**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 September 30, 2006


OR


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


For
      the
      transition period from___________________ to _____________________





Commission
      File Number


000-24439





**HINES
      HORTICULTURE, INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **33-0803204**(State
                or other jurisdiction of
            
            (I.R.S.
                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
      November 10, 2006, there were 22,072,549 shares of Common Stock, par value
      $0.01
      per share, outstanding.











**HINES
      HORTICULTURE, INC.**


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





TABLE
      OF
      CONTENTS




**Part
      I. Financial Information**





Item
                1.
            Financial
                Statements (Unaudited)
            Page
                No.Condensed
                Consolidated Balance Sheets as of September 30, 2006 (as restated)
                and
                December 31, 2005 (as restated)
            4Condensed
                Consolidated Statements of Operations for the Three and Nine Months
                Ended
                September 30, 2006 (as restated) and 2005 (as restated)
            5Condensed
                Consolidated Statements of Cash Flows for the Nine Months Ended September
                30, 2006 (as restated) and 2005 (as restated)
            6Notes
                to the Condensed Consolidated Financial Statements
            7Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            21Item
                4.
            Controls
                and Procedures
            32**Part
                II. Other Information**Item 1.
            Legal
              Proceedings
            33Item
                6.
            Exhibits
            33Signature
            34Index
                to Exhibits
            35








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 September 30, 2006 originally filed with the Securities and
      Exchange Commission on November 14, 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 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 1 and Item 6 of Part II. Except as
      identified in the prior sentence, no other item included in the original
      Form 10-Q has been amended. Except as required to reflect the effects of
      the restatement described below, this Form 10-Q/A does not reflect events
      occurring after the filing of our original Form 10-Q or modify or update those
      disclosures affected by subsequent events. Information not affected by the
      restatement is unchanged and reflects the disclosures made at the time of the
      original filing of the Form 10-Q on November 14, 2006.





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


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





Summaries
      of the errors and how they impact our condensed consolidated financial
      statements follow. A summary of the impact of the errors on the financial
      statements for fiscal years 2005 and 2004 is presented in our 2006 Annual Report
      on Form 10-K 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 September 30, 2006 and December 31, 2005 resulted in a decrease
        in
        inventory of approximately $3,300 and $4,200, respectively.
 
 The
        effects of the correction of this error on the condensed consolidated statements
        of operations for the three and nine months ended September 30, 2006 was
        a
        decrease in cost of goods sold of $100 and $900, respectively. The effects
        of
        the correction of this error on the condensed consolidated statements of
        operations for the three and nine months ended September 30, 2005 was a decrease
        in cost of goods sold of $200 and $800, respectively.




**Miami
      and Vacaville Property Sales**


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







2








**Lower
      of Cost or Market and Excessive Inventory Write Off**


We
      determined that we should have recorded both a lower of cost or market
      adjustment for certain of our inventory and a write off of excess inventory
      in
      the third quarter of 2006 at our South Carolina facility. The lower of cost
      or
      market adjustment was caused by pricing pressures in the region as a result
      of
      increased competition and lost market share, which occurred in the third fiscal
      quarter of 2006. The lost market share also caused excess inventory at this
      facility. The effect of the correction of these two errors was an increase
      in
      cost of goods sold and a corresponding decrease in inventory of approximately
      $5,700 in the condensed consolidated financial statements as of and for the
      quarter ended September 30, 2006.





Fixed
      Asset
      Impairment


Due
        to
        the lost market share in the market served by our South Carolina facility,
        we
        determined that the expected undiscounted future cash flows to be generated
        by
        our South Carolina facility did not exceed the carrying value of the related
        fixed assets. As a result, we determined that the fixed assets located at
        the
        South Carolina facility were impaired in the third quarter of 2006. The effect
        of this correction resulted in an increase in total operating expenses of
        $1,477
        and a corresponding decrease in fixed assets in the third quarter of 2006.





**Workers’
      Compensation and Auto Insurance Accruals**


In
      connection with the preparation of our 2006 consolidated financial statements,
      we discovered an error in the calculation of our accrued workers’ compensation
      and auto insurance liabilities. The effect of the correction of this error
      on
      the condensed consolidated statements of operations for the three and nine
      months ended September 30, 2006 was a decrease in cost of goods sold of $25
      and
      $125, respectively, a decrease in distribution expenses of $21 and $76,
      respectively, and an increase in loss from discontinued operations of $28
      and $101, respectively.





The
      effect of the correction of this error on the condensed consolidated statements
      of operations for the three and nine months ended September 30, 2005 was a
      decrease in cost of goods sold of $9 and $35, respectively, a decrease in
      distribution expenses of $12 and $44, respectively, and an increase in loss
      from discontinued operations of $27 and $99, respectively.





The
      effect of the correction of this error on the September 30, 2006 and December
      31, 2005 condensed consolidated balance sheets was a decrease in inventories
      of
      $151 and $143, respectively, and a decrease in liabilities of $648 and
      $337, respectively.





**Asset
      Retirement Obligations Adjustment**


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





The
      effect of the correction of this error on the September 30, 2006 condensed
      consolidated balance sheet was a decrease to inventories of $25, a decrease
      in
      net fixed assets of $261 and an increase in liabilities of $13. The effect
      of the correction of this error on the December 31, 2005 condensed consolidated
      balance sheet was an increase in inventories of $4, an increase in net fixed
      assets of $60 and an increase in liabilities of $359.





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




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





Unless
        otherwise specified, all financial information contained in this report gives
        effect to the restatements of our consolidated financial statements, as
        described in Note 4 to the Condensed Consolidated Financial Statements. We
        have not amended, and we do not intend to amend, our 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 September 30, 2006, Amendment No.
        1 to
        Form 10-Q for the quarterly period ended March 31, 2006, Amendment No. 1
        to Form
        10-Q for the quarterly period ended June 30, 2006 and in the 2006 Annual
        Report
        on Form 10-K for the year ended December 31, 2006, all filed on July 10,
        2007.





3


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**HINES
      HORTICULTURE, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**September
      30, 2006 and December 31, 2005**


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


**(Unaudited,
      as restated - see Note 4)**




**ASSETS**
            
            September
                30,
            
            December
                31,2006
            
            2005CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            7,882
            
            $
            62Accounts
                receivable, net
            
            
            23,543
            
            
            16,444Inventories
            
            
            128,586
            
            
            159,733Consigned
                inventories
            
            
            1,546
            
            
            138Prepaid
                expenses and other current assets
            
            
            1,496
            
            
            2,666Assets
                held for sale
            
            
            55,172
            
            
            72,391Total
                current assets
            
            
            218,225
            
            
            251,434FIXED
                ASSETS, net
            
            
            87,409
            
            
            82,851DEFERRED
                FINANCING COSTS, net
            
            
            5,131
            
            
            6,207DEFERRED
                INCOME TAXES
            
            
            -
            
            
            6,676GOODWILL
            
            
            38,818
            
            
            43,926$
            349,583
            
            $
            391,094**LIABILITIES
                AND SHAREHOLDERS' EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            16,414
            
            $
            12,624Accrued
                liabilities
            
            
            6,610
            
            
            8,591Accrued
                payroll and benefits
            
            
            6,469
            
            
            4,453Accrued
                interest
            
            
            9,077
            
            
            4,711Borrowings
                on revolving credit facility
            
            
            -
            
            
            10,080Deferred
                income taxes
            
            
            35,242
            
            
            56,542Liabilities
                related to assets held for sale
            
            
            6,747
            
            
            8,079Total
                current liabilities
            
            
            80,559
            
            
            105,080LONG-TERM
                DEBT
            
            
            175,000
            
            
            175,000FINANCING
                OBLIGATIONS
            
            
            63,739
            
            
            47,040DEFERRED
                INCOME TAXES
            
            
            4,072
            
            
            -OTHER
                LIABILITIES
            
            
            5,492
            
            
            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 shares at September 30, 2006 and December
                31,
                2005
            
            
            221
            
            
            221Additional
                paid-in capital
            
            
            128,781
            
            
            128,781Accumulated
                deficit
            
            
            (108,281
            )
            
            (73,288
            )Total
                shareholders' equity
            
            
            20,721
            
            
            55,714$
            349,583
            
            $
            391,094





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


4





**HINES
      HORTICULTURE, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**Three
      Months and Nine Months Ended September 30, 2006 and 2005**


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


**(Unaudited,
      as restated - see Note 4)**





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005Sales,
                net
            
            $
            37,478
            
            $
            37,939
            
            $
            208,266
            
            $
            222,111Cost
                of goods sold
            
            
            27,716
            
            
            19,492
            
            
            120,952
            
            
            108,621Gross
                profit
            
            
            9,762
            
            
            18,447
            
            
            87,314
            
            
            113,490Distribution
                expenses
            
            
            8,789
            
            
            8,680
            
            
            46,647
            
            
            47,291Selling,
                general and administrative expenses
            
            
            12,051
            
            
            9,391
            
            
            41,256
            
            
            39,086Other
                operating expenses (income)
            
            
            406
            
            
            (7
            )
            
            2,282
            
            
            523Asset
                impairment charges
            
            
            1,477
            
            
            -
            
            
            1,477
            
            
            -Total
                operating expenses
            
            
            22,723
            
            
            18,064
            
            
            91,662
            
            
            86,900Operating
                (loss) income
            
            
            (12,961
            )
            
            383
            
            
            (4,348
            )
            
            26,590Other
                expenses (income)Interest,
                net
            
            
            4,636
            
            
            5,376
            
            
            14,971
            
            
            17,446Interest
                rate swap agreement income
            
            
            -
            
            
            -
            
            
            -
            
            
            (895
            )Amortization
                of deferred financing costs
            
            
            648
            
            
            467
            
            
            1,397
            
            
            1,3565,284
            
            
            5,843
            
            
            16,368
            
            
            17,907(Loss)
                income from continuing operations before income taxes
            
            
            (18,245
            )
            
            (5,460
            )
            
            (20,716
            )
            
            8,683Income
                tax (benefit) provision
            
            
            (7,050
            )
            
            (1,974
            )
            
            (7,997
            )
            
            3,129(Loss)
                income from continuing operations
            
            
            (11,195
            )
            
            (3,486
            )
            
            (12,719
            )
            
            5,554(Loss)
                income from discontinued operations, net of income taxes
            
            
            (19,057
            )
            
            (1,845
            )
            
            (22,274
            )
            
            3,410Net
                (loss) income
            
            $
            (30,252
            )
            $
            (5,331
            )
            $
            (34,993
            )
            $
            8,964Basic
                and diluted (loss) earnings per share:(Loss)
                income from continuing operations
            
            $
            (0.51
            )
            $
            (0.16
            )
            $
            (0.58
            )
            $
            0.25(Loss)
                income from discontinued operations, net of income taxes
            
            
            (0.86
            )
            
            (0.08
            )
            
            (1.01
            )
            
            0.16Net
                (loss) income per common share
            
            $
            (1.37
            )
            $
            (0.24
            )
            $
            (1.59
            )
            $
            0.41Weighted
                average shares outstanding--Basic
            
            
            22,072,549
            
            
            22,072,549
            
            
            22,072,549
            
            
            22,072,549Weighted
                average shares outstanding--Diluted
            
            
            22,072,549
            
            
            22,072,549
            
            
            22,072,549
            
            
            22,119,345





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





5








**HINES
      HORTICULTURE, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**Nine
      Months Ended September 30, 2006 and 2005**


**(Dollars
      in thousands)**


**(Unaudited,
      as restated - see Note 4)**





2006
            
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                (loss) income
            
            $
            (34,993
            )
            $
            8,964Loss
                (income) from discontinued operations
            
            
            22,274
            
            
            (3,410
            )Adjustments
                to reconcile (loss) income from continuing operations to net cash
                provided
                by operating activities:Depreciation
            
            
            6,296
            
            
            5,269Accretion
                of asset retirement obligations
            
            
            46
            
            
            33Amortization
                of deferred financing costs
            
            
            1,397
            
            
            1,356Interest
                rate swap agreement income
            
            
            -
            
            
            (895
            )Loss
                (gain) on sale of assets
            
            
            14
            
            
            (184
            )Asset
                impairment charges
            
            
            1,477
            
            
            -Deferred
                income taxes
            
            
            (7,997
            )
            
            3,129Changes
                in working capital accounts:Accounts
                receivable
            
            
            (7,099
            )
            
            (8,955
            )Inventories
            
            
            23,431
            
            
            4,688Prepaid
                expenses and other current assets
            
            
            1,163
            
            
            613Accounts
                payable and accrued liabilities
            
            
            7,878
            
            
            11,699Net
                cash provided by continuing operations
            
            
            13,887
            
            
            22,307Net
                cash (used in) provided by discontinued operations
            
            
            (2,259
            )
            
            4,876Net
                cash provided by operating activities
            
            
            11,628
            
            
            27,183CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of fixed assets
            
            
            (7,666
            )
            
            (7,514
            )Proceeds
                from sale of fixed assets
            
            
            3
            
            
            107Proceeds
                from land sale option
            
            
            -
            
            
            2,000Net
                cash used in continuing operations
            
            
            (7,663
            )
            
            (5,407
            )Net
                cash (used in) provided by discontinued operations
            
            
            (42
            )
            
            344Net
                cash used in investing activities
            
            
            (7,705
            )
            
            (5,063
            )CASH
                FLOWS FROM FINANCING ACTIVITIESBorrowings
                on revolving credit facility
            
            
            164,813
            
            
            230,693Repayments
                on revolving credit facility
            
            
            (174,893
            )
            
            (249,300
            )Repayments
                of long-term debt
            
            
            -
            
            
            (3,815
            )Financing
                obligation
            
            
            14,297
            
            
            -Deferred
                financing costs incurred
            
            
            (320
            )
            
            (192
            )Net
                cash provided by (used in) financing activities
            
            
            3,897
            
            
            (22,614
            )NET
                CHANGE IN CASH
            
            
            7,820
            
            
            (494
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            62
            
            
            600CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            7,882
            
            $
            106Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            10,465
            
            $
            13,301Cash
                paid for income taxes
            
            $
            1,112
            
            $
            25




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




Hines
      is
      a leading national supplier of ornamental shrubs, color plants and
      container-grown plants and our continuing operations consist of eight commercial
      nursery facilities located in Arizona, California, Oregon, South Carolina and
      Texas. Hines markets its products to retail and commercial customers throughout
      the United States and Canada.




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




2. New
      Accounting Standards:


In
        November 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“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 Opinion No. 20 and FASB Statement No. 3.”
SFAS No. 154 changes the requirements for the accounting for and reporting
      of a
      change in an accounting principle. This statement applies to all voluntary
      changes in an accounting principle. It also applies to changes required by
      an
      accounting pronouncement if that the pronouncement does not include specific
      transition provisions. When a pronouncement includes specific transition
      provisions, those provisions should be followed. APB Opinion No. 20 previously
      required that most voluntary changes in an accounting principle be recognized
      by
      including in net income of the period of the change the cumulative effect of
      changing to the new accounting principle. SFAS No. 154 requires retrospective
      application to prior periods’ financial statements of changes in an accounting
      principle. 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 will have
      a
      material impact on its consolidated financial position, results of operations
      or
      cash flows.


Effective
        the beginning of the first quarter of fiscal year 2006, the Company adopted
        the
        provisions of SFAS No. 123(R), “Share Based Payment,” using the modified
        prospective transition method. Under this method, prior periods are not
        restated. The provisions of SFAS 123(R) apply to new stock options and stock
        options outstanding, but not yet vested, on the effective date. As of December
        31, 2005, all outstanding options were fully vested.
 
 In
        June
        2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes -an
        interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for
        uncertainty in income taxes recognized in an enterprise’s financial statements
        in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 is
        effective for all uncertainty in income taxes recognized in the financial
        statements in fiscal years beginning after December 15, 2006. The Company
        is
        evaluating the effect the adoption of FIN 48 may have a on its consolidated
        financial position, results of operations and cash flows.





7








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





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




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




3. Unaudited
      Financial Information:





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




Accordingly,
      footnotes and other disclosures, which would substantially duplicate the
      disclosures contained in the Company’s Form 10-K for the year ended
      December 31, 2006, filed on July 10, 2007 by Hines under the Securities
      Exchange Act of 1934, as amended, have been omitted. The financial information
      herein is not necessarily representative of a full year's operations. The
      year-end condensed balance sheet was derived from audited restated financial
      statements, but does not include all disclosures required by accounting
      principles generally accepted in the United States of America.





8




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 the full year and affected each of the fiscal quarters of 2004
      and
      2005 and the first, second and third fiscal quarters of 2006.





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


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


·
            the
                Company’s condensed consolidated statements of operations for the three
                and nine months ended September 30, 2006 and 2005;
                and


·
            the
                Company’s condensed consolidated statements of cash flows for the nine
                months ended September 30, 2006 and 2005.





**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 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 September 30, 2006 and December 31, 2005 resulted in a decrease
            in
            inventory of approximately $3,300 and $4,200, respectively.
 
 The
            effects of the correction of this error on the condensed consolidated
            statements
            of operations for the three and nine months ended September 30, 2006
            was a
            decrease in cost of goods sold of approximately $100 and $900, respectively.
            The
            effects of the correction of this error on the condensed consolidated
            statements
            of operations for the three and nine months ended September 30, 2005
            was a
            decrease in cost of goods sold of approximately $200 and $800, respectively.




**Miami
      and Vacaville Property Sales**


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


The
      Company determined that it should have recorded both a lower of cost or market
      adjustment for certain of its inventory and a write off of excess inventory
      in
      the third quarter of 2006 at its South Carolina facility. The lower of cost
      or
      market adjustment was caused by pricing pressures in the region as a result
      of
      increased competition and lost market share, which occurred in the third fiscal
      quarter of 2006. The lost market share also caused excess inventory at this
      facility. The effect of the correction of these two errors was an increase
      in
      cost of goods sold and a corresponding decrease in inventory of approximately
      $5,700 in the condensed consolidated financial statements as of and for the
      quarter ended September 30, 2006.





**Fixed
      Asset Impairment**


Due
        to
        the lost market share in the market served by the Company's South Carolina
        facility, the Company determined that the expected undiscounted future cash
        flows to be generated by the South Carolina facility did not exceed the carrying
        value of the related fixed assets. As a result, the Company determined that
        the
        fixed assets located at the South Carolina facility were impaired in the
        third
        quarter of 2006. The effect of this correction resulted in an increase in
        total
        operating expenses of $1,477 and a corresponding decrease in fixed assets
        in the
        third quarter of 2006.





9





**Workers’
      Compensation and Auto Insurance Accruals**


In
      connection with the preparation of the 2006 consolidated financial statements,
      the Company discovered an error in the calculation of accrued workers’
compensation and auto insurance liabilities. The effect of the correction of
      this error on the condensed consolidated statements of operations for the three
      and nine months ended September 30, 2006 was a decrease in cost of goods sold
      of
      $25 and $125, respectively, a decrease in distribution expenses of $21 and
      $76,
      respectively, and an increase in loss from discontinued operations of $28 and
      $101, respectively.




The
      effect of the correction of this error on the condensed consolidated statements
      of operations for the three and nine months ended September 30, 2005 was a
      decrease in cost of goods sold of $9 and $35, respectively, a decrease in
      distribution expenses of $12 and $44, respectively, and an increase in loss
      from
      discontinued operations of $27 and $99, respectively.




The
      effect of the correction of this error on the September 30, 2006 and December
      31, 2005 condensed consolidated balance sheets was a decrease in inventories
      of
      $151 and $143, respectively, and a decrease in liabilities of $648 and
      $337, respectively.




**Asset
      Retirement Obligations Adjustment**


In
      connection with the preparation of the 2006 consolidated financial statements,
      the Company discovered that it had not properly recorded its asset retirement
      obligations for certain of the 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 September 30, 2006 condensed
        consolidated balance sheet was a decrease in inventories of $25, a decrease
        in net fixed assets of $261 and an increase in liabilities of $13. The
        effect of the correction of this error on the December 31, 2005 condensed
        consolidated balance sheet was an increase in inventories of $4, an increase
        in
        net fixed assets of $60 and an increase in liabilities of $359.





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





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





10







**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30, 2006**
            
            **September
                30, 2006***As
                Originally Reported*
            
            *As
                Restated for Correction of Errors*
            
            *As
                Originally Reported*
            
            *As
                Restated for Correction of Errors***Statement
                of Operations:**Cost
                of goods sold
            
            $
            22,119
            
            $
            27,716
            
            $
            116,194
            
            $
            120,952Gross
                profit
            
            
            15,268
            
            
            9,762
            
            
            91,789
            
            
            87,314Distribution
                expenses
            
            
            8,794
            
            
            8,789
            
            
            46,724
            
            
            46,647Asset
                impairment charges
            
            
            -
            
            
            1,477
            
            
            -
            
            
            1,477Total
                operating expenses
            
            
            21,015
            
            
            22,723
            
            
            89,801
            
            
            91,662Operating
                (loss) income
            
            
            (5,747
            )
            
            (12,961
            )
            
            1,988
            
            
            (4,348
            )Loss
                from continuing operations before income taxes
            
            
            (11,209
            )
            
            (18,245
            )
            
            (14,558
            )
            
            (20,716
            )Income
                tax benefit
            
            
            (4,504
            )
            
            (7,050
            )
            
            (5,876
            )
            
            (7,997
            )Loss
                from continuing operations
            
            
            (6,705
            )
            
            (11,195
            )
            
            (8,682
            )
            
            (12,719
            )Loss
                from discontinued operations, net of income taxes
            
            
            (19,870
            )
            
            (19,057
            )
            
            (23,091
            )
            
            (22,274
            )Net
                loss
            
            
            (26,575
            )
            
            (30,252
            )
            
            (31,773
            )
            
            (34,993
            )Basic
                and diluted loss per share:Loss
                from continuing operations
            
            $
            (0.30
            )
            $
            (0.51
            )
            $
            (0.39
            )
            $
            (0.58
            )Loss
                from discontinued operations, net of income taxes
            
            
            (0.90
            )
            
            (0.86
            )
            
            (1.05
            )
            
            (1.01
            )Net
                loss per common share
            
            $
            (1.20
            )
            $
            (1.37
            )
            $
            (1.44
            )
            $
            (1.59
            )






**Nine
                Months Ended****September
                30, 2006***As
                Originally Reported*
            
            *As
                Restated for Correction of Errors***Statement
                of Cash Flows:**Net
                loss (a)
            
            $
            (31,773
            )
            $
            (34,993
            )Loss
                from discontinued operations (a)
            
            
            23,091
            
            
            22,274Depreciation
            
            
            6,344
            
            
            6,296Accretion
                of asset retirement obligations
            
            
            25
            
            
            46Fixed
                asset impairment
            
            
            -
            
            
            1,477Deferred
                income taxes
            
            
            (5,726
            )
            
            (7,997
            )Inventories
            
            
            18,513
            
            
            23,431Accounts
                payable and accrued liabilities
            
            
            8,038
            
            
            7,878Net
                cash provided by continuing operations from operating
                activities
            
            
            14,335
            
            
            13,887Net
                cash used in discontinued operations from operating
                activities
            
            
            (2,707
            )
            
            (2,259
            )Proceeds
                from sale of fixed assets
            
            
            14,297
            
            
            3Net
                cash provided by (used in) continuing operations from investing
                activities
            
            
            6,631
            
            
            (7,663
            )Net
                cash used in discontinued operations from investing
                activities
            
            
            (39
            )
            
            (42
            )Net
                cash provided by (used in) investing activities
            
            
            6,592
            
            
            (7,705
            )Financing
                obligation
            
            
            -
            
            
            14,297Net
                cash (used in) provided by financing activities
            
            
            (10,400
            )
            
            3,897


(a)
        Theses line items originally reported combined in loss from continuing
        operations




11




**September
                30, 2006***As
                Originally Reported*
            
            *As
                Restated for Correction of Errors***Balance
                Sheet:**Inventories
            
            $
            143,912
            
            $
            128,586Assets
                held for sale
            
            
            28,005
            
            
            55,172Total
                current assets
            
            
            206,384
            
            
            218,225Fixed
                assets, net
            
            
            84,753
            
            
            87,409Deferred
                income taxes
            
            
            13,711
            
            
            -Total
                assets
            
            
            348,797
            
            
            349,583Accrued
                liabilities
            
            
            10,691
            
            
            6,610Deferred
                income taxes, current portion
            
            
            39,583
            
            
            35,242Total
                current liabilities
            
            
            88,981
            
            
            80,559Deferred
                gain on land sale
            
            
            56,109
            
            
            -Financing
                obligation
            
            
            -
            
            
            63,739Deferred
                income taxes, long-term portion
            
            
            -
            
            
            4,072Other
                liabilities
            
            
            2,072
            
            
            5,492Accumulated
                deficit
            
            
            (102,367
            )
            
            (108,281
            )Shareholders'
                equity
            
            
            26,635
            
            
            20,721Total
                liabilities and shareholders' equity
            
            
            348,797
            
            
            349,583




**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30, 2005**
            
            **September
                30, 2005***As
                Originally Reported*
            
            *As
                Restated for Correction of Errors*
            
            *As
                Originally Reported*
            
            *As
                Restated for Correction of Errors***Statement
                of Operations:**Cost
                of goods sold
            
            $
            19,757
            
            $
            19,492
            
            $
            109,465
            
            $
            108,621Gross
                profit
            
            
            18,182
            
            
            18,447
            
            
            112,646
            
            
            113,490Distribution
                expenses
            
            
            8,690
            
            
            8,680
            
            
            47,335
            
            
            47,291Total
                operating expenses
            
            
            18,175
            
            
            18,064
            
            
            86,944
            
            
            86,900Operating
                income
            
            
            7
            
            
            383
            
            
            25,702
            
            
            26,590(Loss)
                income before income taxes
            
            
            (5,836
            )
            
            (5,460
            )
            
            7,795
            
            
            8,683Income
                tax (benefit) provision
            
            
            (2,393
            )
            
            (1,974
            )
            
            3,196
            
            
            3,129(Loss)
                income from continuing operations
            
            
            (3,443
            )
            
            (3,486
            )
            
            4,599
            
            
            5,554(Loss)
                income from discontinued operations
            
            
            (1,730
            )
            
            (1,845
            )
            
            3,217
            
            
            3,410Net
                (loss) income
            
            
            (5,173
            )
            
            (5,331
            )
            
            7,816
            
            
            8,964Basic
                and diluted (loss) earnings per share:(Loss)
                income from continuing operations
            
            $
            (0.16
            )
            $
            (0.16
            )
            $
            0.21
            
            $
            0.25(Loss)
                income from discontinued operations
            
            
            (0.07
            )
            
            (0.08
            )
            
            0.14
            
            
            0.16Net
                (loss) income per common share
            
            $
            (0.23
            )
            $
            (0.24
            )
            $
            0.35
            
            $
            0.41








12




**Nine
                Months Ended****September
                30, 2005***As
                Originally Reported*
            
            *As
                Restated for Correction of Errors***Statement
                of Cash Flows:**Net
                income (a)
            
            $
            7,816
            
            $
            8,964Income
                from discontinued operations (a)
            
            
            (3,217
            )
            
            (3,410
            )Depreciation
            
            
            5,257
            
            
            5,269Accretion
                of asset retirement obligations
            
            
            51
            
            
            33Deferred
                income taxes
            
            
            3,196
            
            
            3,129Inventories
            
            
            5,353
            
            
            4,688Accounts
                payable and accrued liabilities
            
            
            12,047
            
            
            11,699Net
                cash provided by continuing operations from operating
                activities
            
            
            22,438
            
            
            22,307Net
                cash provided by discontinued operations from operating
                activities
            
            
            4,777
            
            
            4,876Net
                cash provided by operating activities
            
            
            27,215
            
            
            27,183Purchase
                of fixed assets
            
            
            (8,165
            )
            
            (7,514
            )Net
                cash used in continuing operations from investing
                activities
            
            
            (5,356
            )
            
            (5,407
            )Net
                cash provided by discontinued operations from investing
                activities
            
            
            261
            
            
            344Net
                cash used in investing activities
            
            
            (5,095
            )
            
            (5,063
            )


(a)
        These
        line items originally reported combined in loss from continuing
        operations




5. Discontinued
      Operations:





*Miami
      Asset Sales*


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




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




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




As
      of
      September 30, 2006, all of the Company’s remaining assets, inventories and
      related liabilities related to the Miami, Florida operations have been
      reclassified on the balance sheet as “assets held for sale” and “liabilities
      related to assets held for sale.”




*Northeast
      Facilities*


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





13




In
        reviewing long-lived assets for impairment in accordance with SFAS No. 144,
        “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company
        determined that its four nursery facilities located in the Northeast were
        impaired because the carrying values of the long-lived assets exceeded the
        estimated undiscounted future cash flows of the assets. The Company used
        an
        independent third party appraisal in order to determine fair value, which
        resulted in an impairment charge of $8,041. The charge was recorded by the
        Company in its condensed consolidated financial statements in the second
        quarter
        of 2006.





In
      October 2006, two major customers withdrew substantial future sales commitments
      from three of the four Northeast facilities, which withdrawal occurred
      subsequent to the original announcement of the sale of the four Northeast
      facilities. The withdrawal represented a reduction of approximately 75% of
      the
      2007 annual sales commitments for the three facilities, greatly reducing the
      fair market value of these assets. As a result, it was determined that the
      long-lived assets associated with these facilities were impaired. The fair
      value
      used to determine the impairment was based on letters of intent the Company
      received in connection with the sale of the Northeast facilities. As a result,
      the Company recorded an additional impairment charge of $11,084 in the third
      quarter of 2006 to reflect the revised estimate of the fair value of these
      assets. This impairment charge was recorded as a component of loss from
      discontinued operations.




*Goodwill
      Impairment*


In
        connection with the Company’s decision to sell the four Northeast facilities and
        the Miami, Florida facility, the Company allocated $5,108 of goodwill to
        these
        facilities. This allocation was based on the relative fair values of these
        facilities. Prior to the allocation, the Company reported total goodwill
        of
        approximately $43,926, which was initially recorded based on purchase price
        allocations from various acquisitions made by the Company. Subsequent to
        the
        allocation of the goodwill to the operations to be disposed of, the Company
        concluded that the carrying value of the goodwill allocated to the four
        Northeast color facilities and the Miami, Florida facility was impaired.
        As a
        result, the Company recorded a goodwill impairment charge of $5,108. The
        goodwill impairment charge was recorded as a component of the loss from
        discontinued operations in the condensed consolidated statements of operations.
        At September 30, 2006, the Company determined the remaining goodwill of $38,818
        was not impaired.




Summarized
      financial information for discontinued operations is set forth
      below:





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,
            
            September
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005(as
                restated)
            
            (as
                restated)
            
            (as
                restated)
            
            (as
                restated)Sales,
                net
            
            $
            9,141
            
            $
            11,432
            
            $
            50,392
            
            $
            68,143(Loss)
                income before income taxes
            
            
            (32,034
            )
            
            (3,006
            )
            
            (37,442
            )
            
            5,553Income
                tax (benefit) provision
            
            
            (12,977
            )
            
            (1,161
            )
            
            (15,168
            )
            
            2,143(Loss)
                income from discontinued operations
            
            $
            (19,057
            )
            $
            (1,845
            )
            $
            (22,274
            )
            $
            3,410




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





September
                30,
            
            December
                31,2006
            
            2005(as
                restated)
            
            (as
                restated)Inventories
            
            $
            17,081
            
            $
            20,454Fixed
                assets, net
            
            
            22,493
            
            
            46,603Deferred
                income taxes
            
            
            15,598
            
            
            4,850Assets
                held for sale
            
            $
            55,172
            
            $
            71,907Deferred
                income taxes
            
            $
            6,747
            
            $
            8,079Liabilities
                related to assets held for sale
            
            $
            6,747
            
            $
            8,079





The
        2005
        assets held for sale in the above table does not include $484 related to
        the
        Company’s Vacaville, California facility because this facility is part of
        continuing operations as of December 31, 2005.





14




6. Earnings
      Per Share:





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





7. Stock-Based
      Compensation:





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





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





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





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





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30, 2005
            
            September
                30, 2005Net
                (loss) income, as restated
            
            $
            (5,331
            )
            $
            8,964Stock-based
                compensation expense, net of tax
            
            
            (11
            )
            
            (32
            )Pro
                forma net (loss) income, as restated
            
            $
            (5,342
            )
            $
            8,932Net
                (loss) income per share:Basic
                and diluted - as restated
            
            $
            (0.24
            )
            $
            0.41Basic
                and diluted - pro forma, as restated
            
            $
            (0.24
            )
            $
            0.41







15




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





Expected
      Dividend - No dividends are expected to be paid.





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




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





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





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





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





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





Weighted
                Average
            
            AggregateShares
            
            Exercise
                Price
            
            Intrinsic
                ValueOutstanding
                at December 31, 2005
            
            
            869,110
            
            
            $
                6.22Cancelled
            
            
            (21,883
            )
            
            7.01Outstanding
                at September 30, 2006
            
            
            847,227
            
            
            $
                6.20
            
            
            $ 
                  -Exercisable
            
            
            847,227
            
            
            $
                6.20
            
            
            $ 
                  -







16





The
      aggregate intrinsic value represents the difference between the exercise prices
      of the underlying awards and the quoted price of the Company’s common stock for
      those awards that have an exercise price below the quoted price on September
      30,
      2006. The Company had no options outstanding on September 30, 2006 with an
      exercise price below the quoted price of the Company’s common stock resulting in
      an aggregate intrinsic value of $0.





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





**Outstanding
                and Exercisable**Average
            
            WeightedNumber
                of
            
            Remaining
            
            Average
                ofRange
                of exercise price
            
            
            Options
            
            
            Contract
                Life
            
            
            Exercise
                Price$3.32
                to $5.00
            
            
            81,000
            
            
            4.81
            
            
            $
                 4.53$5.50
            
            
            618,127
            
            
            5.63
            
            
            5.50$6.00
                to $8.00
            
            
            33,000
            
            
            3.08
            
            
            6.73$11.00
            
            
            115,100
            
            
            1.81
            
            
            11.00Total
            
            
            847,227
            
            
            4.95
            
            
            $ 
                6.20








8. Inventories:





Inventories
      consisted of the following:





September
                30,
            
            December
                31,2006
            
            2005(as
                restated)
            
            (as
                restated)Inventories
              from
              continuing operations:Nursery
                stock
            
            $
            118,765
            
            $
            151,992Material
                and supplies
            
            
            9,821
            
            
            7,741Inventories
            
            
            128,586
            
            
            159,733Consigned
                inventories
            
            
            1,546
            
            
            138Total
                continuing operations inventories
            
            
            130,132
            
            
            159,871Inventories
                from discontinued operations included in assets held for
                sale:Nursery
                stock
            
            
            13,867
            
            
            16,795Material
                and supplies
            
            
            2,161
            
            
            2,695Inventories
            
            
            16,028
            
            
            19,490Consigned
                inventories
            
            
            1,053
            
            
            964Total
                discontinued operations inventories
            
            
            17,081
            
            
            20,454Total
                inventories
            
            $
            147,213
            
            $
            180,325







17





9. Senior
      Credit Facility:





On
      September 30, 2003, the Company amended and restated its Senior Credit Facility.
      Hines Nurseries and its domestic operating subsidiaries are borrowers under
      the
      Senior Credit Facility. The Senior Credit Facility currently consists of a
      revolving loan which, subject to applicable borrowing base calculations,
      provides for borrowings which are not to exceed revolving utilization limits
      which range between $10,800 and $23,300 depending on the fiscal quarter. The
      revolving loan also permits the ability to obtain letters of credit up to a
      separate sub-limit.





The
      Senior Credit Facility was amended by the First Amendment to Credit Agreement
      dated as of June 30, 2005 (the “First Amendment”), then again pursuant to a
      Waiver Regarding Financial Covenants dated as of October 13, 2005 (the
“Waiver”), and by the Second Amendment to Credit Facility dated as of February
      3, 2006 (the “Second Amendment”). The Senior Credit Facility was also amended as
      of August 8, 2006 pursuant to the Third Amendment to Credit Agreement (the
      “Third Amendment”). On November 8, 2005, in accordance with the Waiver, at the
      Company’s request the availability of the revolving loan was reduced from
      $145,000 to $120,000 (subject to borrowing base limits). On August 8, 2006,
      in
      accordance with the Third Amendment, the availability of revolving loans was
      reduced by the imposition of revolving utilization limits which range from
      $10,800 to $23,300 depending on the fiscal quarter.





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





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





The
      Senior Credit Facility requires Hines Nurseries and its subsidiaries to meet
      specific covenants and financial ratios, including a minimum fixed charge
      coverage test, a maximum leverage test and a maximum capital expenditure test.
      The Senior Credit Facility contains customary representations and warranties
      and
      customary events of default and other covenants. As of September 30, 2006,
      the
      Company was not in compliance with the minimum fixed charge coverage ratio
      covenant; however, as discussed below, the non-compliance was waived in
      connection with the Third Amendment.





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





*First
      Amendment To Senior Credit Facility.* Effective June 30, 2005, Hines Nurseries negotiated and entered into the First
      Amendment to the Senior Credit Facility. The First Amendment amended the Senior
      Credit Facility to require that the proceeds from the sale of 122 acres of
      unimproved property in Miami, Florida on November 7, 2005 (“Miami 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.





18




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





*Third
      Amendment To Senior Credit Facility.* In
      August 2006, Hines Nurseries negotiated and entered into the Third Amendment
      to
      the Senior Credit Facility. The Third Amendment waived the requirement that
      the
      Company comply with the minimum fixed charge coverage ratio covenant for the
      periods ended June 30, 2006 and September 30, 2006. The Third Amendment also
      instituted maximum revolving utilization restrictions under the credit facility
      which, subject to applicable borrowing base calculations, limit the Company’s
      borrowings to limits which range from $10,800 to $23,300 depending on the fiscal
      quarter. It also increased the interest rate spread by 25 basis points on
      outstanding prime and London Interbank Offered Rate (“LIBOR”) borrowings,
      increased unused line fees and established new fixed charge covenant ratios
      beginning in the fourth quarter of 2006. In addition, the Third Amendment
      requires the Company to sell its four color nursery facilities in the Northeast
      and certain assets in Miami, Florida by no later than December 31, 2006. The
      sales of these assets are required to generate a predetermined minimum amount
      of
      aggregate proceeds.





*Interest
      Rate; Fees.* The
      interest rate on the loans under the Senior Credit Facility may be, at the
      Company’s option, Prime rate loans or LIBOR rate loans. Prime rate loans under
      the revolving loan bear interest at the Prime lending rate plus an additional
      amount that ranges from 1.00% to 2.00%, depending on its consolidated leverage
      ratio. Currently, the applicable margin for Prime rate loans is 2.00% for the
      revolving loan





LIBOR
      rate loans under the revolving loan bear interest at the LIBOR rate plus an
      additional amount that ranges from 2.00% to 3.00%, depending on its consolidated
      leverage ratio. Currently, the applicable margin for LIBOR rate loans is 3.00%
      for the revolving loan. In addition to paying interest on outstanding principal,
      the Company is required to pay a commitment fee on the daily average unused
      portion of the revolving loan which accrues based on the utilization of the
      revolving loan.





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





The
      Company must deliver borrowing base certificates and reports at least monthly.
      The borrowing base also may be subject to certain other adjustments and reserves
      to be determined by the agent. Eligible accounts receivable of both The Home
      Depot, the Company’s largest customer, and Lowe’s Companies, Inc., its second
      largest customer, may not exceed 30% of total eligible accounts receivable
      at
      any time. At September 30, 2006, the Company had $68,664 of available unused
      borrowings under the Senior Credit Facility.





10. 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.





19




*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.





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


On
        March
        1, 2006, the Company received notice that Triad Communities, L.P. exercised
        its
        option to purchase, pursuant to the previously disclosed Option Agreement
        dated
        April 30, 2003 (“Option Agreement”), its 168-acre property in Vacaville,
        California. The total book value of assets related to the sale was approximately
        $500. The Option Agreement provided that the gross purchase price of the
        property be $15,100. On April 3, 2006, the Company sold the property for
        a net
        purchase price of approximately $14,300. Total proceeds from the Option
        Agreement and sale of the property were approximately $16,900, which included
        approximately $2,600 in option payments previously received.
 
 Under
        the
        terms of the Option Agreement, the Company is able to transition off the
        property in three phases from 2006 to 2008. The first phase of transition
        was
        completed on July 1, 2006 and consisted of 24 acres. The second phase of
        transition will be July 1, 2007 and the third phase of the transition will
        be
        July 1, 2008, and will consist of approximately 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.
        Because the Company is not paying rent, the Company is in a sale-leaseback
        with
        continuing involvement position with respect to this property. The Company
        originally recognized the sale of the property and deferred the gain on the
        Lagoon Valley property. However, in order to conform to SFAS No. 98, as of
        June
        30, 2006, the Company has reinstated the net book value of the assets and
        recorded the proceeds received as a financing obligation. When the Company
        completes the transition on July 1, 2008, the Company will remove the net
        book
        value of the assets and expects to recognize a gain of approximately
        $16,200.
 
 On
        November 7, 2005, the Company successfully completed the sale of 122 acres
        of
        unimproved property in Miami, Florida and received net proceeds of approximately
        $47,000. 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 was used to
        pay
        down the revolving credit facility. As part of the Miami Property Sale, the
        Company entered into a two-year lease agreement with the buyer 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. The Company is leasing the remaining 89 acres
        until June 30, 2007, and is subleasing 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. 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. The Company recorded the transaction as a financing
        transaction in accordance with SFAS No. 98 due to the Company’s continuing
        involvement in the property. This treatment gives effect to the restatement
        discussed in Note 4.




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.





20




**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 (unaudtied) and should be read in
        conjunction with our consolidated financial statements and related notes
        included elsewhere in this Quarterly Report on Form 10-Q/A.*




***Executive
      Summary and Market Trends***





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




Our
      net
      sales in the Eastern region of the United States (which is serviced primarily
      by
      our Northeast, mid-Atlantic, and Southeast facilities and also, to a lesser
      extent, by certain of our Western facilities) have continued to decline on
      a
      quarter over comparable prior year quarter basis since the third quarter of
      2004. As a result of this continued decline, we had been considering internally
      the divestiture of all four Northeast nursery facilities located in Danville,
      Pennsylvania, Pipersville, Pennsylvania, Utica, New York and Newark, New York,
      as well as assets located in Miami, Florida. In addition, our decline required
      us to seek amendments and waivers in connection with our Senior Credit Facility
      as a result of our inability to comply with all of our financial covenants
      as
      described more fully below.




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




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




Our
      recommendation to the lenders of our Senior Credit Facility to divest the
      Northeast and Miami nursery facilities was based on several significant factors.
      As mentioned above, our net sales have deteriorated in the Eastern region.
      Despite our efforts to reverse this decline, our Northeast, mid-Atlantic and
      Southeastern facilities have continued to lose market share in the Eastern
      region during this period. Intense competition, significant pricing pressures
      and customer consolidations have all contributed to the decline in market share.
      Moreover, net sales in the Southeastern region were adversely impacted by
      inclement weather as we estimate that the impact of hurricanes reduced our
      net
      sales by as much as $10.0 million in this region during 2004 and
      2005.




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





21




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




While
      net
      sales in the Eastern region have continued to significantly decline, as
      described above, our net sales throughout the rest of the country had remained
      relatively stable during 2004 and 2005 (when compared to the comparable prior
      year periods), and have declined by approximately $7 million during the nine
      months ended September 30, 2006 compared to the same period a year ago. While
      inclement weather has from time to time adversely impacted sales outside of
      the
      Eastern region, or otherwise contributed to short-term fluctuations in such
      sales, inclement weather has not historically had the same impact on our net
      sales in these areas as it has had in the Eastern region.




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




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




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




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




There
      are
      a number of risks, uncertainties and important factors that might cause actual
      results to differ from any results expressed or implied by such forward looking
      statements. In addition to the risks, uncertainties and other factors discussed
      elsewhere in this Form 10-Q/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, filed
      on July 10, 2007.





22




Factors
      which could cause actual results to differ materially from any forward-looking
      information contained herein include, but are not limited to, general economic
      trends and seasonality, including those specifically impacting the nursery
      business, general agricultural risks beyond our control including risks
      associated with disease and pests, including sudden oak death, adverse weather
      conditions, increases in prices for water, petroleum and raw materials, our
      substantial leverage and ability to service our debt, our ability to comply
      with
      the covenants contained in our debt facilities, competitive practices in the
      industry in which we compete, fluctuations in our operating costs, revenues
      and
      cash flows from operations, our dependence on a limited number of key customers,
      increases in transportation and fuel costs, factors with regard to the
      challenges associated with pay by scan and other factors. Additional factors
      that may influence our results in the future include the fact that we may not
      achieve the minimum level of aggregate proceeds from the asset sales required
      by
      our Third Amendment and the fact that such anticipated sales of assets and
      properties may be subject to various conditions and may not close for a number
      of reasons, including reasons outside our control.





***Overview***




We
      are a
      leading national supplier of ornamental shrubs, color plants and container-grown
      plants and our continuing operations consists of eight commercial nursery
      facilities located in Arizona, California, Oregon, South Carolina and Texas.
      We
      produce approximately 4,000 varieties of ornamental shrubs and color plants
      and
      we sell to more than 1,170 retail and commercial customers, representing more
      than 6,700 outlets throughout the United States and Canada. As of September
      30,
      2006, Hines Horticulture produced and distributed horticultural products through
      its wholly owned subsidiary, Hines Nurseries.




***United
      States Tax Matters***




As
      a
      result of our business activities, we qualify for a special exception under
      the
      U.S. federal tax code that allows us to use the cash method of accounting for
      federal income tax purposes. Under the cash method, sales are included in
      taxable income when payments are received and expenses are deducted as they
      are
      paid. We derive significant tax benefits by being able to deduct the cost of
      inventory as the cost is incurred. As a result of our ability to utilize the
      cash method of accounting, we have historically generated net operating losses
      for federal income tax purposes and have not been required to pay cash income
      taxes. During 2005, we were required to pay federal cash income taxes in the
      form of alternative minimum tax as a result of the sale of land in Miami,
      Florida (“Miami 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 September 30, 2006,
      we had a current deferred liability for deferred income taxes of $35.0 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 historically have generated cash as we ship inventory and
      collect accounts receivable. We have experienced, and expect to continue to
      experience, significant variability in net sales, operating income and net
      income on a quarterly basis.





23





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




On
        March
        1, 2006, we received notice that Triad Communities, L.P. exercised its option
        to
        purchase, pursuant to the previously disclosed Option Agreement dated April
        30,
        2003 (“Option Agreement”), our 168-acre property in Vacaville, California.
        The total book value of assets related to the sale was approximately $0.5
        million. The Option Agreement provided that the gross purchase price of the
        property be $15.1 million. On April 3, 2006, we sold the property for a new
        purchase price of $14.3 million. Total proceeds from the Option Agreement
        and
        sale of the property were approximately $16.9 million, which included
        approximately $2.6 million in option payments previously received.
 
 Under
        the
        terms of the Option Agreement, we are able to transition off the property
        in three phases from 2006 to 2008. The first phase of transition was completed
        on July 1, 2006 and consisted of 24 acres. The second phase of transition
        will
        be July 1, 2007 and the third phase of the transition will be July 1, 2008,
        and
        will consist of approximately 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. Because we
        are not paying rent, we are in a sale-leaseback with continuing involvement
        position with respect to this property. We originally recognized the sale
        of the
        property and deferred the gain on the Lagoon Valley property. However, in
        order
        to conform with Statement of Financial Accounting Standards (“SFAS”) No. 98, as
        of June 30, 2006 and subsequent periods we have reinstated the net book value
        of
        the assets and recorded the proceeds received as a financing obligation as,
        more
        fully disclosed in Note 4 to the Condensed Consolidated Financial Statements.
        When we complete the transition, which is expected to be completed on July
        1,
        2008, we will remove the net book value of the assets and expect to recognize
        a
        gain of approximately $16.2 million.
  ***Discontinued
        Operations***




*Miami
      Asset Sales*


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




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




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




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


*Northeast
      Facilities*


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


In
        reviewing our long-lived assets for impairment in accordance with SFAS No.
        144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, we determined
        that our four nursery facilities located in the Northeast as well as certain
        assets located in Miami, Florida were impaired because the carrying values
        of
        the long-lived assets exceeded the estimated undiscounted future cash flows
        of
        the assets. We used an independent third party appraisal in order to determine
        fair value, which resulted in an impairment charge of $8.0 million. The charge
        was recorded in our condensed consolidated financial statements in the second
        quarter of 2006.





24




In
        October 2006, two major customers withdrew substantial future sales commitments
        from three of the four Northeast facilities, which withdrawal occurred
        subsequent to the original announcement of the sale of the four Northeast
        facilities. The withdrawal represented a reduction of approximately 75% of
        the
        2007 annual sales commitments for the three facilities, greatly reducing
        the
        fair market value of these assets. As a result, we determined that the
        long-lived assets associated with these facilities were impaired. The fair
        value
        used to determine the impairment was based on letters of intent we received
        in
        connection with the sale of the Northeast facilities. As a result, we recorded
        an additional impairment charge of $11.1 million in the third quarter of
        2006 to
        reflect the revised estimate of the fair value of these assets. This impairment
        charge was recorded as a component of loss from discontinued
        operations.




***Goodwill
      Impairment***




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


***Pay
      By Scan***




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




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




**Results
      of Operations**




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




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




*Net
      Sales.* Net
      sales
      of $37.5 million for the three months ended September 30, 2006 decreased $0.5
      million, or 1.2%, from net sales of $37.9 million for the comparable period
      in
      2005. The decline in net sales was mainly due to one of the west coast
      facilities and resulted from weaker demand during the quarter for that site’s
      existing product mix. As a result of the capacity transition from southern
      to
      northern California, some of our higher demand crops were unavailable for sale
      and this directly impacted the product mix that our southern California facility
      was able to sell during the period. This decrease was partially offset by
      increases in net sales at our other continuing operations
      facilities.




*Gross
      Profit.* Gross
      profit of $9.8 million for the three months ended September 30, 2006 decreased
      $8.7 million, or 47.1%, from gross profit of $18.4 million for the comparable
      period in 2005. Gross profit as a percentage of sales for the quarter decreased
      to 26.0% from 48.6% for the comparable period in 2005. The decline in gross
      profit and gross profit margin was mainly due to the decline in net sales,
      as
      discussed above, as well as higher cost inventory, which was produced during
      2005.





*Distribution
      Expenses.* Distribution
      expenses of $8.8 million for the three months ended September 30, 2006 increased
      $0.1 million, or 1.3%, from $8.7 million for the comparable period in 2005.
      As a
      percentage of net sales, distribution expenses for the quarter increased to
      23.5% from 22.9% in the third quarter of 2005. This slight increase was mainly
      due to increased third party carrier charges.





25




*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses of $12.1 million for the three months ended
      September 30, 2006 increased by $2.7 million, or 28.3%, from $9.4 million in
      the
      third quarter of 2005. The increase in selling expenses was mainly due to a
      higher amount of third party product merchandising costs which have been
      increasingly required by certain customers. Third party merchandising costs
      are
      typically more expensive than utilizing our in-house merchandising labor force.
      The increase in general and administrative expenses was mainly due to an
      increase in personnel and higher costs related to the implementation of
      Sarbanes-Oxley.




*Other
      Operating Expense.* Other
      operating expenses of $0.4 million for the three months ended September 30,
      2006
      increased by $0.4 million from nominal other operating expense for the
      comparable period in 2005. Other operating expenses for the third quarter of
      2006 consisted primarily of consulting fees relating to our productivity
      improvement initiatives.




*Operating
      (Loss) Income.* Operating
      loss for the three months ended September 30, 2006 was $13.0 million compared
      to
      $0.4 million of operating income for the comparable period in 2005. The swing
      from operating income to operating loss resulted from a decline in gross profit
      for the period of $8.7 million, an increase of $2.7 million in selling, general
      and administrative expenses and an increase of other operating expenses to
      $0.4
      million.




*Other
      Expenses.* Other
      expenses of $5.3 million for the three months ended September 30, 2006 decreased
      $0.6 million, or 9.6%, from $5.8 million for the comparable period in 2005
      primarily due to lower interest expense. Interest expense for the three months
      ended September 30, 2006 declined $0.7 million, or 13.8%, primarily as a result
      of lower outstanding debt, partially offset by higher interest rates. This
      was
      offset by an increase in deferred financing expenses which resulted from the
      write-off of a portion of the deferred financing expenses in connection with
      our
      third amendment to the Senior Credit Facility.




*Income
      Tax Benefit.* Our
      effective income tax rate was 38.6% for the three months ended September 30,
      2006, up from 36.2% from the comparable period a year ago. Benefit from income
      taxes was $7.1 million for the three months ended September 30, 2006 compared
      to
      $2.0 million for the comparable period in 2005. The increase in income tax
      benefit is primarily due to lower income from continuing operations before
      income taxes. In addition, included in the three months ended September 30,
      2006, is the reversal of $0.2 million of tax liabilities due to
      the closure of certain tax years for tax audit purposes.




*Loss
          from Continuing Operations.* Loss
          from continuing operations of $11.2 million for the three months ended
          September
          30, 2006 increased $7.7 million, or 221%, from $3.5 million for the comparable
          period in 2005. The increase in the loss from continuing operations was
          attributable to lower net sales, gross margin decline and other factors
          discussed above.
  *Loss
          from Discontinued Operations.* Loss
          from discontinued operations, net of tax, of $19.1 million for the three
          months
          ended September 30, 2006 increased $17.2 million from $1.8 million for
          the
          comparable period in 2005. The increase in loss from discontinued operations
          was
          primarily due to asset and other impairment charges.
  *Net
          Loss.* Net
          loss
          for the three months ended September 30, 2006 of $30.3 million increased
          $24.9
          million compared to $5.3 million for the comparable period in 2005. The
          increase
          in net loss was mainly attributable to the loss on discontinued operations
          recorded during the third quarter, as well as other factors discussed above.




***Nine
      Months Ended September 30, 2006 compared to Nine Months Ended September 30,
      2005***




*Net
      Sales.* Net
      sales
      of $208.3 million for the nine months ended September 30, 2006 decreased by
      $13.8 million, or 6.2%, from net sales of $222.1 million for the comparable
      period in 2005. The decline in net sales during the nine month period is mainly
      due to the persistent rain in the Pacific Northwest, northern California and
      Southwest during the late winter and early spring months as well as lost market
      share in the mid-Atlantic markets. The late winter and early spring rains
      reduced consumer demand at the retail level and also delayed certain product
      availability for up to three weeks, which also impacted sales. Additionally,
      our
      facility in South Carolina reported less sales volume as a result of lost market
      share primarily in the mid-Atlantic markets.





*Gross
      Profit.* Gross
      profit of $87.3 million for the nine months ended September 30, 2006 decreased
      $26.2 million, or 23.1%, from gross profit of $113.5 million for the comparable
      period in 2005. The decline in gross profit and gross profit margin was mainly
      due to the decline in net sales, as discussed above, as well as higher cost
      inventory produced during 2005.





26




*Distribution
      Expenses.* Distribution expenses of $46.6 million for the nine months ended September
      30,
      2006 decreased $0.6 million, or 1.4%, from $47.3 million for the comparable
      period in 2005. The decrease is due primarily to lower sales. As a percentage
      of
      net sales, distribution expenses for the nine months ended September 30, 2006
      increased to 22.4% from 21.3% for the comparable period in 2005. This increase
      is primarily due to increased diesel fuel costs and third party carrier
      costs.




*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses of $41.3 million for the nine months ended
      September 30, 2006 increased $2.2 million, or 5.6%, from $39.1 million for
      the
      comparable period in 2005. The increase in selling and general and
      administrative expenses is primarily due to an increase in third party product
      merchandising costs, which have been increasingly required by certain customers,
      as well as an increase in general and administrative personnel and higher costs
      related to the implementation of Sarbanes-Oxley.




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




*Operating
      (Loss) Income.* Operating loss of $4.3 million for the nine months ended September 30, 2006
      decreased by $30.9 million, or 116.4 %, from income of $26.6 million for the
      comparable period in 2005. The decline in operating income resulted from lower
      sales volume, gross profit decline, and an increase in selling and general
      and
      administrative expenses and other expenses, as discussed above.




*Other
      Expenses.* Other
      expenses of $16.4 million for the nine months ended September 30, 2006 decreased
      by $1.5 million, or 8.6%, from $17.9 million for the comparable period a year
      ago. The decrease was primarily due to a reduction in interest expense of $2.5
      million related to lower outstanding debt and partially offset by higher
      interest rates. The decrease in interest expense was further offset by the
      swap
      agreement income in 2005 of $0.9 million. The swap agreement matured in February
      of 2005.




*Income
      Tax (Benefit) Provision.* Our
      effective tax rate was 38.6% for the nine months ended September 30, 2006,
      up
      from an effective tax rate of 36.0% for the comparable period in 2005. Benefit
      from income taxes was $8.0 million for the nine months ended September 30,
      2006
      compared to a provision for income tax of $3.1 million for the comparable period
      in 2005. The shift from provision to benefit is due to lower income from
      continuing operations before income taxes. In addition, included in the nine
      months ended September 30, 2006, is the reversal of approximately $0.2 million
      of tax liabilities due to the closure of certain tax years for tax
      audit purposes.




*(Loss)
      Income from Continuing Operations.* Loss
      from continuing operations for the nine months ended September 30, 2006 of
      $12.7
      million was $18.3 million less than income from continuing operations of $5.6
      million for the comparable period in 2005. The shift from income to loss was
      mainly due to lower operating income, partially offset by a decrease in interest
      expense.




*(Loss)
      Income from Discontinued Operations.* Loss
      from discontinued operations, net of tax, for the nine months ended September
      30, 2006 of $22.3 million was $25.7 million less than income from discontinued
      operations, net of tax, of $3.4 million for the comparable period in 2005.
      The
      shift from income to loss was primarily due to a decrease in sales and gross
      profit margins from the facilities which comprise discontinued
      operations.




*Net
      (Loss) Income.* Net loss
      for the nine months ended September 30, 2006 of $35.0 million was $44.0 million
      less than net income of $9.0 million for the comparable period in 2005. The
      shift from net income to net loss is primarily due to lower net sales volume,
      gross profit margin, the loss from discontinued operations and other factors
      discussed above.





**Liquidity
      and Capital Resources**




Our
      primary sources of liquidity are funds generated by operations and borrowings
      under our Senior Credit Facility. The seasonal nature of our operations results
      in a significant fluctuation in certain components of working capital (primarily
      accounts receivable and inventory) during the growing and selling cycles. As
      a
      result, operating activities during the first and fourth quarters use
      significant amounts of cash, and in contrast, operating activities for the
      second and third quarters historically have generated cash as we ship inventory
      and collect accounts receivable. The covenants under our Senior Credit Facility
      may affect our ability to operate our business, may limit our ability to take
      advantage of business opportunities as they arise and may adversely affect
      the
      conduct of our current business. A breach of a covenant in our debt instruments
      could cause acceleration of a significant portion of our outstanding
      indebtedness. In the event we breach the covenants in our debt instruments
      and
      we are unable to obtain waivers in connection therewith, we may not be able
      to
      obtain alternative financing for our debt on reasonable terms or otherwise.
      In
      that event, in order to pay the principal of our debt, we would be required
      to
      sell our equity securities, sell our assets or take other actions which could
      adversely impact our business, operations and shareholders. The foregoing
      actions may not enable us to pay the entire principal of our debt.





27




Net
      cash
      provided by operating activities of continuing operations was $13.9 million
      for
      the nine months ended September 30, 2006 compared to $22.3 million for the
      comparable period in 2005. The decrease in cash provided by operating activities
      was mainly due to the decline in gross profit during the period, partially
      offset by reduced working capital levels. The decline in gross profit was
      primarily due to the decrease in net sales and the sell-through of higher cost
      inventory that was produced in 2005. The reduced working capital requirements
      were mainly due to reduced accounts receivable and inventory balances at quarter
      end. The decline in accounts receivable resulted mainly from the reduction
      in
      net sales. The decline in inventory resulted from fewer units in production
      as
      we better align production with forecasted sales as well as units we are now
      capturing into inventory with lower production costs resulting from our internal
      labor productivity initiatives.





Net
      cash
      used in investing activities from continuing operations was $7.7 million for
      the
      nine months ended September 30, 2006 compared to net cash used in investing
      activities from continuing operations of $5.4 million for the same period a
      year
      ago. The increase in cash used in investing activities was mainly due to a
      $0.2
      million increase in capital expenditures during the period and a reduction
      of
      $2.0 million of land sale option proceeds in 2006. Capital expenditures during
      the period mainly consisted of general maintenance capital and expenditures
      related to our Irvine capacity relocation project.





Net
        cash
        provided by financing activities was $3.9 million for the nine months ended
        September 30, 2006 compared to net cash used in financing activities of $22.6
        million for the same period in 2005. The swing from net cash used in financing
        activities to net cash provided by financing activities was primarily due
        to the
        receipt of $14.3 million of cash proceeds from the Lagoon Valley property
        sale
        and smaller repayments on our outstanding debt of $12.3
        million compared to the same period a year ago.




We
      typically draw down our revolving loan in the first and fourth quarters to
      fund
      our seasonal inventory buildup and seasonal operating expenses. Based on past
      history, approximately 72-74% of our sales generally occur in the first half
      of
      the year, generally allowing us to reduce borrowing under our revolving loan
      in
      the second and third quarters. After applying the borrowing base limitations
      and
      letters of credits to our available borrowings as of September 30, 2006 we
      were
      limited to a maximum borrowing availability of $10.8 million based on the
      utilization limits in place for the quarter.





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





We
      do not
      have any off balance sheet financing or any financial arrangements with related
      parties, other than operating leases. The following table discloses aggregate
      information about our contractual obligations and commercial commitments for
      our
      continuing operations as of September 30, 2006.





**Payments
                Due by Period*****(Dollars
                in millions)*****Less
                than**
            
            
            
            
            
            **After****Contractual
                Cash Obligations**
            
            **Total**
            
            **1
                year**
            
            **1-3
                years**
            
            **4-5
                years**
            
            **5
                years**Senior
                Notes
            
            $
            175.0
            
            $
            -
            
            $
            -
            
            $
            175.0
            
            $
            -Interest
            
            
            93.3
            
            
            18.9
            
            
            55.0
            
            
            19.4
            
            
            -Operating
                Leases
            
            
            4.0
            
            
            1.6
            
            
            2.0
            
            
            0.4
            
            
            -Total
            
            $
            272.3
            
            $
            20.5
            
            $
            57.0
            
            $
            194.8
            
            $
            -




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




***Our
      Senior Credit Facility***





We
      entered into our Senior Credit Facility on September 30, 2003. Hines Nurseries
      and its domestic operating subsidiaries are borrowers under the Senior Credit
      Facility. The credit facility currently consists of a revolving loan which,
      subject to applicable borrowing base calculations, provides for borrowings
      which
      are not to exceed revolving utilization limits which range between $10.8 million
      and $23.3 million depending on the fiscal quarter. The revolving loan also
      permits us to obtain letters of credit up to a separate sub-limit.





28




The
      Senior Credit Facility was amended by the First Amendment to Credit Agreement
      dated as of June 30, 2005 (the “First Amendment”), then again pursuant to a
      Waiver Regarding Financial Covenants dated as of October 13, 2005 (the
“Waiver”), and by the Second Amendment to Credit Facility dated as of February
      3, 2006 (the “Second Amendment”). On November 8, 2005, in accordance with the
      Waiver, at our request the availability of the revolving loan was reduced from
      $145.0 million to $120.0 million (subject to borrowing base limits). On August
      8, 2006, in accordance with the Third Amendment to the Senior Credit Facility,
      the Senior Credit Facility was amended again and the availability of the
      revolving loan was reduced by the imposition of revolving utilization limits
      which range from $10.8 million to $23.3 million depending on the fiscal
      quarter.





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





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





The
      Senior Credit Facility requires Hines Nurseries and its subsidiaries to meet
      specific covenants and financial ratios, including a minimum fixed charge
      coverage test, a maximum leverage test and a maximum capital expenditure test.
      The Senior Credit Facility contains customary representations and warranties
      and
      customary events of default and other covenants. As of September 30, 2006,
      we
      were in compliance with our covenants.





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





*First
      Amendment To Senior Credit Facility.* Effective June 30, 2005, Hines Nurseries negotiated and entered into the First
      Amendment to the Senior Credit Facility. The First Amendment amended the Senior
      Credit Facility to require that the proceeds from the Miami 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. The Second Amendment amends the calculation of the minimum
      fixed charge coverage ratio for the first quarter of 2006 and thereafter. The
      Second Amendment also eliminates the maximum leverage ratio.





*Third
        Amendment To Senior Credit Facility.* In
        August 2006, Hines Nurseries negotiated and entered into the Third Amendment
        to
        the Senior Credit Facility. The Third Amendment waived the requirement that
        we
        comply with the minimum fixed charge coverage ratio covenant for the periods
        ended June 30, 2006 and September 30, 2006. The Third Amendment also instituted
        maximum revolving utilization restrictions under the credit facility which,
        subject to applicable borrowing base calculations, limit the Company’s
        borrowings to limits which range from $10.8 million to $23.3 million depending
        on the fiscal quarter. It also increased the interest rate spread by 25 basis
        points on outstanding prime and London Interbank Offered Rate (“LIBOR”)
        borrowings, increased unused line fees and established new fixed charge covenant
        ratios beginning in the fourth quarter of 2006. In addition, the Third Amendment
        requires us to sell ours four color nursery facilities in the Northeast and
        certain assets in Miami, Florida by no later than December 31, 2006. The
        sales
        of these assets are required to generate a predetermined amount of aggregate
        proceeds.




**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.




29




*Revenue
      Recognition* .




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





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




*Sales
      Returns and Allowances* .




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




*Allowance
      for Doubtful Accounts* .




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





*Impairment
      of Long-Lived Assets.*




In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” long-lived assets and intangible assets with determinate
      lives are reviewed for impairment whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable. We
      evaluate potential impairment by comparing the carrying amount of the asset
      with
      the estimated undiscounted future cash flows associated with the use of the
      asset and its eventual disposition.




*Accounting
      for Goodwill Impairment* .




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




*Accrued
      Liabilities* .




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




*New
      Accounting Standards.*





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





30


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 adopted SFAS No. 151 on January 1, 2006.
          The
          adoption of SFAS No. 151 did not have a material impact on our consolidated
          financial position, results of operations or cash flows.
 
 In
          December 2004, the FASB issued SFAS No. 153, “Exchange of Non Monetary Assets -
          an amendment of APB Opinion No. 29,” which requires non monetary asset exchanges
          to be accounted for at fair value. We were required to adopt the provisions
          of
          SFAS No. 153 for non monetary exchanges occurring in fiscal periods beginning
          after June 15, 2005. We adopted SFAS No. 153 on January 1, 2006. The adoption
          of
          SFAS No. 153 did not have an impact on our consolidated financial position,
          results of operations or cash flows.
 
 In
          May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
          Corrections - a replacement of APB Opinon No. 20 and FASB Statement No.
          3.” SFAS
          No. 154 changes the requirements for the accounting for and reporting of
          a
          change in an accounting principle. This statement applies to all voluntary
          changes in an accounting principle. It also applies to changes required
          by an
          accounting pronouncement if the pronouncement does not include specific
          transition provisions. When a pronouncement includes specific transition
          provisions, those provisions should be followed. APB Opinion No. 20 previously
          required that most voluntary changes in an accounting principle be recognized
          by
          including in net income of the period of the change the cumulative effect
          of
          changing to the new accounting principle. SFAS No. 154 requires retrospective
          application to prior periods’ financial statements of changes in an accounting
          principle. We adopted SFAS No. 154 on January 1, 2006. The adoption of
          SFAS
          No. 154 did not have an impact on our consolidated financial position,
          results of operations or cash flows.
 
 In
          February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
          Financial Instruments - an amendment of FASB Statements No. 133 and 140.” SFAS
          No. 155 simplifies the accounting for certain hybrid financial instruments
          that
          contain an embedded derivative that otherwise would have required bifurcation.
          SFAS No. 155 also eliminates the interim guidance in SFAS No. 133, “Accounting
          for Derivative Instruments and Hedging Activities,” which provides that
          beneficial interest in securitized financial assets is not subject to the
          provisions of SFAS No. 133. SFAS No. 155 is effective for all financial
          instruments acquired or issued in fiscal years beginning after September
          15,
          2006. We do not believe that the adoption of SFAS No. 155 will have a material
          impact on its consolidated financial position, results of operations or
          cash
          flows.
 
 In
          June 2006, the FASB ratified Emerging Issues Task Force Issue
          No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental
          Authorities Should Be Presented in the Income Statement (That Is, Gross
          versus
          Net Presentation)” (“EITF 06-3”). The scope of EITF 06-3 includes any tax
          assessed by a governmental authority that is directly imposed on a
          revenue-producing transaction between a seller and a customer. This issue
          provides that a company may adopt a policy of presenting taxes either gross
          within revenue or net. If taxes subject to this issue are significant,
          a company
          is required to disclose its accounting policy for presenting taxes and
          the
          amount of such taxes that are recognized on a gross basis. We do not believe
          the
          adoption of EITF 06-3 will have a material impact on our consolidated financial
          statements.
  In
          September 2006, the Securities and Exchange Commission (the “SEC”) issued
          Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year
          Misstatements when Quantifying Misstatements in Current Year Financial
          Statements” (“SAB 108”). SAB 108 provides guidance on the consideration of the
          effects of prior year misstatements in quantifying current year misstatements
          for the purpose of determining whether the current year’s financial statements
          are materially misstated. SAB 108 is effective for fiscal years ending
          after
          November 15, 2006. We do not expect SAB 108 to have a material impact on
          our consolidated financial statements.
 
 In
          September 2006, the FASB issued SFAS No. 157, “Fair Value
          Measurements.” This standard defines fair value, establishes a framework for
          measuring fair value in accounting principles generally accepted in the
          United
          States of America, and expands disclosure about fair value measurements.
          This
          pronouncement applies to other accounting standards that require or permit
          fair
          value measurements. Accordingly, this statement does not require any new
          fair
          value measurement. This statement is effective for fiscal years beginning
          after
          November 15, 2007, and interim periods within those fiscal years. We are
          currently evaluating the requirements of SFAS No. 157 and the impact that
          the
          adoption of this statement will have on our consolidated financial statements.
 
 Effective
          the beginning of the first quarter of fiscal year 2006, we adopted the
          provisions of SFAS No. 123(R), “Share-Based Payment,” using the modified
          prospective transition method. Under this method, prior periods are not
          restated. The provisions of SFAS 123(R) apply to new stock options and
          stock
          options outstanding, but not yet vested, on the effective date. As of December
          31, 2005, all outstanding options were fully vested.








31








**Effects
      of Inflation**




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




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




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





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





32




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
      September 30, 2006.





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





**PART
      II. OTHER INFORMATION**


**Item
        1.   Legal Proceedings**
 
 On
        July
        18, 2006, Mr. Jean-Paul filed an action against us and other defendants in
        the
        Eleventh Judicial Circuit, Dade County, Florida, alleging negligence in
        connection with an automobile accident involving one of our trailers and
        a
        third-party carrier.  The claim is scheduled for trial in August
        2007.  We are defended in these actions by our insurance carrier, and are
        fully insured with respect to this matter, beyond a deductible.  Because
        this suit is in the initial phases of discovery, the potential loss associated
        with this claim is not probable or estimable and no loss accrual beyond our
        deductible has been recorded.
 
 From
        time
        to time, the Company is involved in various disputes and litigation matters,
        which arise in the ordinary course of business.  The litigation process is
        inherently uncertain and it is possible that the resolution of these disputes
        and lawsuits may adversely affect the Company’s financial position. 
Management believes, however, that the ultimate resolution of such matters
        will
        not have a material adverse impact on the Company’s consolidated financial
        position, results of operations or cash flows.




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




See
      index
      to Exhibits at page 35 for a list of exhibits included
      herewith.





33








**SIGNATURE**





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





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





Date:
      July 10, 2007





34




HINES
      HORTICULTURE, INC.


QUARTERLY
      REPORT ON FORM 10-Q


FOR
      THE
      FISCAL QUARTER ENDED SEPTEMBER 30, 2006





INDEX
      TO
      EXHIBITS







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


________________





+
      Filed
      herewith




35