full
amount of the letter of credit held by Kemper. Resolving the
Insurance

16



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Claims
for less than the full amount of the letter of credit would release any
such difference from Restricted Cash and from Unimpaired Claims payable, and
accordingly, increase net assets in liquidation. The Liquidation Trust is
continuing to resolve the Insurance Claims while considering other options to
recover any excess collateral. If this matter cannot be resolved by
fact-finding and negotiation with Kemper, the actual amount of the Insurance
Claims may be determined by the Bankruptcy Court. The ultimate fair value of
the Kemper Claim is likely to differ from its estimated fair value and the
difference may be significant.

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
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.

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 30, 2003.

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.

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##### 



PART II  OTHER INFORMATION

Item 1. Legal Proceedings

No material developments during the period.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

|               |  |                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Document                                                                                                                                     
|               |  |                                                                                                                                              
|31.1           |  | Certification by Trustee pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.     
|               |  |                                                                                                                                              
|32.1           |  | Liquidation Trustees Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.

(b)  Reports on Form 8-K

None.

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##### 



SIGNATURES

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.

|                      |  |                             |  |     |  |                    
|--------------------- |  | --------------------------- |  | --- |  | -------------------
|                      |  | Hechinger Liquidation Trust
|                     
|Date: August 14, 2003 |  | By:                         |  | /s/ |  | Conrad F.
Hocking  
|                      |  |                             |  |    
|                      |  | Name:                       |  |     |  | Conrad F. Hocking  
|                      |  | Title:                      |  |     |  | Liquidation Trustee

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##### 



INDEX TO EXHIBITS
FORM 10-Q

|            |  |                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                              
|            |  |                                                                                                                                              
|31.1        |  | Certification by Trustee pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     
|            |  |                                                                                                                                              
|32.1        |  | Liquidation Trustees Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

20