<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
(MARK ONE)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

[ ]      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: 0-24439
                          ___________________________

                            HINES HORTICULTURE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                          ___________________________

            DELAWARE                                           33-0803204
 (STATE OR OTHER JURISDICTION OF                            (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                           IDENTIFICATION NUMBER)

                  12621 JEFFREY ROAD, IRVINE, CALIFORNIA 92620
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

                                 (949) 559-4444
                        HTTP://WWW.HINESHORTICULTURE.COM
                          ___________________________

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE

         Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X].

         Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X].

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

     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 Act). Yes [ ] No [X].

         As of June 30, 2005, the aggregate market value of the registrant's
voting common stock held by non-affiliates of the registrant was approximately
$41.9 million.

         As of March 22, 2006, there were 22,072,549 shares of Common Stock
outstanding.

                       DOCUMENT INCORPORATED BY REFERENCE:

Certain portions of the registrant's Proxy Statement prepared in connection with
the 2006 Annual Meeting of Stockholders are incorporated in Part III hereof by
reference.

<PAGE>

<TABLE>
<S>     <C>
                                    HINES HORTICULTURE, INC.

                                       TABLE OF CONTENTS

                                                                                            PAGE
                                                                                             NO.
                                                                                            ----

                                             PART I
                                             ------

ITEM 1.  BUSINESS.............................................................................1
ITEM 1A. RISK FACTORS.........................................................................5
ITEM 1B. UNRESOLVED STAFF COMMENTS...........................................................12
ITEM 2.  PROPERTIES..........................................................................13
ITEM 3.  LEGAL PROCEEDINGS...................................................................14
ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................14

                                            PART II
                                            -------

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
           MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.................................14
ITEM 6.  SELECTED FINANCIAL DATA.............................................................16
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.............................................................18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................28
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................................28
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE..........................................................29
ITEM 9A. CONTROLS AND PROCEDURES.............................................................29
ITEM 9B. OTHER INFORMATION...................................................................29

                                            PART III
                                            --------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................29
ITEM 11. EXECUTIVE COMPENSATION..............................................................29
ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
           RELATED STOCKHOLDER MATTERS.......................................................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................29
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES..............................................29

                                            PART IV
                                            -------

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.............................................30

SIGNATURES ..................................................................................33

</TABLE>
<PAGE>

                            HINES HORTICULTURE, INC.

 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
                    SECURITIES LITIGATION REFORM ACT OF 1995


     This report contains forward-looking statements. Hines Horticulture, Inc.
desires to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of the safe harbor with
respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect the future results of
Hines Horticulture, Inc. and could cause those results to differ materially from
those expressed in the forward-looking statements contained herein.

     Hines Horticulture, Inc.'s estimated or anticipated future results,
products and service performance or other non-historical facts are
forward-looking and reflect our management's current perspective of existing
trends and information. These statements involve risks and uncertainties that
cannot be predicted or quantified and, consequently, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Such risks and uncertainties include, among others, the continued ability of
Hines Horticulture, Inc. to access water, the impact of growing conditions,
risks associated with customer concentration, adverse weather conditions,
seasonality, government regulations, loss of key employees, general economic
conditions, general agricultural risks including risks associated with plant
disease and pests and sudden oak death, increases in operating costs, the impact
of competition, the ability to obtain future financing or to satisfy payment
obligations under existing financing, limitations resulting from Hines
Horticulture, Inc.'s substantial leverage and debt restrictions and other risks
and uncertainties described below in the section entitled "Risk Factors" and in
Hines Horticulture, Inc.'s other Securities and Exchange Commission filings.

     Therefore, Hines Horticulture, Inc. wishes to caution each reader of this
report to consider carefully these factors as well as the specific factors
discussed with each forward-looking statement in this report and disclosed in
its filings with the Securities and Exchange Commission as such factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the ability of Hines Horticulture, Inc. to implement its business
strategy and may cause actual results to differ materially from those
contemplated by the statements expressed herein.

     We assume no obligation to update any of the forward-looking statements
after the date of the Form 10-K.

     We maintain an Internet website at http://www.hineshorticulture.com (this
uniform resource locator, or URL, is an inactive textual reference only and is
not intended to incorporate our website into this Form 10-K). We file our
reports with the Securities and Exchange Commission (the "SEC") and make
available, free of charge, on or through this website, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
and information statements and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Our reports filed with, or furnished
to, the SEC are also available directly at the SEC's website at
http://www.sec.gov.

     Any of the materials we file with the SEC may also be read and copied at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Information on the operation of the SEC's Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at http://www.sec.gov.

                                     PART I

ITEM 1.  BUSINESS

INTRODUCTION

     Hines Horticulture, Inc. ("Hines," the "Company," "we," "our" or "us"), a
Delaware corporation, produces and distributes horticultural products through
its wholly owned subsidiaries, Hines Nurseries, Inc. ("Hines Nurseries") and
Hines Fertilizer, Inc. ("Hines Fertilizer"), formerly known as Enviro-Safe
Laboratories, Inc., which no longer actively conducts business. Unless otherwise
specified, references to "Hines" or the "Company" refer to Hines Horticulture,
Inc. and its subsidiaries.


                                       1
<PAGE>

     Hines is a leading national supplier of ornamental shrubs, color plants and
container-grown plants with 13 commercial nursery facilities located in Arizona,
California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and
Texas. Hines markets its products to retail and commercial customers throughout
the United States and Canada. Hines produces approximately 5,700 varieties of
ornamental shrubs and color plants. Hines sells to more than 2,400 retail and
commercial customers, representing more than 8,750 outlets throughout the United
States and Canada.

     On March 27, 2002, the Company completed the sale of its growing media
business, Sun Gro Horticulture, Inc. and its wholly owned subsidiary, Sun Gro
Horticulture Canada Ltd. (collectively known as "Sun Gro") to Sun Gro
Horticulture Income Fund, a newly-established Canadian income fund. The assets
sold included 14 facilities located across Canada and the United States and
control of approximately 50,000 acres of peat bogs in Canada. We will no longer
harvest, produce or sell peat moss or other growing media soil mixes. We
received net proceeds of approximately $125 million from the sale, the majority
of which were used to pay down outstanding bank debt.

     On July 25, 2005, Hines Fertilizer and Hines Nurseries entered into an
asset purchase agreement with a non-affiliated third party vendor to sell
substantially all of the assets of Hines Fertilizer, excluding cash, accounts
receivables and intercompany receivables. The purchase price for the assets was
approximately $0.6 million and was paid through the issuance of customer credits
for past purchases. The gain on sale of assets was approximately $0.1 million.
In accordance with the asset purchase agreement, the Company entered into a
three year non-compete agreement, which restricts our ability to own and manage
a competing fertilizer company and restricts our Miami production facility's
ability to co-brand and market with competing fertilizer companies, unless
directly requested by our customers. Upon a change in control of Hines
Horticulture or Hines Nurseries, all non-compete restrictions shall cease and no
longer be of any effect.

     On November 7, 2005, the Company successfully completed the sale of 122
acres of unimproved property in Miami, Florida ("Miami Land Sale") and received
net proceeds of $47.0 million. In accordance with the amendment to our Senior
Credit Facility, the proceeds from the Miami Land Sale have been used to payoff
the entire outstanding balance of the term loan; the residual amount having paid
down our revolving credit facility. The Company has entered into a two-year
lease agreement with the buyer to lease the property while transitioning
operations to other locations. The Company will lease the entire property for a
one-year period, with a thirty-day extension right, and will then vacate
approximately 33 acres. The Company will lease the remaining 89 acres for an
additional one-year period, with extension rights for an additional ninety days,
and will then vacate the remaining acreage. The Company will pay the buyer rent
of five hundred dollars per outstanding acre, annually, during the lease term.
For accounting purposes, the entire gain has been deferred due to our continuing
involvement, as defined in Statement of Financial Accounting Standards ("SFAS")
No. 98, "Accounting for Leases," in the property.

     In April 2003, the Company entered into an option agreement to sell
168-acre nursery property in Vacaville, California. The Company entered into the
option agreement because the nursery property is located in an area which the
city of Vacaville is planning to develop as a residential project. This
agreement was subsequently amended in March 2005 to extend the option term to
March 1, 2006 contingent upon payments of $1.8 million during the option term.
On March 1, 2006, the buyer exercised its option to purchase the property. Total
proceeds from the option agreement and sale of the land will be approximately
$16.9 million, with the final payment of $14.3 million due no later than April
3, 2006. Under the terms of the option agreement, Hines is able to transition
off the land in three phases from 2006 to 2008. The Company is continuing to
develop replacement acreage and infrastructure at our 842-acre Winters facility
in Northern California.

     The Company's Consolidated Financial Statements included in this Annual
Report on Form 10-K reflect the financial position, results of operations and
cash flows of the Sun Gro business as "discontinued operations." In accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets," the Company's Consolidated Financial Statements have been restated to
reflect the financial position, results of operations and cash flows of the Sun
Gro business as "discontinued operations."

HISTORY

  OWNERSHIP

     James W. Hines Sr. founded Hines in 1920 in San Gabriel, California. Hines
was a family owned business until its acquisition by the Weyerhauser Company in
1976. Hines was sold in 1990 to a private investment group and certain members
of our management. In August 1995, Hines was acquired by Madison Dearborn
Capital Partners, L.P. ("MDCP"), a private equity investment firm and certain
members of our management. On June 22, 1998, Hines completed an initial public
offering of 5.1 million shares of its Common Stock.


                                       2
<PAGE>

BUSINESS OVERVIEW

     Hines is one of the largest commercial nursery operations in North America,
producing one of the broadest assortments of container-grown plants in the
industry. Hines sells its green goods primarily to the retail segment which
includes the premium independent garden centers, as well as the leading home
centers and mass merchandisers, such as The Home Depot, Lowe's and Wal-Mart.

     Hines produces and markets approximately 5,700 varieties of ornamental,
container-grown plants grown primarily for outdoor use, most of which are sold
under its Hines Nurseries(TM) and Iverson(TM) trade names. The Company grows
most of its product categories at several of its nurseries. However, the Company
emphasizes certain product categories at particular nurseries depending on the
growing climate conducive to a particular product and on regional customer
needs. Most of Hines' revenues fall into the following variety categories for
the years ended December 31:

<TABLE>
PRODUCT CATEGORY           REPRESENTATIVE PRODUCTS                           2005        2004       2003
-------------------------- --------------------------------------------- ----------- ----------- ----------
<S>                                                                             <C>         <C>        <C>
Evergreens
   Broadleafs              Azalea, boxwood, camellia, euonymous, holly          24%         24%        21%

   Conifers                Pines, spruce, junipers                               7%          7%         7%

Deciduous Plants           Barberry, dogwood, forsythia, spirea                  8%          8%         7%

Flowering Color Plants     Perennials, Annual bedding plants,
                               Tropical flowering plants, bulbs                 54%         54%        60%

Other                      Ferns, trees                                          7%          7%         5%

                                                                         ----------- ----------- ----------
                                                                               100%        100%       100%
                                                                         =========== =========== ==========
</TABLE>

     Since 1993, Hines has added numerous plant varieties to its product line.
Hines has also successfully developed patio-ready type products, which it
markets under the names of Patio Tropics(TM) and Festival Pots(TM). These
products generally command premium prices and improved profit margins compared
with other plants offered by the Company.

     Plants (other than annual bedding plants) are produced by propagating young
plants called "liners" using cuttings from mature plants. Using propagation
techniques for each specific crop with respect to growing media, hormonal
stimulation and growing conditions, these cuttings are cultivated into viable
liners and are then transplanted into one gallon containers. These plants are
placed in the nursery for six to 24 months until they reach certain specified
sizes and levels of maturity, according to market demand, and are sold at
different price points depending on their size and levels of maturity. During
the field growing stages, plants are typically pruned by mechanized pruning
machines that are designed for specific plant categories and watered and
fertilized by integrated irrigation and fertilization systems, which are closely
monitored and regulated to ensure consistency and quality.

     The Company's water and fertilizer recycling systems are designed to
minimize the costs of these elements and maximize water conservation. Each of
the Company's facilities has infrastructure and procedures in place to protect
its growing stock from most frost, snow and freezing conditions typically
prevailing at these facilities.

     To produce annual bedding plants, a nursery either buys and germinates
seeds to produce small plants, called "plugs," or purchases plugs from
specialized plug producers. The plugs are then transplanted to bedding packs,
gallon hanging baskets and containers of various sizes. The growth cycle of
color plants is typically less than one year, with many color plants having a
growing season as short as eight to 16 weeks, allowing certain of the Company's
nurseries to produce approximately three to four inventory turns per year. As
with ornamental plants, the Company applies controlled watering and fertilizing
in order to ensure high quality.


                                       3
<PAGE>

CUSTOMERS. Our retail customers include home centers, mass merchandisers,
independent garden centers and garden center chains. The following table sets
forth the estimated percentage of Hines' net sales by customer type for the
period indicated:
                                                       YEARS ENDED DECEMBER 31,
                CUSTOMER TYPE                        2005       2004       2003
                -------------                        ----       ----       ----

Home centers.................................         65%        63%        63%
Mass merchandisers...........................         13         16         17
Independent garden centers...................         13         11         10
Garden center chains.........................          3          4          5
Re-wholesalers...............................          4          4          4
Landscapers and others.......................          2          2          1
                                                    -------    ------     ------

           Total.............................        100%       100%       100%
                                                    =====      =====      =====

     Our management believes the Company enjoys competitive advantages in
selling into these channels due to its ability to provide a broad assortment of
consistently high quality products in large volumes, its nationwide distribution
and its value-added services such as custom labeling, bar-coding, full
electronic data interchange and technical support. Our management expects to
participate in the overall growth of these channels to a greater extent than its
competitors that do not offer such services. Hines' top ten customers accounted
for approximately 78%, 77% and 78% of its net sales in 2005, 2004 and 2003,
respectively. Hines' largest customer, The Home Depot, accounted for
approximately 47%, 45% and 47% of its net sales in 2005, 2004 and 2003,
respectively. Hines' next largest customer, Lowe's Companies, Inc., accounted
for approximately 17%, 16% and 14% of its net sales in 2005, 2004 and 2003,
respectively. No other customer accounted for more than 10% of net sales.

     DISTRIBUTION. Hines distributes its products directly from its nursery
sites to its retail customers primarily through common carriers and through the
Company's fleet of approximately 150 trucks, 30 of which are owned and the
balance of which are leased. The Company believes that common carriers are
available to accommodate seasonal delivery peaks. The Company uses a variety of
product shipping techniques, such as specialized shelving, protective racks and
special loading techniques. Nursery products are distributed nationwide, except
color plants, which are typically distributed within a 300-mile radius of each
nursery.

     RESEARCH AND DEVELOPMENT; PATENTS AND TRADEMARKS. Hines' product sourcing
and development yield unique plant varieties, which are marketed under a trade
name and patented whenever possible. The Company applies for patents on plant
varieties that are significantly different from existing varieties. Differences
among plant varieties may include coloration, size at maturity or hardiness in
drought or cold conditions. These varieties command higher prices, provide
higher unit margins and enhance the Company's reputation as a product innovator.
The Company's expenses associated with research and development are not material
and are recorded in selling and distribution expenses.

     The Company has registered numerous trademarks, service marks and logos
used in its businesses in the United States and Canada. In addition, the Company
has developed and continues to develop specialty plants for which it holds
patents registered with the U.S. Patent and Trademark Office. The Company
currently holds 44 patents, with 9 patent applications pending. The Company's
management does not believe that the loss of any particular patent would have a
material adverse effect on the Company.

     PRODUCTION. Raw materials consist of starter materials, containers and soil
mixtures. The Company's management believes that there are alternate sources of
supply readily available.

     SALES AND MARKETING. Most of Hines' facilities have separate sales forces,
which include a sales manager, in-house customer service representatives, direct
sales consultants and various support personnel. As of December 31, 2005, Hines
employed approximately 300 direct sales consultants, key account managers,
market area managers and merchandisers. National accounts are serviced through
"National Account Task Teams" comprised of a senior management member and direct
sales personnel from each nursery supplying the account. Hines also markets its
products through trade shows, print advertising in trade journals, direct mail
promotion and catalogues.

     COMPETITION. Competition in the nursery products segment of the lawn and
garden industry is based principally on the breadth of product offering,
consistent product quality and availability, customer service and price. The
nursery products segment is highly fragmented. According to the 2002 Census of
Agriculture released in June 2004 by the U.S. Department of Agriculture's
National Agricultural Statistics Service, the nursery business is comprised of


                                       4
<PAGE>

approximately 60,000 primarily small and regionally based growers. Management
believes Hines is one of only two growers able to serve every major regional
market in North America, the Company's only national competitor being Monrovia
Nursery Company. In each of its markets, Hines competes with regional growers
such as Color Spot in the West, Clinton Nurseries in the Northeast, Zelenka
Nurseries in the Midwest, Wight Nurseries in the South and many other smaller
regional and local growers. Hines' key competitive advantages are its ability to
provide consistent, high quality products in large volumes, its nationwide
distribution and its value-added services.

SEASONALITY

     Our business is highly seasonal in nature, with most of sales typically
occurring in the first half of the year. In particular, our sales are strongest
in the second quarter, which corresponds to the Spring gardening season. In
2005, approximately 74% of net sales and approximately 165% of operating profits
occurred in the first half of the year. Approximately 54% of net sales and
approximately 151% of operating profits occurring in the second quarter of 2005.
The table below sets forth the Company's quarterly net sales, as a percentage of
total year net sales, for the periods indicated:

                                             PERCENTAGE OF TOTAL NET SALES
                                             -----------------------------
                                             2005        2004         2003
                                             ----        ----         ----
               First Quarter                  20%         18%          17%
               Second Quarter                 54          54           56
               Third Quarter                  15          15           15
               Fourth Quarter                 11          13           12
                                             ----        ----         ----
                                             100%        100%         100%
                                             ====        ====         ====

GOVERNMENT REGULATION

     The Company is subject to certain United States federal, state and local
provincial health, safety and environmental laws and regulations regarding the
production, storage and transportation of certain products and the disposal of
its wastes. The Environmental Protection Agency ("EPA") and similar state and
local agencies regulate the Company's operations and activities, including, but
not limited to, water runoff and the use of certain pesticides in its nursery
operations. In the ordinary course of business, the Company uses substances that
are regulated or may be hazardous under environmental laws. The Company does not
anticipate that future expenditures for compliance with such environmental laws
and regulations will have a material adverse effect on the Company's financial
position, results of operations or competitive position. The Company cannot give
any assurance, however, that compliance with such laws and regulations, or
compliance with other environmental laws and regulations that may be enacted in
the future, will not have an adverse effect on the Company's financial position,
results of operations or competitive position.

     Hines obtains certain irrigation water supplied to local water districts
from facilities owned and operated by the United States acting through the
Department of Interior Bureau of Reclamation ("reclamation water"). Federal
reclamation laws and regulations govern the use and price of reclamation water,
including availability of subsidized water rates. Hines utilizes reclamation
water as one of the water supplies for its Northern California and Oregon
facilities. The Company's management believes that the nursery operations are in
compliance with applicable regulations and it maintains a continuous compliance
program; however, changes in law may reduce availability of, or increase the
price of, reclamation water to the Company.

EMPLOYEES

     As of December 31, 2005, the Company employed approximately 2,940 persons.
At the peak of our growing cycle, an additional 1,480 seasonal employees were
employed during 2005. All of the Company's employees are non-union, and the
Company's management believes that its labor relations are good.

ITEM 1A.  RISK FACTORS

     You should carefully consider and evaluate all of the information in this
Form 10-K, including the risk factors listed below. The risks described below
are the ones we currently deem material, but they may not be the only risks
facing our company. Additional risks not now known to us or that we currently
deem immaterial may also impair our business operations.

     The risks described below and the risks described elsewhere in this Form
10-K, including in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," could materially adversely
affect our business, prospects, financial condition, operating results or cash
flow. If our business is harmed, the trading price of our common stock could
decline.

                                       5
<PAGE>

     This Form 10-K also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
discussed in these statements. Factors that could contribute to these
differences include those discussed below and elsewhere in this Form 10-K. The
cautionary statements made in this Form 10-K, including those in the risk
factors below, should be read as being applicable to all forward-looking
statements wherever they appear. Our operations are subject to a variety of
risks and uncertainties and the following risk factors are not to be considered
a definitive list of all risks associated with our operations and should be read
in conjunction with the risks and uncertainties contained in our other filings
with the Securities and Exchange Commission. The Private Securities Litigation
Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The
cautionary statements contained in the risk factors below are being made
pursuant to the provisions of the Private Securities Litigation Reform Act and
with the intention of obtaining the benefits of the "safe harbor" provisions of
the Act. We caution investors that any forward-looking statements made by us are
not guarantees of future performance and that a variety of factors, including
those discussed below, could cause our actual results and experience to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. The risks and uncertainties which may affect the
operations, performance and results of our business are described in more detail
below. We undertake no duty to update any of the forward-looking statements
after the date of this Form 10-K.

RISKS RELATED TO OUR CAPITAL STRUCTURE

WE HAVE A SUBSTANTIAL AMOUNT OF DEBT OUTSTANDING, WHICH COULD HURT OUR FUTURE
PROSPECTS AND PREVENT US FROM FULFILLING OUR DEBT OBLIGATIONS.

     We have a significant amount of debt outstanding, including 10.25% Senior
Notes issued on September 30, 2003, which we refer to as the Senior Notes. As of
December 31, 2005, we had total consolidated debt outstanding of $185.1 million.
This debt may have several important consequences as it could:

          o    make it more difficult for us to satisfy our obligations,
               including making scheduled interest payments under the Senior
               Notes and other debt obligations;

          o    limit our ability to obtain additional financing;

          o    increase our vulnerability to adverse general economic
               conditions, including changes in interest rates and adverse
               changes in the commercial nursery industry conditions;

          o    require us to dedicate a substantial portion of our cash flow
               from operations to payments on our debt, thereby reducing the
               availability of our cash flow for other purposes;

          o    limit our flexibility in planning for, or reacting to, changes in
               our business and the commercial nursery industry; and

          o    place us at a competitive disadvantage compared to our
               competitors that have less debt.

THE TERMS OF OUR DEBT MAY LIMIT OUR ABILITY TO PLAN FOR OR RESPOND TO CHANGES IN
OUR BUSINESS.

     We have an amended Senior Credit Facility that consists of a revolving
facility with availability of up to $120.0 million (subject to borrowing base
limits) and a term loan facility of up to $40.0 million, which was fully paid
down in 2005. Our Senior Credit Facility and the indenture governing the Senior
Notes issued by Hines Nurseries contain covenants that restrict our ability to,
among other things:

          o    incur additional debt or issue certain preferred stock;

          o    pay dividends or distributions on, or redeem or repurchase,
               capital stock;

          o    create liens or negative pledges with respect to our assets;

          o    make investments, loans or advances;


                                       6
<PAGE>

          o    make capital expenditures;

          o    issue, sell or allow distributions on capital stock of specified
               subsidiaries;

          o    enter into sale and leaseback transactions;

          o    prepay or defease specified debt;

          o    enter into transactions with affiliates;

          o    enter into specified hedging arrangements;

          o    merge, consolidate or sell our assets; or

          o    engage in any business other than the commercial nursery
               business.

     These covenants may affect our ability to operate our business, may limit
our ability to take advantage of business opportunities as they arise and may
adversely affect the conduct of our current business. A breach of a covenant in
our debt instruments could cause acceleration of a significant portion of our
outstanding indebtedness.

REPAYMENT OF THE PRINCIPAL OF THE SENIOR NOTES AND OUR OTHER DEBT MAY REQUIRE
ADDITIONAL FINANCING. WE ARE NOT CERTAIN OF THE SOURCE OR AVAILABILITY OF ANY
SUCH FINANCING AT THIS TIME.

     Our anticipated operating cash flows will not be sufficient to repay the
principal of the Senior Notes issued by Hines Nurseries and our other debt.
Accordingly, in order to pay the principal of the Senior Notes and our other
debt, we will be required to refinance our debt, sell our equity securities,
sell our assets or take other actions. The foregoing actions may not enable us
to pay the principal of the Senior Notes or such other debt or may not be
permitted by the terms of our debt instruments then in effect.

RISKS RELATED TO OUR BUSINESS

OUR PRODUCTION OF PLANTS MAY BE ADVERSELY AFFECTED BY A NUMBER OF AGRICULTURAL
FACTORS BEYOND OUR CONTROL. IN ADDITION, OUR NURSERY OPERATIONS WERE ADVERSELY
AFFECTED BY THE ACUTE TROPICAL WEATHER SEASON THAT PLAGUED THE SOUTHERN AND
SOUTH-EASTERN REGIONS OF THE UNITED STATES IN 2005, AND SIGNIFICANT TROPICAL
STORMS IN THE FUTURE COULD ADVERSELY IMPACT OUR OPERATIONS.

     Our production of plants may be adversely affected by a number of
agricultural risks, including disease, pests, freezing conditions, snow, drought
or other inclement weather, and improper use of pesticides or herbicides. These
factors could cause production difficulties which could damage or reduce our
inventory, resulting in sales, profit and operating cash flow declines, which
could be material.

INCREASES IN WATER PRICES OR INSUFFICIENT AVAILABILITY OF WATER COULD ADVERSELY
AFFECT OUR PLANT PRODUCTION, RESULTING IN REDUCED SALES AND PROFITABILITY.

     Plant production depends upon the availability of water. Our nurseries
receive their water from a variety of sources, including on-site wells, creeks,
reservoirs and holding ponds, municipal water districts and irrigation water
supplied to local districts by facilities owned and operated by the United
States acting through the Department of Interior Bureau of Reclamation. The loss
or reduction of access to water at any of our nurseries could have a material
adverse effect on our business, results from operations and operating cash
flows. In addition, increases in our costs for water could adversely impact our
profitability and operating cash flows.

     Our nursery in Arizona receives its water from on-site wells. Under
Arizona's Groundwater Management Act, these wells have been issued
"grandfathered non-irrigation water" permits, which limit the amount of
groundwater we can use. The availability of water depends on the groundwater
aquifer, which at this time, we believe is adequate to supply our needs for this
nursery as it is currently operated.

     Our Northern California and Oregon nurseries rely primarily on surface
water supplies and, therefore, may experience fluctuations in available water
supplies and serious reductions in their supplies of surface water in the event
of prolonged droughts. If such reductions occur, those nurseries would have to
rely on backup water supplies which are more costly than surface water supplies.


                                       7
<PAGE>

     The use and price of water supplied by facilities owned and operated by the
Bureau of Reclamation, including availability of subsidized water rates, is
governed by federal reclamation laws and regulations. Such water is used at our
Northern California nursery and is the source of a substantial majority of the
water for our Oregon nursery. While we believe we are in material compliance
with applicable regulations and maintain a compliance program, there can be no
assurance that changes in law will not reduce availability or increase the price
of reclamation water to us. Any such change could have a material adverse effect
on our business, financial position, results of operations and operating cash
flows.

     The reclamation regulations govern who may hold an interest in irrigation
lands. Under the reclamation regulations, persons having a direct or indirect
beneficial economic interest in us will be treated as "indirect holders" of
irrigation land owned by us in proportion to their beneficial interest in us. If
any holder of our common stock (whether directly or indirectly through a
broker-dealer or otherwise) is ineligible under applicable reclamation
regulations to hold an indirect interest in our irrigation land, we may not be
eligible to receive reclamation water on this land. Generally, the eligibility
requirement of the reclamation regulations would be satisfied by a person:

     o    who is a citizen of the United States or an entity established under
          federal or state law or a person who is a citizen of or an entity
          established under the laws of certain foreign countries (including
          Canada and Mexico and members of the Organization for Economic
          Cooperation and Development); and

     o    whose ownership, direct and indirect, of other land which is qualified
          to receive water from a reclamation project, when added to such
          person's attributed indirect ownership of irrigation land owned by us,
          does not exceed certain maximum acreage limitations (generally, 960
          acres for individuals and 640 acres for entities).

     While our restated certificate of incorporation contains provisions
intended to prohibit ineligible holders of irrigation land from owning our
common stock, such provisions may not be effective in protecting our right to
continue to use reclamation water.

WE FACE RISKS ASSOCIATED WITH SUDDEN OAK DEATH ("SOD"). QUARANTINES OF OUR
PRODUCTS OR OTHER ACTIONS BY FEDERAL AND STATE REGULATORY AUTHORITIES IN
RESPONSE TO SUDDEN OAK DEATH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS AND RESULTS OF OPERATIONS.

     SOD is caused by a fungus-like pathogen recently identified by scientists
in California and named Phytophthora ramorum ("P. ramorum"). Since its
appearance in 1995, P. ramorum has killed thousands of coast live oak, black
oak, tan oak and Shreve oak in Northern California. P. ramorum can also infect
the leaves and branches of other plants referred to as SOD host plants.
Currently, approximately 90 plant species grown by commercial nurseries have
been identified as SOD hosts.

     In February 2004, as part of the SOD National Nursery Survey, the United
States Department of Agriculture (the "USDA") encouraged all states to conduct a
survey of nurseries that ship SOD host plants interstate. Accordingly, the
California Department of Food & Agriculture ("CDFA") and the USDA conducted
joint tests at nurseries located throughout California. On March 9, 2004, two
nurseries in California, which we do not own or operate, tested positive for P.
ramorum. As a result of these findings certain states declared a quarantine on
all plant material coming from California and several others imposed a
quarantine on SOD host and associated host plants only.

     On March 19, 2004, we took the precautionary measure of voluntarily
suspending the shipment of all SOD host plants grown in our California
facilities pending the results of the joint CDFA and USDA testing of all
interstate shippers, including our facilities. On March 26, 2004, we were
notified by the CDFA that all of our California growing facilities had tested
negative for P. ramorum. As a result of these findings, the CDFA and the USDA
issued SOD Compliance Agreements with our Fallbrook and Irvine facilities,
allowing us to ship host and associated host plants interstate, if we meet, and
continue to meet, certain inspection requirements. Our Vacaville and Winters
facilities are located in a California quarantined county and have continued to
operate under the terms of their Compliance Agreement with the CDFA and USDA
since 2002. Its Compliance Agreement requires that potential SOD host plants be
inspected and tested monthly during the growing season for the presence of the
pathogen.


                                       8
<PAGE>

     Currently, our Forest Grove, Oregon facility and all of our California
facilities that ship product interstate are SOD-free and are operating under
USDA SOD Compliance Agreements. However, if in the future we do test positive
for SOD, our products could be subject to quarantine by federal and state
regulatory authorities. If this were to occur, we could experience a significant
loss of sales and may be required to destroy inventory, which could have a
material adverse effect on our business, results from operations, and operating
cash flows.

BECAUSE OUR BUSINESS IS HIGHLY SEASONAL, OUR REVENUES, CASH FLOWS FROM
OPERATIONS AND OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL AND QUARTERLY
BASIS.

     Our business is highly seasonal. The seasonal nature of our operations
results in a significant increase in our working capital during the growing and
selling cycles. As a result, operating activities during the first and fourth
quarters use significant amounts of cash, and in contrast, operating activities
for the second and third quarters generate substantial cash as we ship inventory
and collect accounts receivable. We have experienced, and expect to continue to
experience, significant variability in net sales, operating cash flows and net
income on a quarterly basis. One significant factor contributing to this
variability is weather, particularly on weekends during the peak gardening
season in the second quarter. Unfavorable weather conditions during the peak
gardening season could have a material adverse effect on our net sales, cash
flows from operations and operating income.

     Other factors that may contribute to this variability include:

          o    shifts in demand for live plant products;

          o    changes in product mix, service levels and pricing by us and our
               competitors;

          o    period-to-period changes in holidays;

          o    the economic stability of our retail customers; and

          o    our relationship with each of our retail customers.

BECAUSE WE DEPEND ON A CORE GROUP OF SIGNIFICANT CUSTOMERS, OUR SALES, CASH
FLOWS FROM OPERATIONS AND RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED IF
OUR KEY CUSTOMERS REDUCE THE AMOUNT OF PRODUCTS THEY PURCHASE FROM US.

     Our top ten customers together accounted for approximately 78% of our net
sales in 2005. Our largest customer, The Home Depot, accounted for approximately
47% and our second largest customer, Lowes Companies, Inc., accounted for
approximately 17% of our 2005 net sales. We expect that a small number of
customers will continue to account for a substantial portion of our net sales
for the foreseeable future. We do not have long-term contracts with any of our
retail customers, and they may not continue to purchase our products.

     The loss of, or a significant adverse change in, our relationship with The
Home Depot, Lowes Companies, Inc. or any other major customer could have a
material adverse effect on us. The loss of, or a reduction in orders from, any
significant retail customers, losses arising from retail customers' disputes
regarding shipments, fees, merchandise condition or related matters, or our
inability to collect accounts receivable from any major retail customer could
have a material adverse effect on us. In addition, revenue from customers that
have accounted for significant revenue in past periods, individually or as a
group, may not continue, or if continued, may not reach or exceed historical
levels in any period.

WE FACE INTENSE COMPETITION, AND OUR INABILITY TO COMPETE EFFECTIVELY FOR ANY
REASON COULD ADVERSELY AFFECT OUR BUSINESS.

     Our competition varies by region, each of which is highly competitive.
Although many of our largest customers are national retailers, buying decisions
are generally made locally by our customers. We compete primarily on the basis
of breadth of product mix, consistency of product quality, product availability,
customer service and price. We generally face competition from several local
companies and usually from one or two regional companies in each of our current
markets. Competition in our existing markets may also increase considerably in
the future. Some of our competitors may have greater market share in a
particular region or market, less debt, greater pricing flexibility or superior
marketing or financial resources. Increased competition could result in lower
profit margins, substantial pricing pressure, reduced market share and lower
operating cash flows. Price competition, together with other forms of
competition, could have a material adverse effect on our business, financial
position, results of operations and operating cash flows.


                                       9
<PAGE>

OUR NURSERY FACILITY IN IRVINE, CALIFORNIA IS ENTIRELY ON LEASED LAND AND WE DO
NOT EXPECT THE LEASES TO BE EXTENDED BEYOND THEIR CURRENT TERMS.

     Our 542-acre nursery facility and headquarters in Irvine, California are
entirely on leased land. In 2003, we entered into an amended lease agreement for
this facility in which 63 new acres were added and the lease expiration schedule
was changed. Under the amended lease agreement, the lease on 114 acres expires
on June 30, 2006, the lease on 140 acres expires on December 31, 2006, and the
lease on the remaining 288 acres expires on December 31, 2010. We do not expect
these leases to be extended beyond their current terms. For the 254 acres that
will expire in 2006, we are developing plans to transition a majority of the
production to our Winters, California facility and the remaining production to
the parcel recently added to our facility in Irvine. For the 288 acres that will
expire at the end of 2010, we will be required to establish new production
facilities or transition production to existing facilities. We may incur
substantial costs in connection with the establishment of these new production
facilities or the transition of production to existing facilities.

     We may not be successful in executing our transition plan or establishing
suitable replacement production facilities. If we are unsuccessful in these
efforts, our net sales, cash flows and operating income could be materially
adversely affected. In addition, when we vacate 254 acres in 2006, we currently
estimate that we will incur approximately a total of $0.3 million of removal and
remediation costs. We may incur significant expenses beyond what we have
forecasted if additional remedial action is required. Significant costs in
excess of our estimates could have a material adverse effect on our business,
financial position, results of operations and operating cash flow.

OUR ANTICIPATED TRANSITION OF OUR OPERATIONS RESULTING FROM RECENT LAND SALES
MAY NOT BE AS SUCCESSFUL AS WE ANTICIPATE AND UNEXPECTED DELAYS AND DIFFICULTIES
OR INCREASED COSTS COULD ADVERSELY AFFECT OUR BUSINESS AND PROSPECTS.

     In 2005, we sold approximately 122 acres located in Miami-Dade County,
Florida (which property we refer to as the Florida Property) and in March 2006
we received notice that an optionee had exercised its option to purchase our
168-acre property in Vacaville, California (which property we refer to as the
Northern California Property). Under the terms of the sale for the Florida
Property, we are expected to transition our operations located on such property
to other locations. In connection with the sale of the Northern California
Property, the option agreement provides that we are to transition off the land
in three phases from 2006 to 2008. Interruptions or delays in the transitioning
from the Florida Property or the Northern California Property could adversely
impact our nursery operations and increase our costs. In addition, we could
incur significant expenses beyond those which we have forecasted in connection
with such relocations. Our failure to effectively manage the transition from
these properties or the incurrence of additional related costs beyond those
which we forecast could result in a decrease in revenue or other adverse effects
in our business and results of operations.

WE ARE SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND REGULATIONS THAT GOVERN, AND
IMPOSE LIABILITY, FOR OUR ACTIVITIES AND OPERATIONS. IF WE DO NOT COMPLY WITH
THESE LAWS AND REGULATIONS, OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY
AFFECTED.

     We are subject to federal, state and local laws and regulations that
govern, and impose liability for, our activities and operations which may have
adverse environmental effects, such as discharges to air and water, as well as
handling and disposal practices for hazardous substances and other wastes. Some
of our nursery operations are conducted near residential developments, which
could increase our exposure to liability for the environmental effects of our
operations. Our operations have resulted, or may result, in noncompliance with
or liability for cleanup under these laws. In addition, the presence of
hazardous substances on our properties, or the failure to properly remediate any
resulting contamination may adversely affect our ability to sell, lease or
operate our properties or to borrow using them as collateral. In some cases, our
liability may not be limited to the value of the property or its improvements.
We cannot assure you that these matters, or any similar matters that may arise
in the future, will not have a material adverse effect on us.

     Certain of our operations and activities, such as water runoff from our
production facilities and the use of certain pesticides, are subject to
regulation by the United States Environmental Protection Agency and similar
state and local agencies. These agencies may regulate or prohibit the use of
such products, procedures or operations, thereby affecting our operations and
profitability. In addition, we must comply with a broad range of environmental
laws and regulations. Additional or more stringent environmental laws and
regulations may be enacted in the future and such changes could have a material
adverse effect on our business.


                                       10
<PAGE>

WE ARE SUBJECT TO FEDERAL AND STATE "FAIR TRADE" LAWS AND WEIGHTS AND MEASURES
REGULATIONS THAT GOVERN AND IMPOSE LIABILITY FOR IMPROPERLY MARKETING, LABELING
OR ADVERTISING PLANT CONTAINER SIZE. IF WE DO NOT COMPLY WITH THESE LAWS AND
REGULATIONS, OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED.

     We are subject to federal and state weights and measures regulations that
govern and impose liability for improperly labeling or advertising our plant
container sizes. It is common in our industry, at the wholesale and retail
levels, to market, label, and advertise container grown nursery stock with
varying types of measurements, such as imperial volume or diameter of container.
These measurements, although consistent with industry practice, may not
represent the exact size of the actual product. If the Federal Trade Commission
or any state regulator determines that our current marketing, labeling, or
advertising is in violation of "fair trade" laws or weights and measures
regulations in their jurisdiction, we may incur significant costs to become
compliant, be forced to terminate further shipments of inventory into certain
jurisdictions, be fined, or otherwise suffer a material adverse affect on our
business.

CHANGES IN LOCAL ZONING LAWS MAY ADVERSELY AFFECT OUR BUSINESS.

     We are subject to local zoning laws regulating the use of our owned and
leased property. Some of our facilities are located in areas experiencing rapid
development and growth, which typically are characterized by changes in existing
zoning. Changes in local zoning laws could require us to establish new
production facilities or transition production to other facilities, which could
have a material adverse effect on our cash flows, financial position and results
of operations.

COMPLIANCE WITH, AND CHANGES TO, LABOR LAWS, PARTICULARLY THOSE CONCERNING
SEASONAL WORKERS, COULD SIGNIFICANTLY INCREASE OUR COSTS.

     The production of our plants is labor intensive. We are subject to the Fair
Labor Standards Act as well as various federal, state and local regulations that
govern matters such as minimum wage requirements, overtime and working
conditions, including, but not limited, to federal and state health and worker
safety rules and regulations. A large number of our seasonal employees are paid
at or slightly above the applicable minimum wage level and, accordingly, changes
in minimum wage laws could materially increase our costs. Non-U.S. nationals
comprise a large portion of our seasonal employee workforce and changes to U.S.
immigration policies that restrict the ability of immigrant workers to obtain
employment in the United States and which may contribute to shortages of
available seasonal labor could increase our costs. Non-compliance with
applicable regulations or modifications to existing regulations may increase
costs of compliance, require a termination of certain activities, result in
fines or loss of a portion of our labor force or otherwise have a material
adverse impact on our business and results of operations.

OUR TRANSPORTATION COSTS ARE SIGNIFICANT AND WE DEPEND ON INDEPENDENT
CONTRACTORS FOR TRUCKING SERVICES TO SHIP LARGE QUANTITIES OF OUR PRODUCTS AND
INCREASES IN TRANSPORTATION COSTS, CHANGES IN AVAILABLE TRUCKING CAPACITY AND
OTHER CHANGES AFFECTING SUCH CARRIERS, AS WELL AS INTERRUPTIONS IN SERVICE OR
WORK STOPPAGES, COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.

     We rely extensively on the services of agents and independent contractors
to provide trucking services to us. Transportation costs accounted for
approximately 24% of our net sales in 2005. Our ability to ship our products,
particularly during our peak shipping seasons, could be adversely impacted by
shortages in available trucking capacity, changes by carriers and transportation
companies in policies and practices, such as scheduling, pricing, payment terms
and frequency of service, or increases in the cost of fuel, taxes and labor, and
other factors not within our control. We compete with other companies who ship
perishable goods for available trucking capacity and, accordingly, reductions in
capacity or shortages of the agents and independent contractors who provide
trucking services to us could potentially adversely impact our sales. Higher
diesel fuel costs and increased third party carrier charges adversely impacted
our results of operations during 2005 and future significant increases in
transportation costs could have a material adverse effect on our business,
particularly if we are not able to pass on such price increases to our customers
in the form of higher prices for our products. Material interruptions in service
or stoppages in transportation, whether caused by strike or otherwise, could
adversely impact our business, results of operations, financial position and
operating cash flows.

OUR RESEARCH AND DEVELOPMENT EFFORTS MAY NOT BE SUCCESSFUL.

     Our success is based, in part, upon our ability to discover and develop new
products that customers will want. As a result, we continue to invest in
research and development in order to enable us to identify and develop new
products to meet consumer demands. Despite investments in this area, our
research and development may not result in the discovery or successful
development of new products which will be accepted by our customers.


                                       11
<PAGE>

OUR CURRENT PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT INFLUENCE OVER OUR BUSINESS
AND COULD DELAY, DETER OR PREVENT A CHANGE OF CONTROL OR OTHER BUSINESS
COMBINATION.

     Investment partnerships controlled by Madison Dearborn Partners, L.P.
beneficially own approximately 53% of the outstanding common stock of Hines
Horticulture, Inc. and have sufficient voting power to control, or at the least
significantly influence, the election of directors and the approval of other
actions requiring the approval of our shareholders. In addition, Madison
Dearborn Partners has two of its designees on Hines Horticulture, Inc.'s six
member board of directors.

OUR BUSINESS WILL SUFFER IF CERTAIN SENIOR EXECUTIVES DISCONTINUE EMPLOYMENT
WITH US OR IF WE ARE UNABLE TO RECRUIT AND RETAIN HIGHLY SKILLED STAFF.

     Our success is largely dependent on the skills, experience and efforts of
our senior management, including Robert A. Ferguson (President and Chief
Executive Officer) and Claudia M. Pieropan (Chief Financial Officer, Secretary
and Treasurer). The loss of services of one or more members of our senior
management could have a material adverse effect on us. We do not maintain
key-man life insurance policies on any members of management. No members of
senior management are bound by non-compete agreements, and if any such members
were to depart and subsequently compete with us, such competition could have a
material adverse effect on us. Our business also depends on our ability to
continue to recruit, train and retain skilled employees, particularly skilled
growers and sales personnel. The loss of the services of any key personnel, or
our inability to hire new personnel with the requisite skills, could impair our
ability to develop new products or enhance existing products, sell products to
our customers or manage our business effectively.

PRICE INCREASES OF CERTAIN RAW MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS.

     We are vulnerable to price increases for raw materials. For 2005, raw
material costs accounted for approximately 20% of net sales. We do not have
long-term contracts with the majority of our raw material suppliers. Increases
in the cost of raw materials essential to our operations, including seed,
plastic, chemicals and fertilizer, would increase our costs of production.
Significant increases in the price of petrochemicals or a scarcity of raw
materials essential to plant propagation could have a material adverse effect on
our business. We may not be able to pass such price increases on to our
customers in the form of higher prices for our products, which could materially
adversely affect our results of operations and operating cash flows.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
PROSPECTS MAY BE HARMED.

     Our success depends in part on proprietary techniques and plant designs.
Although we attempt to protect our proprietary property and processes through a
combination of patents, trade secrets and non-disclosure agreements, these may
be insufficient. Litigation may be necessary to protect our intellectual
property and determine the validity and scope of the proprietary rights of
competitors. Intellectual property litigation could result in substantial costs
and diversion of our management and other resources. If we are unable to
successfully protect our intellectual property rights, our competitors could be
able to market products that compete with our proprietary products without
obtaining a license from us.

CHANGES IN CORPORATE GOVERNANCE AND SECURITIES DISCLOSURE AND COMPLIANCE
PRACTICES HAVE INCREASED AND MAY CONTINUE TO INCREASE OUR LEGAL COMPLIANCE AND
FINANCIAL REPORTING COSTS AND MAY MAKE IT MORE DIFFICULT AND EXPENSIVE TO OBTAIN
DIRECTOR AND OFFICER LIABILITY INSURANCE.

     The Sarbanes-Oxley Act of 2002 required us to change or supplement some of
our corporate governance and securities disclosure and compliance practices. The
Sarbanes Oxley-Act of 2002 and related rules and regulations promulgated by the
Securities and Exchange Commission have increased, and may continue to increase,
our legal compliance and financial reporting costs. These developments may also
make it more difficult and more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage. This, in turn, could make it more
difficult for us to attract and retain qualified members of our board of
directors, or qualified executive officers.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

      Not applicable.


                                       12
<PAGE>

ITEM 2.  PROPERTIES

     At December 31, 2005, the Company owned approximately 4,180 acres related
to its nursery facilities. In addition, the Company leases approximately 1,270
acres related to its nursery facilities (including leases from Blooming Farm,
Inc., an affiliated entity). Approximately 4,000 acres were usable for
production, with approximately 2,500 acres currently in production. We believe
that our owned and leased facilities are sufficient to meet our operating
requirements for the foreseeable future.

The Company's current facilities are identified in the table below:

<TABLE>
<S>     <C>
LOCATION                               DESCRIPTION                             STATUS
--------                               -----------                             ------

Blairsville, Georgia................   43 acre nursery                         Owned (a)
Chino Valley, Arizona...............   66 acre nursery                         Owned
Danville, Pennsylvania..............   154 acre nursery                        Leased (b)
Fallbrook, California...............   261 acre nursery                        Owned/leased (c)
Forest Grove, Oregon................   1,013 acre nursery                      Owned/leased (d)
Fulshear, Texas.....................   435 acre nursery                        Owned
Irvine, California..................   542 acre nursery and headquarters       Leased (e)
Miami, Florida......................   334 acre nursery                        Owned/leased (f)
Newark, New York....................   37 acre nursery                         Owned
Northern California.................   1,389 acre nursery                      Owned (g)
Pipersville, Pennsylvania...........   60 acre nursery                         Owned/leased (h)
San Joaquin Valley, California .....   57 acre nursery                         Owned/leased (i)
Trenton, South Carolina.............   1,001 acre nursery                      Owned/leased (j)
Utica, New York.....................   65 acre nursery                         Owned
</TABLE>

(a)  Blairsville, Georgia is managed by the Miami, Florida location and they are
     both considered to be a single nursery operation.
(b)  141 acres are year-to-year and 13 acres expire in 2009.
(c)  We own 248 acres and lease 13 acres at this nursery.
(d)  We own 668 acres and lease 345 acres at this nursery.
(e)  The lease expires with respect to 114 acres in June 2006 and 140 acres in
     December 2006. The lease for the remaining acreage does not expire until
     December 2010.
(f)  We own 212 acres and lease 122 acres at this nursery.
(g)  The Northern California nursery consists of sites in Allendale, Vacaville
     and Winters, California. In March 2006, an option to purchase 168 acres of
     property in Vacaville has been exercised.
(h)  We own 31 acres and lease 29 acres at this nursery.
(i)  The San Joaquin nursery consists of sites in Chowchilla and Madera,
     California. We own 48 acres and lease 9 acres at this nursery.
(j)  We own 941 acres and lease 60 acres at this nursery.

      In May 2003, we amended the lease for our 479-acre Irvine, California
nursery and headquarters. Under the amendment, we agreed to vacate 254 acres
covered by the lease in 2006 in exchange for an extension of the term of the
lease on 170 acres that was set to expire in September 2003 to December 2010 and
the lease of an additional 63 acres contiguous to our existing facility from
July 2003 to December 2010. Our landlord also agreed to assist with the costs of
developing the new acreage and transition costs of up to $4.0 million, which
include payments of $2.0 million and percentage rent credits of up to $2.0
million. The landlord also agreed to assist us with our objective of trying to
secure beyond 2010 an acceptable nursery property relatively near our current
location in Irvine, California, although we cannot be sure that we will
accomplish this objective.

       In April 2003, we entered into an option agreement to sell our 168-acre
nursery property in Vacaville, California. We entered into the option agreement
because the nursery property is located in an area which the city of Vacaville
is planning to develop as a residential project. This agreement was subsequently
amended in March 2005 to extend the option term to March 1, 2006 contingent upon
payments of $1.8 million during the option term. On March 1, 2006, the buyer
exercised its option to purchase the property. Total proceeds from the option
agreement and sale of the land will be approximately $16.9 million, with the
final payment of $14.3 million due no later than April 3, 2006. Under the terms
of the option agreement, we are able to transition off the land in three phases
from 2006 to 2008. We are continuing to develop replacement acreage and
infrastructure at our 842-acre Winters facility in Northern California.

       On November 7, 2005, we successfully completed the Miami Land Sale and
received net proceeds from the sale of approximately $47.0 million. We will
lease the entire property for a one-year period, with a thirty-day extension
right, and will then vacate approximately 33 acres. We will lease the remaining
89 acres for an additional one-year period, with extension rights for an


                                       13
<PAGE>

additional ninety days, and will then vacate the remaining acreage. The terms of
the lease agreement require us to pay the buyer rent of five hundred dollars per
outstanding acre, annually, during the lease term.

ITEM 3.  LEGAL PROCEEDINGS

     From time to time, the Company is involved in various disputes and
litigation matters, which arise in the ordinary course of business. While the
litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company's
financial position. Our management believes that we are not currently involved
in any material legal proceedings and we know of no such proceedings
contemplated by governmental authorities.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth
quarter of 2005.

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
         MATTERS AND ISSUER PURCHASES OF EQUITY SECTURITIES

     The Common Stock of Hines currently trades on The Nasdaq National Market
under the symbol "HORT." As of March 15, 2006, there were 74 registered holders
of record of the Company's Common Stock. The following table sets forth the
quarterly high and low sale prices of our Common Stock as reported on The Nasdaq
National Market for the periods indicated:

Fiscal year ended December 31,
2005                                           High            Low
----                                         ---------      ---------
1st quarter                                    $4.65          $3.30
2nd quarter                                    $4.36          $3.36
3rd quarter                                    $4.06          $3.18
4th quarter                                    $3.84          $3.10

Fiscal year ended December 31,
2004                                           High            Low
----                                         ---------      ---------
1st quarter                                    $5.27          $3.68
2nd quarter                                    $5.00          $3.88
3rd quarter                                    $4.35          $2.61
4th quarter                                    $4.15          $2.70


     Hines has not paid dividends on its Common Stock in the past and does not
presently plan to pay dividends on the Common Stock. The payment of dividends is
restricted under the terms of the Company's senior credit agreement and senior
subordinated note indenture. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."


                                       14
<PAGE>

     The Company currently maintains its 1998 Long-Term Equity Incentive Plan
(the "1998 Stock Plan") under which Common Stock is authorized for issuance to
employees and directors upon the exercise of options. As of December 31, 2005,
the Company did not have outstanding any options, warrants or rights under any
other equity compensation plan. The following table provides aggregate
information regarding the shares of Common Stock that may be issued upon the
exercise of options, warrants and rights under all of the Company's equity
compensation plans as of December 31, 2005.

<TABLE>
                                     Number of securities to be     Weighted-average     Number of securities remaining
                                      issued upon exercise of       exercise price of     available for future issuance
                                        outstanding options,          outstanding           under equity compensation
                                        warrants and rights         options, warrants      plans (excluding securities
                                                                       and rights            reflected in column (a))
           Plan Category                         (a)                      (b)                          (c)
-----------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>                                     <C>
EQUITY COMPENSATION PLANS
 APPROVED BY SECURITY HOLDERS:
     1998 Long-Term Equity
     Incentive Plan                                   869,110     $            6.22                       2,720,100
EQUITY COMPENSATION PLANS NOT
 APPROVED BY SECURITY HOLDERS:                             --     $              --                              --

                                       -----------------------                               -----------------------
                               Total                  869,110                                             2,720,100
                                       =======================                               =======================
</TABLE>

                                       15
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The selected financial data presented below as of the end of and for each
of the years in the five-year period ended December 31, 2005 has been derived
from the consolidated financial statements of Hines Horticulture and its
subsidiaries. The consolidated financial statements as of December 31, 2005 and
2004, and for each of the years in the three-year period ended December 31,
2005, and the independent registered public accounting firm report thereon, are
included elsewhere in this filing. Certain reclassifications have been made in
prior periods' financial statements to confirm to fiscal 2005 classifications.

<TABLE>
                                                                              YEAR ENDED DECEMBER 31,
                                                  --------------------------------------------------------------------------------
                                                      2005             2004             2003             2002            2001
                                                  ------------     ------------     ------------     ------------     ------------
                                                                           (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                               <C>              <C>              <C>              <C>              <C>
STATEMENT OF OPERATIONS DATA:
Sales, net                                        $    327,913     $    335,168     $    341,189     $    339,359     $    329,048
Cost of goods sold                                     174,580          170,694          170,750          169,807          158,565
                                                  ------------     ------------     ------------     ------------     ------------

Gross profit                                           153,333          164,474          170,439          169,552          170,483
Operating expenses                                     132,599          125,928          125,784          122,338          121,975
                                                  ------------     ------------     ------------     ------------     ------------

Operating income                                        20,734           38,546           44,655           47,214           48,508
Other expense, primarily interest expense               24,815           24,510           35,223           33,900           38,188
(Benefit from) provision for income taxes               (1,523)           5,800            3,867            5,456            4,627
                                                  ------------     ------------     ------------     ------------     ------------

(Loss) income from continuing operations                (2,558)           8,236            5,565            7,858            5,693
Income (loss) from discontinued operations,
  net of tax (a)                                            --               --            4,148           (5,413)          (2,268)
Cumulative effect of change in accounting
  principle, net of tax (b)                                 --               --               --          (55,148)              --
                                                  ------------     ------------     ------------     ------------     ------------

Net (loss) income                                 $     (2,558)    $      8,236     $      9,713     $    (52,703)    $      3,425
                                                  ============     ============     ============     ============     ============

EARNINGS (LOSS) PER SHARE:
     (Loss) income from continuing operations
          Basic                                   $      (0.12)    $       0.37     $       0.25     $       0.36     $       0.26
          Diluted                                 $      (0.12)    $       0.37     $       0.25     $       0.36     $       0.26
     Net (loss) income
          Basic                                   $      (0.12)    $       0.37     $       0.44     $      (2.39)    $       0.16
          Diluted                                 $      (0.12)    $       0.37     $       0.44     $      (2.39)    $       0.16

Weighted average shares outstanding -- Basic        22,072,549       22,072,549       22,072,549       22,072,549       22,072,549
Weighted average shares outstanding -- Diluted      22,072,549       22,121,182       22,072,549       22,078,012       22,091,208

SUMMARY CASH FLOW DATA:
Net cash provided by operating activities         $      7,074     $     19,012     $     22,963     $     29,712     $     26,551
Net cash provided by (used in) investing
  activities                                            40,423           (6,541)           2,464          109,738          (28,886)
Net cash (used in) provided by financing
  activities                                           (48,035)         (12,574)         (25,157)        (139,450)           2,335

SUPPLEMENTAL DATA:
Depreciation and amortization                     $     11,384     $     10,681     $      9,394     $      8,565     $     12,436
Capital expenditures                                    10,258            5,869            5,589            7,209           18,178

BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents                         $         62     $        600     $        703     $        433     $        676
Working capital                                         94,818           74,634           61,976           12,051          (41,086)
Short-term debt                                         10,080           29,328           36,107           90,335          143,159
Total assets                                           388,135          398,329          402,911          406,245          610,820
Long-term debt                                         175,000          203,571          209,287          164,829          209,639
Shareholders' equity                                    58,408           60,966           52,730           41,802           88,745
</TABLE>

                                                                16
<PAGE>

              NOTES TO SELECTED CONSOLIDATED YEARLY FINANCIAL DATA
                             (DOLLARS IN THOUSANDS)


(a)  On March 27, 2002, we sold Sun Gro, our peat moss and soil mix business,
     for net proceeds of approximately $125,000, the majority of which we used
     to repay indebtedness. Our consolidated financial statements in this filing
     reflect the financial position, results of operations and cash flows of the
     Sun Gro business as "discontinued operations." For the year ended December
     31, 2003, we recognized a $4,148 gain, net of tax of $2,784, from the sale.
     For the year ended December 31, 2002, we recognized a $5,562 loss, net of
     tax of $10,729, from the sale and a $149 gain, net of tax of $287, from the
     operations through the date of the sale. For the year ended December 31,
     2001 the loss from discontinued operations of $2,268 represents the loss
     from the operations of that period.

(b)  The cumulative effect of change in accounting principle for the year ended
     December 31, 2002 of $55,148, net of tax of $23,609, represents the
     goodwill impairment charge resulting from the Company's adoption of SFAS
     No. 142, "Goodwill and Other Intangible Assets."


                                       17
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K. In addition to historical information, this discussion contains
certain forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated by these forward
looking statements due to factors, including but not limited to, those set forth
under "Risk Factors" and elsewhere in this Form 10-K. We assume no obligation to
update any of the forward-looking statements after the date of this Form 10-K.

OVERVIEW

     We are a leading national supplier of ornamental shrubs, color plants and
container-grown plants with 13 commercial nursery facilities located in Arizona,
California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and
Texas. We produce approximately 5,700 varieties of ornamental shrubs and color
plants and we sell to more than 2,400 retail and commercial customers,
representing more than 8,750 outlets throughout the United States and Canada.
Hines Horticulture, Inc. produces and distributes horticultural products through
its wholly owned subsidiary, Hines Nurseries.

REFINANCING

     On September 30, 2003, we refinanced substantially all of our outstanding
debt (the "Refinancing"), which included the issuance of $175.0 million of
10.25% Senior Notes ("Notes") due in 2011 and an amended and restated Senior
Credit Facility ("Senior Credit Facility") that expires in 2008. Our Senior
Credit Facility currently consists of a revolving facility with availability of
up to $120.0 million (subject to certain borrowing base limits). Our Refinancing
enabled us to extend the maturity of our previous debt, which we believe will
provide us with greater financial and operating flexibility in the future. For
additional information concerning our Notes and Senior Credit Facility, see
"Liquidity and Capital Resources."

SALE OF 122 ACRES IN MIAMI, FLORIDA

     On November 7, 2005, we successfully completed the Miami Land Sale and
received net proceeds from the sale of approximately $47.0 million. We will
lease the entire property for a one-year period, with a thirty-day extension
right, and will then vacate approximately 33 acres. We will lease the remaining
89 acres for an additional one-year period, with extension rights for an
additional ninety days, and will then vacate the remaining acreage. The terms of
the lease agreement require us to pay the buyer rent of five hundred dollars per
outstanding acre, annually, during the lease term. For accounting purposes, the
entire gain has been deferred due to our continuing involvement, as defined in
SFAS No. 98, in the property.

SALE OF 168 ACRES IN VACAVILLE, CALIFORNIA

     In April 2003, we entered into an option agreement to sell our 168-acre
nursery property in Vacaville, California. We entered into the option agreement
because the nursery property is located in an area which the city of Vacaville
is planning to develop as a residential project. This agreement was subsequently
amended in March 2005 to extend the option term to March 1, 2006 contingent upon
payments of $1.8 million during the option term. On March 1, 2006, the buyer
exercised its option to purchase the property. Total proceeds from the option
agreement and sale of the land will be approximately $16.9 million, with the
final payment of $14.3 million due no later than April 3, 2006. Under the terms
of the option agreement, we are able to transition off the land in three phases
from 2006 to 2008. We are continuing to develop replacement acreage and
infrastructure at our 842-acre Winters facility in Northern California.

DISCONTINUED OPERATIONS

     In March 2002, we completed the sale of Sun Gro Horticulture, which we
refer to as Sun Gro, to a newly established Canadian income fund. We received
net proceeds of approximately $125.0 million from the sale, which includes the
tax refunds from the Canadian Customs & Revenue Authority ("CCRA") recorded in
the fourth quarter of 2002 and third quarter of 2003, the majority of which were
used to pay down outstanding indebtedness. As a result of the sale of Sun Gro,
we no longer harvest or produce peat moss or other growing soil mixes. Our
consolidated financial statements included in this Form 10-K for 2003 reflect
the financial position, results of operations and cash flows of Sun Gro as
discontinued operations.


                                       18
<PAGE>

UNITED STATES TAX MATTERS

     As a result of our business activities, we qualify for a special exception
under the U.S. federal tax code that allows us to use the cash method of
accounting for federal income tax purposes. Under the cash method, sales are
included in taxable income when payments are received and expenses are deducted
as they are paid. We derive significant tax benefits by being able to deduct the
cost of inventory as the cost is incurred. As a result of our ability to utilize
the cash method of accounting, we have historically generated net operating
losses for federal income tax purposes. During the year, we were required to pay
federal cash income taxes in the form of alternative minimum tax as a result of
the Miami Land Sale. At December 31, 2005, we had $2.6 million in net operating
loss carryforwards for federal income tax purposes, which begin to expire in
2024. In addition, we had approximately $6.9 million in net operating loss
carryforwards for state income tax reporting purposes. Our state net operating
losses in certain states begin expiring in 2008.

     Based on our current projections, we anticipate that we will incur tax
liability and begin paying cash income taxes for federal purposes in 2006 and
2007. We are currently paying cash income taxes for state income tax purposes in
certain states due to the differing rules regarding the utilization of net
operating losses.

     The use of the cash method of accounting for federal income tax purposes
resulted in a current deferred tax liability for accounting purposes. At
December 31, 2005, we had a current deferred liability of $66.1 million related
to the use of the cash method of accounting. The deferred tax liability is
deemed current for accounting purposes because the majority of the items to
which this liability relates are comprised of current assets and current
liabilities in our balance sheet (such as inventory, accounts receivable and
accounts payable). The classification of this liability as a current item,
however, does not mean that it is required to be paid within the next twelve
months.

CANADIAN TAX MATTERS

     In connection with the sale of Sun Gro, the Canadian Customs & Revenue
Authority ("CCRA") required that approximately $13.1 million Canadian of the
gross proceeds from the transaction be withheld in an escrow account pending the
determination of whether certain aspects of the sale were taxable for Canadian
purposes. The proceeds withheld were not included in the initial measurement of
the loss on the sale of Sun Gro. On November 7, 2002, we filed a tax return,
submitted a tax payment of $8.2 million Canadian from the escrow funds and
submitted a claim for refund on the basis that the transaction is exempt from
tax for Canadian purposes. The balance of the escrow funds of $4.9 million
Canadian (US $3.1 million) was then remitted to us and was recorded in the
fourth quarter of 2002 as an adjustment to the loss on the sale of Sun Gro. On
September 30, 2003, the CCRA completed its assessment of our tax return in which
it determined that the transaction was exempt from tax for Canadian purposes and
issued a refund to us of all taxes paid, plus accrued interest. We received the
refund check of $8.7 million Canadian (US $6.3 million) on October 2, 2003 and
recorded it in the third quarter of 2003 as an adjustment to the loss on the
sale of Sun Gro.

SEASONALITY

     Our business is highly seasonal. The seasonal nature of our operations
results in a significant increase in our working capital between the growing and
selling cycles. As a result, operating activities in the first and fourth
quarters use significant amounts of cash, and in contrast, operating activities
in the second and third quarters generate substantial cash as we ship inventory
and collect accounts receivable. We have experienced, and expect to continue to
experience, significant variability in net sales, operating income and net
income on a quarterly basis.

LOVELL FARMS ARBITRATION SETTLEMENT

     In connection with the acquisition of Lovell Farms, we agreed, subject to
various provisions in the purchase agreement, to make earn-out payments to the
sellers ("Claimants") of up to approximately $5.0 million for fiscal 2001 if
certain performance thresholds were met. We determined that the thresholds were
not met and that no earn-out payment be made. In response to this decision, the
Claimants initiated arbitration proceedings, which concluded in May 2004. Going
into the hearings, the Claimants demanded that the arbitrator award $5.0 million
and payment of their attorney's fees and costs. A final determination was made
on July 26, 2004 awarding the Claimants $0.9 million and denying their request
for attorney fees and costs. Payment of the $0.9 million increased our goodwill
during the third quarter of 2004. Legal defense fees and other costs incurred in
connection with the arbitration of $0.5 million were expensed during the fiscal
year ended December 31, 2004.


                                       19
<PAGE>

PHYTOPHTHERA RAMORUM OR SUDDEN OAK DEATH

     On September 20, 2004, we announced that our Forest Grove, Oregon facility
had suspended the shipment of all plant material known capable of carrying
Phytophthora RAMORUM, the plant pathogen known to cause Sudden Oak Death
("SOD"), as a result of receiving an Emergency Action Notification from the U.S.
Department of Agriculture ("USDA") stating that a routine inspection had
resulted in a positive detection of the pathogen. After several months of
testing, it was determined that only two areas within the nursery had been
exposed to the pathogen, which resulted in the destruction of approximately $0.5
million, or 1%, of our Oregon inventory. As a result of a trace forward test, we
identified that several customers had received product from the two exposed
areas, and accordingly, we agreed to assist them with the destruction of the
identified inventory. This resulted in customer credits of approximately $0.3
million and lost sales of approximately $1.0 million in 2004. We have also
incurred approximately $0.4 million in SOD clean-up costs in 2004. On December
20, 2004, the USDA determined that our Forest Grove, Oregon facility was free of
SOD and lifted the Emergency Action Notification. As of December 31, 2005, our
Forest Grove, Oregon facility and all of our California facilities are SOD-free
and are operating under USDA SOD Compliance Agreements. For additional
information concerning SOD, see "Risks Related to Our Business."

PAY BY SCAN

     In January 2005, we entered into an agreement with our largest customer to
sell a portion of our product under a pay by scan program. Under this program,
our customer does not take ownership of the inventory at its stores until the
product is scanned at the check out register. Revenue is recorded at the point
the store sells our product to its customer. Sales under this program began in
February 2005 on a limited basis. Annuals and perennials are the only products
impacted by this agreement.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2004

     NET SALES. Net sales of $327.9 million for the fiscal year ended December
31, 2005 decreased $7.3 million, or 2.2%, from net sales of $335.2 million in
2004. The decline in net sales was primarily due to lower sales unit volume,
partially offset by a slight increase in our overall average unit selling price
per unit compared to last year. The decline in sales unit volume of 6.1 million,
or 5.9%, from units sold in 2004 was mainly due to the impact of hurricanes
Katrina, Rita and Wilma in the South and the Southeastern regions, while the
slight price increase was primarily due to improved product mix and the new pay
by scan program. Looking at sales from a quarterly perspective:

     First quarter net sales in 2005 increased approximately $3.6 million, or
6.0%, from net sales for the comparable period in 2004. The increase in first
quarter net sales was a result of improved customer pricing, favorable changes
to our product mix and a higher volume of early spring shipments into markets in
the East. First quarter net sales in 2005 in the Southwest declined compared to
the first quarter in 2004 as southern California and Arizona experienced low
consumer demand as a result of record breaking amounts of winter rain. First
quarter net sales in 2005 in the Northeast increased compared to the same period
in 2004 as a result of the timing of Easter sales, while sales in the Southeast
declined mainly as a result of our new pay by scan program, which deferred
approximately $0.8 million of net sales from the first quarter of 2005 into the
second quarter of 2005.

     Second quarter net sales in 2005 decreased approximately $4.2 million, or
2.3%, from net sales for the comparable period in 2004. The decrease in second
quarter net sales in 2005 was primarily due to lower sales unit volume offset by
an increase in average selling price per unit. Net sales in the Southwest
increased during the second quarter of 2005 as the record-breaking winter rains
finally dissipated and consumers returned to gardening. Second quarter net sales
in 2005 in the Northeast declined as a result of the timing of Easter sales and
lower consumer demand for bedding plants. Second quarter net sales in 2005 in
the South were down due to fewer assigned customer store locations, while in the
Southeast sales were essentially flat compared to second quarter net sales in
2004.

     Third quarter net sales in 2005 decreased approximately $2.4 million, or
4.6%, from net sales for the comparable period in 2004. Fourth quarter net sales
in 2005 decreased approximately $4.3 million, or 10.2%, compared to the fourth
quarter in 2004. Our third and fourth quarter net sales in 2005 have decreased
compared to the same periods in 2004 primarily due to lower consumer demand
throughout the South and Southeast mainly as a result of hurricanes Katrina,
Rita and Wilma.


                                       20
<PAGE>

     GROSS PROFIT. Gross profit of $153.3 million for the fiscal year ended
December 31, 2005 decreased $11.1 million, or 6.8%, from gross profit of $164.5
million in 2004. As a percentage of net sales, gross profit for the year
decreased to 46.8% compared to 49.1% in 2004. The decline in gross profit and
gross profit margin percentage was attributable to lower sales volume, increased
scrap as a result of the hurricanes in the third and fourth quarters of 2005 and
higher raw material and commodity costs. This was especially true for
petroleum-based plastic containers and higher fuel costs. Although we received a
minimal increase in our average selling price per unit, it was not significant
enough to offset the increased raw material and commodity costs that we
experienced during 2005.

     SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$108.9 million for the fiscal year ended December 31, 2005 increased $5.9
million, or 5.7%, from $103.0 million in 2004. Selling expenses for the fiscal
year ended December 31, 2005 of $33.0 million decreased $0.3 million, or 0.9%,
from a year ago mainly as a result of the cost savings generated from the
reorganization carried out in the second quarter of 2005 which included the
realignment of certain aspects of management as well as a permanent reduction in
headcount, but such cost savings were partially offset by an increase in
advertising costs of $0.4 million, as well as an increase in third-party
merchandising costs of $0.6 million. Distribution expenses of $75.9 million for
the fiscal year ended December 31, 2005 increased $6.2 million, or 8.9%, from
$69.7 million for the comparable period in 2004. The increase in distribution
expenses was attributable to higher diesel fuel costs and increased third party
carrier charges, which were primarily driven by more expensive diesel fuel.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$22.1 million for the fiscal year ended December 31, 2005 decreased $0.2
million, or 1.1%, from $22.3 million in 2004. General and administrative
expenses declined as management continued to focus on controlling costs and
creating more efficiency during the year.

     OTHER OPERATING EXPENSES. Other operating expenses of $1.6 million for the
fiscal year ended December 31, 2005 increased $1.0 million, or 168.8%, from $0.6
million in 2004. Other operating expense in 2005 consisted primarily of $1.0
million of consulting fees relating to productivity improvements and severance
costs of $0.5 million incurred during our strategic reorganization in the second
quarter of 2005.

     OPERATING INCOME. Operating income of $20.7 million for the fiscal year
ended December 31, 2005 decreased $17.8 million, or 46.2%, from $38.5 million in
2004. The decline in operating income was mainly due to the decrease in gross
profit primarily due to the hurricanes in the third and fourth quarters of 2005
and an increase in distribution expenses due to rising fuel costs and common
carrier charges.

     OTHER EXPENSES. Other expenses of $24.8 million for the fiscal year ended
December 31, 2005 increased $0.3 million, or 1.2%, from $24.5 million in 2004.
The small increase was due to lower interest rate swap agreement income and
deferred financing fees written off in connection with the early termination of
our Senior Credit-term loan of $1.1 million. This was offset by a decline in
interest expense due to lower overall debt.

     INCOME TAX (BENEFIT) PROVISION. Our effective income tax rate was 37.3% and
41.3% for the fiscal years ended December 31, 2005 and 2004, respectively.
Benefit from income taxes was $1.5 million for the fiscal year ended December
31, 2005, compared to provision for income taxes of $5.8 million in the fiscal
year ended December 31, 2004. The decrease in the effective income tax rate was
mainly due to the decrease in earnings before tax to a loss of $4.1 million in
2005 from income of $14.0 million in 2004.

     NET (LOSS) INCOME. The net loss of $2.6 million for the fiscal year ended
December 31, 2005 decreased by $10.8 million, or 131.1%, from net income of $8.2
million for the comparable period in 2004 as a result of the decline in
operating income, as discussed above.

FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2003

     NET SALES. Net sales of $335.2 million for the fiscal year ended December
31, 2004 decreased $6.0 million, or 1.8%, from net sales of $341.2 million in
2003. The decline in net sales was primarily due to reduced sales volume,
partially offset by 2.3% increase in average net unit selling price. Units sold
for the fiscal year ended December 31, 2004 decreased 4.3 million, or 3.9%, from
units sold in 2003 mainly due to our strategic decision to consolidate and
realign our current customer base. Looking at sales from a quarterly
perspective:

     First quarter net sales in 2004 increased approximately $1.1 million, or
1.9%, from net sales for the comparable period in 2003. The increase in first
quarter net sales in 2004 was due to strong sales of bedding plants and shrubs
throughout the Sunbelt markets primarily as a result of favorable weather and
our new market strategy. However, net sales slowed at the end of the first
quarter in 2004 as the gardening retailers continued their trend of better
managing inventory levels by reducing pre-spring stocking orders.


                                       21
<PAGE>

     Second quarter net sales in 2004 decreased approximately $8.3 million, or
4.4%, from net sales for the comparable period in 2003. The decline in second
quarter net sales in 2004 was primarily isolated to the Midwest and Southeast
markets where consumer demand for color products wavered as a result of
excessive rain in May and June of 2004. Compounding the effect of the decline in
demand was the inability of two of our east coast facilities to transition
perennial and annual color plant sales to new customers as part of a strategic
decision to consolidate and realign our customer base.

     Third quarter net sales in 2004 decreased approximately $0.1 million, or
0.1%, from net sales for the comparable period in 2003. Third quarter net sales
in 2004 in the Sunbelt markets increased $2.9 million as strong spring-like
demand continued into July as a result of favorable weather and as we continued
to focus on the merchandising of our products. Third quarter 2004 shrub sales in
these regions also benefited from a successful joint marketing effort with a
major customer. Third quarter 2004 net sales in the Southeast declined $2.0
million compared to the same period in 2003 mainly as a result of hurricanes
Charley, Frances, Ivan and Jeanne.

     Fourth quarter net sales in 2004 increased approximately $1.2 million, or
2.8%, compared to the fourth quarter in 2003 as we began to see some early signs
of recovery in the markets affected by the four hurricanes that hit the
Southeast region during the third quarter of 2004. In addition, our holiday crop
sales in 2004 were up as a result of incremental store listings in the
Southeast.

     GROSS PROFIT. Gross profit of $164.5 million for the fiscal year ended
December 31, 2004 decreased $6.0 million, or 3.5%, from gross profit of $170.4
million in 2003. As a percentage of net sales, gross profit for the year
decreased to 49.1% compared to 50.0% in 2003. The decline in gross profit was
mainly due to the decline in net sales volume, which mainly resulted from lower
customer demand in the second quarter and the impact of the four major
hurricanes during the third quarter of 2004. The decline in gross profit margin
was due to higher labor costs, fuel costs and scrap rates on bedding plants,
partially offset by a 2.3% increase in average net unit selling price.

     SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$103.0 million for the fiscal year ended December 31, 2004 increased $1.5
million, or 1.4%, from $101.6 million in 2003. Selling expenses increased $2.6
million, or 8.5%, mainly as a result of increased merchandising costs and total
SOD remediation costs at our Oregon facility of approximately $0.6 million.
Distribution expenses of $69.7 million for the fiscal year ended December 31,
2004 decreased from $70.9 million for the comparable period in 2003.
Distribution expense as a percentage of net sales remained consistent at 20.8%
for both periods. Improved logistics, increased payloads and better carrier
relations have been effective in mitigating rising fuel costs and increased
common carrier charges resulting from new trucking regulations.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$22.3 million for the fiscal year ended December 31, 2004 decreased $0.3
million, or 1.2%, from $22.6 million in 2003. General and administrative
expenses declined as management continued to focus on controlling costs and
creating more efficiency.

     OTHER OPERATING LOSS. Other operating expenses of $0.6 million for the
fiscal year ended December 31, 2004 decreased $1.0 million, or 63.5%, from $1.6
million in 2003. The decline was due to severance costs associated with the
resignation of our former Chief Executive Officer in February of 2003, offset by
2004 legal fees of $0.5 million incurred as a result of the Lovell Farms
arbitration settlement.

     OPERATING INCOME. Operating income of $38.5 million for the fiscal year
ended December 31, 2004 decreased $6.1 million, or 13.7%, from $44.7 million in
2003. The decline in operating income in 2004 was mainly due to the decrease in
gross profit and increase in selling expense, as discussed above.

     OTHER EXPENSES. Other expenses of $24.5 million for the fiscal year ended
December 31, 2004 decreased $10.7 million, or 30.4%, from $35.2 million in 2003.
The decline in other expenses was mainly due to the $9.2 million loss on debt
extinguishment recognized during the third quarter of 2003 as a result of our
Refinancing. The improvement was also due to the impact of the mark to market
adjustment on our interest rate swap and a $2.0 million decline in the
amortization of deferred financing expenses, partially offset by higher interest
expense. For the fiscal year ended December 31, 2004, the mark to market
adjustment amounted to income of $4.4 million compared with income of $2.7
million for the same period in 2003. Interest expense increased to $27.2 million
in 2004 from $24.9 million in 2003 due to our Refinancing, which shifted more of
our revolving debt to higher interest rate fixed-term instruments in order to
increase availability under our new revolving credit facility.


                                       22
<PAGE>

     INCOME TAX PROVISION. Our effective income tax rate was 41.3% and 41.0% for
the years ended December 31, 2004 and 2003, respectively. Provision for income
taxes was $5.8 million for the fiscal year ended December 31, 2004, compared to
$3.9 million in the fiscal year ended December 31, 2003.

     INCOME FROM CONTINUING OPERATIONS. Income from continuing operations of
$8.2 million for the fiscal year ended December 31, 2004 increased $2.7 million,
or 48.0%, from $5.6 million in 2003. The increase in income from continuing
operations was mainly due to the decline in other expenses, partially offset by
operating income, as discussed above.

     INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Income from discontinued
operations of $4.1 million for the fiscal year ended December 31, 2003,
represented the after tax portion of the $6.3 million received as a result of
collecting the receivable for withheld Canadian income taxes from the Canadian
government, as discussed above in the section entitled "Canadian Tax Matters."
The $6.3 million received included the collection of the $5.1 million receivable
for previously withheld Canadian income taxes and $1.2 million due to the
favorable exchange rate at the time the receivable was collected.

     NET INCOME. Net income of $8.2 million for the fiscal year ended December
31, 2004 decreased by $1.5 million, or 15.2%, from $9.7 million for the fiscal
year ended December 31, 2003 as a result of the decline in operating income and
change in income (loss) from discontinued operations, partially offset by the
improvements in other expenses, as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

     Our primary sources of liquidity are funds generated by operations and
borrowings under our Senior Credit Facility. The seasonal nature of our
operations results in significant fluctuation in certain components of working
capital (primarily accounts receivable and inventory) during the growing and
selling cycles. As a result, operating activities during the first and fourth
quarters use significant amounts of cash, and in contrast, operating activities
for the second and third quarters generate substantial cash as we ship inventory
and collect accounts receivable.

     Net cash provided by operating activities was $7.1 million for the fiscal
year ended December 31, 2005 compared to $19.0 million for 2004. The decrease in
cash provided by operating activities was mainly due to lower earnings driven by
lower gross profit and higher operating expenses. In addition, net cash provided
from the interest rate swap agreement decreased in 2005 by $3.5 million compared
to 2004, due to the agreement maturing in February 2005. Net cash used in
working capital was primarily affected by the increase in inventory levels,
partially offset by the decrease in accounts receivable. The increase in
inventory for 2005 and the corresponding decrease in accounts receivable was
primarily due to lower net sales.

     Net cash provided by investing activities was $40.4 million for the fiscal
year ended December 31, 2005 compared to net cash used in investing activities
of $6.5 million for 2004. The increase in cash provided by investing activities
was mainly due to the Miami Land Sale for gross proceeds of approximately $47.9
million. In addition to this, we received $2.0 million in option payments in
2005 related to the sale of our 168-acre nursery property in Vacaville,
California. These proceeds were partially offset by an increase in capital
expenditures, discussed below.

     Our capital expenditures were $10.3 million for the fiscal year ended
December 31, 2005 compared to capital expenditures of $5.9 million in 2004. The
increase in capital expenditures for the fiscal year ended December 31, 2005 was
mainly due to our increased investment in property and equipment as we prepared
to transition production capacity from our Irvine facility to our Winters
facility in Northern California. In 2006 we expect our capital expenditures to
increase due to the land sales at our Miami, Florida and Vacaville, California
facilities. The increase in capital expenditures is necessary to transition off
of these properties to other facilities. This is in addition to completing the
transition of production capacity from our Irvine, California facility to our
Winters facility.

     Net cash used in financing activities was $48.0 million for the fiscal year
ended December 31, 2005 compared to $12.6 million for 2004. The proceeds from
the Miami Land Sale were used to pay-off the entire $30.5 million outstanding
balance of our term loan and approximately $16.5 million to pay down our
revolver and other expenses related to the sale.


                                       23
<PAGE>

     We typically draw down our revolving credit facilities in the first and
fourth quarters to fund our seasonal inventory buildup and seasonal operating
expenses. Approximately 74% of our sales occur in the first half of the year,
generally allowing us to reduce borrowing under our revolving credit facilities
in the second and third quarters. On December 31, 2005, we had $10.1 million of
borrowings under our working capital revolver, resulting in unused borrowing
capacity of $61.6 million after applying the borrowing base limitations to our
available borrowings.

     At December 31, 2005, we had total indebtedness outstanding of $185.1
million.

     As previously mentioned, in 2006 we will receive gross proceeds of
approximately $14.3 million related to the sale of land in Vacaville,
California, which is incremental to the $2.6 million we have already received as
option payments. The majority of the $14.3 million will be used to fund the
transition costs discussed above.

OFF BALANCE SHEET ARRANGEMENTS

     We do not have any off balance sheet financing or any financial
arrangements with related parties, other than operating leases. The following
table discloses aggregate information about our contractual obligations and
commercial commitments as of December 31, 2005.

<TABLE>
                                                                     Payments Due by Period
                                                   ----------------------------------------------------------
Contractual Cash Obligations          Total        Less than 1 year   1-3 years    4-5 years   After 5 years
--------------------------------- ---------------  ----------------  -----------  -----------  --------------
                                                                     (in millions)
<S>                               <C>              <C>               <C>          <C>          <C>
Revolving facility                $         10.1   $           10.1  $         -  $         -  $           -
Senior notes                               175.0                  -            -        175.0              -
Interest                                   111.0               19.8         58.4         32.8              -
Operating leases                            19.2                4.9          6.4          2.0            5.9
                                  ---------------  ----------------  -----------  -----------  --------------
             Total                $        315.3   $           34.8  $      64.8  $     209.8  $         5.9
                                  ===============  ================  ===========  ===========  ==============
</TABLE>

     We believe that cash generated by operations and from borrowings expected
to be available under our Senior Credit Facility will be sufficient to meet our
anticipated working capital, capital expenditures and debt service requirements
for at least the next twelve months.

     The following is a summary of certain material terms of our Senior Credit
Facility and Hines Nurseries' 10.25% Senior Notes due 2011.

OUR SENIOR CREDIT FACILITY

     We entered into our Senior Credit Facility on September 30, 2003. Hines
Nurseries and its domestic operating subsidiaries are borrowers under the Senior
Credit Facility. The credit facility currently consists of a revolving facility
with availability of up to $120.0 million (subject to borrowing base limits).
The revolving facility also permits us to obtain letters of credit up to a
sub-limit.

     The Senior Credit Facility was amended by First Amendment to Credit
Agreement dated as of June 30, 2005 (the "First Amendment"), then again pursuant
to a Waiver Regarding Financial Covenants dated as of October 13, 2005 (the
"Waiver"), and by Second Amendment to Credit Facility dated as of February 3,
2006 (the "Second Amendment"). On November 8, 2005, in accordance with the
Waiver, at our request, the availability of the revolving facility was reduced
from $145.0 million to $120.0 million (subject to borrowing base limits).

     GUARANTEES; COLLATERAL. Obligations under the Senior Credit Facility are
guaranteed by us and any of our domestic subsidiaries that are not borrowers
under the credit facility. Borrowings under the Senior Credit Facility are
collateralized by substantially all of our assets.

     RESTRICTIONS; COVENANTS. The Senior Credit Facility places various
restrictions on Hines Nurseries and its subsidiaries, including, but not limited
to, limitations on our ability to incur additional debt, pay dividends or make
distributions, sell assets or make investments. The Senior Credit Facility
specifically restricts Hines Nurseries and its subsidiaries from making
distributions to Hines Horticulture. Distributions to Hines Horticulture are
limited to (i) payments covering customary general and administrative expenses,
not to exceed $0.5 million in any fiscal year, (ii) payments to discharge any
consolidated tax liabilities, (iii) and payments, not to exceed as much as $8.3
million in any fiscal year or $9.3 million over the term of the Senior Credit
Facility, to enable Hines Horticulture to repurchase its own outstanding common
stock from holders other than our majority shareholder. Dividends to Hines
Horticulture are disallowed under the Senior Credit Facility.


                                       24
<PAGE>

     The Senior Credit Facility requires Hines Nurseries and its subsidiaries to
meet specific covenants and financial ratios, including a minimum fixed charge
coverage test, a maximum leverage test and a maximum capital expenditure test.
The Senior Credit Facility contains customary representations and warranties and
customary events of default and other covenants. As of December 31, 2005, we
were not in compliance with some of our covenants; however, as discussed below,
the non-compliance was cured with the Second Amendment.

     FIRST AMENDMENT TO SENIOR CREDIT FACILITY. Effective June 30, 2005, Hines
Nurseries negotiated and entered into the First Amendment to the Senior Credit
Facility. The First Amendment amended the Senior Credit Facility to require that
the proceeds from the Miami Land Sale be used to pay down the term loan. In
accordance with the First Amendment, we repaid the term loan in its entirety on
November 8, 2005 with the completion of the Miami Land Sale. The First Amendment
also amended the calculation of the fixed charge coverage ratio and the leverage
ratio to allow as an addition to Earnings Before Income Taxes, Depreciation and
Amortization ("EBITDA") certain adjustments related to work force reductions and
requires Hines to meet less restrictive minimum fixed charge coverage ratios for
the last fiscal quarter of 2005, for 2006 and for the first quarter of 2007 and
maximum leverage ratios for the last fiscal quarter of 2005, for 2006 and the
first and second quarters of 2007.

     WAIVER REGARDING FINANCIAL COVENANTS. On October 13, 2005, the Hines
Nurseries obtained the Waiver from the financial institutions party to its
Senior Credit Facility to waive compliance with the minimum fixed charge
coverage ratio and the maximum leverage ratio covenants of the Senior Credit
Facility for the third fiscal quarter of 2005. The Waiver was subject to the
Miami Land Sale occurring no later than November 30, 2005 and the net asset sale
proceeds of the sale being no less than $40.0 million. These conditions to the
Waiver were satisfied on November 7, 2005 when we successfully completed the
sale.

     SECOND AMENDMENT TO SENIOR CREDIT FACILITY. In February 2006, Hines
Nurseries negotiated and entered into the Second Amendment to the Senior Credit
Facility dated as of September 30, 2003. The Second Amendment amends the
calculation of the minimum fixed charge coverage ratio for the first quarter of
2006 and thereafter. The Second Amendment also eliminates the maximum leverage
ratio which, as a result of, cured the non-compliance as of December 31, 2005.

     INTEREST RATE; FEES. The interest rate on the loans under the Senior Credit
Facility may be, at our option, prime rate loans or London Inter Bank Offering
Rate ("LIBOR") rate loans. Prime rate loans under the revolving loan facility
bear interest at the prime lending rate plus an additional amount that ranges
from 0.75% to 1.75%, depending on our consolidated leverage ratio. Currently,
the applicable margin for prime rate loans is 1.75% for the revolving loan
facility.

     LIBOR rate loans under the revolving loan facility bear interest at the
LIBOR rate plus an additional amount that ranges from 1.75% to 2.75%, depending
on our consolidated leverage ratio. Currently, the applicable margin for LIBOR
rate loans is 2.75% for the revolving loan facility. In addition to paying
interest on outstanding principal, we are required to pay a commitment fee on
the daily average unused portion of the revolving facility which accrues based
on the utilization of the revolving facility.

     BORROWING BASE. Availability of borrowing under the revolving facility are
subject to a borrowing base consisting of the sum of (i) 85% of eligible
accounts receivable plus (ii) the lesser of (x) up to 55% of eligible inventory
or (y) 85% of the appraised net orderly liquidation value of eligible inventory.

     We must deliver borrowing base certificates and reports at least monthly.
The borrowing base also may be subject to certain other adjustments and reserves
to be determined by the agent. Eligible accounts receivable of both The Home
Depot, our largest customer, and Lowe's Companies, Inc., our second largest
customer, may not exceed 30% of total eligible accounts receivable at any time.

     REPAYMENT. On November 8, 2005, we used the proceeds from the Miami Land
Sale to pay-off the entire outstanding balance of the term loan, which was
approximately $30.5 million.

OUR SENIOR NOTES

     On September 30, 2003, Hines Nurseries issued $175.0 million of Senior
Notes that mature on October 1, 2011. The Senior Notes bear interest at the rate
of 10.25% per annum and will be payable semi-annually in arrears on each April 1
and October 1, which commenced on April 1, 2004.


                                       25
<PAGE>

     GUARANTEES. Hines Horticulture and each of its domestic subsidiaries,
subject to certain exceptions, has, jointly and severally, fully and
unconditionally guaranteed, on a senior unsecured basis, the obligations of
Hines Nurseries under the Senior Notes.

     REDEMPTION. Prior to October 1, 2006, up to 35% of the aggregate principal
amount of the Senior Notes may be redeemed with the net cash proceeds from one
or more public equity offerings, at our option, at a redemption price of
110.250% of the principal amount thereof plus accrued interest, if any, to the
date of redemption. On or after October 1, 2007, we are entitled, at our option,
to redeem all or a portion of the Senior Notes at redemption prices ranging from
100.000% to 105.125%, depending on the redemption date, plus accrued and unpaid
interest.

     RESTRICTIONS. The indenture pursuant to which the Senior Notes were issued
imposes a number of restrictions on Hines Nurseries and our other subsidiaries.
Subject to certain exceptions, we may not incur additional indebtedness, make
certain restricted payments, make certain asset dispositions, incur additional
liens or enter into significant transactions. A breach of material term of the
indenture or other material indebtedness that results in acceleration of the
indebtedness under the Notes also constitutes an event of default under our
Senior Credit Facility.

     REPURCHASE ON A CHANGE IN CONTROL. The Senior Notes contain a put option
whereby the holders have the right to put the Senior Notes back to us at
101.000% of the principal amount thereof on the date of purchase, plus accrued
and unpaid interest if a change of control occurs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires us 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. We believe that the following
areas represent our most critical accounting policies related to actual results
that may vary from those estimates.

     REVENUE RECOGNITION. We record revenue, net of sales discounts and
allowances, when all of the following have occurred: an agreement of sale
exists, product delivery and acceptance has occurred and collection is
reasonably assured.

     Sales with pay by scan arrangements are recognized when the products are
sold by the retailers.

     SALES RETURNS AND ALLOWANCES. Amounts accrued for sales returns and
allowance are maintained at a level believed adequate by management to absorb
probable losses in the trade receivable due to sales discounts and allowances.
The provision rate is established by management using the following criteria:
past sales returns experience, current economic conditions and other relevant
factors. The rate is re-evaluated on a quarterly basis. Provisions for sales
discounts and allowances charged against income increase the allowance. We
record revenue, net of sales discounts and allowances, when the risk of
ownership is transferred to the customer. Allowances are provided at the time
revenue is recognized in accordance with SFAS No. 48, "Revenue Recognition When
Right of Return Exists."

     ALLOWANCE FOR DOUBTFUL ACCOUNTS. The allowance for doubtful accounts is
maintained at a level believed by management to adequately reflect the probable
losses in the trade receivable due to customer defaults, insolvencies or
bankruptcies. The provision is established by management using the following
criteria: customer credit history, customer current credit rating and other
relevant factors. The provision is re-evaluated on a quarterly basis. Provisions
to bad debt expense charged against income increase the allowance. All
recoveries on trade receivables previously charged off are credited to the
accounts receivable recovery account charged against income, while direct
charge-offs of trade receivables are deducted from the allowance.

     ACCOUNTING FOR GOODWILL IMPAIRMENT. On January 1, 2002, we adopted SFAS No.
142, "Goodwill and Other Intangible Assets." In accordance with this standard,
goodwill has been classified as indefinite-lived assets no longer subject to
amortization. Indefinite-lived assets are subject to impairment testing upon
adoption of SFAS No. 142 and at least annually thereafter. We perform our annual
impairment test in the fourth quarter of each year. In accordance with SFAS No.
142, this involves a two step process. First, we must determine if the carrying
amount of equity exceeds the fair value based upon the quoted market price of
our common stock. If we determine that goodwill may be impaired, we compare the
"implied fair value" of the goodwill, as defined by SFAS No. 142, to its


                                       26
<PAGE>

carrying amount to determine the impairment loss, if any. The initial impairment
analysis was completed in the fourth quarter of 2002. We recorded a non-cash
charge of $55.1 million, net of tax, to reduce the carrying value of our
goodwill for the year ended December 31, 2002. We have recognized this
impairment charge as a cumulative effect of change in accounting principle. Upon
completing the annual impairment analysis in the fourth quarter of fiscal 2005,
it was determined that a charge for impairment was not required.

     ACCRUED LIABILITIES. Accrued liabilities include amounts accrued for
expected claims costs relating to our insurance programs for workers'
compensation and auto liabilities. We have large deductibles for these lines of
insurance, which means we must pay the portion of each claim that falls below
the deductible amount. Our expected claims costs are based on an actuarial
analysis that considers our current payroll and automobile profile, recent
claims history, insurance industry loss development factors and the deductible
amounts. We accrue our expected claims costs for each year on a ratable monthly
basis with a corresponding charge against income. Management reviews the
adequacy of the accruals at the end of each quarter. The accruals for the
expected costs relating to our insurance programs for workers' compensation and
auto liabilities are maintained at levels believed by our management to
adequately reflect our probable claims obligations.

ACCOUNTING PRONOUNCEMENTS ADOPTED

     In March 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") 47, "Accounting for Conditional Asset Retirement
Obligations." FIN 47 clarifies the term "conditional asset retirement
obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations."
The adoption of FIN 47 did not have a material impact on our consolidated
financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. We
do not expect the adoption of this standard to have a material impact on our
consolidated financial position, results of operations and cash flows.

     In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under Accounting Principles Board (APB) Opinion No. 25. In
March 2005, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin (SAB) 107, "Share-Based Payment," which expresses views of
the SEC Staff about the application of SFAS No. 123(R). SFAS No. 123(R) was to
be effective for interim or annual reporting periods beginning on or after June
15, 2005, but in April 2005 the SEC issued a rule that SFAS No. 123(R) will be
effective for annual reporting periods beginning on or after June 15, 2005. We
are required to adopt SFAS No. 123(R) on January 1, 2006. We anticipate adopting
the prospective method and expect the adoption of SFAS No. 123(R) will not have
an impact for the year ending December 31, 2006 on our results of operations
based upon the outstanding unvested stock options at December 31, 2005. We
cannot estimate the impact on our results of operations of any additional stock
options that may be granted.

     In December 2004, the FASB issued SFAS No. 153, "Exchange of Non-Monetary
Assets - An Amendment of ARB Opinion No. 29," which requires non-monetary asset
exchanges to be accounted for at fair value. We are required to adopt the
provisions of SFAS No. 153 for non-monetary exchanges occurring in fiscal
periods beginning after June 15, 2005. We do not expect the adoption of this
standard to have a material impact on our consolidated financial position,
results of operations and cash flows.

     In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." FASB No. 154 replaces APB Opinion No. 20, "Accounting Changes,"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
and changes the requirements for the accounting for and reporting of a change in
an accounting principle. This standard applies to all voluntary changes in an
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. APB Opinion No. 20
previously required that most voluntary changes in an accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This standard requires


                                       27
<PAGE>

retrospective application to prior periods' financial statements of changes in
an accounting principle. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We
do not expect the adoption of this standard to have a material impact on our
consolidated financial position, results of operations and cash flows.

EFFECTS OF INFLATION

     Management believes the Company's results of operations have not been
materially impacted by inflation over the past three years.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As part of our ongoing business, we are exposed to certain market risks,
including fluctuations in interest rates, foreign exchange rates and commodity
prices. We do not enter into transactions designed to mitigate market risks for
trading or speculative purposes.

     We have various debt instruments outstanding at December 31, 2005 that are
impacted by changes in interest rates. We manage our interest rate risk by
balancing the amount of our fixed and variable debt. For fixed-rate debt,
interest rate changes affect the fair market value of such debt but do not
impact earnings or cash flows. Conversely, for variable-rate debt, interest rate
changes generally do not affect the fair market value of such debt but do impact
future earnings and cash flows, assuming other factors are held constant. At
December 31, 2005 the carrying amount and estimated fair value of our debt was
$185.1 million and $181.6 million, respectively. Given the current balance of
our variable rate debt, we estimate a change in interest costs of approximately
$0.1 million for every one-percentage point change in applicable interest rates.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements commence at page F-1 of this report
and an index thereto is included in Part IV, Item 15 of this report.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following selected unaudited quarterly financial data should be read in
conjunction with the consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.

<TABLE>
                                            FOURTH            THIRD            SECOND            FIRST
   2005                                     QUARTER          QUARTER           QUARTER          QUARTER
-----------                              ------------      ------------      ------------     ------------
                                                         (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                      <C>               <C>               <C>              <C>
Sales, net                               $     37,659      $     49,371      $    176,893     $     63,990

Gross profit                                   11,527            21,532            89,050           31,224

Net (loss) income                             (10,374)           (5,173)           14,735           (1,746)

Net (loss) income per common share:
        Basic & Diluted                  $      (0.47)     $      (0.23)     $       0.67     $      (0.08)
                                         ============      ============      ============     ============


                                            FOURTH            THIRD            SECOND            FIRST
   2004                                     QUARTER          QUARTER           QUARTER          QUARTER
-----------                              ------------      ------------      ------------     ------------
                                                         (IN THOUSANDS, EXCEPT SHARE DATA)

Sales, net                               $     41,949      $     51,748      $    181,081     $     60,390

Gross profit                                   17,991            23,528            93,689           29,266

Net (loss) income                              (5,643)           (3,726)           18,678           (1,073)

Net (loss) income per common share:
        Basic                            $      (0.26)     $      (0.17)     $       0.85     $      (0.05)
                                         ============      ============      ============     ============

Net (loss) income per common share:
        Diluted                          $      (0.26)     $      (0.17)     $       0.84     $      (0.05)
                                         ============      ============      ============     ============
</TABLE>

     The other information in response to this item is submitted as a separate
section of this Report beginning on page F-1.


                                       28
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURES

     Not applicable.

ITEM 9A.  CONTROLS AND PROCEDURES

     The Company carried out an evaluation, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as defined in Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d-15(e). Based upon that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective, as of the end of the period covered by this report,
in enabling the Company to record, process, summarize and report information
required to be included in the Company's periodic SEC filings within the
required time period. In connection with such evaluation, no change in our
internal control over financial reporting occurred during the last fiscal
quarter covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

     Not applicable.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Except for the information required to be disclosed regarding our code of
conduct and ethics under Item 406 of Regulation S-K, Item 10 is incorporated by
reference from the Company's 2006 Proxy Statement to be filed with the
Securities and Exchange Commission.

     The Company has adopted a code of conduct and ethics that applies to all
directors, officers and employees. The code of conduct and ethics is posted on
the Company's website, the address of which is www.hineshorticulture.com and is
available in print to any shareholder upon written request addressed to: Hines
Horticulture, Inc., Attention: Investor Relations Department, 12621 Jeffrey
Road, Irvine, CA 92620. The Company intends to include on its website any
amendments to, or waivers from, a provision of its code of conduct and ethics
that applies to the Company's executive officers that relates to any element of
the code of conduct and ethics definition enumerated in Item 406(b) of
Regulation S-K.

ITEM 11.  EXECUTIVE COMPENSATION

     Incorporated by reference from the Company's 2006 Proxy Statement to be
filed with the Securities and Exchange Commission.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS.

     Incorporated by reference from the Company's 2006 Proxy Statement to be
filed with the Securities and Exchange Commission.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Incorporated by reference from the Company's 2006 Proxy Statement to be
filed with the Securities and Exchange Commission.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

     Incorporated by reference from the Company's 2006 Proxy Statement to be
filed with the Securities and Exchange Commission.


                                       29
<PAGE>

                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) List of documents filed as part of this report:

     (1) Financial Statements:
         ---------------------
<TABLE>
                                                                                                             PAGE
                                                                                                             ----
<S>                                                                                                           <C>
         Report of Independent Registered Public Accounting Firm..............................................F-1
         Consolidated Balance Sheets at December 31, 2005 and 2004............................................F-2
         Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003...........F-3
         Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the Years
              Ended December 31, 2005, 2004 and 2003..........................................................F-4
         Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003...........F-5
         Notes to Consolidated Financial Statements...........................................................F-6
</TABLE>

     (2) Financial Statement Schedules:
         ------------------------------

              All schedules are omitted since the required information is not
         present or is not present in amounts sufficient to require submission
         of the schedule, or because the information required is included in the
         Consolidated Financial Statements and Notes thereto.


     (3) List of Exhibits
         ----------------


                                       30
<PAGE>

                                INDEX TO EXHIBITS

   EXHIBIT
   NUMBER      DESCRIPTION
   ------      -----------
     2.1       Acquisition Agreement, dated as of March 18, 2002, by and among
               Hines Horticulture, Inc., Hines Nurseries, Inc., Sun Gro
               Horticulture, Inc., Sun Gro Horticulture Canada Ltd. And Sun Gro
               Horticulture Income Fund. (1)
     2.2       Asset Purchase Agreement, dated as of March 26, 2002, by and
               between Sun Gro Horticulture, Inc. and Sun Gro Horticulture
               Canada Ltd. (1)
     2.3       Underwriting Agreement, dated as of March 18, 2002, by and among
               Hines Horticulture, Inc., Sun Gro Horticulture, Inc. and Sun Gro
               Horticulture Income Fund. (1)
     3.1       Restated Certificate of Incorporation of Hines Horticulture, Inc.
               (3)
     3.2       Amended and Restated By-laws of Hines Horticulture, Inc. (3)
     4.1       Indenture, dated as of September 30, 2003, between Hines
               Nurseries, Inc., Hines Horticulture, Inc., the Subsidiary
               Guarantors named therein and the Bank of New York, as Trustee,
               relating to Hines Nurseries, Inc.'s $175,000,000 10.25% Senior
               Notes due 2011. (4)
     4.2       Holdings Guaranty dated September 30, 2003, by Hines
               Horticulture, Inc., in favor of and for the benefit of, Deutsche
               Bank Trust Company Americas, as Guaranteed Party. (4)
     4.3       Form of 144A Senior Note due 2011. (4)
     4.4       Form of Senior Note due 2011. (4)
     4.5       Form of Regulation S Senior Note due 2011. (4)
     4.6       Registration Rights Agreement, dated as of September 30, 2003,
               between Hines Nurseries, Inc., Hines Horticulture, Inc., Hines
               SGUS Inc., Enviro-Safe Laboratories, Inc. and the Initial
               Purchasers named therein. (4)
    10.1       Employment Agreement dated as of August 3, 1995 between Hines
               Horticulture and Robert A. Ferguson. (8)*
    10.2       Employment Agreement dated as of August 4, 1995 between Hines
               Horticulture and Claudia M. Pieropan. (2)*
    10.3       Amended and Restated 1998 Long-Term Equity Incentive Plan, as
               Amended. (+)*
    10.4       Form of Incentive Stock Option Agreement. (3)*
    10.5       Stock Purchase Agreement dated September 9, 1999 between Hines
               Nurseries, Inc. and those individuals whose names are set forth
               on the Signature Page to Stock Purchase Agreement. (8)
    10.6       Purchase Agreement by and among Hines Nurseries, Inc., Lovell
               Farms, Inc., Botanical Farms, Inc., Warren W. Lovell III, Jeffrey
               S. Lovell, Jenifer E. Moreno, as Trustee of the Trace Lovell
               Family Investment Trust and Enrique A. Yanes, Dated as of March
               3, 2000. (5)
    10.7       Warrant and Guarantee Agreement, dated November 28, 2000 by and
               between Hines Horticulture, Inc., Hines Nurseries, Inc. and
               Madison Dearborn Capital Partners, L.P. (6)
    10.8       Warrant, dated November 28, 2000, issued by Hines Horticulture,
               Inc. to Madison Dearborn Capital Partners, L.P. (6)
    10.9       Amended and Restated Promissory Note by Blooming Farm, Inc. in
               favor of Hines Nurseries, Inc. dated September 22, 2003. (4)
    10.10      Amended and Restated Secured Promissory Note by Blooming Farm,
               Inc. in favor of Hines Nurseries, Inc. dated September 22, 2003.
               (4)
    10.11      Amended and Restated Ground Lease dated September 1, 1996 by and
               between The Irvine Company and Hines Horticulture, Inc. (4) **
    10.12      Addendum No. 1 to Amended and Restated Ground Lease dated October
               29, 1996 by and between The Irvine Company and Hines
               Horticulture, Inc. (4)
    10.13      Addendum No. 2 to Amended and Restated Ground Lease dated
               December 18, 1997 by and between The Irvine Company and Hines
               Horticulture, Inc. (4)
    10.14      Addendum No. 3 to Amended and Restated Ground Lease dated May 19,
               2003 by and between The Irvine Company and Hines Nurseries, Inc.
               (4) **
    10.15      Letter Agreement dated September 18, 2003 by and between The
               Irvine Company and Hines Nurseries, Inc. (4)**
    10.16      Credit Agreement dated September 30, 2003 among Hines Nurseries,
               Inc., Enviro-Safe Laboratories, Inc., and Hines SGUS Inc., as
               Borrowers, the lenders listed therein, Deutsche Bank Trust
               Company Americas, as Agent, Fleet Capital Corporation and Lasalle
               Business Credit, LLC, as Co-Syndication Agents, and Harris Trust
               and Savings Bank and Wells Fargo Bank, N.A., as Co-Documentation
               Agents. (4)


                                       31
<PAGE>

    10.17      Security Agreement, dated September 30, 2003, among Hines
               Nurseries, Inc., Enviro-Safe Laboratories, Inc. Hines SGUS Inc.,
               and Hines Horticulture, Inc., as Grantors, and Deutsche Bank
               Trust Company Americas, as agent for and representative of the
               beneficiaries named therein. (4)
    10.18      Registration Agreement dated as of June 11, 1998 by and between
               Hines Holdings, Inc. and MDCP. (3)
    10.19      First Amendment to Credit Agreement, effective as of June 30,
               2005. (9)
    10.20      Waiver Regarding Financial Covenants dated October 13, 2005,
               among Hines Nurseries, Inc. and Hines SGUS Inc., as borrowers,
               the lenders listed therein, and Deutsche Bank Trust Company
               Americas, as agent. (9)
    10.21      Second Amendment to Credit Agreement, effective as of February 3
               2006. (+)
    10.22      Real Property Purchase and Sale Agreement and Escrow
               Instructions, dated September 12, 2005, by and between Hines
               Nurseries, Inc. and Quantum Ventures, LLC. (10)
    10.23      Summary of Oral Amendment to Real Property Purchase and Sale
               Agreement and Escrow Instructions, dated September 12, 2005, by
               and between Hines Nurseries, Inc. and Quantum Ventures, LLC. (10)
    10.24      Lease Agreement dated November 7, 2005, by and between Hines
               Nurseries, Inc. and Quantum Ventures, LLC. (10)
    10.25      Option Agreement, dated April 30, 2005, by and between Hines
               Nurseries, Inc. and Triad Communities, L.P. (+)
    10.26      First Amendment to Option Agreement, dated February 28, 2005, by
               and between Hines Nurseries, Inc. and Triad Communities, L.P. (+)
    10.27      Exercise of Option Agreement, dated March 1, 2006, by and between
               Hines Nurseries, Inc. and Triad Communities, L.P. (+)
    21.1       Subsidiaries of the Company. (7)
    23.1       Consent of independent registered public accounting firm (+)
    31.1       Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a),
               as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
               2002.(+)
    31.2       Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a),
               as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
               2002.(+)
    32.1       Certification of Chief Operating 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.
*        Management contract or compensatory arrangement.
**       Confidential treatment requested as to certain portions of the exhibit
         which have been filed separately with the Securities and Exchange
         Commission
++       This certification shall not be deemed "filed" for purposes of Section
         18 of the Securities Exchange Act of 1934, or otherwise subject to the
         liability of that section, nor shall it be deemed to be incorporated by
         reference into any filing under the Securities Act of 1933 or the
         Securities Exchange Act of 1934.
(1)      Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
         on April 10, 2002.
(2)      Incorporated by reference to Hines Holdings, Inc.'s Registration
         Statement on Form S-4, File No. 33-99452, filed on November 15, 1995
         and amended on December 22, 1995 and January 6, 1996.
(3)      Incorporated by reference to Hines Horticulture, Inc.'s Registration
         Statement on Form S-1, File No. 333-51943, filed on May 6, 1998 and
         amended on May 26 1998 and June 16, 1998.
(4)      Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
         Report on Form 10-Q for the quarter ended September 30, 2003
(5)      Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
         on March 17, 2000.
(6)      Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
         on November 29, 2000.
(7)      Incorporated by reference to Hines Horticulture, Inc.'s Annual Report
         on Form 10-K for the year ended December 31, 2003.
(8)      Incorporated by reference to Hines Horticulture, Inc.'s Annual Report
         on Form 10-K for the year ended December 31, 2004.
(9)      Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
         Report on Form 10-Q for the quarter ended June 30, 2005.
(10)     Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
         on November 9, 2005.


                                       32
<PAGE>

                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) 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 on March 28, 2006.

                                             HINES HORTICULTURE, INC.

                                             By:  /s/ Claudia M. Pieropan
                                                  -----------------------------
                                                  Claudia M. Pieropan
                                                  Chief Financial Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 28, 2006.


SIGNATURE                               CAPACITY
---------                               --------

/s/ Robert A. Ferguson                  President, Chief Executive Officer and
----------------------------------      Director (Principal Executive Officer)
Robert A. Ferguson


/s/ Claudia M. Pieropan                 Chief Financial Officer, Secretary and
----------------------------------      Treasurer (Principal Financial and
Claudia M. Pieropan                     Accounting Officer)


/s/ Thomas R. Reusche                   Director and Chairman of the Board
----------------------
Thomas R. Reusche


/s/ Stan R. Fallis                      Director
----------------------------------
Stan R. Fallis


/s/ James R. Tennant                    Director
----------------------------------
James R. Tennant


/s/ G. Ronald Morris                    Director
----------------------------------
G. Ronald Morris


/s/ Paul R. Wood                        Director
----------------------------------
Paul R. Wood


                                       33
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and
Shareholders of Hines Horticulture, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and comprehensive
income (loss) and cash flows present fairly, in all material respects, the
financial position of Hines Horticulture, Inc. and subsidiaries at December 31,
2005 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.




/s/ PricewaterhouseCoopers LLP

Orange County, California
March 24, 2006


                                      F-1
<PAGE>

<TABLE>
<S>     <C>
                                    HINES HORTICULTURE, INC.
                                  CONSOLIDATED BALANCE SHEETS
                           (Dollars in thousands, except share data)


                           ASSETS                                         DECEMBER 31,
                           ------                                ------------------------------
                                                                     2005              2004
                                                                 ------------      ------------
CURRENT ASSETS:
        Cash                                                     $         62      $        600
        Accounts receivable, net of allowance for
           doubtful accounts of $325 and $456                          16,444            19,969
        Inventories                                                   183,281           181,133
        Consigned inventories                                           1,350                --
        Prepaid expenses and other current assets                       2,666             3,072
        Assets held for sale                                              484                --
                                                                 ------------      ------------

                Total current assets                                  204,287           204,774
                                                                 ------------      ------------

FIXED ASSETS, net                                                     122,234           131,536

DEFERRED FINANCING EXPENSES, net of
   accumulated amortization of $3,207 and $2,227                        6,207             8,883

DEFERRED INCOME TAXES                                                  11,481             9,210

GOODWILL                                                               43,926            43,926
                                                                 ------------      ------------

                                                                 $    388,135      $    398,329
                                                                 ============      ============

          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------

CURRENT LIABILITIES:
        Accounts payable                                         $     12,624      $     12,558
        Accrued liabilities                                            11,474             9,820
        Accrued payroll and benefits                                    4,453             5,900
        Accrued interest                                                4,711             5,194
        Interest rate swap agreement, current portion                      --               895
        Long-term debt, current portion                                    --             5,719
        Borrowings on revolving credit facility                        10,080            23,609
        Deferred income taxes                                          66,127            66,445
                                                                 ------------      ------------

                Total current liabilities                             109,469           130,140
                                                                 ------------      ------------

LONG-TERM DEBT                                                        175,000           203,571

DEFERRED GAIN ON LAND SALE                                             39,880                --

OTHER LIABILITIES                                                       5,378             3,652

COMMITMENT AND CONTINGENCIES (Note 8)

SHAREHOLDERS' EQUITY
        Common stock
           Authorized - 60,000,000 shares,  $0.01 par value;
           Issued and outstanding - 22,072,549
           shares at December 31, 2005 and 2004                           221               221

        Additional paid-in capital                                    128,781           128,781
        Accumulated deficit                                           (70,594)          (68,036)
                                                                 ------------      ------------

        Total shareholders' equity                                     58,408            60,966
                                                                 ------------      ------------

                                                                 $    388,135      $    398,329
                                                                 ============      ============


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

                                              F-2
<PAGE>

                                                    HINES HORTICULTURE, INC.
                                             CONSOLIDATED STATEMENTS OF OPERATIONS
                                           (Dollars in thousands, except share data)


                                                                                          YEAR ENDED DECEMBER 31,
                                                                            ---------------------------------------------------
                                                                                2005               2004               2003
                                                                            -------------      -------------      -------------


Sales, net                                                                  $     327,913      $     335,168      $     341,189
Cost of goods sold                                                                174,580            170,694            170,750
                                                                            -------------      -------------      -------------

    Gross profit                                                                  153,333            164,474            170,439
                                                                            -------------      -------------      -------------

Selling and distribution expenses                                                 108,922            103,011            101,557
General and administrative expenses                                                22,075             22,321             22,592
Other operating expenses                                                            1,602                596              1,635
                                                                            -------------      -------------      -------------
    Total operating expenses                                                      132,599            125,928            125,784
                                                                            -------------      -------------      -------------

    Operating income                                                               20,734             38,546             44,655

Other expenses
   Interest expense                                                                22,819             27,151             24,927
   Interest rate swap agreement income                                               (895)            (4,425)            (2,710)
   Amortization of deferred financing expense                                       2,891              1,784              3,771
   Loss on debt extinguishment                                                         --                 --              9,235
                                                                            -------------      -------------      -------------
                                                                                   24,815             24,510             35,223
                                                                            -------------      -------------      -------------

(Loss) income before income tax (benefit) provision
     and discontinued operations                                                   (4,081)            14,036              9,432

Income tax (benefit) provision                                                     (1,523)             5,800              3,867
                                                                            -------------      -------------      -------------

(Loss) income from continuing operations before discontinued operations            (2,558)             8,236              5,565

Income from discontinued operations, net of tax benefit of $2,784                      --                 --              4,148
                                                                            -------------      -------------      -------------

Net (loss) income                                                           $      (2,558)     $       8,236      $       9,713
                                                                            =============      =============      =============


Basic and diluted (loss) earnings per share:

   (Loss) income per common share from continuing operations                $       (0.12)     $        0.37      $        0.25
   Income per common share from  discontinued operations                    $          --      $          --      $        0.19
                                                                            -------------      -------------      -------------

   Net (loss) income per common share                                       $       (0.12)     $        0.37      $        0.44
                                                                            =============      =============      =============

Weighted average shares outstanding-Basic                                      22,072,549         22,072,549         22,072,549
                                                                            =============      =============      =============
Weighted average shares outstanding-Diluted                                    22,072,549         22,121,182         22,072,549
                                                                            =============      =============      =============


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

                                                              F-3
<PAGE>

                                                      HINES HORTICULTURE, INC.
                          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
                                              (Dollars in thousands, except share data)


                                              COMMON STOCK                                             ACCUMULATED
                                     ----------------------------     ADDITIONAL                          OTHER
                                       NUMBER OF                       PAID-IN       ACCUMULATED      COMPREHENSIVE    SHAREHOLDERS'
                                        SHARES          AMOUNT         CAPITAL         DEFICIT        INCOME (LOSS)       EQUITY
                                     ------------    ------------    ------------    ------------     ------------     ------------

BALANCE, December 31, 2002             22,072,549    $        221    $    128,781    $    (85,985)    $     (1,215)    $     41,802

  Comprehensive income:
   Net income                                  --              --              --           9,713               --            9,713
   Interest rate swap, net of tax
     benefit of $843                           --              --              --              --            1,215            1,215
                                                                                                                       ------------
     Total comprehensive income                                                                                              10,928

                                     ------------    ------------    ------------    ------------     ------------     ------------
BALANCE, December 31, 2003             22,072,549             221         128,781         (76,272)              --           52,730
                                     ------------    ------------    ------------    ------------     ------------     ------------


   Net income                                  --              --              --           8,236               --            8,236
                                     ------------    ------------    ------------    ------------     ------------     ------------
BALANCE, December 31, 2004             22,072,549             221         128,781         (68,036)              --           60,966
                                     ------------    ------------    ------------    ------------     ------------     ------------


   Net loss                                    --              --              --          (2,558)              --           (2,558)
                                     ------------    ------------    ------------    ------------     ------------     ------------
BALANCE, December 31, 2005             22,072,549    $        221    $    128,781    $    (70,594)    $         --     $     58,408
                                     ============    ============    ============    ============     ============     ============


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

                                                                F-4
<PAGE>

                                                  HINES HORTICULTURE, INC.
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (Dollars in thousands)


                                                                                      YEAR ENDED DECEMBER 31,
                                                                          -------------------------------------------------
                                                                              2005              2004               2003
                                                                          ------------      ------------       ------------

CASH FLOWS FROM OPERATING ACTIVITIES
   Net (loss) income                                                      $     (2,558)     $      8,236       $      9,713
   Income from discontinued operations                                              --                --             (4,148)
   Adjustments to reconcile net (loss) income to
      net cash provided by operating activities:
        Depreciation, depletion and amortization                                11,384            10,681              9,394
        Amortization of deferred financing costs                                 2,891             1,784              3,771
        Interest rate swap agreement income                                       (895)           (4,425)            (2,710)
        Fixed asset impairment                                                     423                --                 --
        Loss on extinguishment of debt                                              --                --              9,235
        Deferred income taxes                                                   (2,589)            5,739              3,867
        (Gain) loss on disposition of fixed assets                                (334)               88                 73

Change in working capital accounts:
   Accounts receivable                                                           3,525             3,755              1,790
   Inventories                                                                  (3,880)           (8,318)            (3,188)
   Prepaid expenses and other current assets                                       115                85             (1,305)
   Accounts payable and accrued liabilities                                     (1,008)            1,387             (3,529)
                                                                          ------------      ------------       ------------
                Net cash provided by operating activities                        7,074            19,012             22,963
                                                                          ------------      ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of fixed assets                                                    (10,258)           (5,869)            (5,589)
   Proceeds from sale of fixed assets                                              827                --                 --
   Proceeds from sale of land                                                   47,854                --                 --
   Proceeds from sale of discontinued operations                                    --                --              5,778
   Proceeds from land sale option                                                2,000               275                275
   Leasehold incentive proceeds                                                     --                --              2,000
   Contingent consideration for acquisitions                                        --              (947)                --
                                                                          ------------      ------------       ------------
                Net cash provided by (used in) investing activities             40,423            (6,541)             2,464
                                                                          ------------      ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net repayment on revolving line of credit                                   (13,529)           (6,709)           (42,432)
   Proceeds from the issuance of long-term debt                                     --                --            215,000
   Repayments of long-term debt                                                (34,290)           (5,786)          (180,555)
   Deferred financing costs                                                       (216)              (79)           (11,637)
   Redemption premium on early payment of subordinated notes                        --                --             (5,533)
                                                                          ------------      ------------       ------------
                  Net cash used in financing activities                        (48,035)          (12,574)           (25,157)
                                                                          ------------      ------------       ------------


NET CHANGE IN CASH                                                                (538)             (103)               270

CASH, beginning of period                                                          600               703                433
                                                                          ------------      ------------       ------------

CASH, end of period                                                       $         62      $        600       $        703
                                                                          ============      ============       ============

Supplemental disclosure of cash flow information:

   Cash paid for interest                                                 $     22,874      $     26,481       $     25,833

   Cash paid for income taxes                                             $         24      $         33       $        457


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

                                                            F-5
</TABLE>
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ----------------------------------------------------------------------

     DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
     -------------------------------------------------

     Hines Horticulture, Inc. ("Hines" or the "Company"), a Delaware
corporation, produces and distributes horticultural products through its wholly
owned subsidiaries, Hines Nurseries, Inc. ("Hines Nurseries") and Hines
Fertilizer, Inc. ("Hines Fertilizer"), formerly known as Enviro-Safe
Laboratories, Inc., which no longer actively conducts business. Unless otherwise
specified, references to "Hines" or the "Company" refer to Hines Horticulture,
Inc. and its subsidiaries.

     Hines is a leading national supplier of ornamental shrubs, color plants and
container-grown plants with commercial nursery facilities located in Arizona,
California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and
Texas. Hines markets its products to retail and commercial customers throughout
the United States.

     As of December 31, 2001, the Company also had a growing media business. The
growing media business was conducted through Sun Gro Horticulture, Inc. ("Sun
Gro-U.S."), a wholly owned subsidiary of Hines Nurseries, Sun Gro-U.S.'s wholly
owned subsidiary, Sun Gro Horticulture Canada Ltd. ("Sun Gro-Canada"), and Sun
Gro-Canada's direct and indirect Canadian subsidiaries.

     On March 27, 2002, the Company sold the assets of Sun Gro-U.S. and the
stock of Sun Gro-Canada, its growing media business, to the Sun Gro Horticulture
Income Fund, a newly established Canadian income fund. The assets sold included
14 facilities located across Canada and the United States and control of
approximately 50,000 acres of peat bogs in Canada. Hines no longer harvests,
produces or sells peat moss or other growing media soil mixes. Hines received
net proceeds of approximately $125,000 from the sale, which were used to pay
down outstanding bank debt.

     In connection with the sale of Sun Gro, the Canadian Customs & Revenue
Authority ("CCRA") required that approximately $13,136 Canadian of the gross
proceeds from the sale be withheld in an escrow account pending the
determination of whether certain aspects of the sale were taxable for Canadian
purposes. The proceeds withheld were not included in the initial measurement of
the loss on the sale of Sun Gro. In 2002, the Company filed a tax return,
submitted a tax payment of $8,219 Canadian from the escrow funds and submitted a
claim for refund on the basis that the transaction is exempt from tax for
Canadian purposes. The balance of the escrow funds of $4,917 Canadian (US$3,146)
was then remitted to us and was recorded in the fourth quarter of 2002 as an
adjustment to the loss on the sale of Sun Gro. On September 30, 2003, the CCRA
completed its assessment of our tax return in which it determined that the
transaction was exempt from tax for Canadian purposes and issued a refund to us
of all tax paid, plus accrued interest. We received the refund check of $8,663
Canadian (US $6,278) on October 2, 2003 and recorded it in the third quarter of
2003 as an adjustment to the loss on the sale of Sun Gro.

SIGNIFICANT ACCOUNTING POLICIES
-------------------------------

     REVENUE RECOGNITION
     -------------------

     Hines records revenue, net of sales discounts and allowances, when all of
the following have occurred: an agreement of sale exists, product delivery and
acceptance has occurred and collection is reasonably assured.

     Sales with pay by scan arrangements are recognized when the products are
sold by the retailers.

     SALES RETURNS AND ALLOWANCES: Amounts accrued for sales returns and
allowance are maintained at a level believed adequate by management to absorb
probable losses in the trade receivable due to sales discounts and allowances.
The provision rate is established by management using the following criteria:
past sales returns experience, current economic conditions, and other relevant
factors, and are re-evaluated on a quarterly basis. The allowance is increased
by provisions for sales discounts and allowances charged against income. The
Company records revenue, net of sales discounts and allowances, when the risk of
ownership is transferred to the customer. Allowances are provided at the time of
revenue is recognized in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists."


                                      F-6
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: Trade accounts
receivable are recorded at the invoiced amount and does not bear interest. The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. The allowance for doubtful
accounts is maintained at a level believed adequate by management to reflect the
probable losses in the trade receivable due to customer default, insolvency or
bankruptcy. The provision is established by management using the following
criteria: customer credit history, customer current credit rating and other
relevant factors, and is re-evaluated on a quarterly basis. Past due balances
over 90 days and over a specified amount are reviewed individually for
collectibility. All other balances are reviewed on a pooled basis by type of
receivable. The allowance is increased by provisions to bad debt expense charged
against income. All recoveries on trade receivables previously charged off are
credited to the accounts receivable recovery account charged against income,
while direct charge-offs of trade receivables are deducted from the allowance.

     Activity with respect to the Company's allowance for doubtful accounts
receivable is summarized as follows:

<TABLE>
                                                    For the Years Ended December 31,
                                                    --------------------------------
                                                 2005              2004             2003
                                            --------------   --------------    --------------
<S>                                         <C>              <C>               <C>
     Beginning balance                      $         456    $         601     $       1,997
     Adjustment to expense                            112              (88)              163
     Amounts written off                             (243)             (57)           (1,559)
                                            --------------   --------------    --------------
     Ending balance                         $         325    $         456     $         601
                                            ==============   ==============    ==============
</TABLE>

     CONCENTRATION OF CREDIT RISK
     ----------------------------

     The Company is subject to credit risk primarily through its accounts
receivable balances. The Company does not require collateral for its accounts
receivable. The Company's largest customer, The Home Depot, accounted for
approximately 47%, 45% and 47% of the Company's consolidated net sales in 2005,
2004 and 2003, respectively. The Company's second largest customer, Lowe's
Companies, Inc., accounted for approximately 17%, 16% and 14% of its net sales
in 2005, 2004 and 2003, respectively. No other customer accounts for more than
10% of net sales. These two customers represented 46% and 56% of accounts
receivable before the allowance for doubtful accounts at December 31, 2005 and
2004, respectively. No other customers represented more than 10% of our accounts
receivable.

     AMORTIZATION OF DEFERRED FINANCING EXPENSES
     -------------------------------------------

     Deferred financing expenses are being amortized using a method which
approximates the effective interest method over the term of the associated
financing agreements of approximately three to seven years. As a result of the
Company's refinancing of both the amended and restated Senior Credit Facility
and Senior Notes, $11,110 was capitalized as deferred financing fees. For the
year ended December 31, 2005, the Company wrote off $1,135 of deferred financing
expenses in connection with the pay-off of the Senior Credit Facility term loan
and the reduction of the availability of the revolving facility from $145,000 to
$120,000. In addition, the Company capitalized $215 of deferred financing
expenses in connection with the First Amendment to Credit Facility and Waiver
Regarding Financial Covenants in 2005.


                                      F-7
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     DEPRECIATION
     ------------

     Fixed assets are stated at cost less accumulated depreciation. Interest is
capitalized for qualifying assets during the assets' acquisition period. The
Company capitalized $120 and $36 for the years ended December 31, 2005 and 2004,
respectively, and no interest was capitalized for the year ended December 31,
2003. Capitalized interest is recorded as part of the asset to which it relates
and is depreciated over the respective asset's estimated useful life.
Depreciation has been provided for on the straight-line method over the
following estimated economic useful lives:

     Buildings                            10 to 40 years
     Leasehold improvements               Shorter of 20 years or term of lease
     Machinery and equipment              2 to 10 years
     Vehicles and trailers                2 to 10 years
     Software                             5 to 10 years
     Furniture and fixtures               3 to 5 years

     IMPAIRMENT OF LONG-LIVED ASSETS
     -------------------------------

     In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," long-lived assets and intangible assets with determinate
lives are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company evaluates potential impairment by comparing the carrying amount of the
asset with the estimated undiscounted future cash flows associated with the use
of the asset and its eventual disposition. Should the review indicate that the
asset is not recoverable, the Company's carrying value of the asset would be
reduced to its estimated fair value, which is generally measured by future
discounted cash flows.

     GOODWILL
     --------

     In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill is no longer amortized, but instead is subject to an annual impairment
review. As the Company's operations are comprised of one reporting unit, the
Company reviews the recoverability of its goodwill by comparing the Company's
fair value to the net book value of its assets. If the book value of the
Company's assets exceeds the Company's fair value, the goodwill is written down
to its implied fair value. The Company evaluates the carrying value of goodwill
in the fourth quarter of each year and when events and circumstances indicate
that the assets may be impaired. At December 31, 2005, the Company determined an
impairment of goodwill had not occurred.

     ENVIRONMENTAL COSTS
     -------------------

     The Company recognizes environmental liabilities when conditions requiring
remediation are identified. The Company determines its liability on a site by
site basis and records a liability at the time when it is probable and can be
reasonably estimated. Expenditures that extend the life of the related property
or mitigate or prevent future environmental contamination are capitalized.
Environmental liabilities are not discounted or reduced for possible recoveries
from insurance carriers.

     INTERNAL USE SOFTWARE
     ---------------------

     The Company capitalizes costs of materials, consultants, interest and
payroll and payroll-related costs for employees incurred in developing
internal-use computer software in accordance with Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Computer software costs are being amortized using the
straight-line method over an estimated useful life of 5 to 10 years.

     INVENTORIES
     -----------

     Hines' determines the cost of inventory of nursery stock by accumulating
costs associated with getting the plant ready for sale. These costs include
direct labor, overhead, materials (soil, water, containers, stakes, labels,
chemicals) and scrap. Costs are accumulated until the time of harvest, which,
for Hines means that they are ready for sale, and are valued at the lower of
cost or market. Nursery stock also includes plants that are not yet ready for
sale. Hines' ornamental nursery stock has an average growing period of
approximately eighteen months. All nursery stock is classified as a current
asset based on the Company's' normal operating cycle. Materials and supplies are
stated at the lower of cost (first-in, first-out) or market.


                                      F-8
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     INCOME TAXES
     ------------

     Hines' operations are agricultural in nature and the Company derives
significant benefits by qualifying to use the cash method of accounting for
federal tax purposes. The Company records income taxes under the asset and
liability method, whereby deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. Management evaluates the need to establish a valuation allowance
for deferred tax assets based upon the amount of existing temporary differences,
the period in which they are expected to be recovered and expected levels of
taxable income. A valuation allowance to reduce deferred tax assets is
established when it is "more likely than not" that some or all of the deferred
tax assets will not be realized.

     ADVERTISING
     -----------

     The Company expenses advertising costs at the time the advertising first
takes place. Advertising expense was $1,238, $860 and $884 for the years ended
December 31, 2005, 2004 and 2003, respectively.

     ACCRUED LIABILITIES
     -------------------

     Accrued liabilities include amounts accrued for expected claims costs
relating to our insurance programs for workers' compensation and auto
liabilities. The Company has large deductibles for these lines of insurance,
which means the Company must pay the portion of each claim that falls below the
deductible amount. Expected claims costs are based on an actuarial analysis that
considers our current payroll and automobile profile, recent claims history,
insurance industry loss development factors and the deductible amounts. Expected
claims costs for each year are accrued on a ratable monthly basis with a
corresponding charge against income. The adequacy of the accruals is reviewed at
the end of each quarter. The accruals for the expected costs relating to the
insurance programs for workers' compensation and auto liabilities are maintained
at levels believed by the Company's management to adequately reflect its claims
obligations.

     COMPREHENSIVE INCOME
     --------------------

     Comprehensive income encompasses all changes in equity other than those
arising from transactions with stockholders, and consist of net income, currency
translation adjustments and unrealized net gains and losses on cash flow hedges.
There are no items in accumulated other comprehensive income at December 31,
2005 and 2004.

     USE OF ESTIMATES
     ----------------

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

     EARNINGS PER SHARE ("EPS")
     --------------------------

     Earnings per share are calculated in accordance with SFAS No. 128,
"Earnings per Share," which requires the Company to report both basic earnings
per share, based on the weighted-average number of common shares outstanding,
and diluted earnings per share, based on the weighted-average number of common
shares outstanding adjusted to include the potentially dilutive effect of
outstanding stock options and warrants. On December 31, 2005, 440,000 warrants


                                      F-9
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


outstanding had expired and therefore had no effect on our diluted earnings per
share for the year ended December 31, 2005. For the year ended December 31,
2004, the incremental shares related to 440,000 warrants outstanding increased
fully diluted shares by 48,633. For the year ended December 31, 2003, the
incremental shares related to the 440,000 warrants outstanding were excluded
from the computation of diluted earnings per share because they would have been
anti-dilutive. Additionally, for the years ended December 31, 2005, 2004 and
2003, shares related to employee stock options in the amount of 0.9 million, 1.1
million and 1.0 million, respectively, were excluded from the computation of
diluted earnings per share because they would have been anti-dilutive.

     SHIPPING AND HANDLING FEES AND COSTS
     ------------------------------------

     In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs". The EITF concluded that amounts billed to a customer in a sale
transaction related to shipping and handling should be classified as revenue.
Shipping and handling fees included as revenue totaled $31,927, $28,888 and
$30,276 for the years ended December 31, 2005, 2004 and 2003, respectively.

     The Company classifies shipping and handling costs as part of selling and
distribution expenses. Shipping and handling costs were $75,900, $69,702 and
$70,866 for the years ended December 31, 2005, 2004 and 2003, respectively.

     DERIVATIVES
     -----------

     Derivative instruments are accounted in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company's
only derivative instrument was an interest rate swap agreement that did not
qualify for hedge accounting treatment under SFAS No. 133 and therefore is
marked to market (see Note 5). The interest rate swap agreement matured in
February 2005.

     STOCK-BASED COMPENSATION
     ------------------------

     SFAS No. 148, "Accounting for Stock-Based-Compensation-Transition and
Disclosure-an Amendment of FASB Statement No. 123" amends SFAS No. 123,
"Accounting for Stock-Based Compensation", and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. As permitted under both SFAS No. 123 and SFAS No. 148, the Company
continues to follow the intrinsic value method of accounting under Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees."

<TABLE>
                                                                        Year Ended December 31,
                                                                        -----------------------
                                                                 2005             2004              2003
                                                              -----------      -----------      -----------
<S>                                                           <C>              <C>              <C>
         Net (loss) income, as reported                       $    (2,558)     $     8,236      $     9,713
         Stock option expense, net of tax benefit of $30,
              $175 and $338                                           (43)            (252)            (486)
                                                              -----------      -----------      -----------
         Pro forma net (loss) income                          $    (2,601)     $     7,984      $     9,227
                                                              ===========      ===========      ===========
         Earnings per share:
         Basic and diluted - as reported                      $     (0.12)     $      0.37      $      0.44
                                                              ===========      ===========      ===========
         Basic and diluted - pro forma                        $     (0.12)     $      0.36      $      0.42
                                                              ===========      ===========      ===========
</TABLE>


                                      F-10
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     The Company estimates the weighted average fair value of each stock option
on the grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions:

<TABLE>
                                                       2005           2004         2003
                                                       ----           ----         ----
<S>                                                <C>            <C>           <C>
          Dividend Yield                                   0%             0%           0%
          Expected volatility                          83.86%         83.86%       74.95%
          Risk-free interest rate                       3.48%          3.48%        3.77%
          Expected life                            Four years     Four years    Six years
</TABLE>

     ACCOUNTING PRONOUNCEMENTS ADOPTED
     ---------------------------------

     In March 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") 47, "Accounting for Conditional Asset Retirement
Obligations." FIN 47 clarifies the term "conditional asset retirement
obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations."
FIN 47 is effective no later than the end of the fiscal year ending after
December 15, 2005. The adoption of FIN 47 did not have an impact on the
Company's consolidated financial position, results of operations or cash flows.

     NEW ACCOUNTING PRONOUNCEMENTS
     -----------------------------

     In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not expect the adoption of this standard to have a material impact
on its consolidated financial position, results of operations or cash flows.

     In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under Accounting Principles Board (APB) Opinion No. 25. In
March 2005, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin (SAB) 107, "Share-Based Payment," which expresses views of
the SEC Staff about the application of SFAS No. 123(R). SFAS No. 123(R) was to
be effective for interim or annual reporting periods beginning on or after June
15, 2005, but in April 2005 the SEC issued a rule that SFAS No. 123(R) will be
effective for annual reporting periods beginning on or after June 15, 2005. The
Company is required to adopt SFAS No. 123(R) on January 1, 2006. The Company
anticipates adopting the prospective method and expect the adoption of SFAS No.
123(R) will not have an impact for the year ending December 31, 2006 on its
results of operations based upon the outstanding unvested stock options at
December 31, 2005. The Company cannot estimate the impact on its results of
operations any additional stock options that may be granted.

     In December 2004, the FASB issued SFAS No. 153, "Exchange of Non-Monetary
Assets - An Amendment of ARB Opinion No. 29," which requires non-monetary asset
exchanges to be accounted for at fair value. The Company is required to adopt
the provisions of SFAS No. 153 for non-monetary exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company does not expect the adoption
of this standard to have a material impact on its consolidated financial
position, results of operations or cash flows.

     In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." FASB No. 154 replaces APB Opinion No. 20, "Accounting Changes,"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
and changes the requirements for the accounting for and reporting of a change in
an accounting principle. This standard applies to all voluntary changes in an
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. APB Opinion No. 20
previously required that most voluntary changes in an accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This standard requires


                                      F-11
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


retrospective application to prior periods' financial statements of changes in
an accounting principle. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not expect the adoption of this standard to have a material
impact on its consolidated financial position, results of operations and cash
flows.

     RECLASSIFICATIONS
     -----------------

     Certain prior year amounts have been reclassified to conform to current
year presentations.

2.   DISPOSITIONS
     ------------

     On July 25, 2005, Hines Fertilizer and Hines Nurseries entered into an
asset purchase agreement with a non-affiliated third party vendor to sell
substantially all of the assets of Hines Fertilizer, excluding cash, accounts
receivables and intercompany receivables. The purchase price for the assets was
approximately $600 and was paid through the issuance of customer credits for
past purchases. The gain on sale of assets was approximately $100. In accordance
with the asset purchase agreement, the Company entered into a three year
non-compete agreement, which restricts our ability to own and manage a competing
fertilizer company and restricts our Miami production facility's ability to
co-brand and market with competing fertilizer companies, unless directly
requested by our customers. Upon a change in control of Hines Horticulture or
Hines Nurseries, all non-compete restrictions shall cease and no longer be of
any effect.

     On November 7, 2005, the Company successfully completed the sale of 122
acres of unimproved property in Miami, Florida ("Miami Land Sale") and received
net proceeds of $47,000. In accordance with the amendment to our Senior Credit
Facility, the proceeds from the Miami Land Sale have been used to payoff the
entire outstanding balance of the term loan; the residual amount having paid
down our revolving credit facility. The Company has entered into a two-year
lease agreement with the buyer to lease the property while transitioning
operations to other locations. The Company will lease the entire property for a
one-year period, with a thirty-day extension right, and will then vacate
approximately 33 acres. The Company will lease the remaining 89 acres for an
additional one-year period, with extension rights for an additional ninety days,
and will then vacate the remaining acreage. The Company will pay the buyer rent
of five hundred dollars per outstanding acre, annually, during the lease term.
For accounting purposes, the entire gain has been deferred due to our continuing
involvement, as defined in SFAS No. 98. "Accounting for Leases," in the
property.

     In April 2003, the Company entered into an option agreement to sell
168-acre nursery property in Vacaville, California. The Company entered into the
option agreement because the nursery property is located in an area which the
city of Vacaville is planning to develop as a residential project. This
agreement was subsequently amended in March 2005 to extend the option term to
March 1, 2006 contingent upon payments of $1,800 during the option term. On
March 1, 2006, the buyer exercised its option to purchase the property. Total
proceeds from the option agreement and sale of the land will be approximately
$16,900, with the final payment of $14,300 due no later than April 3, 2006.
Under the terms of the option agreement, Hines is able to transition off the
land in three phases from 2006 to 2008. The Company is continuing to develop
replacement acreage and infrastructure at our 842-acre Winters facility in
Northern California.

3.   INVENTORIES
     -----------

     Inventories consisted of the following:

<TABLE>
                                                                        December 31,
                                                              -------------------------------
                                                                   2005             2004
                                                              -------------     -------------
<S>                                                           <C>               <C>
         Nursery stock                                        $     172,845     $     169,908
         Consigned inventory                                          1,350                 -
         Materials and supplies                                      10,436            11,225
                                                              -------------     -------------
                                                              $     184,631     $     181,133
                                                              =============     =============
</TABLE>

                                      F-12
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


4.   FIXED ASSETS
     ------------

     Fixed assets consisted of the following:
<TABLE>
                                                                        December 31,
                                                              --------------------------------
                                                                   2005              2004
                                                              --------------    --------------
<S>                                                           <C>               <C>
         Land                                                 $      22,550     $      30,141
         Buildings and improvements                                 105,726            97,652
         Machinery and equipment                                     38,453            35,824
         Software                                                    21,014            19,837
         Construction in progress                                     3,512             6,244
                                                              --------------    --------------
                                                                    191,255           189,698
         Less accumulated depreciation                              (69,021)          (58,162)
                                                              --------------    --------------

               Fixed assets, net                              $     122,234     $     131,536
                                                              ==============    ==============
</TABLE>

5.   INTEREST RATE SWAP AGREEMENT
     ----------------------------

     In May 2000, the Company entered into an interest rate swap agreement to
economically hedge $75,000 of debt. This interest rate swap agreement does not
qualify for hedge accounting treatment under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and therefore is marked to
market. The interest rate swap agreement effectively changes the Company's
exposure on its variable-rate interest payments to fixed-rate interest payments
(7.13%) based on the 3-month London Inter Bank Offering Rate ("LIBOR") rate in
effect at the beginning of each quarterly period. Despite the refinancing of
long-term debt, the interest rate swap agreement remained outstanding and
matured in February 2005.

     Effective January 1, 2001, the Company adopted the provisions of SFAS No.
133, as amended. Adopting the provisions of SFAS No. 133 on January 1, 2001
resulted in a cumulative after-tax charge to accumulated other comprehensive
income as of January 1, 2001 of $2,334, representing the fair value of the
interest rate swap agreement, net of tax. This amount was being amortized as
interest rate swap agreement expense over the term of the debt. At December 31,
2002, accumulated other comprehensive loss had a balance, net of tax, of
$(1,215). For the year ended December 31, 2003, $420 was amortized and the
balance of $795 was written off as a loss on debt extinguishment due to the
refinancing in September 2003. For the year ended December 31, 2005, 2004 and
2003, the Company recognized pre-tax income of $895, $4,425 and $2,710
respectively, reported as interest rate swap agreement income in the
consolidated statements of operations. In addition, as a result of the
refinancing of long-term debt, the Company recognized the remaining pre-tax
unamortized value of the interest rate swap agreement of $1,347 as loss on debt
extinguishment in the 2003 statement of operations.

6.   SENIOR CREDIT FACILITY
     ----------------------

     On September 30, 2003, the Company amended and restated its Senior Credit
Facility. Hines Nurseries and its domestic operating subsidiaries are borrowers
under the Senior Credit Facility. The Senior Credit Facility currently consists
of a revolving facility with availability of up to $120,000 (subject to
borrowing base limits). The revolving facility also permits the ability to
obtain letters of credit up to a sub-limit.

     The Senior Credit Facility was amended by First Amendment to Credit
Agreement dated as of June 30, 2005 (the "First Amendment"), then again pursuant
to a Waiver Regarding Financial Covenants dated as of October 13, 2005 (the
"Waiver"), and by Second Amendment to Credit Facility dated as of February 3,
2006 (the "Second Amendment"). On November 8, 2005, in accordance with the
Waiver at the Company's request, the availability of the revolving facility was
reduced from $145,000 to $120,000 (subject to borrowing base limits).

     GUARANTEES; COLLATERAL. Obligations under the Senior Credit Facility are
guaranteed by Hines and any of its domestic subsidiaries that are not borrowers
under the Senior Credit Facility. Borrowings under the Senior Credit Facility
are collateralized by substantially all of the Company's assets.


                                      F-13
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     RESTRICTIONS; COVENANTS. The Senior Credit Facility places various
restrictions on Hines Nurseries and its subsidiaries, including, but not limited
to, limitations on the Company's ability to incur additional debt, pay dividends
or make distributions, sell assets or make investments. The Senior Credit
Facility specifically restricts Hines Nurseries and its subsidiaries from making
distributions to Hines Horticulture. Distributions to Hines Horticulture are
limited to (i) payments covering customary general and administrative expenses,
not to exceed $500 in any fiscal year, (ii) payments to discharge any
consolidated tax liabilities, (iii) and payments, not to exceed as much as
$8,300 in any fiscal year or $9,300 over the term of the Senior Credit Facility,
to enable Hines Horticulture to repurchase its own outstanding common stock from
holders other than its majority shareholder. Dividends to Hines Horticulture are
disallowed under the Senior Credit Facility.

     The Senior Credit Facility requires Hines Nurseries and its subsidiaries to
meet specific covenants and financial ratios, including a minimum fixed charge
coverage test, a maximum leverage test and a maximum capital expenditure test.
The new Senior Credit Facility contains customary representations and warranties
and customary events of default and other covenants. As of December 31, 2005,
the Company was not in compliance with some of its covenants; however, as
discussed below, the non-compliance was cured with the Second Amendment.

     FIRST AMENDMENT TO SENIOR CREDIT FACILITY. Effective June 30, 2005, Hines
Nurseries negotiated and entered into the First Amendment to the Senior Credit
Facility. The First Amendment amended the Senior Credit Facility to require that
the proceeds from the sale of 122 acres of unimproved property in Miami, Florida
on November 7, 2005 ("Miami Land Sale") be used to pay down the term loan. In
accordance with the First Amendment, the Company repaid the term loan in its
entirety on November 8, 2005 with the completion of the Miami Land Sale. The
First Amendment also amended the calculation of the fixed charge coverage ratio
and the leverage ratio to allow as an addition to Earnings Before Income Taxes,
Depreciation and Amortization ("EBITDA") certain adjustments related to work
force reductions and requires Hines to meet less restrictive minimum fixed
charge coverage ratio for the last fiscal quarter of 2005, for 2006 and for the
first quarter of 2007 and maximum leverage ratios for the last fiscal quarter of
2005, for 2006 and the first and second quarters of 2007.

     WAIVER REGARDING FINANCIAL COVENANTS. On October 13, 2005, the Hines
Nurseries obtained the Waiver from the financial institutions party to its
Senior Credit Facility to waive compliance with the minimum fixed charge
coverage ratio and the maximum leverage ratio covenants of the Senior Credit
Facility for the third fiscal quarter of 2005. The Waiver was subject to the
Miami Land Sale occurring no later than November 30, 2005 and the net asset sale
proceeds of the sale being no less than $40,000. These conditions to the Waiver
were satisfied on November 7, 2005 when the Company successfully completed the
sale. In addition, at the request of the Company, the availability of the
revolving facility was reduced from $145,000 to $120,000 (subject to borrowing
base limits).

     SECOND AMENDMENT TO SENIOR CREDIT FACILITY. In February 2006, Hines
Nurseries negotiated and entered into the Second Amendment to the Senior Credit
Facility dated as of September 30, 2003. The Second Amendment amends the
calculation of the minimum fixed charge coverage ratio for the first quarter of
2006 and thereafter. The Second Amendment also eliminates the maximum leverage
ratio which, as a result of, cured the non-compliance as of December 31, 2005.

     INTEREST RATE; FEES. The interest rate on the loans under the Senior Credit
Facility may be, at the Company's option, Prime rate loans or LIBOR rate loans.
Prime rate loans under the revolving loan facility bear interest at the Prime
lending rate plus an additional amount that ranges from 0.75% to 1.75%,
depending on its consolidated leverage ratio. Currently, the applicable margin
for Prime rate loans is 1.75% for the revolving loan facility.

     LIBOR rate loans under the revolving loan facility bear interest at the
LIBOR rate plus an additional amount that ranges from 1.75% to 2.75%, depending
on its consolidated leverage ratio. Currently, the applicable margin for LIBOR
rate loans is 2.75% for the revolving loan facility. In addition to paying
interest on outstanding principal, the Company is required to pay a commitment
fee on the daily average unused portion of the revolving facility which accrues
based on the utilization of the revolving facility.

     BORROWING BASE. Availability of borrowings under the revolving facility are
subject to a borrowing base consisting of the sum of (i) 85% of eligible
accounts receivable plus (ii) the lesser of (x) up to 55% of eligible inventory
or (y) 85% of the appraised net orderly liquidation value of eligible inventory.


                                      F-14
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     The Company must deliver borrowing base certificates and reports at least
monthly. The borrowing base also may be subject to certain other adjustments and
reserves to be determined by the agent. Eligible accounts receivable of both The
Home Depot, the Company's largest customer, and Lowe's Companies, Inc., its
second largest customer, may not exceed 30% of total eligible accounts
receivable at any time. At December 31, 2005, the Company had $61,606 of
available credit.

     REPAYMENT. On November 8, 2005, the Company used the proceeds from the
Miami Land Sale to payoff the entire outstanding balance of the term loan, which
was approximately $30,500. Amounts are no longer available under the $40,000
term loan facility.

7.   LONG-TERM DEBT
     --------------

<TABLE>
                                                                    December 31,    December 31,
                                                                        2005            2004
                                                                    ------------    ------------
<S>                                                                 <C>             <C>

Senior Credit Facility - term loan at the bank's reference rate
plus 2.25% or the LIBOR rate plus 3.25%. Interest rates were
5.46% at December 31, 2004 (See Note 6).                            $        --     $    34,285

Senior Notes, interest at 10.25% payable semi-annually on each
April 1 and October 1, maturing on October 1, 2011                      175,000         175,000

Other obligations                                                            --               5
                                                                    ------------    ------------
                                                                        175,000         209,290

Less current portion                                                         --           5,719
                                                                    ------------    ------------
                 Total long-term debt                               $   175,000     $   203,571
                                                                    ============    ============
</TABLE>

     SENIOR NOTES. On September 30, 2003, Hines Nurseries issued $175,000 of
Senior Notes that mature on October 1, 2011. The Senior Notes bear interest at
the rate of 10.25% per annum and will be payable semi-annually in arrears on
each April 1 and October 1, which commenced on April 1, 2004.

         GUARANTEES. Hines Horticulture and each of its domestic subsidiaries,
subject to certain exceptions, has, jointly and severally, fully and
unconditionally guaranteed, on a senior unsecured basis, the obligations of
Hines Nurseries under the Senior Notes.

         REDEMPTION. Prior to October 1, 2006, up to 35% of the aggregate
principal amount of the Senior Notes may be redeemed with the net cash proceeds
from one or more public equity offerings, at the Company's option, at a
redemption price of 110.250% of the principal amount thereof plus accrued
interest, if any, to the date of redemption. On or after October 1, 2007, the
Company is entitled, at its option, to redeem all or a portion of the Senior
Notes at redemption prices ranging from 100.000% to 105.125%, depending on the
redemption date plus accrued and unpaid interest.

         RESTRICTIONS. The indenture pursuant to which the Senior Notes were
issued imposes a number of restrictions on Hines Nurseries and its other
subsidiaries. Subject to certain exceptions, the Company may not incur
additional indebtedness, make certain restricted payments, make certain asset
dispositions, incur additional liens or enter into significant transactions. A
breach of a material term of the indenture or other material indebtedness that
results in acceleration of the indebtedness under the Senior Notes also
constitutes an event of default under its Senior Credit Facility.

         REPURCHASE ON A CHANGE OF CONTROL. The Senior Notes contain a put
option whereby the holders have the right to put the Senior Notes back to Hines
at 101.000% of the principal amount thereof on the date of purchase plus accrued
and unpaid interest if a change of control occurs.


                                      F-15
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     On September 30, 2003, the Company called for redemption its $78,000 in
aggregate principal amount of the 12.75% Senior Subordinated Notes at a
redemption price of 106% of the aggregate principal amount thereof ($82,680 at
September 30, 2003), plus accrued and unpaid interest thereon through the date
of redemption. In addition, the Company refinanced all debt outstanding under
the previous credit facility. Payment of the redemption premium on the 12.75%
Senior Subordinated Notes, the write-off of the unamortized deferred financing
expenses and the write-off of the remaining other comprehensive income related
to the SFAS No. 133 adoption resulted in a loss on debt extinguishment of $9,235
in the year ended December 31, 2003.

8.   COMMITMENTS AND CONTINGENCIES
     -----------------------------
OPERATING LEASES

     The Company leases certain land, office, trucks and warehouse facilities
under various renewable long-term operating leases, which expire through 2010.
Certain of these leases include escalation clauses based upon changes in the
consumer price index and/or the fair rental value of leased land. One of the
operating land leases requires the Company to pay rent equal to the greater of
2.25 percent, increasing to 3 percent by the year 2010, of the sales derived
from the related land, or a minimum per acre amount, as defined in the
agreement. Total rent expense for these operating lease agreements for the years
ended December 31, 2005, 2004 and 2003 was $7,050, $7,033 and $7,972,
respectively.

     The following are the Company's future minimum annual payments under its
non-cancelable operating leases for each of the next five years ending December
31 and thereafter:

                                    Continuing
                                    Operations
                                    -----------

         2006                       $     4,904
         2007                             3,071
         2008                             1,853
         2009                             1,446
         2010                             1,286
         Thereafter                       6,644
                                    -----------
                                    $    19,204
                                    ===========

     In May 2003, the Company amended the lease for its 479-acre Irvine,
California nursery headquarters. Under the amendment, the Company agreed to
vacate 254 acres covered by the lease in 2006 in exchange for an extension of
the term of the lease on 170 acres that was set to expire beginning in September
2003 to December 2010 and the lease of an additional 63 acres contiguous to its
existing facility from July 2003 to December 2010. The landlord also agreed to
assist with the costs of developing the new acreage and transition costs of up
to $4,000, which include payments of $2,000 and percentage rent credits of up to
$2,000. The payment of $2,000 is being amortized over the life of the lease.

LEGAL MATTERS

     From time to time, the Company is involved in various disputes and
litigation matters, which arise in the ordinary course of business. The
litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company.
Management believes, however, that the ultimate resolution of such matters will
not have a material adverse impact on the Company's consolidated financial
position, results of operations or cash flows.

9.   SHAREHOLDERS' EQUITY
     --------------------

     On June 22, 1998, the Board adopted the 1998 Long-Term Equity Incentive
Plan (the "1998 Stock Plan"). The 1998 Stock Plan provides for grants of stock
options, stock appreciation rights, restricted stock, performance awards and any
combination of the foregoing to certain directors, officers and employees of the
Company and its subsidiaries. The purpose of the 1998 Stock Plan is to provide
such individuals with incentives to maximize shareholder value and otherwise
contribute to the success of the Company and to enable the Company to attract,
retain and reward the best available persons for positions of substantial
responsibility.


                                      F-16
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     On June 1, 2000, the Board of Directors adopted and approved to increase
the number of shares of common stock available for issuance under the 1998 Stock
Plan by 1.0 million shares. At December 31, 2005, the Company had reserved 3.6
million shares of its common stock for issuance upon exercise of options granted
or to be granted under this plan.

     On July 9, 2002, the Company offered to exchange all outstanding stock
options held by certain employees under the 1998 Stock Plan for new stock
options to be granted under the 1998 Stock Plan upon the terms and subject to
the conditions described in the offer to exchange. If an employee elected to
participate in the exchange, they were required to tender for exchange all of
the stock options they held in exchange for a certain number of new stock
options. The offer to exchange expired on August 14, 2002 and all stock options
properly tendered before the expiration of the offer to exchange were accepted
and cancelled on August 15, 2002. A total of 1.8 million stock options were
tendered by employees and cancelled pursuant to the terms of the offer to
exchange.

     On February 18, 2003, the Company granted new stock options to those
employees who participated in the exchange program. The exercise price of the
new stock options is $5.50 per share. A total of 0.8 million new options were
granted pursuant to this exchange program. There was no additional compensation
expense associated with the exchange program.

     The Company adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" in 1998. As permitted by SFAS No. 123, the Company
measures compensation cost in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, but provides pro forma disclosures of net income and earnings
per share as if the fair value method (as defined in SFAS No. 123) had been
applied. Had compensation cost been determined using the fair value method
prescribed by SFAS No. 123, the Company's net income and earnings per share for
the years ended December 31, 2005 and 2004 as noted in Note 1.


                                      F-17
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     A summary of the status of the Company's stock option plan as of December
31 is presented below:

<TABLE>
                                              2005                            2004                             2003
                               -------------------------------   ------------------------------   ------------------------------

                                              Weighted Average                 Weighted Average                 Weighted Average
                                   Shares      Exercise Price       Shares      Exercise Price      Shares       Exercise Price
                               --------------  ---------------   -------------  ---------------   -------------  ---------------
<S>                                <C>               <C>              <C>             <C>              <C>             <C>
Outstanding -beginning of year     1,067,923         $ 6.15           989,723         $ 6.22           271,078         $ 8.33
Granted                                   --             --           100,000           5.50         1,303,633           5.50
Exercised                                 --             --                --             --                --             --
Cancelled                           (198,813)          5.82           (21,800)          6.00          (584,988)          5.60
                               --------------                    -------------                    -------------
Outstanding -end of year             869,110         $ 6.22         1,067,923         $ 6.15           989,723         $ 6.22
                               ==============                    =============                    =============

Exercisable                          869,110         $ 6.22         1,006,237         $ 6.20           933,834         $ 6.29
                               ==============                    =============                    =============

Weighted average fair value
  of options granted during period                   $   --                           $ 5.18                           $ 3.62


     The weighted average remaining contractual life was six years at December
31, 2005. As of December 31, 2005, expiration dates ranged from June 22, 2008 to
February 18, 2013

                                                OUTSTANDING                                 EXERCISABLE
                            ----------------------------------------------------   ----------------------------
                                                 Average           Weighted                         Weighted
                               Number of        Remaining         Average of       Number of      Average of
Range of exercise price         Options       Contract Life     Exercise Price       Options     Exercise Price
--------------------------  ---------------  ---------------  ------------------   -----------   --------------
$3.32 to $5.00                      81,000        5.56             $     4.53          81,000      $   4.53
$5.50                              632,910        6.40                   5.50         632,910          5.50
$6.00 to $8.00                      34,200        3.82                   6.71          34,200          6.71
$11.00                             121,000        2.58                  11.00         121,000         11.00
                            ---------------                                        -----------

Total                              869,110        5.70             $     6.22         869,110      $   6.22
                            ===============                                        ===========
</TABLE>


10.  INCOME TAXES
     ------------

     The components of (loss) income before income tax (benefit) provision and
the income tax (benefit) provision consisted of the following:

<TABLE>
                                                    For the Years Ended December 31,
                                             ---------------------------------------------
                                                 2005             2004             2003
                                             -----------      -----------      -----------
<S>                                          <C>              <C>              <C>
(Loss) income from continuing operations     $    (4,081)     $    14,036      $     9,432
Income from discontinued operations                   --               --            1,364
                                             -----------      -----------      -----------
                                             $    (4,081)     $    14,036      $    10,796
                                             ===========      ===========      ===========

Current income tax provision:
Federal                                      $       637      $        --      $        --
State                                                429               61               --
                                             -----------      -----------      -----------
                                             $     1,066      $        61      $        --
                                             -----------      -----------      -----------
Deferred (benefit) provision:
Federal                                      $    (2,294)     $     5,085              959
State                                               (295)             654              124
                                             -----------      -----------      -----------
                                                  (2,589)     $     5,739            1,083
                                             -----------      -----------      -----------
     Income tax (benefit) provision          $    (1,523)     $     5,800      $     1,083
                                             ===========      ===========      ===========
</TABLE>


                                      F-18
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     The reported (benefit from) provision for income taxes differs from the
amount computed by applying the statutory federal income tax rate of 35 percent
to income before (benefit) provision for income taxes as follows:

<TABLE>
                                                                              For the Years Ended December 31,
                                                                        --------------------------------------------
                                                                            2005             2004            2003
                                                                        -----------      -----------     -----------
<S>                                                                     <C>              <C>             <C>
(Benefit) provision computed at statutory rate                          $    (1,428)     $     4,913     $     3,779
Increase (decrease) resulting from:
State tax, net of federal benefit                                              (184)             632             506
Canada withholding tax                                                           --               --          (3,344)
Meals and entertainment                                                          82               89              80
Other                                                                             7              166              62
                                                                        -----------      -----------     -----------
                                                                        $    (1,523)     $     5,800     $     1,083
                                                                        ===========      ===========     ===========

(Benefit from) provision for income taxes for continuing operations     $    (1,523)     $     5,800     $     3,867
Benefit from income taxes for discontinued operations                            --               --          (2,784)
                                                                        -----------      -----------     -----------

                                                                        $    (1,523)     $     5,800     $     1,083
                                                                        ===========      ===========     ===========
</TABLE>


Deferred tax assets:                                2005              2004
                                                ------------      ------------

Net operating loss carryforwards                $      1,275      $     11,728
Book/tax difference in debt                               --               354
Intangible asset basis differences                    10,623            13,287
Tax credits                                              768               129
Other                                                    251                --
                                                ------------      ------------
     Gross deferred tax assets                        12,917            25,498
                                                ------------      ------------

Deferred tax liabilities:
Accrual to cash adjustment                           (66,127)          (66,445)
Fixed asset basis differences                         (1,436)          (16,288)
                                                ------------      ------------
     Gross deferred tax liabilities                  (67,563)          (82,733)
                                                ------------      ------------

Net deferred tax liability                      $    (54,646)     $    (57,235)
                                                ============      ============

Deferred income tax liability, current          $    (66,127)     $    (66,445)
Deferred income tax asset, non-current                11,481             9,210
                                                ------------      ------------
                                                $    (54,646)     $    (57,235)
                                                ============      ============

     The Company derives significant benefits by qualifying to use the cash
method of accounting for federal and state income tax purposes. Under the cash
method, sales are included in taxable income when payments are received and
expenses are deducted as they are paid. The primary benefit the Company receives
is the ability to deduct the cost of inventory as it is incurred. The net
benefit realized by the Company thus far is represented by the "Accrual to Cash
Adjustment" item above. Because the items to which this "Accrual to Cash
Adjustment" relate to are comprised of current assets and current liabilities in
the consolidated balance sheets (such as inventory, accounts receivable,
accounts payable, etc.), this deferred tax item is also characterized as
current.

     At December 31, 2005, the Company had approximately $2,637 in net operating
loss carryforwards for federal income tax reporting purposes. The Company's
federal net operating losses begin to expire in 2024. In addition, the Company
had approximately $6,923 in net operating loss carryforwards for state income
tax reporting purposes. The Company's state net operating losses in certain
states begin to expire in 2008.


                                      F-19
<PAGE>

                            HINES HORTICULTURE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


     The Company records a liability for potential tax assessments based on its
estimate of the potential exposure. New laws and new interpretations of laws and
rulings by tax authorities may affect the liability for potential tax
assessments. Due to the subjectivity and complex nature of the underlying
issues, actual payments or assessments may differ from estimates. To the extent
the Company's estimates differ from actual payments or assessments, income tax
expense is adjusted. Management believes that adequate amounts of tax and
related interest, if any, have been provided for any adjustments that may result
from these examinations.

11.  EMPLOYEE BENEFIT PLANS
     ----------------------

     As of January 1, 2001, Hines Nurseries established a 401(k) Retirement
Savings Plan (the "Plan") for salaried and permanent hourly employees. As of
January 1, 2003, pursuant to Internal Revenue Service ("IRS") rules,
participants may now make voluntary contributions to the plan up to a maximum of
twelve thousand dollars not to exceed 20 percent of their annual compensation
(as defined). In addition to this, employees over age 50 may now contribute an
additional two thousand dollars. Hines' matching contribution to the Plan is
equal to 100 percent of the first 3 percent of a participant's voluntary
deferral of salary, and 50 percent of the next 2 percent of a participant's
voluntary deferral of salary per calendar year. As of May 16, 2003, Hines
discontinued its matching contributions. As of January 1, 2004, pursuant to IRS
rules, participants may make voluntary contributions to the plan up to a maximum
of fourteen thousand dollars not to exceed 50 percent of their annual
compensation (as defined). In addition to this, employees over age 50 may now
contribute an additional four thousand dollars.

     The total expense related to the Hines plan was $0, $0 and $632 for the
years ended December 31, 2005, 2004 and 2003, respectively.

12.  FAIR VALUES OF FINANCIAL INSTRUMENTS
     ------------------------------------

     The fair value of the Senior Notes is based on the closing price of the
debt securities at December 31, 2005 and 2004. The carrying amount of the
Company's other long-term debt approximates its fair value based upon borrowing
rates currently available to the Company. The carrying amount of the short-term
debt approximates the fair value based on the short-term maturity of the
instrument.

     The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2005 and 2004 are as follows:

<TABLE>
                                                                              December 31,
                                                   ----------------------------------------------------------------
                                                                2005                               2004
                                                   ------------------------------     -----------------------------
                                                     Carrying         Estimated         Carrying        Estimated
                                                      Amount          Fair Value         Amount         Fair Value
                                                   -------------     ------------     ------------     ------------
<S>                                                 <C>              <C>              <C>              <C>
     Revolving line of credit                       $     10,080     $     10,080     $     23,609     $     23,609
     Long-term debt (including current portion)     $    175,000     $    171,500     $    209,290     $    225,478
</TABLE>


13.  GUARANTOR/NON-GUARANTOR DISCLOSURES
     -----------------------------------

     The Senior Notes issued by Hines Nurseries (the "issuer") have been
guaranteed by the Company (the "parent guarantor") and by both Hines SGUS and
Hines Fertilizer, (collectively, Hines SGUS and Hines Fertilizer are the
"subsidiary guarantors"). The issuer is a 100% owned subsidiary of the parent
guarantor. The subsidiary guarantors are 100% owned subsidiaries of the issuer.
The parent and subsidiary guaranties are full, unconditional and joint and
several. The parent guarantor has no independent assets, liabilities or
operations and subsidiary guarantors are minor with no material assets,
liabilities or operations. In addition, under the Senior Notes, the parent
guarantor is unable to obtain dividends or loans from the issuer or subsidiary
guarantors. As a result of the foregoing, separate financial statements of Hines
Nurseries, Hines SGUS and Hines Fertilizer are not presented.


                                      F-20