UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Check one

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2005 or
o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


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

for the quarterly period ended June 30, 2006 or


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

Commission file number 000-50160

HECHINGER LIQUIDATION TRUST

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) 52-7230151 (I.R.S. Employer Identification No.)


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)

405 East Gude Drive, Suite 206, Rockville, Maryland (Address of principal executive offices) 20850 (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 þ		No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or ~~(as~~a ~~defined~~non-accelerated infiler. 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 þ

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


Yes o		No þ

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 þ		No o

HECHINGER LIQUIDATION TRUST INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED ~~MARCH~~JUNE 3130, ~~2005~~2006

Description	Page
PART I. FINANCIAL INFORMATION:
Item 1.Financial Statements
Item 1. Financial Statements
Unaudited Statements of Net Assets in Liquidation	3	3
Unaudited Statements of Changes in Net Assets in Liquidation	4	4
Unaudited Statements of Cash Receipts and Disbursements	5	5
Notes to Unaudited Financial Statements	6	6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.Quantitative and Qualitative Disclosures About Market Risk	20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.Controls and Procedures	20
Item 4. Controls and Procedures		21
PART II. OTHER INFORMATION:
Item 1.Legal Proceedings	21
Item 1. Legal Proceedings		21
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3.Defaults Upon Senior Securities	21
Item 3. Defaults Upon Senior Securities		22
Item 4.Submission of Matters to a Vote of Security Holders	22
Item 4. Submission of Matters to a Vote of Security Holders		22
Item 5.Other Information	22
Item 5. Other Information		22
Item 6.Exhibits	22
Item 6. Exhibits		22
SIGNATURES	23	23
INDEX TO EXHIBITS	24	24

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Hechinger Liquidation Trust Unaudited Statements of Net Assets in Liquidation

	As of		As of
($ in thousands)	~~March~~June 3130, ~~2005~~2006		September 30, ~~2004~~2005
Assets
Cash and cash equivalents
Cash designated as available for distribution	$	2,792	$	3,388
Cash designated as available for distribution to holders of impaired claims	$	3,254	$	3,054
Reserved cash		2321,~~150~~298		2122,~~471~~206
Restricted cash		1,961		9,312
Other cash		2,491		1,389
Other cash		7,029		204
Total cash and cash equivalents		27,043		26,649
Total cash and cash equivalents		34,932		34,375
Committee action settlement receivable		—		7,000
Preference receivables (net of costs of recovery of $151 and $1,029, respectively)		363		3,149
Preference receivables (net of costs of recovery of $133 and $152, respectively)		880		869
Other assets		~~1,106~~3		~~160~~3
Total assets		3627,~~401~~926		3734,~~684~~521
Liabilities
Unimpaired and convenience claims payable		21,~~937~~337		21,~~970~~337
Uncashed claims checks		~~265~~440		~~142~~361
Distributions payable		~~284~~491		~~228~~292
Estimated costs of liquidation
Wind-down reserve		~~2,196~~790		31,~~518~~436
Litigation reserve		~~1,272~~371		~~2,384~~730
Total liabilities		6,954		9,242
Fleet settlement accrual		8,250		3,500
Net Assets in Liquidation	$	29,447	$	28,442
Total liabilities		11,679		7,656
Net Assets in Liquidation	$	16,247	$	26,865

See accompanying notes to unaudited financial statements.

Hechinger Liquidation Trust Unaudited Statements of Changes in Net Assets in Liquidation

	For the three			For the three
	months ended			months ended
($ in thousands)	~~March~~June 3130, ~~2005~~2006			~~March~~June 3130, ~~2004~~2005
Increase/(decrease) in Net Assets in Liquidation
Decrease in estimated fair value of preference receivables, net	$	(67	)	$	(660	)
Fleet settlement accrual	$	(4,750	)	$	(3,500	)
(Decrease)/increase in estimated fair value of preference receivables, net		(4	)		396
Increase in estimated costs of liquidation:
Wind-down reserve		—			(~~1,540~~124	)
Litigation reserve		—			(2,000	)
Interest income		282			187
Interest income		138			62
Other increases		2			104
Other increases		998			732
Net decrease in Net Assets in Liquidation before distributions authorized		(4,470	)		(2,937	)
Net increase/(decrease) in Net Assets in Liquidation before distributions authorized		1,069			(3,406	)
Distributions authorized		—			( 7,055	)
Distributions authorized		(142	)		(329	)
Net decrease in Net Assets in Liquidation after distributions authorized		(4,470	)		(9,992	)
Net increase/(decrease) in Net Assets in Liquidation after distributions authorized		927			(3,735	)
Net Assets in Liquidation at beginning of period		20,717			29,447
Net Assets in Liquidation at beginning of period		28,520			37,004
Net Assets in Liquidation at end of period	$	16,247		$	19,455
Net Assets in Liquidation at end of period	$	29,447		$	33,269

	For the six			For the six
	For the nine			For the nine
	months ended			months ended
	March 31, 2005			March 31, 2004
	June 30, 2006			June 30, 2005
Increase/(decrease) in Net Assets in Liquidation
(Decrease)/increase in estimated fair value of preference receivables, net	$	(67	)	$	3,090
Fleet settlement accrual	$	(4,750	)	$	(3,500	)
Increase in estimated fair value of preference receivables, net		31			329
Decrease in estimated fair value of unimpaired and convenience claims payable		—			23
Increase in estimated costs of liquidation:
Wind-down reserve		—			(~~1,540~~124	)
Litigation reserve		—			(2,000	)
Interest income		768			447
Decrease in estimated fair value of unimpaired and convenience claims payable		23			—
Other increases		12			1,115
Interest income		260			126
Net decrease in Net Assets in Liquidation before distributions authorized		(3,939	)		(1,710	)
Other increases		1,011			772
Distributions authorized		(6,679	)		(7,277	)
Net increase in Net Assets in Liquidation before distributions authorized		1,227			448
Net decrease in Net Assets in Liquidation after distributions authorized		(10,618	)		(8,987	)
Distributions authorized		(222	)		(1,755	)
Net Assets in Liquidation at beginning of period		26,865			28,442
Net increase/(decrease) in Net Assets in Liquidation after distributions authorized		1,005			(1,307	)
Net Assets in Liquidation at end of period	$	16,247		$	19,455
Net Assets in Liquidation at beginning of period		28,442			34,576
Net Assets in Liquidation at end of period	$	29,447		$	33,269

See accompanying notes to unaudited financial statements.

Hechinger Liquidation Trust ~~Unaudited Statements of Cash Receipts and Disbursements~~

	For the six			For the six
	months ended			months ended
($ in thousands)	March 31, 2005			March 31, 2004
Cash receipts
Preference collections, before costs of recovery	$	3,670		$	6,222
Interest income		260			126
Other receipts		65			62
Total cash receipts		3,995			6,410
Cash disbursements
Costs of liquidation
Legal and professional fees
Litigation		1,112			2,162
Preference recoveries		951			1,010
Liquidation Trust operations		383			1,087
Operating expenses		939			977
Unimpaired and convenience claims		10			270
Reissued/(voided) claims checks, net		(123	)		212
Total cash disbursements		3,272			5,718
Increase in cash and cash equivalents before distributions paid		723			692
Distributions paid		166			2,112
Increase/(decrease) in cash and cash equivalents		557			(1,420	)
Cash and cash equivalents at beginning of period		34,375			46,837
Cash and cash equivalents at end of period	$	34,932		$	45,417

Unaudited Statements of Cash Receipts and Disbursements

See accompanying notes to unaudited financial statements.


	For the nine			For the nine
	months ended			months ended
($ in thousands)	June 30, 2006			June 30, 2005
Cash receipts
Collection of committee action settlement	$	7,000		$	—
Preference collections, before costs of recovery		199			3,742
Interest income		768			447
Other receipts		12			691

Total cash receipts		7,979			4,880


Cash disbursements
Costs of liquidation
Operating expenses		438			1,497
Legal and professional fees
Litigation		359			1,203
Preference recoveries		179			1,156
Liquidation Trust operations		208			546
Unimpaired and convenience claims		—			11
Voided claims checks, net of reissues		(79	)		(153	)

Total cash disbursements		1,105			4,260


Increase in cash and cash equivalents before distributions paid		6,874			620

Distributions paid		(6,480	)		(7,242	)


Increase/(decrease) in cash and cash equivalents		394			(6,622	)

Cash and cash equivalents at beginning of period		26,649			34,375


Cash and cash equivalents at end of period	$	27,043		$	27,753

5See accompanying notes to unaudited financial statements.

~~Hechinger Liquidation Trust~~5 ~~Notes to Unaudited Financial Statements~~

1.Hechinger ~~Background~~Liquidation ~~and~~Trust Notes ~~Basis~~to ofUnaudited ~~Presentation~~Financial Statements

1. Background and Basis of Presentation

~~Hechinger Liquidation Trust (the “Liquidation Trust”) was established effective October 26,~~Background ~~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~~Hechinger 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~~was ~~preference,~~established ~~fraudulent~~effective ~~conveyance and other avoidance actions; (iii)~~October ~~resolve~~26, ~~either consensually or through litigation, all disputed~~ ~~claims~~2001 ~~asserted against~~ (the ~~Debtors (~~“~~Disputed~~Effective ~~Claims~~Date”), ~~pursuant~~in toaccordance with the ~~Plan;~~Revised ~~and~~First ~~(iv) make~~Amended ~~all distributions~~Consolidated ~~required~~Plan ~~under~~of Liquidation (the ~~Plan (~~“~~Distributions~~Plan”), ~~and~~for ~~payments~~Hechinger toInvestment ~~holders~~Company of ~~claims~~Delaware, ~~allowed under~~Inc. ~~the terms of the Plan (“Allowed Claims”~~ and, ~~together~~affiliates ~~with~~ (the ~~Disputed Claims, the~~ “~~Claims~~Debtors”)., ~~The~~confirmed ~~Liquidation Trust will terminate upon the earlier of (a) the fulfillment of its purpose~~ by the ~~liquidation~~United ofStates ~~all~~Bankruptcy ofCourt ~~its~~for ~~assets and~~ the ~~distribution~~District of ~~the~~Delaware ~~proceeds of~~ (the ~~liquidation~~“Bankruptcy ~~thereof~~Court”) inby ~~accordance~~an ~~with~~order ~~the~~dated ~~Plan, or (b) by~~ October 265, ~~2005, unless the Bankruptcy Court approves an extension of the term~~2001.

~~Pursuant~~The Liquidation Trust has no authority to engage in any trade or business. The purpose of the Liquidation ~~Bankruptcy~~Trust ~~Code,~~is ~~certain~~to ~~types~~(i) liquidate any and all remaining assets of ~~Allowed~~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”), ~~will~~pursuant beto ~~paid~~the inPlan; ~~full~~and (iv) make all distributions required under the Plan (“Distributions”), and payments to holders of claims allowed under the terms of the Plan. ~~Such~~(“Allowed Claims” ~~are~~and, ~~therefore~~together ~~referred~~with tothe asDisputed ~~“Unimpaired~~Claims, the “Claims.”). The ~~Plan~~Liquidation ~~defines~~Trust ~~which~~will terminate upon the earlier of (a) the fulfillment of its ~~types~~purpose by the liquidation of ~~Claims~~all ~~are~~of ~~paid~~its assets and the distribution of the proceeds of the liquidation thereof in ~~full~~accordance with the Plan, or (b) by October 26, 2006, unless the Bankruptcy Court approves an extension of this term.

~~The~~Pursuant ~~Liquidation~~to ~~Trust exists primarily for~~ the ~~benefit~~Bankruptcy ofCode, ~~the~~certain ~~majority~~types of ~~claimants~~Allowed ~~who~~Claims will ~~not~~ be ~~repaid~~paid in full ~~for~~ under the ~~amounts the Debtors owed them as of the bankruptcy filing~~Plan. ~~These~~ Such Claims are therefore referred to as “~~Impaired~~Unimpaired Claims.” ~~because~~The ~~the rights of the claimants have been impaired by the Debtors’ bankruptcy. Each holder of an Allowed Claim in the~~ Plan’s ~~Class 4A~~defines ~~(Senior~~which ~~Unsecured~~types 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~~are ~~Allowed.~~paid ~~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~~full.

The ~~holders~~Liquidation ofTrust ~~Beneficial~~exists ~~Interests~~primarily ~~receive~~for ~~all~~the ~~remaining~~benefit ~~net~~of ~~proceeds~~the majority of ~~the~~claimants ~~Liquidation~~who will ~~Trust,~~not ifbe ~~any,~~repaid ~~after~~in full for the ~~expenses~~amounts ~~and~~the ~~all~~Debtors ~~creditors~~owed them as of the ~~Liquidation~~bankruptcy ~~Trust,~~filing. ~~including Allowed~~These ~~Unimpaired~~Claims ~~and~~are ~~Convenience~~referred ~~Claims~~to ~~(certain~~as ~~small~~“Impaired Claims” tobecause bethe ~~paid~~rights atof 7the claimants have been impaired by the Debtors’ bankruptcy.5% Each holder of ~~their~~an Allowed ~~amounts~~ Claim in ~~accordance with~~ the Plan)’s ~~are~~Class 4A ~~paid~~(Senior Unsecured Claims), ~~and~~Class 4B ~~all~~(General ~~contingencies~~Unsecured ~~are~~Claims), ~~resolved.~~and ~~Holders~~Class 5 of(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 ~~Beneficial~~their ~~Interests~~Allowed ~~(i.e.,~~Impaired ~~each~~Claim ~~Class~~as compared to the total amount of all Impaired Claims) ~~have~~ultimately Allowed. When and to the ~~same~~extent Disputed ~~rights~~Impaired Claims become Allowed Impaired Claims, ~~except~~holders ~~with respect~~of tosuch ~~payment~~Claims become holders of Beneficial ~~Distributions~~Interests in accordance with the Plan.

~~Through~~The ~~March 31,~~holders ~~2005,~~of ~~the~~Beneficial ~~Liquidation~~Interests ~~Trust~~receive ~~has~~all ~~authorized~~remaining ~~Distributions~~net toproceeds ~~holders~~ of ~~Beneficial~~ ~~Interests~~the ~~(i.e.~~Liquidation Trust, toif ~~holders~~any, ofafter ~~Allowed~~the ~~Impaired~~expenses ~~Claims)~~and ofall ~~8.1%~~creditors of the ~~Allowed~~Liquidation ~~amount~~Trust, ofincluding Allowed ~~the~~Unimpaired ~~Impaired~~and Convenience Claims, ~~and~~(certain ~~established~~small aClaims ~~reserve~~to ofbe 8paid at 7.15% of their Allowed amounts in accordance with the ~~estimated~~Plan) ~~amount~~are paid, and all contingencies are resolved. Holders of ~~Disputed~~each ~~Impaired~~Class ~~Claims,~~of ~~based~~Beneficial onInterests ~~the~~(i.e., ~~estimated~~each ~~amount~~Class of ~~such~~Impaired Claims) ~~approved~~have by the ~~Bankruptcy~~same ~~Court~~rights, ~~for~~except ~~reserve~~with ~~purposes~~respect ~~(the~~to ~~“Disputed~~payment ~~Impaired~~of ~~Claims Reserve”)~~Distributions.

~~Basis~~ Through June 30, 2006, the Liquidation Trust has authorized Distributions to holders of Beneficial ~~Presentation~~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”).

~~The~~Basis ~~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~~Presentation ~~all assets~~

6 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~~6 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. The Statements of Changes in Net Assets in Liquidation primarily reflect any authorized Distributions to holders of Beneficial Interests and changes in the estimated fair value of the Liquidation Trust’s assets and liabilities. The Liquidation Trust’s fiscal year ends on September 30.

~~The~~and ~~accompanying~~liabilities, ~~unaudited~~including ~~financial~~the ~~statements~~projected ~~reflect~~total ~~all~~cost ~~adjustments,~~of ~~consisting~~liquidating ~~only~~the ofassets and winding down ~~normal~~the ~~recurring~~affairs ~~adjustments~~of ~~that~~the ~~are~~Liquidation Trust, at estimated fair value. Unimpaired Claims, to be paid in full, are reflected in the ~~opinion~~Statements of ~~the~~Net Assets in Liquidation ~~Trustee,~~as ~~necessary~~liabilities ~~for~~at aestimated ~~fair~~aggregate ~~statement~~settlement amounts. The unpaid amount of the ~~results~~authorized ~~for~~Distributions ~~the~~to ~~interim~~holders ~~periods~~of Allowed ~~presented~~Impaired Claims is also reflected as a liability. ~~Such~~In ~~financial~~addition, ~~statements~~liabilities ~~and~~include loss ~~these~~contingency ~~notes~~accruals ~~thereto~~for ~~should~~losses beconsidered ~~read~~probable inand ~~conjunction~~estimable. ~~with~~The ~~the~~Statements ~~audited~~of ~~Liquidation~~Changes ~~Trust financial~~in ~~statements~~Net asAssets ofin ~~September 30,~~Liquidation ~~2004~~primarily ~~and~~reflect ~~September 30,~~authorized ~~2003,~~Distributions to holders of Beneficial Interests and ~~for~~changes in the ~~fiscal~~estimated ~~years~~fair ~~ended September 30,~~value ~~2004~~of ~~and~~the ~~September 30,~~Liquidation ~~2003,~~Trust’s assets and liabilities, ~~for~~including ~~the~~changes ~~period~~resulting from ~~October 26~~significant events in, ~~2001~~or ~~(Effective Date)~~the ~~through~~resolution ~~September 30~~of, litigation ~~2002,~~pursued ~~and~~by the ~~notes~~Liquidation ~~thereto~~Trust. The Liquidation Trust’s fiscal year ends on September 30.

The ~~amounts~~accompanying ~~shown~~unaudited infinancial ~~this~~statements ~~document~~reflect ~~are~~all ~~rounded~~adjustments, ~~and~~consisting only of normal recurring adjustments that are, ~~therefore~~in ~~approximate~~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, 2005 and September 30, 2004, and for the fiscal years ended September 30, 2005, September 30, 2004 and September 30, 2003, and the notes thereto.

~~Certain~~The amounts in the financial statements as of September 30, 2004 and for the three months and six months ended March 31, 2004 have been reclassified to conform to the presentation as of March 31, 2005 and for the three months and six months ended March 31, 2005. Convenience Claims payable shown ~~separately~~ in ~~the~~this ~~financial~~document ~~statements~~are asrounded ~~of September 30, 2004 have been combined with Unimpaired Claims payable to conform to the presentation in the March 31, 2005 financial statements. Increases in the Wind-Down~~ and ~~Litigation Reserves, presented as an aggregate amount in the financial statements for the three months and six months ended March 31, 2004,~~ are ~~shown separately~~therefore ~~herein to conform with the presentation in the financial statements for the three months and six months ended March 31, 2005~~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 ~~certain~~ estimates and assumptions that affect ~~the~~ the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results are likely to differ from those estimates and those differences may be significant.

Cash and Cash Equivalents

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

7 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.

~~The Liquidation Trust incurs no taxable income or gain on its own behalf; therefore, no tax~~7 ~~provision is recorded in the financial statements of the Liquidation Trust.~~

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 1011).

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. ~~As such, Available Cash includes Distributions payable~~ (see ~~Note~~Notes 8) and ~~the Disputed Impaired Claims Reserve (see Note 10~~11). ~~Available Cash does not include Reserved Cash,~~ ~~Restricted Cash, or Other Cash, each further described below.~~

Available Cash consists of:

	As of		As of
($ in thousands)	~~March~~June 3130, ~~2005~~2006		September 30, ~~2004~~2005
Distributions payable	$	~~284~~491	$	~~228~~292
Reserve for remaining disputed impaired claims at 8.1%		2,508		3,160
Reserve for remaining disputed impaired claims at 10.2911% and 9.1%, respectively		2,763		2,762
Total available cash	$	23,~~792~~254	$	3,~~388~~054

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 1011 for details of specific reserves and their related amounts.

~~Restricted~~Other Cash ~~consists~~is of cash ~~held as collateral for a letter of credit~~ and cash ~~held~~ inequivalents annot ~~escrow~~designated ~~account. During January 2005, $7.4 million of Restricted Cash was released~~ to ~~Other~~ ~~Cash following~~ a ~~reduction~~specific inreserve ~~the~~or ~~letter of credit to a balance of $1~~fund.~~6 million, which~~ ~~resulted from settlement of the related secured Claim (see Note 6).~~

~~Other Cash is cash and cash equivalents not designated to a specific reserve or fund~~4. ~~Subsequent~~ toCommittee ~~March 31,~~Action ~~2005,~~Settlement ~~the Liquidation Trustee filed a Notice of Fourth Interim Distribution~~Receivable ~~with the Bankruptcy Court, indicating that an additional Distribution in the amount of 1.0% of Impaired Claims will be made to holders of Allowed Impaired Claims during May 2005.~~

4. The ~~Preference~~Liquidation ~~Receivables~~Trust has been pursuing an adversary proceeding known as the “Committee Action” against certain former officers and directors of Hechinger Company (the “Officer and Director Defendants”), certain former lenders of the Debtors, and others (see Note 13).

~~The~~During September 2005, the Liquidation Trust’s ~~preference~~reached ~~receivables~~a ~~are~~settlement ~~reflected~~with in the ~~accompanying~~Officer ~~Statements of~~and ~~Net~~Director ~~Assets~~Defendants inwith ~~Liquidation~~respect atto ~~their~~the ~~estimated~~Committee ~~fair value of $0~~Action.~~4 million,~~ ~~net~~Pursuant ofto ~~estimated~~the ~~costs~~terms of ~~recovery~~ ofthe agreement, $07.20 million, ~~for~~in ~~the~~cash ~~sole~~was ~~remaining~~paid ~~preference~~to ~~recovery~~the ~~action~~Liquidation ~~being~~Trust ~~actively~~during ~~pursued~~ October 2005, and ~~for~~the ~~settlement~~Liquidation Trust ~~collections~~dismissed inthe ~~progress~~Committee Action as ofagainst ~~March 31,~~the ~~2005;~~Officer and $3Director Defendants.~~1 million,~~ ~~net of estimated~~The ~~costs~~settlement ofhad ~~recovery~~no ofeffect ~~$1.0 million,~~on ~~for~~the 10Liquidation ~~preference~~Trust’s ~~recovery~~claims ~~actions~~against ~~being~~any ~~actively~~other ~~pursued~~defendant ~~and for settlement collections~~ in ~~progress~~the Committee ~~as of September 30, 2004~~Action.

85. Preference Receivables

The ~~fair value of~~ Liquidation Trust’s ~~assets~~preference isreceivables ~~reassessed~~are atreflected ~~least~~in ~~quarterly~~the ~~and~~accompanying ~~adjustments~~Statements toof Net Assets in Liquidation at their estimated fair ~~values~~value ~~are~~of ~~reflected~~$0.9 million, innet ~~the~~of ~~period~~estimated incosts ~~which~~of recovery ~~they~~of ~~become known~~$0.1 million, ~~The~~as ~~eventual~~of June 30, 2006 and $0.9 million, net of estimated costs of recovery ~~realizable~~of $0.2 million as of September 30, 2005. Most of the value of preference receivables isconsists ~~likely~~of the tosole ~~differ~~remaining ~~from~~preference ~~their~~recovery ~~estimated~~action ~~net~~being ~~fair~~actively ~~value~~pursued. During June 2005, following the February 2005 trial of this action, the Bankruptcy Court awarded the Liquidation Trust $1.0 million. The defendant appealed the decision and ~~these~~award, ~~differences~~and ~~may~~the beappellate ~~significant~~court upheld the Bankruptcy Court ruling in its entirety during March 2006. Although the defendant has further appealed the case, the Liquidation Trust believes that ultimate collection of the full award is likely.

~~5. Other Assets~~8

~~Other~~The ~~assets~~fair ~~consist~~value of ~~receivables from various former vendors, service providers, and others. During March 2005, the~~ Liquidation Trust ~~agreed~~assets tois areassessed ~~settlement~~at ofleast ~~$0.6 million~~quarterly ~~in connection~~and ~~with~~adjustments ~~litigation against a group of insurance companies collectively referred~~ to ~~as Kemper Insurance~~ Company (“Kemper”), a former insurance company of the Debtors, which is included in other assets as of March 31, 2005. Other assets also include a $0.4 million distribution in the liquidation of the Debtor’s former company-owned life insurance policy carrier. Other assets are reported at estimated ~~net~~ fair ~~value,~~values ~~based~~are onreflected ~~either~~in the ~~amount~~period ~~paid (generally~~ in ~~the form~~which ofthey ~~cash~~become ~~deposits) or the estimated recoverable amount, whichever is more determinable~~known. The eventual net realizable value of ~~these~~preference ~~assets~~receivables is likely to differ from their estimated net fair ~~value~~ value and these differences may be significant.

6. Unimpaired and Convenience Claims Payable

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

Unimpaired and Convenience Claims payable consists of:

	As of		As of
($in thousands)	March 31, 2005		September 30, 2004
($ in thousands)	June 30, 2006		September 30, 2005
Allowed unimpaired claims	$	21,~~935~~335	$	1,~~339~~335
Estimated fair value of disputed unimpaired claims		—		—
Kemper claim, net		—		1,600
Other disputed unimpaired claims		—		29
Total estimated fair value of disputed unimpaired claims		—		1,629
Convenience claims		2		2
Total	$	21,~~937~~337	$	21,~~970~~337
Number of disputed unimpaired claims		53		93

~~The~~Pursuant ~~largest~~to ~~remaining~~the ~~Unimpaired~~Plan, ~~Claim is a secured Claim asserted by Kemper for payment of~~ certain ~~workers’~~fees ~~compensation~~and ~~claims~~expenses ~~against~~which ~~the~~Kmart ~~Debtors~~Corporation (~~the~~ “~~Kemper Claim~~Kmart”). ~~The~~incurred ~~Liquidation~~in ~~Trust~~connection ~~recorded~~with the ~~estimated~~Debtors’ ~~net~~bankruptcy ~~fair~~filing ~~value~~were ofallowed ~~the~~as ~~Kemper~~an Unimpaired Claim. atAllowed Unimpaired ~~$1.6 million~~Claims as of ~~March~~June 3130, ~~2005~~ 2006 and September 30, ~~2004.~~2005 ~~This~~include ~~value~~this ~~was based on an agreement reached between Kemper and the Liquidation Trust during December 2004 to settle the Kemper~~ Claim ~~for $1.7 million~~, ~~offset~~which byhas anot ~~$0.1~~yet ~~million~~been ~~prepayment~~substantiated ~~held~~ by aKmart ~~third-party claims administrator. The Kemper Claim was therefore included with Allowed Unimpaired Claims~~ as ofrequired ~~March 31,~~by ~~2005~~the ~~and with Disputed Unimpaired Claims as of September 30~~Plan, ~~2004.~~at ~~During~~its ~~January 2005,~~estimated ~~the~~amount ~~letter~~ of ~~credit securing the Kemper Claim was reduced to~~ $1.63 million ~~pursuant to the December 2004 agreement between Kemper and the Liquidation Trust~~.

~~Pursuant~~The toamount asserted by the ~~Plan,~~holders ~~certain~~of ~~fees~~the remaining Disputed Unimpaired Claims is insignificant as of June 30, 2006 and ~~expenses~~September 30, ~~which~~2005. ~~Kmart~~The ~~Corporation~~Liquidation ~~(“Kmart”)~~Trust ~~incurred~~believes inthat the ~~connection~~likelihood ~~with~~of paying any of the ~~Debtors’~~Claims ~~bankruptcy~~is ~~filing~~remote ~~were~~and ~~allowed~~anticipates asthat aneach ~~Unimpaired~~of ~~Claim.~~these ~~Allowed~~Claims will be expunged or waived; accordingly, no liability has been recorded with respect to the remaining Disputed Unimpaired Claims.

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

~~Unimpaired~~7. Uncashed Claims ~~as of March 31, 2005 and September 30, 2004 include this Claim, which has not yet~~Checks ~~been substantiated by Kmart as required by the Plan, at its estimated amount of $1.3 million.~~

~~The~~Pursuant ~~amount~~to ~~asserted by~~ the ~~holders~~Plan, ofany ~~the~~Claims ~~remaining~~payments ~~Disputed~~and ~~Unimpaired~~Distributions ~~Claims~~which ~~is insignificant~~remain asuncashed offor ~~March~~90 ~~31,~~days following ~~2005~~their ~~and~~issuance ~~September 30,~~date ~~2004.~~are ~~The~~forfeited to the Liquidation Trust ~~anticipates~~for ~~that~~distribution to other ~~each~~holders of ~~these~~Allowed Claims. ~~will~~Pending bea ~~expunged~~final ororder ~~waived;~~from ~~accordingly~~the Bankruptcy Court, nothe ~~liability~~Liquidation Trust has ~~been~~treated ~~recorded~~such ~~with respect~~items toas ~~the~~a ~~remaining~~liability. ~~Disputed~~Such ~~Unimpaired~~checks ~~Claims~~currently asmay be reissued upon timely request of ~~March 31~~the payee, ~~2005~~subject to applicable fees.

~~Unimpaired Claims are valued by reviewing the facts available to the Liquidation Trust,~~9 including the Debtors’ records and information submitted by the claimants, and estimating the ultimate settlement value of the Claims. The fair value of Unimpaired Claims payable is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. However, no assurance can be given as to the ultimate allowance, disallowance or settlement of the remaining Disputed Unimpaired Claims, individually or in the aggregate.

78. ~~Uncashed~~Distributions ~~Claims Checks~~Payable

~~Pursuant~~Distributions topayable represents the ~~Plan,~~amount ~~any~~of ~~Claims~~authorized ~~payments and~~ Distributions which ~~remain~~the ~~uncashed for 90 days~~Liquidation ~~following~~Trust ~~their~~has ~~issuance~~been ~~date~~unable ~~are~~to ~~forfeited~~pay to ~~the~~holders ~~Liquidation~~of ~~Trust~~Allowed ~~for~~Impaired ~~Distribution~~Claims. toA ~~other~~ number of holders of such Allowed Claims., ~~Pending~~while aotherwise ~~final~~eligible ~~order~~for ~~from~~Distributions, ~~the~~have ~~Bankruptcy~~either ~~Court,~~not yet provided all information necessary for payment; were subject to an offsetting claim by the Liquidation Trust ~~has~~which ~~treated~~had ~~such~~not ~~items~~yet asbeen aresolved; ~~liability.~~or, ~~Such~~because ~~checks~~they ~~currently~~had ~~may~~not becashed a previous Distribution check, ~~reissued~~were ~~upon~~not ~~timely~~paid ~~request~~any ofsubsequent ~~the~~Distributions. ~~payee~~Until all such issues are resolved, the holder of an ~~subject~~Allowed toClaim ~~applicable~~may ~~fees~~not receive a Distribution.

89. ~~Distributions~~Estimated ~~Payable~~Costs of Liquidation

~~Distributions~~The ~~payable~~Wind-down ~~primarily~~Reserve ~~represents~~and ~~8.1%~~Litigation ofReserve ~~the~~described ~~Allowed~~below ~~amount~~together ofconstitute ~~Impaired Claims for which~~ the ~~Liquidation Trust had not yet paid Distributions as of March 31, 2005 and September 30,~~estimated ~~2004,~~costs ~~respectively. As~~ of ~~these~~liquidation ~~dates,~~in athe ~~number~~accompanying ofStatements ~~holders~~ of ~~such~~Net ~~Allowed~~Assets ~~Claims,~~in ~~while otherwise eligible for Distributions, had either not yet provided all information necessary for payment, or were subject to an offsetting claim by the~~ Liquidation ~~Trust which had not yet been resolved~~. ~~Until all such issues are resolved, the holder of an Allowed Claim may not receive a Distribution.~~

9 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”). ~~Estimated~~Substantially ~~Costs~~all of the day-to-day operations of the Liquidation Trust have been terminated; however, provision has been made for necessary management oversight and administrative, legal and accounting processes to continue through the end of 2006. These final items include resolution of the remaining Disputed Claims and all litigation (excluding the costs provided for in the Litigation Reserve), a final Distribution, if applicable, and filings with regulatory authorities and with the Bankruptcy Court.

~~The~~Pursuant ~~Wind-down~~to ~~Reserve~~the Plan, the Liquidation Trust also established and funded a reserve to pay the costs of pursuing certain actions referred to as the “Bondholder Action” and the “Committee Action” (the “Litigation Reserve”). ~~described~~The ~~below~~amount ~~together~~of ~~constitute~~ the ~~estimated~~Litigation Reserve as of June 30, 2006 and September ~~costs~~30, 2005 is intended to fund the appeal of ~~liquidation~~the inDistrict Court’s Summary Judgment Decision and related judgment with respect to the ~~accompanying~~Committee ~~Statements~~Action in the Court of ~~Net~~Appeals ~~Assets~~(see inNote ~~Liquidation~~13).

~~Under~~The ~~the~~fair ~~Plan,~~value of the ~~Liquidation~~estimated ~~Trust was required to establish and fund a reserve to pay administration~~ costs ~~and costs~~ of ~~holding~~liquidation ~~and~~is ~~liquidating~~reassessed ~~the~~at ~~Liquidation~~least ~~Trust’s~~quarterly ~~assets (the~~and ~~“Wind-down~~adjustments ~~Reserve”). Substantially all of the day-~~to~~-day~~ ~~operations~~estimated offair ~~the~~values ~~Liquidation Trust~~ are ~~planned~~ toreflected ~~cease~~ in the ~~near~~period ~~future;~~in ~~however,~~which ~~provision~~they ~~has~~become ~~been~~known. Actual ~~made~~costs ~~for~~are ~~certain~~likely ~~necessary administrative,~~to ~~legal~~differ ~~and~~from ~~accounting~~the ~~processes~~estimated tocosts beand ~~completed~~these ~~thereafter~~differences ~~through~~may ~~December 2005~~be significant.

Pursuant to the Plan, the Liquidation Trust also established and funded a reserve to pay the costs of pursuing certain actions referred to as the Bondholder Action and the Committee Action (the “Litigation Reserve”)10. ~~The~~Fleet ~~amount~~Settlement ~~of the Litigation Reserve as of March 31, 2005 and~~Accrual September 30, 2004 is intended to fund the pursuit of the Bondholder Action through an appeal and the Committee Action through trial (see Note 12). In accordance with the procedures set forth in the Plan, approval has been obtained for all increases in the Litigation Reserve.

The ~~Liquidation~~Fleet ~~Trustee~~settlement ~~may~~accrual ~~also~~of ~~determine~~$8.3 million ~~that~~as ~~pursuing~~of orJune 30, ~~defending~~2006 ~~future~~was ~~appeals~~recorded orbased on a ~~re-trials~~settlement in principle with Fleet Retail Finance Inc. (“Fleet”) and General Electric Credit Corporation (“GECC”), defendants in the Bondholder Action and the Committee Action is(the in“Actions”). Under the ~~best~~terms ~~interest~~ of ~~the~~a ~~holders of~~stipulated ~~Beneficial~~order ~~Interests~~between inFleet and the Liquidation Trust. Inwhich ~~order~~established the toFleet ~~reserve~~Reserve ~~funds~~(the to“Fleet ~~carry~~Stipulation”), ~~out~~all ~~these~~as discussed in Notes 11 and 13, below, and ~~actions~~subject asto ~~needed~~review by the Bankruptcy Court, asFleet may seek reimbursement of ~~March~~certain legal fees incurred in its defense of the Actions. Subsequent to June 3130, ~~2005~~2006, and subject to certain conditions, including Fleet documenting certain expenditures to the ~~Liquidation~~satisfaction of the Liquidation Trustee, ~~has~~the ~~designated~~Liquidation aTrust, ~~contingency~~Fleet and GECC have agreed in principle to release each other from ~~reserve~~further claims and, upon payment to Fleet of $48.03 million ~~(see~~of ~~Note~~the ~~10)~~$11.0 million ~~None~~Fleet ofReserve, ~~this~~Fleet and ~~amount~~GECC will berelease ~~added~~any claim to the ~~Litigation~~balance of the Fleet Reserve. The settlement is also ~~accrual~~subject ~~until~~to ~~and~~the ~~unless~~approval of the ~~Liquidation~~Bankruptcy Court, and no assurance can be given as to its ultimate outcome.

10 The Fleet loss contingency accrual of $3.5 million as of September 30, 2005, now incorporated into the Fleet settlement accrual, represented the Liquidation Trust’s best estimate, in accordance with SFAS No. 5, “Accounting for Contingencies”, of the loss it might incur in conjunction with Fleet prevailing against the Liquidation Trust in the Bondholder Action (see Note 13).

~~Trustee determines that future action will be pursued, and~~10 ~~then only in accordance with the approval procedures set forth in the Plan.~~

~~The~~11. ~~fair~~Bankruptcy ~~value~~Reserves ofRequired ~~the~~The ~~estimated~~reserves ~~costs~~for ~~of liquidation is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in~~ which ~~they~~Reserved ~~become~~Cash ~~known. Actual~~is ~~costs~~maintained ~~are~~consist ~~likely~~of ~~to differ from~~ the ~~estimated costs and these differences may be significant.~~ following:

10. Bankruptcy Reserves Required


	As of		As of
($ in thousands)	June 30, 2006		September 30, 2005
Liability reserves
Fleet settlement accrual	$	8,250	$	3,500
Wind-down		790		1,436
Litigation		371		730
Unimpaired and convenience claims		1,337		1,337
Uncashed claims checks		440		361


Total liability reserves		11,188		7,364


Contingency reserves
Fleet reserve		2,750		7,500
Litigation appeals provision		4,000		4,000
Excess disputed unimpaired claims		300		300
Preference settlement claims		60		42
Minimum reserve		3,000		3,000


Total contingency reserves		10,110		14,842


Total reserves	$	21,298	$	22,206

~~Reserves~~The Fleet settlement accrual, ~~other~~totaling ~~than~~$8.3 million ~~those~~of ~~funded~~the byFleet ~~Restricted~~Reserve ~~Cash~~initially established at $11.0 million, orhas ~~included~~been recorded as a liability based on a settlement in ~~Available~~principle ~~Cash~~between the Liquidation Trust, ~~consist~~Fleet and GECC reached subsequent to June 30, 2006 (see Note 10). The $2.8 million balance of: the Fleet Reserve remains classified as a contingency reserve as of June 30, 2006, and until the settlement reached in principle is consummated and approved by the Bankruptcy Court.

	As of		As of
($ in thousands)	March 31, 2005		September 30, 2004
Liability Reserves
Wind-down (net of related escrow of $278)	$	1,918	$	3,240
Litigation		1,272		2,384
Unimpaired and convenience claims (excluding secured claim (see Note 6))		1,337		1,370
Uncashed claims checks		265		142
Total liability reserves		4,792		7,136
Contingency Reserves
Fleet		11,000		11,000
Litigation appeals provision		4,000		—
Excess disputed unimpaired claims		329		309
Preference settlement claims		29		26
Minimum reserve		3,000		3,000
Total contingency reserves		18,358		14,335
Total reserves	$	23,150	$	21,471

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 ~~litigation~~minimum ~~appeals provision represents cash held in~~ reserve, toestablished ~~allow~~pursuant ~~the Liquidation Trust~~ to ~~pursue or defend future appeals and re-trials of~~ the ~~Committee~~Plan ~~Action~~ and ~~the~~intended ~~Bondholder Action.~~to ~~The~~assure ~~Liquidation Trustee designated this contingency reserve as of March 31, 2005 because~~adequate ~~the~~liquidity ~~anticipated~~for ~~future cash receipts of~~ the Liquidation Trust, ~~may~~is ~~not~~to be ~~sufficient~~maintained, subject to ~~fund~~reduction ~~such actions~~by ~~prospectively.~~an Noorder ~~liability~~of ~~has been accrued in connection with such possible future~~the ~~actions~~Bankruptcy ~~because~~Court, until the Liquidation Trust ~~has~~makes ~~not~~a ~~determined~~final ~~that~~Distribution, if any, ~~such~~or ~~action~~is ~~will be required~~otherwise terminated.

~~The Fleet Reserve, established pursuant to a stipulated order between Fleet Retail Finance~~11 Inc. (“Fleet”) and the Liquidation Trust, is likely to be drawn upon if Fleet, as a defendant in the Committee Action and the Bondholder Action, should ultimately prevail in one or both of such actions. No liability has been accrued in connection with the Fleet Reserve because the Liquidation Trust has appealed the adverse decision and judgment in the Bondholder Action (see Note 12), does not consider Fleet likely to ultimately prevail in either of these actions, and has no access to information to estimate the amount, if any, that Fleet may validly assert against the Fleet Reserve.

~~The~~12. ~~Liquidation Trust also maintains the Disputed~~ Impaired Claims ~~Reserve,~~The ~~which,~~Liquidation asTrust’s anestimate ~~equity reserve, is designated as part~~ of ~~Available Cash (see Note 3), for Distribution to holders of Disputed~~ Impaired Claims ~~should~~consists ~~such Claims become Allowed. The reserve for the remaining Disputed Impaired Claims is determined based on the then current cumulative Distribution rate and on the estimated amount~~ of ~~remaining Disputed Impaired Claims.~~ :


	As of		As of
($ in thousands)	June 30, 2006		September 30, 2005
Allowed impaired claims	$	706,043	$	706,043
Estimated fair value of disputed impaired claims		13,784		13,775


Total estimated impaired claims	$	719,827	$	719,818


Asserted value of disputed impaired claims	$	52,028	$	55,179


Number of disputed impaired claims		15		16

11 During November 2005, the Liquidation Trust authorized a Distribution of 1.1911% of the Allowed amount to holders of Allowed Impaired Claims, which 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.

~~The~~Distributions to holders of Allowed Impaired Claims have been authorized, through June 30, 2006, in the cumulative amount of 10.2911% of the Allowed amount of the Impaired Claims. A total of $70.6 million has been paid to holders of Allowed Impaired Claims through June 30, 2006. In conjunction with the authorized Distributions, as of June 30, 2006, the Liquidation Trust’s ~~estimate~~held a total of $3.3 million of Available Cash for Distribution to holders of Impaired Claims, ~~consists~~including the $2.8 million Disputed Impaired Claims Reserve for Distribution to holders of: Disputed Impaired Claims should such Disputed Claims become Allowed, and $0.5 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.

	As of		As of
($ in thousands)	March 31, 2005		September 30, 2004
Allowed impaired claims	$	705,720	$	704,015
Estimated fair value of disputed impaired claims		17,247		20,798
Total estimated impaired claims	$	722,967	$	724,813
Asserted value of disputed impaired claims	$	56,037	$	64,068
Number of disputed impaired claims		23		47

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

~~No assurance can be given as to the ultimate allowance, disallowance or settlement of the remaining Disputed Impaired Claims, individually or in the aggregate~~13. Contingencies

~~12.~~ The ~~Contingencies~~Bondholder Action

~~The~~In March 2004 the District Court issued an opinion and order (collectively, the “Decision”) in the Bondholder Action, directing the entry of judgment in favor of Fleet and GECC. The Liquidation Trust appealed the Decision, and in July 2005 the Court of Appeals issued its Opinion affirming the March 2004 Decision. The Liquidation Trust’s motion for reconsideration and reversal of the Court of Appeals Opinion was denied by the Court of Appeals during August 2005, and the Liquidation Trust has determined not to pursue the action further. Subsequent to June 30, 2006, the Liquidation Trust, Fleet and GECC reached an agreement in principle to settle all claims, the terms of which are described immediately below.

InThe ~~March 2004,~~Committee ~~following a non-jury trial held in October 2003, the Court issued an opinion and order (collectively, “the Decision”) in the Bondholder~~ Action~~, directing the entry of judgment~~ in favor the defendants. In April 2004, the Liquidation Trust filed an appeal from the Decision and related judgment. The Liquidation Trust and the defendants each completed the filing of appeal briefs during September 2004. The Court of Appeals has scheduled oral argument for the appeal during June 2005. The timing of a ruling is unknown. Also see the discussion of the Fleet Reserve in Note 10.

~~The~~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 Retail, 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 with the Court of

~~In April 2004, the Committee Action was assigned to the judge who presided in the Bondholder~~12 Action, who has scheduled the Committee Action for trial in August 2005. During December 2004 and January 2005, the Court heard oral argument on motions, including motions for summary judgment, filed by various defendants. The timing of a decision on defendants’ motions is unknown.

~~The~~Appeals ~~various~~its ~~defendants~~notice ~~are~~of ~~vigorously~~appeal ~~opposing~~from the ~~Bondholder~~Summary ~~Action~~Judgment Decision and related judgment in the Committee Action. ~~There~~ isA noMarch 2006 ~~assurance~~mediation ~~that~~ordered ~~the~~and ~~Liquidation~~conducted ~~Trust~~by ~~will prevail on~~ the ~~claims~~Third ~~asserted~~Circuit inCourt ~~the~~of Appeals ~~Committee~~did ~~Action~~not ~~and~~result in ~~the~~a ~~appeal~~settlement ofamong the ~~Bondholder~~remaining ~~Action.~~parties ~~The~~to ~~Liquidation Trust cannot predict with any certainty~~ the ~~outcome~~Committee ~~of the litigation or the amount or range of potential recoveries~~Action.

13 The Liquidation Trust continued to negotiate with some of the remaining parties, reaching an agreement in principle with both Fleet and GECC subsequent to June 30, 2006. ~~Subsequent~~Subject ~~events~~to certain conditions, including Fleet documenting certain expenditures to the satisfaction of the Liquidation Trustee, the Liquidation Trust, Fleet and GECC have agreed in principle to release each other from further claims and, upon payment to Fleet of $8.3 million of the $11.0 million Fleet Reserve, Fleet and GECC will release any claim to the balance of the Fleet Reserve. The settlement is also subject to the approval of the Bankruptcy Court. The settlement in principle has no effect on the Liquidation Trust’s claims against any other defendant in the Committee Action.

~~Subsequent~~During ~~to March~~September ~~31,~~ 2005, the Liquidation ~~Trustee~~Trust ~~filed~~reached a ~~Notice~~settlement ofwith ~~Fourth~~the ~~Interim~~Officer and ~~Distribution~~Director Defendants with respect to the ~~Bankruptcy~~Committee ~~Court,~~Action. ~~indicating~~Under ~~that~~the anterms ~~additional~~of ~~Distribution~~the agreement, $7.0 million in cash was paid to the ~~amount~~Liquidation ofTrust during October 2005, and the Liquidation Trust 1dismissed the Committee Action as against the Officer and Director Defendants.0% ofThe ~~Impaired~~settlement ~~Claims~~had no ~~will~~effect beon ~~made~~the toLiquidation ~~holders~~Trust’s ofclaims ~~Allowed~~against ~~Impaired~~any ~~Claims~~other ~~during~~defendant ~~May 2005~~in the Committee Action.

12 The various remaining defendants are vigorously opposing this action. There is no assurance that the Liquidation Trust will prevail on the appeal filed with respect to the Committee Action. While the Liquidation Trust is vigorously pursuing this litigation with the intent to obtain a very substantial recovery, the Liquidation Trust cannot predict with any certainty the outcome of the litigation or the amount or range of potential recoveries.

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~13

Reference is made to the unaudited financial statements of the Liquidation Trust as of March 31, 2005 and September 30, 2004 and for the three months and six months ended March 31, 2005 and March 31, 2004, and the notes thereto (the “Unaudited Liquidation Trust Financial Statements”), included as Item 12. ~~of this Form 10-Q. The following information concerning the Liquidation Trust~~Management’s ~~financial~~Discussion ~~performance~~ and ~~condition~~Analysis ~~should be read in conjunction with the audited Liquidation Trust financial statements as~~ of ~~September 30,~~Financial ~~2004~~Condition and ~~September 30,~~Results ~~2003,~~of ~~and for the~~Operations ~~fiscal years ended September 30, 2004 and September 30, 2003, and for the period from October 26, 2001 (Effective Date) through September 30, 2002, and the notes thereto.~~

~~The~~Reference ~~Unaudited~~is ~~Liquidation~~made ~~Trust~~to ~~Financial~~the ~~Statements~~unaudited ~~have~~financial ~~been~~statements ~~prepared~~of on the ~~same~~Liquidation ~~basis~~Trust as ~~the~~ ~~audited~~of ~~Liquidation~~June 30, ~~Trust~~2006 ~~financial~~and ~~statements~~September 30, ~~using~~2005 and for the ~~liquidation~~three ~~basis~~months ofand ~~accounting~~the nine months ended June 30, 2006 and June 30, in 2005, and the ~~opinion~~notes ofthereto (the “Unaudited Liquidation ~~Trustee,~~Trust ~~contain~~Financial ~~all adjustments~~Statements”), included ~~consisting~~as Item 1. of ~~normal~~this ~~recurring adjustments~~Form ~~necessary~~10-Q. ~~for~~The afollowing ~~fair~~information ~~presentation~~concerning of the Liquidation Trust’s ~~results~~financial ~~for~~performance ~~such~~and ~~periods. The~~condition ~~Liquidation~~should ~~Trust’s~~be ~~results~~read ~~for~~in ~~the~~conjunction ~~three~~with ~~months~~the ~~ended~~audited Liquidation ~~March 31,~~Trust ~~2005~~financial ~~are~~statements ~~not~~as ~~necessarily indicative~~ of ~~the~~September 30, ~~results~~2005 toand beSeptember 30, ~~expected~~2004, and for ~~any~~the fiscal ~~other~~years ~~interim~~ended ~~period~~September 30, or2005, ~~any~~September 30, ~~future~~2004 ~~fiscal~~and ~~year. All~~September 30, ~~amounts~~2003, ~~are rounded~~ and ~~are~~the ~~therefore approximate~~notes thereto.

I. The ~~Accounting~~Unaudited ~~Policies~~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 ~~Estimates~~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, 2006 are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year. All amounts are rounded and are therefore approximate.

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 accountingI. ~~During~~Accounting ~~preparation~~Policies ~~of these financial statements, the Liquidation Trustee is required to make certain estimates~~ and ~~assumptions which affect the reported amounts of~~Estimates 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 following discussion and analysis of the Liquidation Trust’s ~~critical~~changes ~~accounting~~in ~~policies~~net ~~are~~assets ~~described~~in liquidation, cash receipts and disbursements, and net assets in ~~Management’s~~liquidation ~~Discussion~~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 ~~Analysis~~in accordance with the liquidation basis of ~~Financial~~accounting. ~~Condition~~During preparation of these financial statements, the Liquidation Trustee is required to make certain estimates and ~~Results~~assumptions which affect the reported amounts of assets ~~Operations~~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 ~~Trust’s~~Trustee ~~annual~~evaluates and updates these estimates and assumptions based on historical ~~report~~experience and on ~~Form~~various ~~10-K~~other ~~for~~assumptions the ~~year~~Liquidation ~~ended~~Trustee ~~September 30,~~believes ~~2004~~are reasonable under the circumstances. Actual results may differ from these estimates and different assumptions would lead to different estimates.

~~II.~~ The ~~Changes~~Liquidation Trust’s critical accounting policies are described in ~~Net~~Management’s ~~Assets~~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, 2005.

~~Significant~~II. ~~financial~~Changes ~~activities~~in ofNet ~~the~~Assets ~~Liquidation~~in Trust during the periods reflected below include Distributions and Claims payments, resolution of Claims asserted, pursuit of preference recovery actions and other litigation, and carrying out the liquidation activities of the Liquidation ~~Trust.~~

Net assets in liquidation are subject to material change when either (a) Distributions to holders of Allowed Impaired Claims are authorized, or (b) estimates of the fair value of the Liquidation Trust’s assets and/or liabilities change, 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.”

1314

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

	For the three months ended
($ in thousands)	~~March~~June 3130, ~~2005~~2006			~~March~~June 3130, ~~2004~~2005
Distributions authorized	$	(142	)	$	(329	)
Fleet settlement accrual	$	(4,750	)	$	(3,500	)
Changes in estimates — (decrease)/increase
Distributions authorized		—			(7,055	)
in net assets in liquidation
(Decrease)/increase in estimated fair value of preference receivables, net		(4	)		396
Preference receivables, net		(67	)		(660	)
Increase in estimated costs of liquidation:
Estimated costs of liquidation		—			(3,540	)
Wind-down reserve		—			(124	)
Net other increases		1,136			794
Interest income and net other increases		284			291
Net increase/(decrease) in net assets in liquidation	$	927		$	(3,735	)
Net decrease in net assets in liquidation	$	(4,470	)	$	(9,992	)

	For the six months ended
	For the nine months ended
	March 31, 2005			March 31, 2004
($ in thousands)	June 30, 2006			June 30, 2005
Distributions authorized	$	(222	)	$	(1,755	)
Fleet settlement accrual	$	(4,750	)	$	(3,500	)
Changes in estimates — (decrease)/increase
Distributions authorized		(6,679	)		(7,277	)
in net assets in liquidation
Increase in estimated fair value of preference receivables, net		31			329
Preference receivables, net		(67	)		3,090
Increase in estimated costs of liquidation:
Estimated costs of liquidation		—			(3,540	)
Wind-down reserve		—			(124	)
Net other increases		1,294			898
Interest income and net other increases		780			1,585
Net increase/(decrease) in net assets in liquidation	$	1,005		$	(1,307	)
Net decrease in net assets in liquidation	$	(10,618	)	$	(8,987	)

A. ~~Distributions~~Fleet ~~authorized~~settlement accrual

NoPursuant ~~new~~to ~~interim~~a ~~Distribution~~stipulation ~~was~~between ~~authorized~~the ~~during~~Liquidation Trust and Fleet Retail Finance Inc. (“Fleet”) (the ~~six~~“Fleet ~~months~~Stipulation”), ~~ended~~the ~~March~~Liquidation Trust established a Fleet Reserve totaling $11.0 31million. The Fleet Stipulation contains provisions pursuant to which Fleet may seek reimbursement of certain legal fees and expenses in the event of certain outcomes in proceedings by the Liquidation Trust against Fleet, ~~2005~~including orthe ultimate resolution of the Committee Action ~~during~~and/or the ~~six~~Bondholder ~~months~~Action ~~ended~~(see ~~March~~Part 31II, ~~2004~~Item 1., “Legal Proceedings,” below) in favor of Fleet.

~~i. Distributions authorized~~The ~~during~~Fleet ~~the~~Stipulation ~~three~~provides ~~months~~that, ~~ended~~in ~~March 31,~~the ~~2005~~event ~~primarily~~the ~~related~~Committee to Action and/or the ~~Liquidation~~Bondholder Action ~~Trust’s~~(the ~~$0.1 million~~“Actions”) ~~payment~~are ofultimately ~~applicable~~resolved ~~taxes~~in onfavor ~~certain~~of ~~calendar~~Fleet ~~year~~(by ~~2004 taxable~~a ~~net~~final, ~~income~~non-appealable ~~and~~order or ~~gain~~settlement ~~allocable~~approved toby ~~holders~~the ofBankruptcy ~~Disputed~~Court), ~~Impaired~~Fleet ~~Claims~~may onseek ~~behalf~~immediate reimbursement of ~~such~~the ~~holders.~~reasonable ~~Distributions~~legal atfees ~~the~~and ~~cumulative~~expenses ~~rate~~incurred ofby ~~8.1%~~Fleet ~~were~~in ~~authorized~~defense toof ~~holders~~either ofor ~~$0.7 million~~both Actions, up to ~~and~~the $111.0 million balance of ~~Impaired~~the ~~Claims~~Fleet ~~newly~~Reserve. ~~allowed~~Such ~~during~~reimbursement cannot be demanded until the appeal ~~three~~period ~~months~~has passed, and ~~six~~is ~~months~~subject ~~ended March 31,~~to ~~2005,~~review ~~respectively~~by the Bankruptcy Court.

~~ii.~~As of June ~~Distributions~~30, at2006, ~~the~~based ~~then~~on ~~cumulative~~the ~~rate~~agreement ofin ~~6.573%~~principle ~~were~~arrived ~~authorized~~at towith ~~holders~~Fleet ofand ~~$4.3~~with ~~million~~another ~~and~~defendant ~~$26.0 million~~in ofthe ~~Impaired~~Actions, ~~Claims~~General ~~newly~~Electric ~~allowed~~Credit ~~during~~Corporation ~~the~~(“GECC”), ~~three~~subsequent ~~months~~to ~~and~~June 30, 2006, the ~~six months~~Liquidation ~~ended~~Trust ~~March 31,~~determined ~~2004,~~that ~~respectively.~~recording Inan ~~addition~~estimated loss totaling $8.3 million, consistent ~~included~~with inthe ~~Distributions~~total ~~authorized during~~amount of the ~~three~~settlement ~~months~~reached ~~ended~~in ~~March 31~~principle, ~~2004,~~was ~~the~~necessary. The Liquidation Trust ~~paid~~therefore ~~applicable~~recorded ~~taxes~~a ~~on certain~~decrease ~~calendar~~in ~~year~~net ~~2003~~assets ~~taxable~~in ~~income~~liquidation ~~and~~of ~~gain~~$4.8 million ~~allocable~~(in addition to ~~holders~~the loss contingency accrual of ~~Disputed~~$3.5 million ~~Impaired~~recorded ~~Claims on~~previously) ~~behalf~~and transferred that portion of ~~such~~the ~~holders~~Fleet Reserve from contingency reserves to the liability designated as the Fleet settlement accrual.

AsDuring athe ~~result~~three months ended June 30, 2005, related to the adverse Court of Appeals decision in the ~~ongoing~~Bondholder ~~Claims~~Action ~~resolution~~(discussed ~~process~~in Part II, ~~fewer~~Item 1., ~~Impaired~~“Legal ~~Claims~~Proceedings,” ~~remain~~below) toand bebased on ~~resolved~~certain asterms of ~~each~~the ~~successive~~Fleet ~~period~~Stipulation, the Liquidation Trust recorded a decrease in net assets in liquidation as a loss contingency accrual of $3.5 million and transferred that portion of the Fleet Reserve from contingency reserves to the Fleet loss contingency accrual (now incorporated into the Fleet settlement accrual).

~~B. Changes in estimates - estimated fair value of preference receivables~~15

~~The estimated fair value of preference receivables was decreased by $0~~B.~~1 million~~ ~~for additional~~Distributions ~~collections costs during the three months ended March 31, 2005. The estimate otherwise~~authorized remained unchanged for the three months and six months ended March 31, 2005, because substantially all of the remaining cases have been settled for the same amounts as their estimated value as of September 30, 2004.

~~The~~No ~~estimated~~new ~~fair~~interim ~~value~~Distribution ofwas ~~preference~~authorized ~~receivables decreased by $0.7 million~~ during the three months ended ~~March~~June 3130, ~~2004~~2006. During ~~and~~November 2005, ~~increased~~the byLiquidation aTrust ~~net~~authorized ~~amount~~a Distribution of ~~$3.~~1 ~~million~~.1911% ~~during~~of the ~~six months~~Allowed ~~then~~amount ~~ended.~~to ~~The~~holders ~~decrease~~of ~~during~~Allowed ~~the~~Impaired ~~three~~Claims, ~~months~~totaling ~~ended March~~$6.6 31million, ~~2004~~which ~~resulted~~was ~~from~~paid anduring ~~increase in~~December 2005. Because this Distribution resulted from the ~~estimated~~$7.0 million ~~costs~~cash proceeds of ~~prosecuting~~ the ~~remaining~~Committee Action ~~preference~~settlement ~~actions~~(discussed below under “Legal Proceedings”), ~~which~~pursuant ~~were~~to the ~~most~~Plan, ~~difficult~~Kmart’s $150.0 ~~and~~million ~~contentious~~General ~~cases,~~Unsecured ~~including~~Claim ~~the~~was ~~engagement~~excluded offrom athe ~~consulting firm~~Distribution. ~~The~~In ~~increase~~addition, ~~during~~included in Distributions authorized for the ~~six~~ nine months ended ~~March~~June 3130, ~~2004~~2006, ~~was~~the ~~due~~Liquidation toTrust apaid $30.8 1 million ~~settlement~~of ~~reached~~applicable intaxes ~~the~~on ~~last~~certain ~~remaining large~~calendar ~~preference~~year ~~case~~2005 totaxable ~~which~~net ~~the~~income ~~Liquidation~~and ~~Trust~~gain ~~had~~allocable ~~not~~to holders ~~previously~~of ~~assigned~~Disputed aImpaired ~~value,~~Claims ason ~~the case~~behalf ~~was~~of ~~not~~such ~~previously~~holders ~~sufficiently~~(the ~~developed~~“2005 toTax ~~value~~Payment”).

14 During May 2005, the Liquidation Trust authorized a Distribution of 1.0% of the Allowed amount to holders of Allowed Impaired Claims, totaling $7.1 million, which was paid during May 2005. Distributions at the previous cumulative rate of 8.1%, totaling $0.1 million, were also authorized during the nine months ended June 30, 2005 to holders of $1.7 million of Impaired Claims newly allowed during the period. In addition, included in Distributions authorized for the nine months ended June 30, 2005, the Liquidation Trust paid $0.1 million of applicable taxes on certain calendar year 2004 taxable net income and gain allocable to holders of Disputed Impaired Claims on behalf of such holders (the “2004 Tax Payment”).

C. As ~~Changes~~a inresult ~~estimates~~of –the ~~estimated~~ongoing ~~costs~~Claims resolution process, fewer Impaired Claims remain to be resolved as of ~~liquidation~~each successive period.

NoC. ~~significant~~Changes ~~change~~ in ~~the~~estimated ~~status~~fair value of ~~the~~preference ~~Liquidation Trust’s wind-down activities~~receivables, ~~the~~net ~~Bondholder Action, or the Committee Action occurred during the three months and six months ended March 31, 2005; therefore, no changes in estimate were recorded during those periods.~~

NoThe ~~significant~~estimated ~~change~~fair invalue ~~such~~of ~~items~~preference ~~occurred~~receivables was adjusted slightly during the three months ended June 30, 2006, and during the nine months ended ~~December~~June 3130, ~~2003.~~2006 based on settlements ~~The~~achieved ~~changes~~in ~~discussed~~excess ~~below~~of ~~all~~previously estimated amounts as of June 30, 2006, offset by an increase in estimated costs of recovery which occurred ~~during~~principally oras ~~shortly~~of ~~after~~December 31, 2005. Costs of recovery during the three months ended ~~March~~ December 31, ~~2004~~2005 included contingent fees of $0.1 million ~~Several~~payable ~~events caused~~to preference collections counsel with respect to additional value the Liquidation Trust torecognized from ~~revise~~waivers ~~its~~of ~~estimates~~otherwise ofvalid Impaired Claims obtained in the ~~costs~~course of ~~winding~~preference ~~down~~settlements. The ~~its~~Liquidation ~~operations~~Trust ~~and~~recognizes ~~prosecuting~~additional value from such Impaired Claims waivers with each additional Distribution, because Impaired Claims waivers decrease the ~~actions~~amount ~~provided~~of ~~for~~Claims the Liquidation Trust must pay in ~~the~~each ~~Litigation~~subsequent ~~Reserve~~Distribution. asThe $0.1 million of ~~March~~additional contingent fees recognized during the three months ended December 31, ~~2004:~~2005 were related to the Distribution paid during December 2005.

iDuring the three months ended June 30, 2005, the Bankruptcy Court awarded $1.0 ~~Because~~million in favor of the ~~December~~Liquidation Trust in the one significant remaining preference recovery action. Although the defendant appealed the decision and award, the Liquidation Trust increased the estimated fair value of preference receivables by the net amount of $0.4 ~~2003~~million ~~filing~~to reflect the full amount of athe ~~complaint~~$1.0 million ~~against~~award. aThe ~~group~~increase of ~~insurance~~$0.4 million ~~companies~~for the three months ended ~~collectively~~June 30, ~~referred~~2005 tois asnet ~~Kemper~~of ~~Insurance~~increased ~~Company~~costs ~~(“Kemper”)~~of (collecting the ~~“Kemper~~higher ~~Complaint”)~~amount, ~~did~~and ~~not~~net of contingent fees ~~result~~of in$0.1 million apaid ~~negotiated~~to ~~settlement,~~the ~~estimated~~Liquidation ~~costs~~Trust’s ~~for~~preference collections counsel ~~and~~with ~~experts~~respect ~~were~~to ~~planned~~the ~~through~~value it received for waivers of otherwise valid Impaired Claims obtained in the ~~scheduled~~course ~~March~~of preference settlements, related to the Distribution paid during May 2005. ~~trial~~The increase of $0.3 million for the nine months ended June 30, 2005 is net of an increase in the estimated costs of collection.

iiD. A ~~number~~Changes ~~of the trials~~ in ~~preference~~estimates ~~actions~~– ~~scheduled~~estimated ~~during~~costs ~~the three months ended March 31, 2004 were postponed by the Bankruptcy Court. Scheduled preference action trials as~~ of ~~March~~liquidation ~~31, 2004 extended through the end of 2004, and not all cases had been scheduled.~~

~~iii. During~~No ~~April 2004,~~significant change in the status of the Liquidation Trust’s wind-down activities or the Committee Action, ~~previously~~occurred ~~scheduled~~during ~~for~~the ~~trial~~three ~~during~~months ~~January 2004~~or the nine months ended June 30, ~~was~~2006. ~~scheduled~~During the ~~for~~three ~~trial~~months inand ~~August~~nine months ended June 30, 2005 the Wind-down Reserve was increased by $0.1 million, because the Liquidation Trust’s wind-down activities proceeded more slowly than previously estimated.

~~As a result of these delays, the resolution of the remaining Claims, final Distributions and~~16 other wind-down matters were therefore expected to require an additional year of operations, well into 2005. Therefore, the Wind-down Reserve was increased by $1.5 million during the three months ended March 31, 2004 to reflect the increase in expected costs.

AsUpon ~~of December 31, 2003, an assessment of future funding of~~ the ~~Litigation~~2005 ~~Reserve,~~re-evaluation ~~if any, had been deferred pending a decision in the October 2003 trial~~ of the ~~Bondholder~~activity ~~Action.~~required Into ~~March 2004,~~complete the ~~court ruled in favor of the defendants and against the Liquidation Trust~~wind-down, ~~a ruling which~~ the Liquidation Trust ~~then~~determined ~~decided~~that ~~to appeal. Based on a review of~~ the ~~Bondholder~~expected ~~Action~~wind-down ~~ruling and~~period ~~any~~should ~~potential~~be ~~implications~~extended ~~for~~into ~~the Committee Action~~mid-2006, primarily ~~and~~spreading ofpreviously ~~the~~estimated ~~Liquidation~~costs ~~Trust’s alternatives~~over ina ~~these~~longer ~~matters~~period, ~~the~~but ~~Litigation~~also ~~Reserve~~increasing ~~was~~costs ~~increased~~as ~~by $2~~a result.~~0 million~~ ~~during~~While the ~~three~~ ~~months~~Liquidation ~~ended~~Trust ~~March 31,~~has ~~2004,~~continued inpast ~~accordance with~~ the ~~procedures~~mid-2006 ~~set~~estimate ~~forth~~and inits ~~the Plan. The~~termination ~~current~~date ~~status of the Bondholder Action and the Committee Action~~ is ~~discussed~~uncertain, ontotal ~~page~~estimated 21expenditures ofhave ~~this Form~~not ~~10-Q under “Part II – Other Information, Item 1~~changed.~~, Legal Proceedings”.~~

DE. ~~Net~~Interest income and net other increases

~~Net~~ Interest income and net other increases during the three months and the ~~six~~nine months ended June ~~March 31~~30, ~~2005~~2006 consisted primarily of ainterest $0income.~~6 million~~ ~~settlement~~Interest inincome ~~the Kemper Complaint, a $0.4 million distribution in the liquidation of the Debtor’s former company-owned life insurance policy carrier,~~ and ~~interest income.~~net ~~Net~~ other increases during the three months and the ~~six~~nine months ended ~~March~~June 3130, ~~2004~~2005 consisted primarily of a $0.7 6 million settlement in connection with litigation against a former insurance ~~broker~~company of the Debtors, a $0.4 million distribution in the liquidation of the Debtors’ former company-owned life insurance policy carrier, and interest income.

15III. Cash Receipts and Disbursements

~~III.~~ The ~~Cash~~following ~~Receipts~~table summarizes the cash receipts and ~~Disbursements~~disbursements for the periods as indicated:

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


	For the nine months ended
($ in thousands)	June 30, 2006			June 30, 2005
Cash receipts
Collection of committee action settlement	$	7,000		$	—
Preference collections, before costs of recovery		199			3,742
Other receipts		780			1,138


Total cash receipts		7,979			4,880


Cash disbursements
Operating expenses		438			1,497
Legal and professional fees
Litigation		359			1,203
Preference recoveries		179			1,156
Liquidation Trust operations		208			546
Claims payments		—			11
Voided claims checks, net of reissues		(79	)		(153	)


Total cash disbursements		1,105			4,260


Distributions paid		(6,480	)		(7,242	)


Increase/(decrease) in cash and cash equivalents	$	394		$	(6,622	)

	For the six months ended
($ in thousands)	March 31, 2005			March 31, 2004
Cash receipts
Preference collections, before costs of recovery	$	3,670		$	6,222
Other receipts		325			188
Total cash receipts		3,995			6,410
Cash disbursements
Legal and professional fees
Litigation		1,112			2,162
Preference recoveries		951			1,010
Liquidation Trust operations		383			1,087
Operating expenses		939			977
Claims payments		10			270
Reissued/(voided) claims checks, net		(123	)		212
Total cash disbursements		3,272			5,718
Distributions paid		166			2,112
Net cash in/(out)flow	$	557		$	(1,420	)

A. Cash receipts

A. During ~~Cash~~September 2005, ~~receipts~~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.

~~Most~~Cash ~~of the cash~~ receipts ~~are~~ from collections of preference receivables, ~~which~~ have been ongoing since the preference actions were filed in mid-2001,. ~~and~~Preference ~~are~~collections ~~substantially~~during ~~complete~~the asnine ofmonths ended ~~March~~June ~~2005.~~30, ~~Cash~~2006 ~~receipts~~were nominal, resulting from collections ofefforts ~~preference~~on ~~receivables~~recently ~~are~~settled ~~expected~~cases ~~to decline~~and ~~significantly~~certain ~~subsequent~~default tojudgments ~~the six months ended March 31, 2005~~issued.

~~Preference collections during the six months ended March 31, 2005 were significantly lower~~17 than during the six months ended March 31, 2004. Four substantial preference recovery actions (totaling $3.3 million in settlement value), which were settled immediately prior to trial, constituted most of the value of preference collections during the six months ended March 31, 2005.

~~During~~Collections during the ~~six~~nine months ended ~~March~~June 3130, ~~2004,~~2005 ~~the~~were ~~Liquidation~~substantially ~~Trust~~higher ~~settled~~than ~~and collected one~~during ~~very~~the ~~substantial~~nine ~~case,~~months ~~valued~~ended ~~at $3.8~~June ~~million (see II. B.~~30, ~~“Changes in estimates~~2006,” ~~above),~~primarily ~~in addition~~because toof ~~preference~~four ~~collections~~substantial ~~from 60 other cases. There were 90~~ preference ~~cases being~~recovery ~~actively~~actions ~~pursued~~(totaling ~~as of September~~$3.3 ~~30,~~million ~~2003,~~in ~~compared~~settlement ~~to 10 as of September 30~~value), ~~2004.~~among ~~Therefore~~others, ~~more~~ ~~cases~~which were ~~available~~settled immediately prior to ~~settle~~trial and ~~collect~~collected during the ~~six~~nine months ended ~~March~~June 3130, ~~2004 than during the six months ended March 31,~~ 2005. ~~On the other hand, absent the pressure of trial dates~~ during early 2004, many of the more significant cases proceeded slowly during the six months ended March 31, 2004; as a result, most of the cases settled and collected during that period were the smaller ones.

16 With the exception of one substantial case, no preference actions remain to be litigated as of June 30, 2006. In the one remaining case, the Bankruptcy Court awarded the Liquidation Trust $1.0 million. The defendant appealed the decision and award, and the appellate court upheld the Bankruptcy Court ruling in its entirety. Although the defendant has further appealed the case, 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.

B. Other ~~Legal~~receipts ~~and~~resulted ~~professional~~mainly ~~fees~~from interest income.

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

1Operating expenses during the nine months ended June 30, 2006 were substantially lower than those during the nine months ended June 30, 2005, primarily because, at the end of the nine months ended June 30, 2005, the Liquidation Trust still had three full-time employees, while, as a result of its reduced level of operation, the Liquidation Trust required only part-time employees during the nine months ended June 30, 2006. Approximately 60 ~~Litigation~~percent of operating expenses for the nine months ended June 30, 2006 consisted of annual insurance premiums for the Liquidation Trust, in an amount comparable to payments during the preceding years.

The litigation fees paid for the Bondholder Action and the Committee Action during the six months ended March 31, 2005 were significantly less than those paid during the six months ended March 31, 2004C. ~~Fees~~Legal ~~paid during the six months ended March 31, 2005 related to filing the Liquidation Trust’s appeal briefs in the Bondholder Action,~~ and toprofessional ~~defending various motions, including motions for summary judgment, filed by defendants in the Committee Action. Fees paid during the six months ended March 31, 2004 included expert~~ fees and legal fees related to the higher activity level of the October 2003 trial and post-trial briefs in the Bondholder Action, as well as discovery and trial preparation for, and defending various motions related to, the Committee Action. The Committee Action, now scheduled for trial in August 2005, had been scheduled for trial in January 2004, prior to its adjournment during September 2003.

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

~~Preference~~The ~~recovery~~litigation fees ~~during~~paid for the ~~six~~Bondholder Action and the Committee Action during the nine months ended ~~March~~June 3130, ~~2005~~2006 were ~~not~~significantly ~~comparable,~~less asthan ~~a percentage~~those ofpaid ~~preference~~during ~~collections~~the nine months ended June 30, to2005. ~~such~~Fees ~~fees~~paid during the ~~six~~nine months ended ~~March~~June 3130, ~~2004, primarily~~2005 ~~because~~related ofto ~~significant~~filing ~~differences~~the Liquidation Trust’s appeal briefs in the ~~size~~Bondholder ofAction, ~~the~~and ~~specific~~to ~~cases~~defending ~~settled~~various ~~and~~motions, ~~collected.~~including ~~The~~motions ~~collection~~for ~~fees~~summary ~~for~~judgment, ~~most~~filed ~~preference~~by ~~settlements~~defendants ~~are~~in ~~contingent~~the Committee Action. During the nine months ended June 30, ~~and~~2006, ~~are~~however, ~~set~~fees atrelated amainly to preparation of the initial appeal ~~declining~~brief ~~rate~~in ~~(generally~~the ~~ranging~~Committee ~~from~~Action, ~~35%~~in addition to 7%a of$0.1 million ~~collections)~~payment ~~for~~to ~~larger~~an ~~cases~~expert in key matters.

~~i. During~~Total preference recovery fees during the ~~six~~nine months ended ~~March~~June 3130, ~~2005~~2006 were not comparable, as ~~substantially~~a ~~all~~percentage of preference collections, to such fees during the ~~$3.7~~nine months ended June ~~million~~30, of2005. The collection fees for most preference ~~recoveries~~settlements ~~related~~are contingent, and are set at a declining rate (generally ranging from 35% to ~~four~~7% ~~significant~~of ~~cases,~~collections) for ~~which~~larger ~~the~~cases. ~~contingent~~In addition, preference recovery fees ~~were~~include expenses incurred in support of preference collections and associated ~~therefore~~litigation. ~~nearer~~The costs incurred during the ~~lower~~nine ~~end~~months ended June 30, 2005 included $0.2 million of fees ~~the~~for ~~rate~~expert ~~scale~~reports in connection with preference litigation. In addition, during the nine months ended June 30, 2005, the Liquidation Trust paid contingent fees of $0.21 million to its preference collections counsel with respect to ~~the~~additional value the Liquidation Trust ~~received~~recognized from ~~for~~ 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, ~~and~~because $0Impaired Claims waivers decrease the amount of Claims the Liquidation Trust must pay in each subsequent Distribution.~~3 million~~ Substantially all of the Liquidation Trust’s preference recovery fees for ~~expert~~the ~~reports~~nine inmonths ~~preparation~~ended ~~for~~June 30, ~~preference~~2006 ~~action~~were additional contingent ~~trials~~fees paid relative to the Distributions authorized during November 2005, rather than relating to preference collections received during the period.

~~ii. During~~Legal ~~the~~and ~~six~~professional ~~months ended March 31, 2004, with respect to one settlement totaling $3.8 million, no contingent preference recovery~~ fees ~~were~~for ~~paid~~Liquidation ~~(see~~Trust ~~related~~operations ~~fees~~include ~~discussed~~all ~~below). However~~legal, ~~the remaining $2.5 million of preference recoveries was collected from 60 different~~accounting, ~~vendors;~~and ~~therefore,~~other ~~the~~support ~~contingent~~services ~~fees~~except for ~~each such smaller case were near~~ the ~~higher~~expenses ~~end~~ of ~~the rate~~prosecuting ~~scale, significantly higher than for~~ the ~~large~~Bondholder ~~cases~~Action ~~settled~~and ~~during~~ the ~~six months ended March~~ ~~31, 2005. In addition, the Liquidation Trust paid $0.1 million of fees for an expert report in~~Committee ~~preparation for a preference action trial.~~

~~3. Liquidation Trust operations~~18

~~Legal and professional fees for Liquidation Trust operations include all legal, accounting, and other support services except for the expenses of prosecuting the Bondholder~~ Action ~~and the Committee Action~~, and expenses related to preference collections pursued on a contingency-fee ~~basis.~~ ~~Certain of the largest preference claims suits were handled by Liquidation Trust counsel on an hourly~~ basis ~~and the related fees included in Liquidation Trust operations~~. The higher fees for Liquidation Trust operations during the ~~six~~nine months ended ~~March~~June 3130, ~~2004~~2005 as compared to the ~~six~~ nine months ended ~~March~~June 3130, ~~2005~~2006 resulted primarily from legal fees associated with settlement ~~(a)~~of aclaims ~~preference~~against ~~case settled during~~ the ~~three months ended December 31~~Debtors, ~~2003~~as ~~for~~well ~~$3.8 million~~as ~~(see~~prosecution ~~II.,~~of B.claims ~~“Changes~~against incertain former ~~estimates,”~~vendors ~~above)~~of ~~and (b)~~ the ~~Kemper~~Debtors. ~~Complaint~~During ~~filed~~the ~~during December~~nine ~~2003.~~months Inended ~~addition~~June 30, ~~Liquidation~~2006, ~~Trust activities~~however, ~~and~~legal ~~the associated professional~~ fees, ~~have~~were minimal ~~declined~~ because ~~fewer~~most ~~issues~~such ~~and claims~~cases ~~remain~~were topreviously be resolved ~~as of each successive period~~.

CD. ~~Operating~~Distributions ~~expenses~~paid

~~Operating~~Distributions ~~expenses~~paid ~~during~~depend primarily on the ~~six~~amount ~~months~~of ~~ended~~Allowed ~~March 31~~Impaired Claims, ~~2005~~including ~~declined~~Claims newly ~~slightly~~allowed, ~~compared~~and on the Distributions authorized from time to time. During November 2005, the ~~those~~Liquidation ~~during~~Trust authorized a Distribution of 1.1911% of the ~~six~~Allowed ~~months~~amount ~~ended~~to ~~March~~holders of Allowed Impaired Claims, totaling $6.6 31million, ~~2004~~of which $6.4 million ~~Severance~~was paid toduring ~~two~~December 2005. Because ~~key~~this ~~employees~~Distribution inresulted from the ~~six~~$7.0 million proceeds of the Committee Action ~~months~~settlement, ~~ended~~pursuant ~~March~~to the Plan, Kmart’s $150.0 31million General Unsecured Claim was excluded from the Distribution. In addition, ~~2005~~during ~~substantially~~the ~~offset~~nine ~~decreased~~months ~~rent~~ended ~~expenditures~~June 30, ~~for~~2006, the Liquidation Trust’s paid ~~much~~the 2005 Tax Payment.

17 During May 2005, the Liquidation Trust authorized a Distribution of 1.0% of the Allowed amount to holders of Allowed Impaired Claims, totaling $7.1 million, substantially all of which was paid during May 2005. In addition, during the nine months ended June 30, 2005, holders of $1.1 million of Allowed Impaired Claims received payments at the previous cumulative Distribution rate of 8.1%, and the Liquidation Trust paid the 2004 Tax Payment. In general, as a result of the ongoing Claims resolution process, fewer Impaired Claims remain to be resolved and paid as of each successive period.

~~reduced~~IV. ~~office~~Net ~~and~~Assets ~~warehouse~~in space and decreased annual bank fees incurred with respect to the substantially reduced letter of credit balance resulting from the December 2004 settlement of a secured Claim asserted by Kemper (the “Kemper Claim”) against the Liquidation ~~Trust.~~

DA. ~~Claims payments~~Assets

~~Payments~~The ofLiquidation ~~Unimpaired~~Trust’s ~~Claims~~cash ~~were~~and ~~lower~~cash ~~during~~equivalents ~~the~~balance ~~six~~of ~~months ended March~~$27.0 ~~31,~~million ~~2005~~and ~~than~~$26.6 million ~~during~~as ~~the~~of ~~six~~June 30, ~~months~~2006 ~~ended~~and ~~March~~September 3130, ~~2004~~2005, ~~because~~respectively, asis aclassified ~~result~~as ofeither ~~the ongoing Claims resolution~~(a) cash ~~process,~~designated ~~fewer~~as ~~Unimpaired~~available ~~Claims~~for ~~remain~~distribution to beholders ~~resolved~~of ~~and~~Impaired ~~paid~~Claims as(“Available ofCash”), ~~each~~(b) Reserved ~~successive~~Cash ~~period~~or (c) Other Cash.

E 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 $3.3 million as of June 30, 2006 was based primarily on the cumulative Distribution rate of 10.2911%, for $28.5 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 $3.1 million as of September 30, 2005 was based primarily on the then current cumulative Distribution rate of 9.1%, for $31.6 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.

~~Distributions~~Reserved ~~paid~~cash ~~depend~~is ~~primarily~~held onby the ~~amount~~Liquidation ofTrust ~~Allowed~~to ~~Impaired~~assure ~~Claims,~~payment ~~including~~of ~~Claims newly allowed, and on~~ the ~~Distributions~~Liquidation ~~authorized from time to time~~Trust’s obligations. NoUnder ~~new~~the ~~interim~~terms ~~Distribution was~~of ~~authorized or paid during~~ the ~~six months ended March 31~~Plan, ~~2005~~reserved orcash ~~during~~is ~~the~~intended ~~six~~to ~~months~~provide ~~ended March~~for (a) ~~31,~~operating expenses ~~2004.~~of ~~During~~ the ~~six~~Liquidation ~~months~~Trust, ~~ended March~~(b) ~~31,~~estimated ~~2005,~~payments to holders of ~~$1.1 million~~Allowed ofUnimpaired ~~Allowed~~and ~~Impaired~~Convenience Claims ~~received~~in ~~payments~~accordance atwith the ~~cumulative Distribution rate of 8.1%~~Plan, and ~~the Liquidation Trust authorized and paid taxes of $0.1~~(c) ~~million~~payments onwhich ~~calendar~~may ~~year~~become ~~2004~~necessary ~~taxable~~if ~~net income~~ and ~~gain~~ ~~allocable~~as ~~to holders of~~ Disputed ~~Impaired~~Unimpaired Claims onbecome ~~behalf~~allowed, ofor ~~such~~if ~~holders.~~certain ~~During~~specific ~~the~~contingencies ~~six~~should ~~months~~occur. ~~ended~~Reserved ~~March 31,~~cash ~~2004,~~decreased ~~holders~~by of $320.59 million offrom ~~Allowed~~September 30, ~~Impaired~~2005 ~~Claims~~to ~~received~~June 30, ~~payments~~2006, atto ~~the then~~a ~~cumulative~~balance ~~Distribution rate~~ of 6 $21.~~573%. In general~~3 million, primarily as a result of ~~the~~disbursements ~~ongoing~~from ~~Claims resolution~~the ~~process,~~Wind-down ~~fewer Impaired Claims remain to be resolved~~ and ~~paid~~Litigation Reserves, as ofdiscussed ~~each successive period~~below.

~~IV. Net Assets in Liquidation~~19

AB. ~~Assets~~Liabilities and Reserves

1The most significant component of liabilities and contingency reserves is the Fleet Reserve, established at a total of $11.0 ~~Cash~~million pursuant to a stipulated order between Fleet and ~~cash~~the Liquidation ~~equivalents~~Trust. As of June 30, 2006, the Fleet settlement accrual, totaling $8.3 million of the $11.0 million Fleet Reserve, has been recorded based on a settlement in principle between the Liquidation Trust, Fleet and GECC reached subsequent to June 30, 2006. Subject to certain conditions, including Fleet documenting certain expenditures to the satisfaction of the Liquidation Trustee, the Liquidation Trust, Fleet and GECC have agreed in principle to release each other from further claims and, upon payment to Fleet of $8.3 million of the $11.0 million Fleet Reserve, Fleet and GECC will release any claim to the balance of the Fleet Reserve. The settlement is also subject to the approval of the Bankruptcy Court.

~~The~~In order for the Liquidation Trust’s ~~cash~~to ~~and~~provide ~~cash~~for ~~equivalents~~a ~~balance~~settlement ofaccrual totaling $348.93 million, consistent ~~and~~with the total amount of the settlement reached in principle, as of June 30, 2006, the Liquidation Trust recorded a decrease in net assets in liquidation of $~~34.~~4.8 million (in addition to asthe loss contingency accrual of ~~March~~$3.5 ~~31,~~million ~~2005~~recorded ~~and~~previously). ~~September~~As of June 30, ~~2004~~2005, ~~respectively~~a loss contingency accrual of $3.5 million had been recorded as a liability related to the resolution of the Bondholder Action in favor of Fleet, isas explained in “Legal Proceedings,” below. The $2.8 million remaining Fleet Reserve balance remains classified as ~~either (~~a) contingency reserve as of June ~~Cash~~30, ~~Designated~~2006, asgiven ~~Available~~the ~~for~~possibility ~~Distribution~~that ~~(“Available~~the ~~Cash”)~~settlement reached in principle may not be consummated, ~~(b) Reserved~~or approved ~~Cash~~by the Bankruptcy Court, ~~(c) Restricted~~in ~~Cash or~~which ~~(d) Other~~case ~~Cash~~the Fleet Reserve might not be released.

~~Available~~Estimated ~~Cash~~costs ~~is designated to assure the availability~~ of ~~funds~~liquidation ~~for~~decreased ~~payment~~by ~~to holders of Impaired Claims who have not received authorized Distributions. The required amount of Available Cash of~~ $21.80 million ~~as of March 31~~, ~~2005~~to ~~was~~a ~~based~~balance ~~primarily on the cumulative Distribution rate~~ of ~~8.1%, for~~ $21.62 million ofas ~~Allowed but unpaid Impaired Claims plus $32.5 million~~ of ~~Disputed~~ ~~Impaired Claims (at their estimated value for reserve purposes). The required amount of Available Cash of $3.4~~June ~~million~~30, as2006, ofcompared to September 30, ~~2004 was also based primarily on the cumulative Distribution rate of 8~~2005.~~1%,~~ ~~for~~The ~~$1.9 million~~decrease ofis ~~Allowed~~due ~~but~~to ~~unpaid~~disbursements ~~Impaired~~totaling ~~Claims plus~~ $390.56 million offrom ~~Disputed Impaired Claims (at their estimated value for reserve purposes). The value of Disputed Claims, for~~ the ~~purpose~~Wind-down ofReserve ~~establishing adequate reserves, was estimated by the Liquidation Trust~~ and ~~approved~~$0.4 million byfrom the ~~Bankruptcy~~Litigation ~~Court in an order establishing the amounts of Disputed Claims Reserves~~Reserve.

~~Reserved Cash is held by the Liquidation Trust to assure payment of the Liquidation Trust’s obligations~~V. ~~Under the terms of the Plan, Reserved Cash is intended to provide for (a) operating~~Contingencies 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 increased by $1.7 million from September 30, 2004 to March 31, 2005, to a balance of $23.2 million, primarily as a result of the establishment of the litigation appeals provision, and offset in part by expenditures from the Wind-down and Litigation Reserves, all as discussed below.

~~Restricted~~The ~~Cash~~Liquidation asTrust ofis ~~September 30~~pursuing litigation against various parties, ~~2004~~in ofparticular ~~$9.3 million~~the “Committee ~~related~~Action,” ~~primarily~~as todescribed ain ~~letter~~“Legal ofProceedings,” below. The Liquidation Trust cannot ~~credit~~predict ~~collateralizing~~with any certainty the ~~Kemper~~ultimate ~~Claim.~~outcome ~~During~~of ~~January 2005,~~the ~~$7.4 million~~remaining oflitigation ~~Restricted~~or ~~Cash~~the ~~was~~amount or range ~~released~~of topotential recoveries.

18VI. Forward-Looking Statements

~~Other~~ This ~~Cash~~quarterly ~~following~~report aon ~~reduction~~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 ~~letter~~terms currently contemplated in ongoing negotiations and in other estimates of ~~credit~~settlement tovalue, the effect of substantial delays in settling contingent assets and liabilities, resulting in a ~~balance~~prolonged period of ~~$1.6 million~~liquidation, ~~which~~economic conditions, changes in ~~resulted~~tax ~~from~~and other government rules and regulations applicable to the ~~December 2004~~Liquidation ~~settlement~~Trust and other risks. These risks are beyond the ability of the ~~Kemper~~Liquidation ~~Claim~~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.

~~Other Cash, which is not designated to a specific reserve or fund, increased primarily as a result of the release of $7.4~~Item ~~million~~3. ~~from~~Quantitative ~~Restricted Cash, as described above,~~ and ~~preference collections~~Qualitative ~~during~~Disclosures ~~the~~About ~~six~~Market ~~months ended March 31, 2005, offset in part by the establishment of the~~Risk litigation appeals provision, as described under “C., Contingency reserves”, below. Subsequent to March 31, 2005, the Liquidation Trustee filed a Notice of Fourth Interim Distribution with the Bankruptcy Court, indicating that an additional Distribution in the amount of 1.0% of Impaired Claims will be made to holders of Allowed Impaired Claims during May 2005.

~~2. Preference~~The ~~receivables~~Liquidation ~~and~~Trust ~~other~~does ~~assets~~not hold any market risk sensitive instruments.

~~Preference receivables, net of costs of recovery, decreased by $2.8 million, to a balance of~~20 $0.4 million as of March 31, 2005, compared to September 30, 2004, primarily due to ongoing preference collections. Collections of preference receivables totaled $3.7 million, and costs to collect, including significant non-recurring expert fees, totaled $1.0 million.

~~Other assets increased by $0.9~~Item ~~million, to a balance of $1~~4.~~1 million~~ asControls ~~of March 31, 2005, compared to September 30, 2004, primarily due to the $0.6 million settlement in the Kemper Complaint~~ and ~~a $0.4 million distribution announced in the~~Procedures ~~liquidation of the Debtors’ former company-owned life insurance policy carrier.~~

B. The ~~Liabilities~~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.

~~Estimated~~The ~~costs~~Liquidation ofTrust, ~~liquidation~~including ~~decreased~~the byLiquidation ~~$2.4 million~~Trustee, tohas aconducted ~~balance~~an evaluation of ~~$3.5 million~~the effectiveness as of ~~March 31,~~ ~~2005,~~disclosure ~~compared~~controls and procedures pursuant to ~~September~~Exchange Act Rules ~~30,~~13a-15 ~~2004~~and 15d-15. ~~The~~Based ~~decrease~~on isthat ~~due~~evaluation, tothe ~~disbursements~~Liquidation ~~totaling~~Trustee ~~$1.3 million~~concluded ~~from~~that the ~~Wind-down~~Liquidation ~~Reserve~~Trust’s disclosure controls and ~~$1.1 million~~procedures ~~from~~are ~~the~~effective ~~Litigation~~as ~~Reserve~~of June 30, 2006.

C. There ~~Contingency~~has ~~reserves~~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 ~~most~~remaining ~~significant~~responsibilities ~~component~~of inthe ~~contingency~~Liquidation ~~reserves~~Trust isno ~~the~~longer ~~Fleet~~require ~~Reserve,~~the ~~established at a~~full-time ~~total~~attention of ~~$11.0 million~~the ~~pursuant~~Liquidation toTrustee aor ~~stipulated~~of ~~order~~Liquidation ~~between~~Trust ~~Fleet~~employees. ~~Retail~~The ~~Finance~~Liquidation ~~Inc. (“Fleet”)~~Trustee and ~~the~~one ~~Liquidation~~other ~~Trust.~~employee ~~The~~are ~~Fleet~~performing ~~Reserve~~necessary ismanagement ~~likely~~oversight toand ~~be drawn upon if Fleet~~administrative, aslegal ~~a defendant~~and inaccounting ~~the~~processes ~~Committee~~on ~~Action~~a ~~and~~part-time ~~the Bondholder Action~~basis, ~~should~~with ~~ultimately~~periodic ~~prevail~~assistance infrom ~~one~~other orformer ~~both of such actions~~employees. While Nothe ~~liability~~Liquidation ~~has~~Trustee ~~been~~believes ~~recorded~~that inthese ~~connection~~individuals ~~with~~will ~~the~~consistently ~~Fleet~~make ~~Reserve~~themselves available ~~because~~as ~~the Liquidation~~needed ~~Trust~~to ~~has~~perform ~~appealed~~their ~~the~~assigned ~~adverse~~responsibilities, ~~decision~~including ~~and~~functions ~~judgment~~related into internal ~~the~~control ~~Bondholder~~over ~~Action~~financial reporting, ~~does~~there ~~not consider~~can ~~Fleet~~be ~~likely~~no toassurance ~~ultimately~~that ~~prevail~~this inavailability ~~either~~will continue. ofAs ~~these~~a ~~Actions~~result, ~~and~~there ~~has~~may nobe ~~access~~future ~~to information~~deficiencies toin ~~estimate~~internal ~~the~~accounting ~~amount,~~controls ifrelated ~~any,~~to a ~~that~~lack ~~Fleet~~of ~~may~~segregation ~~validly~~of ~~assert against the Fleet Reserve~~duties.

~~The~~PART ~~litigation~~II ~~appeals~~– ~~provision~~OTHER ~~represents cash held in reserve to allow the Liquidation~~INFORMATION Trust to pursue or defend future appeals and re-trials of the Committee Action and the Bondholder Action. The Liquidation Trustee designated this contingency reserve as of March 31, 2005 because the anticipated future cash receipts of the Liquidation Trust may 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.

VItem 1. ~~Contingencies~~Legal Proceedings

~~The~~Further ~~Liquidation~~background ~~Trust~~information isabout ~~pursuing~~the ~~litigation~~following ~~against~~cases ~~various~~is ~~parties,~~disclosed in ~~particular the cases described as the Bondholder Action and the Committee Action~~Part I, ~~as described in~~ Item 3., “Legal Proceedings,” ~~below.~~ ~~The~~of the Liquidation Trust’s ~~cannot~~Form ~~predict~~10-K ~~with~~for ~~any certainty~~ the ~~ultimate~~fiscal ~~outcome~~year ofended ~~any of the~~September 30, ~~litigation or the amount or range of potential recoveries~~2005.

19Bankruptcy Court Case

VI As of June 30, 2006, one defendant in a preference litigation action had appealed a Bankruptcy Court award to the Liquidation Trust of $1.0 million ~~Forward-Looking~~to ~~Statements~~the United States District Court for the District of Delaware (the “District Court”). During March 2006, the District Court upheld the decision and award of the Bankruptcy Court. The defendant has further appealed the affirmation by the District Court to the United States Court of Appeals for the Third Circuit (the “Court of Appeals”). A June 2006 mediation ordered and conducted by the Court of Appeals did not result in a settlement. Prosecution of all other significant preference litigation has been completed.

~~This~~Federal ~~quarterly~~Court ~~report on Form 10-Q contains forward-looking statements about the business,~~Cases financial condition and prospects of the Liquidation Trust. The actual results of the Liquidation Trust could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including, without limitation, the Liquidation Trust’s success in securing claims settlements on the terms currently contemplated in ongoing negotiations and in other estimates of settlement value, the effect of substantial delays in settling contingent assets and liabilities, resulting in a prolonged period of liquidation, economic conditions, changes in tax and other government rules and regulations applicable to the Liquidation Trust and other risks. These risks are beyond the ability of the Liquidation Trust to control, and in many cases, the Liquidation Trust cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by any forward-looking statements included in this Form 10-Q. When used in this quarterly report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates” and other similar expressions as they relate to the Liquidation Trust or the Liquidation Trustee are intended to identify forward-looking statements.

~~Item~~ The 3.Bondholder ~~Quantitative and Qualitative Disclosures About Market Risk~~Action

In March 2004 the District Court issued an opinion and order (collectively, the “Decision”) in the Bondholder Action, directing the entry of judgment in favor of Fleet and GECC. The Liquidation Trust ~~does~~appealed ~~not~~the ~~hold~~Decision, ~~any~~and ~~market~~in ~~risk~~July 2005 ~~sensitive~~the ~~instruments~~Court of Appeals issued its Opinion affirming the March 2004 Decision. The Liquidation Trust’s motion for reconsideration and reversal of the Court of Appeals Opinion was denied by the Court of Appeals during August 2005, and the Liquidation Trust has determined not to pursue the action further. Subsequent to June 30, 2006, the Liquidation Trust, Fleet and

~~Item 4. Controls and Procedures~~21

~~The~~GECC ~~Liquidation~~reached ~~Trust~~an ~~has~~agreement ~~designed~~in ~~and~~principle ~~maintains disclosure controls and procedures~~ to ~~ensure that~~settle ~~information~~all ~~required to be disclosed in its reports filed or submitted under the Exchange Act is recorded~~claims, ~~processed, summarized and reported within~~ the ~~time~~terms ~~periods~~of ~~specified in the~~which ~~Commission’s rules and regulations. These controls and procedures~~ are ~~also~~described ~~designed~~immediately ~~to ensure that such information is communicated to the Liquidation Trustee, to allow him to make timely decisions about required disclosures~~below.

The ~~Liquidation~~Committee ~~Trust, including the Liquidation Trustee, has conducted an evaluation of the~~Action effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Liquidation Trustee concluded that the Liquidation Trust’s disclosure controls and procedures are effective as of March 31, 2005.

~~There~~During ~~has~~July 2005, ~~been~~the noDistrict ~~change~~Court inissued ~~the~~a ~~Liquidation~~memorandum ~~Trust’s~~opinion ~~internal~~and ~~control~~order ~~over~~on ~~financial~~pending ~~reporting~~summary ~~that~~judgment ~~occurred~~motions ~~during~~(collectively, the ~~Liquidation~~“Summary Judgment Decision”), dismissing the Liquidation Trust’s ~~most~~claims ~~recent~~against ~~fiscal~~Fleet ~~quarter~~Retail, ~~that~~GECC, ~~has~~and ~~materially affected,~~certain orother isdefendants ~~reasonably~~in ~~likely~~the toCommittee ~~materially~~Action. During ~~affect~~August 2005, the District Court substantively denied the Liquidation Trust’s ~~internal~~motion ~~control~~for ~~over~~reconsideration ~~financial~~of ~~reporting~~the Summary Judgment Decision. During December 2005, the Liquidation Trust filed with the Court of Appeals its notice of appeal from the Summary Judgment Decision and related judgment in the Committee Action. 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.

AsThe aLiquidation ~~result~~Trust ofcontinued ~~delays~~to innegotiate ~~implementation~~with ofsome ~~certain requirements~~ of the ~~Sarbanes~~remaining –parties, ~~Oxley~~reaching ~~Act of~~a ~~2002,~~settlement ~~the~~in ~~Liquidation~~principle ~~Trust’s~~with ~~internal~~both ~~controls~~Fleet ~~over~~and ~~financial~~GECC ~~reporting~~subsequent ~~will~~to ~~not~~June 30, be2006. ~~subject~~Subject to certain ~~audit~~conditions, ~~until~~including ~~the~~Fleet ~~fiscal~~documenting ~~year~~certain ~~ending~~expenditures ~~September 30,~~to ~~2006. However,~~ the ~~requirements~~satisfaction of the ~~Sarbanes –~~Liquidation ~~Oxley~~Trustee, ~~Act~~the ofLiquidation ~~2002~~Trust, ~~have~~Fleet ~~been~~and ~~taken~~GECC ~~into~~have ~~account~~agreed in ~~planning~~principle ~~for~~to ~~the~~release ~~future~~each ~~administrative~~other from ~~requirements~~further ofclaims ~~the~~and, ~~Liquidation~~upon ~~Trust~~payment ~~when~~to itFleet ~~suspends~~of ~~day-to-day operations~~$8.3 million Inof ~~addition~~the to$11.0 million ~~the Liquidation~~Fleet ~~Trustee~~Reserve, ~~the~~Fleet and ~~Liquidation~~GECC ~~Trust~~will ~~had~~release ~~two~~any ~~employees~~claim ason ofthe ~~March 31,~~balance ~~2005.~~of In the ~~next three~~Fleet ~~months,~~Reserve. ~~the~~The ~~Liquidation~~settlement ~~Trust~~is ~~expects~~also subject to ~~cease~~the ~~much~~approval of ~~its~~the ~~day-to-day~~Bankruptcy ~~operations~~Court. ~~and~~The ~~to minimize~~settlement ~~staffing~~in ~~accordingly,~~principle ~~which~~has ~~may~~no ~~result~~effect inon ~~deficiencies~~the Liquidation inTrust’s ~~internal~~claims ~~accounting~~against ~~controls related~~any toother adefendant ~~lack~~in ofthe ~~segregation~~Committee ~~of duties~~Action.

20 During September 2005, the Liquidation Trust reached a settlement with 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, and the Liquidation Trust dismissed the Committee Action as against the Officer and Director Defendants. The settlement had no effect on the Liquidation Trust’s claims against any other defendant in the Committee Action.

~~PART~~ The IIvarious –remaining ~~OTHER~~defendants ~~INFORMATION~~are vigorously opposing this action. There is no assurance that the Liquidation Trust will prevail on the appeal filed with respect to the Committee Action. While the Liquidation Trust is vigorously pursuing this litigation with the intent to obtain a very substantial recovery, the Liquidation Trust cannot predict with any certainty the outcome of the litigation or the amount or range of potential recoveries.

Item 1 2. ~~Legal~~Unregistered ~~Proceedings~~Sales of Equity Securities and Use of Proceeds

~~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, 2004~~None.

~~Federal~~Item 3. ~~Court~~Defaults ~~Cases~~Upon Senior Securities

~~The Bondholder Action~~None.

~~In March~~Item 2004, following a non-jury trial held in October 2003, the Court issued an opinion and order (collectively, “the Decision”) in the Bondholder Action, directing the entry of judgment in favor of the defendants4. InSubmission ~~April 2004, the Liquidation Trust filed an appeal from the Decision and related judgment. The Liquidation Trust and the defendants each completed the filing~~ of ~~appeal briefs~~Matters ~~during~~to ~~September 2004.~~a ~~The~~Vote ~~Court~~ of ~~Appeals~~Security ~~has scheduled oral argument for the appeal~~Holders ~~during June 2005. The timing of a ruling is unknown.~~

~~The Committee Action~~None.

~~In April~~Item ~~2004, the Committee Action was assigned to the judge who presided in the Bondholder Action, who has scheduled the Committee Action for trial in August 2005~~5. ~~During~~Other ~~December 2004 and~~Information ~~January 2005, the Court heard oral argument on motions, including motions for summary judgment, filed by various defendants. The timing of a decision on defendants’ motions is unknown.~~

~~The various defendants are vigorously opposing the Bondholder Action and the Committee Action~~None. There is no assurance that the Liquidation Trust will prevail on the claims asserted in the Committee Action and in the appeal of the Bondholder Action. The Liquidation Trust cannot predict with any certainty the outcome of the litigation or the amount or range of potential recoveries.

~~Bankruptcy~~Item 6. ~~Court Case~~Exhibits

The Kemper Complaint


Exhibit
Number		Document

31.1		Certification by Liquidation Trustee

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

~~During December 2004, Kemper and the Liquidation Trust reached an agreement to settle Kemper’s~~22 secured Claim, for unliquidated workers’ compensation claims against the Debtors, for $1.7 million, offset by a $0.1 million prepayment held by a third-party claims administrator. During January 2005, pursuant to this agreement, Kemper reduced the letter of credit collateralizing its Claim to $1.6 million, and released a $12.0 million bond held as additional security, which bond constitutes most of the largest remaining Disputed Impaired Claim.

~~During March 2005, the Liquidation Trust’s claims against Kemper for the return of excess~~SIGNATURES ~~collateral, deposits and other amounts due to the Liquidation Trust were settled for $0.6 million under an agreement in principle, subject to approval by the Bankruptcy Court.~~

~~Item~~ Pursuant 2.to ~~Unregistered~~the ~~Sales~~requirements of ~~Equity~~the Securities ~~and~~Exchange ~~Use~~Act of ~~Proceeds~~1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

None.

~~Item 3. Defaults Upon Senior Securities~~23

~~None.~~INDEX TO EXHIBITS FORM 10-Q

21Exhibit No.

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

31.1		Certification by Liquidation Trustee

32.1		Liquidation Trustee’s Certification Pursuant to 18 u.s.c. Section 1350

~~None.~~24

Item 5. Other Information

Subsequent to March 31, 2005, the Liquidation Trustee filed a Notice of Fourth Interim Distribution with the Bankruptcy Court, indicating that an additional Distribution in the amount of 1.0% of Impaired Claims will be made to holders of Allowed Impaired Claims during May 2005.

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

SIGNATURES

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

	HECHINGER LIQUIDATION TRUST
Date: May 2, 2005	By:	/s/ Conrad F. Hocking
	Name: Conrad F. Hocking
	Title: Liquidation Trustee

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

HECHINGER LIQUIDATION TRUST

Date: August 14, 2006

/s/ Conrad F. Hocking

Name: Conrad F. Hocking

Title: Liquidation Trustee

Filing Compare · HECHINGER LIQUIDATION TRUST