UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
one)





x
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
              for
      the quarterly period ended March 31, 2009
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
              52-7230151(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)





405 East Gude Drive, Suite 206, Rockville, Maryland
                          20850(Address of principal executive offices)
                          (Zip Code)





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





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





Yes x                                      No
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).







Yes o                                      No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the 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
 ̈





HECHINGER
LIQUIDATION TRUST


INDEX
TO FORM 10-Q


FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2009





Description
                          
                          PagePART
      I.  FINANCIAL INFORMATION:Item
      1.
                          Financial
      StatementsUnaudited
      Statements of Net Assets in Liquidation
                          
                          3Unaudited
      Statements of Changes in Net Assets in Liquidation
                          
                          4Unaudited
      Statements of Cash Receipts and Disbursements
                          
                          5Notes
      to Unaudited Financial Statements
                          
                          6Item
      2.
                          Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          
                          15Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          
                          22Item
      4T.
                          Controls
      and Procedures
                          
                          22PART
      II.  OTHER INFORMATION:Item
      1.
                          Legal
      Proceedings
                          
                          22Item
      1A.
                          Risk
      Factors
                          
                          23Item
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          
                          23Item
      3.
                          Defaults
      Upon Senior Securities
                          
                          23Item
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          
                          23Item
      5.
                          Other
      Information
                          
                          23Item
      6.
                          Exhibits
                          
                          23SIGNATURES
                          
                          24INDEX
      TO EXHIBITS
                          
                          25


2


PART I – FINANCIAL
INFORMATION





Item
1.  Financial Statements




Hechinger
Liquidation Trust


Unaudited
Statements of Net Assets in Liquidation




($  in
thousands)




As of
                
                
                As ofMarch 31, 2009
                
                
                September 30, 2008AssetsCash
      and cash equivalentsCash
      designated as available for distribution to holders of impaired
      claims
                
                $
                49
                
                
                $
                1,818Reserved
      cash
                
                
                4,843
                
                
                
                5,972Other
      cash
                
                
                1,466
                
                
                
                295Total
      cash and cash equivalents
                
                
                6,358
                
                
                
                8,085Preference
      receivables (net of costs of recovery of $54 and $54,
      respectively)
                
                
                211
                
                
                
                211Other
      assets
                
                
                2
                
                
                
                37Total
      assets
                
                
                6,571
                
                
                
                8,333LiabilitiesUnimpaired
      and convenience claims payable
                
                
                1,300
                
                
                
                1,337Uncashed
      claims checks
                
                
                38
                
                
                
                426Distributions
      payable
                
                
                49
                
                
                
                825Estimated
      costs of liquidationWind-down
      reserve
                
                
                505
                
                
                
                757Litigation
      reserve
                
                
                -
                
                
                
                152Total
      liabilities
                
                
                1,892
                
                
                
                3,497Net
      Assets in Liquidation
                
                $
                4,679
                
                
                $
                4,836




See
accompanying notes to unaudited financial statements.


3




Hechinger
Liquidation Trust


Unaudited
Statements of Changes in Net Assets in Liquidation




($  in
thousands)





For the three
                
                
                For the threemonths ended
                
                
                months endedMarch 31, 2009
                
                
                March 31, 2008Increase
      in Net Assets in LiquidationInterest
      income
                
                $
                1
                
                
                $
                165Other
      increases, net
                
                
                -
                
                
                
                1Net
      increase in Net Assets in Liquidation before distributions forfeited,
      net
                
                
                1
                
                
                
                166Distributions
      forfeited, net
                
                
                107
                
                
                
                -Net
      increase in Net Assets in Liquidation after distributions forfeited,
      net
                
                
                108
                
                
                
                166Net
      Assets in Liquidation at beginning of period
                
                
                4,571
                
                
                
                16,472Net
      Assets in Liquidation at end of period
                
                $
                4,679
                
                
                $
                16,638





For the six
                
                
                For the sixmonths ended
                
                
                months endedMarch 31, 2009
                
                
                March 31, 2008Increase/(decrease)
      in Net Assets in LiquidationIncrease
      in estimated costs of liquidation
                
                $
                (275
                )
                
                $
                -Decrease
      in estimated fair value of unimpaired claims
                
                
                85
                
                
                
                -Interest
      income
                
                
                3
                
                
                
                365Other
      increases, net
                
                
                124
                
                
                
                293Net
      (decrease)/increase in Net Assets in Liquidation before distributions
      authorized, net
                
                
                (63
                )
                
                
                658Distributions
      authorized
                
                
                (904
                )
                
                
                -Distributions
      forfeited, net
                
                
                810
                
                
                
                -Distributions
      authorized, net
                
                
                (94
                )
                
                
                -Net
      (decrease)/increase in Net Assets in Liquidation after distributions
      authorized, net
                
                
                (157
                )
                
                
                658Net
      Assets in Liquidation at beginning of period
                
                
                4,836
                
                
                
                15,980Net
      Assets in Liquidation at end of period
                
                $
                4,679
                
                
                $
                16,638




See
accompanying notes to unaudited financial statements.


4




Hechinger
Liquidation Trust


Unaudited
Statements of Cash Receipts and Disbursements




($  in
thousands)





For the six
                
                
                For the sixmonths ended
                
                
                months endedMarch 31, 2009
                
                
                March 31, 2008Cash
      receiptsInterest
      income
                
                $
                3
                
                
                $
                365Other
      receipts
                
                
                124
                
                
                
                295Total
      cash receipts
                
                
                127
                
                
                
                660Cash
      disbursementsCosts
      of liquidationOperating
      expenses
                
                
                323
                
                
                
                206Legal
      and professional feesLiquidation
      Trust operations
                
                
                206
                
                
                
                147Litigation
                
                
                150
                
                
                
                148Preference
      recoveries
                
                
                -
                
                
                
                3(Voided)/reissued
      claims checks, net
                
                
                (40
                )
                
                
                -Unimpaired
      and convenience claims paid
                
                
                3
                
                
                
                -Total
      cash disbursements before distributions paid, net of voided claims
      checks
                
                
                642
                
                
                
                504(Decrease)/increase
      in cash and cash equivalents before distributions paid
                
                
                (515
                )
                
                
                156Distributions
      paid
                
                
                1,212
                
                
                
                -(Decrease)/increase
      in cash and cash equivalents
                
                
                (1,727
                )
                
                
                156Cash
      and cash equivalents at beginning of period
                
                
                8,085
                
                
                
                19,478Cash
      and cash equivalents at end of period
                
                $
                6,358
                
                
                $
                19,634




See
accompanying notes to unaudited financial statements.


5


Hechinger
Liquidation Trust


Notes to Unaudited Financial
Statements





1.
            Background
      and Basis of Presentation





Background





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





The
Liquidation Trust has no authority to engage in any trade or
business.  The purpose of the Liquidation Trust is to
(i) liquidate any and all remaining assets of the Debtors; (ii) pursue
causes of action assigned to the Liquidation Trust, including preference,
fraudulent conveyance and other avoidance actions; (iii) resolve, either
consensually or through litigation, all disputed claims asserted against the
Debtors (“Disputed Claims”), pursuant to the Plan; and (iv) make all
distributions required under the Plan (“Distributions”), and payments to holders
of claims allowed under the terms of the Plan (“Allowed Claims” and, together
with the Disputed Claims, the “Claims”).  The Liquidation Trust will
terminate upon the earlier of (a) the fulfillment of its purpose by the
liquidation of all of its assets and the distribution of the proceeds of the
liquidation thereof in accordance with the Plan, or (b) by September 30,
2009, unless the Bankruptcy Court approves a further extension of the
term.





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





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





The
holders of Beneficial Interests receive all remaining net proceeds of the
Liquidation Trust, if any, after the expenses and all creditors of the
Liquidation Trust are paid, including Allowed Unimpaired and Convenience Claims
(certain small Claims paid at 7.5% of their Allowed amounts in accordance with
the Plan), and after 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.





Through
March 31, 2009, the Liquidation Trust has authorized Distributions to holders of
Beneficial Interests (i.e., to holders of Allowed Impaired Claims) at a
cumulative rate of 11.9411% of the Allowed amount of the Impaired
Claims.





As of
March 31, 2009, substantially all assets of the Debtors, including resolving
causes of action, have been liquidated and all remaining Disputed Claims have
been waived.  Significant unresolved items, for which the timing of
resolution is not under the Liquidation Trust’s control, include one remaining
preference action and one significant Allowed Claim, the amount of which remains
subject to substantiation by the holder of the Claim (see Notes 5 and 6,
respectively).  The Liquidation Trust is in the process of winding up
its limited operations, and expects to request that the Bankruptcy Court
authorize a final Distribution during the next several months, and terminate the
Liquidation Trust by the end of the fiscal year ending September 30,
2009.


6





As part
of preparing for its termination, the Liquidation Trust has acted to judicially
resolve Claims-related liabilities which it has been unable to
pay.  Pursuant to the Court-authorized terms of the Plan, Distribution
and Claims payment checks which are not timely cashed become Unclaimed Property,
and furthermore, holders of Allowed Impaired Claims which have not cashed a
check are not paid subsequent Distributions unless the holder makes a written
request that future Distributions be paid.  During and as of November
2008, the Liquidation Trust notified all such holders that their uncashed checks
and any subsequent Distributions have become Unclaimed Property which, pursuant
to the Plan, reverts to the Liquidation Trust (the “November 2008 Unclaimed
Property Notice”).  In addition, upon notice to holders of Allowed
Impaired Claims which had not provided their taxpayer identification number, the
Bankruptcy Court issued an Order (the “TIN Motion and Order”) declaring
Distributions due to such holders as Unclaimed Property which, pursuant to the
Plan, reverts to the Liquidation Trust.  These actions are
collectively referred to as the “November 2008 Notices.”  During and
as of March 2009, the Liquidation Trust notified all holders of checks remaining
uncashed from the most recent interim Distribution, made during August 2008 (the
“Sixth Interim Distribution”) that their uncashed checks have become Unclaimed
Property which, pursuant to the Plan, reverts to the Liquidation Trust (the
“March 2009 Unclaimed Property Notice”, and, together with the November 2008
Notices, the “Unclaimed Property Notices”).  Pursuant to the Unclaimed
Property Notices, the Liquidation Trust has reclassified Unclaimed Property from
various liability accounts (see Notes 7, 8 and 11), increasing Net Assets in
Liquidation, based on its assessment that all such uncashed checks and unpaid
Distributions have reverted permanently to the Liquidation Trust pursuant to the
terms of the Plan.





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.  The unpaid amount of the authorized Distributions
to holders of Allowed Impaired Claims is also reflected as a
liability.  In addition, liabilities include loss contingency accruals
for any losses considered probable and estimable.  The Statements of
Changes in Net Assets in Liquidation primarily reflect authorized Distributions
to holders of Beneficial Interests, net of forfeitures of unclaimed
Distributions reverting to the Liquidation Trust, and changes in the estimated
fair value of the Liquidation Trust’s assets and liabilities, including changes
resulting from significant events in, or the resolution of, litigation pursued
by the Liquidation Trust.  The Liquidation Trust’s fiscal year ends on
September 30.





The
accompanying unaudited financial statements reflect all adjustments, consisting
only of normal recurring adjustments that are, in the opinion of the Liquidation
Trustee, necessary for a fair statement of the results for the interim periods
presented.  Such financial statements and these notes thereto should
be read in conjunction with the audited Liquidation Trust financial statements
as of September 30, 2008 and September 30, 2007, and for the fiscal years
ended September 30, 2008, September 30, 2007 and September 30, 2006, and
the notes thereto.





The
amounts shown in this document 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
disclosure of contingent assets and liabilities.  Actual results are
likely to differ from those estimates and those differences may be
significant.


7





Cash and Cash
Equivalents





The
Liquidation Trust considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.  The
Liquidation Trust holds substantially all cash balances in operating and
investment accounts in excess of federally insured limits.  Cash is
classified as: Designated as Available for Distribution to Holders of Impaired
Claims, Reserved Cash and Other Cash (see Note 4).





Taxes





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





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





3.
            Fair
      Value Measurements





Statement
of Financial Accounting Standards No. 157 (“SFAS 157”) “Fair Value
Measurements,” provides a consistent definition of fair value, establishes a
framework for measuring fair value, and requires additional disclosures about
fair-value-related measurements.  It does not require any amounts to
be measured at fair value which were not previously so measured under existing
accounting standards.  Under the liquidation basis of accounting, all
assets and liabilities are presented at estimated fair
value.  Adopting SFAS 157, effective October 1, 2008, did not result
in changes to the valuation techniques the Liquidation Trust had previously used
to measure the fair value of its assets and liabilities.  The primary
impact on the Liquidation Trust of adopting this standard was to expand fair
value measurement disclosure.





SFAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date.  SFAS 157 prioritizes the inputs to valuation
techniques (which may include the market approach, income approach, and/or cost
approach, as applicable) into three broad levels, as follows:





·
            Level
      1 – highest priority – quoted prices in active markets for identical
      assets or liabilities


·
            Level
      2 – inputs other than quoted prices, but which are observable for the
      assets or liabilities, either directly or
  indirectly


·
            Level
      3 – lowest priority – unobservable inputs for the asset or
      liability


8


The
Liquidation Trust’s assets and liabilities measured at fair value on a recurring
basis were as follows:





($  in
thousands)





Fair Value Measurements as of March 31, 2009 usingQuoted Prices inActive Markets
                                
                                
                                Significant Other
                                
                                
                                Significantfor Identical Items
                                
                                
                                Observable Inputs
                                
                                
                                Unobservable InputsMarch
      31, 2009
                                
                                
                                (Level
      1)
                                
                                
                                (Level
      2)
                                
                                
                                (Level
      3)Assets:Preference
      receivables
                                
                                $
                                211
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                211Total
      assets measured at fair value
                                
                                $
                                211
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                211Liabilities:Unimpaired
      and convenience claims payable
                                
                                $
                                1,300
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                1,300Estimated
      costs of liquidation
                                
                                
                                505
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                505Total
      liabilities measured at fair value
                                
                                $
                                1,805
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                1,805





Gains and
losses on all assets and liabilities, whether realized or unrealized, are
reported in the Statement of Changes in Net Assets in Liquidation.





There
were no changes in the estimated fair value of assets measured at fair value on
a recurring basis using significant unobservable inputs (Level 3) during the
three months ended March 31, 2009.  Changes in the estimated fair
value of liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) during the three months ended March
31, 2009 were as follows:





($  in
thousands)


for Identical Items
                      
                      
                      Observable Inputs
                      
                      
                      Unobservable InputsDecember 31, 2008
                      
                      
                      Payments
                      
                      
                      Change in estimate
                      
                      
                      March 31, 2009Unimpaired
      and convenience claims payable
                      
                      $
                      1,303
                      
                      
                      $
                      3
                      
                      
                      $
                      -
                      
                      
                      $
                      1,300Estimated
      costs of liquidation
                      
                      
                      690
                      
                      
                      
                      185
                      
                      
                      
                      -
                      
                      
                      
                      505Total
      liabilities measured at fair value
                      
                      $
                      1,993
                      
                      
                      $
                      188
                      
                      
                      $
                      -
                      
                      
                      $
                      1,805





4.
            Cash and Cash
      Equivalents





Cash is
invested in highly liquid investments with a maturity of three months or less,
and in accordance with Section 345 of the Bankruptcy Code or as otherwise
permitted by order of the Bankruptcy Court.  Under the terms of the
Plan, the Liquidation Trust is not required to segregate funds for reserves (see
Note 10).





Cash Designated as Available
for Distribution to Holders of Impaired Claims (“Available Cash”) is
designated solely to assure the availability of funds for payment to holders of
Impaired Claims who have not received their Distributions.


9


Available
Cash consists of:





($ in thousands)
                  
                  As of
                  
                  
                  As ofMarch 31, 2009
                  
                  
                  September 30, 2008Distributions
      payable (see Note 8)
                  
                  $
                  49
                  
                  
                  $
                  825Reserve
      for remaining disputed impaired claims at 11.9411%
                  
                  
                  -
                  
                  
                  
                  993Total
      available cash
                  
                  $
                  49
                  
                  
                  $
                  1,818





As of
March 31, 2009, no Disputed Impaired Claims remained; therefore, the Disputed
Impaired Claims Reserve was no longer required.





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 contingencies should occur.  See Note 10 for details of
specific reserves and their related amounts.





Other Cash is cash
and cash equivalents not designated to a specific reserve or fund.





5.
            Preference
      Receivables





The
Liquidation Trust’s preference receivables are reflected in the accompanying
Statements of Net Assets in Liquidation at their estimated fair value, net of
estimated costs of recovery.  As of March 31, 2009 and
September 30, 2008, Preference Receivables consisted mainly of one
remaining significant action.  During June 2005, the Bankruptcy Court
awarded the Liquidation Trust $1.0 million in this action.  During
March 2006, the District Court upheld the Bankruptcy Court ruling in its
entirety.  The defendant appealed the affirmation by the District
Court to the Court of Appeals.  During June 2007, the Court of Appeals
remanded the case to the District Court, with instructions to remand to the
Bankruptcy Court for specific findings.  Pursuant to the Bankruptcy
Court’s scheduling order, both parties filed briefings by February
2008.  The Bankruptcy Court may decide the case or schedule further
proceedings, up to and including a trial, at its discretion.  The
Liquidation Trust and its counsel intend to vigorously pursue collection of the
original judgment.  The Liquidation Trust’s current estimate of the
fair value of preference receivables is primarily based on the content of the
Court of Appeals ruling and on previous negotiations with the defendant in this
action.





The fair
value of the preference receivables is reassessed 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.





6.
            Unimpaired and Convenience
      Claims Payable





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


10


Unimpaired
and Convenience Claims payable consists of:





($  in
thousands)


As of
                  
                  
                  As ofMarch 31, 2009
                  
                  
                  September 30, 2008Allowed
      unimpaired claims
                  
                  $
                  1,300
                  
                  
                  $
                  1,335Convenience
      claims
                  
                  
                  -
                  
                  
                  
                  2Total
                  
                  $
                  1,300
                  
                  
                  $
                  1,337Number
      of disputed unimpaired claims
                  
                  
                  0
                  
                  
                  
                  3





Certain
fees and expenses which Kmart Corporation (“Kmart”) incurred in connection with
the Debtors’ bankruptcy filing were allowed, pursuant to the Plan, as an
Unimpaired Claim.  Allowed Unimpaired Claims as of March 31, 2009 and
September 30, 2008 include this Claim, which has not yet been substantiated by
Kmart as required by the Plan, at its estimated amount of $1.3
million.  However, no assurance can be given as to the ultimate
settlement value of this Claim.





As of
March 31, 2009, the last Disputed Unimpaired Claims have been
waived.





7.
            Uncashed
      Claims Checks





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





Uncashed
Claims checks as of September 30, 2008 represented payments to holders of
allowed Unimpaired Claims and Distributions to holders of allowed Impaired
Claims, from the inception of the Liquidation Trust through July 2008 (and prior
to the Sixth Interim Distribution).  Pursuant to the November 2008
Notices (see Note 1), $0.3 million ($0.1 million related to Unimpaired Claims
and $0.2 million related to Impaired Claims) included in uncashed Claims checks
as of September 30, 2008 has been reclassified from this liability account,
increasing Net Assets in Liquidation and making the unclaimed funds available to
the Liquidation Trust.





During
December 2008, $0.5 million of uncashed Claims checks from the Sixth Interim
Distribution were voided by the payment agent and the funds returned to the
Liquidation Trust, increasing the balance in uncashed Claims
checks.  The uncashed Claims checks from the Sixth Interim
Distribution remaining unclaimed as of February 2009 were included in the March
2009 Unclaimed Property Notice, pursuant to which an additional $0.2 million of
uncashed Claims checks has been reclassified from this liability account,
increasing Net Assets in Liquidation and making the unclaimed funds available to
the Liquidation Trust.  Approximately half of the remaining balance of
uncashed Claims checks as of March 31, 2009 has been reissued subsequent to
March 31, 2009.


11





8.
            Distributions
      Payable





Distributions
payable represents the amount of authorized Distributions which the Liquidation
Trust has been unable to pay to holders of Allowed Impaired Claims.  A
number of holders of such Allowed Claims, while otherwise eligible for
Distributions, had either not yet provided all information necessary for payment
or, because they had not cashed a previous Distribution check, were not paid any
subsequent Distributions.  Until all such issues are resolved, the
holder of an Allowed Claim may not receive a Distribution.





Distributions
payable as of September 30, 2008 represented Distributions which the Liquidation
Trust had been unable to pay to holders of Allowed Impaired Claims from the
inception of the Liquidation Trust through the Sixth Interim
Distribution.  Pursuant to the Unclaimed Property Notices (see Note
1), a net amount of $0.4 million included in Distributions Payable as of
September 30, 2008 has been reclassified from this liability account, increasing
Net Assets in Liquidation and making the unclaimed funds available to the
Liquidation Trust.  Distributions payable as of March 31, 2009
primarily represented amounts payable to two holders of Allowed Impaired Claims
who were paid subsequent to March 31, 2009.





9.
            Estimated
      Costs of Liquidation





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





Under the Plan, the Liquidation Trust
was required to establish and fund a reserve to pay administration costs and
costs of holding and liquidating the Liquidation Trust’s assets (the “Wind-down
Reserve”).  The amounts included in the Wind-down Reserve represent
the projected costs of operating the Liquidation Trust through its expected
termination.  These costs, which include professional fees, insurance
and personnel, among other things, are based on various assumptions regarding
the number of employees, the use of professionals (particularly in connection
with continuing Claims resolution and litigation), the anticipated termination
date of the Liquidation Trust and other matters.





Substantially
all of the day-to-day operations of the Liquidation Trust were terminated during
June 2005; however, provision has been made for necessary management oversight
and administrative, legal and accounting processes to continue through its
expected termination by the end of the fiscal year ending September 30,
2009.  These final items include resolution of the remaining Disputed
Claims and all litigation, a final Distribution, if applicable, and any
necessary filings with regulatory authorities and with the Bankruptcy
Court.





Pursuant
to the Plan, the Liquidation Trust also established and funded a reserve to pay
the costs of pursuing certain actions, including the case referred to as the
“Committee Action” (the “Litigation Reserve”).  The Liquidation Trust
determined not to further pursue the Committee Action following a May 2008
adverse decision in the Court of Appeals regarding this Action.





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


12


10.
            Bankruptcy Reserves
      Required





The
reserves for which Reserved Cash is maintained consist of the
following:





($  in
thousands)


As of
                          
                          
                          As ofMarch 31, 2009
                          
                          
                          September 30, 2008Liability reservesUnimpaired
      and convenience claims
                          
                          $
                          1,300
                          
                          
                          $
                          1,337Uncashed
      claims checks
                          
                          
                          38
                          
                          
                          
                          426Wind-down
                          
                          
                          505
                          
                          
                          
                          757Litigation
                          
                          
                          -
                          
                          
                          
                          152Total
      liability reserves
                          
                          
                          1,843
                          
                          
                          
                          2,672Contingency reservesMinimum
      reserve
                          
                          
                          3,000
                          
                          
                          
                          3,000Excess
      disputed unimpaired claims
                          
                          
                          -
                          
                          
                          
                          300Total
      contingency reserves
                          
                          
                          3,000
                          
                          
                          
                          3,300Total
      reserves
                          
                          $
                          4,843
                          
                          
                          $
                          5,972





The minimum reserve, established
pursuant to the Plan and intended to assure adequate liquidity for the
Liquidation Trust, is to be maintained, subject to reduction by an order of the
Bankruptcy Court, until the Liquidation Trust makes a final Distribution or is
otherwise terminated.





11.
            Impaired
      Claims





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





($ in thousands)
                        
                        As of
                        
                        
                        As ofMarch 31, 2009
                        
                        
                        September 30, 2008Allowed
      impaired claims
                        
                        $
                        719,980
                        
                        
                        $
                        712,412Estimated
      fair value of disputed impaired claims
                        
                        
                        -
                        
                        
                        
                        7,703Total
      estimated impaired claims
                        
                        $
                        719,980
                        
                        
                        $
                        720,115Asserted
      value of disputed impaired claims
                        
                        $
                        -
                        
                        
                        $
                        8,086Number
      of disputed impaired claims
                        
                        
                        -
                        
                        
                        
                        5





Distributions
to holders of Allowed Impaired Claims have been authorized, through March 31,
2009, in the cumulative amount of 11.9411% of the Allowed amount of the Impaired
Claims.  A total of $83.7 million (including $0.4 million of uncashed
checks subsequently forfeited by their holders, as discussed below) has been
paid to holders of Allowed Impaired Claims through March 31, 2009.





Pursuant
to the Unclaimed Property Notices (see Note 1), in accordance with the terms of
the Plan, $0.8 million (comprised of $0.4 million of uncashed checks (see Note
7) and $0.4 million of Distributions payable (see Note 8)) of Distributions
previously authorized to holders of Allowed Impaired Claims who had not met all
the requirements for a Distribution payment, generally by not providing their
taxpayer identification number, or who had not cashed a Distribution check and
therefore have not been paid subsequent Distributions, were forfeited by such
holders and reversed, increasing Net Assets in Liquidation and making the
unclaimed funds available to the Liquidation Trust.


13





12.
            Contingencies





Litigation
and Other Proceedings on behalf of the Liquidation Trust




As of
March 31, 2009, the Liquidation Trust was pursuing one significant preference
litigation action.  During March 2006, the District Court upheld the
Bankruptcy Court’s award to the Liquidation Trust of $1.0 million in this
case.  The defendant further appealed the affirmation by the District
Court to the Court of Appeals.  During June 2007, the Court of Appeals
remanded the case to the District Court, with instructions to remand to the
Bankruptcy Court for specific findings.Pursuant to the Bankruptcy
Court’s scheduling order, both parties filed briefings by February
2008.  The Bankruptcy Court may decide the case or schedule further
proceedings, up to and including a trial, at its discretion.  The
Liquidation Trust and its counsel intend to vigorously pursue collection of the
original judgment.





Litigation
and Other Proceedings against the Liquidation Trust





Settling
Claims filed with the Bankruptcy Court is the ordinary course of business for
the Liquidation Trust.  As of March 31, 2009, no Disputed Claims
remain.





Other
than as described herein, the Liquidation Trust is not a defendant in any action
or proceeding which, if the Liquidation Trust were to be found liable in such
action or proceeding, would materially adversely impact the Liquidation Trust’s
financial condition.




13.
            Other





During
the six months ended March 31, 2009, the Liquidation Trust received a $0.1
million payment of funds escheated for the benefit of one of the
Debtors.  Until collectability of the amount was established by
receiving the payment from the state to which the funds were escheated, the
amount was not recorded as an asset of the Liquidation Trust.





During
the six months ended March 31, 2008, the Liquidation Trust received a $0.3
million distribution in the liquidation of the former company-owned life
insurance policy carrier for one of the Debtors.  The Debtors were
entitled to these liquidation proceeds solely as a result of the occurrence and
particular terms of this insurance carrier’s liquidation, and therefore no
receivable from the carrier had been recorded as an asset of the Liquidation
Trust.


14


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
March 31, 2009 and September 30, 2008 and for the three months and the six
months ended March 31, 2009 and March 31, 2008, and the notes thereto (the
“Unaudited Liquidation Trust Financial Statements”), included as Item 1. 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, 2008 and
September 30, 2007, and for the fiscal years ended September 30, 2008,
September 30, 2007 and September 30, 2006, 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 three months ended
March 31, 2009 are not necessarily indicative of the results to be expected for
any other interim period or any future fiscal year.  All amounts are
rounded and are therefore approximate.





I.
            Accounting Policies
      and Estimates





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





The
Liquidation Trust’s critical accounting policies are described in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in the
Liquidation Trust’s annual report on Form 10-K for the year ended September 30,
2008.





As part
of preparing for the Liquidation Trust’s termination, the Liquidation Trust has
acted to judicially resolve Claims-related liabilities which it has been unable
to pay.  Pursuant to the Court-authorized terms of the Plan,
Distribution and Claims payment checks which are not timely cashed become
Unclaimed Property, and furthermore, holders of Allowed Impaired Claims which
have not cashed a check are not paid subsequent Distributions unless the holder
makes a written request that future Distributions be paid.  During and
as of November 2008, the Liquidation Trust notified all such holders that their
uncashed checks and any subsequent Distributions have become Unclaimed Property
which, pursuant to the Plan, reverts to the Liquidation Trust (the “November
2008 Unclaimed Property Notice”).  In addition, upon notice to holders
of Allowed Impaired Claims which had not provided their taxpayer identification
number, the United States Bankruptcy Court for the District of Delaware (the
“Bankruptcy Court”) issued an Order (the “TIN Motion and Order”) declaring
Distributions due to such holders as Unclaimed Property which, pursuant to the
Plan, reverts to the Liquidation Trust.  These actions are
collectively referred to as the “November 2008 Notices.”  During and
as of March 2009, the Liquidation Trust notified all holders of checks remaining
uncashed from the most recent interim Distribution, made during August 2008 (the
“Sixth Interim Distribution”) that their uncashed checks have become Unclaimed
Property which, pursuant to the Plan, reverts to the Liquidation Trust (the
“March 2009 Unclaimed Property Notice”, and, together with the November 2008
Notices, the “Unclaimed Property Notices”).


15





Pursuant
to the Unclaimed Property Notices, the Liquidation Trust has reclassified
Unclaimed Property totaling $0.9 million from various liability accounts
(primarily uncashed Claims checks of $0.1 million related to Unimpaired Claims
and $0.4 million related to Impaired Claims, and Distributions payable of $0.4
million), increasing Net Assets in Liquidation, based on its assessment that all
such uncashed checks and unpaid Distributions have reverted permanently to the
Liquidation Trust pursuant to the terms of the Plan.








II.
            Changes in Net Assets
      in Liquidation





Net
assets in liquidation are subject to material change when either (a)
Distributions to holders of Allowed Impaired Claims are authorized or forfeited,
or (b) estimates of the fair value of the Liquidation Trust’s assets and/or
liabilities change, including as a result of significant events in, or the
resolution of, litigation pursued by the Liquidation Trust.  The
authorization and forfeiture of Distributions and changes in estimates are
non-cash changes.  These changes are shown in the Liquidation Trust’s
Statements of Changes in Net Assets in Liquidation and are discussed
below.





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





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





($  in
thousands)


For the three
                  
                  
                  For the threemonths ended
                  
                  
                  months endedMarch 31, 2009
                  
                  
                  March 31, 2008Increase
      in net assets in liquidationDistributions
      forfeited, net
                  
                  $
                  107
                  
                  
                  $
                  -Interest
      income
                  
                  
                  1
                  
                  
                  
                  165Other
      increases, net
                  
                  
                  -
                  
                  
                  
                  1Net
      increase in net assets in liquidation
                  
                  $
                  108
                  
                  
                  $
                  166





For the six
                  
                  
                  For the sixmonths ended
                  
                  
                  months endedMarch 31, 2009
                  
                  
                  March 31, 2008Increase/(decrease)
      in net assets in liquidationDistributions
      authorized
                  
                  $
                  (904
                  )
                  
                  $
                  -Distributions
      forfeited, net
                  
                  
                  810
                  
                  
                  
                  -Increase
      in estimated costs of liquidation
                  
                  
                  (275
                  )
                  
                  
                  -Decrease
      in estimated fair value of unimpaired claims
                  
                  
                  85
                  
                  
                  
                  -Interest
      income
                  
                  
                  3
                  
                  
                  
                  365Other
      increases, net
                  
                  
                  124
                  
                  
                  
                  293Net
      (decrease)/increase in net assets in liquidation
                  
                  $
                  (157
                  )
                  
                  $
                  658


16


A.           Distributions





1.
            Distributions
      authorized





During
the three months and the six months ended March 31, 2009, no new interim
Distribution was authorized.  During the six months ended March 31,
2009, Distributions at the cumulative rate of 11.9411%, totaling $0.9 million,
were authorized to the holder of a $7.6 million Impaired Claim newly allowed in
October 2008, decreasing Net Assets in Liquidation.  No new interim
Distribution was authorized, and no Impaired Claims were newly allowed, during
the three months and the six months ended March 31, 2008.





2.
            Distributions
      forfeited





As a
result of the November 2008 Notices (discussed above), previously authorized
Distributions totaling $0.7 million (comprised of $0.2 million of uncashed
checks and $0.5 million of Distributions payable) were forfeited and reversed,
increasing Net Assets in Liquidation, during the three months ended December 31,
2008.  As a result of the March 2009 Unclaimed Property 2008 Notice
(also discussed above), previously authorized Distributions totaling $0.2
million (consisting of uncashed checks) were forfeited and reversed, increasing
Net Assets in Liquidation during the three months ended March 31,
2009.  Partially offsetting such forfeitures during the three months
ended March 31, 2009, $0.1 million of Distributions previously considered as
forfeited were restored to the holder of an Allowed Impaired
Claim.  No such Notice or forfeitures occurred during the three months
and the six months ended March 31, 2008.





B.           Estimated
costs of liquidation





Based on revised forecasts of
operational requirements prior to and associated with the expected termination
of the Liquidation Trust, the remaining Wind-down Reserve was increased by $0.3
million during the three months ended December 31, 2008, both as a result of the
remaining obligations of the Liquidation Trust taking longer to complete than
expected, and because the estimated cost of the termination process had
increased.  No such change in estimate occurred during the three
months ended March 31, 2009 or during the three months and the six months ended
March 31, 2008.





C.           Unimpaired
claims





The November 2008 Notices discussed
above were also sent to holders of Allowed Unimpaired Claims who had either not
cashed their Claim payment check, or who had not met all the requirements for
payment of their Claims, generally by not providing sufficient information for
payment.  As a result of the November 2008 Notices, a total of $0.1
million of uncashed checks and remaining payables to holders of Allowed
Unimpaired Claims were forfeited and reversed, increasing Net Assets in
Liquidation, during the three months ended December 31, 2008.  No such
Notice to holders of Allowed Unimpaired Claims or forfeitures occurred during
the three months ended March 31, 2009 or during the three months and the six
months ended March 31, 2008.





D.           Interest
income





Interest
income decreased during the three months and the six months ended March 31, 2009
as compared to the three months and the six months ended March 31, 2008,
primarily as a result of significantly declining interest rates, but also
because the Liquidation Trust held decreased cash balances available for
investment as a result of the Sixth Interim Distribution in August
2008.





E.           Other
increases, net





During
the six months ended March 31, 2009, the Liquidation Trust received a $0.1
million payment of funds escheated for the benefit of one of the
Debtors.  Until collectability of the amount was established by
receiving the payment from the state to which the funds were escheated, the
amount was not recorded as an asset of the Liquidation Trust.  No such
amounts were received during the three months ended March 31,
2009.


17





Other
increases, net during the six months ended March 31, 2008 consisted primarily of
a $0.3 million distribution in the liquidation of the former company-owned life
insurance policy carrier for one of the Debtors.  The Debtors were
entitled to these liquidation proceeds solely as a result of the occurrence and
particular terms of this insurance carrier’s liquidation, and therefore no
receivable from the carrier had been recorded as an asset of the Liquidation
Trust.  No such amounts were received during the three months ended
March 31, 2008.





III.
            Cash Receipts and
      Disbursements





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





($  in
thousands)


For the six
                  
                  
                  For the sixmonths ended
                  
                  
                  months endedMarch 31, 2009
                  
                  
                  March 31, 2008Cash
      receiptsInterest
      income
                  
                  $
                  3
                  
                  
                  $
                  365Other
      receipts
                  
                  
                  124
                  
                  
                  
                  295Total
      cash receipts
                  
                  
                  127
                  
                  
                  
                  660Cash
      disbursementsDistributions
      paid
                  
                  
                  1,212
                  
                  
                  
                  -Operating
      expenses
                  
                  
                  323
                  
                  
                  
                  206Legal
      and professional feesLiquidation
      Trust operations
                  
                  
                  206
                  
                  
                  
                  147Litigation
                  
                  
                  150
                  
                  
                  
                  148Preference
      recoveries
                  
                  
                  -
                  
                  
                  
                  3(Voided)/reissued
      claims checks, net
                  
                  
                  (40
                  )
                  
                  
                  -Unimpaired
      and convenience claims paid
                  
                  
                  3
                  
                  
                  
                  -Total
      cash disbursements, net of voided claims checks
                  
                  
                  1,854
                  
                  
                  
                  504(Decrease)/increase
      in cash and cash equivalents
                  
                  $
                  (1,727
                  )
                  
                  $
                  156





A.
            Cash
      receipts





Changes
in interest income and other receipts during the six months ended March 31, 2009
as compared to the six months ended March 31, 2008 are discussed in “Changes in
Net Assets in Liquidation,” above.





B.
            Distributions
      paid





Distributions paid depend primarily on
the amount of Allowed Impaired Claims, including Claims newly allowed, and on
the Distributions authorized from time to time.  During the six months
ended March 31, 2009, no new interim Distribution was
authorized.  During the three months ended March 31, 2009,
Distributions totaling $0.3 million were paid to holders of previously allowed
Impaired Claims who resolved prior impediments to payment.  During the
three months ended December 31, 2008, Distributions at the cumulative rate of
11.9411%, totaling $0.9 million, were authorized and paid to the holder of a
$7.6 million Impaired Claim newly allowed during the period.  No new
interim Distribution was authorized, and no Impaired Claims newly allowed or
paid, during the three months and the six months ended March 31,
2008.


18





B.
            Operating
      expenses





Operating
expenses during the six months ended March 31, 2009 were significantly higher
than those during the six months ended March 31, 2008, primarily because of
differences in the terms of insurance coverage purchased and the increase in
Liquidation Trust activity in preparation for its termination.  During
the six months ended March 31, 2009, the Liquidation Trust paid for six months
of business and liability insurance coverage, as well as for extended reporting
period liability coverage, representing a significant portion of operating
expenses during the period.  During the six months ended March 31,
2008, the Liquidation Trust paid for one year of business and liability
coverage, representing a significant portion of operating expenses during the
period.  In addition, during the six months ended March 31, 2009, the
Liquidation Trust incurred additional payroll and other costs, as compared to
the six months ended March 31, 2008, resulting from termination-related
activities such as the Unclaimed Property Notices.





C.
            Legal
      and professional fees





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





Legal and
professional fees for Liquidation Trust operations include all legal,
accounting, and other support services except for the expenses of prosecuting an
action referred to as the “Committee Action”, and expenses related to
preference collections.  During the six months ended March 31, 2009,
the Liquidation Trust incurred higher legal and professional fees than during
the six months ended March 31, 2008, primarily because of counsel’s involvement
in efforts to facilitate the termination of the Liquidation Trust during fiscal
2009.  Counsel carried out diminished activity on the Liquidation
Trust’s behalf during the six months ended March 31, 2008, pending the final
resolution of the Committee Action.





The
litigation fees paid for the now concluded Committee Action during the six
months ended March 31, 2009 were comparable to those paid during the six months
ended March 31, 2008.  Fees paid during the six months ended March 31,
2009 represented the Liquidation Trust’s final payment to an expert
witness.  Fees paid during the six months ended March 31, 2008
represented the Liquidation Trust’s final payment to litigation
counsel.





D.
            Voided
      claims checks





During the six months ended March 31,
2009, $0.5 million of uncashed checks from the Sixth Interim Distribution paid
during August 2008 were voided by the payment agent and the funds returned to
the Liquidation Trust, and the Liquidation Trust reissued $0.4 million of
previously voided Claims checks.  No similar activity occurred during
the six months ended March 31, 2008, primarily because no Distribution was paid
during the preceding several months.





IV.
            Net Assets in
      Liquidation





A.
            Assets





1.
            Cash and cash
      equivalents





The
Liquidation Trust’s cash and cash equivalents balance of $6.4 million as of
March 31, 2009 and $8.1 million as of September 30, 2008 is classified as either
(a) cash designated as available for distribution to holders of Impaired Claims
(“Available Cash”), (b) Reserved Cash or (c) Other Cash.


19


Available
Cash is designated to assure the availability of funds for payment to holders of
Allowed and Disputed Impaired Claims who have not received previously authorized
Distributions.  The nominal amount of Available Cash as of March 31,
2009 primarily represented Distributions payable to two holders of Allowed
Impaired Claims who were paid during May 2009.  The balance of
Available Cash decreased by $1.8 million as of March 31, 2009, compared to the
balance at September 30, 2008, primarily as a result of (1) reclassification of
$0.4 million of Distributions payable to Other Cash as a result of the Unclaimed
Property Notices, (2) payment of $0.3 million in Distributions to holders of
previously allowed Impaired Claims who resolved prior impediments to payment,
and (3) resolution of the final Disputed Impaired Claims, eliminating the
requirement for the remaining $1.0 million Impaired Claims
Reserve.  The required amount of Available Cash of $1.8 million as of
September 30, 2008 was based primarily on the Impaired Claims Reserve of $1.0
million, at the cumulative Distribution rate of 11.9411%, for $8.3 million of
Disputed Impaired Claims (at their estimated value for reserve purposes), as
well as Distributions payable of $0.8 million.  The value of Disputed
Claims, for the purpose of establishing adequate reserves, was estimated by the
Liquidation Trust and approved by the Bankruptcy Court in an order establishing
the amounts of Disputed Claims Reserves.





Reserved
cash is held by the Liquidation Trust to assure payment of the Liquidation
Trust’s obligations.  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.  Reserved cash decreased to a
balance of $4.8 million as of March 31, 2009, a change of $1.1 million from
September 30, 2008, primarily as a result of activity in uncashed claims checks
and in the Wind-down Reserve and the Litigation Reserve, all as discussed
below.





Other
cash is cash and cash equivalents not designated to a specific reserve or
fund.  The increase in other cash to a balance of $1.5 million as of
March 31, 2009, a change of $1.2 million from September 30, 2008, primarily
relates to Distributions forfeited as a result of the Unclaimed Property
Notices, as well as to the release of the $0.3 million Disputed Unimpaired
Claims Reserve upon the waiver of all remaining Disputed Unimpaired
Claims.





2.
            Preference
      receivables





As of
March 31, 2009 and September 30, 2008, preference receivables consisted mainly
of one remaining significant action.  During June 2005, the Bankruptcy
Court awarded the Liquidation Trust $1.0 million in this
action.  During March 2006, the District Court upheld the Bankruptcy
Court ruling in its entirety.  The defendant appealed the affirmation
by the District Court to the Court of Appeals.  During June 2007, the
Court of Appeals remanded the case to the District Court, with instructions to
remand to the Bankruptcy Court for specific findings.  Pursuant to the
Bankruptcy Court’s scheduling order, both parties filed briefings by February
2008.  The Bankruptcy Court may decide the case or schedule further
proceedings, up to and including a trial, at its discretion.  The
Liquidation Trust and its counsel intend to vigorously pursue collection of the
original judgment.  The Liquidation Trust’s current estimate of the
fair value of preference receivables is primarily based on the content of the
Court of Appeals ruling and on previous negotiations with the defendant in this
action.





B.
            Liabilities
      and Reserves





1.
            Unimpaired and
      convenience claims payable





As of
March 31, 2009 and September 30, 2008, substantially all of the balance of
Unimpaired and convenience Claims payable consisted of an estimated $1.3 million
of fees and expenses which Kmart Corporation (“Kmart”) incurred in connection
with the Debtors’ bankruptcy filing, which were allowed as an Unimpaired Claim
pursuant to the Plan.  This Claim has not yet been substantiated by
Kmart as required by the Plan.  The Liquidation Trust has requested
substantiation of this Claim, and is currently working with Kmart in an effort
to resolve the matter.


20





2.
            Uncashed claims
      checks





During
the six months ended March 31, 2009, uncashed Claims checks decreased to a
minimal amount, compared to $0.4 million as of September 30, 2008, as
follows:





($
in thousands)





Balance
      as of September 30, 2008
                  
                  $
                  426Voided
      checks returned
                  
                  
                  462Uncashed
      checks reclassified
                  
                  
                  (426
                  )Previously
      voided checks reissued
                  
                  
                  (424
                  )Balance
      as of March 31, 2009
                  
                  $
                  38





During
December 2008, $0.5 million of uncashed checks from the Sixth Interim
Distribution were voided by the payment agent and the funds returned to the
Liquidation Trust.  Pursuant to the Unclaimed Property Notices, $0.4
million of uncashed Claims checks were reclassified from this liability account,
increasing Net Assets in Liquidation and making the unclaimed funds available to
the Liquidation Trust.  A total of $0.4 million of previously voided
checks were reissued based upon timely request of the holders.





3.
            Distributions
      payable





During
the six months ended March 31, 2009, Distributions payable decreased to a
minimal amount compared to $0.8 million as of September 30, 2008, primarily
because, pursuant to the Unclaimed Property Notices, $0.4 million included in
Distributions Payable as of September 30, 2008 has been reclassified from this
liability account, increasing Net Assets in Liquidation and making the unclaimed
funds available to the Liquidation Trust.  In addition, during the
three months ended March 31, 2009, Distributions totaling $0.3 million were paid
to holders of previously allowed Impaired Claims who resolved prior impediments
to payment.  Distributions payable as of March 31, 2009 primarily
represented amounts payable to two holders of Allowed Impaired Claims who were
paid during May 2009.





4.
            Estimated costs of
      liquidation





Estimated
costs of liquidation decreased by $0.4 million, to a balance of $0.5 million as
of March 31, 2009, compared to $0.9 million as of September 30, 2008, as
follows:





($
in thousands)





Balance
      as of September 30, 2008
                  
                  $
                  909Disbursements
      – litigation reserve
                  
                  
                  (150
                  )Disbursements
      – wind-down reserve
                  
                  
                  (529
                  )Increase
      in estimated costs of liquidation
                  
                  
                  275Balance
      as of March 31, 2009
                  
                  $
                  505





The
increase to the Wind-down Reserve is discussed above under “Changes in Net
Assets in Liquidation,” and disbursements are discussed above under “Cash
Receipts and Disbursements.”





V.
            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.


21





Item 3.
            Quantitative
      and Qualitative Disclosures About Market
Risk





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





Item 4T.
            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 Rules 13a-15 and 15d-15.  Based on that evaluation,
the Liquidation Trustee concluded that the Liquidation Trust’s disclosure
controls and procedures are effective as of March 31, 2009.





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





The
remaining responsibilities of the Liquidation Trust no longer require the
full-time attention of the Liquidation Trustee or of Liquidation Trust
employees.  The Liquidation Trustee and one other employee are
performing necessary management oversight and administrative, legal and
accounting processes on a part-time basis, with periodic assistance from two
other part-time employees.  While the Liquidation Trustee believes
that these individuals will consistently make themselves available as needed to
perform their assigned responsibilities, including functions related to internal
control over financial reporting, there can be no assurance that this
availability will continue.  As a result, there may be future
deficiencies in internal accounting controls related to a lack of segregation of
duties.





PART II – OTHER
INFORMATION





Item
1.  Legal Proceedings





Litigation
and Other Proceedings on behalf of the Liquidation Trust




As of
March 31, 2009, one significant preference litigation action continued – of
approximately 1,800 preference actions filed by the Debtors in
2001.  During March 2006, the United States District Court for
the District of Delaware (the “District Court”) upheld the Bankruptcy Court’s
award to the Liquidation Trust of $1.0 million in this case.  The
defendant further appealed the affirmation by the District Court to the Third
Circuit Court of Appeals (“Court of Appeals”).  During June 2007, the
Court of Appeals remanded the case to the District Court, with instructions to
remand to the Bankruptcy Court for specific findings.Pursuant to the Bankruptcy
Court’s scheduling order, both parties filed briefings by February
2008.  The Bankruptcy Court may decide the case or schedule further
proceedings, up to and including a trial, at its discretion.  The
Liquidation Trust and its counsel intend to vigorously pursue collection of the
original judgment.  Prosecution of all other significant preference
litigation has been completed.


22





Litigation
and Other Proceedings against the Liquidation Trust




Settling
Claims filed with the Bankruptcy Court is the ordinary course of business for
the Liquidation Trust.  As of March 31, 2009, no Claims remained
unresolved.




Other
than as described herein, the Liquidation Trust is not a defendant in any action
or proceeding which, if the Liquidation Trust were to be found liable in such
action or proceeding, would materially adversely impact the Liquidation Trust’s
financial condition.




Item 1A.
            Risk
      Factors





There are
no material changes in risk factors as previously disclosed in the Liquidation
Trust’s annual report on Form 10-K for the year ended September 30,
2008.





Item 2.
            Unregistered
      Sales of Equity 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





ExhibitNumber
              
              Document31.1
              
              Certification
      by Liquidation Trustee32.1
              
              Liquidation
      Trustee’s Certification Pursuant to 18 U.S.C. Section
  1350


23


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 TRUSTDate:  May
      15, 2009
                By:
                /s/    Conrad F.
      HockingName:
                Conrad
      F. HockingTitle:
                Liquidation
      Trustee


24





INDEX
TO EXHIBITS


FORM
10-Q





Exhibit
No.




31.1
                  Certification
      by Liquidation Trustee32.1
                  Liquidation
      Trustee’s Certification Pursuant to 18 U.S.C. Section
  1350


25