**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 March 31, 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
            Noo




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 filero
            Accelerated filero
            Non-accelerated filerx





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


Yes
                  o
              Nox




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
              Noo




**HECHINGER
      LIQUIDATION TRUST**


**INDEX
      TO FORM 10-Q**


**FOR
      THE QUARTERLY PERIOD ENDED MARCH 31, 2007**




**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 and Results
                    of Operations
                14Item
                    3.
                
                Quantitative
                    and Qualitative Disclosures About Market Risk
                19Item
                    4.
                
                Controls
                    and Procedures
                19PART
                    II. OTHER INFORMATION:Item
                    1.
                
                Legal
                    Proceedings
                19Item
                    1A.
                
                Risk
                    Factors
                21Item
                    2.
                
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                21Item
                    3.
                
                Defaults
                    Upon Senior Securities
                21Item
                    4.
                
                Submission
                    of Matters to a Vote of Security Holders
                21Item
                    5.
                
                Other
                    Information
                21Item
                    6.
                
                Exhibits
                21SIGNATURES
                22INDEX
                    TO EXHIBITS
                23
 
 
 2


**PART
      I - FINANCIAL INFORMATION**








**Item
      1. Financial Statements**





**Hechinger
      Liquidation Trust**


**Unaudited
      Statements of Net Assets in Liquidation**




**($
      in thousands)**


**As
                  of**
              
              **As
                  of****March
                  31,**
                **2007**
              
              **September
                  30,**
                **2006****Assets**Cash
                  and cash equivalentsCash
                  designated as available for distributionto
                  holders of impaired claims
              
              $
              2,681
              
              $
              2,872Reserved
                  cash
              
              
              10,777
              
              
              11,193Other
                  cash
              
              
              5,772
              
              
              4,658Total
                  cash and cash equivalents
              
              
              19,230
              
              
              18,723Preference
                  receivables (net of costs ofrecovery
                  of $129 and $147,respectively)
              
              
              871
              
              
              853Other
                  assets
              
              
              2
              
              
              674Total
                  assets
              
              
              20,103
              
              
              20,250**Liabilities**Unimpaired
                  and convenience claims payable
              
              
              1,337
              
              
              1,337Uncashed
                  claims checks
              
              
              455
              
              
              431Distributions
                  payable
              
              
              421
              
              
              424Estimated
                  costs of liquidationWind-down
                  reserve
              
              
              1,285
              
              
              1,682Litigation
                  reserve
              
              
              327
              
              
              371Total
                  liabilities
              
              
              3,825
              
              
              4,245**Net
                  Assets in Liquidation**
              
              $
              16,278
              
              $
              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**
                    
                    ****For
                        the three****
                      **months
                          ended****March
                        31, 2007**
                    
                    **March
                        31, 2006**Increase/(decrease)
                        in Net Assets in Liquidation(Decrease)/increase
                        in estimated fair valueof
                        preference receivables, net
                    
                    $
                    (1
                    )
                    $
                    66Interest
                        income
                    
                    
                    221
                    
                    
                    252Other
                        increases
                    
                    
                    3
                    
                    
                    2Net
                        increase in Net Assets in Liquidationbefore
                        distributions authorized
                    
                    
                    223
                    
                    
                    320Distributions
                        authorized
                    
                    
                    (187
                    )
                    
                    (53
                    )Net
                        increase in Net Assets in Liquidationafter
                        distributions authorized
                    
                    
                    36
                    
                    
                    267Net
                        Assets in Liquidation at beginning of period
                    
                    
                    16,242
                    
                    
                    20,450Net
                        Assets in Liquidation at end of period
                    
                    $
                    16,278
                    
                    $
                    20,717
  
 **For
                          the six**
                        **months
                            ended**
                      **March
                        31, 2007**
                    
                    **For
                          the six**
                        **months
                            ended**
                      **March
                        31, 2006**Increase/(decrease)
                        in Net Assets in LiquidationIncrease
                        in estimated fair valueof
                        preference receivables, net
                    
                    $
                    —
                    
                    $
                    35Interest
                        income
                    
                    
                    455
                    
                    
                    486Other
                        increases
                    
                    
                    5
                    
                    
                    10Net
                        increase in Net Assets in Liquidationbefore
                        distributions authorized
                    
                    
                    460
                    
                    
                    531Distributions
                        authorized
                    
                    
                    (187
                    )
                    
                    (6,679
                    )Net
                        increase/(decrease) in Net Assets in Liquidationafter
                        distributions authorized
                    
                    
                    273
                    
                    
                    (6,148
                    )Net
                        Assets in Liquidation at beginning of period
                    
                    
                    16,005
                    
                    
                    26,865Net
                        Assets in Liquidation at end of period
                    
                    $
                    16,278
                    
                    $
                    20,717







See
      accompanying notes to unaudited financial statements.




4




**Hechinger
      Liquidation Trust**


**Unaudited
      Statements of Cash Receipts and Disbursements**




**($
      in thousands)**




**For
                      the six**
                    **months
                        ended**
                  **March
                    31, 2007**
                
                **For
                      the six**
                    **months
                        ended**
                  **March
                    31, 2006**Cash
                    receiptsCollection
                    of committee action settlement
                
                $
                —
                
                $
                7,000Preference
                    collections, beforecosts
                    of recovery
                
                
                78
                
                
                118Interest
                    income
                
                
                455
                
                
                486Other
                    receipts
                
                
                599
                
                
                10Total
                    cash receipts
                
                
                1,132
                
                
                7,614Cash
                    disbursementsCosts
                    of liquidationOperating
                    expenses
                
                
                294
                
                
                400Legal
                    and professional feesLiquidation
                    Trust operations
                
                
                102
                
                
                174Litigation
                
                
                45
                
                
                269Preference
                    recoveries
                
                
                20
                
                
                152(Reissued)/voided
                    claims checks, net
                
                
                (25
                )
                
                27Total
                    cash disbursements
                
                
                436
                
                
                1,022Increase
                    in cash and cash equivalentsbefore
                    distributions paid
                
                
                696
                
                
                6,592Distributions
                    paid
                
                
                189
                
                
                6,480Increase
                    in cash and cash equivalents
                
                
                507
                
                
                112Cash
                    and cash equivalentsat
                    beginning of period
                
                
                18,723
                
                
                26,649Cash
                    and cash equivalentsat
                    end of period
                
                $
                19,230
                
                $
                26,761




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
      March 31, 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”).





**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.





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
      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**
              
              **As
                  of****March
                  31,**
                **2007**
              
              **September
                  30,**
                **2006**Distributions
                  payable
              
              $
              421
              
              $
              424Reserve
                  for remaining disputed impairedclaims
                  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 $0.9
      million, net of estimated costs of recovery of $0.1 million, as of March 31,
      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 United States
      District Court for the District of Delaware (the “District Court”) upheld the
      Bankruptcy Court ruling in its entirety. Although the defendant has appealed
      the
      affirmation by the District Court to the United States Court of Appeals for
      the
      Third Circuit (the “Court of Appeals”), the Liquidation Trust believes that
      ultimate collection of the full award is likely (see Note
      12).





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.





**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.




8





**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**
              
              **As
                  of****March
                  31,**
                **2007**
              
              **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 March 31, 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 March 31, 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.





**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





**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 March 31, 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.**
            **Bankruptcy
                Reserves Required**





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


**($
                  in thousands)**
              
              **As
                  of**
              
              **As
                  of****March
                  31,**
                **2007**
              
              **September
                  30,**
                **2006**Liability
                  reservesWind-down
              
              $
              1,285
              
              $
              1,682Litigation
              
              
              327
              
              
              371Unimpaired
                  and convenience claims
              
              
              1,337
              
              
              1,337Uncashed
                  claims checks
              
              
              455
              
              
              431Total
                  liability reserves
              
              
              3,404
              
              
              3,821Contingency
                  reservesLitigation
                  appeals provision
              
              
              4,000
              
              
              4,000Excess
                  disputed unimpaired claims
              
              
              300
              
              
              300Preference
                  settlement claims
              
              
              73
              
              
              72Minimum
                  reserve
              
              
              3,000
              
              
              3,000
 
 Total
                  contingency reserves
              
              
              7,373
              
              
              7,372Total
                  reserves
              
              $
              10,777
              
              $
              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 will be required.





10


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**
              
              **As
                  of****March
                  31,**
                **2007**
              
              **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 March 31,
      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 March 31, 2007. In conjunction with the authorized Distributions,
      as of March 31, 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.





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 District Court, and in 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.”





11


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 “Fleet
      Settlement”). 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.





Pursuant
      to a scheduling order issued by the Court of Appeals during March 2007, the
      Liquidation Trust filed its appellate brief in the Committee Action subsequent
      to March 31, 2007. 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
      March 31, 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 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 March 31, 2007. Oral argument occurred
      during March 2007, and a Court of Appeals decision in this case is expected
      in
      2007. Prosecution of all other significant preference litigation has been
      completed.





12


**Litigation
      and Other Proceedings Against the Liquidation Trust**





Settling
      Claims filed with the Bankruptcy Court is the ordinary course of business for
      the Liquidation Trust. As of March 31, 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
      March 31, 2007 and September 30, 2006 and for the three months and the six
      months ended March 31, 2007 and March 31, 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 March 31, 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****March
                    31, 2007**
                
                **March
                    31, 2006**Distributions
                    authorized
                
                $
                (187
                )
                $
                (53
                )(Decrease)/increase
                    in estimated fair valueof
                  preference receivables, net
                
                
                (1
                )
                
                66Interest
                    income and net other increases
                
                
                224
                
                
                254Net
                    increase in net assets in liquidation
                
                $
                36
                
                $
                267
  **($
                    in thousands)**
                
                **For
                    the six months ended****March
                    31, 2007**
                
                **March
                    31, 2006**Distributions
                    authorized
                
                $
                (187
                )
                $
                (6,679
                )Increase
                    in estimated fair valueof
                  preference receivables, net
                
                
                —
                
                
                35Interest
                    income and net other increases
                
                
                460
                
                
                496Net
                    increase/(decrease) in net assets in liquidation
                
                $
                273
                
                $
                (6,148
                )
  **A.**
                **Distributions
                    authorized**





No
      new
      interim Distribution was authorized during the three months or the six months
      ended March 31, 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 March 31,
      2006; however, included in Distributions authorized for the three months ended
      March 31, 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.





**B.**
            **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.





15


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





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




**($
                  in thousands)**
              
              **For
                  the six months ended****March
                  31, 2007**
              
              **March
                  31, 2006**Cash
                  receiptsCollection
                  ofcommittee
                  action settlement
              
              $
              —
              
              $
              7,000Preference
                  collections, beforecosts
                  of recovery
              
              
              78
              
              
              118Interest
                  income
              
              
              455
              
              
              486Other
                  receipts
              
              
              599
              
              
              10Total
                  cash receipts
              
              
              1,132
              
              
              7,614Cash
                  disbursementsOperating
                  expenses
              
              
              294
              
              
              400Legal
                  and professional feesLiquidation
                  Trust operations
              
              
              102
              
              
              174Litigation
              
              
              45
              
              
              269Preference
                  recoveries
              
              
              20
              
              
              152(Reissued)/voided
                  claims checks, net
              
              
              (25
              )
              
              27Total
                  cash disbursements
              
              
              436
              
              
              1,022Distributions
                  paid
              
              
              (189
              )
              
              (6,480
              )Increase
                  in cash and cash equivalents
              
              $
              507
              
              $
              112


**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
      six
      months ended March 31, 2007 and the six months ended March 31, 2006 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 March 31, 2007. 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 during the six months ended March 31, 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).





16








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





Operating
      expenses during the six months ended March 31, 2007 were somewhat lower than
      those during the six months ended March 31, 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 six months ended
      March 31, 2007 as compared to the six months ended March 31, 2006. A significant
      portion of operating expenses for the six months ended March 31, 2007 and for
      the six months ended March 31, 2006 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.





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 six months ended March
      31, 2007 were significantly less than those paid during the six months ended
      March 31, 2006. Fees paid during the six months ended March 31, 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 six
      months ended March 31, 2007, however, related mainly to the Fleet
      settlement.





Total
      preference recovery fees during the six months ended March 31, 2007 were not
      comparable to such fees during the six months ended March 31, 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 six
      months ended March 31, 2007, preference recovery fees related to collection
      of a
      number of recently settled cases and certain default judgments issued. During
      the six months ended March 31, 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
      six months ended March 31, 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 six months ended March
      31, 2007; however, holders of $2.0 million of 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 six months ended
      March 31, 2006, the Liquidation Trust paid the 2005 Tax Payment.





17




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





**A.**
            **Assets**




The
      Liquidation Trust’s cash and cash equivalents balance of $19.2 million as of
      March 31, 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 March 31, 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 $0.4 million
      from September 30, 2006 to March 31, 2007, to a balance of $10.8 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 $0.4 million, to a balance of $1.6 million
      as
      of March 31, 2007, compared to September 30, 2006. The decrease is primarily
      due
      to disbursements totaling $0.4 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.





18


**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 March 31, 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”).





19


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.





Pursuant
      to a scheduling order issued by the Court of Appeals during March 2007, the
      Liquidation Trust filed its appellate brief in the Committee Action during
      April
      2007. 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.








20








Bankruptcy
      Court Case





As
      of
      March 31, 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 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 March 31, 2007. Oral argument occurred
      during March 2007, and a Court of Appeals decision in this case is expected
      in
      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 Trustee  32.1
            Liquidation Trustee’s Certification Pursuant
              to 18 U.S.C. Section 1350








21


**SIGNATURES**





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




HECHINGER
              LIQUIDATION TRUSTDate: May
              14,
              2007
            By:
            /s/ Conrad
              F.
              HockingName:Conrad
              F. HockingTitle:Liquidation
              Trustee







22


**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






23