<PAGE>

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

                                    FORM 10-Q

                                   (Mark One)

(X)      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
              For the quarterly period ended September 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. Employer
incorporation 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(X) No( )

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

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

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

     As of November 10, 2006, there were 22,072,549 shares of Common Stock, par
value $0.01 per share, outstanding.
================================================================================

                                     Page 1
<PAGE>

                            HINES HORTICULTURE, INC.
                                      INDEX
                          PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)                              Page No.
-------   --------------------------------                              --------

          Condensed Consolidated Balance Sheets as of September 30,
          2006 and December 31, 2005                                       3

          Condensed Consolidated Statements of Operations for the
          Three and Nine Months Ended September 30, 2006 and 2005          4

          Condensed Consolidated Statements of Cash Flows for the
          Nine Months Ended September 30, 2006 and 2005                    5

          Notes to the Condensed Consolidated Financial Statements         6

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                       15

Item 3.   Quantitative and Qualitative Disclosures About Market Risk      25

Item 4.   Controls and Procedures                                         26

                           PART II. OTHER INFORMATION


Item 1.   Legal Proceedings                                               26

Item 1A.  Risk Factors                                                    26

Item 5.   Other Information                                               26

Item 6.   Exhibits                                                        26

          Signature                                                       27

          Index to Exhibits                                               28

Note:  Items 2, 3 and 4 of Part II are omitted because they are not applicable.

                                     Page 2
<PAGE>
<TABLE>

PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

                                           HINES HORTICULTURE, INC.
                                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                   SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
                            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                                  (UNAUDITED)

ASSETS                                                                      September 30,   December 31,
------                                                                          2006            2005
                                                                             ---------       ---------
<S>                                                                          <C>             <C>
CURRENT ASSETS:
        Cash                                                                 $   7,882       $      62
        Accounts receivable, net                                                23,543          16,444
        Inventories                                                            143,912         164,068
        Consigned inventories                                                    1,546             109
        Prepaid expenses and other current assets                                1,496           2,666
        Assets held for disposal                                                28,005          50,315
                                                                             ---------       ---------

                                                   Total current assets        206,384         233,664
                                                                             ---------       ---------

FIXED ASSETS, net                                                               84,753          82,791

DEFERRED FINANCING EXPENSES, net                                                 5,131           6,207
DEFERRED INCOME TAXES                                                           13,711          21,547
GOODWILL                                                                        38,818          43,926
                                                                             ---------       ---------

                                                                             $ 348,797       $ 388,135
                                                                             =========       =========

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

CURRENT LIABILITIES:
        Accounts payable                                                     $  16,414       $  12,624
        Accrued liabilities                                                     10,691          11,474
        Accrued payroll and benefits                                             6,469           4,453
        Accrued interest                                                         9,077           4,711
        Borrowings on revolving credit facility                                     --          10,080
        Deferred income taxes                                                   39,583          58,048
        Liabilities held for disposal                                            6,747           8,079
                                                                             ---------       ---------

                                              Total current liabilities         88,981         109,469
                                                                             ---------       ---------

LONG-TERM DEBT                                                                 175,000         175,000
DEFERRED GAIN ON LAND SALES                                                     56,109          39,880
OTHER LIABILITIES                                                                2,072           5,378
                                                                             ---------       ---------

                                                      Total liabilities        322,162         329,727
                                                                             ---------       ---------


SHAREHOLDERS' EQUITY
        Preferred stock
           Authorized - 2,000,000 shares, $0.01 par value;
           none outstanding                                                         --              --
        Common stock
           Authorized - 60,000,000 shares, $0.01 par value;
           Issued and outstanding - 22,072,549 shares
           at September 30, 2006 and December 31, 2005                             221             221
        Additional paid-in capital                                             128,781         128,781
        Accumulated deficit                                                   (102,367)        (70,594)
                                                                             ---------       ---------

                                             Total shareholders' equity         26,635          58,408
                                                                             ---------       ---------

                                                                             $ 348,797       $ 388,135
                                                                             =========       =========

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

                                                 Page 3
<PAGE>

                                                     HINES HORTICULTURE, INC.
                                          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  Three Months and Nine Months Ended September 30, 2006 and 2005
                                             (Dollars in thousands, except share data)
                                                            (Unaudited)

                                                                  Three Months Ended September 30,   Nine Months Ended September 30,
                                                                  --------------------------------   -------------------------------
                                                                       2006             2005             2006             2005
                                                                   ------------     ------------     ------------     ------------

Sales, net                                                         $     37,387     $     37,939     $    207,983     $    222,111
Cost of goods sold                                                       22,119           19,757          116,194          109,465
                                                                   ------------     ------------     ------------     ------------
    Gross profit                                                         15,268           18,182           91,789          112,646
                                                                   ------------     ------------     ------------     ------------

Distribution expenses                                                     8,794            8,690           46,724           47,335
Selling, general and administrative expenses                             11,779            9,391           40,795           39,086
Other operating expenses                                                    442               94            2,282              523
                                                                   ------------     ------------     ------------     ------------
    Total operating expenses                                             21,015           18,175           89,801           86,944
                                                                   ------------     ------------     ------------     ------------

    Operating (loss) income                                              (5,747)               7            1,988           25,702

Other expenses (income)
   Interest, net                                                          4,814            5,376           15,149           17,446
   Interest rate swap agreement income                                       --               --               --             (895)
   Amortization of deferred financing expenses                              648              467            1,397            1,356
                                                                   ------------     ------------     ------------     ------------
                                                                          5,462            5,843           16,546           17,907
                                                                   ------------     ------------     ------------     ------------

(Loss) income from continuing operations before income taxes            (11,209)          (5,836)         (14,558)           7,795

Income tax (benefit) provision                                           (4,504)          (2,393)          (5,876)           3,196
                                                                   ------------     ------------     ------------     ------------

(Loss) income from continuing operations                                 (6,705)          (3,443)          (8,682)           4,599

(Loss) income from discontinued operations, net of income taxes         (19,870)          (1,730)         (23,091)           3,217
                                                                   ------------     ------------     ------------     ------------

Net (loss) income                                                  $    (26,575)    $     (5,173)    $    (31,773)    $      7,816
                                                                   ============     ============     ============     ============


Basic and diluted earnings per share:

(Loss) income from continuing operations                           $      (0.30)    $      (0.16)    $      (0.39)    $       0.21
(Loss) income from discontinued operations, net of income taxes           (0.90)           (0.07)           (1.05)            0.14
                                                                   ------------     ------------     ------------     ------------
Net (loss) income per common share                                 $      (1.20)    $      (0.23)    $      (1.44)    $       0.35
                                                                   ============     ============     ============     ============


Weighted average shares outstanding--Basic                           22,072,549       22,072,549       22,072,549       22,072,549
                                                                   ============     ============     ============     ============

Weighted average shares outstanding--Diluted                         22,072,549       22,072,549       22,072,549       22,119,345
                                                                   ============     ============     ============     ============

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

                                                         Page 4
<PAGE>

                                      HINES HORTICULTURE, INC.
                           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           Nine Months Ended September 30, 2006 and 2005
                                       (Dollars in thousands)
                                             (Unaudited)

                                                                  Nine Months Ended September 30,

                                                                      2006           2005
                                                                    --------       --------
CASH FLOWS FROM OPERATING ACTIVITIES
    (Loss) income from continuing operations                        $ (8,682)      $  4,599
    Adjustments to reconcile (loss) income from continuing
      operations to net cash provided by operating activities:
         Depreciation                                                  6,344          5,257
         Accretion of asset retirement obligations                        25             51
         Amortization of deferred financing expenses                   1,397          1,356
         Interest rate swap agreement income                              --           (895)
         Loss (gain) on sale of assets                                   362           (184)
         Deferred income taxes                                        (5,726)         3,196

Change in working capital accounts:
    Accounts receivable                                               (7,099)        (8,955)
    Inventories                                                       18,513          5,353
    Prepaid expenses and other current assets                          1,163            613
    Accounts payable and accrued liabilities                           8,038         12,047
                                                                    --------       --------
        Net cash provided by continuing operations                    14,335         22,438
        Net cash (used in) provided by discontinued operations        (2,707)         4,777
                                                                    --------       --------
        Net cash provided by operating activities                     11,628         27,215
                                                                    --------       --------
CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of fixed assets                                          (7,666)        (8,165)
    Proceeds from sale of fixed assets                                14,297            809
    Proceeds from land sale option                                        --          2,000
                                                                    --------       --------
        Net cash provided by (used in) continuing operations           6,631         (5,356)
        Net cash (used in) provided by discontinued operations           (39)           261
                                                                    --------       --------
        Net cash provided by (used in) investing activities            6,592         (5,095)
                                                                    --------       --------
CASH FLOWS FROM FINANCING ACTIVITIES
    Net repayments on revolving line of credit                       (10,080)       (18,607)
    Repayments of long-term debt                                          --         (3,815)
    Deferred financing expenses incurred                                (320)          (192)
                                                                    --------       --------
        Net cash used in financing activities                        (10,400)       (22,614)
                                                                    --------       --------

NET CHANGE IN CASH                                                     7,820           (494)

CASH, beginning of period                                                 62            600
                                                                    --------       --------

CASH, end of period                                                 $  7,882       $    106
                                                                    ========       ========

Supplemental disclosure of cash flow information:
    Cash paid for interest                                          $ 10,465       $ 13,301
    Cash paid for income taxes                                      $  1,112       $     25

                        The accompanying notes are an integral part of these
                            condensed consolidated financial statements.
</TABLE>
                                               Page 5
<PAGE>

                            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"), 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 and our continuing operations consist of eight
     commercial nursery facilities located in Arizona, California, Oregon, 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.

     Significant Accounting Policies
     -------------------------------

         In March 2005, the Financial Accounting Standards Board ("FASB") issued
     FASB Interpretation No. ("FIN") 47, "Accounting for Conditional Asset
     Retirement Obligations." FIN 47 clarifies the accounting for conditional
     asset retirement obligations as used in Statement of Financial Accounting
     Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations."
     A conditional asset retirement obligation is an unconditional legal
     obligation to perform an asset retirement activity in which the timing and
     (or) method of settlement are conditional on a future event that may or may
     not be within the control of the entity. Therefore, an entity is required
     to recognize a liability for the fair value of a conditional asset
     retirement obligation under SFAS No. 143 if the fair value of the liability
     can be reasonably estimated. During the third quarter of 2006, the Company
     continued to evaluate its asset retirement obligations and identified
     additional retirement obligations of approximately $405. In addition, in
     order to bring to present value the future obligations, the Company
     recorded an additional accretion expense of $12. This brings the overall
     obligation to approximately $1,193. Additional obligations of approximately
     $398 arose from the remediation costs associated with the Company's lease
     requirements to exit from the land located in Danville, Pennsylvania. As
     discussed below, the Company is in the process of selling the operations
     located in Danville. Additional obligations of $6 arose from the
     remediation costs associated with the Company's requirements to remove
     asbestos piping used for irrigation located in Vacaville, California. In
     addition, the Company has determined that it will incur approximately $300
     in land cleanup costs at its Fallbrook, California facility. However,
     because there is an indeterminate settlement date, the Company has not
     recognized this liability on its financial statements. As the Company
     continues to evaluate and identify additional asset retirement obligations,
     additional liabilities will be recorded when the future obligations can be
     reasonably estimated.

2.   Unaudited Financial Information:
     --------------------------------

         The unaudited financial information furnished herein, in the opinion of
     management, reflects all adjustments (consisting of only normal recurring
     adjustments) 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 for the preceding
     fiscal year 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, 2005, as amended by an amendment, filed on May 12, 2006
     by Hines under the Securities Exchange Act of 1934, as amended, 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.

                                     Page 6
<PAGE>

3.   Discontinued Operations:
     ------------------------

     MIAMI ASSET SALES
         On October 2, 2006, the Company entered into asset purchase agreements
     to sell certain inventory, vehicles, equipment and other assets located at
     its Miami, Florida facility. Total proceeds from the sale of these assets
     were $4,099, of which $1,764 was used to payoff outstanding lease
     obligations related to the assets which were sold. In connection with
     entering into the asset purchase agreements, the Company ceased active
     operations at its Miami, Florida facilities.

         On November 8, 2006, the Company completed the evaluation of the fair
     value of its Miami, Florida assets, which are described above. As a result
     of the evaluation, the Company recorded an impairment charge of
     approximately $5,253 to reflect the fair value of these assets. This
     impairment charge was recorded in the statements of operations as a loss
     from discontinued operations for the period ended September 30, 2006.

         In addition, on October 30, 2006, the Company entered into a commercial
     contract to sell one of the two remaining real properties located in Miami,
     Florida. The contract, which contains closing and other customary
     conditions, provides for the sale of approximately 138 acres of land in
     Miami-Dade County, Florida and certain other assets of the Company which
     are to be identified during the prospective buyer's inspection and due
     diligence period. The expected sales price for the land and the other
     assets is approximately $12,455, assuming the transaction closes. During
     the fourth quarter of 2006, the Company anticipates recording a net gain
     from the sale of the 138 acres of land, which would be recorded as a
     component of discontinued operations.

         As of September 30, 2006, all of the Company's remaining assets,
     inventories and related liabilities related to the Miami, Florida
     operations have been reclassified on the balance sheet as "assets or
     liabilities held for disposal."

     NORTHEAST FACILITIES
         In August 2006 the Company made a decision to pursue the sale of the
     four Northeast nursery operations as provided for in the Company's credit
     facility. These operations consist of the Company's facilities in Danville
     and Pipersville, Pennsylvania and Newark and Utica, New York. The fixed
     assets, inventories and related liabilities of these four facilities have
     been reclassified on the balance sheet as "assets or liabilities held for
     disposal."

         As required by SFAS No. 144, "Accounting for the Impairment or Disposal
     of Long-Lived Assets," the Company had performed impairment tests on the
     assets the Company is seeking to sell by December 31, 2006. These assets
     included the Company's four nursery facilities located in the Northeast as
     well as certain assets located in Miami, Florida. The original impairment
     tests performed in connection with the second quarter of fiscal 2006
     determined that the carrying value of the long-lived assets for the
     Northeast facilities had exceeded the estimated undiscounted future cash
     flows associated with the use of the assets and therefore were deemed
     unrecoverable. An impairment charge of $8,041 was recorded by the Company
     in its condensed consolidated statements of operations for the period ended
     June 30, 2006.

         On October 30, 2006, the Company conducted a re-evaluation of the fair
     value of its four Northeast facilities. The re-evaluation was triggered by
     two major customers withdrawing substantial future sales commitments from
     three of the four facilities, which withdrawal occurred subsequent to the
     original announcement of the sale of the four Northeast facilities. The
     withdrawal represented a reduction of approximately 75% of the 2007 annual
     sales commitments for the three facilities, greatly reducing the fair
     market value of these assets. As a result of the Company's re-evaluation,
     the Company has determined that an additional impairment charge of $11,084
     be recorded to more accurately reflect the fair value of these assets. This
     impairment charge was recorded as a component of the loss from discontinued
     operations in the condensed consolidated statements of operations for the
     period ended September 30, 2006.

     GOODWILL IMPAIRMENT
         In connection with the Company's decision to sell the four Northeast
     facilities and the Miami, Florida assets, the Company allocated
     approximately $5,108 of goodwill to these facilities and assets. Prior to
     the allocation, the Company reported total goodwill of approximately
     $43,926, which was initially recorded based on purchase price allocations
     from various acquisitions made by the Company. Subsequent to the allocation
     of the goodwill to the operations to be disposed of, the Company concluded
     that the carrying value of the goodwill attributable to the four Northeast
     color facilities and the Miami, Florida assets was impaired. As a result,
     the Company recorded a goodwill impairment charge of $5,108. The goodwill
     impairment charge was recorded as a component of the loss from discontinued
     operations in the condensed consolidated statements of operations for the
     period ended September 30, 2006.

                                     Page 7
<PAGE>

         Summarized financial information for discontinued operations is set
     forth below:
<TABLE>
                                                         Three months ended                    Nine months ended
                                                  --------------------------------      -------------------------------
                                                  September 30,      September 30,      September 30,     September 30,
                                                      2006               2005               2006               2005
                                                    --------           --------           --------           --------
<S>                                                 <C>                <C>                <C>                <C>
Sales, net                                          $  9,141           $ 11,432           $ 50,392           $ 68,143
(Loss) income before income taxes                    (32,082)            (2,932)           (37,543)             5,453
Income tax (benefit) provision                       (12,212)            (1,202)           (14,452)             2,236
                                                    --------           --------           --------           --------
(Loss) income from discontinued operations          $(19,870)          $ (1,730)          $(23,091)          $  3,217
                                                    ========           ========           ========           ========
</TABLE>

         As of September 30, 2006 and December 31, 2005, the components of
     assets and liabilities of discontinued operations in the consolidated
     balance sheets are as follows:

                                         September 30,       December 31,
                                             2006               2005
                                           --------           --------
Inventory                                  $ 17,081           $ 20,454
Fixed assets, net                            13,154             39,927
Deferred income taxes                        (2,230)           (10,066)
                                           --------           --------
Assets held for disposal                   $ 28,005           $ 50,315
                                           ========           ========

Deferred income taxes                      $  6,747           $  8,079
                                           --------           --------
Liabilities held for disposal              $  6,747           $  8,079
                                           ========           ========


4.   Earnings Per Share:
     -------------------

         Earnings per share are calculated in accordance with SFAS No. 128,
     "Earnings per Share," which requires the Company to report both basic
     earnings per share, based on the weighted-average number of common shares
     outstanding, and diluted earnings per share, based on the weighted-average
     number of common shares outstanding adjusted to include the potentially
     dilutive effect of outstanding stock options and warrants using the
     treasury method. For the three and nine months ended September 30, 2006,
     the incremental shares related to underlying employee stock options from
     total outstanding options of 847,227, were excluded from the computation of
     diluted earnings per share because they would have been anti-dilutive. For
     the three and nine months ended September 30, 2005, the incremental shares
     related to the underlying employee stock options were 0 and 2,067,
     respectively, from total outstanding options of 1,066,273. In addition, for
     the three and nine months ended September 30, 2005, the incremental shares
     related to 440,000 warrants outstanding were 0 and 44,729, respectively.
     The 440,000 warrants expired on December 31, 2005.

5.   Stock-Based Compensation:
     -------------------------

         The Company's 1998 Long-Term Equity Incentive Plan (the "1998 Stock
     Plan"), which has been approved by the shareholders, 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.

                                     Page 8
<PAGE>

         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 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 (APB) Opinion No. 25, "Accounting for Stock
     Issued to Employees", and related interpretations (APB No. 25). Thus,
     expense was generally not recognized for the Company's employee stock
     option plans. Results for prior periods have not been restated.

         PRO FORMA IMPACT IN Q3 2005 HAD THE COMPANY APPLIED THE FAIR VALUE
     PROVISIONS OF SFAS NO. 123

         The following table shows net income and EPS had the Company applied
     the fair value method of accounting for stock-based compensation in
     accordance with SFAS No. 123 during the third quarter of 2005 (in
     thousands, except per share data).

<TABLE>
                                                Three months ended      Nine months ended
                                                September 30, 2005     September 30, 2005
                                                ------------------     ------------------
<S>                                                  <C>                    <C>
Net loss, as reported                                $(5,173)               $ 7,816
Stock-based compensation expense, net of tax             (11)                   (32)
                                                     -------                -------
Pro forma net loss                                   $(5,184)               $ 7,784
                                                     =======                =======

Net loss per share:

Basic and diluted - as reported                      $ (0.23)               $  0.35
                                                     =======                =======
Basic and diluted - pro forma                        $ (0.23)               $  0.35
                                                     =======                =======
</TABLE>

         The weighted-average assumptions used in estimating the fair value of
     stock options granted in 2005, along with the weighted-average grant date
     fair values, were as follows:

                                                                      2005
                                                                      ----

          Dividend yield                                                  0%
          Expected volatility                                         83.86%
          Risk-free interest rate                                      3.48%
          Expected life                                           Four years
          Forfeiture rate                                                 0%

         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.

         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 this exchange a large number of
     options were cancelled and reissued to the same individuals.

                                     Page 9
<PAGE>

         There were no stock option grants during the three and nine months
     ended September 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
September 30, 2006:

<TABLE>
                                                       2006
                                        --------------------------------------
                                                         Weighted Average          Aggregate
                                           Shares         Exercise Price        Intrinsic Value
                                        --------------  --------------------    -----------------
<S>                                           <C>       <C>                     <C>
Outstanding at December 31, 2005              869,110   $              6.22
Granted                                             -                     -
Exercised                                           -                     -
Cancelled                                     (21,883)                 7.01
                                        --------------
Outstanding - September 30, 2006              847,227   $              6.20     $              -
                                        ==============                          =================

Exercisable                                   847,227   $              6.20     $              -
                                        ==============                          =================

Weighted average fair value
  of options granted during period                      $                 -
</TABLE>


         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 September 30, 2006. The Company had no options
     outstanding on September 30, 2006 with an exercise price below the quoted
     price of the Company's common stock resulting in an aggregate intrinsic
     value of $0.

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

                                          OUTSTANDING AND EXERCISABLE
                                 ----------------------------------------------

                                                    Average       Weighted
                                    Number of      Remaining     Average of
     Range of Exercise Price         Options     Contract Life Exercise Price
     --------------------------- ----------------------------------------------
     $3.32 to $5.00                   81,000          4.81         $ 4.53
     $5.50                           618,127          5.63           5.50
     $6.00 to $8.00                   33,000          3.08           6.73
     $11.00                          115,100          1.81          11.00
                                 -----------
     Total                           847,227          4.95         $ 6.20
                                 ===========

                                    Page 10
<PAGE>

6.   Inventories:
     ------------

         Inventories consisted of the following:

                                                 September 30,      December 31,
                                                     2006              2005
                                                   --------          --------
Nursery stock                                      $134,091          $156,327
Material and supplies                                 9,821             7,741
                                                   --------          --------
     Subtotal                                       143,912           164,068
Consigned inventory                                   1,546               109
                                                   --------          --------
     Total continuing operations inventory          145,458           164,177
                                                   --------          --------

Discontinued operations:

Nursery stock                                        13,867            16,795
Material and supplies                                 2,161             2,695
                                                   --------          --------
     Subtotal                                        16,028            19,490
Consigned inventory                                   1,053               964
                                                   --------          --------
     Total discontinued operations inventory         17,081            20,454
                                                   --------          --------

Total Inventory                                    $162,539          $184,631
                                                   ========          ========


7.   New Accounting Standards:
     -------------------------

         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 does not believe that the
     adoption of FIN 48 will have a material impact on its consolidated
     financial position, results of operations or 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.

         In September 2006, the Securities and Exchange Commission (the "SEC")
     issued Staff Accounting Bulletin ("SAB") 108, "Considering the Effects of
     Prior Year Misstatements when Quantifying Misstatements in Current Year
     Financial Statements" ("SAB 108"). SAB 108 provides guidance on the
     consideration of the effects of prior year misstatements in quantifying
     current year misstatements for the purpose of determining whether the
     current year's financial statements are materially misstated. SAB 108 is
     effective for fiscal years ending after November 15, 2006. The Company does
     not expect SAB 108 to have a material impact on its consolidated financial
     statements.

         In September 2006, the FASB issued SFAS No. 157, "Fair Value
     Measurements". This standard defines fair value, establishes a framework
     for measuring fair value in accounting principles generally accepted in the
     United States of America, and expands disclosure about fair value
     measurements. This pronouncement applies to other accounting standards that
     require or permit fair value measurements. Accordingly, this statement does
     not require any new fair value measurement. This statement is effective for
     fiscal years beginning after November 15, 2007, and interim periods within
     those fiscal years. The Company is currently evaluating the requirements of
     SFAS No. 157 and the impact that the adoption of this statement will have
     on its consolidated financial statements.

                                    Page 11
<PAGE>

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 which, subject to applicable
     borrowing base calculations, provides for borrowings which are not to
     exceed revolving utilization limits which range between $10,800 and $23,300
     depending on the fiscal quarter. The revolving loan also permits the
     ability to obtain letters of credit up to a separate 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 to
     Credit Agreement (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 revolving loans was reduced by the
     imposition of revolving utilization limits which range from $10,800 to
     $23,300 depending on the fiscal quarter.

         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.

         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 Senior Credit Facility contains customary
     representations and warranties and customary events of default and other
     covenants. As of September 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 breaches 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 Land
     Sale") be used to pay down the term loan. In accordance with the First
     Amendment, the Company repaid the term loan in its entirety on November 8,
     2005 with the completion of the Miami Land Sale. The First Amendment also
     amended the calculation of the fixed charge coverage ratio and the leverage
     ratio to allow as an addition to Earnings Before 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.

                                    Page 12
<PAGE>

         SECOND AMENDMENT TO SENIOR CREDIT FACILITY. In February 2006, Hines
     Nurseries negotiated and entered into the Second Amendment to the Senior
     Credit Facility. 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. The Third Amendment waived the requirement that the
     Company comply with the minimum fixed charge coverage ratio covenant for
     the periods ended June 30, 2006 and September 30, 2006. The Third Amendment
     also instituted maximum revolving utilization restrictions under the credit
     facility which, subject to applicable borrowing base calculations, limit
     the Company's borrowings to limits which range from $10,800 to $23,300
     depending on the fiscal quarter. It also increased the interest rate spread
     by 25 basis points on outstanding prime and London Interbank Offered Rate
     ("LIBOR") borrowings, increased unused line fees and established 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.

         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 1.00% to
     2.00%, depending on its consolidated leverage ratio. Currently, the
     applicable margin for Prime rate loans is 2.00% for the revolving loan.

         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. Currently, the applicable margin for
     LIBOR rate loans is 3.00% for the revolving loan. 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.

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.

                                    Page 13
<PAGE>

         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.

10.  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 ("Option Agreement"), the Company's
     168-acre property in Vacaville, California. The Option Agreement provided
     that the gross purchase price of the property be $15,100. On April 3, 2006,
     the Company successfully completed the sale of the land and received net
     proceeds of $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 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. The
     Company is continuing to develop replacement acreage and infrastructure at
     its 842-acre Winters South facility in northern California. The entire gain
     on the sale of property has been deferred due to our continuing involvement
     in the property, as defined in SFAS No. 98, "Accounting for Leases."

         On November 7, 2005, the Company successfully completed the sale of 122
     acres of unimproved property in Miami, Florida and received net proceeds of
     approximately $47,000. The Company originally entered into a two-year lease
     agreement with the buyer, whereby the Company would lease the entire
     property for a one-year period, with a thirty-day extension right, and then
     vacate approximately 33 acres and lease the remaining 89 acres for an
     additional one-year period, with extension rights for an additional ninety
     days. The Company's rent obligation under the lease was five hundred
     dollars per outstanding acre, annually. On October 2, 2006, the Company
     entered into a First Amendment to the lease, requiring the Company to pay
     the landlord bonus rent in the amount of 50% of sublease rent, amending the
     term of the lease to expire on June 30, 2007. On the same day, the Company
     entered into a sublease agreement pursuant to which the Company subleased
     the reduced premises under the lease to a subtenant for a term expiring on
     June 30, 2007 for a monthly sublease payment of $15,000. The entire gain on
     the sale of property has been deferred due to our continuing involvement in
     the property, as defined in SFAS No. 98.

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.

                                    Page 14
<PAGE>

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.

     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. As a result of this continued decline, we had been considering internally
the divestiture of all four Northeast nursery facilities located in Danville,
Pennsylvania, Pipersville, Pennsylvania, Utica, New York and Newark, New York,
as well as assets located in Miami, Florida. In addition, our decline required
us to seek amendments and waivers in connection with our Senior Credit Facility
as a result of our inability to comply with all of our financial covenants as
described more fully below.

     On August 8, 2006, we negotiated and entered into the Third Amendment to
Credit Agreement (the "Third Amendment") relating to the Senior Credit Facility
dated as of September 30, 2003. In accordance with the terms of the Third
Amendment, we obtained waivers of financial covenants, reduced the aggregate
revolving loan availability under our Senior Credit Facility and as a result of
our recommendation made to the lenders of the Senior Credit Facility, we
committed to the divestiture of our four Northeast facilities and our assets in
Miami, Florida for predetermined minimum aggregate proceeds by no later than
December 31, 2006. On August 8, 2006, in connection with the Third Amendment,
our Board of Directors approved the aforementioned divestitures.

     On August 10, 2006, we announced our decision to divest all four Northeast
nursery facilities as well as assets located in Miami, Florida. On August 18,
2006, we decided, after further evaluation of the matter, to discontinue all of
our nursery operations in Miami, Florida by the end of the third quarter of
2006.

     Our recommendation to the lenders of our Senior Credit Facility to divest
the Northeast and Miami nursery facilities was based on several significant
factors. As mentioned above, our net sales have deteriorated in the Eastern
region. 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 2004 and 2005.

     Liquidity was another important factor that we considered when making the
recommendation to divest these facilities. As a result of our declining
performance, we were unable to meet our current financial debt covenant, the
minimum fixed charge coverage ratio, which led to increasing concerns from our
lenders. By divesting these assets, we are reducing the need for future
outstanding borrowings under our revolver, reducing our future net interest
expense, assisting in the funding of our capacity transitions and possibly
enabling us to reduce other outstanding debt in the future.

     The last significant factor we considered was our return on assets. As a
result of the upcoming expiration of our lease at our Irvine, California
facility and the sale of our Lagoon Valley facility in northern California, we
are faced with replacing lost capacity at these sites. These replacements will
require significant amounts of capital expenditures over the next several years.
Based on these circumstances, we determined that cash generated from operations
in addition to borrowing availability did not enable us to move forward with
these capacity transitions and the investments required to turnaround operations
at our Northeast and Miami facilities. Having assessed the potential returns
from the various facilities, we decided to move forward with the capacity
transitions in the West and to utilize the proceeds from the divestitures of the
Northeast and Miami facilities to fund the capital expenditures.

                                    Page 15
<PAGE>

     While net sales in the Eastern region have continued to significantly
decline, as described above, our net sales throughout the rest of the country
had remained relatively stable during 2004 and 2005 (when compared to the
comparable prior year periods), and have declined by approximately $7 million
during the nine months ended September 30, 2006 compared to the same period a
year ago. 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 a certain number 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.

     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 II. Item 1A - Risk
Factors in the Company's Annual Report on Form 10-K for the year ended December
31, 2005, (together with any changes thereto contained in the Company's Form
10-Q for the quarters ended March 31, 2006, June 30, 2006 and this Form 10-Q and
in any subsequent quarterly reports on Form 10-Q), those contained in the
Company's other filings with the Securities and Exchange Commission, and those
set forth below.

     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 of key
customers, increases in transportation and fuel costs, factors with regard to
the challenges associated with pay by scan and other factors. Additional factors
that may influence our results in the future include the fact that we may not
achieve the minimum level of aggregate proceeds from the asset sales required by
our Third Amendment and the fact that such anticipated sales of assets and
properties may be subject to various conditions and may not close for a number
of reasons, including reasons outside our control.

                                    Page 16
<PAGE>

     OVERVIEW

     We are a leading national supplier of ornamental shrubs, color plants and
container-grown plants and our continuing operations consists of eight
commercial nursery facilities located in Arizona, California, Oregon, South
Carolina and Texas. We produce approximately 4,000 varieties of ornamental
shrubs and color plants and we sell to more than 1,170 retail and commercial
customers, representing more than 6,700 outlets throughout the United States and
Canada. As of September 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 Land Sale"). At December 31, 2005, we had $2.6 million in net
operating loss carryforwards for federal income tax purposes, which begin to
expire in 2024. In addition, we had approximately $6.9 million in net operating
loss carryforwards for state income tax reporting purposes. Our state net
operating losses in certain states begin expiring in 2008.

     Based on our current projections, we anticipate that we will not pay cash
income taxes for federal purposes or state purposes through 2008.

     The use of the cash method of accounting for federal income tax purposes
results in a current deferred tax liability for accounting purposes. At
September 30, 2006, we had a current deferred liability for deferred income
taxes from continuing operations of $39.6 million primarily 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 historically have generated 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 ("Option Agreement"), 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 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.

     The entire gain on the sale of the property has been deferred, due to our
continuing involvement in the property, as defined in Statement of Financial
Accounting Standards ("SFAS") No. 98, "Accounting for Leases."

                                    Page 17
<PAGE>

     DISCONTINUED OPERATIONS

MIAMI ASSET SALES
     On October 2, 2006, we entered into asset purchase agreements to sell
certain inventory, vehicles, equipment and other assets located at our Miami,
Florida facility. Total proceeds from the sale of these assets were
approximately $4.1 million, of which approximately $1.8 million was used to
payoff outstanding lease obligations related to the assets which were sold. In
connection with entering into the asset purchase agreements, we ceased active
operations at our Miami, Florida facilities.

     On November 8, 2006, we completed the evaluation of the fair value of our
Miami, Florida assets, which are described above. As a result of the evaluation,
we recorded an impairment charge of approximately $5.3 million to reflect the
fair value of these assets. This impairment charge was recorded in the
statements of operations as a component of the loss from discontinued operations
for the period ended September 30, 2006.

     In addition, on October 30, 2006, we entered into a commercial contract to
sell one of our two remaining real properties located in Miami, Florida. The
contract, which contains closing and other customary conditions, provides for
the sale of approximately 138 acres of land in the Miami-Dade County, Florida
and certain other assets of the Company which are to be identified during the
prospective buyer's inspection and due diligence period. The expected sales
price for the land and the other assets is approximately $12.5 million, assuming
the transaction closes. During the fourth quarter of 2006, we anticipate
recording a net gain of approximately $9.1 million from the sale of the 138
acres of land, which would be recorded as a component of discontinued
operations.

     As of September 30, 2006, all of our remaining assets, inventories and
related liabilities related to our Miami, Florida operations have been
reclassified on the balance sheet as "assets or liabilities held for disposal."

NORTHEAST FACILITIES

     In August 2006, we made a decision to pursue the sale of our four Northeast
nursery operations as provided for in the Third Amendment. These operations
consist of our facilities in Danville and Pipersville, Pennsylvania and Newark
and Utica, New York. The fixed assets, inventories and related liabilities of
these four facilities have been reclassified on the balance sheet as "assets or
liabilities held for disposal."

     As required by SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we had performed impairment tests on the assets the Company
is seeking to sell by December 31, 2006. These assets included the Company's
four nursery facilities located in the Northeast as well as certain assets
located in Miami, Florida. The original impairment tests performed in connection
with the second quarter of fiscal 2006 determined that the carrying value of the
long-lived assets for the Northeast facilities had exceeded the estimated
undiscounted future cash flows associated with the use of the assets and
therefore were deemed unrecoverable. An impairment charge of approximately $8.0
million was recorded by us in our condensed consolidated statements of
operations for the period ended June 30, 2006.

     On October 30, 2006, we conducted a re-evaluation of the fair value of its
four Northeast facilities. The re-evaluation was triggered by two major
customers withdrawing substantial future sales commitments from three of the
four facilities, which withdrawal occurred subsequent to the original
announcement of the sale of the four Northeast facilities. The withdrawal
represented a reduction of approximately 75% of the 2007 annual sales
commitments for the three facilities, greatly reducing the fair market value of
these assets. As a result of our re-evaluation, we have determined that an
additional impairment charge of approximately $11.1 million be recorded to more
accurately reflect the fair value of these assets. This impairment charge was
recorded as a component of the loss from discontinued operations in the
condensed consolidated statements of operations for the period ended September
30, 2006.

     GOODWILL IMPAIRMENT

     In connection with our decision to sell the four Northeast facilities and
the Miami, Florida assets, we allocated approximately $5.1 million of goodwill
to these facilities and assets. Prior to the allocation, we reported total
goodwill of approximately $43.9 million, which was initially recorded based on
purchase price allocations from various acquisitions made by us. Subsequent to
the allocation of the goodwill to the operations to be disposed of, we concluded
that the carrying value of the goodwill attributed to the four Northeast color
facilities and the Miami, Florida assets was impaired. As a result, we recorded
a goodwill impairment charge of approximately $5.1 million. The goodwill
impairment charge was recorded as a component of the loss from discontinued
operations in the statements of operations as a loss from discontinued
operations for the period ended September 30, 2006.

                                    Page 18
<PAGE>

     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 our 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. However, we believe that pay by scan has
had an impact on our earnings for the nine month period ended September 30, 2006
as we are experiencing a reduction in revenue when comparing year over year
shipments. The result of this was an increase in our consigned inventory held at
our customer's store locations at September 30, 2006 as well as increased shrink
as a result of the lower sell-through of product.

RESULTS OF OPERATIONS
---------------------

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2005

     NET SALES. Net sales of $37.4 million for the three months ended September
30, 2006 decreased $0.6 million, or 1.5%, from net sales of $37.9 million for
the comparable period in 2005. The decline in net sales was mainly due to one of
the west coast facilities and resulted from weaker demand during the quarter for
that site's existing product mix. As a result of the capacity transition from
southern to northern California, some of our higher demand crops were
unavailable for sale and this directly impacted the product mix that our
southern California facility was able to sell during the period. This decrease
was partially offset by increases in net sales at our other continuing
operations facilities

     GROSS PROFIT. Gross profit of $15.3 million for the three months ended
September 30, 2006 decreased $2.9 million, or 16.0%, from gross profit of $18.2
million for the comparable period in 2005. Gross profit as a percentage of sales
for the quarter decreased to 40.8% from 47.9% for the comparable period in 2005.
The decline in gross profit and gross profit margin was mainly due to the
decline in net sales, as discussed above, as well as higher cost inventory,
which was produced during 2005.

      DISTRIBUTION EXPENSES. Distribution expenses of $8.8 million for the three
months ended September 30, 2006 increased $0.1 million, or 1.2%, from $8.7
million for the comparable period in 2005. As a percentage of net sales,
distribution expenses for the quarter increased to 23.5% from 22.9% in the third
quarter of 2005. This slight increase was mainly due to increased third party
carrier charges.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses of $11.8 million for the three months ended September
30, 2006 increased by $2.4 million, or 25.4%, from $9.4 million in the third
quarter of 2005. The increase in selling expenses was mainly due to a higher
amount of third party product merchandising costs which have been increasingly
required by certain customers. Third party merchandising costs are typically
more expensive than utilizing our in-house merchandising labor force. The
increase in general and administrative expenses was mainly due to an increase in
personnel and higher costs related to the implementation of Sarbanes-Oxley.

     OTHER OPERATING EXPENSE. Other operating expenses of $0.4 million for the
three months ended September 30, 2006 increased by $0.3 million from $0.1
million for the comparable period in 2005. Other operating expenses for the
third quarter of 2006 consisted primarily of consulting fees relating to our
productivity improvement initiatives.

     OPERATING (LOSS) INCOME. Operating loss for the three months ended
September 30, 2006 was $5.7 million compared to nominal operating income for the
comparable period in 2005. The swing from operating income to operating loss
resulted from a decline in gross profit for the period of $2.9 million, an
increase of $1.4 million in selling expenses, an increase of $1.0 million in
general and administrative expenses and an increase of other operating expenses
to $0.4 million.

     OTHER EXPENSES. Other expenses of $5.5 million for the three months ended
September 30, 2006 decreased $0.4 million, or 6.5%, from $5.8 million for the
comparable period in 2005 primarily due to lower interest expense. Interest
expense for the three months ended September 30, 2006 declined $0.6 million, or
10.5%, primarily as a result of lower outstanding debt, partially offset by
higher interest rates. This was offset by an increase in deferred financing
expenses which resulted from the write-off of a portion of the deferred
financing expenses in connection with our third amendment to the Senior Credit
Facility.

                                    Page 19
<PAGE>

     INCOME TAX BENEFIT. Our effective income tax rate was 40.2% for the three
months ended September 30, 2006, down from 41.0% from the comparable period a
year ago. Benefit from income taxes was $4.5 million for the three months ended
September 30, 2006 compared to $2.4 million for the comparable period in 2005.
The increase in income tax benefit is primarily due to lower income from
continuing operations before income taxes. In addition, included in the three
months ended September 30, 2006, is the reversal of $0.2 million of tax
liabilities due to the closure of certain tax years for tax audit purposes.

     LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations of $6.7
million for the three months ended September 30, 2006 increased $3.3 million, or
94.7%, from $3.4 million for the comparable period in 2005. The increase in the
loss from continuing operations was attributable to lower net sales, gross
margin decline and other factors discussed above.

     LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations, net
of tax, of $19.9 million for the three months ended September 30, 2006 increased
$18.1 million from $1.7 million for the comparable period in 2005. As a result
of the anticipated sales of our four Northeast facilities and our Miami, Florida
assets, all results of operations, asset impairment charges and goodwill
impairments of those facilities have been reclassified to discontinued
operations. The increase in loss from discontinued operations, net of income
taxes, was primarily due to a decrease in net sales and gross profit margins as
well as exit costs, an asset impairment charge of $16.3 million and a goodwill
impairment charge of $5.1 million, which were recorded in the third quarter of
2006.

     NET LOSS. Net loss for the three months ended September 30, 2006 of $26.6
million increased $21.4 million compared to $5.2 million for the comparable
period in 2005. The increase in net loss was mainly attributable to the loss on
discontinued operations recorded during the third quarter, as well as other
factors discussed above.

NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2005

     NET SALES. Net sales of $208.0 million for the nine months ended September
30, 2006 decreased by $14.1 million, or 6.4%, from net sales of $222.1 million
for the comparable period in 2005. The decline in net sales during the nine
month period is mainly due to the persistent rain in the Pacific Northwest,
northern California and Southwest during the late winter and early spring months
as well as lost market share in the mid-Atlantic markets. The late winter and
early spring rains reduced consumer demand at the retail level and also delayed
certain product availability for up to three weeks, which also impacted sales.
Additionally, our facility in South Carolina reported less sales volume as a
result of lost market share primarily in the mid-Atlantic markets.

     GROSS PROFIT. Gross profit of $91.8 million for the nine months ended
September 30, 2006 decreased $20.9 million, or 18.5%, from gross profit of
$112.6 million for the comparable period in 2005. The decline in gross profit
and gross profit margin was mainly due to the decline in net sales, as discussed
above, as well as higher cost inventory produced during 2005.

     DISTRIBUTION EXPENSES. Distribution expenses of $46.7 million for the nine
months ended September 30, 2006 decreased $0.6 million, or 1.3%, from $47.3
million for the comparable period in 2005. The decrease is due primarily to
lower sales. As a percentage of net sales, distribution expenses for the nine
months ended September 30, 2006 increased to 22.5% from 21.3% for the comparable
period in 2005. This increase is primarily due to increased diesel fuel costs
and third party carrier costs.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses of $40.8 million for the nine months ended September 30,
2006 increased $1.7 million, or 4.4%, from $39.1 million for the comparable
period in 2005. The increase in selling and general and administrative expenses
is primarily due to an increase in third party product merchandising costs,
which have been increasingly required by certain customers, as well as an
increase in general and administrative personnel and higher costs related to the
implementation of Sarbanes-Oxley.

     OTHER OPERATING EXPENSES. Other operating expenses of $2.3 million for the
nine months ended September 30, 2006 increased by $1.8 million from $0.5 million
for the comparable period a year ago. Other operating expenses consisted
primarily of consulting fees relating to our productivity improvement
initiatives.

     OPERATING INCOME. Operating income of $2.0 million for the nine months
ended September 30, 2006 decreased by $23.7 million, or 92.3%, from $25.7
million for the comparable period in 2005. The decline in operating income
resulted from lower sales volume, gross profit decline, and an increase in
selling and general and administrative expenses and other expenses, as discussed
above.

                                    Page 20
<PAGE>

     OTHER EXPENSES (INCOME). Other expenses of $16.5 million for the nine
months ended September 30, 2006 decreased by $1.4 million, or 7.6%, from $17.9
million for the comparable period a year ago. The decrease was primarily due to
a reduction in interest expense of $2.3 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.

     INCOME TAX (BENEFIT) PROVISION. Our effective tax rate was 40.4% for the
nine months ended September 30, 2006, down from an effective tax rate of 41.0%
for the comparable period in 2005. Benefit from income taxes was $5.9 million
for the nine months ended September 30, 2006 compared to a provision for income
tax of $3.2 million for the comparable period in 2005. The shift from provision
to benefit is due to lower income from continuing operations before income
taxes. In addition, included in the nine months ended September 30, 2006, is the
reversal of approximately $0.2 million of tax liabilities due to the closure of
certain tax years for tax audit purposes.

     (LOSS) INCOME FROM CONTINUING OPERATIONS. Loss from continuing operations
for the nine months ended September 30, 2006 of $8.7 million was $13.3 million
less than income from continuing operations of $4.6 million for the comparable
period in 2005. The shift from income to loss was mainly due to lower operating
income, partially offset by a decrease in interest expense.

     (LOSS) INCOME FROM DISCONTINUED OPERATIONS. Loss from discontinued
operations, net of tax, for the nine months ended September 30, 2006 of $23.1
million was $26.3 less than income from discontinued operations, net of tax, of
$3.2 million for the comparable period in 2005. The shift from income to loss
was primarily due to a decrease in sales and gross profit margins from the
facilities which comprise discontinued operations. In addition, we recorded
asset and goodwill impairment charges totaling $24.4 million and $5.1 million,
respectively, during the nine months ended September 30, 2006.

     NET (LOSS) INCOME. Net loss for the nine months ended September 30, 2006 of
$31.8 million was $39.6 million less than net income of $7.8 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 loss from discontinued
operations 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 historically have generated 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 of continuing operations was
$14.3 million for the nine months ended September 30, 2006 compared to $22.4
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 in 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 accounts receivable resulted mainly from
the reduction in net sales. The decline in inventory resulted from fewer units
in production as we better align production with forecasted sales as well as
units we are now capturing into inventory with lower production costs resulting
from our internal labor productivity initiatives.

     Net cash provided by investing activities from continuing operations was
$6.6 million for the nine months ended September 30, 2006 compared to net cash
used in investing activities from continuing operations of $5.4 million for the
same period a year ago. The increase in cash provided by investing activities
was mainly due to the receipt of $14.4 million of cash proceeds from the Lagoon
Valley land sale, partially offset by a $2.0 million reduction in land sale

                                    Page 21
<PAGE>

option payments received relating to our leased Irvine properties and a $0.3
million increase in capital expenditures during the period. Capital expenditures
during the period mainly consisted of general maintenance capital and
expenditures related to our Irvine capacity relocation project.

     Net cash used in financing activities was $10.4 million for the nine months
ended September 30, 2006 compared to $22.6 million for the same period in 2005.
Net cash used in financing operations primarily represents the repayment of debt
for each respective period. The decline in net cash used in financing activities
for the nine months ended September 30, 2006 is due to the impact of cash
generated and used in operating and investing activities, as discussed above. At
September 30, 2006, we had fully repaid the revolver balance and had cash on
hand of $7.9 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. After applying the borrowing base
limitations and letters of credits to our available borrowings as of September
30, 2006 we were limited to a maximum borrowing availability of $10.8 million
based on the utilization limits in place for the quarter.

     At September 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 for our continuing operations as of September 30, 2006.

<TABLE>
                                                                       PAYMENTS DUE BY PERIOD
                                                                       (DOLLARS IN MILLIONS)
                                                      -----------------------------------------------------
                                                      Less than                                       After
     Contractual Cash Obligations        Total         1 year        1-3 years      4-5 years       5 years
                                        -------        -------        -------        --------        -------
<S>                                     <C>            <C>            <C>            <C>             <C>
Senior Notes ........................   $ 175.0        $  --          $  --          $  175.0        $    --
Interest ............................      93.3           18.9           55.0            19.4             --
Operating Leases.....................       4.0            1.6            2.0             0.4             --
                                        -------        -------        -------        --------        -------
Total ...............................   $ 272.3        $  20.5        $  57.0        $  194.8        $    --
                                        =======        =======        =======        ========        =======
</TABLE>

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

     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
which, subject to applicable borrowing base calculations, provides for
borrowings which are not to exceed revolving utilization limits which range
between $10.8 million and $23.3 million depending on the fiscal quarter. The
revolving loan also permits us to obtain letters of credit up to a separate
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 by the imposition of revolving utilization limits
which range from $10.8 million to $23.3 million depending on the fiscal quarter.

     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.

                                    Page 22
<PAGE>
     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 September 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.

     FIRST AMENDMENT TO SENIOR CREDIT FACILITY. Effective June 30, 2005, Hines
Nurseries negotiated and entered into the First Amendment to the Senior Credit
Facility. The First Amendment amended the Senior Credit Facility to require that
the proceeds from the Miami Land Sale be used to pay down the term loan. In
accordance with the First Amendment, we repaid the term loan in its entirety on
November 8, 2005 with the completion of the Miami Land Sale. The First Amendment
also amended the calculation of the fixed charge coverage ratio and the leverage
ratio to allow as an addition to Earnings Before 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. 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.
The Third Amendment waived the requirement that we comply with the minimum fixed
charge coverage ratio covenant for the periods ended June 30, 2006 and September
30, 2006. The Third Amendment also instituted maximum revolving utilization
restrictions under the credit facility which, subject to applicable borrowing
base calculations, limit the Company's borrowings to limits which range from
$10,800 to $23,300 depending on the fiscal quarter. It also increased the
interest rate spread by 25 basis points on outstanding prime and London
Interbank Offered Rate ("LIBOR") borrowings, increased unused line fees and
established new fixed charge covenant ratios beginning in the fourth quarter of
2006. In addition, the Third Amendment requires us to sell ours 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 London Inter Bank Offering
Rate ("LIBOR") rate loans. 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. Currently, the
applicable margin for prime rate loans is 2.00% for the revolving loan.

     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. Currently, the applicable margin for LIBOR rate
loans is 3.00% for the revolving loan. 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.

                                    Page 23
<PAGE>

     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.

     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 the accounts receivable recovery account charged against
income, while direct charge-offs of trade receivables are deducted from the
allowance.

     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.

     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.

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<PAGE>

     In March 2005, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 47, "Accounting for Conditional Asset Retirement
Obligations." FIN 47 clarifies the accounting for conditional asset retirement
obligations as used in Statement of Financial Accounting Standards ("SFAS") No.
143, "Accounting for Asset Retirement Obligations." A conditional asset
retirement obligation is an unconditional legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Therefore, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation under SFAS No. 143 if the
fair value of the liability can be reasonably estimated. During the third
quarter of 2006, we continued to evaluate its asset retirement obligations and
identified additional retirement obligations of approximately $0.4 million. In
addition, in order to bring to present value the future obligations, we recorded
a nominal accretion expense. This brings the overall obligation to approximately
$1.2 million. Additional obligations of approximately $0.4 million arose from
the remediation costs associated with our lease requirements to exit from the
land located in Danville, Pennsylvania. As discussed previously, we are in the
process of selling the operations located in Danville. Additional nominal
obligations arose from the remediation costs associated with our requirements to
remove asbestos piping used for irrigation located in Vacaville, California. In
addition, we have determined that it will incur approximately $0.3 million in
land cleanup costs at our Fallbrook, California facility. However, because there
is an indeterminate settlement date, we have not recognized this liability on
our financial statements. As we continue to evaluate and identify additional
asset retirement obligations, additional liabilities will be recorded when the
future obligations can be reasonably estimated.

     NEW ACCOUNTING STANDARDS.

     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
financial statement in fiscal years beginning after December 15, 2006. We do not
believe that the adoption of FIN 48 will have a material impact on its
consolidated financial position, results of operations or 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.

     In September 2006, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin ("SAB") 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of determining whether the current year's financial statements
are materially misstated. SAB 108 is effective for fiscal years ending after
November 15, 2006. The Company does not expect SAB 108 to have a material impact
on its consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
This standard defines fair value, establishes a framework for measuring fair
value in accounting principles generally accepted in the United States of
America, and expands disclosure about fair value measurements. This
pronouncement applies to other accounting standards that require or permit fair
value measurements. Accordingly, this statement does not require any new fair
value measurement. This statement is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company is
currently evaluating the requirements of SFAS No. 157 and the impact that the
adoption of this statement will have on its consolidated financial statements.


     ACCOUNTING STANDARDS ADOPTED

     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.

     EFFECTS OF INFLATION

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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<PAGE>

     We also manage our interest rate risk by balancing the amount of our fixed
and variable long-term debt. For fixed-rate debt, interest rate changes affect
the fair market value of such debt but do not impact earnings or cash flows.
Conversely, for variable-rate debt, interest rate changes generally do not
affect the fair market value of such debt but do impact future earnings and cash
flows, assuming other factors are held constant. At September 30, 2006, the
carrying amount and estimated fair value of our long-term debt was $175.0
million and $155.8 million, respectively. Assuming that the anticipated sales of
assets are completed, we believe that future borrowings on our variable rate
debt will be minimal; therefore any change in applicable interest rates should
not have a material impact on our financial statements.

ITEM 4.  CONTROLS AND PROCEDURES

     Based on the evaluation 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), our principal executive officer and our
principal financial officer have concluded that such controls and procedures
were effective as of the end of the period covered by this report. 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

     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 1A.  RISK FACTORS

     There have been no material changes to the risk factors as disclosed in the
Company's 2005 annual report on Form 10-K, as amended, filed with the Securities
and Exchange Commission, except for the updates provided in the Company's
quarterly reports for the periods ended March 31, 2006 and June 30, 2006, and
the additional risk factor set forth below.

OUR CONTRACTUAL AGREEMENT FOR THE SALE OF REAL PROPERTY IN THE MIAMI, FLORIDA
AREA AND OTHER ASSETS IS SUBJECT TO CLOSING CONDITIONS THAT MAY NOT BE
SATISFIED.

     On October 30, 2006, Hines Nurseries entered into a commercial contract for
the sale of approximately 138 acres of real property located in Miami-Dade
County, Florida and certain other assets of the Company which are to be
identified during the prospective buyer's due diligence period, for an expected
sales price of $12.5 million. Completion of these transactions is subject to
closing conditions, including the prospective buyer's right to terminate the
agreement during the due diligence period. There can be no assurance that the
transactions contemplated by this contract will close on a timely basis, or at
all, and their failure to do so could have a material adverse effect on the
Company, including impacting the Company's ability to comply with the terms of
the Third Amendment.

ITEM 5.  OTHER INFORMATION.

     MATERIAL CONTRACTS

     On November 9, 2006, Hines Horticulture entered into a severance agreement
with James O'Donnell (the "Employee"). The Employee is an executive officer and
the severance agreement provides the Employee with six months severance as well
as certain bonus payments in the event the Employee is terminated by the Company
without "Cause" (as defined in the severance agreement) or the Employee resigns
for "Good Reason" (as defined in the severance agreement). The severance
agreement also contains certain other terms and conditions including provisions
which provide that the Employee agrees to non-disparagement and non-solicitation
provisions. A copy of the severance agreement is filed as an exhibit to this
Form 10-Q as Exhibit 10.5 and is incorporated herein by reference.

ITEM 6.  EXHIBITS

     See index to Exhibits at page 28 for a list of exhibits included herewith.

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<PAGE>


                                    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. PIEROPAN
                                                 ------------------------------
                                                 Claudia M. Pieropan
                                                 Chief Financial Officer,
                                                 Secretary and Treasurer
                                                 (Principal financial officer
                                                 and duly authorized officer)

Date:  November 14, 2006




                                    Page 27
<PAGE>


                            HINES HORTICULTURE, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                 FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2006

                                INDEX TO EXHIBITS

Exhibit No.                           Description
-----------   -----------------------------------------------------------------

       10.1   Third Amendment to Credit Agreement dated as of August 8, 2006 by
              and among Hines Nurseries, Inc., a subsidiary of Hines
              Horticulture, Inc., Hines SGUS Inc., the financial institutions
              party thereto, Deutsche Bank Trust Company Americas, as
              administrative agent for the Lenders. (1)

       10.2   Asset Purchase Agreement between Hines Horticulture, Inc. and
              Costa Nursery Farms, LLC dated as of October 2, 2006. (2)

       10.3   Asset Purchase Agreement between Hines Horticulture, Inc. and Pure
              Beauty Farms, Inc. (2) dated as of October 2, 2006.

       10.4   Offer Letter between Hines Horticulture, Inc. and James O'Donnell.
              (3)(*)

       10.5   Severance Agreement between Hines Horticulture, Inc. and James
              O'Donnell dated November 9, 2006. (+)(*)

       10.6   Commercial Contract between Hines Horticulture, Inc. and F & J
              Farms, LLC dated as of October 30, 2006. (4)

       31.1   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

* Management contract or compensatory arrangement.

(1) Incorporated by reference to Hines Horticulture, Inc.'s Form 10-Q filed on
August 14, 2006.

(2) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed on
October 6, 2006.

(3) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed on
October 17, 2006.

(4) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed on
November 3, 2006.


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