**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**Check
      one**





x
            Quarterly
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934
              for the quarterly period ended December
                31,
                2006 or




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








**Commission
      file number 000-50160**





**HECHINGER
      LIQUIDATION TRUST**


(Exact
      name of Registrant as specified in its charter)


**Delaware**
            **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
o





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





Large
      accelerated filer o  Accelerated
      filer o  Non-accelerated
      filer x





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





Yes
o 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
o





**HECHINGER
      LIQUIDATION TRUST**


**INDEX
      TO FORM 10-Q**


**FOR
      THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006**




**Description**
            
            **Page**PART
                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 andResults
                of Operations
            14Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            18Item
                4.
            Controls
                and Procedures
            18PART
                II. OTHER INFORMATION:Item
                1.
            Legal
                Proceedings
            18Item
                1A.
            Risk
                Factors
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            20Item
                3.
            Defaults
                Upon Senior Securities
            20Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            20Item
                5.
            Other
                Information
            20Item
                6.
            Exhibits
            20SIGNATURES
            21INDEX
                TO EXHIBITS
            22


2


**PART
      I - FINANCIAL INFORMATION**








**Item
      1. Financial Statements**





**Hechinger
      Liquidation Trust**


**Unaudited
      Statements of Net Assets in Liquidation**




**($
      in thousands)**




**As
                  of****December 31,
                2006**
            
            **As
                  of****September
                30, 2006****Assets**Cash
                and cash equivalentsCash
                designated as available for distributionto
                holders of impaired claims
            
            $
            2,872
            
            $
            2,872Reserved
                cash
            
            
            10,850
            
            
            11,193Other
                cash
            
            
            4,957
            
            
            4,658Total
                cash and cash equivalents
            
            
            18,679
            
            
            18,723Preference
                receivables (net of costs ofrecovery
                of $135 and $147,respectively)
            
            
            867
            
            
            853Other
                assets
            
            
            598
            
            
            674Total
                assets
            
            
            20,144
            
            
            20,250**Liabilities**Unimpaired
                and convenience claims payable
            
            
            1,337
            
            
            1,337Uncashed
                claims checks
            
            
            431
            
            
            431Distributions
                payable
            
            
            424
            
            
            424Estimated
                costs of liquidationWind-down
                reserve
            
            
            1,383
            
            
            1,682Litigation
                reserve
            
            
            327
            
            
            371Total
                liabilities
            
            
            3,902
            
            
            4,245**Net
                Assets in Liquidation**
            
            **$**
            **16,242**
            
            **$**
            **16,005**








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 three****months
                ended**
            
            **months
                ended****December
                31, 2006**
            
            **December
                31, 2005**Increase/(decrease)
                in Net Assets in LiquidationIncrease/(decrease)
                in estimated fair valueof
                preference receivables, net
            
            $
            1
            
            $
            (31
            )Interest
                income
            
            
            235
            
            
            234Other
                increases
            
            
            1
            
            
            8Net
                increase in Net Assets in Liquidationbefore
                distributions authorized
            
            
            237
            
            
            211Distributions
                authorized
            
            
            -
            
            
            (6,626
            )Net
                increase/(decrease) in Net Assets in Liquidationafter
                distributions authorized
            
            
            237
            
            
            (6,415
            )Net
                Assets in Liquidation at beginning of period
            
            
            16,005
            
            
            26,865Net
                Assets in Liquidation at end of period
            
            $
            16,242
            
            $
            20,450









See
      accompanying notes to unaudited financial statements.




4




**Hechinger
      Liquidation Trust**


**Unaudited
      Statements of Cash Receipts and Disbursements**




**($
      in thousands)**




**For
                the three**
            
            **For
                the three****months
                ended**
            
            **months
                ended****December
                31, 2006**
            
            **December
                31, 2005**Cash
                receiptsCollection
                of committee action settlement
            
            $
            -
            
            $
            7,000Preference
                collections, beforecosts
                of recovery
            
            
            77
            
            
            115Interest
                income
            
            
            235
            
            
            234Other
                receipts
            
            
            1
            
            
            8Total
                cash receipts
            
            
            313
            
            
            7,357Cash
                disbursementsCosts
                of liquidationOperating
                expenses
            
            
            247
            
            
            324Legal
                and professional feesLitigation
            
            
            45
            
            
            167Preference
                recoveries
            
            
            13
            
            
            26Liquidation
                Trust operations
            
            
            52
            
            
            85Voided
                claims checks, net of reissues
            
            
            -
            
            
            2Total
                cash disbursements
            
            
            357
            
            
            604(Decrease)/increase
                in cash and cash equivalentsbefore
                distributions paid
            
            
            (44
            )
            
            6,753Distributions
                paid
            
            
            -
            
            
            6,426(Decrease)/increase
                in cash and cash equivalents
            
            
            (44
            )
            
            327Cash
                and cash equivalentsat
                beginning of period
            
            
            18,723
            
            
            26,649Cash
                and cash equivalentsat
                end of period
            
            $
            18,679
            
            $
            26,976





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 October 26, 2007, 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 Impaired Claims ultimately Allowed. When and to the extent Disputed
      Impaired Claims become Allowed Impaired Claims, holders of such Claims become
      holders of Beneficial Interests in accordance with the Plan.





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





Through
      December 31, 2006, the Liquidation Trust has authorized Distributions to holders
      of Beneficial Interests (i.e., to holders of Allowed Impaired Claims) of
      10.2911% of the Allowed amount of the Impaired Claims, and established a reserve
      of 10.2911% of the estimated amount of Disputed Impaired Claims, based on the
      estimated amount of such Claims approved by the Bankruptcy Court for reserve
      purposes (the “Disputed Impaired Claims Reserve”).




**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
      losses considered probable and estimable. The Statements of Changes in Net
      Assets in Liquidation primarily reflect authorized Distributions to holders
      of
      Beneficial Interests 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.





6


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, 2006 and September 30, 2005, and for the fiscal years ended
      September 30, 2006, September 30, 2005 and September 30, 2004, 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.





**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 3).





**Taxes**





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





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





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





7


**3.**  **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
      (see Notes 8 and 11).





Available
      Cash as of December 31, 2006 and as of September 30, 2006 consists of:





**($
                in thousands)**Distributions
                payable
            
            $
            424Reserve
                for remaining disputed impairedclaims
                at 10.2911%
            
            
            2,448Total
                available cash
            
            $
            2,872







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 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.





**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 $0.9
      million, net of estimated costs of recovery of $0.1 million, as of December
      31,
      2006 and as of September 30, 2006. Most of the value of preference receivables
      consists of the sole remaining preference recovery action being actively
      pursued. During June 2005, following the February 2005 trial of this action,
      the
      Bankruptcy Court awarded the Liquidation Trust $1.0 million. During March 2006,
      the District Court upheld the Bankruptcy Court ruling in its entirety. Although
      the defendant has appealed the affirmation by the District Court to the Court
      of
      Appeals, the Liquidation Trust believes that ultimate collection of the full
      award is likely.





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





**5.**  **Other
      Assets**




Other
      assets consist of receivables from various former vendors, service providers,
      and others. As of December 31, 2006 and as of September 30, 2006, other
      assets included a $0.6 million settlement receivable from certain former counsel
      to the Debtors, which was collected subsequent to December 31, 2006. In
      addition, as of September 30, 2006, other assets included $0.1 million of stock
      (received in partial settlement of a preference claim) accounted for at its
      market value and sold shortly after year-end.




8




Other
      assets are reported at estimated net fair value, based on either the amount
      paid
      or the estimated recoverable amount, whichever is more determinable. The
      eventual net realizable value of these assets 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. Convenience Claims, also included in this classification, are not
      significant.





Unimpaired
      and Convenience Claims payable as of December 31, 2006 and as of September
      30,
      2006 consists of:





**($
      in thousands)**





Allowed
                unimpaired claims
            
            $
            1,335Estimated
                fair value of disputed unimpaired claims
            
            
            -Convenience
                claims
            
            
            2Total
            
            $
            1,337Number
                of disputed unimpaired claims
            
            
            3





Pursuant
      to the Plan, certain fees and expenses which Kmart Corporation (“Kmart”)
      incurred in connection with the Debtors’ bankruptcy filing were allowed as an
      Unimpaired Claim. Allowed Unimpaired Claims as of December 31, 2006 and
      September 30, 2006 include this Claim, which has not yet been substantiated
      by
      Kmart as required by the Plan, at its estimated amount of $1.3 million.





The
      amount asserted by the holders of the remaining Disputed Unimpaired Claims
      is
      insignificant as of December 31, 2006 and September 30, 2006. The Liquidation
      Trust believes that the likelihood of paying any of these Claims is remote
      and
      anticipates that each of these Claims will be expunged or waived; accordingly,
      no liability has been recorded with respect to the remaining Disputed Unimpaired
      Claims.





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





**7.**  **Uncashed
      Claims Checks**





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


9





**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,
      have
      either not yet provided all information necessary for payment; were subject
      to
      an offsetting claim by the Liquidation Trust which had not yet been resolved;
      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.





**9.**  **Estimated
      Costs of Liquidation**





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





Under
      the
      Plan, the Liquidation Trust was required to establish and fund a reserve to
      pay
      administration costs and costs of holding and liquidating the Liquidation
      Trust’s assets (the “Wind-down Reserve”). 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 the current estimated
      termination date of February 2008. These final items include resolution of
      the
      remaining Disputed Claims and all litigation (excluding the costs provided
      for
      in the Litigation Reserve), a final Distribution, if applicable, and 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 amount of the Litigation
      Reserve as of December 31, 2006 and September 30, 2006 is intended to fund
      the
      appeal of the District Court’s Summary Judgment Decision and related judgment
      with respect to the Committee Action in the Court of Appeals (see Note 12).





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





10


**10.**  **Bankruptcy
      Reserves Required**





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





**($
                in thousands)****As
                of**
            
            **As
                of****December
                31, 2006**
            
            **September
                30, 2006**Liability
                reservesWind-down
            
            $
            1,383
            
            $
            1,682Litigation
            
            
            327
            
            
            371Unimpaired
                and convenience claims
            
            
            1,337
            
            
            1,337Uncashed
                claims checks
            
            
            431
            
            
            431Total
                liability reserves
            
            
            3,478
            
            
            3,821Contingency
                reservesLitigation
                appeals provision
            
            
            4,000
            
            
            4,000Excess
                disputed unimpaired claims
            
            
            300
            
            
            300Preference
                settlement claims
            
            
            72
            
            
            72Minimum
                reserve
            
            
            3,000
            
            
            3,000Total
                contingency reserves
            
            
            7,372
            
            
            7,372Total
                reserves
            
            $
            10,850
            
            $
            11,193





The
      litigation appeals provision represents cash held in reserve to allow the
      Liquidation Trust to pursue or defend a future trial and appeals of the
      Committee Action. The Liquidation Trustee designated this contingency reserve
      after concluding that future cash receipts of the Liquidation Trust might not
      be
      sufficient to fund such actions prospectively. No liability has been accrued
      in
      connection with such possible future actions because the Liquidation Trust
      has
      not determined that any such action required will necessitate additional funding
      of the Litigation Reserve.





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, if any, or is otherwise terminated.





**11.**  **Impaired
      Claims**





The
      Liquidation Trust’s estimate of Impaired Claims as of December 31, 2006 and as
      of September 30, 2006 consists of:





**($
                in thousands)**Allowed
                impaired claims
            
            $
            709,770Estimated
                fair value of disputed impaired claims
            
            
            10,584Total
                estimated impaired claims
            
            $
            720,354Asserted
                value of disputed impaired claims
            
            $
            48,682Number
                of disputed impaired claims
            
            
            12





Subsequent
      to December 31, 2006, the Bankruptcy Court approved a stipulation settling
      two
      Disputed Impaired Claims, asserted in the total amount of $26.0 million, at
      their estimated fair value of $2.0 million as of December 31, 2006 and September
      30, 2006.


11





Distributions
      to holders of Allowed Impaired Claims have been authorized, through December
      31,
      2006, in the cumulative amount of 10.2911% of the Allowed amount of the Impaired
      Claims. A total of $70.9 million has been paid to holders of Allowed Impaired
      Claims through December 31, 2006. In conjunction with the authorized
      Distributions, as of December 31, 2006, the Liquidation Trust held a total
      of
      $2.9 million of Available Cash for Distribution to holders of Impaired Claims,
      including the $2.4 million Disputed Impaired Claims Reserve for Distribution
      to
      holders of Disputed Impaired Claims should such Disputed Claims become Allowed,
      and $0.4 million in Distributions payable to holders of Allowed Impaired Claims
      (see Notes 3 and 8). The Disputed Impaired Claims Reserve is determined based
      on
      the cumulative Distribution rate and on the estimated amount, approved by the
      Bankruptcy Court for reserve purposes, of each remaining Disputed Impaired
      Claim.





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





**12.**  **Contingencies**





**Litigation
      and Other Proceedings on behalf of the Liquidation Trust**





Federal
      Court Case




The
      Liquidation Trust is pursuing an action referred to as the “Committee Action” on
      behalf of its beneficiaries in the United States District Court for the District
      of Delaware (the “District Court”), and in the United States Court of Appeals
      for the Third Circuit (the “Court of Appeals”). This action arose from a
      business combination among the Debtors during 1997 and the related financing
      (the “1997 Transactions”), and was filed against certain parties that arranged,
      approved, or financed the 1997 Transactions. The 1997 Transactions were arranged
      and/or approved by Leonard Green & Partners, L.P. and related entities and
      the controlling shareholders and directors of the Debtors (including the
“Officer and Director Defendants”) (collectively, the “Insiders”). The 1997
      Transactions were financed by a series of secured credit agreements, under
      which
      the Chase Manhattan Bank and Fleet Retail Finance Inc., formerly BankBoston
      Retail Finance Inc. (“Fleet”) served as agent for the pre-petition lender group
      (the “Pre-petition Lenders”).





An
      amended complaint with respect to the Committee Action was filed in the United
      States Bankruptcy Court for the District of Delaware on April 3, 2001, as Civil
      Action No. 00-840-RRM and was styled “The Official Committee of Unsecured
      Creditors of Hechinger Investment Company of Delaware, Inc., et  al .,
      Plaintiff, v. Fleet Retail Finance Group, The Chase Manhattan Bank, Back Bay
      Capital Funding, LLC, each individually and as agent for various parties to
      credit agreements described herein, Leonard Green & Partners, L. P., Green
      Equity Investors II, L. P., John W. Hechinger, Jr., John W. Hechinger, S. Ross
      Hechinger, Ann D. Jordan, Robert S. Parker, Melvin A. Wilmore, Alan J. Zakon,
      Kenneth J. Cort, W. Clark McClelland, June R. Hechinger, Nancy Hechinger Lowe,
      Sally Hechinger Rudoy, Catherine S. England, Richard England, Jr., June L.
      P.,
      and Jarsan Associates L. P., Defendants.”





The
      Committee Action, initially filed by the Official Committee of Unsecured
      Creditors appointed for the Debtors, and assigned to the Liquidation Trust
      pursuant to the Plan, alleges that the defendants carried out the 1997
      Transactions despite their knowledge that Hechinger was insolvent at the time,
      and asserts fraudulent conveyance and/or breach of fiduciary duty claims against
      the Insiders, seeking recovery of at least $127 million in damages. It also
      asserts fraudulent conveyance claims against the Pre-petition Lenders and
      challenges the repayment of the Pre-petition Lenders using the proceeds of
      a
      post-petition loan.





During
      July 2005, the District Court issued a memorandum opinion and order on pending
      summary judgment motions (collectively, the “Summary Judgment Decision”),
      dismissing the Liquidation Trust’s claims against Fleet, General Electric Credit
      Corp. (“GECC”), and certain other defendants in the Committee Action. During
      August 2005, the District Court substantively denied the Liquidation Trust’s
      motion for reconsideration of the Summary Judgment Decision. During December
      2005, the Liquidation Trust filed its notice of appeal from the Summary Judgment
      Decision and related judgment in the Committee Action with the Court of
      Appeals.


12




During
      September 2005, the Liquidation Trust reached a settlement agreement with the
      Officer and Director Defendants. Under the terms of the agreement, the $7.0
      million settlement amount was paid to the Liquidation Trust during October
      2005,
      and the Liquidation Trust dismissed the Committee Action as against the Officer
      and Director Defendants.





A
      March
      2006 mediation ordered and conducted by the Court of Appeals did not result
      in a
      settlement among the remaining parties to the Committee Action. The Liquidation
      Trust continued to negotiate with some of the remaining parties, reaching an
      agreement with both Fleet and GECC during August 2006. Under the terms of the
      Fleet Settlement and upon the Bankruptcy Court’s approval of the related
      stipulation, the Liquidation Trust paid Fleet $8.3 million of the $11.0 million
      Fleet Reserve, Fleet and GECC released any claim to the balance of the Fleet
      Reserve, and the Liquidation Trust, Fleet and GECC released each other from
      all
      further claims.





In
      accordance with the procedures set forth in the Plan, approval of each
      settlement was obtained from the Committee that represents the interests of
      the
      beneficiaries of the Liquidation Trust. These settlements have no effect on
      the
      Liquidation Trust's claims against any other defendant in the Committee
      Action.





The
      various remaining defendants are vigorously opposing this action, for which
      the
      Court of Appeals has not yet issued a scheduling order. There is no assurance
      that the Liquidation Trust will prevail on appeal. While the Liquidation Trust
      is vigorously pursuing this litigation with the intent to obtain a very
      substantial recovery, the Liquidation Trust cannot predict with any certainty
      the outcome of the litigation or the amount or range of potential recoveries.





Bankruptcy
      Court Case





As
      of
      December 31, 2006, only one significant preference litigation action continued
      -
      of approximately 1,800 preference litigation actions filed by the Debtors in
      2001. During March 2006, the District Court upheld the Bankruptcy Court’s award
      to the Liquidation Trust of $1.0 million. The defendant has further appealed
      the
      District Court affirmation to the Court of Appeals. A June 2006 mediation
      ordered and conducted by the Court of Appeals did not result in a settlement,
      and the appeal process continued as of December 31, 2006. Oral argument is
      scheduled for April 2007 and a Court of Appeals decision in this case is
      expected in late 2007. Prosecution of all other significant preference
      litigation has been completed.





**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 December 31, 2006, a total of 17 Disputed Claims
      remained unresolved. None of these Disputed Claims, if resolved in favor of
      the
      claimant, would have a material effect on the financial condition of the
      Liquidation Trust.





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


**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
      December 31, 2006 and September 30, 2006 and for the three months ended December
      31, 2006 and the three months ended December 31, 2005, 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, 2006 and
      September 30, 2005, and for the fiscal years ended September 30, 2006,
      September 30, 2005 and September 30, 2004, 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 December 31, 2006 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,
      2006.





**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 (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. Both the authorization of
      Distributions and changes in estimates are non-cash changes. These changes
      are
      shown in the Liquidation Trust’s Statements of Changes in Net Assets in
      Liquidation and are discussed below.





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


14


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





**($
                in thousands)**
            
            **For
                the three months ended****December
                31, 2006**
            
            **December
                31, 2005**Distributions
                authorized
            
            $
            -
            
            $
            (6,626
            )Interest
                income and net other increases
            
            
            237
            
            
            211Net
                increase/(decrease) in net assets in liquidation
            
            $
            237
            
            $
            (6,415
            )





**A.**  **Distributions
      authorized**





No
      new
      interim Distribution was authorized during the three months ended December
      31,
      2006.





During
      November 2005, the Liquidation Trust authorized a Distribution of 1.1911% of
      the
      Allowed amount to holders of Allowed Impaired Claims, totaling $6.6 million,
      which was paid during December 2005. Because this Distribution resulted from
      the
      $7.0 million cash proceeds of the Committee Action settlement (discussed below
      under “Legal Proceedings”), pursuant to the Plan, Kmart’s $150.0 million General
      Unsecured Claim was excluded from the Distribution.





**B.**  **Interest
      income and net other increases**





Interest
      income and net other increases during the three months ended December 31, 2006
      and the three months ended December 31, 2005 consisted primarily of interest
      income from the Liquidation Trust’s cash and cash equivalents.





**III.**  **Cash
      Receipts and Disbursements**





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


**($
                in thousands)**
            
            **For
                the three months ended****December
                31, 2006**
            
            **December
                31, 2005**Cash
                receiptsCollection
                ofcommittee
                action settlement
            
            $
            -
            
            $
            7,000Preference
                collections, beforecosts
                of recovery
            
            
            77
            
            
            115Other
                receipts
            
            
            236
            
            
            242Total
                cash receipts
            
            
            313
            
            
            7,357Cash
                disbursementsOperating
                expenses
            
            
            247
            
            
            324Legal
                and professional feesLitigation
            
            
            45
            
            
            167Preference
                recoveries
            
            
            13
            
            
            26Liquidation
                Trust operations
            
            
            52
            
            
            85Voided
                claims checks, net of reissues
            
            
            -
            
            
            2Total
                cash disbursements
            
            
            357
            
            
            604Distributions
                paid
            
            
            -
            
            
            (6,426
            )(Decrease)/increase
                in cash and cash equivalents
            
            $
            (44
            )
            $
            327


15




**A.** **Cash
          receipts**





During
      September 2005, the Liquidation Trust reached a settlement with certain former
      officers and directors of Hechinger Company (the “Officer and Director
      Defendants”) with respect to the Committee Action. Under the terms of the
      agreement, $7.0 million in cash was paid to the Liquidation Trust during October
      2005.





Cash
      receipts from collections of preference receivables have been ongoing since
      the
      preference actions were filed in mid-2001. Preference collections during the
      three months ended December 31, 2006 and the three months ended December 31,
      2005 were nominal, resulting from collections efforts on recently settled cases
      and certain default judgments issued. With the exception of one substantial
      case, no preference actions remain to be litigated as of December 31, 2006.
      In
      the one remaining case, the Bankruptcy Court awarded the Liquidation Trust
      $1.0
      million, a judgment affirmed in its entirety by the District Court. Although
      the
      defendant has further appealed the decision and award to the Court of Appeals,
      the Liquidation Trust believes that ultimate collection of the full award is
      likely. Future preference receipts, other than from this one case, are expected
      to be insignificant.





Other
      receipts resulted mainly from interest income.





**B.**  **Operating
      expenses**





Operating
      expenses during the three months ended December 31, 2006 were somewhat lower
      than those during the three months ended December 31, 2005, primarily due to
      the
      Liquidation Trust’s declining level of operations. The Liquidation Trust
      requires only part-time employees; accordingly, payroll expense varies with
      the
      level of activity. A significant portion of operating expenses for the three
      months ended December 31, 2006 and for the three months ended December 31,
      2005
      consisted of annual insurance premiums for the Liquidation Trust, in amounts
      comparable to payments during the preceding years.





**C.**  **Legal
      and professional fees**





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





The
      litigation fees paid for the Committee Action during the three months ended
      December 31, 2006 were significantly less than those paid during the three
      months ended December 31, 2005. Fees paid during the three months ended December
      31, 2005 primarily related to initial appeals matters in the Committee Action.
      During the three months ended December 31, 2006, however, fees related mainly
      to
      the Fleet settlement.





Total
      preference recovery fees during the three months ended December 31, 2006 were
      17
      percent of preference collections, as compared to 23 percent of preference
      collections during the three months ended December 31, 2005. The collection
      fees
      for most preference settlements are contingent, and are set at a declining
      rate
      (generally ranging from 35% to 7% of collections) for larger cases. In addition,
      preference recovery fees include expenses incurred in support of preference
      collections and associated litigation. During both the three months ended
      December 31, 2006 and the three months ended December 31, 2005, preference
      recovery fees related to preference collections received during the period
      (collection of a number of recently settled cases and certain default judgments
      issued), with the variation in preference fees caused mainly by the amount
      collected in each case.





Legal
      and
      professional fees for Liquidation Trust operations include all legal,
      accounting, and other support services except for the expenses of prosecuting
      the Committee Action, and expenses related to preference collections pursued
      on
      a contingency-fee basis. The operations of the Liquidation Trust, including
      the
      legal and professional fees, continue to diminish because most assets have
      been
      liquidated and most Claims have been resolved.


16




**D.**  **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
      November 2005, the Liquidation Trust authorized a Distribution of 1.1911% of
      the
      Allowed amount to holders of Allowed Impaired Claims, totaling $6.6 million,
      of
      which $6.4 million was paid during December 2005. Because this Distribution
      resulted from the $7.0 million proceeds of the Committee Action settlement,
      pursuant to the Plan, Kmart’s $150.0 million General Unsecured Claim was
      excluded from the Distribution.





No
      additional interim Distribution was authorized or paid during the three months
      ended December 31, 2006.





**IV.**  **Net
      Assets in Liquidation**





**A.**  **Assets**




The
      Liquidation Trust’s cash and cash equivalents balance of $18.7 million as of
      December 31, 2006 and as of September 30, 2005 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.





Available
      Cash is designated to assure the availability of funds for payment to holders
      of
      Impaired Claims who have not received authorized Distributions. The required
      amount of Available Cash of $2.9 million as of December 31, 2006 and as of
      September 30, 2006 was based primarily on the cumulative Distribution rate
      of
      10.2911%, for $25.2 million of Disputed Impaired Claims (at their estimated
      value for reserve purposes), as well as unpaid Distributions to holders of
      Allowed Impaired Claims who have not met all the requirements for a
      Distribution, or have not cashed a Distribution check and therefore have not
      been paid subsequent Distributions, in accordance with the Plan. 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 by $0.3 million
      from September 30, 2006 to December 31, 2006, to a balance of $10.9 million,
      primarily as a result of disbursements from the Wind-down Reserve, as discussed
      below.





**B.** **Liabilities
          and Reserves**





Estimated
      costs of liquidation decreased by $0.3 million, to a balance of $1.7 million
      as
      of December 31, 2006, compared to September 30, 2006. The decrease is primarily
      due to disbursements totaling $0.3 million from the Wind-down
      Reserve.





**V.**  **Contingencies**





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


17





**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 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 December 31, 2006.





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 other former
      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**





Further
      background information about the following cases is disclosed in Part I, Item
      3., “Legal Proceedings,” of the Liquidation Trust’s Form 10-K for the fiscal
      year ended September 30, 2006.





Federal
      Court Case





The
      Liquidation Trust is pursuing an action referred to as the “Committee Action” on
      behalf of its beneficiaries in the United States District Court for the District
      of Delaware (the “District Court”), and in the United States Court of Appeals
      for the Third Circuit (the “Court of Appeals”). This action arose from a
      business combination among the Debtors during 1997 and the related financing
      (the “1997 Transactions”), and was filed against certain parties that arranged,
      approved, or financed the 1997 Transactions. The 1997 Transactions were arranged
      and/or approved by Leonard Green & Partners, L.P. and related entities and
      the controlling shareholders and directors of the Debtors (including the
“Officer and Director Defendants”) (collectively, the “Insiders”). The 1997
      Transactions were financed by a series of secured credit agreements, under
      which
      the Chase Manhattan Bank and Fleet Retail Finance Inc., formerly BankBoston
      Retail Finance Inc. (“Fleet”) served as agent for the pre-petition lender group
      (the “Pre-petition Lenders”).


18




An
      amended complaint with respect to the Committee Action was filed in the United
      States Bankruptcy Court for the District of Delaware on April 3, 2001, as Civil
      Action No. 00-840-RRM and was styled “The Official Committee of Unsecured
      Creditors of Hechinger Investment Company of Delaware, Inc., et  al .,
      Plaintiff, v. Fleet Retail Finance Group, The Chase Manhattan Bank, Back Bay
      Capital Funding, LLC, each individually and as agent for various parties to
      credit agreements described herein, Leonard Green & Partners, L. P., Green
      Equity Investors II, L. P., John W. Hechinger, Jr., John W. Hechinger, S. Ross
      Hechinger, Ann D. Jordan, Robert S. Parker, Melvin A. Wilmore, Alan J. Zakon,
      Kenneth J. Cort, W. Clark McClelland, June R. Hechinger, Nancy Hechinger Lowe,
      Sally Hechinger Rudoy, Catherine S. England, Richard England, Jr., June L.
      P.,
      and Jarsan Associates L. P., Defendants.”





The
      Committee Action, initially filed by the Official Committee of Unsecured
      Creditors appointed for the Debtors, and assigned to the Liquidation Trust
      pursuant to the Plan, alleges that the defendants carried out the 1997
      Transactions despite their knowledge that Hechinger was insolvent at the time,
      and asserts fraudulent conveyance and/or breach of fiduciary duty claims against
      the Insiders, seeking recovery of at least $127 million in damages. It also
      asserts fraudulent conveyance claims against the Pre-petition Lenders and
      challenges the repayment of the Pre-petition Lenders using the proceeds of
      a
      post-petition loan.





During
      July 2005, the District Court issued a memorandum opinion and order on pending
      summary judgment motions (collectively, the “Summary Judgment Decision”),
      dismissing the Liquidation Trust’s claims against Fleet, General Electric Credit
      Corp. (“GECC”), and certain other defendants in the Committee Action. During
      August 2005, the District Court substantively denied the Liquidation Trust’s
      motion for reconsideration of the Summary Judgment Decision. During December
      2005, the Liquidation Trust filed its notice of appeal from the Summary Judgment
      Decision and related judgment in the Committee Action with the Court of
      Appeals.





During
      September 2005, the Liquidation Trust reached a settlement agreement with the
      Officer and Director Defendants. Under the terms of the agreement, the $7.0
      million settlement amount was paid to the Liquidation Trust during October
      2005,
      and the Liquidation Trust dismissed the Committee Action as against the Officer
      and Director Defendants.





A
      March
      2006 mediation ordered and conducted by the Court of Appeals did not result
      in a
      settlement among the remaining parties to the Committee Action. The Liquidation
      Trust continued to negotiate with some of the remaining parties, reaching an
      agreement with both Fleet and GECC during August 2006. Under the terms of the
      Fleet Settlement and upon the Bankruptcy Court’s approval of the related
      stipulation, the Liquidation Trust paid Fleet $8.3 million of the $11.0 million
      Fleet Reserve, Fleet and GECC released any claim to the balance of the Fleet
      Reserve, and the Liquidation Trust, Fleet and GECC released each other from
      all
      further claims.





In
      accordance with the procedures set forth in the Plan, approval of each
      settlement was obtained from the Committee that represents the interests of
      the
      beneficiaries of the Liquidation Trust. These settlements have no effect on
      the
      Liquidation Trust's claims against any other defendant in the Committee
      Action.





The
      various remaining defendants are vigorously opposing this action, for which
      the
      Court of Appeals has not yet issued a scheduling order. There is no assurance
      that the Liquidation Trust will prevail on appeal. While the Liquidation Trust
      is vigorously pursuing this litigation with the intent to obtain a very
      substantial recovery, the Liquidation Trust cannot predict with any certainty
      the outcome of the litigation or the amount or range of potential recoveries.


19




Bankruptcy
      Court Case





As
      of
      December 31, 2006, only one significant preference litigation action continued
      -
      of approximately 1,800 preference litigation actions filed by the Debtors in
      2001. During March 2006, the District Court upheld the Bankruptcy Court’s award
      to the Liquidation Trust of $1.0 million. The defendant has further appealed
      the
      District Court affirmation to the Court of Appeals. A June 2006 mediation
      ordered and conducted by the Court of Appeals did not result in a settlement,
      and the appeal process continued as of December 31, 2006. Oral argument is
      scheduled for April 2007 and a Court of Appeals decision in this case is
      expected in late 2007. Prosecution of all other significant preference
      litigation has been completed.





**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,
      2006.





**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**




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





20


**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:
                February 12, 2007
            By:
            /s/
                Conrad F. HockingName:
                Conrad F. HockingTitle:
                Liquidation Trustee


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**INDEX
      TO EXHIBITS**


**FORM
      10-Q**





**Exhibit
      No.**




31.1
            Certification
                by Liquidation Trustee




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




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