**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q/A**





**Amendment
      No. 1**




(Mark
      One)


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


For
      the
      quarterly period ended March 31, 2006


OR


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


For
      the
      transition period from___________________ to _____________________





Commission
      File Number


000-24439





**HINES
      HORTICULTURE, INC.**


(Exact
      name of registrant as specified in its charter)





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





12621
      Jeffrey Road


Irvine,
      California 92620


(Address
      of principal executive offices) (Zip Code)





(949)
      559-4444


(Registrant's
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the preceding 12 months (or for such shorter period that the Registrant was
      required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days.


Yes(
       ) No(X)





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


Large
      accelerated
      filer (  )    Accelerated
      filer (  )    Non-accelerated 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 May
      11, 2006, there were 22,072,549 shares of Common Stock, par value $0.01 per
      share, outstanding.














**HINES
      HORTICULTURE, INC.**


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








**Part
      I.  Financial Information**


Item
                    1.
                Financial
                    Statements (unaudited)
                Page
                    No.Condensed
                    Consolidated Balance Sheets as of March 31, 2006 (as restated)
                    and
                    December 31, 2005 (as restated)
                4Condensed
                    Consolidated Statements of Operations for the Three Months Ended
                    March 31,
                    2006 (as restated) and 2005 (as restated)
                5Condensed
                    Consolidated Statements of Cash Flows for the Three Months Ended
                    March 31,
                    2006 (as restated) and 2005 (as restated)
                6Notes
                    to the Condensed Consolidated Financial Statements
                7Item
                    2.
                Management's
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                17Item
                    4.
                Controls
                    and Procedures
                25**Part
                    II. Other Information**Item
                    1A.
                Risk
                    Factors
                26Item
                    6.
                Exhibits
                26Signature
                27Index
                    to Exhibits
                28
  1




**Explanatory
      Note**


**(Dollars
      in thousands)**





This
      amended quarterly report on Form 10-Q/A (Amendment No. 1) is being filed by
      us
      to amend our quarterly report on Form 10-Q for the quarterly period ended March
      31, 2006 originally filed with the Securities and Exchange Commission on May
      15,
      2006.





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





This
      amendment on Form 10-Q/A includes changes to Item 1, Item 2 and
      Item 4 of Part I and Item 1A and Item 6 of Part II. Except
      as identified in the prior sentence, no other item included in the original
      Form 10-Q has been amended. Except as required to reflect the effects of
      the restatement described below, this Form 10-Q/A does not reflect events
      occurring after the filing of our original Form 10-Q or modify or update those
      disclosures affected by subsequent events. Information not affected by the
      restatement is unchanged and reflects the disclosures made at the time of the
      original filing of the Form 10-Q on May 16, 2006.





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


·  our
      condensed consolidated balance sheets as of March 31, 2006 and December 31,
      2005;


·  our
      condensed consolidated statements of operations for the three months ended
      March
      31, 2006 and 2005; and


·  our
      condensed consolidated statements of cash flows for the three months ended
      March
      31, 2006 and 2005.





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


**Inventory
        Costs**
 We
          determined that certain materials and supplies were incorrectly capitalized
          as a
          component of nursery stock after the related inventory was sold, thereby
          misstating inventory and costs of goods sold for the full year and each
          of the
          quarters of 2004 and 2005 and the first, second and third quarters of 2006.
          These materials and supplies should have been relieved to cost of goods
          sold as
          the related inventory was sold. The correction to reduce inventory balances
          resulted in lower cost of goods sold in subsequent periods as the nursery
          stock
          was sold.
  The
          effects of the correction of this error on the condensed consolidated balance
          sheets as of March 31, 2006 and December 31, 2005 resulted in a decrease
          in
          inventory of approximately $3,900 and $4,200, respectively.
  The
          effects of the correction of this error on the condensed statements of
          operations for the three months ended March 31, 2006 and 2005 was a
          decrease in cost of goods sold of approximately $200 and $300,
          respectively.


**Miami
      Property Sale**


We
        sold property located in Miami, Florida in November 2005. We did not correctly
        record the transaction in accordance with Statement of Financial Accounting
        Standards (“SFAS”) No. 98, “Accounting for Leases,” as a financing transaction.
        The effect of the correction of this error on the March 31, 2006 and December
        31, 2005 condensed consolidated balance sheets was the recognition of a
        financing obligation of $47,040, reinstatement of the carrying value of the
        land
        of $7,160, reclassification of deferred tax
        assets, non-current of $15,750 to current deferred tax liabilities,
        and a decrease in deferred gain on land sale of $39,880. The effect of
        the correction of this error did not have an impact on our condensed
        consolidated statements of operations for the three months ended March 31,
        2006
        and 2005.


2


**Workers’
      Compensation and Auto Insurance Accruals**


In
        connection with the preparation of our 2006 consolidated financial statements,
        we discovered an error in the calculation of our accrued workers’ compensation
        and auto insurance liabilities. The effect of the correction of this error
        on
        the March 31, 2006 condensed consolidated statement of operations was a decrease
        in cost of goods sold of $72 and a decrease in distribution expenses of $46.
        The
        effect of the correction of this error on the March 31, 2005 condensed
        consolidated statement of operations was a decrease in cost of goods sold
        of $57
        and a decrease in distribution expenses of $24. The effect of the correction
        of
        this error on the March 31, 2006 and December 31, 2005 condensed consolidated
        balance sheets was a decrease in inventories of $166 and $143,
        respectively, and a decrease in liabilities of $479 and $337,
        respectively.
  **Asset
        Retirement Obligations Adjustment**


In
        connection with the preparation of our 2006 consolidated financial statements,
        we discovered that we had not recorded an asset retirement obligation for
        certain of our assets located in Irvine, California upon the adoption of
        SFAS
        No. 143, "Accounting for Asset Retirement Obligations."
 
 The
        effect of the correction of this error on the March 31, 2006 condensed
        consolidated balance sheet was an increase in net fixed assets of $52, an
        increase in inventories of $25 and an increase in liabilities of $373. The
        effect of the correction of this error on the December 31, 2005 condensed
        consolidated balance sheet was an increase in net fixed assets of $60, an
        increase in inventories of $4 and an increase in liabilities of $359.
 
 The
        effect of the correction of this error on the March 31, 2006 and 2005 condensed
        consolidated statements of operations was an increase (decrease) in costs
        of
        goods sold of $1 and ($15), respectively.


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





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





The
      accounting errors identified above and the related restatements did not have
      an
      impact on our revenues, cash balances or liquidity as of or for the three months
      ended March 31, 2006 and 2005.




3


**PART
                I. FINANCIAL INFORMATION**Item
                1. Financial Statements**HINES
                HORTICULTURE, INC.****CONDENSED
                CONSOLIDATED BALANCE SHEETS****March
                31, 2006 and December 31, 2005****(Dollars
                in thousands, except share data)****(Unaudited,
                as restated - see Note 4)**




**ASSETS**
            
            March
                31,
            
            December
                31,2006
            
            2005CURRENT
                ASSETS:Cash
            
            $
            60
            
            $
            62Accounts
                receivable, net
            
            
            38,358
            
            
            16,444Inventories
            
            
            197,625
            
            
            178,975Consigned
                inventories
            
            
            2,181
            
            
            1,350Prepaid
                expenses and other current assets
            
            
            3,411
            
            
            2,666Assets
                held for sale
            
            
            484
            
            
            484Total
                current assets
            
            
            242,119
            
            
            199,981FIXED
                ASSETS, net
            
            
            127,715
            
            
            129,454DEFERRED
                FINANCING COSTS, net
            
            
            5,986
            
            
            6,207GOODWILL
            
            
            43,926
            
            
            43,926$
            419,746
            
            $
            379,568**LIABILITIES
                AND SHAREHOLDERS' EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            26,545
            
            $
            12,624Accrued
                liabilities
            
            
            9,054
            
            
            8,591Accrued
                payroll and benefits
            
            
            4,532
            
            
            4,453Accrued
                interest
            
            
            9,332
            
            
            4,711Borrowings
                on revolving credit facility
            
            
            38,059
            
            
            10,080Deferred
                income taxes
            
            
            46,027
            
            
            48,868Total
                current liabilities
            
            
            133,549
            
            
            89,327LONG-TERM
                DEBT
            
            
            175,000
            
            
            175,000FINANCING
                OBLIGATION
            
            
            47,040
            
            
            47,040DEFERRED
              INCOME
              TAXES
            
            
            4,227
            
            
            4,227OTHER
                LIABILITIES
            
            
            8,508
            
            
            8,260SHAREHOLDERS'
                EQUITYPreferred
                stockAuthorized
                - 2,000,000 shares, $0.01 par value;none
                outstanding
            
            
            -
            
            
            -Common
                stockAuthorized
                - 60,000,000 shares, $0.01 par value;issued
                and outstanding - 22,072,549 sharesat
                March 31, 2006 and December 31, 2005
            
            
            221
            
            
            221Additional
                paid-in capital
            
            
            128,781
            
            
            128,781Accumulated
                deficit
            
            
            (77,580
            )
            
            (73,288
            )Total
                shareholders' equity
            
            
            51,422
            
            
            55,714$
            419,746
            
            $
            379,568




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


4


**HINES
        HORTICULTURE, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **Three
        Months Ended March 31, 2006 and 2005**
 **(Dollars
        in thousands, except share and per share data)**
 **(Unaudited,
        as restated - see Note 4)**




Three
                Months Ended March 31,2006
            
            2005Sales,
                net
            
            $
            56,909
            
            $
            63,990Cost
                of goods sold
            
            
            30,565
            
            
            32,405Gross
                profit
            
            
            26,344
            
            
            31,585Distribution
                expenses
            
            
            14,235
            
            
            14,670Selling,
                general and administrative expenses
            
            
            12,972
            
            
            13,815Other
                operating expenses (income), net
            
            
            742
            
            
            (115
            )Total
                operating expenses
            
            
            27,949
            
            
            28,370Operating
                (loss) income
            
            
            (1,605
            )
            
            3,215Other
                expenses (income)Interest,
                net
            
            
            5,157
            
            
            6,240Interest
                rate swap agreement income
            
            
            -
            
            
            (895
            )Amortization
                of deferred financing costs
            
            
            371
            
            
            4455,528
            
            
            5,790Loss
                before income taxes
            
            
            (7,133
            )
            
            (2,575
            )Income
                tax benefit
            
            
            (2,841
            )
            
            (954
            )Net
                loss
            
            $
            (4,292
            )
            $
            (1,621
            )Basic
                and diluted loss per share:Net
                loss per common share
            
            $
            (0.19
            )
            $
            (0.07
            )Weighted
                average shares outstanding--basic and diluted
            
            
            22,072,549
            
            
            22,072,549






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


5





**HINES
                HORTICULTURE, INC.****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS****Three
                Months Ended March 31, 2006 and 2005****(Dollars
                in thousands)****(Unaudited,
                as restated - see Note 4)**






2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (4,292
            )
            $
            (1,621
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            2,839
            
            
            2,632Accretion
                of asset retirement obligations
            
            
            15
            
            
            11Amortization
                of deferred financing costs
            
            
            371
            
            
            445Interest
                rate swap agreement income
            
            
            -
            
            
            (895
            )Gain
                on sale of assets
            
            
            (20
            )
            
            (115
            )Deferred
                income taxes
            
            
            (2,841
            )
            
            (954
            )Changes
                in working capital accounts:Accounts
                receivable
            
            
            (21,914
            )
            
            (27,442
            )Inventories
            
            
            (19,549
            )
            
            (26,463
            )Prepaid
                expenses and other current assets
            
            
            (752
            )
            
            (1,091
            )Accounts
                payable and accrued liabilities
            
            
            19,175
            
            
            18,276Net
                cash used in operating activities
            
            
            (26,968
            )
            
            (37,217
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of fixed assets
            
            
            (963
            )
            
            (2,468
            )Proceeds
                from sale of fixed assets
            
            
            100
            
            
            132Proceeds
                from land sale option
            
            
            -
            
            
            1,100Net
                cash used in investing activities
            
            
            (863
            )
            
            (1,236
            )CASH
                FLOWS FROM FINANCING ACTIVITIESBorrowings
                on revolving line of credit
            
            
            65,257
            
            
            77,507Repayments
                on revolving line of credit
            
            
            (37,278
            )
            
            (39,275
            )Repayments
                of long-term debt
            
            
            -
            
            
            (5
            )Deferred
                financing costs incurred
            
            
            (150
            )
            
            -Net
                cash provided by financing activities
            
            
            27,829
            
            
            38,227NET
                CHANGE IN CASH
            
            
            (2
            )
            
            (226
            )CASH,
                beginning of period
            
            
            62
            
            
            600CASH,
                end of period
            
            $
            60
            
            $
            374Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            478
            
            $
            10,689Cash
                paid for income taxes
            
            $
            1,046
            
            $
            22






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


6


**HINES
      HORTICULTURE, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


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








1.  Description
      of Business:





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




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




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




2.  New
        Accounting Standards:
 
 In
        November 2004, the Financial Accounting Standards Board ("FASB") issued
        Statement of Financial Accounting Standard ("SFAS") No. 151, “Inventory Costs,”
which clarifies the accounting for abnormal amounts of idle facility expense,
        freight, handling costs, and wasted material. The Company adopted SFAS No.
        151
        on January 1, 2006. The adoption of SFAS No. 151 did not have a material
        impact
        on the Company’s consolidated financial position, results of operations or cash
        flows.
 
 In
        December 2004, the FASB issued SFAS No. 153, “Exchange of Non Monetary Assets -
        an amendment of APB Opinion No. 29,” which requires non monetary asset exchanges
        to be accounted for at fair value. The Company is required to adopt the
        provisions of SFAS No. 153 for non monetary exchanges occurring in fiscal
        periods beginning after June 15, 2005. The Company adopted SFAS No. 153 on
        January 1, 2006. The adoption of SFAS No. 153 did not have an impact on the
        Company’s consolidated financial position, results of operations or cash
        flows.
 
 In
        May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
        Corrections - a replacement of APB Opinon No. 20 and FASB Statement No. 3.” SFAS
        No. 154 changes the requirements for the accounting for and reporting of
        a
        change in an accounting principle. This statement applies to all voluntary
        changes in an accounting principle. It also applies to changes required by
        an
        accounting pronouncement if the pronouncement does not include specific
        transition provisions. When a pronouncement includes specific transition
        provisions, those provisions should be followed. APB Opinion No. 20 previously
        required that most voluntary changes in an accounting principle be recognized
        by
        including in net income of the period of the change the cumulative effect
        of
        changing to the new accounting principle. SFAS No. 154 requires retrospective
        application to prior periods’ financial statements of changes in an accounting
        principle. The Company adopted SFAS No. 154 on January 1, 2006. The adoption
        of
        SFAS No. 154 did not have an impact on the Company’s consolidated financial
        position, results of operations or cash flows.
 
 In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments - an amendment of FASB Statements No. 133 and 140.” SFAS
        No. 155 simplifies the accounting for certain hybrid financial instruments
        that
        contain an embedded derivative that otherwise would have required bifurcation.
        SFAS No. 155 also eliminates the interim guidance in SFAS No. 133, “Accounting
        for Derivative Instruments and Hedging Activities,” which provides that
        beneficial interest in securitized financial assets is not subject to the
        provisions of SFAS No. 133. SFAS No. 155 is effective for all financial
        instruments acquired or issued in fiscal years beginning after September
        15,
        2006. The Company does not believe that the adoption of SFAS No. 155 may
        have a
        material impact on its consolidated financial position, results of
        operations and cash flows.
  Effective
          the beginning of the first quarter of fiscal year 2006, the Company adopted
          the
          provisions of SFAS No. 123(R) 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.
 3.  Unaudited
        Financial Information:
 The
          unaudited financial information furnished herein, in the opinion of management,
          reflects all adjustments (consisting of only normal recurring adjustments,
          except for the restatement discussed in Note 4), which are necessary for
          a fair
          statement of the consolidated financial position, results of operations
          and cash
          flows of the Company as of and for the periods indicated. The Company presumes
          that users of the interim financial information herein have read or have
          access
          to the Company's audited consolidated financial statements on Form 10-K
          for the
          year ended December 31, 2006, which restates and amends the consolidated
          financial statements for the years ended December 31, 2005 and 2004, and
          that
          the adequacy of additional disclosure needed for a fair presentation, may
          be
          determined in that context.


7


Accordingly,
        footnotes and other disclosures, which would substantially duplicate the
        disclosures contained in the Company’s Form 10-K for the year ended
        December 31, 2006, filed on July 10, 2007 have been omitted. The financial
        information herein is not necessarily representative of a full year's
        operations. The year-end condensed balance sheet was derived from the restated
        audited financial statements as of December 31, 2005, but does not include
        all
        disclosures required by accounting principles generally accepted in the United
        States of America.


4.  Restatement
      of Financial Statements:


In
        connection with the preparation of the Company’s consolidated financial
        statements for the year ended December 31, 2006, the Company identified
        errors which affected the full year and each of the fiscal quarters of 2004
        and
        2005, and the first, second and third fiscal quarters of 2006.
 
 This
        amendment on Form 10-Q/A includes changes to Item 1, Item 2 and
        Item 4 of Part I and Item 6 of Part II. Except as identified
        in the prior sentence, no other item included in the original Form 10-Q has
        been amended. Except as required to reflect the effects of the restatement
        described below, this Form 10-Q/A does not reflect events occurring after
        the filing of our original Form 10-Q or modify or update those disclosures
        affected by subsequent events. Information not affected by the restatement
        is
        unchanged and reflects the disclosures made at the time of the original filing
        of the Form 10-Q on May 15, 2006.


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


·
            its
                condensed consolidated balance sheets as of March 31, 2006 and
                December 31, 2005;


·
            its
                condensed consolidated statements of operations for the three months
                ended
                March 31, 2006 and 2005; and


·
            its
                condensed consolidated statements of cash flows for the three months
                ended
                March 31, 2006 and 2005.





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


**Inventory
        Costs**
 The
          Company determined that certain materials and supplies were incorrectly
          capitalized as a component of nursery stock after the related inventory
          was
          sold, thereby misstating inventory and costs of goods sold for each of
          the
          quarters of 2004 and 2005 and the first, second and third quarters of 2006.
          These materials and supplies should have been relieved to cost of goods
          sold as
          the related inventory was sold. The correction to reduce inventory balances
          resulted in lower cost of goods sold in subsequent periods as the nursery
          stock
          was sold.
  The
          effects of the correction of this error on the condensed consolidated balance
          sheets as of March 31, 2006 and December 31, 2005 resulted in a decrease
          in
          inventory of approximately $3,900 and $4,200, respectively.
  The
          effects of the correction of this error on the condensed statements of
          operations for the three months ended March 31, 2006 and 2005 was a
          decrease in cost of goods sold of approximately $200 and $300,
          respectively.
 **Miami
        Property Sale**


The
        Company sold its property located in Miami, Florida in November 2005. The
        Company did not correctly record the transaction in accordance with SFAS
        No. 98, “Accounting for Leases,” as a financing transaction. The effect of the
        correction of this error on the March 31, 2006 and December 31, 2005 condensed
        consolidated balance sheets was the recognition of a financing obligation
        of
        $47,040, reinstatement of the carrying value of the land of $7,160,
        reclassification of deferred tax assets, non-current of $15,750 to
        current deferred tax liabilities and a decrease in deferred gain on land
        sale of $39,880. The effect of the correction of this error did not have an
        impact on the Company’s condensed consolidated statements of operations for the
        three months ended March 31, 2006 and 2005.





**Workers’
      Compensation and Auto Insurance Accruals**


In
        connection with the preparation of the Company’s 2006 consolidated financial
        statements, the Company discovered an error in the calculation of the accrued
        workers’ compensation and auto insurance liabilities. The effect of the
        correction of this error on the March 31, 2006 condensed consolidated statement
        of operations was a decrease in cost of goods sold of $72 and a decrease
        in
        distribution expenses of $46. The effect of the correction of this error
        on the
        March 31, 2005 condensed consolidated statement of operations was a decrease
        in
        cost of goods sold of $57 and a decrease in distribution expenses of $24.
        The
        effect of the correction of this error on the March 31, 2006 and December
        31,
        2005 condensed consolidated balance sheets was a decrease in inventories
        of $166
        and $143, respectively, and a decrease in accrued liabilities of $479 and
        $337, respectively.




8


**Asset
      Retirement Obligations Adjustment**


In
        connection with the preparation of the Company’s 2006 consolidated financial
        statements, the Company discovered that it had not recorded an asset retirement
        obligation for certain of its assets located in Irvine, California upon the
        adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations."
 
 The
        effect of the correction of this error on the March 31, 2006 condensed
        consolidated balance sheet was an increase in net fixed assets of $52, an
        increase in inventories of $25 and an increase in liabilities of $373. The
        effect of the correction of this error on the December 31, 2005 condensed
        consolidated balance sheet was an increase in net fixed assets of $60, an
        increase in inventories of $4 and an increase in liabilities of $359.
 
 The
        effect of the correction of this error on the March 31, 2006 and 2005 condensed
        consolidated statements of operations was an increase (decrease) in costs
        of
        goods sold of $1 and ($15), respectively.
  The
          tables set forth below summarize the impact of the adjustments described
          above
          on the individual line items on the Company’s consolidated financial statements
          for the affected periods. A reconciliation of the December 31, 2005 consolidated
          balance sheet can be found in the Company's Annual Report on Form 10-K for
          the year ended December 31, 2006 filed on July 10, 2007.


9





**Three
                Months Ended**
            
            
            
            
            
            **Three
                Months Ended****March
                31, 2006**
            
            
            
            
            
            **March
                31, 2005****Statement
                of Operations:**
            
            *As*
              *Originally*
              *Reported*
            
            *As
                Restated*
              *for*
              *Correction*
              *of
                Errors*
            
            
            **Statement
                of Operations:**
            
            *As
                Originally Reported*
            
            *As
                Restated for Correction of Errors*Cost
                of goods sold
            
            $
                30,885
            
            $
                30,565
            
            
            Cost
                of goods sold
            
            $
                32,766
            
            $
                32,405Gross
                profit
            
            26,017
            
            26,344
            
            
            Gross
                profit
            
            31,224
            
            31,585Distribution
                expenses (a)
            
            14,282
            
            14,235
            
            
            Distribution
                expenses (a)
            
            14,694
            
            14,670Total
                operating expenses
            
            27,988
            
            27,949
            
            
            Total
                operating expenses
            
            28,394
            
            28,370Operating
                loss
            
            (1,971)
            
            (1,605)
            
            
            Operating
                income
            
            2,830
            
            3,215Loss
                before income taxes
            
            (7,499)
            
            (7,133)
            
            
            Loss
                  before income taxes
            
            (2,960)
            
            (2,575)Income
                tax benefit
            
            (3,075)
            
            (2,841)
            
            
            Income
                  tax benefit
            
            (1,214)
            
            (954)Net
                loss
            
            (4,424)
            
            (4,292)
            
            
            Net
                loss
            
            (1,746)
            
            (1,621)Basic
                and diluted loss per share:
            
            
            
            
            
            
            
            Basic
                and diluted loss per share:Net
                loss per common share
            
            $
                (0.20)
            
            $
                (0.19)
            
            
            
            Net
                loss per common share
            
            $
                (0.08)
            
            $
                (0.07)**Statement
                of Cash Flows:**
            
            
            
            
            
            
            
            **Statement
                of Cash Flows:**Net
                loss
            
            $
                (4,424)
            
            $
                (4,292)
            
            
            
            Net
                loss
            
            $
                (1,746)
            
            $
                (1,621)Depreciation
            
            2,830
            
            2,839
            
            
            
            Depreciation
            
            2,628
            
            2,632Accretion
                  of asset retirement obligations
            
            2
            
            15
            
            
            
            Accretion
                of asset retirement obligation
            
            31
            
            11Deferred
                  income taxes
            
            (3,075)
            
            (2,841)
            
            
            
            Deferred
                income taxes
            
            (1,214)
            
            (954)Inventories
            
            (19,303)
            
            (19,549)
            
            
            
            Inventories
            
            (26,236)
            
            (26,463)Accounts
                  payable and accrued liabilities
            
            19,317
            
            19,175
            
            
            
            Accounts
                payable and accrued liabilities
            
            18,422
            
            18,276Net
                cash used in operating
                activities
            
            (37,213)
            
            (37,217)Purchase
                of fixed assets
            
            (2,472)
            
            (2,468)**Balance
                Sheet:**
            
            **March
                31, 2006**Inventories
            
            $ 201,685
            
            $ 197,625Total
                current assets
            
            246,179
            
            242,119Fixed
                assets, net
            
            120,503
            
            127,715Deferred income
              taxes,
              non-current
            
            11,481
            
            -Total
                assets
            
            428,075
            
            419,746Accrued
                liabilities
            
            12,381
            
            9,054Deferred
                income taxes, current
            
            63,052
            
            46,027Total
                current liabilities
            
            153,901
            
            133,549Deferred
                gain on land sale
            
            39,880
            
            -Financing
                obligation
            
            -
            
            47,040Deferred income
              taxes,
              non-current
            
            -
            
            4,227Other
                liabilities
            
            5,310
            
            8,508Total
                liabilities
            
            374,091
            
            368,324Accumulated
                deficit
            
            (75,018)
            
            (77,580)Total
                shareholders' equity
            
            53,984
            
            51,422Total
                liabilities and shareholders' equity
            
            428,075
            
            419,746(a)
                This line item originally reported combined with selling
                expenses




10





5.  Earnings
      Per Share:





Earnings
      per share (“EPS”) are calculated in accordance with SFAS No. 128, “Earnings
      per Share,” which requires the Company to report both basic earnings per share,
      based on the weighted-average number of common shares outstanding, and diluted
      earnings per share, based on the weighted-average number of common shares
      outstanding adjusted to include the potentially dilutive effect of outstanding
      stock options and warrants using the treasury method. For the three months
      ended
      March 31, 2006 and 2005, shares related to the employee stock options in the
      amount of 868,415 and 1,070,445, respectively, were excluded from the
      computation of diluted earnings per share because they would have been
      anti-dilutive. In addition, for the three months ended March 31, 2006 and March
      31, 2005, the incremental shares related to zero and 440,000 warrants
      outstanding, respectively, were excluded from the computation of diluted
      earnings per share because they would have been anti-dilutive. The 440,000
      warrants expired on December 31, 2005.




6.  Stock-Based
      Compensation:





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





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





Prior
      to
      January 1, 2006, the Company measured stock compensation expense using the
      intrinsic value method of accounting in accordance with Accounting Principles
      Board (“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.





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 first quarter of 2005.





Three
                Months EndedMarch
                31, 2005Net
                loss, as restated
            
            $
            (1,621
            )Stock-based
                compensation expense, net of tax
            
            
            (11
            )Pro
                forma net loss, as restated
            
            $
            (1,632
            )Net
                loss per share:Basic
                and diluted - as restated
            
            $
            (0.07
            )Basic
                and diluted - pro forma, as restated
            
            $
            (0.07
            )








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





2005Dividend
                yield
            0%Expected
                volatility
            83.86%Risk-free
                interest rate
            3.48%Expected
                life
            Four
                yearsForfeiture
                rate
            0%




11


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





There
      were no stock option grants during the three months ended March 31, 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 March 31,
      2006:





Weighted
                Average
            
            AggregateShares
            
            Exercise
                Price
            
            Intrinsic
                ValueOutstanding
                at December 31, 2005
            
            
            869,110
            
            
            $
                6.22Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Cancelled
            
            
            (1,750
            )
            
            10.21Outstanding
                at March 31, 2006
            
            
            867,360
            
            
            $
                6.21
            
            
            $ 
                2Exercisable
            
            
            867,360
            
            
            $
                6.21
            
            
            $ 
                2








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 March 31,
      2006. The Company had options outstanding on March 31, 2006 to purchase an
      aggregate of 12,000 shares with an exercise price below the quoted price of
      the
      Company’s common stock resulting in an aggregate intrinsic value of
      $2.





The
      weighted average remaining contractual life was five years at March 31, 2006.
      As
      of March 31, 2006, expiration dates ranged from June 22, 2008 to February 18,
      2013.





**Outstanding**
            
            **Exercisable**Average
            
            Weighted
            
            
            
            WeightedNumber
                of
            
            Remaining
            
            Average
                of
            
            Number
                of
            
            Average
                ofRange
                of exercise price
            
            Options
            
            Contract
                Life
            
            Exercise
                Price
            
            Options
            
            Exercise
                Price$3.32
                to $5.00
            
            81,000
            
            5.31
            
            $
                4.53
            
            81,000
            
            $
                4.53$5.50
            
            632,660
            
            6.15
            
            5.50
            
            632,660
            
            5.50$6.00
                to $8.00
            
            34,200
            
            3.57
            
            6.71
            
            34,200
            
            6.71$11.00
            
            119,500
            
            2.33
            
            11.00
            
            119,500
            
            11.00Total
            
            867,360
            
            5.46
            
            $
                6.21
            
            867,360
            
            $
                 6.21


12


7.  Inventories:





Inventories
      consisted of the following:





March
                31,
            
            December
                31,2006
            
            2005(As
                Restated)
            
            (As
                Restated)Nursery
                stock
            
            $
            182,646
            
            $
            168,539Material
                and supplies
            
            
            14,979
            
            
            10,436Inventories
            
            $
            197,625
            
            $
            178,975Consigned
                inventories
            
            $
            2,181
            
            $
            1,350





8.  Senior
      Credit Facility:





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


13


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 the Company’s request the availability of the revolving loan was
      reduced from $145,000 to $120,000 (subject to borrowing base
      limits).





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





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





The
      Senior Credit Facility requires Hines Nurseries and its subsidiaries to meet
      specific covenants and financial ratios, including a minimum fixed charge
      coverage test, a maximum leverage test and a maximum capital expenditure test.
      The new Senior Credit Facility contains customary representations and warranties
      and customary events of default and other covenants. As of March 31, 2006,
      the
      Company was in compliance with its covenants.





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





*Second
      Amendment To Senior Credit Facility.* In
      February 2006, Hines Nurseries negotiated and entered into the Second Amendment
      to the Senior Credit Facility dated as of September 30, 2003. The Second
      Amendment amends the calculation of the minimum fixed charge coverage ratio
      for
      the first quarter of 2006 and thereafter. The Second Amendment also eliminates
      the maximum leverage ratio.





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





LIBOR
      rate loans under the revolving loan bear interest at the LIBOR rate plus an
      additional amount that ranges from 1.75% to 2.75%, depending on its consolidated
      leverage ratio. Currently, the applicable margin for LIBOR rate loans is 2.75%
      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. At March 31, 2006, the Company had $73,133 of available
      credit.


14




9.  Long-Term
      Debt:





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





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





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





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





*Repurchase
      or a change of control.* The
      Senior Notes contain a put option whereby the holders have the right to put
      the
      Senior Notes back to Hines at 101.000% of the principal amount thereof on the
      date of purchase plus accrued and unpaid interest if a change of control occurs.





10.  Assets
      Held for Sale:




On
      March
      1, 2006, the Company received notice that Triad Communities, L.P. exercised
      its
      option to purchase, pursuant to the previously disclosed Option Agreement dated
      April 30, 2003, the Company’s 168-acre property in Vacaville, California. The
      total book value of assets related to the sale of the land was approximately
      $484. The Option Agreement provides that the gross purchase price of the
      property will 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
      include 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
      company will record the transaction as a
      financing transaction in accordance with SFAS No. 98, “Accounting for Leases,”
due to the Company's continuing involvement in the land.





11.  Miami
      Property Sale (Previously “Deferred Gain on Land Sale”):




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




15


12.  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.


16


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







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




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




***Forward
      Looking Statements And Risk Factors***





Except
      for historical information contained herein, this quarterly report on Form
      10-Q/A 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/A, the risks, uncertainties and other factors that
      could cause or contribute to actual results differing materially from those
      expressed or implied in the forward looking statements include, without
      limitation, those set forth under Part I. Item 1A - Risk Factors in the
      Company’s Annual Report on Form 10-K for the year ended December 31,
      2006.




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, restrictive covenants
      under our debt facilities, competitive practices in the industry in which we
      compete, fluctuations in our operating costs, revenues and cash flows from
      operations, our dependence on a limited number key customers, increases in
      transportation and fuel costs, factors with regard to the challenges associated
      with pay by scan and other factors.




***Overview***




We
      are a
      leading national supplier of ornamental shrubs, color plants and container-grown
      plants with 13 commercial nursery facilities located in Arizona, California,
      Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and Texas.
      We
      produce approximately 5,700 varieties of ornamental shrubs and color plants
      and
      we sell to more than 2,400 retail and commercial customers, representing more
      than 8,750 outlets throughout the United States and Canada. As of March 31,
      2006, Hines Horticulture produced and distributed horticultural products through
      its wholly owned subsidiary, Hines Nurseries.


17


***United
      States Tax Matters***




As
      a
      result of our business activities, we qualify for a special exception under
      the
      U.S. federal tax code that allows us to use the cash method of accounting for
      federal income tax purposes. Under the cash method, sales are included in
      taxable income when payments are received and expenses are deducted as they
      are
      paid. We derive significant tax benefits by being able to deduct the cost of
      inventory as the cost is incurred. As a result of our ability to utilize the
      cash method of accounting, we have historically generated net operating losses
      for federal income tax purposes and have not been required to pay cash income
      taxes. During 2005, we were required to pay federal cash income taxes in the
      form of alternative minimum tax as a result of the sale of land in Miami,
      Florida (“Miami Property Sale”). At December 31, 2005, we had $2.3 million
      in net operating loss carryforwards for federal income tax purposes, which
      begin
      to expire in 2024. In addition, we had approximately $6.6 million in net
      operating loss carryforwards for state income tax reporting purposes. Our state
      net operating losses in certain states begin expiring in 2008.




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




The
      use
      of the cash method of accounting for federal income tax purposes results in
      a
      current deferred tax liability for accounting purposes. At March 31, 2006,
      we
      had a current deferred liability for deferred income taxes of $46.0 million
      related to the use of the cash method of accounting. The deferred tax liability
      is deemed current for accounting purposes because the majority of the items
      to
      which this liability relates are comprised of current assets and current
      liabilities in our balance sheet (such as inventory, accounts receivable and
      accounts payable). The classification of this liability as a current item,
      however, does not mean that it is required to be paid within the next twelve
      months.




***Seasonality***




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




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




On
      March
      1, 2006, we received notice that Triad Communities, L.P. exercised its option
      to
      purchase, pursuant to the previously disclosed Option Agreement dated April
      30,
      2003, our 168-acre property in Vacaville, California. The total book value
      of
      assets related to the sale of the land was approximately $0.5 million. The
      Option Agreement provides that the gross purchase price of the property 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.





Due
      to
      our continuing involvement, we recorded the transaction as a financing
      transaction in accordance with SFAS No. 98, “Accounting for
      Leases.”





***Pay
      By Scan***




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


18


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




**Results
      of Operations**




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




***Three
      Months Ended March 31, 2006 compared to Three Months Ended March 31,
      2005***




*Net
      Sales.* Net
      sales
      of $56.9 million for the three months ended March 31, 2006 decreased $7.1
      million, or 11.1%, from net sales of $64.0 million for the comparable period
      in
      2005. The decline in net sales was due to adverse weather conditions in the
      West
      along with the full effect of pay by scan. Persistent rain in the Pacific
      Northwest, northern California and Southwest reduced first quarter consumer
      demand and delayed certain product availability until the second quarter.




During
      the month of April, we have continued to feel the impact of the weather
      conditions which have adversely affected our first quarter net sales and product
      availability.  If these unfavorable conditions persist throughout the
      second quarter, our net sales, earnings and minimum fixed charge debt covenant
      could be impacted.




*Gross
      Profit.* Gross
      profit of $26.3 million for the three months ended March 31, 2006 decreased
      $5.2
      million, or 16.6%, from gross profit of $31.6 million for the comparable period
      in 2005. Gross profit as a percentage of sales for the quarter decreased to
      46.3% from 49.4% for the comparable period in 2005.




*Distribution
      Expenses.* Distribution
      expenses of $14.2 million for the three months ended March 31, 2006 decreased
      $0.4 million, or 3.0%, from $14.7 million for the comparable period in 2005.
      As
      a percentage of net sales, distribution expenses for the quarter increased
      to
      25.0% from 22.9% in the first quarter of 2005. The decrease in distribution
      expenses was mainly due to the decline in sales, as discussed above. As a
      percentage of sales, distribution expense increased due to higher diesel fuel
      costs and increased third party carrier charges, which were primarily driven
      by
      more expensive diesel fuel.




*Selling,
      General and Administrative Expenses.* Selling
      and ** general
      and administrative expenses of $13.0 million for the three months ended March
      31, 2006 decreased by $0.8 million, or 6.1%, from $13.8 million for the
      comparable period in 2005. Selling expenses of $7.2 million for the three months
      ended March 31, 2006 decreased by $0.7 million, or 8.9%, from $7.9 million
      a
      year ago. The decrease in selling expense resulted from the reduction in work
      force due to the strategic reorganization which occurred in the second quarter
      of 2005. In addition, there was a decrease in sales commissions as a result
      of
      lower net sales. General and administrative expenses of $5.8 million for the
      three months ended March 31, 2006 decreased $0.1 million, or 2.3%, from $5.9
      million for the comparable period in 2005. The decline in general and
      administrative expenses was due to lower compensation and benefit expenses,
      which mainly resulted from the reduction in work force due to the strategic
      reorganization which occurred in the second quarter of 2005.




*Other
      Operating Expense (Income), net.* Other
      operating expenses (net) of $0.7 million for the three months ended March 31,
      2006 increased by $0.9 million from other operating income (net) of $0.1 million
      for the comparable period in 2005. The increase in other operating expenses
      was
      primarily due to $0.8 million in consulting fees relating to our productivity
      improvement initiatives.




*Operating
      (Loss) Income.* Operating
      loss of for the three months ended March 31, 2006 of $1.6 million is $4.8
      million less than operating income of $3.2 million for the comparable period
      in
      2005. The shift from operating income to operating loss resulted from a decline
      in gross profit for the period of $5.2 million.


19


*Other
      Expenses.* Other
      expenses of $5.5 million for the three months ended March 31, 2006 decreased
      $0.3 million, or 4.5%, from $5.8 million for the comparable period in 2005
      due
      primarily to lower interest expense, offset by the decrease in interest rate
      swap agreement income from our $75.0 million interest rate swap agreement which
      terminated in February 2005. Interest expense for the three months ended March
      31, 2006 declined $1.1 million, or 17.4%, primarily as a result of lower overall
      debt.




*Income
      Tax Benefit.* Our
      effective income tax rate was 39.8% for the three months ended March 31, 2006,
      up slightly from 37.0% for the comparable period a year ago. Benefit from income
      taxes was $2.8 million for the three months ended March 31, 2006 compared to
      $1.0 million for the comparable period in 2005.




*Net
      Loss.* Net
      loss
      of $4.3 million for the three months ended March 31, 2006 increased by $2.7
      million, or 164.8%, from a net loss of $1.6 million for the comparable period
      in
      2005. The increase in net loss was due to the increase in operating loss,
      partially offset by the decrease in other expenses and a higher benefit from
      income taxes.




**Liquidity
      and Capital Resources**




Our
      primary sources of liquidity are funds generated by operations and borrowings
      under our Senior Credit Facility. Our Senior Credit Facility expires in 2008
      and
      consists of a revolving loan with availability of up to $120.0 million (subject
      to certain borrowing base limits). Additional information pertaining to our
      Senior Credit Facility is provided below and in Note 8 to the Condensed
      Consolidated Financial Statements (unaudited) included in Part I, Item 1 of
      this
      Quarterly Report on Form 10-Q/A.





The
      seasonal nature of our operations results in a significant fluctuation in
      certain components of working capital (primarily accounts receivable and
      inventory) during the growing and selling cycles. As a result, operating
      activities during the first and fourth quarters use significant amounts of
      cash,
      and in contrast, operating activities for the second and third quarters generate
      substantial cash as we ship inventory and collect accounts
      receivable.





Net
      cash
      used in operating activities was $27.0 million for the three months ended March
      31, 2006 compared to $37.2 million for the comparable period in 2005. The
      decrease in cash used in operating activities was mainly due to the timing
      of
      our $9.0 million semi-annual interest payment on our Senior Notes and improved
      customer collections as a result of favorable terms, offset by lower earnings
      driven by lower gross profit. In 2006, we paid our April 1st interest payment
      in
      the second quarter, while last year’s payment was paid during the first
      quarter.





Net
      cash
      used in investing activities was $0.9 million for the three months ended March
      31, 2006 compared to $1.2 million for the same period a year ago. The decrease
      in cash used in investing activities was mainly due to a decrease in capital
      expenditures of $1.5 million, offset by a decrease in proceeds received from
      a
      land sale option of $1.1 million.





Net
      cash
      provided by financing activities was $27.8 million for the three months ended
      March 31, 2006 compared to $38.2 million for the same period in 2005. The
      decrease in cash provided by financing activities was due to the timing of
      our
      $9.0 million semi-annual interest payment on our senior notes, as discussed
      above.





We
      typically draw down our revolving loan in the first and fourth quarters to
      fund
      our seasonal inventory buildup and seasonal operating expenses. Based on past
      history, approximately 72-74% of our sales generally occur in the first half
      of
      the year, generally allowing us to reduce borrowing under our revolving loan
      in
      the second and third quarters. On March 31, 2006, we had $38.1 million of
      borrowings under our revolving loan, resulting in unused borrowing capacity
      of
      approximately $73.1 million after applying the borrowing base limitations and
      letters of credits to our available borrowings.





At
      March
      31, 2006, we had total outstanding bank indebtedness of $213.1
      million.





We
      do not
      have any off balance sheet financing or any financial arrangements with related
      parties, other than operating leases. The following table discloses aggregate
      information about our contractual obligations and commercial commitments as
      of
      March 31, 2006.


20







**Payments
                Due by Period****Less
                than**
            
            ***(Dollars
                in millions)***
            
            **After****Contractual
                Cash Obligations**
            
            **Total**
            
            **1
                year**
            
            **1-3
                years**
            
            **4-5
                years**
            
            **5
                years**Revolving
                Facility
            
            $
            38.1
            
            $
            38.1
            
            $
            -
            
            $
            -
            
            $
            -Senior
                Notes
            
            
            175.0
            
            
            -
            
            
            -
            
            
            -
            
            
            175.0Interest
            
            
            103.9
            
            
            19.1
            
            
            56.4
            
            
            28.4
            
            
            -Operating
                Leases
            
            
            17.9
            
            
            4.4
            
            
            5.9
            
            
            1.7
            
            
            5.9Total
            
            $
            334.9
            
            $
            61.6
            
            $
            62.3
            
            $
            30.1
            
            $
            180.9







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




The
      following is a summary of certain material terms of our Senior Credit Facility
      and Hines Nurseries’ 10.25% senior subordinated notes due 2011.





***Our
      Senior Credit Facility***





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





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





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





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





The
      Senior Credit Facility requires Hines Nurseries and its subsidiaries to meet
      specific covenants and financial ratios, including a minimum fixed charge
      coverage test, a maximum leverage test and a maximum capital expenditure test.
      The Senior Credit Facility contains customary representations and warranties
      and
      customary events of default and other covenants. As of March 31, 2006, we were
      in compliance with our covenants.


21


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





*Second
      Amendment To Senior Credit Facility.* In
      February 2006, Hines Nurseries entered into Second Amendment to the Senior
      Credit Facility dated as of September 30, 2003. The Second Amendment amends
      the
      calculation of the minimum fixed charge coverage ratio for the first quarter
      of
      2006 and thereafter. The Second Amendment also eliminates the maximum leverage
      ratio.





*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 0.75% to 1.75%,
      depending on our consolidated leverage ratio. Currently, the applicable margin
      for prime rate loans is 1.75% for the revolving loan.





LIBOR
      rate loans under the revolving loan bear interest at the LIBOR rate plus an
      additional amount that ranges from 1.75% to 2.75%, depending on our consolidated
      leverage ratio. Currently, the applicable margin for LIBOR rate loans is 2.75%
      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.





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.





***Our
      Senior Notes***





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





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





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





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


22


*Repurchase
      on a Change in Control.* The
      Senior Notes contain a put option whereby the holders have the right to put
      the
      Senior Notes back to us at 101.000% of the principal amount thereof on the
      date
      of purchase, plus accrued and unpaid interest if a change of control
      occurs.





**Critical
      Accounting Policies**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires us to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates. We believe
      that the following areas represent our most critical accounting policies related
      to actual results that may vary from those estimates.




*Revenue
      Recognition* .




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




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




*Sales
      Returns and Allowances* .




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




*Allowance
      For Doubtful Accounts* .




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




*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 liability. 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.


23


*New
      Accounting Standards.*





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





In
      December 2004, the FASB issued SFAS No. 153, “Exchange of Non Monetary Assets -
      an amendment of APB Opinion No. 29,” which requires non monetary asset exchanges
      to be accounted for at fair value. We were required to adopt the provisions
      of
      SFAS No. 153 for non monetary exchanges occurring in fiscal periods beginning
      after June 15, 2005. We have adopted SFAS No. 153 on January 1, 2006. The
      adoption of SFAS No. 153 did not have an impact on our consolidated financial
      position, results of operations or cash flows.





In
      May 2005, the FASB issued Statement No. 154, “Accounting Changes and
      Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
      No. 3.” FASB No. 154 replaces APB Opinion No. 20, “Accounting
      Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim
      Financial Statements,” and changes the requirements for the accounting and
      reporting of a change in an accounting principle. This statement applies to
      all
      voluntary changes in an accounting principle. It also applies to changes
      required by an accounting pronouncement if the pronouncement does not
      include specific transition provisions. When a pronouncement includes specific
      transition provisions, those provisions should be followed. APB Opinion No.
      20
      previously required that most voluntary changes in an accounting principle
      be
      recognized by including in net income of the period of the change the cumulative
      effect of changing to the new accounting principle. SFAS No. 154 requires
      retrospective application to prior periods’ financial statements of changes in
      an accounting principle. We have adopted SFAS No. 154 on January 1, 2006. The
      adoption of Statement No. 154 did not have an impact on our financial
      position, results of operations or cash flows.





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





*Accounting
      Standards Adopted.*





Effective
      the beginning of the first quarter of fiscal year 2006, the Company adopted
      the
      provisions of SFAS No. 123(R) 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.




24





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




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





·  We
      did
      not have adequate policies and procedures and adequate review and oversight
      relating to the recording of inventory. For example, there was no policy or
      mechanism in place to identify abnormal scrap using statistical metrics, and
      there was no appropriate process in place to analyze the net realizable value
      of
      inventory. This led to adjustments recorded in the restatement of the
      consolidated financial statements for the quarter ended September 30, 2006.
      In
      addition, there was no process in place to appropriately review and approve
      significant changes to our inventory costing methodology, resulted
      in errors which began in fiscal 2004 and continued into 2005 and the
      first three quarters of 2006. These deficiencies represent a material weakness
      in internal control over financial reporting because they did or could lead
      to
      material misstatements in our consolidated financial statements.




·  We
      did
      not perform sufficient analysis and review of significant estimates and
      accounts, and certain journal entries were recorded without an appropriate
      level
      of documentation and support. For example, certain transactions were not
      appropriately analyzed, including the sale-leaseback transactions for the
      disposition of our Miami facility in 2005 and the disposition of our Vacaville
      property in 2006, nor did we properly analyze the recoverability of our assets
      associated with our South Carolina facility. These matters represent a material
      weakness in internal control over financial reporting because they could result
      in material misstatements to interim and annual consolidated financial
      statements that were not properly prevented or detected by our internal control.
      All identified errors related to this material weakness have been corrected
      in
      connection with the restatement of the consolidated financial statements for
      the
      applicable periods.




·  We
      had
      information technology general control deficiencies that in the aggregate were
      deemed to represent a material weakness in the control environment and were
      the
      result of a lack of communication and enforcement of control consciousness.
      These deficiencies in the aggregate represented more than a remote likelihood
      that a material misstatement of our interim or annual financial statements
      would
      not have been prevented or detected. These deficiencies included deficiencies
      related to logical and physical access requests, configuration changes, updates
      of control documentation and data backup and storage.




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




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




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


25


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





In
      light
      of the above-referenced information, our management, under the supervision
      and
      with the participation of our principal executive officer and principal
      financial officer, re-evaluated the assessment of the effectiveness of our
      disclosure controls and procedures ( as
      defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended) as
      of the
      end of the period covered by this report .
      Based
      upon that evaluation, our principal
      executive officer and principal financial officer concluded that ,
      solely
      as a result of the material weaknesses referenced above, our disclosure controls
      and procedures were not effective as of the end of the fiscal quarter ended
      March 31, 2006.





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






**PART
      II. OTHER INFORMATION**




**Item
      1A. Risk Factors**




See
      the
      Company’s 2006 Annual Report on Form 10-K, filed on July 10, 2007, with the
      Securities and Exchange Commission for a comprehensive list of risk factors
      with
      the exception that the Company hereby updates the following risk factor with
      regard to the cost estimates contained therein:





**Our
      nursery facility in Irvine, California is entirely on leased land and we do
      not
      expect the leases to be extended beyond their current
      terms.**




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





We
      may
      not be successful in executing our transition plan or establishing suitable
      replacement production facilities. If we are unsuccessful in these efforts,
      our
      net sales, cash flows and operating income could be materially adversely
      affected. In addition, as of March 31, 2006, we estimate that we will incur
      approximately a total of $0.2 million of removal and remediation costs when
      we
      vacate 254 acres in 2006 and $0.9 million of removal and remediation costs
      when
      we vacate 288 acres in 2010. We may incur significant expenses beyond what
      we
      have forecasted if additional remedial action is required. Significant costs
      in
      excess of our estimates could have a material adverse effect on our business,
      financial position, results of operations and operating cash flow.





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




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


26




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:
      July 10, 2007


27


HINES
      HORTICULTURE, INC.


QUARTERLY
      REPORT ON FORM 10-Q


FOR
      THE
      FISCAL QUARTER ENDED MARCH 31, 2006





INDEX
      TO
      EXHIBITS







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





________________





+
      Filed
      herewith




28