**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q/A**




**Amendment
      No. 1**




(Mark
      One)


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934


For
      the
      quarterly period ended June 30, 2006


OR


 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934


For
      the
      transition period from___________________ to ___________________




Commission
      File Number


000-24439





**HINES
      HORTICULTURE, INC.**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            **33-0803204**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                Number)




12621
      Jeffrey Road


Irvine,
      California 92620


(Address
      of principal executive offices) (Zip Code)





(949)
      559-4444


(Registrant's
      telephone number, including area code)





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  ̈ No x





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




Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx








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


Yes  ̈ No x





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





As
      of
      August 8, 2006, there were 22,072,549 shares of Common Stock, par value $0.01
      per share, outstanding.








**HINES
      HORTICULTURE, INC.**


**AMENDMENT
      NO. 1 TO FORM 10-Q**




TABLE
                OF CONTENTS**Part
                I. Financial Information**Item
                1.
            Financial
                Statements (Unaudited)
            Page
                No.Condensed
                Consolidated Balance Sheets as of June 30, 2006 (as restated) and
                December 31, 2005 (as restated)
            4Condensed
                Consolidated Statements of Operations for the Three and Six Months
                Ended
                June 30, 2006 (as restated) and 2005 (as restated)
            5Condensed
                Consolidated Statements of Cash Flows for the Six Months Ended June
                30,
                2006 (as restated) and 2005 (as restated)
            6Notes
                to the Condensed Consolidated Financial Statements
            7Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            19Item
                4.
            Controls
                and Procedures
            29**Part
                II. Other Information**Item
              1.
            Legal
              Proceedings
            30Item
                6.
            Exhibits
            30Signature
            31Index
                to Exhibits
            32








1





**Explanatory
      Note**


**(Dollars
      in thousands)**





The
      amended quarterly report on Form 10-Q/A (Amendment No. 1) is being filed by
      us
      to amend our quarterly report on Form 10-Q for the quarterly period ended June
      30, 2006 originally filed with Securities and Exchange Commission on August
      14,
      2006.





In
        connection with the preparation of our 2006 consolidated financial statements
        for the year ended December 31, 2006, we identified errors which affected
        the
        full year and each of the fiscal quarters of 2004 and 2005 and the first,
        second
        and third fiscal quarters of 2006 as discussed below.





This
      amendment on Form 10-Q/A includes changes to Item 1, Item 2 and
      Item 4 of Part I and Item 1 and Item 6 of Part II. Except as
      identified in the prior sentence, no other item included in the original
      Form 10-Q has been amended. Except as required to reflect the effects of
      the restatement described below, this Form 10-Q/A does not reflect events
      occurring after the filing of our original Form 10-Q or modify or update those
      disclosures affected by subsequent events. Information not affected by the
      restatement is unchanged and reflects the disclosures made at the time of the
      original filing of the Form 10-Q on August 14, 2006.





As
      a
      result of the foregoing, we are restating herein the following financial
      statements:


●
            our
                condensed consolidated balance sheets as of June 30, 2006 and
                December 31, 2005;●
            our
                condensed consolidated statements of operations for the three months
                and
                six months ended June 30, 2006 and 2005; and●
            our
                condensed consolidated statements of cash flows for the six months
                ended
                June 30, 2006 and 2005.





Summaries
      of the errors and how they impact our condensed consolidated financial
      statements follow. A summary of the impact of the errors on the financial
      statements for fiscal years 2005 and 2004 is presented in our 2006 Annual Report
      on Form 10-K filed on July 10, 2007.





**Inventory
      Costs**


We
        determined that certain materials and supplies were incorrectly capitalized
        as a
        component of nursery stock after the related inventory was sold, thereby
        misstating inventory and costs of goods sold for the full year and each of
        the
        quarters of 2004 and 2005 and the first, second and third quarters of 2006.
        These materials and supplies should have been relieved to cost of goods sold
        as
        the related inventory was sold. The correction to reduce inventory balances
        resulted in lower cost of goods sold in subsequent periods as the nursery
        stock
        was sold.
  The
        effects of the correction of this error on the condensed consolidated balance
        sheets as of June 30, 2006 and December 31, 2005 resulted in a decrease in
        inventory of approximately $3,500 and $4,200, respectively.
 
 The
        effects of the correction of this error on the condensed consolidated statements
        of operations for the three and six months ended June 30, 2006 was a decrease
        in
        cost of goods sold of $500 and $700, respectively. The effects of the correction
        of this error on the condensed consolidated statements of operations for
        the
        three and six months ended June 30, 2005 was a decrease in cost of goods
        sold of
        $200 and $500, respectively.





**Miami
      and Vacaville Property Sales**


We
        sold
        two properties located in Miami, Florida and Vacaville, California in November
        2005 and April 2006, respectively. We did not correctly record these
        transactions in accordance with Statement of Financial Accounting Standards
        (“SFAS”) No. 98, “Accounting for Leases,” as financing transactions. The effects
        of the correction of these errors on the June 30, 2006 and December 31, 2005
        condensed consolidated balance sheets associated with the Miami, Florida
        sale
        were the recognition of a financing obligation of $47,040, reinstatement
        of the
        carrying value of the property of $7,160, reclassification of deferred tax
        assets, non-current of $15,750 to current deferred tax liabilities and a
        decrease in deferred gain on land sale of $39,880. The effects of the
        correction of these errors on the June 30, 2006 condensed consolidated balance
        sheets associated with the Vacaville, California sale was the recognition
        of a
        financing obligation of $16,700, reinstatement of the carrying value of the
        property of approximately $500 and a decrease in deferred gain on land sale
        of $16,200. The effect of the correction of these errors did not have a
        material impact on our condensed consolidated statements of operations for
        the three and six months ended June 30, 2006.








2





**Workers’
      Compensation and Auto Insurance Accruals**


In
      connection with the preparation of our 2006 consolidated financial statements,
      we discovered an error in the calculation of our accrued workers’ compensation
      and auto insurance liabilities. The effect of the correction of this error
      on
      the condensed consolidated statements of operations for the three and six months
      ended June 30, 2006 was a decrease in cost of goods sold of $84 and $156,
      respectively, and a decrease in distribution expenses of $28 and $74,
      respectively. The effect of the correction of this error on the condensed
      consolidated statements of operations for the three and six months ended June
      30, 2005 was a decrease in cost of goods sold of $34 and $91, respectively,
      and
      a decrease in distribution expenses of $17 and $41, respectively.





The
        effect of the correction of this error on the June 30, 2006 and December
        31,
        2005 condensed consolidated balance sheets was a decrease in inventories of
        $140 and $143, respectively, and a decrease in liabilities of $564 and
        $337, respectively.





**Asset
      Retirement Obligation Adjustment**


In
      connection with the preparation of our 2006 consolidated financial statements,
      we discovered that we had not properly recorded our asset retirement obligations
      for certain of our assets located in Irvine, California upon the adoption of
      SFAS No. 143, "Accounting for Asset Retirement Obligations."





The
      effect of the correction of this error on the June 30, 2006 condensed
      consolidated balance sheets was a decrease in net fixed assets of $289 and
      an
      increase in liabilities of $8. The effect of the correction of this error
      on the December 31, 2005 condensed consolidated balance sheet was an increase
      in
      net fixed assets of $60, an increase in inventories of $4 and an
      increase in liabilities of $359.





The
      effect of the correction of this error on the three and six months ended June
      30, 2006 and 2005 condensed consolidated statements of operations was not
      material.





Tables
      set forth in Note 4 to the Condensed Consolidated Financial Statements summarize
      the impact of the adjustments described above on the consolidated financial
      statements for the affected periods.





Unless
        otherwise specified, all financial information contained in this report gives
        effect to the restatements of our consolidated financial statements, as
        described in Note 4 to the Condensed Consolidated Financial Statements. We
        have
        not amended, and do not intend to amend, the previously filed Annual Reports
        on
        Form 10-K or Quarterly Reports on Form 10-Q for each of the fiscal years
        and
        fiscal quarters of 2004 and 2005. Financial information included in our
        previously filed Annual Reports on Form 10-K for the fiscal years ended December
        31, 2004 and 2005, and Quarterly Reports on Form 10-Q for each of the quarters
        of 2004 and 2005, and for the first three quarters of 2006, should not be
        relied
        upon and are superseded by the information in this Amendment No. 1 to Form
        10-Q
        for the quarterly period ended June 30, 2006, Amendment No. 1 to Form 10-Q
        for
        the quarterly period ended March 31, 2006, Amendment No. 1 to Form 10-Q for
        the quarterly period ended September 30, 2006 and in the Annual Report on
        Form
        10-K for the fiscal year ended December 31, 2006, all filed on July 10, 2007.





The
      accounting errors identified above and the related restatements did not have
      an
      impact on our revenues, cash balances or liquidity as of and for the three
      and
      six months ended June 30, 2006 and 2005.





3


**PART
        I. FINANCIAL INFORMATION**


Item
        1.  Financial
        Statements


**HINES
                HORTICULTURE, INC.****CONDENSED
                CONSOLIDATED BALANCE SHEETS****June
                30, 2006 and December 31, 2005****(Dollars
                in thousands, except share data)****(Unaudited,
                as restated - see Note 4)**




June
                30,
            
            December
                31,**ASSETS**
            
            2006
            
            2005CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            6,077
            
            $
            62Accounts
                receivable, net
            
            
            52,556
            
            
            16,444Inventories
            
            
            154,079
            
            
            178,975Consigned
                inventories
            
            
            4,663
            
            
            1,350Prepaid
                expenses and other current assets
            
            
            2,313
            
            
            2,666Assets
                held for sale
            
            
            -
            
            
            484Total
                current assets
            
            
            219,688
            
            
            199,981FIXED
                ASSETS, net
            
            
            119,894
            
            
            129,454DEFERRED
                FINANCING COSTS, net
            
            
            5,608
            
            
            6,207GOODWILL
            
            
            43,926
            
            
            43,926$
            389,116
            
            $
            379,568**LIABILITIES
                AND SHAREHOLDERS' EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            19,934
            
            $
            12,624Accrued
                liabilities
            
            
            11,387
            
            
            8,591Accrued
                payroll and benefits
            
            
            7,702
            
            
            4,453Accrued
                interest
            
            
            4,682
            
            
            4,711Borrowings
                on revolving credit facility
            
            
            -
            
            
            10,080Deferred
                income taxes
            
            
            45,730
            
            
            48,868Total
                current liabilities
            
            
            89,435
            
            
            89,327LONG-TERM
                DEBT
            
            
            175,000
            
            
            175,000FINANCING
                OBLIGATIONS
            
            
            63,739
            
            
            47,040DEFERRED
                INCOME TAXES
            
            
            4,227
            
            
            4,227OTHER
                LIABILITIES
            
            
            5,742
            
            
            8,260SHAREHOLDERS'
                EQUITYPreferred
                stockAuthorized
                - 2,000,000 shares, $0.01 par value; none outstanding
            
            
            -
            
            
            -Common
                stockAuthorized
                - 60,000,000 shares, $0.01 par value;issued
                and outstanding - 22,072,549 sharesat
                June 30, 2006 and December 31, 2005
            
            
            221
            
            
            221Additional
                paid-in capital
            
            
            128,781
            
            
            128,781Accumulated
                deficit
            
            
            (78,029
            )
            
            (73,288
            )Total
                shareholders' equity
            
            
            50,973
            
            
            55,714$
            389,116
            
            $
            379,568The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.




4





**HINES
                HORTICULTURE, INC.****CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS****Three
                Months and Six Months Ended June 30, 2006 and
                2005****(Dollars
                in thousands, except share and per share data)****(Unaudited,
                as restated - See Note 4)**




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2006
            
            2005
            
            2006
            
            2005Sales,
                net
            
            $
            155,130
            
            $
            176,893
            
            $
            212,039
            
            $
            240,883Cost
                of goods sold
            
            
            85,832
            
            
            87,559
            
            
            116,397
            
            
            119,964Gross
                profit
            
            
            69,298
            
            
            89,334
            
            
            95,642
            
            
            120,919Distribution
                expenses
            
            
            35,367
            
            
            37,052
            
            
            49,602
            
            
            51,722Selling,
                general and administrative expenses
            
            
            19,982
            
            
            20,171
            
            
            32,954
            
            
            33,986Other
                operating expenses
            
            
            1,098
            
            
            544
            
            
            1,840
            
            
            429Asset
                impairment charges
            
            
            8,041
            
            
            -
            
            
            8,041
            
            
            -Total
                operating expenses
            
            
            64,488
            
            
            57,767
            
            
            92,437
            
            
            86,137Operating
                income
            
            
            4,810
            
            
            31,567
            
            
            3,205
            
            
            34,782Other
                expenses (income)Interest,
                net
            
            
            5,178
            
            
            5,846
            
            
            10,335
            
            
            12,086Interest
                rate swap agreement income
            
            
            -
            
            
            -
            
            
            -
            
            
            (895
            )Amortization
                of deferred financing costs
            
            
            378
            
            
            444
            
            
            749
            
            
            8895,556
            
            
            6,290
            
            
            11,084
            
            
            12,080(Loss)
                income before income taxes
            
            
            (746
            )
            
            25,277
            
            
            (7,879
            )
            
            22,702Income
                tax (benefit) provision
            
            
            (297
            )
            
            9,361
            
            
            (3,138
            )
            
            8,407Net
                (loss) income
            
            $
            (449
            )
            $
            15,916
            
            $
            (4,741
            )
            $
            14,295Basic
                and diluted earnings (loss) per share:Net
                (loss) income per common share
            
            $
            (0.02
            )
            $
            0.72
            
            $
            (0.21
            )
            $
            0.65Weighted
                average shares outstanding—Basic
            
            
            22,072,549
            
            
            22,072,549
            
            
            22,072,549
            
            
            22,072,549Weighted
                average shares outstanding—Diluted
            
            
            22,072,549
            
            
            22,131,507
            
            
            22,072,549
            
            
            22,129,403The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.





5








**HINES
                HORTICULTURE, INC.****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS****Six
                Months Ended June 30, 2006 and 2005****(Dollars
                in thousands)****(Unaudited,
                as restated - see Note 4)**




2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                (loss) income
            
            $
            (4,741
            )
            $
            14,295Adjustments
                to reconcile net (loss) income to net cashprovided
                by operating activities:Depreciation
            
            
            5,782
            
            
            5,341Accretion
                of asset retirement obligations
            
            
            30
            
            
            22Amortization
                of deferred financing costs
            
            
            749
            
            
            889Interest
                rate swap agreement income
            
            
            -
            
            
            (895
            )Gain
                on sale of assets
            
            
            (19
            )
            
            (171
            )Asset
                impairment charges
            
            
            8,041
            
            
            -Deferred
                income taxes
            
            
            (3,138
            )
            
            8,407Changes
                in working capital accounts:Accounts
                receivable
            
            
            (36,112
            )
            
            (47,220
            )Inventories
            
            
            21,446
            
            
            11,567Prepaid
                expenses and other current assets
            
            
            346
            
            
            (57
            )Accounts
                payable and accrued liabilities
            
            
            13,082
            
            
            21,923Net
                cash provided by operating activities
            
            
            5,466
            
            
            14,101CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of fixed assets
            
            
            (3,624
            )
            
            (5,337
            )Proceeds
                from sale of fixed assets
            
            
            106
            
            
            194Proceeds
                from land sale option
            
            
            -
            
            
            1,100Net
                cash used in investing activities
            
            
            (3,518
            )
            
            (4,043
            )CASH
                FLOWS FROM FINANCING ACTIVITIESBorrowings
                on revolving credit facility
            
            
            164,813
            
            
            179,621Repayments
                on revolving credit facility
            
            
            (174,893
            )
            
            (188,196
            )Financing
                obligations
            
            
            14,297
            
            
            -Repayments
                of long-term debt
            
            
            -
            
            
            (1,910
            )Deferred
                financing costs incurred
            
            
            (150
            )
            
            -Net
                cash provided by (used in) financing activities
            
            
            4,067
            
            
            (10,485
            )NET
                CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            6,015
            
            
            (427
            )CASH
                and CASH EQUIVALENTS, beginning of period
            
            
            62
            
            
            600CASH
                and CASH EQUIVALENTS, end of period
            
            $
            6,077
            
            $
            173Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            10,216
            
            $
            12,503Cash
                paid for income taxes
            
            $
            1,046
            
            $
            24The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.








6





**HINES
      HORTICULTURE, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Dollars
      in thousands, except share and per share data)**







1.     Description
      of Business:




Hines
      Horticulture, Inc. (“Hines Horticulture” 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 and Canada.




The
      Condensed Consolidated Financial Statements include the accounts of Hines
      Horticulture and its wholly owned subsidiaries after elimination of intercompany
      accounts and transactions.




Impairment
      of Long-Lived Assets


On
        August
        8, 2006, the Company received approval from its Board of Directors to pursue
        the
        sale of its four color nursery facilities in the Northeast and certain assets
        in
        Miami, Florida in connection with the Company entering into the Third Amendment
        and Limited Waiver to Credit Agreement (the “Third Amendment”) to the Senior
        Credit Facility dated as of September 30, 2003. The Company performed an
        impairment test of the long-lived assets of the nurseries located in the
        Northeast and Miami under the provisions set forth in Statement of Financial
        Accounting Standards ("SFAS") No. 144, “Accounting for the Impairment or
        Disposal of Long-Lived Assets.” The Company determined that the carrying value
        of the long-lived assets for three of the Northeast facilities exceeded the
        estimated undiscounted future cash flows associated with the use of the assets.
        As a result, the Company reduced the carrying value of the assets to the
        fair
        value of those assets as determined by a recent appraisal performed by Cushman
        & Wakefield, Inc. The impairment charge of $8,041 was recorded in the
        condensed consolidated statements of operations for the period ended June
        30,
        2006.





2.     New
      Accounting Standards:




In
        November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
        No.
        151, “Inventory Costs,” which clarifies the accounting for abnormal amounts of
        idle facility expense, freight, handling costs, and wasted material. The
        Company
        adopted SFAS No. 151 on January 1, 2006. The adoption of SFAS No. 151 did
        not
        have a material impact on the Company’s consolidated financial position, results
        of operations or cash flows.





In
      December 2004, the FASB issued SFAS No. 153, “Exchange of Non Monetary Assets -
      an amendment of APB 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 adopted SFAS No. 153 on
      January 1, 2006. The adoption of SFAS No. 153 did not have an impact on the
      Company’s consolidated financial position, results of operations or cash
      flows.





In
      May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections - a replacement of APB Opinon No. 20 and FASB Statement No. 3.” SFAS
      No. 154 changes the requirements for the accounting for and reporting of a
      change in an accounting principle. This statement applies to all voluntary
      changes in an accounting principle. It also applies to changes required by
      an
      accounting pronouncement if 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. SFAS No. 154 requires retrospective
      application to prior periods’ financial statements of changes in an accounting
      principle. The Company adopted SFAS No. 154 on January 1, 2006. The adoption
      of
      SFAS No. 154 did not have an impact on the Company’s consolidated financial
      position, results of operations or cash flows.





7








In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140.” SFAS
      No. 155 simplifies the accounting for certain hybrid financial instruments
      that
      contain an embedded derivative that otherwise would have required bifurcation.
      SFAS No. 155 also eliminates the interim guidance in SFAS No. 133, “Accounting
      for Derivative Instruments and Hedging Activities,” which provides that
      beneficial interest in securitized financial assets is not subject to the
      provisions of SFAS No. 133. SFAS No. 155 is effective for all financial
      instruments acquired or issued in fiscal years beginning after September 15,
      2006. The Company does not believe that the adoption of SFAS No. 155 will have
      a
      material impact on its consolidated financial position, results of operations
      or
      cash flows.





Effective
      the beginning of the first quarter of fiscal year 2006, the Company adopted
      the
      provisions of SFAS No. 123(R), “Share Based Payment,” using the modified
      prospective transition method. Under this method, prior periods are not
      restated. The provisions of SFAS 123(R) apply to new stock options and stock
      options outstanding, but not yet vested, on the effective date. As of December
      31, 2005, all outstanding options were fully vested.





In
      June
      2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 is
      effective for all uncertainty in income taxes recognized in the financial
      statements in fiscal years beginning after December 15, 2006. The Company is
      evaluating the effect the adoption of FIN 48 may have on its consolidated
      financial position, results of operations and cash flows.


In
        June 2006, the FASB ratified Emerging Issues Task Force Issue
        No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental
        Authorities Should Be Presented in the Income Statement (That Is, Gross versus
        Net Presentation)” (“EITF 06-3”). The scope of EITF 06-3 includes any tax
        assessed by a governmental authority that is directly imposed on a
        revenue-producing transaction between a seller and a customer. This issue
        provides that a company may adopt a policy of presenting taxes either gross
        within revenue or net. If taxes subject to this issue are significant, a
        company
        is required to disclose its accounting policy for presenting taxes and the
        amount of such taxes that are recognized on a gross basis. The Company does
        not
        believe the adoption of EITF 06-3 will have a material impact on its
        consolidated financial statements.




3.    
Unaudited
      Financial Information:




The
      unaudited financial information furnished herein, in the opinion of management,
      reflects all adjustments (consisting of only normal recurring adjustments,
      except for the restatement discussed in Note 4), which are necessary for a
      fair
      statement of the consolidated financial position, results of operations and
      cash
      flows of the Company as of and for the periods indicated. The Company presumes
      that users of the interim financial information herein have read or have access
      to the Company's audited consolidated financial statements on Form 10-K for
      the
      year ended December 31, 2006, which restates and amends the consolidated
      financial statements for the years ended December 31, 2005 and 2004, and that
      the adequacy of additional disclosure needed for a fair presentation may be
      determined in that context.





Accordingly,
      footnotes and other disclosures, which would substantially duplicate the
      disclosures contained in the Company’s Form 10-K for the year ended
      December 31, 2006, filed on July 10, 2007 have been omitted. The financial
      information herein is not necessarily representative of a full year's
      operations. The year-end condensed balance sheet was derived from audited
      financial statements, but does not include all disclosures required by
      accounting principles generally accepted in the United States of
      America.




4.    
Restatement
      of Financial Statements:




In
        connection with the preparation of the Company’s consolidated financial
        statements for the year ended December 31, 2006, the Company identified errors
        which affected the full year and each of the fiscal quarters of 2004 and
        2005
        and the first, second and third fiscal quarters of 2006.





As
      a
      result of the foregoing, the Company is restating herein the following financial
      statements:


●
            the
                Company’s condensed consolidated balance sheets as of June 30, 2006 and
                December 31, 2005;


●
            the
                Company’s condensed consolidated statements of operations for the three
                and six months ended June 30, 2006 and 2005;
                and


●
            the
                Company’s condensed consolidated statements of cash flows for the six
                months ended June 30, 2006 and 2005.




Summaries
      of the errors and how they impact the Company's condensed consolidated financial
      statements follow.  A summary of the impact on the financial statements for
      fiscal years 2004 and 2005 is presented in the Company's 2006 Annual Report
      on
      Form 10-K for the year ended December 31, 2006 filed on July 10,
      2007.





8








**Inventory
      Costs**


The
          Company determined that certain materials and supplies were incorrectly
          capitalized as a component of nursery stock after the related inventory
          was
          sold, thereby misstating inventory and costs of goods sold for each of
          the
          quarters of 2004 and 2005 and the first, second and third quarters of 2006.
          These materials and supplies should have been relieved to cost of goods
          sold as
          the related inventory was sold. The correction to reduce inventory balances
          resulted in lower cost of goods sold in subsequent periods as the nursery
          stock
          was sold.
  The
        effects of the correction of this error on the condensed consolidated balance
        sheets as of June 30, 2006 and December 31, 2005 resulted in a decrease in
        inventory of approximately $3,500 and $4,200, respectively.
 
 The
        effects of the correction of this error on the condensed consolidated statements
        of operations for the three and six months ended June 30, 2006 was a decrease
        in
        cost of goods sold of $500 and $700, respectively. The effects of the correction
        of this error on the condensed consolidated statements of operations for
        the
        three and six months ended June 30, 2005 was a decrease in cost of goods
        sold of
        $200 and $500, respectively.


**Miami
      and Vacaville Property Sales**


The
        Company sold two properties located in Miami, Florida and Vacaville, California
        in November 2005 and April 2006, respectively. The Company did not correctly
        record these transactions in accordance with SFAS No. 98, “Accounting for
        Leases,” as financing transactions. The effects of the correction of these
        errors on the June 30, 2006 and December 31, 2005 condensed consolidated
        balance
        sheets associated with the Miami, Florida sale were the recognition of a
        financing obligation of $47,040, reinstatement of the carrying value of the
        property of $7,160, reclassification of non-current deferred tax assets of
        $15,750 to current deferred tax liabilites, and a decrease in deferred gain
        on
        land sale of $39,880. The effects of the correction of these errors on the
        June
        30, 2006 condensed consolidated balance sheets associated with the Vacaville,
        California sale was the recognition of a financing obligation of $16,700,
        reinstatement of the carrying value of the property of approximately $500,
        and a
        decrease in deferred gain of $16,200. The effect of the correction of these
        errors did not have a material impact on the condensed consolidated statements
        of operations for the three and six months ended June 30,
        2006.





**Workers’
      Compensation and Auto Insurance Accruals**


In
      connection with the preparation of the 2006 consolidated financial statements,
      the Company discovered an error in the calculation of accrued workers’
compensation and auto insurance liabilities. The effect of the correction of
      this error on the condensed consolidated statements of operations for the three
      and six months ended June 30, 2006 was a decrease in cost of goods sold of
      $84
      and $156, respectively, and a decrease in distribution expenses of $28 and
      $74,
      respectively. The effect of the correction of this error on the condensed
      consolidated statements of operations for the three and six months ended June
      30, 2005 was a decrease in cost of goods sold of $34 and $91, respectively,
      and
      a decrease in distribution expenses of $17 and $41, respectively.





The
        effect of the correction of this error on the June 30, 2006 and December
        31,
        2005 condensed consolidated balance sheets was a decrease in inventories
        of $140
        and $143, respectively, and a decrease in liabilities of $564 and $337,
        respectively.




**Asset
      Retirement Obligations Adjustment**


In
      connection with the preparation of the Company’s 2006 consolidated financial
      statements, it discovered that it had not properly recorded its asset retirement
      obligations for certain of its assets located in Irvine, California upon
      the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations."





9








The
      effect of the correction of this error on the June 30, 2006 condensed
      consolidated balance sheets was a decrease in net fixed assets of $289 and
      an
      increase in liabilities of $8. The effect of the correction of this error
      on the December 31, 2005, condensed consolidated balance sheet was an increase
      in net fixed assets of $60, an increase in inventories of $4, and a decrease
      in liabilities of $359.





The
      effect of the correction of this error on the three and six months ended June
      30, 2006 and 2005 condensed consolidated statements of operations was not
      material.





The
        tables set forth below summarize the impact of the adjustments described
        above
        on the individual line items on the Company’s consolidated financial statements
        for the affected periods. A reconciliation of the December 31, 2005 consolidated
        balance sheet can be found in the Company’s Annual Report on Form 10-K for the
        year ended December 31, 2006, filed on July 10, 2007.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30, 2006**
            
            **June
                30, 2006***As
                Originally Reported*
            
            *As
                Restated for Correction of*
              *Errors*
            
            *As
                Originally Reported*
            
            *As
                Restated for Correction of*
              *Errors***Statement
                of Operations:**Cost
                of goods sold
            
            $
            86,369
            
            $
            85,832
            
            $
            117,254
            
            $
            116,397Gross
                profit
            
            
            68,576
            
            
            69,298
            
            
            94,593
            
            
            95,642Distribution
                expenses (a)
            
            
            35,394
            
            
            35,367
            
            
            49,676
            
            
            49,602Total
                operating expense
            
            
            64,331
            
            
            64,488
            
            
            92,319
            
            
            92,437Operating
                income
            
            
            4,245
            
            
            4,810
            
            
            2,274
            
            
            3,205Loss
                before income taxes
            
            
            (1,311
            )
            
            (746
            )
            
            (8,810
            )
            
            (7,879
            )Income
                tax benefit
            
            
            (537
            )
            
            (297
            )
            
            (3,612
            )
            
            (3,138
            )Net
                loss
            
            
            (774
            )
            
            (449
            )
            
            (5,198
            )
            
            (4,741
            )Basic
                and diluted loss per share:Net
                loss per common share
            
            $
            (0.04
            )
            $
            (0.02
            )
            $
            (0.24
            )
            $
            (0.21
            )




**Six
                Months Ended****June
                30, 2006***As
                Originally Reported*
            
            *As
                Restated for Correction of Errors***Statement
                of Cash Flows:**Net
                loss
            
            $
            (5,198
            )
            $
            (4,741
            )Depreciation
            
            
            5,802
            
            
            5,782Accretion
                of asset retirement obligations
            
            
            13
            
            
            30Deferred
                income taxes
            
            
            (3,612
            )
            
            (3,138
            )Inventories
            
            
            22,148
            
            
            21,446Accounts
                payable and accrued liabilities
            
            
            13,308
            
            
            13,082Proceeds
                from sale of fixed assets
            
            
            14,403
            
            
            106Net
                cash provided by (used in) investing activities
            
            
            10,779
            
            
            (3,518
            )Financing
                obligations
            
            
            -
            
            
            14,297Net
                cash (used in) provided by financing activities
            
            
            (10,230
            )
            
            4,067


(a)
        This
        line item originally reported combined with selling
        expenses


10








**June
                30, 2006***As
                Originally Reported*
            
            *As
                Restated for Correction of Errors***Balance
                Sheet:**Inventories
            
            $
            157,683
            
            $
            154,079Total
                current assets
            
            
            223,292
            
            
            219,688Fixed
                assets, net
            
            
            112,553
            
            
            119,894Deferred
                income taxes, non-current
            
            
            11,481
            
            
            -Total
                assets
            
            
            396,860
            
            
            389,116Accrued
                liabilities
            
            
            15,017
            
            
            11,387Deferred
                income taxes, current
            
            
            62,515
            
            
            45,730Total
                current liabilities
            
            
            109,850
            
            
            89,435Deferred
                gain on land sale
            
            
            56,109
            
            
            -Financing
                obligations
            
            
            -
            
            
            63,739Deferred
                income taxes, non-current
            
            
            -
            
            
            4,227Other
                liabilities
            
            
            2,691
            
            
            5,742Accumulated
                deficit
            
            
            (75,792
            )
            
            (78,029
            )Total
                shareholders' equity
            
            
            53,210
            
            
            50,973Total
                liabilities and shareholders' equity
            
            
            396,860
            
            
            389,116







11








**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30, 2005**
            
            **June
                30, 2005***As
                Originally Reported*
            
            *As
                Restated for Correction of*
              *Errors*
            
            *As
                Originally Reported*
            
            *As
                Restated for Correction of*
              *Errors***Statement
                of Operations:**Cost
                of goods sold
            
            $
            87,843
            
            $
            87,559
            
            $
            120,609
            
            $
            119,964Gross
                profit
            
            
            89,050
            
            
            89,334
            
            
            120,274
            
            
            120,919Distribution
                expenses (a)
            
            
            37,069
            
            
            37,052
            
            
            51,763
            
            
            51,722Total
                operating expense
            
            
            57,784
            
            
            57,767
            
            
            86,178
            
            
            86,137Operating
              Income
            
            
            31,266
            
            
            31,567
            
            
            34,096
            
            
            34,782Income
                before income taxes
            
            
            24,976
            
            
            25,277
            
            
            22,016
            
            
            22,702Income
                tax provision
            
            
            10,241
            
            
            9,361
            
            
            9,027
            
            
            8,407Net
                income
            
            
            14,735
            
            
            15,916
            
            
            12,989
            
            
            14,295Basic
                and diluted earnings per share:Net
                income per common share
            
            $
            0.67
            
            $
            0.72
            
            $
            0.59
            
            $
            0.65




**Six
                Months Ended****June
                30, 2005***As
                Originally Reported*
            
            *As
                Restated for Correction of Errors***Statement
                of Cash Flows:**Net
                income
            
            $
            12,989
            
            $
            14,295Depreciation
            
            
            5,333
            
            
            5,341Accretion
                of asset retirement obligations
            
            
            51
            
            
            22Deferred
                income taxes
            
            
            9,027
            
            
            8,407Inventories
            
            
            11,999
            
            
            11,567Accounts
                payable and accrued liabilities
            
            
            22,166
            
            
            21,923Net
                cash provided by operating activities
            
            
            14,111
            
            
            14,101Purchase
                of fixed assets
            
            
            (5,347
            )
            
            (5,337
            )Net
                cash used in investing activities
            
            
            (4,053
            )
            
            (4,043
            )(a)
                This line item originally reported combined with selling
                expenses








12




5.      Earnings
      Per Share:




Earnings
      per share (“EPS”) 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 using the treasury method. For the three and six
      months ended June 30, 2006, the incremental shares related to underlying
      employee stock options in the amount of 861,860, were excluded from the
      computation of diluted earnings per share because they would have been
      anti-dilutive. For the three and six months ended June 30, 2005, the incremental
      shares related to the underlying employee stock options were 2,789 and 2,664,
      respectively, from total outstanding options of 1,066,773. In addition, for
      the
      three and six months ended June 30, 2005, the incremental shares related to
      440,000 warrants outstanding were 56,169 and 54,190, respectively. The 440,000
      warrants expired on December 31, 2005.




6.    
Stock-Based
      Compensation:





The
      Company’s 1998 Long-Term Equity Incentive Plan (the “1998 Stock Plan”), which is
      shareholder-approved, permits the grant 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. Option awards are generally granted with an exercise price equal
      to or greater than the market price of the Company’s stock at the date of grant;
      those option awards generally vest over a period of four years subject to
      continuous service and have 10-year contractual terms.





Effective
      the beginning of the first quarter of fiscal year 2006, the Company adopted
      the
      provisions of SFAS No. 123(R), “Share-Based Payments,” using the modified
      prospective transition method. Under this method, prior periods are not
      restated. The provisions of SFAS No. 123(R) apply to new stock options and
      stock
      options outstanding, but not yet vested, on the effective date. As of December
      31, 2005, all outstanding options were fully vested.





Prior
      to
      January 1, 2006, the Company measured stock compensation expense using the
      intrinsic value method of accounting in accordance with Accounting Principles
      Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and
      related interpretations. Thus, expense was generally not recognized for the
      Company’s employee stock option plans. Results for prior periods have not been
      restated.





The
      following table shows net income and earnings per share had the Company applied
      the fair value method of accounting for stock-based compensation in accordance
      with SFAS No. 123, “SFAS No. 123” during the second quarter of 2005 and for
      the six months ended June 30, 2005.




Three
                Months Ended
            
            Six
                Months EndedJune
                30, 2005
            
            June
                30, 2005Net
                income, as restated
            
            $
            15,916
            
            $
            14,295Stock-based
                compensation expense, net of tax
            
            
            (11
            )
            
            (22
            )Pro
                forma net income, as restated
            
            $
            15,905
            
            $
            14,273Net
                income per share:Basic
                and diluted - as restated
            
            $
            0.72
            
            $
            0.65Basic
                and diluted - pro forma, as restated
            
            $
            0.72
            
            $
            0.65





Valuation
      Method - The Company estimates the fair value of stock options granted using
      the
      Black-Scholes option-pricing model and a single option award
      approach.





13








Expected
      Dividend - No dividends are expected to be paid.




Expected
      Volatility - The computation of expected volatility is based on the historical
      volatility.





Risk-Free
      Interest Rate - The risk-free interest rate used in the Black-Scholes valuation
      method is based on the implied yield currently available on U.S. Treasury
      securities with an equivalent remaining term.





Expected
      Term - The expected term represents the period the Company’s stock-based awards
      are expected to be outstanding and was determined based on historical experience
      with similar awards, giving consideration to the contractual terms of the
      stock-based awards, vesting schedules and expectations of future employee
      behavior as influenced by changes to the terms of its stock-based
      awards.





Forfeiture
      Rate - The forfeiture rate is an estimate of the percentage of granted stock
      options that will be cancelled prior to becoming vested. The Company has
      estimated this to be 0% because of the historically small amount of forfeitures
      in prior periods with the exception of the stock option exchange that took
      place
      in 2002. In the exchange, a large number of options were cancelled and reissued
      to the same individuals.





There
      were no stock option grants during the six months ended June 30, 2006;
      accordingly, there was no determination of fair value during this
      period.





A
      summary
      of the status of the Company’s stock option plan as of June 30, 2006 as
      follows:




Weighted
                Average
            
            AggregateShares
            
            Exercise
                Price
            
            Intrinsic
                ValueOutstanding
                at December 31, 2005
            
            
            869,110
            
            
            $
                6.22Cancelled
            
            
            (7,250
            )
            
            6.64Outstanding
                at June 30, 2006
            
            
            861,860
            
            
            $
                6.22
            
            
            $
                3Exercisable
            
            
            861,860
            
            
            $
                6.22
            
            
            $
                3




The
      aggregate intrinsic value represents the difference between the exercise prices
      of the underlying awards and the quoted price of the Company’s common stock for
      those awards that have an exercise price below the quoted price on June 30,
      2006. The Company had options outstanding on June 30, 2006 to purchase an
      aggregate of 12,000 shares with an exercise price below the quoted price of
      the
      Company’s common stock resulting in an aggregate intrinsic value of
      $3.





14








The
      weighted average remaining contractual life was five years at June 30, 2006.
      As
      of June 30, 2006, expiration dates ranged from June 22, 2008 to February 18,
      2013.





**Outstanding**
            
            **Exercisable**Average
            
            Weighted
            
            
            
            WeightedNumber
                of
            
            Remaining
            
            Average
                of
            
            Number
                of
            
            Average
                ofRange
                of exercise price
            
            Options
            
            Contract
                Life
            
            Exercise
                Price
            
            Options
            
            Exercise
                Price$3.32
                to $5.00
            
            
            81,000
            
            
            5.06
            
            
            $
                 4.53
            
            
            81,000
            
            
            $
                 4.53$5.50
            
            
            627,160
            
            
            5.90
            
            
            5.50
            
            
            627,160
            
            
            5.50$6.00
                to $8.00
            
            
            34,200
            
            
            3.33
            
            
            6.71
            
            
            34,200
            
            
            6.71$11.00
            
            
            119,500
            
            
            2.08
            
            
            11.00
            
            
            119,500
            
            
            11.00Total
            
            
            861,860
            
            
            5.20
            
            
            $
                 6.22
            
            
            861,860
            
            
            $
                 6.22




7.    
Inventories:




Inventories
      consisted of the following:




June
                30,
            
            December
                31,2006
            
            2005(As
                Restated)
            
            (As
                Restated)Nursery
                stock
            
            $
            141,303
            
            $
            168,539Material
                and supplies
            
            
            12,776
            
            
            10,436Inventories
            
            $
            154,079
            
            $
            178,975Consigned
                inventories
            
            $
            4,663
            
            $
            1,350




8.    
      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 loan with availability of up to $100,000 (subject to borrowing base
      limits). The revolving loan also permits the ability to obtain letters of credit
      up to a sub-limit.





The
      Senior Credit Facility was amended by the 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 the Second Amendment to Credit Facility dated as of February
      3, 2006 (the “Second Amendment”). The Senior Credit Facility was also amended as
      of August 8, 2006 pursuant to the Third Amendment. On November 8, 2005, in
      accordance with the Waiver, at the Company’s request the availability of the
      revolving loan was reduced from $145,000 to $120,000 (subject to borrowing
      base
      limits). On August 8, 2006, in accordance with the Third Amendment, the
      availability of the revolving loan was reduced from $120,000 to
      $100,000.





*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.





15








*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 June 30, 2006, the
      Company was not in compliance with the minimum fixed charge coverage ratio
      covenant; however, as discussed below, the non-compliance was waived in
      connection with the Third Amendment.




The
      covenants under the Senior Credit Facility may affect the Company’s ability to
      operate its business, may limit its ability to take advantage of business
      opportunities as they arise and may adversely affect the conduct of its current
      business. A breach of a covenant in the Company’s debt instruments could cause
      acceleration of a significant portion of its outstanding indebtedness. In the
      event the Company breach the covenants in its debt instruments and it is unable
      to obtain waivers in connection therewith, it may not be able to obtain
      alternative financing for its debt on reasonable terms or otherwise. In that
      event, in order to pay the principal of the Company’s debt, it would be required
      to sell its equity securities, sell its assets or take other actions. The
      foregoing actions may not enable the Company to pay the principal of its
      debt.





*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 Property
      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 Property 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 Interest, 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 each fiscal quarter of 2006 and for the
      first fiscal quarter of 2007 and maximum leverage ratios for the last fiscal
      quarter of 2005, for each fiscal quarter of 2006 and the first and second fiscal
      quarters of 2007.





*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.





*Third
      Amendment To Senior Credit Facility.* In
      August 2006, Hines Nurseries negotiated and entered into the Third Amendment
      to
      the Senior Credit Facility dated as of September 30, 2003. The Third Amendment
      waives the requirement that the Company comply with the minimum fixed charge
      coverage ratio covenant for the periods ended June 30, 2006 and ending September
      30, 2006. The Third Amendment also reduces the aggregate revolving loan
      commitment under the Senior Credit Facility from $120,000 to $100,000 and
      institutes a maximum revolving utilization restriction under the credit
      facility. It also increases the interest rate spread by 25 basis points on
      outstanding prime and London Interbank Offered Rate (“LIBOR”) borrowings,
      increases unused line fees and establishes new fixed charge covenant ratios
      beginning in the fourth quarter of 2006. In addition, the Third Amendment
      requires the Company to sell its four color nursery facilities in the Northeast
      and certain assets in Miami, Florida by no later than December 31, 2006. The
      sales of these assets are required to generate a predetermined minimum amount
      of
      aggregate proceeds.





16








*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 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. As of June 30, 2006, the applicable margin for Prime rate loans was
      1.75%
      for the revolving loan. As of August 8, 2006, in accordance with the Third
      Amendment, the Prime rate loans under the revolving loan bear interest at the
      Prime lending rate plus an additional amount that ranges from 1.00% to 2.00%,
      depending on its consolidated leverage ratio.





LIBOR
      rate loans under the revolving loan bear interest at the LIBOR rate plus an
      additional amount that ranges from 1.75% to 2.75%, depending on its consolidated
      leverage ratio. As of June 30, 2006, the applicable margin for LIBOR rate loans
      was 2.75% for the revolving loan. As of August 8, 2006, in accordance with
      the
      Third Amendment, LIBOR rate loans under the revolving loan bear interest at
      the
      LIBOR rate plus an additional amount that ranges from 2.00% to 3.00%, depending
      on its consolidated leverage ratio. 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 loan which accrues based on the
      utilization of the revolving loan.





*Borrowing
      Base.* Availability
      of borrowings under the revolving loan 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.





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 June 30, 2006, the Company had $88,063 of available unused
      borrowings under the Senior Credit Facility.




9.    
      Long-Term
      Debt:





***Senior
      Notes.*** On
      September 30, 2003, Hines Nurseries issued $175,000 of senior subordinated
      notes
      that mature on October 1, 2011 (the "Senior Notes"). 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 subsidiaries, subject to certain exceptions, have
      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 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
      or 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.







17


10.     
        Vacaville and Miami Property Sales (Previously “Deferred Gain on Land
        Sales”):




On
      March
      1, 2006, the Company received notice that Triad Communities, L.P. exercised
      its
      option to purchase, pursuant to the previously disclosed Option Agreement dated
      April 30, 2003, the Company’s 168-acre property in Vacaville, California. The
      Option Agreement provided that the gross purchase price of the property will
      be
      $15,100. On April 3, 2006, the Company sold the land for $14,300. Total proceeds
      from the Option Agreement and sale of the land were approximately $16,900,
      which
      included approximately $2,600 in option payments already received.





Under
      the
      terms of the Option Agreement, the Company is able lease back the property
      free
      of charge while transitioning off the land in three phases from 2006 to 2008.
      The three phases of transition will be July 1, 2006, July 1, 2007 and July
      1,
      2008, and will consist of approximately 24 acres, 88 acres and 56 acres,
      respectively. The Company is continuing to develop replacement acreage and
      infrastructure at its 842-acre Winters South facility in Northern California.
      The Company recorded this transaction as a financing transaction in accordance
      with SFAS No. 98, “Accounting for Leases,” due to the Company’s continuing
      involvement in the land. This treatment gives effect to the restatement
      discussed in Note 4.





On
        November 7, 2005, the Company successfully completed the sale of 122 acres
        of
        unimproved property in Miami, Florida and received net proceeds
        of $47,040. In accordance with an amendment to the existing senior credit
        facility, the proceeds from the Miami Property Sale were used to pay off
        the
        entire outstanding balance of the term loan, with the residual amount having
        paid down the revolving credit facility. As part of the Miami Property Sale,
        the
        Company entered into a two-year lease agreement with the buyer to lease the
        property while transitioning operations to other locations. The Company leased
        the entire property for a one-year period, with a thirty-day extension right,
        and then vacated approximately 33 acres. Pursuant to the first amendment
        to the
        lease, the Company will lease the remaining 89 acres until June 30, 2007.
        In
        addition, the buyer agreed to let the Company sublease the property for the
        remainder of the lease term. The Company pays the buyer rent of five hundred
        dollars per acre annually during the lease term plus fifty percent of the
        rent
        the Company receives from subleasing the property. In addition, the Company
        is
        entitled to additional amounts if the buyer is successful in obtaining zoning
        for a certain number of residential lots. The Company originally recognized
        the
        sale and deferred the gain on the transaction,; however, as
        described in Note 4, due to continuing involvement in the property and in
        accordance with SFAS No. 98 as of December 31, 2005, the Company has reinstated
        the net book value of the assets, as well as recorded the proceeds received
        as a
        financing obligation. The impact of this correction is discussed in Note
        4. When
        the Company exits the lease on June 30, 2007, the Company will remove the
        net
        book value of the assets and expects to recognize a gain of
        $39,880.




11. 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.





18


**Item
      2.** **** **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**





*Unless
      the context otherwise requires, the term (1) “Hines Horticulture” means
      Hines Horticulture, Inc., a Delaware corporation, (2) the term “Hines
      Nurseries” means Hines Nurseries, Inc., a California corporation, and a wholly
      owned subsidiary of Hines Horticulture, (3) the term “Hines Fertilizer” means
      Hines Fertilizer, Inc., formerly known as Enviro-Safe Laboratories, Inc., a
      Florida Corporation, and a wholly owned subsidiary of Hines Nurseries and
      (4) the terms “we,” “us” and “our” mean, collectively, the combined entity
      of Hines Horticulture and its wholly owned subsidiaries.*


*The
          following discussion and analysis of our financial condition and results
          of
          operations gives effect to the restatement discussed in Note 4 to
          the Condensed**Consolidated Financial Statements**(unaudited) and should be read in conjunction with our consolidated financial
          statements and related notes included elsewhere in this Quarterly Report
          on Form
          10-Q/A.*


***Executive
      Summary and Market Trends***





Since
      the
      third quarter of 2004, our earnings have declined on a quarter over comparable
      prior year quarter basis. Various factors have contributed to the decline in
      our
      earnings, including declining net sales and increasing production and
      distribution costs.




Our
      net
      sales in the Eastern region of the United States (which is serviced primarily
      by
      our Northeast, mid-Atlantic, and Southeast facilities and also, to a lesser
      extent, by certain of our Western facilities) have continued to decline on
      a
      quarter over comparable prior year quarter basis since the third quarter of
      2004, while sales throughout the rest of the country have remained relatively
      constant on a quarter over comparable prior year quarter basis during the same
      period. Despite our efforts to reverse this decline, our Northeast, mid-Atlantic
      and Southeastern facilities have continued to lose market share in the Eastern
      region during this period. Intense competition, significant pricing pressures
      and customer consolidations have all contributed to the decline in market share.
      Moreover, net sales in the Southeastern region were adversely impacted by
      inclement weather as we estimate that the impact of hurricanes reduced our
      net
      sales by as much as $10.0 million in this region during the past two years.
      Weather forecasters are predicting another active Atlantic hurricane season
      for
      2006.




While
      net
      sales in the Eastern region have continued to decline, as described above,
      our
      net sales throughout the rest of the country have remained relatively stable
      during the same period of time (when compared to the comparable prior year
      periods), and as a result, have not offset the declining sales in the Eastern
      region. While inclement weather has from time to time adversely impacted sales
      outside of the Eastern region, or otherwise contributed to short-term
      fluctuations in such sales, inclement weather has not historically had the
      same
      impact on our net sales in these areas as it has had in the Eastern
      region.




Since
      the
      second quarter of 2005, we have experienced increases in cost of goods sold,
      when expressed as a percentage of our net sales, as a result of increased
      production costs. Since the fourth quarter of 2004, our distribution expenses
      have also increased when expressed as a percentage of net sales. Contributing
      to
      these increases have been the increasing cost of petroleum as well as other
      inflationary costs. A number of items which are components of our production
      and
      distribution costs are, directly, or indirectly, related to petroleum based
      products. Examples include diesel fuel, resin based plastic containers and
      heating fuel, the costs for which have increased over the past two years. Higher
      third party carrier charges have also contributed significantly to increased
      distribution costs. Higher costs in other non-petroleum based components, such
      as labor costs, also contributed to the increased production costs and we
      estimate that labor costs account for close to one-half of our production
      costs.




In
      response to rising costs which have negatively impacted our results of
      operations, we have commenced labor productivity initiatives intended to improve
      our gross profit margins. To date, we believe that we have made progress in
      this
      regard at certain of our facilities and we intend to continue to seek to
      implement these initiatives at our remaining facilities as well as continuing
      to
      explore other cost-savings opportunities throughout our operations.




On
      August
      8, 2006, we received approval from our Board of Directors to pursue the sale
      of
      our four nursery facilities located in the northeast and certain assets located
      in Miami, Florida in connection with our entering into the Third Amendment
      and
      Limited Waiver to Credit Agreement (the “Third Amendment”) to our Senior Credit
      Facility. We believe that these planned divestitures, which are required by
      the
      terms of the Third Amendment, should help to stabilize the net sales (subject
      to
      seasonal fluctuations) and gross profit margins from our continuing
      operations.





19







Also
      on
      August 8, 2006, we performed an impairment test on the long-lived assets of
      the
      nurseries located in the Northeast and Miami and determined that the carrying
      value of the long-lived assets for three of the Northeast facilities exceeded
      the estimated undiscounted future cash flows associated with the use of the
      assets and therefore were deemed unrecoverable. As a result, we reduced the
      carrying value of the assets and recorded an impairment charge of approximately
      $8.0 million in the statements of operations for the period ended June 30,
      2006.




***Forward
      Looking Statements and Risk Factors***




Except
      for historical information contained herein, this quarterly report on Form
      10-Q
      contains forward-looking statements within the meaning of Section 27A of the
      Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
      as amended, which involve certain risks and uncertainties. Forward-looking
      statements are included with respect to, among other things, the company’s
      current business plan and strategy and strategic operating plan. These
      forward-looking statements are identified by their use of such terms and phrases
      as “intends,” “intend,” “intended,” “goal,” “estimate,” “estimates,” “expects,”
“expect,” “expected,” “project,” “projected,” “projections,” “plans,”
“anticipates,” “anticipated,” “should,” “designed to,” “foreseeable future,”
“believe,” “believes” and “scheduled” and similar expressions. Our actual
      results or outcomes may differ materially from those anticipated. Readers are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      speak only as of the date the statement was made. We undertake no obligation
      to
      publicly update or revise any forward-looking statements, whether as a result
      of
      new information, future events or otherwise. For any forward-looking statements,
      we claim the protection of the safe harbor for forward-looking statements in
      Section 27A of the Securities Act of 1933 and Section 21E of the Securities
      Exchange Act of 1934.




There
      are
      a number of risks, uncertainties and important factors that might cause actual
      results to differ from any results expressed or implied by such forward looking
      statements. In addition to the risks, uncertainties and other factors discussed
      elsewhere in this Form 10-Q, the risks, uncertainties and other factors that
      could cause or contribute to actual results differing materially from those
      expressed or implied in the forward looking statements include, without
      limitation, those set forth under Part I. Item 1A - Risk Factors in the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed
      on July 10, 2007.




Factors
      which could cause actual results to differ materially from any forward-looking
      information contained herein include, but are not limited to, general economic
      trends and seasonality, including those specifically impacting the nursery
      business, general agricultural risks beyond our control including risks
      associated with disease and pests, including sudden oak death, adverse weather
      conditions, increases in prices for water, petroleum and raw materials, our
      substantial leverage and ability to service our debt, our ability to comply
      with
      the covenants contained in our debt facilities, competitive practices in the
      industry in which we compete, fluctuations in our operating costs, revenues
      and
      cash flows from operations, our dependence on a limited number key customers,
      increases in transportation and fuel costs, factors with regard to the
      challenges associated with pay by scan and other factors.




***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. As of June 30,
      2006,
      Hines Horticulture produced and distributed horticultural products through
      its
      wholly owned subsidiary, Hines Nurseries.





**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 and have not been required to pay cash income
      taxes. During 2005, we were required to pay federal cash income taxes in the
      form of alternative minimum tax as a result of the sale of land in Miami,
      Florida (“Miami Property Sale”). At December 31, 2005, we had $2.3 million
      in net operating loss carryforwards for federal income tax purposes, which
      begin
      to expire in 2024. In addition, we had approximately $6.6 million in net
      operating loss carryforwards for state income tax reporting purposes. Our state
      net operating losses in certain states begin expiring in 2008.





20







Based
      on
      our current projections, we anticipate that we will not pay cash income taxes
      for federal or state income tax purposes through 2010.




The
      use
      of the cash method of accounting for federal income tax purposes results in
      a
      current deferred tax liability for accounting purposes. At June 30, 2006, we
      had
      a current deferred liability for deferred income taxes of $45.7 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.




***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.




***Sale
      of 168 Acres in Vacaville, California***




On
      March
      1, 2006, we received notice that Triad Communities, L.P. exercised its option
      to
      purchase, pursuant to the previously disclosed Option Agreement dated April
      30,
      2003, our 168-acre property in Vacaville, California. The total book value
      of
      assets related to the sale of the land was approximately $0.5 million. The
      Option Agreement provides that the gross purchase price of the property will
      be
      $15.1 million. On April 3, 2006, we successfully completed the sale of the
      land
      and received net proceeds of $14.3 million. Total proceeds from the Option
      Agreement and sale of the land were approximately $16.9 million, which include
      approximately $2.6 million in option payments already received.





Under
      the
      terms of the Option Agreement, we are able to transition off the land in three
      phases from 2006 to 2008. The three phases of transition will be July 1, 2006,
      July 1, 2007 and July 1, 2008, and will consist of approximately 24 acres,
      88
      acres and 56 acres, respectively. We are continuing to develop replacement
      acreage and infrastructure at our 842-acre Winters South facility in Northern
      California.





We
        entered into a sale-leaseback transaction for the Vacaville facility that
        contained continuing involvement provisions. We originally recognized the
        sale
        and deferred the gain on the Vacaville, California property in the second
        quarter of 2006. However, in order to conform with Statement of Financial
        Accounting Standards ("SFAS") No. 98, as of June 30, 2006 we reinstated the
        net
        book value of the assets and recorded the proceeds received as a financing
        obligation as more fully disclosed in Note 4 to the consolidated financial
        statements. When we complete the transition, which is expected to be completed
        on July 1, 2008, we will remove the net book value of the assets and expect
        to
        recognize a gain of approximately $16.2 million.





***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. Sales under this program began
      in
      February 2005. Revenue is recorded at the point the store sells our product
      to
      its customer. Annuals, perennials and groundcovers are the only products
      impacted by this agreement.





Despite
      the implementation of the new pay by scan program, we did not encounter any
      material variances with the quality and variability of our earnings and cash
      flows during 2005.




**Results
      of Operations**




The
      following discussion of results of operations gives effect to the restatement
      discussed in Note 4 to the condensed consolidated financial statements and
      should be read in conjunction with our Condensed Consolidated Financial
      Statements and related notes included elsewhere in this Quarterly Report on
      Form
      10-Q/A.







21





***Three
      Months Ended June 30, 2006 compared to Three Months Ended June 30,
      2005***




*Net
      Sales.* Net
      sales
      of $155.1 million for the three months ended June 30, 2006 decreased $21.8
      million, or 12.3%, from net sales of $176.9 million for the comparable period
      in
      2005. The decline in net sales was primarily due to lost market share throughout
      the Eastern Region. More intense competition, significant pricing pressures
      and
      customer consolidations in the Northeast, Mid-Atlantic and Southeast have all
      contributed to the decline in net sales in the Eastern Region. In addition
      to
      this, excessive rain and flooding in the Northeast during the quarter resulted
      in reduced consumer demand.




*Gross
      Profit.* Gross
      profit of $69.3 million for the three months ended June 30, 2006 decreased
      $20.0
      million, or 22.4%, from gross profit of $89.3 million for the comparable period
      in 2005. Gross profit as a percentage of sales for the quarter decreased to
      44.7% from 50.5% for the comparable period in 2005. The decline in gross profit
      and gross profit margin was mainly due to the decline in sales, as discussed
      above, as well as higher cost inventory, which were produced during 2005. In
      addition to this, the excessive rain and flooding in the Northeast caused an
      increase in market scrap and also impacted gross margins in the second quarter
      of 2006.




*Distribution
      Expenses.* Distribution
      expenses of $35.4 million for the three months ended June 30, 2006 decreased
      $1.7 million, or 4.5%, from $37.1 million for the comparable period in 2005.
      As
      a percentage of net sales, distribution expenses for the quarter increased
      to
      22.8% from 20.9% in the second quarter of 2005. The decrease in distribution
      expense was mainly due to the decline in sales, as discussed above. As a
      percentage of sales, distribution expense increased due to higher diesel fuel
      costs and increased third party carrier charges, which were primarily driven
      by
      more expensive diesel fuel.




*Selling
      and General and Administrative Expenses.* Selling
      and general and administrative expenses of $20.0 million for the three months
      ended June 30, 2006 decreased $0.2 million for the comparable period in 2005.
      Selling expenses of $13.7 million for the three months ended June 30, 2006
      decreased by $0.7 million, or 5.0%, from $14.4 million in the second quarter
      of
      2005. The decrease in selling expense resulted from the reduction in work force
      due to the strategic reorganization which occurred in the second quarter of
      2005. In addition, there was a decrease in the variable costs of selling
      expenses due to lower net sales. General and administrative expenses of $6.3
      million for the three months ended June 30, 2006 increased by $0.5 million,
      or
      9.3%, from $5.7 million for the comparable period in 2005. The increase in
      general and administrative expenses was mainly due to an increase in consulting
      fees related to increased staffing in IT and Finance for SOX 404 compliance
      related work, partially offset by lower compensation and benefit expenses,
      which
      mainly resulted from the reduction in work force due to the strategic
      reorganization which occurred in the second quarter of 2005.




*Other
      Operating Expense.* Other
      operating expenses of $1.1 million for the three months ended June 30, 2006
      increased by $0.6 million from $0.5 million for the comparable period in 2005.
      Other operating expenses for the second quarter of 2006 consisted primarily
      of
      approximately $1.1 million in consulting fees relating to our productivity
      improvement initiatives.





*Asset
      Impairment Charges.* Asset
      impairment charges of $8.0 million for the three months ended June 30, 2006
      were
      recorded in connection with three of our Northeast facilities.




*Operating
      Income.* Operating
      income for the three months ended June 30, 2006 of $4.8 million was $26.8
      million less than operating income of $31.6 million for the comparable period
      in
      2005. The decline in operating income resulted from a decline in gross profit
      for the period of $20.0 million, an asset impairment charge at two of our
      Northeast facilities of $8.0 million, an increase of $0.5 million in general
      and
      administrative costs and $0.6 million of other operating expenses, which include
      consulting fees related to our productivity improvement initiatives. The gross
      profit decline and unfavorable increase in operating expenses were partially
      offset by decreased selling and distribution expense of $2.4 million, which
      resulted from lower sales unit volume during the second quarter of
      2006.




*Other
      Expenses.* Other
      expenses of $5.6 million for the three months ended June 30, 2006 decreased
      $0.7
      million, or 11.7%, from $6.3 million for the comparable period in 2005 primarily
      due to lower interest expense. Interest expense for the three months ended
      June
      30, 2006 declined $0.7 million, or 11.4%, primarily as a result of lower
      outstanding debt, partially offset by higher interest rates.




*Income
      Tax (Benefit) Provision.* Our
      effective income tax rate was 39.8% for the three months ended June 30, 2006,
      compared to 37.0% from the comparable period a year ago. Benefit from income
      taxes was $0.3 million for the three months ended June 30, 2006 compared to
      provision for income taxes of $9.4 million for the comparable period in
      2005.





22







*Net
      (Loss) Income.* Net
      loss
      for the three months ended June 30, 2006 of $0.4 million was $16.4 million
      less
      than net income of $15.9 million for the comparable period in 2005. The shift
      from net income to net loss was attributable to lower net sales volume, gross
      profit margin decline, the asset impairment charge taken during the second
      quarter and other factors discussed above.




***Six
      Months Ended June 30, 2006 compared to Six Months Ended June 30,
      2005***




*Net
      Sales.* Net
      sales
      of $212.0 million for the six months ended June 30, 2006 decreased by $28.8
      million, or 12.0%, from net sales of $240.9 million for the comparable period
      in
      2005. The decline in net sales was primarily due to lost market share throughout
      the Eastern Region. More intense competition, significant pricing pressures
      and
      customer consolidations in the Northeast, Mid-Atlantic and Southeast also
      contributed to the decline in net sales in the Eastern Region. In addition,
      the
      adverse weather conditions toward the end of first quarter which carried into
      the second quarter further delayed product availability and consumer
      demand.




*Gross
      Profit.* Gross
      profit of $95.6 million for the six months ended June 30, 2006 decreased $25.3
      million, or 20.9%, from gross profit of $120.9 million for the comparable period
      in 2005. Similar to the second quarter circumstances, the decline in gross
      profit and gross profit margin was mainly due to the decline in sales, as
      discussed above, as well as higher cost inventory, produced during
      2005.




*Distribution
      Expenses.* Distribution expenses of $49.6 million for the six months ended June 30, 2006
      decreased $2.1 million, or 4.1%, from $51.7 million for the comparable period
      in
      2005. As a percentage of net sales, distribution expenses for the six months
      ended June 30, 2006 increased to 23.4% from 21.5% in the comparable period
      of
      2005. The decrease in distribution expenses was mainly due to the decline in
      sales, as discussed above. As a percentage of sales, distribution costs
      increased due to higher diesel fuel costs and increased third party carrier
      charges, which were primarily driven by more expensive diesel fuel.




*Selling
      and General and Administrative Expenses.* Selling
      and general and administrative expenses of $33.0 million for the six months
      ended June 30, 2006 decreased $1.0 million, or 3.0%, from $34.0 million for
      the
      comparable period in 2005. Selling expenses of $20.9 million for the six months
      ended June 30, 2006 decreased $1.4 million, or 6.4%, from $22.3 million a year
      ago. The decrease in selling expense resulted from the reduction in work force
      due to the strategic reorganization which occurred in the second quarter of
      2005. In addition, there was a decrease in the variable costs of selling
      expenses due to lower net sales. General and administrative expenses of $12.1
      million for the six months ended June 30, 2006 increased $0.4 million, or 3.4%,
      from $11.7 million a year ago. The increase in general and administrative
      expenses is primarily due to an increase in staffing in IT and Finance for
      SOX
      404 compliance related work, partially offset by a decrease in payroll and
      benefits as a result of the reduction in work force due to the strategic
      reorganization which occurred in the second quarter of 2005.





*Other
      Operating Expenses.* Other
      operating expenses of $1.8 million for the six months ended June 30, 2006
      increased by $1.4 million from $0.4 million for the comparable period a year
      ago. Other operating expenses for the six months ended June 30, 2006 consisted
      of approximately $1.9 million in consulting fees relating to our productivity
      improvement initiatives, partially offset by gain on sale of fixed assets.




*Asset
      Impairment Charges.* Asset
      impairment charges of $8.0 million for the six months ended June 30, 2006 was
      recorded in connection with three of our Northeast facilities.




*Operating
      Income.* Operating income of $3.2 million for the six months ended June 30, 2006
      decreased by $31.6 million, or 90.8%, from $34.8 million for the comparable
      period in 2005. The decline in operating income resulted from lower sales
      volume, gross profit decline and the second quarter asset impairment charge
      in
      the Northeast, partially offset by a decrease in selling and distribution
      expenses.




*Other
      Expenses.* Other
      expenses of $11.1 million for the six months ended June 30, 2006 decreased
      by
      $1.0 million, or 8.2%, from $12.1 million for the comparable period a year
      ago.
      The decrease was primarily due to a reduction in interest expense of $1.8
      million related to lower outstanding debt and partially offset by higher
      interest rates. The decrease in interest expense was further offset by the
      swap
      agreement income in 2005 of $0.9 million. The swap agreement matured in February
      of 2005.





23







*Income
      Tax (Benefit) Provision.* Our
      effective tax rate was 39.8% for the six months ended June 30, 2006, compared
      to
      37.0% for the comparable period in 2005. Benefit from income tax was $3.1
      million for the six months ended June 30, 2006 compared to provision for income
      tax of $8.4 million for the comparable period in 2005.




*Net
      (Loss) Income.* Net loss
      for the six months ended June 30, 2006 of $4.7 million was $19.0 million less
      than net income of $14.3 million for the comparable period in 2005. The shift
      from net income to net loss is primarily due to lower net sales volume, gross
      profit margin, the asset impairment charge taken during the second quarter
      and
      other factors 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 a 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. The covenants under our Senior Credit Facility
      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. In the event we breach the covenants in our debt instruments
      and
      we are unable to obtain waivers in connection therewith, we may not be able
      to
      obtain alternative financing for our debt on reasonable terms or otherwise.
      In
      that event, in order to pay the principal of our debt, we would be required
      to
      sell our equity securities, sell our assets or take other actions which could
      adversely impact our business, operations and shareholders. The foregoing
      actions may not enable us to pay the entire principal of our debt.





Net
      cash
      provided by operating activities was $5.5 million for the six months ended
      June
      30, 2006 compared to $14.1 million for the comparable period in 2005. The
      decrease in cash provided by operating activities was mainly due to the decline
      in gross profit during the period, partially offset by reduced working capital
      levels. The decline is gross profit was primarily due to the decrease in net
      sales and the sell-through of higher cost inventory that was produced in 2005.
      The reduced working capital requirements were mainly due to reduced accounts
      receivable and inventory balances at quarter end. The decline in inventory
      resulted from better alignment of production to forecasted sales as well as
      lower costs resulting from our internal labor productivity initiatives. The
      decline in accounts receivable resulted mainly from the reduction in net
      sales.





Net
      cash
      used in investing activities was $3.5 million for the six months ended June
      30,
      2006 compared to $4.0 million for the same period a year ago. The decrease
      in
      cash used in investing activities was mainly due to a $1.7 million reduction
      in
      capital expenditures offset by the receipt of $1.1 million of land sale option
      proceeds in 2005. Capital expenditures during the period mainly consisted of
      general maintenance capital and expenditures related to our Irvine capacity
      relocation project.





Net
      cash
      provided by financing activities was $4.1 million for the six months ended
      June
      30, 2006 compared to net cash used in financing activities of $10.5 million
      for
      the same period in 2005. Net cash provided by financing operations primarily
      represents the receipt of $14.3 million of cash proceeds from the Lagoon Valley
      land sale and the repayment of debt for each respective period. At June 30,
      2006, we had fully repaid the revolver balance and had cash on hand of $6.1
      million.





We
      typically draw down our revolving loan in the first and fourth quarters to
      fund
      our seasonal inventory buildup and seasonal operating expenses. Based on past
      history, approximately 72-74% of our sales generally occur in the first half
      of
      the year, generally allowing us to reduce borrowing under our revolving loan
      in
      the second and third quarters. On June 30, 2006 we had unused borrowing capacity
      of approximately $88.1 million after applying the borrowing base limitations
      and
      letters of credits to our available borrowings.





At
      June
      30, 2006, we did not have any indebtedness outstanding under our Senior Credit
      Facility and we had $175.0 million principal amount of our Senior Notes
      outstanding.





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
      June 30, 2006.







24








**Payments
                Due by Period****Less
                than**
            
            ***(Dollars
                in millions)***
            
            **After****Contractual
                Cash Obligations**
            
            
            **Total**
            
            
            **1
                year**
            
            
            **1-3
                years**
            
            
            **4-5
                years**
            
            
            **5
                years**Senior
                Notes
            
            $
            175.0
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            175.0Interest
            
            
            102.3
            
            
            18.9
            
            
            55.0
            
            
            28.4
            
            
            -Operating
                Leases
            
            
            16.8
            
            
            4.0
            
            
            5.5
            
            
            1.4
            
            
            5.9Total
            
            $
            294.1
            
            $
            22.9
            
            $
            60.5
            
            $
            29.8
            
            $
            180.9




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.




***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 loan with
      availability of up to $100.0 million (subject to borrowing base limits). The
      revolving loan also permits us to obtain letters of credit up to a
      sub-limit.





The
      Senior Credit Facility was amended by the 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 the 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 loan was reduced from
      $145.0 million to $120.0 million (subject to borrowing base limits). On August
      8, 2006, in accordance with the Third Amendment to the Senior Credit Facility,
      the Senior Credit Facility was amended again and the availability of the
      revolving loan was reduced from $120.0 million to $100.0 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.





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 June 30, 2006, we were
      not in compliance with the minimum fixed charge coverage ratio covenant;
      however, as discussed below, the non-compliance was waived in connection with
      the Third Amendment.





The
      covenants under the Senior Credit Facility 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. In the event we breach
      the
      covenants in our debt instruments and we are unable to obtain waivers in
      connection therewith, we may not be able to obtain alternative financing for
      our
      debt on reasonable terms or otherwise. In that event, in order to pay the
      principal of our debt, we would be required to sell our equity securities,
      sell
      our assets or take other actions. The foregoing actions may not enable us to
      pay
      the principal of our debt.





25








*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 Property 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 Property 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 Interest, 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 each fiscal quarter of 2006 and for the first fiscal
      quarter of 2007 and maximum leverage ratios for the last fiscal quarter of
      2005,
      for each fiscal quarter of 2006 and the first and second fiscal quarters of
      2007.





*Second
      Amendment To Senior Credit Facility.* In
      February 2006, Hines Nurseries entered into 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.





*Third
      Amendment To Senior Credit Facility.* In
      August 2006, Hines Nurseries negotiated and entered into the Third Amendment
      to
      the Senior Credit Facility dated as of September 30, 2003. The Third Amendment
      waives the requirement that we comply with the minimum fixed charge coverage
      ratio covenant for the periods ended June 30, 2006 and ending September 30,
      2006. The Third Amendment also reduces the aggregate revolving loan commitment
      under the Senior Credit Facility from $120.0 million to $100.0 million and
      institutes a maximum revolving utilization restriction under the credit
      facility. It also increases the interest rate spread by 25 basis points on
      outstanding prime and London Interbank Offered Rate (“LIBOR”) borrowings,
      increases unused line fees and establishes new fixed charge covenant ratios
      beginning in the fourth quarter of 2006. In addition, the Third Amendment
      requires us to sell our four color nursery facilities in the Northeast and
      certain assets in Miami, Florida by no later than December 31, 2006. The sales
      of these assets are required to generate a predetermined amount of aggregate
      proceeds.





*Interest
      Rate; Fees.* The
      interest rate on the loans under the Senior Credit Facility may be, at our
      option, prime rate loans or LIBOR rate loans. Prime rate loans under the
      revolving loan 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.
      As of June 30, 2006, the applicable margin for prime rate loans was 1.75% for
      the revolving loan. As of August 8, 2006, in connection with the Third
      Amendment, Prime rate loans under the revolving loan bear interest at the prime
      lending rate plus an additional amount that ranges from 1.00% to 2.00%,
      depending on our consolidated leverage ratio.





LIBOR
      rate loans under the revolving loan bear interest at the LIBOR rate plus an
      additional amount that ranges from 1.75% to 2.75%, depending on our consolidated
      leverage ratio. As of June 30, 2006, the applicable margin for LIBOR rate loans
      was 2.75% for the revolving loan. As of August 8, 2006, in connection with
      the
      Third Amendment, LIBOR rate loans under the revolving loan bear interest at
      the
      LIBOR rate plus an additional amount that ranges from 2.00% to 3.00%, depending
      on our consolidated leverage ratio. 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 loan which accrues based on the
      utilization of the revolving loan.





*Borrowing
      Base.* Availability of borrowing under the revolving loan 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.








26





***Our
      Senior Notes***





On
      September 30, 2003, Hines Nurseries issued $175.0 million of senior subordinated
      notes that mature on October 1, 2011 (the "Senior Notes”). 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 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 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 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**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America 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 allowances are maintained at a level believed
      adequate by management to absorb probable losses in the trade receivables 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 bad debts 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 bad debt expense, while direct charge-offs of trade
          receivables are deducted from the allowance.


27


*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. We
      evaluate 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. In connection with the Third Amendment
      and
      required asset sales, we re-evaluated our four nursery facilities in the
      Northeast as well as assets located in Miami, Florida and determined that three
      of the Northeast facilities exceeded the estimated undiscounted future cash
      flows associated with the use of the assets and therefore deemed those assets
      unrecoverable. As a result, we reduced the carrying value of the assets to
      the
      fair value of those assets as determined by a recent appraisal performed by
      Cushman & Wakefield, Inc. and recorded an impairment charge of approximately
      $8.0 million in our statements of operations for the period ended June 30,
      2006.




*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. 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 carrying amount to determine the impairment loss, if any.




*Accrued
      Liabilities* .




The
      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 liability are maintained at levels
      believed by our management to adequately reflect our probable claims
      obligations.




*New
        Accounting Standards:*
 
 In
          November 2004, the Financial Accounting Standards Board ("FASB") issued
          SFAS No.
          151, “Inventory Costs,” which clarifies the accounting for abnormal amounts of
          idle facility expense, freight, handling costs, and wasted material. We
          adopted
          SFAS No. 151 on January 1, 2006. The adoption of SFAS No. 151 did not have
          a
          material impact on our consolidated financial position, results of operations
          or
          cash flows.
 
 In
          December 2004, the FASB issued SFAS No. 153, “Exchange of Non Monetary Assets -
          an amendment of APB Opinion No. 29,” which requires non monetary asset exchanges
          to be accounted for at fair value. We were required to adopt the provisions
          of
          SFAS No. 153 for non monetary exchanges occurring in fiscal periods beginning after June 15,
          2005. We
          adopted SFAS No. 153 on January 1, 2006. The adoption of SFAS No. 153 did
          not
          have an impact on our consolidated financial position, results of operations
          or
          cash flows.
  In
          May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
          Corrections - a replacement of APB Opinon No. 20 and FASB Statement No.
          3.” SFAS
          No. 154 changes the requirements for the accounting for and reporting of
          a
          change in an accounting principle. This statement applies to all voluntary
          changes in an accounting principle. It also applies to changes required
          by an
          accounting pronouncement if 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. SFAS No. 154 requires retrospective
          application to prior periods’ financial statements of changes in an accounting
          principle. We adopted SFAS No. 154 on January 1, 2006. The adoption of
          SFAS
          No. 154 did not have an impact on our consolidated financial position,
          results of operations or cash flows.
 
 In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments - an amendment of FASB Statements No. 133 and 140.” SFAS
        No. 155 simplifies the accounting for certain hybrid financial instruments
        that
        contain an embedded derivative that otherwise would have required bifurcation.
        SFAS No. 155 also eliminates the interim guidance in SFAS No. 133, “Accounting
        for Derivative Instruments and Hedging Activities,” which provides that
        beneficial interest in securitized financial assets is not subject to the
        provisions of SFAS No. 133. SFAS No. 155 is effective for all financial
        instruments acquired or issued in fiscal years beginning after September
        15,
        2006. We do not believe that the adoption of SFAS No. 155 will have a material
        impact on our consolidated financial position, results of operations or cash
        flows.
 
 Effective
        the beginning of the first quarter of fiscal year 2006, we adopted the
        provisions of SFAS No. 123(R), “Share Based Payment,” using the modified
        prospective transition method. Under this method, prior periods are not
        restated. The provisions of SFAS 123(R) apply to new stock options and stock
        options outstanding, but not yet vested, on the effective date. As of December
        31, 2005, all outstanding options were fully vested.





28


In
        June
        2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes - an
        interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for
        uncertainty in income taxes recognized in an enterprise’s financial statements
        in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 is
        effective for all uncertainty in income taxes recognized in the financial
        statements in fiscal years beginning after December 15, 2006. We are evaluating
        the effect the adoption of FIN 48 may have on our consolidated financial
        position, results of operations and cash flows.
  **Effects
        of Inflation**
  Management
        believes our results of operations have not been materially impacted by
        inflation over the past three years.


**Item
      4.** **** **Controls
      and Procedures**




As
      discussed in Part II, Item 9A “Controls and Procedures” of our 2006 Annual
      Report on Form 10-K, filed on July 10, 2007, we identified the following
      material weaknesses in our internal control over financial
      reporting:


·
              We
                  did not have adequate policies and procedures and adequate review
                  and
                  oversight relating to the recording of inventory. For example,
                  there was
                  no policy or mechanism in place to identify abnormal scrap using
                  statistical metrics, and there was no appropriate process in place
                  to
                  analyze the net realizable value of inventory. This lead to adjustments
                  recorded in the restatement of the consolidated financial statements
                  for
                  the quarter ended September 30, 2006. In addition, there was no
                  process in
                  place to appropriately review and approve significant changes to
                  our
                  inventory costing methodology, resulting in errors which began in
                  fiscal 2004 and continued into 2005 and the first three quarters
                  of 2006.
                  These deficiencies represent a material weakness in internal control
                  over
                  financial reporting because they did or could lead to material
                  misstatements in the Company’s consolidated financial statements.
 
 ·
              We
                  did not perform sufficient analysis and review of significant estimates
                  and accounts, and certain journal entries were recorded without
                  an
                  appropriate level of documentation and support. For example, certain
                  transactions were not appropriately analyzed, including the sale-leaseback
                  transactions for the disposition of our Miami facility in 2005
                  and the
                  disposition of our Vacaville property in 2006, nor did we properly
                  analyze
                  the recoverability of our assets associated with our South Carolina
                  facility. These matters represent a material weakness in internal
                  control
                  over financial reporting because they could result in material
                  misstatements to interim and annual consolidated financial statements
                  that
                  were not properly prevented or detected by the Company’s internal control.
                  All identified errors related to this material weakness have been
                  corrected in connection with the restatement of the consolidated
                  financial
                  statements for the applicable
                  periods.
 
 ·
              We
                  had information technology general control deficiencies that in
                  the
                  aggregate were deemed to represent a material weakness in the control
                  environment and were the result of a lack of communication and
                  enforcement
                  of control consciousness. These deficiencies in the aggregate represented
                  more than a remote likelihood that a material misstatement of our
                  interim
                  or annual financial statements would not have been prevented or
                  detected.
                  These deficiencies included deficiencies related to logical and
                  physical
                  access requests, configuration changes, updates of control documentation
                  and data backup and storage.




We
      have
      taken, or are in the process of taking, a number of corrective actions with
      respect to the material weaknesses in our internal control over financial
      reporting identified above. These actions include improving the documentation
      and review of our inventory accounting policies and procedures and the
      communication of such policies and procedures within our organization. In this
      regard, we have implemented policies and procedures to analyze and scrap by
      facility on a quarterly basis using statistical metrics, and determine the
      net
      realizable value of inventory by facility on a quarterly basis. We have
      also implemented additional policies and procedures to analyze and approve
      all
      changes to our inventory costing methodology.





With
      regard to the analysis and review of significant estimates and accounts, we
      have
      established a formal process to identify key estimates and accounts and have
      assigned additional levels of analysis and review with respect to such key
      estimates and accounts. We have also established a formal process regarding
      the
      review and analysis of significant transactions. In addition, we are designing
      and implementing procedures for increased documentation and additional levels
      of
      review regarding journal entries.




In
      addition, a senior information technology manager has been assigned to lead
      the
      review of all information technology internal controls and a remediation plan
      has been put into place beginning in March 2007. It includes establishing
      controls related to logical and physical access requests, configuration changes,
      updates of control documentation and data backup and storage.




In
      addition to the remediation actions outlined above, we have taken steps to
      hire
      additional personnel with appropriate backgrounds in accounting to enhance
      our
      existing capabilities and we have taken steps to enhance the training and
      education provided to our finance and accounting personnel, including newly
      hired employees. We have also engaged outside consultants to advise us in
      connection with the design, implementation, documentation and testing of our
      internal controls over financial reporting.





29








In
      light
      of the above-referenced information, our management, under the supervision
      and
      with the participation of our principal executive officer and principal
      financial officer, re-evaluated the assessment of the effectiveness of our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      under the Securities Exchange Act of 1934, as amended) as of the end of the
      period covered by this report. Based upon that evaluation, our principal
      executive officer and principal financial officer concluded that, solely as
      a
      result of the material weaknesses referenced above, the Company’s disclosure
      controls and procedures were not effective as of the end of the fiscal quarter
      ended June 30, 2006.





There
      was
      no change in our internal control over financial reporting that occurred during
      the fiscal quarter covered by this report that has materially affected, or
      is
      reasonably likely to materially affect, our internal control over financial
      reporting.








**PART
      II. OTHER INFORMATION**


**Item
        1.   Legal Proceedings**
 
 On
        July
        18, 2006, Mr. Jean-Paul filed an action against us and other defendants in
        the
        Eleventh Judicial Circuit, Dade County, Florida, alleging negligence in
        connection with an automobile accident involving one of our trailers and
        a
        third-party carrier.  The claim is scheduled for trial in August
        2007.  We are defended in these actions by our insurance carrier, and are
        fully insured with respect to this matter, beyond a deductible.  Because
        this suit is in the initial phases of discovery, the potential loss associated
        with this claim is not probable or estimable and no loss accrual beyond our
        deductible has been recorded.
 
 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’s financial position. 
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.




**Item
      6.** **** **Exhibits**




See
      index
      to Exhibits at page 32 for a list of exhibits included herewith.





30








SIGNATURE




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


**HINES
                HORTICULTURE, INC.**
              **(Registrant)**By:
            /s/ CLAUDIA
                M. PIEROPANClaudia
                M. PieropanChief
                Financial Officer, Secretary and Treasurer(Principal
                financial officer and duly authorized
                officer)





Date:
      July 10, 2007





31





HINES
      HORTICULTURE, INC.


QUARTERLY
      REPORT ON FORM 10-Q


FOR
      THE
      FISCAL QUARTER ENDED JUNE 30, 2006





INDEX
      TO
      EXHIBITS




Exhibit
                No.
            Description31.1
            Certification
                of Chief Executive Officer Pursuant To Rules 13a-14(a) and 15d-14(a)
                under
                the Securities Exchange Act of 1934, as amended. (+)31.2
            Certification
                of Chief Financial Officer Pursuant To Rules 13a-14(a) and 15d-14(a)
                under
                the Securities Exchange Act of 1934, as amended. (+)32.1
            Certification
                of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350. Rule
                13a-14(d)/15d-14(d) (+)32.2
            Certification
                of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350. Rule
                13a-14(d)/15d-14(d) (+)





________________




+
      Filed
      herewith








32