**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**Check
      one**





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


for
      the
      quarterly period ended June 30, 2007 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 JUNE 30, 2007**




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
            14Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            20Item
                4.
            Controls
                and Procedures
            20PART
                II. OTHER INFORMATION:Item
                1.
            Legal
                Proceedings
            20Item
                1A.
            Risk
                Factors
            22Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            22Item
                3.
            Defaults
                Upon Senior Securities
            22Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            22Item
                5.
            Other
                Information
            22Item
                6.
            Exhibits
            22SIGNATURES
            23INDEX
                TO EXHIBITS
            24


2


**PART
      I – FINANCIAL INFORMATION**




**Item
      1. Financial Statements**




**Hechinger
      Liquidation Trust**


**Unaudited
      Statements of Net Assets in Liquidation**




**($
      in thousands)**




As
                of
              June
                30, 2007
            
            As
                of
              September 30, 2006**Assets**Cash
                and cash equivalentsCash
                designated as available for distribution to holders of impaired
                claims
            
            $
            2,681
            
            $
            2,872Reserved
                cash
            
            
            10,695
            
            
            11,193Other
                cash
            
            
            6,007
            
            
            4,658Total
                cash and cash equivalents
            
            
            19,383
            
            
            18,723Preference
                receivables (net of costs of recovery of $54 and $147,
                respectively)
            
            
            211
            
            
            853Other
                assets
            
            
            2
            
            
            674Total
                assets
            
            
            19,596
            
            
            20,250**Liabilities**Unimpaired
                and convenience claims payable
            
            
            1,337
            
            
            1,337Uncashed
                claims checks
            
            
            455
            
            
            431Distributions
                payable
            
            
            421
            
            
            424Estimated
                costs of liquidationWind-down
                reserve
            
            
            1,210
            
            
            1,682Litigation
                reserve
            
            
            320
            
            
            371Total
                liabilities
            
            
            3,743
            
            
            4,245**Net
                Assets in Liquidation**
            
            **$**
            **15,853**
            ****
            **$**
            **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**
              **months
                ended**
              **June
                30, 2007**
            
            **For
                the three**
              **months
                ended**
              **June
                30, 2006**Increase/(decrease)
                in Net Assets in LiquidationFleet
                settlement accrual
            
            $
            -
            
            $
            (4,750
            )(Decrease)
                in estimated fair value of preference receivables, net
            
            
            (663
            )
            
            (4
            )Interest
                income
            
            
            233
            
            
            282Other
                increases
            
            
            5
            
            
            2Net
                (decrease) in Net Assets in Liquidation before distributions
                authorized
            
            
            (425
            )
            
            (4,470
            )Distributions
                authorized
            
            
            -
            
            
            -Net
                (decrease) in Net Assets in Liquidation after distributions
                authorized
            
            
            (425
            )
            
            (4,470
            )Net
                Assets in Liquidation at beginning of period
            
            
            16,278
            
            
            20,717Net
                Assets in Liquidation at end of period
            
            $
            15,853
            
            $
            16,247**For
                the nine**
              **months ended**
              **June 30, 2007**
            
            
            **For
                the nine**
              **months ended**
              **June 30, 2006**Increase/(decrease)
                in Net Assets in LiquidationFleet
                settlement accrual
            
            $
            -
            
            $
            (4,750
            )(Decrease)/increase
                in estimated fair value of preference receivables, net
            
            
            (663
            )
            
            31Interest
                income
            
            
            688
            
            
            768Other
                increases
            
            
            10
            
            
            12Net
                (decrease) in Net Assets in Liquidation before distributions
                authorized
            
            
            35
            
            
            (3,939
            )Distributions
                authorized
            
            
            (187
            )
            
            (6,679
            )Net
                increase/(decrease) in Net Assets in Liquidation after distributions
                authorized
            
            
            (152
            )
            
            (10,618
            )Net
                Assets in Liquidation at beginning of period
            
            
            16,005
            
            
            26,865Net
                Assets in Liquidation at end of period
            
            $
            15,853
            
            $
            16,247




See
      accompanying notes to unaudited financial statements.




4




**Hechinger
      Liquidation Trust**


**Unaudited
      Statements of Cash Receipts and Disbursements**




**($
      in thousands)**




**For the nine**
              **months ended**
              **June 30, 2007**
            
            **For the nine**
              **months ended**
              **June 30, 2006**Cash
                receiptsCollection
                of committee action settlement
            
            $
            -
            
            $
            7,000Preference
                collections, before costs of recovery
            
            
            80
            
            
            199Interest
                income
            
            
            688
            
            
            768Other
                receipts
            
            
            605
            
            
            12Total
                cash receipts
            
            
            1,373
            
            
            7,979Cash
                disbursementsCosts
                of liquidationOperating
                expenses
            
            
            333
            
            
            438Legal
                and professional feesLiquidation
                Trust operations
            
            
            139
            
            
            208Litigation
            
            
            51
            
            
            359Preference
                recoveries
            
            
            25
            
            
            179(Voided)
                claims checks, net
            
            
            (24
            )
            
            (79
            )Total
                cash disbursements
            
            
            524
            
            
            1,105Increase
                in cash and cash equivalents before distributions paid
            
            
            849
            
            
            6,874Distributions
                paid
            
            
            189
            
            
            6,480Increase
                in cash and cash equivalents
            
            
            660
            
            
            394Cash
                and cash equivalents at beginning of period
            
            
            18,723
            
            
            26,649Cash
                and cash equivalents at end of period
            
            $
            19,383
            
            $
            27,043




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
      June 30, 2007, the Liquidation Trust has authorized cumulative 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”).





6




**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, if any. 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.





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
      deposits its cash with financial institutions that the Liquidation Trust
      considers to be of high credit quality. 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 consists of:




($
      in
      thousands)





**As
                  of**
                **June 30, 2007**
            
            **As
                  of**
                **September 30, 2006**Distributions
                payable
            
            $
            421
            
            $
            424Reserve
                for remaining disputed impaired claims at 10.2911%
            
            
            2,260
            
            
            2,448Total
                available cash
            
            $
            2,681
            
            $
            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 $0.2
      million, net of estimated costs of recovery of $0.1 million, as of June 30,
      2007
      and $0.9 million, net of estimated costs of recovery of $0.1 million, 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. The defendant further
      appealed the affirmation by the District Court to the Court of Appeals. Oral
      argument occurred during March 2007. 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 (see Note 12). The Liquidation Trust
      and
      its counsel intend to vigorously pursue collection of the original judgment.
      However, based on the content of the ruling and on the status of negotiations
      with the defendant, the Liquidation Trust has reduced its current estimate
      of
      the fair value of preference receivables.





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.





8


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




Other
      assets consist of receivables from various former vendors, service providers,
      and others. As of September 30, 2006, other assets included a $0.6 million
      settlement receivable from certain former counsel to the Debtors, which was
      collected during the three months ended March 31, 2007.




**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 consists of:





**($
      in thousands)**


**As
                of**
              **June 30, 2007**
            
            **As
                of**
              **September 30, 2006**Allowed
                unimpaired claims
            
            $
            1,335
            
            $
            1,335Convenience
                claims
            
            
            2
            
            
            2Total
            
            $
            1,337
            
            $
            1,337Number
                of disputed unimpaired claims
            
            
            3
            
            
            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 June 30, 2007 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 June 30, 2007 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 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 for the Committee Action, as described below), 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 June 30, 2007 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 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**
              **June
                30, 2007**
            
            **As
                of**
              **September
                30, 2006**Liability
                reservesWind-down
            
            $
            1,210
            
            $
            1,682Litigation
            
            
            320
            
            
            371Unimpaired
                and convenience claims
            
            
            1,337
            
            
            1,337Uncashed
                claims checks
            
            
            455
            
            
            431Total
                liability reserves
            
            
            3,322
            
            
            3,821Contingency
                reservesLitigation
                appeals provision
            
            
            4,000
            
            
            4,000Excess
                disputed unimpaired claims
            
            
            300
            
            
            300Preference
                settlement claims
            
            
            73
            
            
            72Minimum
                reserve
            
            
            3,000
            
            
            3,000Total
                contingency reserves
            
            
            7,373
            
            
            7,372Total
                reserves
            
            $
            10,695
            
            $
            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 consists of:




**($
      in thousands)**


**As
                of**
              **June 30, 2007**
            
            **As
                of**
              **September 30, 2006**Allowed
                impaired claims
            
            $
            711,770
            
            $
            709,770Estimated
                fair value of disputed impaired claims
            
            
            8,584
            
            
            10,584Total
                estimated impaired claims
            
            $
            720,354
            
            $
            720,354Asserted
                value of disputed impaired claims
            
            $
            22,669
            
            $
            48,682Number
                of disputed impaired claims
            
            
            9
            
            
            12





Distributions
      to holders of Allowed Impaired Claims have been authorized, through June 30,
      2007, in the cumulative amount of 10.2911% of the Allowed amount of the Impaired
      Claims. A total of $71.1 million has been paid to holders of Allowed Impaired
      Claims through June 30, 2007. In conjunction with the authorized Distributions,
      as of June 30, 2007, the Liquidation Trust held a total of $2.7 million of
      Available Cash for Distribution to holders of Impaired Claims, including the
      $2.3 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.





11




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.




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.





12




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 (the “Fleet Settlement”).
      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
      an
      $11.0 million reserve established pursuant to a previous stipulation between
      the
      Liquidation Trust and Fleet (the “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.





Pursuant
      to a scheduling order issued by the Court of Appeals during March 2007, briefing
      in the Committee Action appeal was completed subsequent to June 30, 2007. Oral
      argument has not yet been scheduled. The various remaining defendants are
      vigorously opposing this action. 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 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
      June 30, 2007, 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 June 2005
      award to the Liquidation Trust of $1.0 million. The defendant further appealed
      the affirmation by the District Court to the Court of Appeals. Oral argument
      occurred during March 2007. 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.  Reconsideration by the Bankruptcy Court has not yet been scheduled. 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.





**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 June 30, 2007, a total of 14 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
      June 30, 2007 and September 30, 2006 and for the three months and the nine
      months ended June 30, 2007 and June 30, 2006, 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 June 30, 2007 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****June
                30, 2007**
            
            **June
                30, 2006**Fleet
                settlement accrual
            
            $
            -
            
            $
            (4,750
            )(Decrease)
                        in estimated fair value of preference receivables,
                        net
            
            
            (663
            )
            
            (4
            )Interest
                income and net other increases
            
            
            238
            
            
            284Net
                (decrease) in net assets in liquidation
            
            $
            (425
            )
            $
            (4,470
            )**($
                in thousands)**
            
            **For
                the nine months ended****June 30, 2007**
            
            
            **June 30, 2006**Fleet
                settlement accrual
            
            $
            -
            
            $
            (4,750
            )(Decrease)/increase
                in estimated fair value of preference receivables, net
            
            
            (663
            )
            
            31Distributions
                authorized
            
            
            (187
            )
            
            (6,679
            )Interest
                income and net other increases
            
            
            698
            
            
            780Net
                (decrease) in net assets in liquidation
            
            $
            (152
            )
            $
            (10,618
            )





**A.** **Fleet
      settlement accrual**





As
      of
      June 30, 2006, based on an agreement in principle arrived at with Fleet Retail
      Finance Inc. (“Fleet”) and with General Electric Credit Corporation (“GECC”)
      during August 2006 (see Part II, Item 1. “Legal Proceedings”, below), the
      Liquidation Trust determined that recording an estimated loss totaling $8.3
      million, consistent with the total amount of the settlement reached in
      principle, was necessary. During the three months and the nine months ended
      June
      30, 2006, the Liquidation Trust therefore recorded a decrease in net assets
      in
      liquidation of $4.8 million (in addition to an accrual of $3.5 million recorded
      previously), increasing the liability designated as the Fleet settlement accrual
      to a total of $8.3 million. The settlement amount was paid during September
      2006.





No
      comparable events occurred during the three months or the nine months ended
      June
      30, 2007.





**B.** **Estimated
      fair value of preference receivables, net**





Most
      of
      the value of preference receivables consists of the sole remaining preference
      recovery action being actively pursued, net of estimated costs of recovery.
      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. 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 (see Part II, Item 1., “Legal Proceedings”, below). The Liquidation
      Trust and its counsel intend to vigorously pursue collection of the original
      judgment. However, during the three months ended June 30, 2007, based on the
      content of the ruling and on the status of negotiations with the defendant,
      the
      Liquidation Trust has reduced its current estimate of the fair value of
      preference receivables, net, from $0.9 million to $0.2 million, consistent
      with
      generally accepted accounting principles. Changes in the estimated fair value
      of
      preference receivables during the nine months ended June 30, 2007, other than
      for this case, were nominal.





The
      estimated fair value of preference receivables was adjusted slightly during
      the
      three months ended June 30, 2006, and during the nine months ended
      June 30, 2006 based on settlements achieved in excess of previously
      estimated amounts as of June 30, 2006, offset by an increase in estimated
      costs of recovery which occurred principally as of December 31, 2005. Costs
      of recovery during the three months ended December 31, 2005 included
      contingent fees of $0.1 million payable to preference collections counsel
      with respect to additional value the Liquidation Trust recognized from waivers
      of otherwise valid Impaired Claims obtained in the course of preference
      settlements. The Liquidation Trust recognizes additional value from such
      Impaired Claims waivers with each additional Distribution, because Impaired
      Claims waivers decrease the amount of Claims the Liquidation Trust must pay
      in
      each subsequent Distribution. The $0.1 million of additional contingent
      fees recognized during the three months ended December 31, 2005 were
      related to the Distribution paid during December 2005.




15




**C.** **Distributions
      authorized**





No
      new
      interim Distribution was authorized during the three months or the nine months
      ended June 30, 2007. Distributions at the cumulative rate of 10.2911%, totaling
      $0.2 million, were authorized during the three months ended March 31, 2007
      to
      holders of $2.0 million of Impaired Claims newly allowed during the
      period.





No
      new
      interim Distribution was authorized during the three months ended June 30,
      2006;
      however, included in Distributions authorized for the three months ended March
      30, 2006, the Liquidation Trust paid $0.1 million of applicable taxes on certain
      calendar year 2005 taxable net income and gain allocable to holders of Disputed
      Impaired Claims on behalf of such holders (the “2005 Tax Payment”). During
      November 2005, the Liquidation Trust authorized a new interim 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 of cash proceeds from 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.




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





Interest
      income and net other increases during the periods shown above consisted
      primarily of interest income from the Liquidation Trust’s cash and cash
      equivalents.




16





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





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


**($
      in thousands)**


**For
                the nine months ended****June
                30, 2007**
            
            **June
                30, 2006**Cash
                receiptsCollection
                of committee action settlement
            
            $
            -
            
            $
            7,000Preference
                collections, before costs
                of recovery
            
            
            80
            
            
            199Interest
                income
            
            
            688
            
            
            768Other
                receipts
            
            
            605
            
            
            12Total
                cash receipts
            
            
            1,373
            
            
            7,979Cash
                disbursementsOperating
                expenses
            
            
            333
            
            
            438Legal
                and professional feesLiquidation
                Trust operations
            
            
            139
            
            
            208Litigation
            
            
            51
            
            
            359Preference
                recoveries
            
            
            25
            
            
            179(Voided)
                claims checks, net
            
            
            (24
            )
            
            (79
            )Total
                cash disbursements
            
            
            524
            
            
            1,105Distributions
                paid
            
            
            189
            
            
            6,480Increase
                in cash and cash equivalents
            
            $
            660
            
            $
            394




**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
      nine months ended June 30, 2007 and the nine months ended June 30, 2006 were
      nominal, resulting from collections efforts on recently settled cases and
      certain default judgments issued. With the exception of one substantial case,
      discussed under “Estimated fair value of preference receivables, net”, Part I,
      Item 2.II.B., above, no preference actions remain to be litigated as of June
      30,
      2007. Future preference receipts, other than from this one case, are expected
      to
      be insignificant.





Other
      receipts during the nine months ended June 30, 2007 related primarily to
      collection of a settlement with certain former counsel to the Debtors in
      connection with the 1997 Transaction (as defined in Part II, Item 1., “Legal
      Proceedings”, below).





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





Operating
      expenses during the nine months ended June 30, 2007 were somewhat lower than
      those during the nine months ended June 30, 2006, 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, and has declined significantly during the nine months ended
      June 30, 2007 as compared to the nine months ended June 30, 2006. A significant
      portion of operating expenses for the nine months ended June 30, 2007 and for
      the nine months ended June 30, 2006 consisted of annual insurance premiums
      for
      the Liquidation Trust, in amounts comparable to payments during the preceding
      years.




17





**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
      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.





The
      litigation fees paid for the Committee Action during the nine months ended
      June
      30, 2007 were significantly less than those paid during the nine months ended
      June 30, 2006. Fees paid during the nine months ended June 30, 2006 primarily
      related to initial appeals matters in the Committee Action, in addition to
      a
      $0.1 million payment to an expert in key matters. Fees paid during the nine
      months ended June 30, 2007, however, related mainly to the Fleet
      settlement.





Total
      preference recovery fees during the nine months ended June 30, 2007 were not
      comparable to such fees during the nine months ended June 30, 2006. 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 the nine
      months ended June 30, 2007, preference recovery fees related to collection
      of a
      number of recently settled cases and certain default judgments issued. During
      the nine months ended June 30, 2006, the Liquidation Trust paid contingent
      fees
      of $0.1 million to its preference collections counsel with respect to additional
      value the Liquidation Trust recognized from waivers of otherwise valid Impaired
      Claims obtained in the course of preference settlements. The Liquidation Trust
      recognizes additional value from such Impaired Claims waivers with each
      additional Distribution, because Impaired Claims waivers decrease the amount
      of
      Claims the Liquidation Trust must pay in each subsequent Distribution.
      Substantially all of the Liquidation Trust’s preference recovery fees for the
      nine months ended June 30, 2006 were additional contingent fees paid relative
      to
      the Distributions paid during December 2005, rather than relating to preference
      collections received during the period.





**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. No new
      interim Distribution was authorized or paid during the nine months ended June
      30, 2007; however, holders of $2.0 million of newly Allowed Impaired Claims
      received payments at cumulative Distribution rate of 10.2911%.





During
      November 2005, the Liquidation Trust authorized a new interim 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. In addition, during the nine months ended
      June 30, 2006, the Liquidation Trust paid the 2005 Tax Payment.





18




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





**A.** **Assets**




The
      Liquidation Trust’s cash and cash equivalents balance of $19.4 million as of
      June 30, 2007 and $18.7 million as of September 30, 2006 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 $2.7 million as of June 30, 2007 was based primarily
      on the cumulative Distribution rate of 10.2911%, for $23.1 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 required amount of Available Cash of $2.9 million as of September
      30,
      2006 was based primarily on the cumulative Distribution rate of 10.2911%, for
      $25.1 million of Disputed Impaired Claims (at their estimated value for reserve
      purposes), as well as unpaid Distributions to holders of Allowed Impaired
      Claims. 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 $0.5 million
      from September 30, 2006 to June 30, 2007, to a balance of $10.7 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 $0.5 million, to a balance of $1.5 million
      as
      of June 30, 2007, compared to September 30, 2006. The decrease is primarily
      due
      to disbursements totaling $0.5 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.





**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.





19




**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 June 30, 2007.





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”).




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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, 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 (the “Fleet Settlement”).
      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
      an
      $11.0 million reserve established pursuant to a previous stipulation between
      the
      Liquidation Trust and Fleet (the “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.





Pursuant
      to a scheduling order issued by the Court of Appeals during March 2007, briefing
      in the Committee Action appeal was completed during July 2007. Oral argument
      has
      not yet been scheduled. The various remaining defendants are vigorously opposing
      this action. 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 substantial recovery, the Liquidation Trust cannot
      predict with any certainty the outcome of the litigation or the amount or range
      of potential recoveries.




21




Bankruptcy
      Court Case





As
      of
      June 30, 2007, 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 June 2005
      award to the Liquidation Trust of $1.0 million. The defendant further appealed
      the affirmation by the District Court to the Court of Appeals. Oral argument
      occurred during March 2007. 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.  Reconsideration
      by the Bankruptcy Court has not yet been scheduled. 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.





**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




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**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.




HECHINGER
                LIQUIDATION TRUSTDate:
                August 14, 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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