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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-Q



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(Mark one)

|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 24, 2006

OR



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

For the transition period from 
to

Commission File Number 333-123682



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H-LINES FINANCE HOLDING CORP.

(Exact name of registrant as specified in its
charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 35-2242993                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4064 Colony Road, Suite 200, Charlotte, North Carolina         |  | 28211                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(704) 973-7000

(Registrants telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)



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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 a 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 ̈No  x

Indicate by check mark whether the Registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

As of
October 30, 2006, 1,000 shares of common stock, par value $.01 per share, were outstanding.



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##### Table of Contents

H-LINES FINANCE HOLDING CORP.

Form 10-Q Index



|          |  |                       |  |                                                                                       |  |         
|--------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|          |  |                       |  |                                                                                       |  | Page No.
|          |  |                      
|Part I.   |  | Financial Information |  | 3                                                                                    
|          |  |                       | 
|          |  | 1.                    |  | Financial Statements                                                                  |  | 3       
|          |  |                       | 
|          |  |                       |  | Unaudited Condensed Consolidated Balance Sheets                                       |  | 3       
|          |  |                       | 
|          |  |                       |  | Unaudited Condensed Consolidated Statements of Operations                             |  | 4       
|          |  |                       | 
|          |  |                       |  | Unaudited Condensed Consolidated Statements of Cash Flows                             |  | 5       
|          |  |                       | 
|          |  |                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                        |  | 6       
|          |  |                       | 
|          |  | 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15      
|          |  |                       | 
|          |  | 3.                    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 33      
|          |  |                       | 
|          |  | 4.                    |  | Controls and Procedures                                                               |  | 33      
|          |  |                      
|Part II.  |  | Other Information     |  | 34                                                                                   
|          |  |                       | 
|          |  | 1.                    |  | Legal Proceedings                                                                     |  | 34      
|          |  |                       | 
|          |  | 1A.                   |  | Risk Factors                                                                          |  | 34      
|          |  |                       | 
|          |  | 2.                    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 34      
|          |  |                       | 
|          |  | 3.                    |  | Defaults Upon Senior Securities                                                       |  | 34      
|          |  |                       | 
|          |  | 4.                    |  | Submission of Matters to a Vote of Security Holders                                   |  | 34      
|          |  |                       | 
|          |  | 5.                    |  | Other Information                                                                     |  | 34      
|          |  |                       | 
|          |  | 6.                    |  | Exhibits                                                                              |  | 34      
|          | 
|Signature |  | 35                   



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##### Table of Contents

PART I. FINANCIAL INFORMATION

1.Financial Statements

H-Lines Finance Holding Corp. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

($ in thousands)



|                                                                                                                               |  |                    |         |   |                      |   |        
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | -------------------- | - | -------
|                                                                                                                               |  | September 24, 2006 |         |   | December 25, 2005(1)
|Assets                                                                                                                         |  |                    |         |   |                      |   |        
|Current assets                                                                                                                 |  |                    |         |   |                      |   |        
|Cash and cash equivalents                                                                                                      |  | $                  | 81,784  |   |                      | $ | 41,268 
|Accounts receivable, net of allowance                                                                                          |  |                    | 149,417 |   |                      |   | 119,838
|Income tax receivable                                                                                                          |  |                    |        |   |                      |   | 322    
|Deferred tax asset                                                                                                             |  |                    | 12,705  |   |                      |   | 15,898 
|Materials and supplies                                                                                                         |  |                    | 25,223  |   |                      |   | 26,355 
|Other current assets                                                                                                           |  |                    | 10,503  |   |                      |   | 5,177  
|                                                                                                                               |  |                    |         |   |                      |   |        
|Total current assets                                                                                                           |  |                    | 279,632 |   |                      |   | 208,858
|Property and equipment, net                                                                                                    |  |                    | 186,639 |   |                      |   | 200,597
|Goodwill                                                                                                                       |  |                    | 306,724 |   |                      |   | 306,724
|Intangible assets, net                                                                                                         |  |                    | 174,793 |   |                      |   | 191,502
|Other long term assets                                                                                                         |  |                    | 21,198  |   |                      |   | 18,034 
|                                                                                                                               |  |                    |         |   |                      |   |        
|Total assets                                                                                                                   |  | $                  | 968,986 |   |                      | $ | 925,715
|                                                                                                                               |  |                    |         |   |                      |   |        
|Liabilities and Stockholders Equity                                                                                           |  |                    |         |   |                      |   |        
|Current liabilities                                                                                                            |  |                    |         |   |                      |   |        
|Accounts payable                                                                                                               |  | $                  | 26,359  |   |                      | $ | 22,368 
|Current portion of long term debt                                                                                              |  |                    | 7,013   |   |                      |   | 2,500  
|Other accrued liabilities                                                                                                      |  |                    | 130,167 |   |                      |   | 118,389
|                                                                                                                               |  |                    |         |   |                      |   |        
|Total current liabilities                                                                                                      |  |                    | 163,539 |   |                      |   | 143,257
|Long term debt, net of current                                                                                                 |  |                    | 526,700 |   |                      |   | 527,568
|Deferred tax liability                                                                                                         |  |                    | 39,036  |   |                      |   | 64,008 
|Deferred rent                                                                                                                  |  |                    | 37,121  |   |                      |   | 40,476 
|Other long term liabilities                                                                                                    |  |                    | 2,623   |   |                      |   | 2,284  
|                                                                                                                               |  |                    |         |   |                      |   |        
|Total liabilities                                                                                                              |  |                    | 769,019 |   |                      |   | 777,593
|                                                                                                                               |  |                    |         |   |                      |   |        
|Stockholders equity                                                                                                           |  |                    |         |   |                      |   |        
|Common stock, $.01 par value, 1,000 shares issued and outstanding as of September 24, 2006 and December 25, 2005,
respectively |  |                    |        |   |                      |   |       
|Additional paid in capital                                                                                                     |  |                    | 79,302  |   |                      |   | 78,005 
|Accumulated other comprehensive (loss) income                                                                                  |  |                    | (403    | ) |                      |   | 74     
|Retained earnings                                                                                                              |  |                    | 121,068 |   |                      |   | 70,043 
|                                                                                                                               |  |                    |         |   |                      |   |        
|Total stockholders equity                                                                                                     |  |                    | 199,967 |   |                      |   | 148,122
|                                                                                                                               |  |                    |         |   |                      |   |        
|Total liabilities and stockholders equity                                                                                     |  | $                  | 968,986 |   |                      | $ | 925,715
|                                                                                                                               |  |                    |         |   |                      |   |        

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|(1) | The balance sheet at December 25, 2005 has been derived from the audited financial statements of H-Lines Finance Holding Corp.
|--- | ------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



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##### Table of Contents

H-Lines Finance Holding Corp. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

($ in thousands)



|                                                   |  |                    |         |                   |                    |   |                    |  |   |                    |   |  |   |        
|-------------------------------------------------- |  | ------------------ | ------- | ----------------- | ------------------ | - | ------------------ |  | - | ------------------ | - |  | - | -------
|                                                   |  | Quarters Ended     |         | Nine Months Ended
|                                                   |  | September 24, 2006 |         |                   | September 25, 2005 |   | September 24, 2006 |  |   | September 25, 2005
|Operating revenue                                  |  | $                  | 304,657 |                   |                    | $ | 289,075            |  | $ | 869,438            |   |  | $ | 817,181
|Operating expenses:                                |  |                    |         |                   |                    |   |                    |  |   |                    |   |  |   |        
|Operating expense (excluding depreciation expense) |  |                    | 229,072 |                   |                    |   | 221,968            |  |   | 673,421            |   |  |   | 644,437
|Selling, general and administrative                |  |                    | 23,782  |                   |                    |   | 28,097             |  |   | 69,999             |   |  |   | 72,319 
|Depreciation and amortization                      |  |                    | 12,445  |                   |                    |   | 13,085             |  |   | 37,539             |   |  |   | 38,526 
|Amortization of vessel drydocking                  |  |                    | 3,362   |                   |                    |   | 3,815              |  |   | 11,332             |   |  |   | 12,359 
|Miscellaneous (income) expense, net                |  |                    | (406    | )                 |                    |   | 585                |  |   | 861                |   |  |   | 1,805  
|                                                   |  |                    |         |                   |                    |   |                    |  |   |                    |   |  |   |        
|Total operating expense                            |  |                    | 268,255 |                   |                    |   | 267,550            |  |   | 793,152            |   |  |   | 769,446
|                                                   |  |                    |         |                   |                    |   |                    |  |   |                    |   |  |   |        
|Operating income                                   |  |                    | 36,402  |                   |                    |   | 21,525             |  |   | 76,286             |   |  |   | 47,735 
|Other expense:                                     |  |                    |         |                   |                    |   |                    |  |   |                    |   |  |   |        
|Interest expense, net                              |  |                    | 12,226  |                   |                    |   | 12,936             |  |   | 36,256             |   |  |   | 39,174 
|Other expense (income), net                        |  |                    | 2       |                   |                    |   | 16                 |  |   | (184               | ) |  |   | 17     
|                                                   |  |                    |         |                   |                    |   |                    |  |   |                    |   |  |   |        
|Income before income taxes                         |  |                    | 24,174  |                   |                    |   | 8,573              |  |   | 40,214             |   |  |   | 8,544  
|Income tax expense (benefit)                       |  |                    | (29,767 | )                 |                    |   | 3,504              |  |   | (23,445            | ) |  |   | 3,730  
|                                                   |  |                    |         |                   |                    |   |                    |  |   |                    |   |  |   |        
|Net income                                         |  | $                  | 53,941  |                   |                    | $ | 5,069              |  | $ | 63,659             |   |  | $ | 4,814  
|                                                   |  |                    |         |                   |                    |   |                    |  |   |                    |   |  |   |        

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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##### Table of Contents

H-Lines Finance Holding Corp. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

($ in thousands)



|                                                                                  |  |                    |         |   |                    |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | -
|                                                                                  |  | Nine Months Ended  |        
|                                                                                  |  | September 24, 2006 |         |   | September 25, 2005 |  
|Cash flows from operating activities:                                             |  |                    |         |   |                    |   |         |  
|Net income                                                                        |  | $                  | 63,659  |   |                    | $ | 4,814   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                    |         |   |                    |   |         |  
|Depreciation                                                                      |  |                    | 22,868  |   |                    |   | 23,855  |  
|Amortization of other intangible assets                                           |  |                    | 14,671  |   |                    |   | 14,671  |  
|Amortization of vessel drydocking                                                 |  |                    | 11,332  |   |                    |   | 12,359  |  
|Amortization of deferred financing costs                                          |  |                    | 2,413   |   |                    |   | 2,528   |  
|Deferred income taxes                                                             |  |                    | (21,542 | ) |                    |   | 3,130   |  
|Gain on equipment disposals                                                       |  |                    | (471    | ) |                    |   | (253    | )
|Stock-based compensation                                                          |  |                    | 686     |   |                    |   |        |  
|Accretion of interest on 11% senior discount notes                                |  |                    | 6,796   |   |                    |   | 9,384   |  
|Changes in operating assets and liabilities                                       |  |                    |         |   |                    |   |         |  
|Accounts receivable                                                               |  |                    | (29,579 | ) |                    |   | (26,095 | )
|Materials and supplies                                                            |  |                    | 1,254   |   |                    |   | (4,112  | )
|Other current assets                                                              |  |                    | (5,004  | ) |                    |   | 799     |  
|Accounts payable                                                                  |  |                    | 3,992   |   |                    |   | (1,666  | )
|Accrued liabilities                                                               |  |                    | 13,813  |   |                    |   | 16,434  |  
|Vessel drydocking payments                                                        |  |                    | (13,703 | ) |                    |   | (12,621 | )
|Other assets/liabilities                                                          |  |                    | (4,871  | ) |                    |   | (1,815  | )
|                                                                                  |  |                    |         |   |                    |   |         |  
|Net cash provided by operating activities                                         |  |                    | 66,314  |   |                    |   | 41,412  |  
|                                                                                  |  |                    |         |   |                    |   |         |  
|Cash flows from investing activities:                                             |  |                    |         |   |                    |   |         |  
|Purchases of property and equipment                                               |  |                    | (10,381 | ) |                    |   | (29,481 | )
|Other investing activities                                                        |  |                    | (245    | ) |                    |   |        |  
|Proceeds from the sale of property and equipment                                  |  |                    | 1,819   |   |                    |   | 904     |  
|                                                                                  |  |                    |         |   |                    |   |         |  
|Net cash used in investing activities                                             |  |                    | (8,807  | ) |                    |   | (28,577 | )
|                                                                                  |  |                    |         |   |                    |   |         |  
|Cash flows from financing activities:                                             |  |                    |         |   |                    |   |         |  
|Principal payments on long term debt                                              |  |                    | (1,875  | ) |                    |   | (1,875  | )
|Dividend from (to) Parent                                                         |  |                    | (12,634 | ) |                    |   | (2,764  | )
|Payment of financing costs                                                        |  |                    | (1,057  | ) |                    |   | (1,588  | )
|Repurchase of notes                                                               |  |                    | (1,276  | ) |                    |   |        |  
|Capital contribution                                                              |  |                    |        |   |                    |   | 303     |  
|Payments on capital lease obligation                                              |  |                    | (149    | ) |                    |   | (134    | )
|                                                                                  |  |                    |         |   |                    |   |         |  
|Net cash used in financing activities                                             |  |                    | (16,991 | ) |                    |   | (6,058  | )
|                                                                                  |  |                    |         |   |                    |   |         |  
|Net increase in cash and cash equivalents                                         |  |                    | 40,516  |   |                    |   | 6,777   |  
|Cash and cash equivalents at beginning of period                                  |  |                    | 41,268  |   |                    |   | 56,349  |  
|                                                                                  |  |                    |         |   |                    |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                  | 81,784  |   |                    | $ | 63,126  |  
|                                                                                  |  |                    |         |   |                    |   |         |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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##### Table of Contents

H-LINES FINANCE HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



1. Organization

On December 6, 2004, H-Lines Finance Holding Corp. (the Company) was formed by Horizon Lines, Inc. (the Parent), as a vehicle to issue 11% senior discount notes due 2013 (the 11%
senior discount notes) with an original $160.0 million aggregate principal amount at maturity. The Company is a wholly-owned subsidiary of the Parent. The Company is the direct parent of Horizon Lines Holding Corp. (HLHC), a
Delaware corporation, which operates as a holding company for Horizon Lines, LLC (HL or Horizon Lines), a Delaware limited liability company and indirect wholly-owned subsidiary and Horizon Lines of Puerto Rico, Inc.
(HLPR), a Delaware corporation and indirect wholly-owned subsidiary of the Company. HL operates a domestic liner business with primary service to ports within the continental United States, Puerto Rico, Alaska, Hawaii, and Guam. HL also
offers terminal services and ground transportation services. HLPR operates as an agent for HL and also provides terminal services in Puerto Rico. The Parent was formed on July 7, 2004 at the direction of Castle Harlan Partners I.V. L.P., a
private equity investment fund managed by Castle Harlan, Inc. (Castle Harlan) as an acquisition vehicle to acquire the equity interest in HLHC. The foregoing transactions included a merger, whereby HLHC became a wholly-owned subsidiary
of the Parent. On December 6, 2004, the Parent contributed all of its shares of the capital stock of HLHC to the Company. As a result, HLHC became a wholly-owned subsidiary of the Company and an indirect wholly-owned subsidiary of the Parent.

2. Basis of Presentation

The
condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany items have been eliminated in consolidation.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X, and accordingly, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance
with generally accepted accounting principles in the United States (GAAP). These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 25, 2005. The Company uses a 52 or 53 week (every sixth or seventh year) fiscal year that ends on the Sunday before the last Friday in December. The following are the dates represented by each
fiscal period in these condensed consolidated financial statements: quarter ended September 24, 2006 represents the period from June 26, 2006  September 24, 2006, quarter ended September 25, 2005 represents the period from
June 27, 2005  September 25, 2005, nine months ended September 24, 2006 represents the period from December 26, 2005  September 24, 2006, and nine months ended September 25, 2005 represents the period
from December 27, 2004  September 25, 2005.

The financial statements as of September 24, 2006 and the financial
statements for the three and nine months ended September 24, 2006 and September 25, 2005 are unaudited; however, in the opinion of management, such statements include all adjustments necessary for the financial information included herein.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and reported amounts of revenues and expenses during the period. Actual results will differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for
the full year. Certain prior period balances have been reclassified to conform with the current period presentation.



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##### Table of Contents

H-LINES FINANCE HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



3. Adoption of the Tonnage Tax

The American Jobs Creation Act of 2004 (the Act) instituted an elective alternative tax on qualifying shipping activities (tonnage tax) for corporations operating U.S.-flag vessels in U.S.
foreign trade, as defined in the Act. This provision of the Act was intended to provide a federal corporate tax incentive for certain operators of U.S. flag vessels, thereby helping to revitalize the U.S. flag vessel industry and create more U.S.
jobs. During the quarter ended September 24, 2006, after evaluating the merits and requirements of the tonnage tax, the Company elected the application of the tonnage tax instead of the federal corporate income tax on income from its qualifying
shipping activities. This third quarter 2006 election of the tonnage tax was made in connection with the filing of the Companys 2005 federal corporate income tax return and will also apply to all subsequent federal income tax returns unless
the Company revokes this alternative tonnage tax treatment. The Company does not intend to revoke its election of the tonnage tax in the foreseeable future. The Company is accounting for this election as a change in the tax status of its qualifying
shipping activities. The impact of this tonnage tax election resulted in a decrease in income tax expense of approximately $39.4 million during the quarter and nine months ended September 24, 2006. Approximately $10.4 million and $
19.9 million relate to the benefit reported on the 2005 federal income tax return and revaluation of the deferred taxes related to the qualifying activities, respectively. The Companys effective tax rate for the quarter and nine months
ended September 24, 2006 is (123.1%) and (58.3%), respectively. Excluding the impact of the benefit reported on the 2005 federal income tax return and revaluation of the deferred taxes related to the qualifying activities, the
Companys effective tax rate for the three and nine months ended September 24, 2006 would be 16.3%.

4. Stock-Based Compensation

On July 27, 2006, the Compensation Committee of the Board of Directors of the Parent (the Board of Directors) approved
the grant by the Parent, pursuant to its Amended and Restated Equity Incentive Plan, of nonqualified stock options to certain employees of the Company and its subsidiaries to purchase an aggregate of 38,075 shares of its common stock at a price of
$15.97 per share. These options were granted on such date. No such option is currently vested or exercisable. Each such option is scheduled to vest and become fully exercisable on July 27, 2009, provided the employee who was granted such option
is employed by the Company and its subsidiaries on such date. The Company recorded $7 thousand of compensation expense during the quarter ended September 24, 2006 related to the options.

On April 7, 2006, the Compensation Committee of the Board of Directors approved the grant by the Parent, pursuant to its Amended and Restated Equity
Incentive Plan, of nonqualified stock options to certain employees of the Company and its subsidiaries to purchase an aggregate of 617,500 shares of its common stock at a price of $12.54 per share. No option is currently vested or exercisable. These
options were granted on such date. Each such option is scheduled to vest and become fully exercisable on April 7, 2009, provided the employee who was granted such option is employed by the Company and its subsidiaries on such date. The Company
recorded $0.1 million and $0.3 million of compensation expense during the quarter and nine months ended September 24, 2006, respectively, related to the options. None of these options were exercised and 11,889 of these options were forfeited
during the quarter and nine months ended September 24, 2006.

On February 1, 2006, the Parent entered into a restricted stock
agreement for 70,000 shares with a member of management. The Company recorded $0.1 million of compensation expense during the nine months ended September 24, 2006 and will record compensation expense of $0.9 million over the five year vesting
period.

The Company recorded $0.1 million and $0.3 million of compensation expense during the quarter and nine months ended
September 24, 2006, respectively, related to the 705,100 nonqualified stock options granted to



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H-LINES FINANCE HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



members of management in September 2005. None of these options were exercised and 10,956 of these options were forfeited during the quarter and nine months
ended September 24, 2006. 87,500 of these options became fully vested on September 27, 2006.

The Company recorded $0.3 million
and $0.7 million in the quarter and nine months ended September 24, 2006, respectively, related to all stock-based compensation.

On
April 19, 2006, the Compensation Committee of the Board of Directors voted to implement an employee stock purchase plan (as amended, the ESPP) effective July 1, 2006. The Parent has reserved 308,866 shares of its common stock
for issuance under the ESPP. Employees generally are eligible to participate in the ESPP if they are employed before the beginning of the applicable purchase period, are customarily employed more than five months in a calendar year and more than
twenty hours per week, and are not, and would not become as a result of being granted an option under the ESPP, 5% stockholders of the Parent or any of its designated subsidiaries. Participation in the ESPP will end automatically upon termination of
employment. Eligible employees are permitted to acquire shares of common stock through payroll deductions within a percentage range of their salary as determined by the Parents Compensation Committee. Such employee purchases are subject to
maximum purchase limitations.

The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the
Internal Revenue Code of 1986, as amended. The ESPP will terminate on July 1, 2016 unless it terminates earlier under the terms of the ESPP. The Board of Directors and the Compensation Committee have the authority to amend, terminate or extend
the term of the ESPP, except that no action may adversely affect any outstanding options previously granted under the plan and stockholder approval is required to increase the number of shares issued or to change the terms of eligibility. The Board
of Directors and the Compensation Committee are able to make amendments to the ESPP as it determines to be advisable if the financial accounting treatment for the ESPP changes from the financial accounting treatment in effect on the date the ESPP
was adopted by the Board of Directors. The Company believes that stock-based compensation associated with the ESPP will be approximately $0.1 million per year.



5. Total Comprehensive Income

Total comprehensive
income is as follows ($ in thousands):



|                                                  |  |                                    |        |   |                                    |   |       |  
|------------------------------------------------- |  | ---------------------------------- | ------ | - | ---------------------------------- | - | ----- | -
|                                                  |  | Quarter endedSeptember 24,2006     |        |   | Quarter endedSeptember 25,2005     |  
|Net income                                        |  | $                                  | 53,941 |   |                                    | $ | 5,069 |  
|Change in fair value of fixed price fuel contract |  |                                    | (177   | ) |                                    |   |      |  
|                                                  |  |                                    |        |   |                                    |   |       |  
|Comprehensive income                              |  | $                                  | 53,764 |   |                                    | $ | 5,069 |  
|                                                  |  |                                    |        |   |                                    |   |       |  
|                                                  |  |                                   
|                                                  |  | Nine months endedSeptember 24,2006 |        |   | Nine months endedSeptember 25,2005 |  
|Net income                                        |  | $                                  | 63,659 |   |                                    | $ | 4,814 |  
|Change in fair value of fixed price fuel contract |  |                                    | (477   | ) |                                    |   | (129  | )
|                                                  |  |                                    |        |   |                                    |   |       |  
|Comprehensive income                              |  | $                                  | 63,182 |   |                                    | $ | 4,685 |  
|                                                  |  |                                    |        |   |                                    |   |       |  



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



6. Property and Equipment

Property and equipment consist of the following ($ in thousands):



|                                 |  |                   |         |   |                  |   |         |  
|-------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                 |  | September 24,2006 |         |   | December 25,2005 |  
|Vessels                          |  | $                 | 136,626 |   |                  | $ | 135,164 |  
|Containers                       |  |                   | 28,105  |   |                  |   | 27,420  |  
|Chassis                          |  |                   | 13,534  |   |                  |   | 13,453  |  
|Cranes                           |  |                   | 14,230  |   |                  |   | 13,997  |  
|Machinery and equipment          |  |                   | 19,173  |   |                  |   | 17,322  |  
|Facilities and land improvements |  |                   | 7,664   |   |                  |   | 5,508   |  
|Software                         |  |                   | 30,860  |   |                  |   | 30,149  |  
|Other                            |  |                   | 1,662   |   |                  |   | 1,244   |  
|                                 |  |                   |         |   |                  |   |         |  
|Total property and equipment     |  |                   | 251,854 |   |                  |   | 244,257 |  
|Accumulated depreciation         |  |                   | (65,215 | ) |                  |   | (43,660 | )
|                                 |  |                   |         |   |                  |   |         |  
|Property and equipment, net      |  | $                 | 186,639 |   |                  | $ | 200,597 |  
|                                 |  |                   |         |   |                  |   |         |  

7. Intangible Assets

Intangible assets consist of the following ($ in thousands):



|                                      |  |                   |         |   |                  |   |         |  
|------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                      |  | September 24,2006 |         |   | December 25,2005 |  
|Customer contracts                    |  | $                 | 137,675 |   |                  | $ | 137,675 |  
|Trademarks                            |  |                   | 63,800  |   |                  |   | 63,800  |  
|Deferred financing costs              |  |                   | 23,532  |   |                  |   | 23,158  |  
|                                      |  |                   |         |   |                  |   |         |  
|Total intangibles with definite lives |  |                   | 225,007 |   |                  |   | 224,633 |  
|Accumulated amortization              |  |                   | (50,214 | ) |                  |   | (33,131 | )
|                                      |  |                   |         |   |                  |   |         |  
|Net intangibles with definite lives   |  |                   | 174,793 |   |                  |   | 191,502 |  
|Goodwill                              |  |                   | 306,724 |   |                  |   | 306,724 |  
|                                      |  |                   |         |   |                  |   |         |  
|Intangible assets, net                |  | $                 | 481,517 |   |                  | $ | 498,226 |  
|                                      |  |                   |         |   |                  |   |         |  

8. Accrued Liabilities

Other accrued liabilities consist of the following ($ in thousands):



|                                |  |                    |         |                   |   |        
|------------------------------- |  | ------------------ | ------- | ----------------- | - | -------
|                                |  | September 24, 2006 |         | December 25, 2005
|Marine operations               |  | $                  | 12,946  |                   | $ | 11,236 
|Terminal operations             |  |                    | 13,984  |                   |   | 9,537  
|Vessel and rolling stock rent   |  |                    | 23,107  |                   |   | 24,735 
|Vessel operations               |  |                    | 19,040  |                   |   | 22,049 
|Fuel                            |  |                    | 9,863   |                   |   | 9,043  
|Bonus                           |  |                    | 7,195   |                   |   | 8,347  
|Interest                        |  |                    | 12,037  |                   |   | 6,636  
|Other liabilities               |  |                    | 31,995  |                   |   | 26,806 
|                                |  |                    |         |                   |   |        
|Total other accrued liabilities |  | $                  | 130,167 |                   | $ | 118,389
|                                |  |                    |         |                   |   |        



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



9. Long-Term Debt

Long-term debt consists of the following ($ in thousands):



|                                                                                                                    |  |                    |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                    |  | September 24, 2006 |         |   | December 25, 2005 |  
|Senior credit facility                                                                                              |  | $                  | 245,000 |   |                   | $ | 246,875 |  
|9% senior notes                                                                                                     |  |                    | 197,014 |   |                   |   | 197,014 |  
|11% senior discount notes(a)                                                                                        |  |                    | 87,186  |   |                   |   | 81,666  |  
|Notes issued by the owner trustees of the owner trusts and secured by mortgages on the vessels owned by such trusts |  |                    | 4,513   |   |                   |   | 4,513   |  
|                                                                                                                    |  |                    |         |   |                   |   |         |  
|Total long-term debt                                                                                                |  |                    | 533,713 |   |                   |   | 530,068 |  
|Less: current portion                                                                                               |  |                    | (7,013  | ) |                   |   | (2,500  | )
|                                                                                                                    |  |                    |         |   |                   |   |         |  
|Long-term debt, net of current                                                                                      |  | $                  | 526,700 |   |                   | $ | 527,568 |  
|                                                                                                                    |  |                    |         |   |                   |   |         |  

---

|(a) | During the nine months ended September 24, 2006, HL made a $1.3 million open market purchase of the Companys 11% senior discount notes, which represented
a $46,000 premium to the accreted value at the date of purchase.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10. Commitments and Contingencies

Environmental Contingency

During
1999, the Alaska State Department of Environmental Conservation (the Department) notified the predecessor company about contaminants from an underground storage tank in Anchorage. A $0.9 million reserve was established by such
predecessor company. In September 2005, HL engaged a third party to remove and dispose of the underground storage tanks, supply and place all back fill material, and conduct testing of soils. The third party completed the engagement during the
fourth quarter of 2005 and submitted an underground storage tank removal report to the Department. The Departments required sampling of the wells was conducted in April 2006 and additional bio-venting quality sampling was conducted in June
2006. The results of the well sampling were submitted to the Department in June 2006, and the results of the additional bio-venting quality sampling were submitted in July 2006. In addition, HL submitted a proposed monitoring plan to the Department.
The Department reviewed the results and the proposed monitoring plan and has requested that HL (i) sample the

wells and perform bio-venting monitoring
twice a year, (ii) install two monitoring wells in the fall of 2006 and (iii) provide reports on an annual basis detailing the results of such monitoring and sampling. In conjunction with the approval by the Department of HLs
monitoring plan in the quarter ended September 24, 2006, HL reduced its reserve from $0.8 million to $0.2 million, the expected costs to perform such monitoring.

Legal Proceedings

In the ordinary course of business, from time to time, the Company and its
subsidiaries become involved in various legal proceedings. These relate primarily to claims for loss or damage to cargo, employees personal injury claims, and claims for loss or damage to the person or property of third parties. The Company
and its subsidiaries generally maintain insurance, subject to customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. The Company and its subsidiaries also, from time to time, become involved in routine
employment-related disputes and disputes with parties with which they have contracts.

There are two actions currently pending before the
Surface Transportation Board (the STB) involving HL. The first action, brought by the Government of Guam in 1998 on behalf of itself and its citizens against HL and



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Matson Navigation Co. (Matson), seeks a ruling from the STB that HLs Guam shipping rates, which are based on published tariff rates, during
1996-1998 were unreasonable under the Interstate Commerce Commission Termination Act of 1995 (the ICCTA), and an order awarding reparations to Guam and its citizens. The STB is addressing this matter in three phases. During
the first phase, which has been completed, the STB reviewed the allegations set forth in the complaints that were filed by the Government of Guam and dismissed certain complaints while allowing certain other complaints to be addressed in phase two.
During the currently ongoing second phase, at the request of the STB, the parties fully briefed in 2002, the threshold issue of what methodology should be applied in determining rate reasonableness under the ICCTA, and the STB is
expected to issue a ruling in 2006 that sets forth a standard for determining whether the rates charged during 1996-1998 were reasonable. During the third phase, the STB will apply the standard that it adopts in the second phase to the rates in
effect during 1996-1998. If the STB determines that the rates charged by HL during 1996-1998 were unreasonable, the STB will issue an additional ruling to determine the persons entitled to damages and in what amounts. On June 8, 2005, upon the
motion of HL, the STB issued a decision that ordered the Government of Guam to show cause by June 28, 2005 as to why the action should not be dismissed. The Government of Guam has responded to this decision by asserting its intent to
participate in the proceeding and by attending oral argument in the second phase of the case at the STB. HL has filed a response thereto asserting that the Government of Guams response is not sufficient to show cause. The STB issued a further
order on September 15, 2005 canceling its order to show cause and notifying the parties that it had scheduled oral argument on the merits of the phase two issues. The oral argument took place on November 16, 2005. No assurance can be given
that the final decision with respect to this matter will be favorable to us. An adverse ruling by the STB in this action could result in significant damages. We are unable to quantify the amount of these damages. In the event that the STB were to
issue a ruling whereby it accepted the Government of Guams proposed standard for the determination of rate reasonableness under the ICCTA, the STB would then need to determine whether rates charged by HL during 1996-1998 were
reasonable under such standard. However, the business of HL that provided marine container shipping to and from Guam during 1996-1998 was, at the time, part of a larger business. During 1996-1998, the Guam-related business of HL was part of the
business of Sea-Land Service, Inc. (Sea-Land), which included transportation, logistics, and terminal services between and at ports in Asia, Guam, Hawaii and the U.S. west coast. Separate financial statements were not prepared for the
operations of Sea-Land that related to marine container shipping to and from Guam. Accordingly, we believe that the actual rates of return that were earned by HLs business with respect to marine container shipments to and from Guam during
1996-1998 cannot be determined. Consequently, the absence of such actual rates of return

would preclude the calculation of a reasonable rate of return
based on the standard proposed by the Government of Guam in the pending action. Even if each of these matters were determined adversely to HL, we are unable at the present time to determine how many citizens of Guam, on whose behalf the pending
action has been brought by the Government of Guam, paid such rates during 1996-1998, or the amounts of their related claims, because the requisite discovery proceedings for that phase of the dispute have not yet begun. Apart from potential damages,
an adverse ruling by the STB could affect HLs current and future rate structure for its Guam shipping by requiring it to reduce its current base tariff rates and limit future rate increases to amounts determined to be within the zone of
reasonableness as defined in the ICCTA, as determined in such ruling. An adverse STB decision could also affect the rates that HL would be permitted to charge on its other routes where rates must be reasonable under the ICCTA. We
have not accrued a liability relating to this litigation because we do not believe that an unfavorable outcome is probable nor can we reasonably estimate the Companys exposure in the event there is an unfavorable outcome.

The second action currently pending before the STB involving HL, brought by DHX, Inc. (DHX) in 1999 against HL and Matson, challenges the
reasonableness of certain rates and practices of HL and Matson. DHX is a major freight forwarder in the domestic Hawaii trade. Freight forwarders typically accept less than full container loads of cargo, consolidate these loads into full container
loads, and offer the full container load to the ocean



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



carriers. Some freight forwarders, including DHX, also solicit full container loads from shippers. Among other

things, DHX charged that HL and Matson took actions that were intended to prevent all freight forwarders in the Hawaii trade from competing with the carriers for the full
container load business. DHX is seeking $11.0 million in damages. In addition to the award of damages, an adverse ruling could affect HLs current and future rate structure for its Hawaii shipping. An adverse STB decision could also affect the
rates that HL would be permitted to charge on its other routes. On December 13, 2004, the STB (i) dismissed all of the allegations of unlawful activity contained in DHXs complaint; (ii) found that HL met all of its tariff filing
obligations; and (iii) reaffirmed the STBs earlier holdings that the anti-discrimination provisions of the Interstate Commerce Act, which were repealed by the ICCTA, are no longer applicable to our business. On June 13, 2005, the STB
issued a decision that denied DHXs motion for reconsideration and denied the alternative request by DHX for clarification of the STBs December 13, 2004 decision. On August 5, 2005, DHX filed a Notice of Appeal with the United
States Court of Appeals for the Ninth Circuit challenging the STBs order dismissing its complaint. DHX filed an appellate brief on November 10, 2005. HL has prepared and submitted its response to the DHX brief, and all parties are waiting
for the court to schedule oral argument. No assurance can be given that the final decision with respect to this matter will be favorable to us. We have not accrued a liability relating to this litigation because we do not believe than an unfavorable
outcome is probable.

Standby Letters of Credit

HL has standby letters of credit, primarily related to its agreements with Ship Finance International Limited (SFL) and its property and casualty insurance programs. On September 24, 2006 and
December 25, 2005, amounts outstanding on these letters of credit totaled $37.2 million and $6.9 million, respectively.

SFL
Agreements

In April 2006, we completed a series of agreements with SFL and certain of its subsidiaries that will enable us to charter
five new non-Jones Act qualified container vessels, each with a capacity of 2,824 twenty-foot equivalent units (TEUs) and capable of a service speed of up to 23 knots (the new vessels). All five of the new vessels are being
built in a South Korean shipyard pursuant to contracts between the shipyard and various third parties (the sellers). To date, one of the vessels has been delivered and is trading by the seller until the second quarter 2007 when the
vessel will be delivered to Horizon Lines. We expect the second new vessel will be delivered to us on November 30, 2006. We intend to sub-charter the vessel that will be delivered on November 30, 2006 to a third party for the period
between delivery and the deployment in our trade routes in March 2007. The new vessels are expected to be deployed, over a five month period in 2007, on our trade routes between the U.S. west coast and Asia and Guam. This deployment will enable us
to redeploy Jones Act qualified active vessels to other Jones Act routes. Upon the deployment of the new vessels, the redeployment of certain Jones Act qualified vessels, and the shifting of certain older vessels to our standby fleet, the average
age of an active vessel in our fleet, will by reduced from 31 years to 20 years.

Our contractual arrangements with SFL and its
subsidiaries include an Agreement to Acquire and Charter to which HL is a party and pursuant to which SFL and its subsidiaries are required to acquire the new vessels from the sellers and then charter them to HL. SFL Holdings has entered into five
separate memoranda of agreement (the MoAs) with the sellers pursuant to which the new vessels will be acquired from the sellers following their completion. Upon the delivery of each vessel to SFL Holdings by the applicable seller, SFL
Holdings will transfer the vessel to one of its wholly-owned subsidiaries. In connection with each such transfer, the transferred vessel will be reflagged as a U.S. vessel and bareboat chartered by the applicable Shipowner to HL (the
Shipowner). The bareboat charter for each new vessel is a hell or high water charter, and the obligation of HL to pay charter hire thereunder for the vessel is absolute and unconditional. The estimated aggregate annual
charter hire for all of the five new vessels is approximately $32.0 million, based on certain assumptions with



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



respect to final vessel price and applicable interest rates that will be adjusted on the date of the delivery of the particular vessel. Under the charters,
HL is responsible for crewing, insuring, maintaining, and repairing each vessel and for all other operating costs with respect to each vessel. The term of each of the bareboat charters is twelve years from the date of delivery of the related vessel,
with a three year renewal option exercisable by HL. In addition, HL has the option to purchase all of the new vessels following the five, eight, twelve, and, if applicable, fifteen year anniversaries of the date of delivery at pre-agreed purchase
prices. If HL elects to purchase all of the vessels after the five or eight year anniversary date, it will have the right to assume the outstanding debt under the Fortis Capital Corp. (Fortis) credit facility, and the amount of the debt
so assumed will be credited against the purchase price paid by it for the vessels. If HL elects not to purchase the new vessels at the end of the initial twelve-year period and the Shipowners sell the new vessels for less than a specified amount, HL
is responsible for paying the amount of such shortfall, which shall not exceed $3.8 million per new vessel. If the new vessels are to be sold by the Shipowners to an affiliated party for less than a different specified amount, HL has the right to
purchase the new vessels for that different specified amount.

In order to facilitate our charter of the new vessels, our contractual
arrangements with SFL and its subsidiaries include various agreements that support the obligations of SFL and its subsidiaries to the sellers under the memoranda of agreement and the syndicate of bank lenders led by Fortis that is providing the debt
financing for the acquisition. In order for HL to secure certain of its obligations to SFL, SFL Holdings, and the SFL Shipowners under the Reimbursement Agreement, HL has delivered letters of credit to Fortis in an aggregate amount of $29.3 million.
These letters of credit are comprised of $25.5 million issued as collateral for SFLs obligations in respect of security deposits for three of the new vessels and $3.8 million issued as collateral for SFLs obligations with respect to
interest-rate swap breakage fees. These letters of credit will be cancelled upon the return by the sellers to SFL Holdings of the security deposits that the sellers received from SFL Holdings pursuant to certain of the memoranda of agreement. We
expect $8.5 million in letters of credit to be cancelled in the fourth quarter of 2006.

The agreement of HL, SFL, SFL Holdings, and the
Shipowners with respect to the aforementioned transactions is reflected in an Agreement to Acquire and Charter, a Reimbursement Agreement, and five separate bareboat charters. In addition, the Parent has issued a Guarantee in favor of the Shipowners
with respect to the performance by HL of its obligations under the Agreement to Acquire and Charter, the Reimbursement Agreement, the bareboat charters, and an Interest and L/C Liability Agreement, among HL, SFL, and Fortis. Copies of the Agreement
to Acquire and Charter, Guarantee, Reimbursement Agreement, and Interest and L/C Liability Agreement were filed as exhibits to the Parents Form 8-K filed with the Securities and Exchange Commission (the SEC) on April 18, 2006.
Copies of the bareboat charters were filed as exhibits to the Parents Registration Statement on Form S-1, filed with the SEC on May 19, 2006. Additional information regarding this transaction was disclosed within the Parents Form
8-K filed with the SEC on April 18, 2006 and the Parents Registration Statement on Form S-1 filed with the SEC on May 19, 2006.

11.
Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (the FASB) issued FASB
Statement No. 158 (FASB 158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), which requires companies to recognize
a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets. FASB 158 does not change how pensions and other postretirement benefits are accounted for and
reported in the income statement. The required transition method of adoption is a prospective application and recognizing the funded status of a companys benefit plans will require an offsetting adjustment to accumulated other comprehensive
income in shareholders equity. The Company has a non-contributory pension plan covering approximately 27 union employees. The pension plan is in an underfunded status and the



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Company expects to record a decrease to accumulated other comprehensive income of approximately $0.7 million upon adoption. FASB 158 is effective for fiscal
years ending after December 15, 2006.

In September 2006, the FASB issued FASB Statement No. 157 (FASB 157),
Fair Value Measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. As a result of
FASB 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. FASB 157
is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of FASB 157 will have a material impact on its statement of operations.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN
48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement
No. 109, Accounting for Income Taxes (FASB No. 109). FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company has not yet completed the process of
evaluating what effect, if any, the adoption of FIN 48 will have on its consolidated statement of operations or financial position.



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2.Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the financial statements of the Company and notes thereto included elsewhere in this
quarterly report. In this quarterly report, unless the context otherwise requires references to we, us, and our mean the Company, together with its subsidiaries, on a consolidated basis.

This Form 10-Q includes forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), with respect to our financial condition, results of operations, and business. Forward-looking statements, written, oral, or otherwise, are those that
do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate, or imply future results, performance, achievements, or events. Words such as, but not limited to, believe,
expect, think, anticipate, estimate, intend, plan, targets, projects, likely, will, would, could and
similar expressions or phrases identify forward-looking statements.

All forward-looking statements involve risks and uncertainties. The
occurrence of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results.

Factors that may cause actual results to differ from expected results include: our substantial debt; restrictive covenants under our debt; decreases in
shipping volumes; our failure to renew our commercial agreements with Maersk; rising fuel prices; labor interruptions or strikes; job-related claims; liability under multi-employer pension plans; compliance with safety and environmental protection
and other governmental requirements; new statutory and regulatory directives in the United States addressing homeland security concerns; the successful start-up of any Jones Act competitor; delayed delivery or non-delivery of our new vessels;
increased inspection procedures and tight import and export controls; restrictions on foreign ownership of our vessels; repeal or substantial amendment of the Jones Act; escalation of insurance costs; catastrophic losses and other liabilities; the
arrest of our vessels by maritime claimants; severe weather and natural disasters; our inability to exercise our purchase options for our chartered vessels; the aging of our vessels; unexpected substantial drydocking costs for our vessels; the loss
of our key management personnel; actions by our significant stockholders; changes in tax laws or the interpretation thereof, an adverse tax audit and other tax matters; and legal or other proceedings to which we are, or may become subject.

In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Form 10-Q might
not occur. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

See the section entitled Risk Factors in our Form 10-K for the fiscal year ended December 25, 2005 as filed with the SEC or in the
Parents prospectus filed with the SEC pursuant to Rule 424(b)(4) on September 13, 2006 for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Those factors and the other risk factors
described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could
harm our results. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these
uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.



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Executive Overview



|                           |  |                                  |         |   |                                  |   |         |                                      |  |   |                                      |   |  |   |         |  
|-------------------------- |  | -------------------------------- | ------- | - | -------------------------------- | - | ------- | ------------------------------------ |  | - | ------------------------------------ | - |  | - | ------- | -
|                           |  | Quarter Ended September 24, 2006 |         |   | Quarter Ended September 25, 2005 |   |         | Nine Months Ended September 24, 2006 |  |   | Nine Months Ended September 25, 2005 |  
|                           |  | ($ in thousands)                 |        
|Operating revenue          |  | $                                | 304,657 |   |                                  | $ | 289,075 |                                      |  | $ | 869,438                              |   |  | $ | 817,181 |  
|Operating expense          |  |                                  | 268,255 |   |                                  |   | 267,550 |                                      |  |   | 793,152                              |   |  |   | 769,446 |  
|                           |  |                                  |         |   |                                  |   |         |                                      |  |   |                                      |   |  |   |         |  
|Operating income           |  | $                                | 36,402  |   |                                  | $ | 21,525  |                                      |  | $ | 76,286                               |   |  | $ | 47,735  |  
|                           |  |                                  |         |   |                                  |   |         |                                      |  |   |                                      |   |  |   |         |  
|Operating ratio            |  |                                  | 88.1    | % |                                  |   | 92.6    | %                                    |  |   | 91.2                                 | % |  |   | 94.2    | %
|Revenue containers (units) |  |                                  | 77,108  |   |                                  |   | 80,316  |                                      |  |   | 224,313                              |   |  |   | 233,341 |  

Operating revenue increased by $15.6 million or 5.4% from the quarter ended September 25,
2005 to the quarter ended September 24, 2006 and by $52.3 million or 6.4% from the nine months ended September 25, 2005 to the nine months ended September 24, 2006. This revenue growth is primarily attributable to rate improvements
resulting from favorable changes in cargo mix and general rate increases, and increased bunker and intermodal fuel surcharges, more than offsetting some volume softness. In addition, the revenue growth in the nine month period ended
September 24, 2006 is due to revenue increases from non-transportation and other revenue services.

Operating expense decreased by
$0.7 million or 0.3% from the quarter ended September 25, 2005 to the quarter ended September 24, 2006 and increased by $23.7 million or 3.1% from the nine months ended September 25, 2005 to the nine months ended September 24,
2006 primarily as a result of higher vessel fuel costs and higher rail and truck transportation costs as a result of higher fuel prices, and an increase in rolling stock rent due to new container fleet leases. This nine month period increase is
offset by a decrease in selling, general, and administrative expenses due to the elimination of the Castle Harlan management fee and a decrease in variable operating costs as a result of lower revenue container volumes shipped.

Operating income increased by $14.9 million or 69.1% from the quarter ended September 25, 2005 to the quarter ended September 24, 2006 and by
$28.6 million or 59.8% from the nine months ended September 25, 2005 to the nine months ended September 24, 2006. This increase in operating income is primarily due to revenue growth in excess of operating expense growth as well as a
reduction in selling, general, and administrative expenses due to the elimination of the Castle Harlan management fee.

We believe that in
addition to GAAP based financial information, earnings before net interest expense, income taxes, depreciation, and amortization (EBITDA) is a meaningful disclosure for the following reasons: (i) EBITDA is a component of the measure
used by our Board of Directors and management team to evaluate our operating performance, (ii) the senior credit facility contains covenants that require HLHC and its subsidiaries to maintain certain interest expense coverage and leverage
ratios, which contain EBITDA as a component, and restrict upstream cash payments if certain ratios are not met, subject to certain exclusions, and our management team uses EBITDA to monitor compliance with such covenants, (iii) EBITDA is a
component of the measure used by our management team to make day-to-day operating decisions, (iv) EBITDA is a component of the measure used by our management to facilitate internal comparisons to competitors results and the marine
container shipping and logistics industry in general and (v) the payment of discretionary bonuses to certain members of our management is contingent upon, among other things, the satisfaction by the Parent of certain targets, which contain
EBITDA as a component. We acknowledge that there are limitations when using EBITDA. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from
operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow for managements discretionary use, as it does not consider certain cash requirements such as tax payments and debt service
requirements. Because all companies do not use identical calculations, this presentation of EBITDA may not be comparable to other



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similarly titled measures of other companies. A reconciliation of net income (loss) to EBITDA is included below ($ in thousands):



|                              |  |                                  |         |   |                                  |   |                                      |  |   |                                      |   |  |   |       
|----------------------------- |  | -------------------------------- | ------- | - | -------------------------------- | - | ------------------------------------ |  | - | ------------------------------------ | - |  | - | ------
|                              |  | Quarter Ended September 24, 2006 |         |   | Quarter Ended September 25, 2005 |   | Nine Months Ended September 24, 2006 |  |   | Nine Months Ended September 25, 2005
|Net income                    |  | $                                | 53,941  |   |                                  | $ | 5,069                                |  | $ | 63,659                               |   |  | $ | 4,814 
|Interest expense, net         |  |                                  | 12,226  |   |                                  |   | 12,936                               |  |   | 36,256                               |   |  |   | 39,174
|Income tax expense (benefit)  |  |                                  | (29,767 | ) |                                  |   | 3,504                                |  |   | (23,445                              | ) |  |   | 3,730 
|Depreciation and amortization |  |                                  | 15,807  |   |                                  |   | 16,900                               |  |   | 48,871                               |   |  |   | 50,885
|                              |  |                                  |         |   |                                  |   |                                      |  |   |                                      |   |  |   |       
|EBITDA                        |  | $                                | 52,207  |   |                                  | $ | 38,409                               |  | $ | 125,341                              |   |  | $ | 98,603
|                              |  |                                  |         |   |                                  |   |                                      |  |   |                                      |   |  |   |       

General

We believe that we are the nations leading Jones Act container shipping and integrated logistics company, accounting for approximately 36% of total U.S. marine container shipments from the continental United
States to Alaska, Puerto Rico, and Hawaii, constituting the three non-contiguous Jones Act markets, and to Guam. Under the coastwise laws of the United States, also known as the Jones Act, all vessels transporting cargo between U.S. ports must,
subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominately U.S. crews and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. We operate the largest
Jones Act containership fleet with 16 vessels and approximately 23,500 cargo containers. We provide comprehensive shipping and logistics services in our markets. We have long-term access to terminal facilities in each of our ports, operating our
terminals in Alaska, Hawaii, and Puerto Rico and contracting for terminal services in our seven ports in the continental U.S. and in our ports in Guam, Hong Kong and Taiwan.

History

Our long operating history dates back to 1956, when Sea-Land pioneered the marine container
shipping industry and established our business. In 1958 we introduced container shipping to the Puerto Rico market, and in 1964 we pioneered container shipping in Alaska with the first year-round scheduled vessel service. In 1987, we began providing
container shipping services between the U.S. west coast and Hawaii and Guam through our acquisition from an existing carrier of all of its vessels and certain other assets that were already serving that market. In December 1999, HLHCs former
parent, CSX Corporation, sold the international marine container operations of Sea-Land to Maersk, and HLHC continued to be owned and operated as CSX Lines, LLC, a division of CSX Corporation. On February 27, 2003, HLHC (which at the time was
indirectly majority-owned by Carlyle-Horizon Partners, L.P.) acquired from CSX Corporation, which was the successor to Sea-Land, 84.5% of CSX Lines, LLC, and 100% of CSX Lines of Puerto Rico, Inc., which together constitute our business today. CSX
Lines, LLC is now known as Horizon Lines, LLC and CSX Lines of Puerto Rico, Inc. is now known as Horizon Lines of Puerto Rico, Inc. On July 7, 2004, the Parent, formerly known as H-Lines Holding Corp., was formed as an acquisition vehicle to
acquire the equity interest in HLHC. The Parent was formed at the direction of Castle Harlan Partners IV, L. P., a private equity investment fund managed by Castle Harlan, Inc. Today, as the only Jones Act vessel operator with one integrated
organization serving Alaska, Hawaii, and Puerto Rico, we are uniquely positioned to serve customers requiring shipping and logistics services in more than one of these markets.

Recent Accounting Pronouncements

In September 2006, the FASB issued FASB 158, which requires
companies to recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets. FASB 158 does not change how pensions and other postretirement benefits are
accounted for and reported in the income statement. The required transition method of adoption is a prospective application and recognizing the funded status of a companys benefit plans will require an offsetting adjustment to accumulated



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other comprehensive income in shareholders equity. The Company has a non contributory pension plan covering approximately 27 union employees. The pension
plan is in an underfunded status and the Company expects to record a decrease to accumulated other comprehensive income of approximately $0.7 million upon adoption. FASB 158 is effective for fiscal years ending after December 15, 2006.

In September 2006, the FASB issued FASB 157, which addresses how companies should measure fair value when they are required to use a fair
value measure for recognition or disclosure purposes under generally accepted accounting principles. As a result of FASB 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make
the measurement of fair value more consistent and comparable and improve disclosures about those measures. FASB 157 is effective for fiscal years beginning after November 15, 2007.

In July 2006, the FASB issued FIN 48, which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies
to all tax positions related to income taxes subject to FASB No. 109. FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to
the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company has not yet completed the process of evaluating what effect,
if any, the adoption of FIN 48 will have on its consolidated statement of operations or financial position.

Critical Accounting Policies

The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions in the reported
amounts of revenues and expenses during the reporting period and in reporting the amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of our financial statements. Since many of these estimates and
assumptions are based upon our critical accounting policies applied on a consistent basis from year to year, actual results could differ from these estimates.

We believe that the application of our critical accounting policies, and the estimates and assumptions inherent in those policies, are reasonable. These accounting policies and estimates are constantly reevaluated and
adjustments are made when facts or circumstances dictate a change. Historically, we have found the application of accounting policies to be appropriate and actual results have not differed materially from those determined using necessary estimates.
There have been no material changes to the Companys critical accounting policies during the quarter and nine months ended September 24, 2006. The critical accounting policies can be found in the Companys Annual Report on Form 10-K
for the fiscal year ended December 25, 2005 as filed with the SEC.

Results of Operations

Operating Revenue Overview

We derive our revenue
primarily from providing comprehensive shipping and logistics services to and from the continental U.S. and Alaska, Puerto Rico, Hawaii, and Guam. We charge our customers on a per load basis and price our services based on the length of inland and
ocean cargo transportation hauls, type of cargo, and other requirements, such as shipment timing and type of container. In addition, we assess fuel surcharges on a basis consistent with industry practice and at times may incorporate these surcharges
into our basic transportation rates. At times, there is a timing disparity between volatility in our fuel costs and related adjustments to our fuel surcharges (or the incorporation of adjusted fuel surcharges into our base transportation rates) that
may result in insufficient recovery of our fuel costs during sharp increases in the price of fuel and recoveries in excess of our fuel costs when fuel prices level off or decline.



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Over 90% of our revenues are generated from our shipping and logistics services in markets where the
marine trade is subject to the Jones Act or other U.S. maritime laws. The balance of our revenue is derived from (i) vessel loading and unloading services that we provide for vessel operators at our terminals, (ii) agency services that we
provide for third-party shippers lacking administrative presences in our markets, (iii) vessel space charter income from third-parties in trade lanes not subject to the Jones Act, (iv) management of vessels owned by third-parties,
(v) trucking and warehousing services for third-parties, and (vi) other non-transportation services.

As used in this Form 10-Q,
the term revenue containers connotes containers that are transported for a charge (as opposed to empty containers).

Operating Expense
Overview

Our operating expenses consist primarily of marine operating costs, inland transportation costs, vessel operating costs, land
costs, and rolling stock rent. Our marine operating costs consist of stevedoring, port charges, wharfage, and various other costs to secure vessels at the port and to load and unload containers to and from vessels. Our inland transportation costs
consist primarily of the costs to move containers to and from the port via rail, truck or barge. Our vessel operating costs consist primarily of crew payroll costs and benefits, vessel fuel costs, vessel maintenance costs, space charter costs,
vessel insurance costs and vessel rent. We view our vessel fuel costs as subject to potential fluctuation as a result of changes in unit prices in the fuel market. Our vessel fuel consumption has been generally constant for corresponding years or
corresponding interim periods, since the number of active vessels, voyages, and destinations have generally been the same for corresponding years or corresponding interim periods. Our land costs consist primarily of maintenance, yard and gate
operations, warehousing operations, and terminal overhead in the terminals in which we operate. Rolling stock rent consists primarily of rent for street tractors, yard equipment, chassis, gensets, and various dry and refrigerated containers.

Quarter Ended September 24, 2006 Compared with the Quarter Ended September 25, 2005



|                                    |  |                                |         |   |                                |   |         |          |  |        |   
|----------------------------------- |  | ------------------------------ | ------- | - | ------------------------------ | - | ------- | -------- |  | ------ | --
|                                    |  | QuarterEnded September 24,2006 |         |   | QuarterEnded September 25,2005 |   |         | % Change | 
|                                    |  | ($ in thousands)               |         |   |                                |  
|Operating revenue                   |  | $                              | 304,657 |   |                                | $ | 289,075 |          |  | 5.4    | % 
|Operating expense:                  |  |                                |         |   |                                |   |         |          |  |        |   
|Vessel                              |  |                                | 81,961  |   |                                |   | 76,282  |          |  | 7.4    | % 
|Marine                              |  |                                | 48,729  |   |                                |   | 49,514  |          |  | (1.6   | )%
|Inland                              |  |                                | 53,555  |   |                                |   | 49,902  |          |  | 7.3    | % 
|Land                                |  |                                | 34,195  |   |                                |   | 35,709  |          |  | (4.2   | )%
|Rolling stock rent                  |  |                                | 10,632  |   |                                |   | 10,561  |          |  | 0.7    | % 
|                                    |  |                                |         |   |                                |   |         |          |  |        |   
|Operating expense                   |  |                                | 229,072 |   |                                |   | 221,968 |          |  | 3.2    | % 
|Selling, general and administrative |  |                                | 23,782  |   |                                |   | 28,097  |          |  | (15.4  | )%
|Depreciation and amortization       |  |                                | 12,445  |   |                                |   | 13,085  |          |  | (4.9   | )%
|Amortization of vessel drydocking   |  |                                | 3,362   |   |                                |   | 3,815   |          |  | (11.9  | )%
|Miscellaneous expense, net          |  |                                | (406    | ) |                                |   | 585     |          |  | (169.4 | )%
|                                    |  |                                |         |   |                                |   |         |          |  |        |   
|Total operating expenses            |  |                                | 268,255 |   |                                |   | 267,550 |          |  | (0.3   | )%
|                                    |  |                                |         |   |                                |   |         |          |  |        |   
|Operating income                    |  | $                              | 36,402  |   |                                | $ | 21,525  |          |  | 69.1   | % 
|                                    |  |                                |         |   |                                |   |         |          |  |        |   
|Operating ratio                     |  |                                | 88.1    | % |                                |   | 92.6    | %        |  | 4.5    | % 
|Revenue containers (units)          |  |                                | 77,108  |   |                                |   | 80,316  |          |  | (4.0   | )%



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Operating Revenue.Operating revenue increased to $304.7 million for the quarter ended
September 24, 2006 compared to $289.1 million for the quarter ended September 25, 2005, an increase of $15.6 million or 5.4%. This revenue increase can be attributed to the following factors ($ in thousands):



|                                                                                    |  |   |         |  
|----------------------------------------------------------------------------------- |  | - | ------- | -
|Revenue container volume decrease                                                   |  | $ | (10,171 | )
|More favorable cargo mix and general rate increases                                 |  |   | 12,128  |  
|Bunker and intermodal fuel surcharges included in rates to offset rising fuel costs |  |   | 14,355  |  
|Decrease in other non-transportation services                                       |  |   | (730    | )
|                                                                                    |  |   |         |  
|Total operating revenue increase                                                    |  | $ | 15,582  |  
|                                                                                    |  |   |         |  

The decreased revenue resulting from revenue container volume declines is primarily due to overall
soft market conditions in Puerto Rico, a delayed seafood season in Alaska, as well as a strategic shift away from lower margin automobile cargo to more refrigerated cargo and other higher margin freight. This revenue container volume decrease is
offset by higher margin cargo mix in addition to general rate increases. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 12.6% of total revenue in the quarter ended
September 24, 2006 and approximately 8.3% of total revenue in the quarter ended September 25, 2005. We increased our bunker and intermodal fuel surcharges several times throughout 2005 and in the first nine months of 2006 as a result of
significant increases in the cost of fuel for our vessels, in addition to fuel increases passed on to us by our truck, rail, and barge carriers. Fuel surcharges are evaluated regularly as the price of fuel fluctuates, and we may at times incorporate
these surcharges into our base transportation rates that we charge. Based on recent declines in fuel costs, we have decreased our fuel surcharges. The decrease in other non-transportation services is primarily due to decreases in equipment rentals
to third parties.

Operating Expense.Operating expense increased to $229.1 million for the quarter ended September 24, 2006
compared to $222.0 million for the quarter ended September 25, 2005, an increase of $7.1 million, or 3.2%. The increase in operating expense primarily reflects the effect of rising fuel prices, offset by reduced expenses associated with lower
container volumes. Vessel expense, which is not primarily driven by revenue container volume, increased to $82.0 million for the quarter ended September 24, 2006 from $76.3 million for the quarter ended September 25, 2005, an increase of
$5.7 million, or 7.4%. This $5.7 million increase can be attributed to the following factors ($ in thousands):



|                                                        |  |   |        |  
|------------------------------------------------------- |  | - | ------ | -
|Increased vessel fuel costs                             |  | $ | 8,036  |  
|Reduction of vessel lease expense from vessel purchases |  |   | (1,490 | )
|Labor and other vessel operating decreases              |  |   | (867   | )
|                                                        |  |   |        |  
|Total vessel expense increase                           |  | $ | 5,679  |  
|                                                        |  |   |        |  

The $8.0 million increase in vessel fuel costs is comprised of an increase of $9.4 million due to
a 32.1% increase in fuel prices, offset by a decrease of $1.4 million due to lower fuel consumption. The decrease in fuel consumption and the $0.9 million decrease in vessel operating costs is primarily due to having one less vessel in service in
Puerto Rico during the quarter ended September 24, 2006.

Marine expense is comprised of the costs incurred to bring vessels into and
out of port, and to load and unload containers. The types of costs included in marine expense are stevedoring and benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. Marine expense decreased to
$48.7 million for the quarter ended September 24, 2006 from $49.5 million for quarter ended September 25, 2005, a decrease of $0.8 million, or 1.6%. This decrease in marine expenses can be attributed to a 4.0% decrease in total revenue
container volume period over period, offset by contractual labor increases.



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Inland expense increased to $53.6 million for the quarter ended September 24, 2006 from $49.9
million for the quarter ended September 25, 2005, an increase of $3.7 million, or 7.3%. Approximately $2.6 million of this increase was due to higher fuel surcharges primarily as a result of higher fuel costs, as rail, truck, and barge carriers
have substantially increased their fuel surcharges period over period. Although total moves were lower in the quarter ended September 24, 2006 due to lower container volumes, the cost per move increased significantly due to higher miles per
move. This, together with contractual rate increases for both rail and non-rail moves, accounts for the remaining $1.1 million increase in the quarter ended September 24, 2006.

Land expense is comprised of the costs included within the terminal for the handling, maintenance, and storage of containers, including yard operations,
gate operations, maintenance, warehouse, and terminal overhead.



|                   |  |                               |        |                               |   |          |  |      |   
|------------------ |  | ----------------------------- | ------ | ----------------------------- | - | -------- |  | ---- | --
|                   |  | QuarterEndedSeptember 24,2006 |        | QuarterEndedSeptember 25,2005 |   | % Change | 
|                   |  | ($ in thousands)              |        |                               |  
|Land expense:      |  |                               |        |                               |   |          |  |      |   
|Maintenance        |  | $                             | 13,564 |                               | $ | 14,254   |  | (4.8 | )%
|Terminal overhead  |  |                               | 11,980 |                               |   | 12,097   |  | (1.0 | )%
|Yard and gate      |  |                               | 6,498  |                               |   | 7,055    |  | (7.9 | )%
|Warehouse          |  |                               | 2,153  |                               |   | 2,303    |  | (6.5 | )%
|                   |  |                               |        |                               |   |          |  |      |   
|Total land expense |  | $                             | 34,195 |                               | $ | 35,709   |  | (4.2 | )%
|                   |  |                               |        |                               |   |          |  |      |   

Non-vessel related maintenance expenses decreased primarily due to a decline in maintenance
expenses associated with the new refrigerated container equipment added to our fleet during 2005 and continued focus on identifying and implementing variable cost savings initiatives, offset by increased fuel costs of $0.4 million. Yard and gate
expense is comprised of the costs associated with moving cargo into and out of the terminal facility and the costs associated with the storage of equipment and revenue loads in the terminal facility. Yard and gate expenses decreased primarily due to
lower revenue container volumes.



|                                      |  |                               |        |                               |   |          |  |       |   
|------------------------------------- |  | ----------------------------- | ------ | ----------------------------- | - | -------- |  | ----- | --
|                                      |  | QuarterEndedSeptember 24,2006 |        | QuarterEndedSeptember 25,2005 |   | % Change | 
|                                      |  | ($ in thousands)              |        |                               |  
|Depreciation and amortization:        |  |                               |        |                               |   |          |  |       |   
|Depreciation  owned vessels          |  | $                             | 2,731  |                               | $ | 2,170    |  | 25.9  | % 
|Depreciation and amortization  other |  |                               | 4,824  |                               |   | 6,026    |  | (20.0 | )%
|Amortization of intangible assets     |  |                               | 4,890  |                               |   | 4,889    |  | 0.0   | % 
|                                      |  |                               |        |                               |   |          |  |       |   
|Total depreciation and amortization   |  | $                             | 12,445 |                               | $ | 13,085   |  | (4.9  | )%
|                                      |  |                               |        |                               |   |          |  |       |   
|Amortization of vessel drydocking     |  | $                             | 3,362  |                               | $ | 3,815    |  | (11.9 | )%
|                                      |  |                               |        |                               |   |          |  |       |   

Depreciation and Amortization. Depreciation and amortization costs decreased by $0.6
million for the quarter ended September 24, 2006 as compared to the quarter ended September 25, 2005. The $1.2 million decrease in depreciation and amortizationother is primarily due to a decrease in leasehold improvements and in the
number of containers. The decrease in leasehold improvement depreciation is primarily due to the acquisition of the rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of the
Horizon Enterprise and the Horizon Pacific in the third quarter of fiscal year 2005, and the associated reduction in leasehold improvements associated with these vessels. Depreciation of owned vessels increased by $0.6 million from the quarter ended
September 25, 2005 to the quarter ended September 24, 2006, primarily due to the Horizon Enterprise and Horizon Pacific transaction mentioned above.



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Amortization of Vessel Drydocking.Amortization of vessel drydocking decreased $0.5 million, or
11.9%, to $3.4 million for the quarter ended September 24, 2006 from $3.8 million in the quarter ended September 25, 2005 due to more drydockings in 2004 and 2005 and to lower overall costs on recent drydockings.

Selling, General and Administrative.Selling, general and administrative costs decreased to $23.8 million for the quarter ended
September 24, 2006 compared to $28.1 million for the quarter ended September 25, 2005, a decrease of $4.3 million or 15.4%. This decrease is comprised of a decrease of $8.2 million in Castle Harlan management fees, offset by approximately
$2.1 million in higher legal and professional fees, and $1.8 million of other expenses, including insurance and labor related expenses. The management services and related fee provisions of a management agreement with Castle Harlan were terminated
in conjunction with the Parents initial public offering in September 2005.

Miscellaneous Expense (income), Net. Miscellaneous
expense (income), net was approximately $0.4 million of income for the quarter ended September 24, 2006 compared to expense of $0.6 million in the quarter ended September 25, 2005, a decrease of $1.0 million. This decrease is primarily due
to a $0.6 million decrease in environmental reserves related to contaminants from an underground storage tank in Anchorage, Alaska, and a decrease in bad debt expense.

Interest Expense, Net.Interest expense, net decreased to $12.2 million for the quarter ended September 24, 2006 compared to $12.9 million for the quarter ended September 25, 2005, a decrease of $0.7
million or 5.5%. This decrease is comprised of a $2.1 million decrease attributable to the redemption of $53.0 million of the principal amount of the 9% senior notes due 2012 (the 9% senior notes) and $56.0 million principal amount of
the 11% senior discount notes utilizing proceeds from the Parents initial public offering in September 2005. This decrease is offset by a $1.3 million increase in interest expense under our senior credit facility due to a 200 basis point
increase in interest rates in the quarter ended September 24, 2006 as compared to the quarter ended September 25, 2005.

Income Tax Expense.The Companys effective tax rate for the quarter ended September 24, 2006 and September 25, 2005 was (123.1%) and 40.9%, respectively. During the quarter ended September 24, 2006, after
evaluating the merits and requirements of the tonnage tax, the Company elected the application of the tonnage tax instead of the corporate income tax on income from its qualifying shipping activities. This third quarter 2006 election of the tonnage
tax was made in connection with the filing of the Companys 2005 federal corporate income tax return and will also apply to all subsequent federal income tax returns unless the Company revokes this alternative tax treatment. The impact of this
election resulted in a decrease in income tax expense of approximately $39.4 million during the quarter ended September 24, 2006. Approximately $10.4 million and $ 19.9 million relate to the benefit reported on the 2005 federal income tax
return and revaluation of the deferred taxes related to the qualifying activities, respectively. Excluding the impact of the benefit reported on the 2005 federal income tax return and revaluation of deferred taxes related to the qualifying
activities, the Companys effective tax rate for the quarter ended September 24, 2006 would be 16.3%.



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Nine Months Ended September 24, 2006 Compared with the Nine Months Ended September 25, 2005



|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|----------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | - | ------- | -------- |  | ----- | --
|                                    |  | Nine MonthsEndedSeptember 24,2006 |         |   | Nine MonthsEndedSeptember 25,2005 |   |         | % Change | 
|                                    |  | ($ in thousands)                  |         |   |                                   |  
|Operating revenue                   |  | $                                 | 869,438 |   |                                   | $ | 817,181 |          |  | 6.4   | % 
|Operating expense:                  |  |                                   |         |   |                                   |   |         |          |  |       |   
|Vessel                              |  |                                   | 242,390 |   |                                   |   | 220,716 |          |  | 9.8   | % 
|Marine                              |  |                                   | 143,946 |   |                                   |   | 146,786 |          |  | (1.9  | )%
|Inland                              |  |                                   | 151,146 |   |                                   |   | 140,331 |          |  | 7.7   | % 
|Land                                |  |                                   | 102,404 |   |                                   |   | 104,614 |          |  | (2.1  | )%
|Rolling stock rent                  |  |                                   | 33,535  |   |                                   |   | 31,990  |          |  | 4.8   | % 
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Operating expense                   |  |                                   | 673,421 |   |                                   |   | 644,437 |          |  | 4.5   | % 
|Selling, general and administrative |  |                                   | 69,999  |   |                                   |   | 72,319  |          |  | (3.2  | )%
|Depreciation and amortization       |  |                                   | 37,539  |   |                                   |   | 38,526  |          |  | (2.6  | )%
|Amortization of vessel drydocking   |  |                                   | 11,332  |   |                                   |   | 12,359  |          |  | (8.3  | )%
|Miscellaneous expense, net          |  |                                   | 861     |   |                                   |   | 1,805   |          |  | (52.3 | )%
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Total operating expenses            |  |                                   | 793,152 |   |                                   |   | 769,446 |          |  | 3.1   | % 
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Operating income                    |  | $                                 | 76,286  |   |                                   | $ | 47,735  |          |  | 59.8  | % 
|                                    |  |                                   |         |   |                                   |   |         |          |  |       |   
|Operating ratio                     |  |                                   | 91.2    | % |                                   |   | 94.2    | %        |  | (3.0  | %)
|Revenue containers (units)          |  |                                   | 224,313 |   |                                   |   | 233,341 |          |  | (3.9  | )%

Operating Revenue.Operating revenue increased to $869.4 million for the nine months ended
September 24, 2006 compared to $817.2 million for the nine months ended September 25, 2005, an increase of $52.3 million or 6.4%. This revenue increase can be attributed to the following factors ($ in thousands):



|                                                                                    |  |   |         |  
|----------------------------------------------------------------------------------- |  | - | ------- | -
|Revenue container volume decrease                                                   |  | $ | (27,977 | )
|More favorable cargo mix and general rate increases                                 |  |   | 34,442  |  
|Bunker and intermodal fuel surcharges included in rates to offset rising fuel costs |  |   | 42,079  |  
|Growth in other non-transportation services                                         |  |   | 3,713   |  
|                                                                                    |  |   |         |  
|Total operating revenue increase                                                    |  | $ | 52,257  |  
|                                                                                    |  |   |         |  

The decreased revenue due to revenue container volume declines for the nine months ended
September 24, 2006 compared to the nine months ended September 25, 2005 is primarily due to overall soft market conditions in Puerto Rico as well as a strategic shift away from lower margin automobile cargo to more refrigerated cargo and
other higher margin freight. This revenue container volume decrease is offset by higher margin cargo mix in addition to general rate increases. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for
approximately 12% of total revenue in the nine months ended September 24, 2006 and approximately 8% of total revenue in the nine months ended September 25, 2005. We increased our bunker and intermodal fuel surcharges several times
throughout 2005 and in the first nine months of 2006, as a result of significant increases in the cost of fuel for our vessels and as a result of fuel increases passed on to us by our truck, rail, and barge carriers. Fuel surcharges are evaluated
regularly as the price of fuel fluctuates, and we may at times incorporate these surcharges into the base transportation rates that we charge. The growth in other non-transportation services is primarily due to increases in terminal services
provided to third parties and to an increase in space charter revenue not included in transportation revenue, offset slightly by a decrease in equipment rental income.



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##### Table of Contents

Operating Expense.Operating expense increased to $673.4 million for the nine months ended
September 24, 2006 compared to $644.4 million for the nine months ended September 25, 2005, an increase of $29.0 million or 4.5%. The increase in operating expense primarily reflects the effect of rising fuel prices, and an increase in
rolling stock rent, offset by lower expenses associated with lower container volumes. Vessel expense, which is not primarily driven by revenue container volume, increased to $242.4 million for the nine months ended September 24, 2006 from
$220.7 million for the nine months ended September 25, 2005, an increase of $21.7 million or 9.8%. This $21.7 million increase can be attributed to the following factors ($ in thousands):



|                                                        |  |   |        |  
|------------------------------------------------------- |  | - | ------ | -
|Increased vessel fuel costs                             |  | $ | 28,894 |  
|Reduction of vessel lease expense from vessel purchases |  |   | (5,014 | )
|Labor and other vessel operating expense decreases      |  |   | (2,206 | )
|                                                        |  |   |        |  
|Total vessel expense increase                           |  | $ | 21,674 |  
|                                                        |  |   |        |  

The $28.9 million increase in fuel costs is comprised of an increase of $32.5 million due to a
38.9% increase in fuel prices, offset by a decrease of $3.6 million due to lower fuel consumption. Approximately $0.9 million of the other vessel operating decreases is due to expiration of the construction differential subsidy restrictions on two
of the three vessels originally subject to these operating restrictions in 2005 and the expiration in January 2006 for the third vessel. The remaining $1.3 million decrease in vessel operating costs is primarily due to having one less vessel in
service in Puerto Rico during the nine months ended September 24, 2006, slightly offset by higher labor and other vessel operating increases.

Marine expense is comprised of the costs incurred to bring vessels into and out of port, and to load and unload containers. The types of costs included in marine expense are stevedoring and benefits, pilotage fees, tug fees, government
fees, wharfage fees, dockage fees, and line handler fees. Marine expense decreased to $143.9 million for the nine months ended September 24, 2006 from $146.8 million for the nine months ended September 25, 2005, a decrease of $2.8 million
or 1.9%. This decrease in marine expenses can be attributed to a 3.9% decrease in total revenue container volume period over period, offset by contractual labor increases.

Inland expense increased to $151.1 million for the nine months ended September 24, 2006 from $140.3 million for the nine months ended
September 25, 2005, an increase of $10.8 million or 7.7%. Approximately $7.3 million of this increase is due to higher fuel costs, as rail, truck, and barge carriers have substantially increased their fuel surcharges period over period.

Land expense is comprised of the costs included within the terminal for the handling, maintenance, and storage of containers, including
yard operations, gate operations, maintenance, warehouse, and terminal overhead.



|                   |  |                                   |         |                                   |   |          |  |      |   
|------------------ |  | --------------------------------- | ------- | --------------------------------- | - | -------- |  | ---- | --
|                   |  | Nine monthsEndedSeptember 24,2006 |         | Nine monthsEndedSeptember 25,2005 |   | % Change | 
|                   |  | ($ in thousands)                  |         |                                   |  
|Land expense:      |  |                                   |         |                                   |   |          |  |      |   
|Maintenance        |  | $                                 | 40,007  |                                   | $ | 41,516   |  | (3.6 | )%
|Terminal overhead  |  |                                   | 36,596  |                                   |   | 35,954   |  | 1.8  | % 
|Yard and gate      |  |                                   | 19,664  |                                   |   | 20,461   |  | (3.9 | )%
|Warehouse          |  |                                   | 6,137   |                                   |   | 6,683    |  | (8.2 | )%
|                   |  |                                   |         |                                   |   |          |  |      |   
|Total land expense |  | $                                 | 102,404 |                                   | $ | 104,614  |  | (2.1 | )%
|                   |  |                                   |         |                                   |   |          |  |      |   

Non-vessel related maintenance expenses decreased primarily due to lower maintenance expenses
associated with the new refrigerated container equipment added to our fleet during 2005 and other new container



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##### Table of Contents

equipment added to our fleet in 2006. This decrease is partially offset by an increase of $1.4 million in fuel costs. Yard and gate expense is comprised of
the costs associated with moving cargo into and out of the terminal facility and the costs associated with the storage of equipment and revenue loads in the terminal facility. Yard and gate expenses decreased primarily due to decreased revenue
container volumes.



|                                    |  |                                   |        |                                   |   |          |  |       |   
|----------------------------------- |  | --------------------------------- | ------ | --------------------------------- | - | -------- |  | ----- | --
|                                    |  | Nine monthsEndedSeptember 24,2006 |        | Nine monthsEndedSeptember 25,2005 |   | % Change | 
|                                    |  | ($ in thousands)                  |        |                                   |  
|Depreciation and amortization:      |  |                                   |        |                                   |   |          |  |       |   
|Depreciationowned vessels          |  | $                                 | 8,169  |                                   | $ | 6,562    |  | 24.5  | % 
|Depreciation and amortizationother |  |                                   | 14,699 |                                   |   | 17,293   |  | (15.0 | )%
|Amortization of intangible assets   |  |                                   | 14,671 |                                   |   | 14,671   |  | 0.0   | % 
|                                    |  |                                   |        |                                   |   |          |  |       |   
|Total depreciation and amortization |  | $                                 | 37,539 |                                   | $ | 38,526   |  | (2.6  | )%
|                                    |  |                                   |        |                                   |   |          |  |       |   
|Amortization of vessel drydocking   |  | $                                 | 11,332 |                                   | $ | 12,359   |  | (8.3  | )%
|                                    |  |                                   |        |                                   |   |          |  |       |   

Depreciation and Amortization. Depreciation of owned vessels increased by $1.6 million from
the nine months ended September 25, 2005 to the nine months ended September 24, 2006. This increase is due to the acquisition of the rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which
consist primarily of the Horizon Enterprise and the Horizon Pacific in the third quarter of fiscal year 2005. The $2.6 million decrease in depreciation and amortization-other is primarily due to a decrease in depreciation of leasehold improvements
and containers. The decrease in leasehold improvements is due to the write-off of certain leasehold improvements made prior to the acquisition of the rights and beneficial interests in the aforementioned trusts in September 2005.

Amortization of Vessel Drydocking.Amortization of vessel drydocking decreased $1.0 million, or 8.3% for the nine months ended September 24,
2006 from the nine months ended September 25, 2005 due to an increased number of drydockings in 2004 and 2005 and to lower overall costs on recent drydockings.

Selling, General and Administrative.Selling, general and administrative costs decreased to $70.7 million for the nine months ended September 24, 2006 compared to $72.3 million for the nine
months ended September 25, 2005, a decrease of $2.3 million or 3.2%. This decrease is comprised of a decease of $9.7 million in management fees, offset by approximately $3.2 million in higher legal and professional fees, and $4.2 million of
other expenses, including labor related and insurance expenses. The management fee expenses related to the ongoing management services and related fee provisions of a management agreement with Castle Harlan. Such management agreement was terminated
in conjunction with the Parents initial public offering in September 2005.

Miscellaneous Expense, Net. Miscellaneous expense
decreased to $0.9 million for the nine months ended September 24, 2006 compared to $1.8 million for the nine months ended September 25, 2005, a decrease of $0.9 million, or 52.3%. This decrease is primarily due to a $0.6 million decrease
in environmental reserves related to contaminants from an underground storage tank in Anchorage, Alaska, and an increase in gain on the sale of fixed assets.

Interest Expense, Net.Interest expense, net decreased $2.9 million, or 7.4%, in the nine months ended September 24, 2006. This decrease is comprised of a $6.2 million decrease attributable to the
redemption of $53.0 million of the principal amount of the 9% senior notes and $56.0 million principal amount of the 11% senior discount notes utilizing proceeds from the Parents initial public offering in September 2005. This decrease is
offset by a $3.4 million increase in interest expense under our senior credit facility due to a 195 basis point increase in interest rates in the nine months ended September 24, 2006 as compared to the nine months ended September 25, 2005.



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##### Table of Contents

Income Tax Expense. The Companys effective tax rate was (58.3%) and (43.7%) for
the nine months ended September 24, 2006 and September 25, 2005, respectively. During the quarter ended September 24, 2006, after evaluating the merits and requirements of the tonnage tax, the Company elected the application of the
tonnage tax instead of the corporate income tax on income from its qualifying shipping activities. This third quarter 2006 election of the tonnage tax was made in connection with the filing of the Companys 2005 federal corporate income tax
return and will also apply to all subsequent federal income tax returns unless the Company revokes this alternative tax treatment. The impact of this election resulted in a decrease in income tax expense of approximately $39.4 million during the
nine months ended September 24, 2006. Approximately $10.4 million and $ 19.9 million relate to the benefit reported on the 2005 federal income tax return and revaluation of the deferred taxes related to the qualifying activities,
respectively. Excluding the impact of the benefit reported on the 2005 federal income tax return and the revaluation of the deferred taxes related to the qualifying activities, the Companys effective tax rate for the nine months ended
September 24, 2006 would be 16.3%.

Seasonality

Our container volumes are subject to seasonal trends common in the transportation industry. Financial results in the first quarter are normally lower due to reduced loads during the winter months. Volumes typically
build to a peak in the third quarter and early fourth quarter, which generally results in higher revenues and improved margins.

Liquidity and Capital
Resources

Our principal sources of funds have been earnings before non-cash charges, borrowings under debt arrangements,
and equity capitalization. Our principal uses of funds have been (i) capital expenditures on our container fleet, our terminal operating equipment, improvements to our owned and leased vessel fleet, and our information technology systems,
(ii) vessel drydocking expenditures, (iii) the purchase of vessels upon expiration of operating leases, (iv) working capital consumption, (v) principal and interest payments on our existing indebtedness, and (vi) dividend
payments to the Parent. Cash and cash equivalents totaled $81.8 million at September 24, 2006. As of September 24, 2006, $12.8 million was available for borrowing by us under the existing $50.0 million revolving credit facility, after
taking into account $37.2 million utilized for outstanding letters of credit.



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##### Table of Contents

Operating Activities



|                                                                                         |  |                                    |         |   |                                    |   |         |  
|---------------------------------------------------------------------------------------- |  | ---------------------------------- | ------- | - | ---------------------------------- | - | ------- | -
|                                                                                         |  | Nine MonthsEnded September 24,2006 |         |   | Nine MonthsEnded September 25,2005 |  
|                                                                                         |  | ($ in thousands)                   |        
|Cash flows provided by operating activities                                              |  |                                    |         |   |                                    |   |         |  
|Net income (loss)                                                                        |  | $                                  | 63,659  |   |                                    | $ | 4,814   |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                    |         |   |                                    |   |         |  
|Depreciation                                                                             |  |                                    | 22,868  |   |                                    |   | 23,855  |  
|Amortization of other intangible assets                                                  |  |                                    | 14,671  |   |                                    |   | 14,671  |  
|Amortization of vessel drydocking                                                        |  |                                    | 11,332  |   |                                    |   | 12,359  |  
|Amortization of deferred financing costs                                                 |  |                                    | 2,413   |   |                                    |   | 2,528   |  
|Deferred income taxes                                                                    |  |                                    | (21,542 | ) |                                    |   | 3,130   |  
|Stock-based compensation                                                                 |  |                                    | 686     |   |                                    |   |         |  
|Accretion of interest on 11% senior discount notes                                       |  |                                    | 6,796   |   |                                    |   | 9,384   |  
|                                                                                         |  |                                    |         |   |                                    |   |         |  
|Subtotal                                                                                 |  |                                    | 37,224  |   |                                    |   | 65,927  |  
|                                                                                         |  |                                    |         |   |                                    |   |         |  
|Earnings adjusted for non-cash charges                                                   |  |                                    | 100,883 |   |                                    |   | 70,741  |  
|Changes in operating assets and liabilities:                                             |  |                                    |         |   |                                    |   |         |  
|Accounts receivable                                                                      |  |                                    | (29,579 | ) |                                    |   | (26,095 | )
|Materials and supplies                                                                   |  |                                    | 1,254   |   |                                    |   | (4,112  | )
|Other current assets                                                                     |  |                                    | (5,004  | ) |                                    |   | 799     |  
|Accounts payable                                                                         |  |                                    | 3,992   |   |                                    |   | (1,666  | )
|Accrued liabilities                                                                      |  |                                    | 13,813  |   |                                    |   | 16,434  |  
|Other assets / liabilities                                                               |  |                                    | (4,871  | ) |                                    |   | (1,815  | )
|                                                                                         |  |                                    |         |   |                                    |   |         |  
|Changes in operating assets and liabilities                                              |  |                                    | (20,395 | ) |                                    |   | (16,455 | )
|                                                                                         |  |                                    |         |   |                                    |   |         |  
|Gain on equipment disposals                                                              |  |                                    | (471    | ) |                                    |   | (253    | )
|Vessel drydocking payments                                                               |  |                                    | (13,703 | ) |                                    |   | (12,621 | )
|                                                                                         |  |                                    |         |   |                                    |   |         |  
|Net cash provided by operating activities                                                |  | $                                  | 66,314  |   |                                    | $ | 41,412  |  
|                                                                                         |  |                                    |         |   |                                    |   |         |  

Net cash provided by operating activities increased by $24.9 million to $66.3 million for the nine
months ended September 24, 2006 compared to $41.4 million of net cash provided by operating activities for the nine months ended September 25, 2005. This increase is primarily driven by improved profitability after non-cash charges. Net
earnings adjusted for depreciation, amortization, deferred income taxes, accretion, and other non-cash operating activities resulted in cash flow generation of $100.9 million for the nine months ended September 24, 2006 compared to $70.7
million for the nine months ended September 25, 2005. Changes in working capital resulted in a use of cash of $20.4 million for the nine months ended September 24, 2006 compared to a use of cash of $16.5 million for the nine months ended
September 25, 2005. The other current assets working capital use is primarily due to an increase in prepaid insurance and an increase in prepaid taxes. The increase in accrued liabilities is primarily due to timing of interest payments and
expenses associated with the secondary offering. The increase in accounts receivable balances in the first nine months of 2006 and 2005 is due to seasonality within the business. The accounts receivable balance typically rises during the first three
quarters of the year, and decreases to its lowest balance in the fourth quarter. The other assets/liabilities working capital use is primarily due to $3.2 million of costs associated with the Companys contractual arrangements with SFL.



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Investing Activities

Net cash used in investing activities was $8.8 for the nine months ended September 24, 2006 compared to $28.6 million for the nine months ended September 25, 2005. Approximately $25.2 million of the capital
expenditures in the nine months ended September 25, 2005 is comprised of the acquisition of the rights and beneficial interests of the sole owner participant in two separate trusts, the assets of which consist primarily of the Horizon
Enterprise and the Horizon Pacific and the charters related thereto under which HL operates such vessels. Excluding this expenditure, capital expenditures increased approximately $6.1 million in 2006 as compared to 2005. Capital expenditures in 2006
primarily relate to the acquisition of containers, a container handler, and capital expenditures relating to the redevelopment of the San Juan, Puerto Rico terminal.

Financing Activities

Net cash used for financing activities during the nine months ended
September 24, 2006 was $17.0 million compared to $6.1 million for the nine months ended September 25, 2005. The net cash used for financing activities during the nine months ended September 24, 2006 includes $12.6 million in dividends
to the Parent, the payment of $1.0 million in financing costs related to fees associated with amendments to HL and HLHCs senior credit facility, and a $1.3 million open market purchase of the Companys 11% senior discount notes.

Capital Requirements

Our current and
future capital needs relate primarily to debt service, maintenance, and improvement of our vessel fleet, including entering into lease transactions for new vessels, purchasing vessels upon the expiration of vessel operating leases, and providing for
other necessary equipment acquisitions. Cash to be used for investing activities, including purchases of property and equipment, for the next twelve months are expected to total approximately $25.0 million. In addition, expenditures for vessel
drydocking payments are estimated at $20.0 million for the next twelve months.

Three of our vessels, Horizon Anchorage, Horizon Tacoma and
Horizon Kodiak, are leased, or chartered. The charter periods for these vessels are due to expire in January 2015. The charters for these vessels permit us to purchase the applicable vessel at the expiration of the charter period for a fair market
value specified in the relevant charter that is determined through a pre-agreed appraisal procedure. During 2005, we expended $25.2 million in cash to purchase owner participant interests in two of our previously leased vessels, Horizon Pacific and
Horizon Enterprise. During 2004 and 2003, we purchased four vessels, Horizon Fairbanks, Horizon Hawaii, Horizon Navigator, and Horizon Trader, at the expiration of their charter periods, utilizing similar fair market value purchase option
arrangements. The purchase prices of the four vessels ranged from $3.8 million to $8.2 million per vessel. The fair market values of the vessels currently under charter at the expiration of their charters cannot be predicted with any certainty.



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##### Table of Contents

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual obligations as of September 24, 2006(1)are as follows ($ in thousands):



|                               |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|------------------------------ |  | ---------------- | --------- | ------------- | - | ------ |  | ---- | ------- | ---- | - | ------ |  | --------- | ------ |  | - | ------- |  | - | -------
|                               |  | TotalObligations |           | Remaining2006 |   | 2007   |  | 2008 |         | 2009 |   | 2010   |  | After2010
|Principal obligations:         |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|Senior credit facility         |  | $                | 245,000   |               | $ | 625    |  | $    | 2,500   |      | $ | 2,500  |  | $         | 2,500  |  | $ | 60,625  |  | $ | 176,250
|Notes issued by owner trustees |  |                  | 4,513     |               |   |       |  |      | 4,513   |      |   |       |  |           |       |  |   |        |  |   |       
|9% senior notes                |  |                  | 197,014   |               |   |       |  |      |        |      |   |       |  |           |       |  |   |        |  |   | 197,014
|11% senior discount notes      |  |                  | 102,505   |               |   |       |  |      |        |      |   |       |  |           |       |  |   |        |  |   | 102,505
|Operating leases               |  |                  | 344,353   |               |   | 15,661 |  |      | 81,670  |      |   | 39,504 |  |           | 38,051 |  |   | 36,665  |  |   | 132,802
|Capital lease obligations      |  |                  | 402       |               |   | 48     |  |      | 193     |      |   | 161    |  |           |       |  |   |        |  |   |       
|                               |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|Subtotal                       |  |                  | 893,787   |               |   | 16,334 |  |      | 88,876  |      |   | 42,165 |  |           | 40,551 |  |   | 97,290  |  |   | 608,571
|                               |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|Interest obligations:          |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|Senior credit facility         |  |                  | 88,165    |               |   | 6,820  |  |      | 19,432  |      |   | 18,734 |  |           | 18,408 |  |   | 17,941  |  |   | 6,830  
|Notes issued by owner trustees |  |                  | 240       |               |   |       |  |      | 240     |      |   |       |  |           |       |  |   |        |  |   |       
|9% senior notes                |  |                  | 112,297   |               |   | 8,866  |  |      | 17,731  |      |   | 17,731 |  |           | 17,731 |  |   | 17,731  |  |   | 32,507 
|11% senior discount notes      |  |                  | 56,380    |               |   |       |  |      |        |      |   | 5,638  |  |           | 11,276 |  |   | 11,276  |  |   | 28,190 
|                               |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|Subtotal                       |  |                  | 257,082   |               |   | 15,686 |  |      | 37,403  |      |   | 42,103 |  |           | 47,415 |  |   | 46,948  |  |   | 67,527 
|                               |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|Total principal and interest   |  | $                | 1,150,869 |               | $ | 32,020 |  | $    | 126,279 |      | $ | 84,268 |  | $         | 87,966 |  | $ | 144,238 |  | $ | 676,098
|                               |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|Other commercial commitments:  |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|Standby letters of credit(2)   |  | $                | 37,209    |               | $ |       |  | $    | 29,338  |      | $ |       |  | $         | 7,871  |  | $ |        |  | $ |       
|Surety bonds(3)                |  |                  | 7,577     |               |   | 7,573  |  |      | 1       |      |   |       |  |           | 3      |  |   |        |  |   |        
|                               |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        
|Other commercial commitments   |  | $                | 44,786    |               | $ | 7,573  |  | $    | 29,339  |      | $ |       |  | $         | 7,874  |  | $ |        |  | $ |       
|                               |  |                  |           |               |   |        |  |      |         |      |   |        |  |           |        |  |   |         |  |   |        

---

|(1) | Included in contractual obligations are scheduled interest payments. Interest payments on the senior credit facility are variable and are based as of
September 24, 2006 upon the London Inter-Bank Offered Rate (LIBOR) plus 2.25%. The three-month LIBOR / swap curve has been utilized to estimate interest payments on the senior credit facility. Interest on the 9% senior notes is fixed and is
paid semi-annually on May 1 and November 1 of each year until maturity on November 1, 2012. Interest on the 11% senior discount notes is fixed. However, no cash interest will accrue prior to April 1, 2008. Thereafter, cash
interest will accrue at a rate of 11.0% per annum and will be payable on April 1 and October 1 of each year, commencing on October 1, 2008 and continuing until maturity on April 1, 2013.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The standby letters of credit include $29.3 million in letters of credit that serve as collateral related to the SFL agreements, $4.6 million in letters of credit
that serve as collateral on state workers compensation and auto liability policies, and $3.3 million in letters of credit that serve as security for all bonds excluding U.S. Customs bonds.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | $5.3 million is U.S. customs bonds, $1.1 million is bonds for payment of taxes levied under the Excise Tax Act of the Commonwealth of Puerto Rico of 1987, and the
remaining $1.2 million is utility or lease bonds. The Company has the financial ability and intention to satisfy its obligations.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SFL Agreements

Although HL is not the primary beneficiary of the variable interest entities created in conjunction with the April 2006 financial transactions with SFL, HL has an interest in the variable interest entities. Certain
contractual obligations and off-balance sheet obligations arising from this transaction are as follows ($ in millions):



|                                       |  |   |     
|-------------------------------------- |  | - | ----
|Annual operating lease obligations (a) |  | $ | 32.0
|Letters of credit (b)                  |  | $ | 29.3
|Residual guarantee (c)                 |  | $ | 3.8 
|Security deposits guarantee (d)        |  | $ | 0.2 

---

|(a) | Such operating lease obligations will commence throughout 2007 as the vessels are delivered and the bareboat charters commence. The term of each of the bareboat charters is twelve
years from the date of delivery of the related vessel. The aggregate annual charter hire for the vessels under the SFL agreement is based on certain assumptions with respect to final vessel price and interest rates that will be adjusted on the date
of the delivery of the particular vessel. The Shipowners have entered into forward starting swaps to lock in the interest rate on the underlying bank loan with Fortis. However, if the vessel delivery date or vessel cost changes, the forward starting
swap agreements will need to be adjusted. If the underlying interest rate on the bank loans to the Shipowners is changed due to any of the above reasons, the aggregate annual charter hire will also change.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The letters of credit were issued in April 2006 to secure certain obligations under the Reimbursement Agreement. To obtain the letters of credit, HL, together with HLHC, UBS AG,
Stamford Bank, as administrative agent, UBS AG, Stamford Branch, as issuing bank, and certain lenders, entered into Amendment No. 2 (Amendment No. 2) to the Amended and Restated Credit Agreement, dated as of April 7, 2006,
(the Pre-Existing Horizon Credit Agreement). Amendment No. 2 amended the Pre-Existing Horizon Credit Agreement by, among other things, (i) increasing the aggregate amount of letters of credit permitted under the Pre-Existing
Horizon Credit Agreement from $20.0 million to $41.0 million and (ii) permitting HL or any of its subsidiaries to guarantee, directly or indirectly, up to $42.5 million of the obligations of SFL and/or any of its subsidiaries or affiliates in
connection with the charter by HL of the vessels from the Shipowners.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | If HL elects not to purchase the vessels at the end of the initial twelve year period and the Shipowners sell the vessels for less than a specified amount, HL is responsible for
paying the amount of such shortfall, which shall not exceed $3.8 million per vessel. Such residual guarantee will be recorded at its fair value of approximately $0.2 million as a liability on the Companys balance sheet upon commencement of the
bareboat charters.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Pursuant to the Agreement to Acquire and Charter and the Reimbursement Agreement, HL has agreed to reimburse SFL, SFL Holdings, and the Shipowners for their respective losses if
there is a default by SFL Holdings as the buyer under the MoAs except under certain circumstances. The losses covered include forfeiture of SFLs security deposits, any damage claims made against SFL Holdings by the sellers under the MoAs (to
the extent such claims exceed SFLs Security Deposits), any liabilities of SFL and the Shipowners to Fortis for any draws on the letters of credit, any interest due under Fortiss credit agreement as a result of any such draws, and any
interest-rate swap breakage fees. In addition, SFL Holdings has the right, under certain circumstances, to require HL to assume its obligations to the sellers under the MoAs. Such security deposits guarantee is recorded on the balance sheet as of
September 24, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Long-Term Debt

On July 7, 2004, HL and HLHC entered into a senior credit facility with various financial lenders. The senior credit facility, as amended and restated, and subsequently amended by Amendment No. 2, consists
of (i) a $50.0 million revolving credit facility and (ii) a $250.0 million term loan facility. We expect that we will be permitted to incur up to an additional $50.0 million of senior secured debt in the form of term loans at the option of
the participating lenders under the term loan facility, provided that no default or event of default under the senior credit facility has occurred or would occur after giving effect to such incurrence and after certain other



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conditions are satisfied. The term loan matures on July 7, 2011 and the revolving credit facility matures on July 7, 2009. No amounts were
outstanding under the revolving credit facility as of September 24, 2006 or December 25, 2005. However, $37.2 million of availability under the revolving credit facility was utilized for outstanding letters of credit as of
September 24, 2006.

Principal payments of approximately $0.6 million are due quarterly on the term loan facility through
June 30, 2010, at which point quarterly payments increase to $58.8 million until final maturity on July 7, 2011. Borrowings under the term loan facility bear interest at HL and HLHCs choice of LIBOR or the base rate, in each case,
plus an applicable margin. The margin applicable to the term loan facility is equal to 1.25% for base rate loans and 2.25% for LIBOR loans. The interest rate at September 24, 2006 approximated 7.75%. HL and HLHC are also charged a commitment
fee on the daily unused amount of the revolving credit facility during the availability period based upon a rate of 0.50%.

The senior
credit facility requires HL and HLHC to meet a minimum interest coverage ratio and a maximum leverage ratio. In addition, the senior credit facility contains restrictive covenants that will, among other things, limit the incurrence of additional
indebtedness, capital expenditures, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances, and other matters customarily restricted in
such agreements. It also contains certain customary events of default, subject to grace periods, as appropriate. HL and HLHC were in compliance with all such covenants as of September 24, 2006. The senior credit facility is secured by the
assets of HL and HLHC. The 9% senior notes and the 11% senior discount notes also contain restrictive covenants including, limiting incurrence of additional indebtedness, dividends, and restrictions customary in such agreements.

On July 7, 2004, HL and HLHC completed an offering of $250.0 million in principal amount of 9% senior notes. The 9% senior notes mature on
November 1, 2012. Interest on the 9% senior notes accrues at the rate of 9% per annum and is payable in cash semi-annually on May 1 and November 1 of each year. The 9% senior notes are the general unsecured obligations of HL and
HLHC and rank equally with the existing and future unsecured indebtedness and other obligations of HL and HLHC that are not, by their terms, expressly subordinated in right of payment to the 9% senior notes and senior in right to any future
subordinated debt. HL and HLHC used $57.8 million of the proceeds of the Parents initial public offering to redeem $53.0 million of the principal amount of the 9% senior notes and pay associated redemption premiums of $4.8 million.

On December 10, 2004, the Company completed an offering of $160.0 million in principal amount of 11% senior discount notes. The 11% senior
discount notes were issued at a discount from their principal amount at maturity and generated gross proceeds of approximately $112.3 million. The 11% senior discount notes mature on April 1, 2013. Until April 1, 2008, the 11% senior
discount notes will accrete at the rate of 11% per annum, compounded semiannually on April 1 and October 1 of each year, beginning October 1, 2005 and ending, though not including, April 1, 2008. Beginning on April 1,
2008, cash interest will accrue at the rate of 11% per annum and will be payable in cash semi-annually in arrears on each April 1 and October 1, commencing October 1, 2008. The 11% senior discount notes are the general unsecured
obligations of the Company and rank equally with the existing and future unsecured indebtedness and other obligations of the Company that are not, by their terms, expressly subordinated in right of payment to the 11% senior discount notes and senior
in right to any future subordinated debt. The Company used $48.0 million of the proceeds from the Parents initial public offering to redeem $56.0 million of the original principal amount at maturity, or $43.2 million in accreted value, of the
11% senior discount notes and to pay associated redemption premiums of $4.8 million.

We intend to fund our ongoing operations through cash
generated by operations and availability under the senior credit facility.

Future principal debt payments are expected to be paid out of
cash flows from operations, borrowings under the senior credit facility, and future refinancings of our debt.

Our ability to make
scheduled payments of principal, to pay the interest, if any, on our indebtedness, to refinance our indebtedness, to make dividend payments to our common stockholders, or to fund planned capital



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expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.

Based upon the current level of operations and certain anticipated improvements,
we believe that cash flow from operations and available cash, together with borrowings available under the senior credit facility, will be adequate to meet our future liquidity needs for the next twelve months. There can be no assurance that we will
generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized, or that future borrowings will be available under the senior credit facility in an amount sufficient to enable us to service
our indebtedness or to fund other liquidity needs. In addition, there can be no assurance that we will be able to effect any future refinancing of our debt on commercially reasonable terms or at all.

Interest Rate Risk

Our primary interest rate
exposure relates to the senior credit facility. As of September 24, 2006, the HLHC and HL had outstanding a $245.0 million term loan, which bears interest at variable rates. Each quarter point change in interest rates would result in a $0.6
million change in interest expense on the term loan. HLHC and HL also have a revolving credit facility that provides for borrowings of up to $50.0 million. As of September 24, 2006, no amounts were outstanding under the revolving credit
facility.

Credit Ratings

As of
September 24, 2006, Moodys Investors Service and Standard and Poors Ratings Services assigned the following credit ratings to our outstanding debt:

Debt/Rating Outlook:



|                                   |  |                 |  |                  
|---------------------------------- |  | --------------- |  | -----------------
|                                   |  | Moodys         |  | Standard & Poors
|Senior secured credit facility     |  | Ba2, LGD2, 20%  |  | B                
|9% senior notes due 2012           |  | B3, LGD4, 69%   |  | CCC+             
|11% senior discount notes due 2013 |  | Caa1, LGD6, 94% |  | CCC+             
|Rating outlook                     |  | Stable, PD      |  | Positive         

In September 2006, Moodys Investors Service (Moodys) implemented its new
Probability-of-Default (PD) and Loss-Given-Default (LGD) rating methodologies for the transportation sector. PD ratings are assigned only to issuers, not specific debt instruments, and use the standard Moodys
alpha-numeric scale. They express Moodys opinion about the likelihood that any entity within a corporate family will default on any of its debt obligations. LGD assessments are assigned to individual rated debt issues and are expressed as a
percentage of principal and interest at the resolution of default, with assessments ranging from LGD1 (loss expected to be 0%-9%) to LGD6 (loss anticipated to be 90%-100%).

Ratio of Earnings to Fixed Charges

Our ratio of earnings to fixed charges for the quarter and nine
months ended September 24, 2006 is as follows ($ in thousands):



|                                   |  |                                  |        |                                      |   |       
|---------------------------------- |  | -------------------------------- | ------ | ------------------------------------ | - | ------
|                                   |  | Quarter Ended September 24, 2006 |        | Nine Months Ended September 24, 2006
|Pretax income                      |  | $                                | 24,174 |                                      | $ | 40,214
|                                   |  |                                 
|Interest expense                   |  |                                  | 13,023 |                                      |   | 37,760
|Rentals                            |  |                                  | 5,821  |                                      |   | 17,579
|                                   |  |                                  |        |                                      |   |       
|Total fixed charges                |  | $                                | 18,844 |                                      |   | 55,339
|                                   |  |                                  |        |                                      |   |       
|Pretax earnings plus fixed charges |  | $                                | 43,018 |                                      |   | 95,553
|                                   |  |                                  |        |                                      |   |       
|Ratio of earnings to fixed charges |  |                                  | 2.28x  |                                      |   | 1.73x 



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For the purposes of calculating the ratio of earnings to fixed charges, earnings represent income before
income taxes plus fixed charges. Fixed charges consists of interest expense, including amortization of net discount or premium, and financing costs and the portion of operating rental expense (33%) that management believes is representative of
the interest component of rent expense.

3.Quantitative and Qualitative Disclosures About Market Risk

We maintain
a policy for managing risk related to exposure to variability in interest rates, fuel prices, and other relevant market rates and prices. Our policy includes entering into derivative instruments in order to mitigate our risks.

Exposure relating to our senior credit facility and our exposure to bunker fuel price increases are discussed in our Form 10-K for the year ended
December 25, 2005. There have been no material changes to these market risks since December 25, 2005.

The aggregate annual
charter hire for the vessels under our agreements with SFL is based on certain assumptions with respect to final vessel price and interest rates that will be adjusted on the date of the delivery of the particular vessel. The Shipowners have entered
into forward starting swaps to lock in the interest rate on the underlying bank loan with Fortis. However, if the vessel delivery date or vessel cost changes, the forward starting swap agreements will need to be adjusted. If the underlying interest
rate on the bank loans to the Shipowners is changed due to any of the above reasons, the aggregate annual charter hire will also change.

Other than as discussed above, there have been no material changes in the quantitative and qualitative disclosures about market risk since December 25, 2005. Information concerning market risk is incorporated by reference to Part II,
Item 7A Quantitative and Qualitative Disclosures about Market Risk of the Companys Form 10-K for the fiscal year ended December 25, 2005.

4.Controls and Procedures

Under the supervision, and with the participation, of our management, including our
principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of
September 24, 2006, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or
in other factors that could significantly affect these controls during the fiscal quarter ended September 24, 2006.

Disclosure
controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file
under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.



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PART II. OTHER INFORMATION

1.Legal Proceedings

During the quarter ended September 24, 2006,
there were no material changes to the Companys previously disclosed legal proceedings. Additionally, we are, and from time to time may be, a party to routine legal proceedings incidental to the operation of our business. The outcome of any
pending or threatened proceedings is not expected to have a material adverse effect on our financial condition, operating results or cash flows, based on our current understanding of the relevant facts. Legal expenses incurred related to these
contingencies are expensed as incurred.

1A.Risk Factors

During the quarter ended September 24, 2006, after
evaluating the merits and requirements of the tonnage tax, the Company elected the application of the tonnage tax instead of the federal corporate income tax on income from its qualifying shipping activities. Changes in tax laws or the
interpretation thereof, adverse tax audits, and other tax matters may impact future results. Other than election of the tonnage tax, there have been no material changes to risk factors since those previously disclosed in the Parents prospectus
filed with the SEC pursuant to Rule 424 (b)(4) on September 13, 2006.

2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

3.Defaults Upon Senior Securities

None.

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

None.

5.Other Information

None.

6.Exhibits



|      |  |                                                                                                                                                   
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|31.1* |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|      | 
|31.2* |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|      | 
|32.1* |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|      | 
|32.2* |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

| | Filed herewith.
|- | ---------------



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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.

Date: October 30, 2006



H-LINES FINANCE HOLDING CORP.By:

/S/    M. MARK
URBANIAM. Mark Urbania Senior Vice President & Chief Financial Officer (Principal Financial Officer &
Authorized Signatory)




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