<PAGE>


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

                                    FORM 10-Q

                                   (Mark One)

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

                  For the quarterly period ended June 30, 2006
                                       OR

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

   For the transition period from___________________ to _____________________

                             Commission File Number
                                    000-24439

                            HINES HORTICULTURE, INC.
             (Exact name of registrant as specified in its charter)


               DELAWARE                                       33-0803204
    (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                     Identification Number)

                               12621 Jeffrey Road
                            Irvine, California 92620
               (Address of principal executive offices) (Zip Code)

                                 (949) 559-4444
              (Registrant's telephone number, including area code)

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

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

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

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

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


                                     Page 1
<PAGE>

                            HINES HORTICULTURE, INC.
                                      INDEX

                          PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)                             Page No.
                                                                        --------
           Condensed Consolidated Balance Sheets as of June 30, 2006
           and December 31, 2005                                            3

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

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

           Notes to the Condensed Consolidated Financial Statements         6

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                        13

Item 3.    Quantitative and Qualitative Disclosures About Market Risk       22

Item 4.    Controls and Procedures                                          23

                           PART II. OTHER INFORMATION


Item 1.    Legal Proceedings                                                23

Item 1A.   Risk Factors                                                     23

Item 4.    Submission of Matters to a Vote of Security Holders              25

Item 5.    Other Information                                                25

Item 6.    Exhibits                                                         26

           Signature                                                        27

           Index to Exhibits                                                28

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


                                     Page 2
<PAGE>

<TABLE>
PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

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

ASSETS                                                         June 30,   December 31,
------                                                          2006         2005
                                                              ---------    ---------
CURRENT ASSETS:
<S>                                                           <C>          <C>
        Cash                                                  $   6,077    $      62
        Accounts receivable, net                                 52,556       16,444
        Inventories                                             157,683      183,281
        Consigned inventories                                     4,663        1,350
        Prepaid expenses and other current assets                 2,313        2,666
        Assets held for sale                                         --          484
                                                              ---------    ---------

                                    Total current assets        223,292      204,287
                                                              ---------    ---------

FIXED ASSETS, net                                               112,553      122,234

DEFERRED FINANCING EXPENSES, net                                  5,608        6,207
DEFERRED INCOME TAXES                                            11,481       11,481
GOODWILL                                                         43,926       43,926
                                                              ---------    ---------

                                                              $ 396,860    $ 388,135
                                                              =========    =========

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

CURRENT LIABILITIES:
        Accounts payable                                      $  19,934    $  12,624
        Accrued liabilities                                      15,017       11,474
        Accrued payroll and benefits                              7,702        4,453
        Accrued interest                                          4,682        4,711
        Borrowings on revolving credit facility                      --       10,080
        Deferred income taxes                                    62,515       66,127
                                                              ---------    ---------

                               Total current liabilities        109,850      109,469
                                                              ---------    ---------

LONG-TERM DEBT                                                  175,000      175,000
DEFERRED GAIN ON LAND SALES                                      56,109       39,880
OTHER LIABILITIES                                                 2,691        5,378
                                                              ---------    ---------

                                       Total liabilities        343,650      329,727
                                                              ---------    ---------

SHAREHOLDERS' EQUITY
        Preferred stock
           Authorized - 2,000,000 shares, $0.01 par value;
           none outstanding                                          --           --
        Common stock
           Authorized - 60,000,000 shares, $0.01 par value;
           Issued and outstanding - 22,072,549 shares
           at June 30, 2006 and December 31, 2005                   221          221
        Additional paid-in capital                              128,781      128,781
        Accumulated deficit                                     (75,792)     (70,594)
                                                              ---------    ---------

                              Total shareholders' equity         53,210       58,408
                                                              ---------    ---------

                                                              $ 396,860    $ 388,135
                                                              =========    =========

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


                                     Page 3
<PAGE>

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

                                                 Three Months Ended June 30,     Six Months Ended June 30,

                                                    2006             2005           2006            2005
                                                 ------------    ------------   ------------    ------------


Sales, net                                       $    154,945    $    176,893   $    211,847    $    240,883
Cost of goods sold                                     86,369          87,843        117,254         120,609
                                                 ------------    ------------   ------------    ------------
    Gross profit                                       68,576          89,050         94,593         120,274
                                                 ------------    ------------   ------------    ------------

Selling and distribution expenses                      48,920          51,504         70,361          74,068
General and administrative expenses                     6,272           5,736         12,077          11,681
Other operating expenses                                1,098             544          1,840             429
Asset impairment charges                                8,041              --          8,041              --
                                                 ------------    ------------   ------------    ------------
    Total operating expenses                           64,331          57,784         92,319          86,178
                                                 ------------    ------------   ------------    ------------

    Operating income                                    4,245          31,266          2,274          34,096

Other expenses (income)
   Interest, net                                        5,178           5,846         10,335          12,086
   Interest rate swap agreement income                     --              --             --            (895)
   Amortization of deferred financing expenses            378             444            749             889
                                                 ------------    ------------   ------------    ------------
                                                        5,556           6,290         11,084          12,080
                                                 ------------    ------------   ------------    ------------

(Loss) income before income taxes                      (1,311)         24,976         (8,810)         22,016

Income tax (benefit) provision                           (537)         10,241         (3,612)          9,027
                                                 ------------    ------------   ------------    ------------

Net (loss) income                                $       (774)   $     14,735   $     (5,198)   $     12,989
                                                 ============    ============   ============    ============


Basic and diluted earnings per share:
Net (loss) income per common share               $      (0.04)   $       0.67   $      (0.24)   $       0.59
                                                 ============    ============   ============    ============


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

Weighted average shares outstanding--Diluted       22,072,549      22,131,507     22,072,549      22,129,403
                                                 ============    ============   ============    ============

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


                                                     Page 4
<PAGE>

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

                                                            Six Months Ended June 30,
                                                                2006        2005
                                                              --------    --------

CASH FLOWS FROM OPERATING ACTIVITIES
    Net (loss) income                                         $ (5,198)   $ 12,989
    Adjustments to reconcile net (loss) income to net cash
      provided by operating activities:
         Depreciation                                            5,802       5,333
         Accretion of asset retirement obligations                  13          51
         Amortization of deferred financing expenses               749         889
         Interest rate swap agreement income                        --        (895)
         Gain on sale of assets                                    (19)       (171)
         Asset impairment charges                                8,041          --
         Deferred income taxes                                  (3,612)      9,027

Change in working capital accounts:
    Accounts receivable                                        (36,112)    (47,220)
    Inventories                                                 22,148      11,999
    Prepaid expenses and other current assets                      346         (57)
    Accounts payable and accrued liabilities                    13,308      22,166
                                                              --------    --------

        Net cash provided by operating activities                5,466      14,111
                                                              --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of fixed assets                                    (3,624)     (5,347)
    Proceeds from sale of fixed assets                          14,403         194
    Proceeds from land sale option                                  --       1,100
                                                              --------    --------

        Net cash provided by (used in) investing activities     10,779      (4,053)
                                                              --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES
    Net repayments on revolving line of credit                 (10,080)     (8,575)
    Repayments of long-term debt                                    --      (1,910)
    Deferred financing expenses incurred                          (150)         --
                                                              --------    --------

        Net cash used in financing activities                  (10,230)    (10,485)
                                                              --------    --------


NET CHANGE IN CASH                                               6,015        (427)

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

CASH, end of period                                           $  6,077    $    173
                                                              ========    ========


Supplemental disclosure of cash flow information:
    Cash paid for interest                                    $ 10,216    $ 12,503
    Cash paid for income taxes                                $  1,046    $     24

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


                                     Page 5
</TABLE>
<PAGE>

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


1.   Description of Business:
     ------------------------

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

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

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

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

         In March 2005, the Financial Accounting Standards Board ("FASB") issued
     FASB Interpretation No. ("FIN") 47, "Accounting for Conditional Asset
     Retirement Obligations." FIN 47 clarifies the accounting for conditional
     asset retirement obligations as used in Statement of Financial Accounting
     Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations."
     A conditional asset retirement obligation is an unconditional legal
     obligation to perform an asset retirement activity in which the timing and
     (or) method of settlement are conditional on a future event that may or may
     not be within the control of the entity. Therefore, an entity is required
     to recognize a liability for the fair value of a conditional asset
     retirement obligation under SFAS No. 143 if the fair value of the liability
     can be reasonably estimated. During the second quarter of 2006, the Company
     continued to evaluate its asset retirement obligations and identified
     additional retirement obligations of approximately $404 increasing its
     overall obligation to approximately $777. Additional obligations of
     approximately $381 arose from the remediation costs associated with the
     Company's requirements to exit from the land located in Irvine, California.
     Additional obligations of $23 arose from the remediation costs associated
     with the Company's requirements to exit off land located in Vacaville,
     California. As the Company continues to evaluate and identify additional
     asset retirement obligations, additional liabilities will be recorded when
     the future obligations can be reasonably estimated.

     Impairment of Long-Lived Assets
     -------------------------------

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

                                     Page 6
<PAGE>

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

         The unaudited financial information furnished herein, in the opinion of
     management, reflects all adjustments (consisting of only normal recurring
     adjustments), which are necessary for a fair statement of the consolidated
     financial position, results of operations and cash flows of the Company as
     of and for the periods indicated. The Company presumes that users of the
     interim financial information herein have read or have access to the
     Company's audited consolidated financial statements for the preceding
     fiscal year and that the adequacy of additional disclosure needed for a
     fair presentation may be determined in that context.

         Accordingly, footnotes and other disclosures, which would substantially
     duplicate the disclosures contained in the Company's Form 10-K for the year
     ended December 31, 2005, as amended, filed on May 12, 2006 by Hines under
     the Securities Exchange Act of 1934, as amended, have been omitted. The
     financial information herein is not necessarily representative of a full
     year's operations. The year-end condensed balance sheet was derived from
     audited financial statements, but does not include all disclosures required
     by accounting principles generally accepted in the United States of
     America.

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

4.   Stock-Based Compensation:
     -------------------------

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

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

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

                                     Page 7
<PAGE>


         PRO FORMA IMPACT IN Q2 2005 HAD THE COMPANY APPLIED THE FAIR VALUE
PROVISIONS OF SFAS NO. 123

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

<TABLE>
                                                           Three Months Ended   Six Months Ended
                                                              June 30, 2005      June 30, 2005
                                                            ----------------    ----------------
<S>                                                         <C>                 <C>
         Net income, as reported                            $         14,735    $         12,989
         Stock-based compensation expense, net of tax                    (11)                (22)
                                                            ----------------    ----------------
         Pro forma net income                               $         14,724    $         12,967
                                                            ================    ================

         Net income per share:

         Basic and diluted - as reported                    $           0.67    $           0.59
                                                            ================    ================
         Basic and diluted - pro forma                      $           0.67    $           0.59
                                                            ================    ================
</TABLE>

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

                                                        2005
                                                        ----
          Dividend Yield                                    0%
          Expected Volatility                           83.86%
          Risk-free Interest Rate                        3.48%
          Expected Life                             Four years
          Forfeiture Rate                                   0%

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

         Expected Dividend - No dividends are expected to be paid.

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

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

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

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

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

                                     Page 8
<PAGE>


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

                                                       2006
                                            -------------------------
                                                                       Aggregate
                                                      Weighted Average Intrinsic
                                             Shares    Exercise Price    Value
                                            --------    -------------  ---------

         Outstanding at December 31, 2005    869,110    $       6.22
         Granted                                  --              --
         Exercised                                --              --
         Cancelled                            (7,250)           6.64
                                            --------
         Outstanding - June 30, 2006         861,860    $       6.22   $       3
                                            ========                   =========

         Exercisable                         861,860    $       6.22   $       3
                                            ========                   =========


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

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

<TABLE>
                                                    OUTSTANDING                             EXERCISABLE
                                   ---------------------------------------------   ----------------------------

                                                    Average          Weighted                       Weighted
                                    Number of      Remaining        Average of      Number of      Average of
          Range of exercise price    Options     Contract Life    Exercise Price     Options     Exercise Price
          -----------------------  -----------   --------------   --------------   -----------   --------------
<S>       <C>                          <C>                 <C>    <C>                  <C>       <C>
          $3.32 to $5.00                81,000             5.06   $         4.53        81,000   $         4.53

          $5.50                        627,160             5.90             5.50       627,160             5.50

          $6.00 to $8.00                34,200             3.33             6.71        34,200             6.71

          $11.00                       119,500             2.08            11.00       119,500            11.00
                                   -----------   --------------   --------------   -----------   --------------

          Total                        861,860             5.20   $         6.22       861,860   $         6.22
                                   ===========   ==============   ==============   ===========   ==============
</TABLE>

5.   Inventories:
     ------------

         Inventories consisted of the following:


                                                      June 30,      December 31,
                                                        2006           2005
                                                     -----------    -----------
         Nursery stock                               $   144,907    $   172,845
         Material and supplies                            12,776         10,436
                                                     -----------    -----------
              Subtotal                                   157,683        183,281
         Consigned inventory                               4,663          1,350
                                                     -----------    -----------
                                                     $   162,346    $   184,631
                                                     ===========    ===========


6.   New Accounting Standards:
     -------------------------

         In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in
     Income Taxes - An Interpretation of FASB Statement No. 109." FIN 48
     clarifies the accounting for uncertainty in income taxes recognized in an
     enterprise's financial statements in accordance with SFAS No. 109,
     "Accounting for Income Taxes." FIN 48 is effective for all uncertainty in
     income taxes recognized in the financial statements in fiscal years
     beginning after December 15, 2006. The Company does not believe that the
     adoption of FIN 48 will have a material impact on its consolidated
     financial position, results of operations or cash flows.

                                     Page 9
<PAGE>

7.   Senior Credit Facility:
     -----------------------

         On September 30, 2003, the Company amended and restated its Senior
     Credit Facility. Hines Nurseries and its domestic operating subsidiaries
     are borrowers under the Senior Credit Facility. The Senior Credit Facility
     currently consists of a revolving loan with availability of up to $100,000
     (subject to borrowing base limits). The revolving loan also permits the
     ability to obtain letters of credit up to a sub-limit.

         The Senior Credit Facility was amended by the First Amendment to Credit
     Agreement dated as of June 30, 2005 (the "First Amendment"), then again
     pursuant to a Waiver Regarding Financial Covenants dated as of October 13,
     2005 (the "Waiver"), and by the Second Amendment to Credit Facility dated
     as of February 3, 2006 (the "Second Amendment"). The Senior Credit Facility
     was also amended as of August 8, 2006 pursuant to the Third Amendment. On
     November 8, 2005, in accordance with the Waiver, at the Company's request
     the availability of the revolving loan was reduced from $145,000 to
     $120,000 (subject to borrowing base limits). On August 8, 2006, in
     accordance with the Third Amendment, the availability of the revolving loan
     was reduced from $120,000 to $100,000.

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

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

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

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

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

                                    Page 10
<PAGE>

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

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

         INTEREST RATE; FEES. The interest rate on the loans under the Senior
     Credit Facility may be, at the Company's option, Prime rate loans or LIBOR
     rate loans. Prime rate loans under the revolving loan bear interest at the
     Prime lending rate plus an additional amount that ranges from 0.75% to
     1.75%, depending on its consolidated leverage ratio. As of June 30, 2006,
     the applicable margin for Prime rate loans was 1.75% for the revolving
     loan. As of August 8, 2006, in accordance with the Third Amendment, the
     Prime rate loans under the revolving loan bear interest at the Prime
     lending rate plus an additional amount that ranges from 1.00% to 2.00%,
     depending on its consolidated leverage ratio.

         LIBOR rate loans under the revolving loan bear interest at the LIBOR
     rate plus an additional amount that ranges from 1.75% to 2.75%, depending
     on its consolidated leverage ratio. As of June 30, 2006, the applicable
     margin for LIBOR rate loans was 2.75% for the revolving loan. As of August
     8, 2006, in accordance with the Third Amendment, LIBOR rate loans under the
     revolving loan bear interest at the LIBOR rate plus an additional amount
     that ranges from 2.00% to 3.00%, depending on its consolidated leverage
     ratio. In addition to paying interest on outstanding principal, the Company
     is required to pay a commitment fee on the daily average unused portion of
     the revolving loan which accrues based on the utilization of the revolving
     loan.

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

         The Company must deliver borrowing base certificates and reports at
     least monthly. The borrowing base also may be subject to certain other
     adjustments and reserves to be determined by the agent. Eligible accounts
     receivable of both The Home Depot, the Company's largest customer, and
     Lowe's Companies, Inc., its second largest customer, may not exceed 30% of
     total eligible accounts receivable at any time. At June 30, 2006, the
     Company had $88,063 of available unused borrowings under the Senior Credit
     Facility.

8.   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.

                                    Page 11
<PAGE>

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

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

9.   Deferred Gain on Land Sales:
     ----------------------------

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

         Under the terms of the Option Agreement, the Company is able to
     transition off the land in three phases from 2006 to 2008. The three phases
     of transition will be July 1, 2006, July 1, 2007 and July 1, 2008, and will
     consist of approximately 24 acres, 88 acres and 56 acres, respectively. The
     Company is continuing to develop replacement acreage and infrastructure at
     its 842-acre Winters South facility in Northern California. The entire gain
     on the sale of property has been deferred due to our continuing involvement
     in the property, as defined in SFAS No. 98, "Accounting for Leases".

         On November 7, 2005, the Company successfully completed the sale of 122
     acres of unimproved property in Miami, Florida and received net proceeds of
     approximately $47,000. The Company entered into a two-year lease agreement
     with the buyer to lease the property while transitioning operations to
     other locations. The Company will lease the entire property for a one-year
     period, with a thirty-day extension right, and will then vacate
     approximately 33 acres. The Company will lease the remaining 89 acres for
     an additional one-year period, with extension rights for an additional
     ninety days, and will then vacate the remaining acreage. The Company will
     pay the buyer rent of five hundred dollars per outstanding acre, annually,
     during the lease term. The entire gain on the sale of property has been
     deferred due to our continuing involvement in the property, as defined in
     SFAS No. 98.

10.  Guarantor/Non-guarantor Disclosures:
     ------------------------------------

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

                                    Page 12
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

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

     EXECUTIVE SUMMARY AND MARKET TRENDS

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

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

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

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

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

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

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

                                    Page 13
<PAGE>

     FORWARD LOOKING STATEMENTS AND RISK FACTORS

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

     There are a number of risks, uncertainties and important factors that might
cause actual results to differ from any results expressed or implied by such
forward looking statements. In addition to the risks, uncertainties and other
factors discussed elsewhere in this Form 10-Q, the risks, uncertainties and
other factors that could cause or contribute to actual results differing
materially from those expressed or implied in the forward looking statements
include, without limitation, those set forth under Part II. Item 1A - Risk
Factors in the Company's Annual Report on Form 10-K for the year ended December
31, 2005, (together with any changes thereto contained in the Company's Form
10-Q for the quarter ended March 31, 2006 and this Form 10-Q and in any
subsequent quarterly reports on Form 10-Q), those contained in the Company's
other filings with the Securities and Exchange Commission, and those set forth
below.

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

     OVERVIEW

     We are a leading national supplier of ornamental shrubs, color plants and
container-grown plants with 13 commercial nursery facilities located in Arizona,
California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and
Texas. We produce approximately 5,700 varieties of ornamental shrubs and color
plants and we sell to more than 2,400 retail and commercial customers,
representing more than 8,750 outlets throughout the United States and Canada. As
of June 30, 2006, Hines Horticulture produced and distributed horticultural
products through its wholly owned subsidiary, Hines Nurseries.

     UNITED STATES TAX MATTERS

     As a result of our business activities, we qualify for a special exception
under the U.S. federal tax code that allows us to use the cash method of
accounting for federal income tax purposes. Under the cash method, sales are
included in taxable income when payments are received and expenses are deducted
as they are paid. We derive significant tax benefits by being able to deduct the
cost of inventory as the cost is incurred. As a result of our ability to utilize
the cash method of accounting, we have historically generated net operating
losses for federal income tax purposes and have not been required to pay cash
income taxes. During 2005, we were required to pay federal cash income taxes in
the form of alternative minimum tax as a result of the sale of land in Miami,
Florida ("Miami Land Sale"). At December 31, 2005, we had $2.6 million in net
operating loss carryforwards for federal income tax purposes, which begin to
expire in 2024. In addition, we had approximately $6.9 million in net operating
loss carryforwards for state income tax reporting purposes. Our state net
operating losses in certain states begin expiring in 2008.

     Based on our current projections, we anticipate that we will not pay cash
income taxes for federal purposes or state purposes in 2006 or 2007.

                                    Page 14
<PAGE>

     The use of the cash method of accounting for federal income tax purposes
results in a current deferred tax liability for accounting purposes. At June 30,
2006, we had a current deferred liability for deferred income taxes of $62.5
million related to the use of the cash method of accounting. The deferred tax
liability is deemed current for accounting purposes because the majority of the
items to which this liability relates are comprised of current assets and
current liabilities in our balance sheet (such as inventory, accounts receivable
and accounts payable). The classification of this liability as a current item,
however, does not mean that it is required to be paid within the next twelve
months.

     SEASONALITY

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

     SALE OF 168 ACRES IN VACAVILLE, CALIFORNIA

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

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

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

     PAY BY SCAN

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

     Despite the implementation of the new pay by scan program, we did not
encounter any material variances with the quality and variability of our
earnings and cash flows during 2005. However, we believe that pay by scan has
had an impact on our 2006 first six months earnings as we are experiencing a
reduction in revenue when comparing year over year shipments. The result of this
was an increase in our consigned inventory held at our customer's store
locations at June 30, 2006 as well as increased shrink as a result of the lower
sell-through of product.

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

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

     NET SALES. Net sales of $154.9 million for the three months ended June 30,
2006 decreased $21.9 million, or 12.4%, from net sales of $176.9 million for the
comparable period in 2005. The decline in net sales was primarily due to lost
market share throughout the Eastern Region. More intense competition,
significant pricing pressures and customer consolidations in the Northeast,
Mid-Atlantic and Southeast have all contributed to the decline in net sales in
the Eastern Region. In addition to this, excessive rain and flooding in the
Northeast during the quarter resulted in reduced consumer demand.

                                    Page 15
<PAGE>

     GROSS PROFIT. Gross profit of $68.6 million for the three months ended June
30, 2006 decreased $20.5 million, or 23.0%, from gross profit of $89.1 million
for the comparable period in 2005. Gross profit as a percentage of sales for the
quarter decreased to 44.3% from 50.3% for the comparable period in 2005. The
decline in gross profit and gross profit margin was mainly due to the decline in
sales, as discussed above, as well as higher cost inventory, which were produced
during 2005. In addition to this, the excessive rain and flooding in the
Northeast caused an increase in market scrap and also impacted gross margins in
the second quarter of 2006.

     SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$48.9 million for the three months ended June 30, 2006 decreased $2.6 million,
or 5.0%, from $51.5 million for the comparable period in 2005. As a percentage
of net sales, selling and distribution expenses for the quarter increased to
31.6% from 29.1% in the second quarter of 2005. Selling expenses of $13.5
million for the three months ended June 30, 2006 decreased by $0.9 million, or
6.3%, from $14.4 million in the second quarter of 2005. The decrease in selling
expense resulted from the reduction in work force due to the strategic
reorganization which occurred in the second quarter of 2005. In addition, there
was a decrease in the variable costs of selling expenses due to lower net sales.
Distribution expenses of $35.4 million for the three months ended June 30, 2006
decreased by $1.7 million, or 4.5%, from $37.1 million for the comparable period
in 2005. The decrease in distribution expenses was mainly due to the decline in
sales, as discussed above. As a percentage of sales, distribution costs
increased due to higher diesel fuel costs and increased third party carrier
charges, which were primarily driven by more expensive diesel fuel.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$6.3 million for the three months ended June 30, 2006 increased by $0.5 million,
or 9.3%, from $5.7 million for the comparable period in 2005. The increase in
general and administrative expenses was mainly due to an increase in consulting
fees related to increased staffing in IT and Finance for SOX 404 compliance
related work, partially offset by lower compensation and benefit expenses, which
mainly resulted from the reduction in work force due to the strategic
reorganization which occurred in the second quarter of 2005.

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

     ASSET IMPAIRMENT CHARGES. Asset impairment charges of $8.0 million for the
three months ended June 30, 2006 was recorded in connection with three of our
Northeast facilities.

     OPERATING INCOME. Operating income for the three months ended June 30, 2006
of $4.2 million was $27.0 million less than operating income of $31.3 million
for the comparable period in 2005. The decline in operating income resulted from
a decline in gross profit for the period of $20.5 million, an asset impairment
charge at two of our Northeast facilities of $8.0 million, an increase of $0.5
million in general and administrative costs and $0.6 million of other operating
expenses, which include consulting fees related to our productivity improvement
initiatives. The gross profit decline and unfavorable increase in operating
expenses were partially offset by decreased selling and distribution expense of
$2.6 million, which resulted from lower sales unit volume during the second
quarter of 2006.

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

     INCOME TAX (BENEFIT) PROVISION. Our effective income tax rate was 41.0% for
the three months ended June 30, 2006, unchanged from the comparable period a
year ago. Benefit from income taxes was $0.5 million for the three months ended
June 30, 2006 compared to provision for income taxes of $10.2 million for the
comparable period in 2005.

     NET (LOSS) INCOME. Net loss for the three months ended June 30, 2006 of
$0.8 million was $15.5 less than net income of $14.7 million for the comparable
period in 2005. The shift from net income to net loss was attributable to lower
net sales volume, gross profit margin decline, the asset impairment charge taken
during the second quarter and other factors discussed above.

SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005

     NET SALES. Net sales of $211.8 million for the six months ended June 30,
2006 decreased by $29.0 million, or 12.1%, from net sales of $240.9 million for
the comparable period in 2005. The decline in net sales was primarily due to
lost market share throughout the Eastern Region. More intense competition,
significant pricing pressures and customer consolidations in the Northeast,
Mid-Atlantic and Southeast also contributed to the decline in net sales in the
Eastern Region. In addition, the adverse weather conditions toward the end of
first quarter which carried into the second quarter further delayed product
availability and consumer demand.

                                    Page 16
<PAGE>

     GROSS PROFIT. Gross profit of $94.6 million for the six months ended June
30, 2006 decreased $25.7 million, or 21.4%, from gross profit of $120.3 million
for the comparable period in 2005. Similar to the second quarter circumstances,
the decline in gross profit and gross profit margin was mainly due to the
decline in sales, as discussed above, as well as higher cost inventory, produced
during 2005.

     SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$70.4 million for the six months ended June 30, 2006 decreased $3.7 million, or
5.0%, from $74.1 million for the comparable period in 2005. As a percentage of
net sales, selling and distribution expenses for the six months ended June 30,
2006 increased to 33.2% from 30.7% for the comparable period in 2005. Selling
expenses of $20.7 million for the six months ended June 30, 2006 decreased $1.6
million, or 7.3%, from $22.3 million a year ago. The decrease in selling expense
resulted from the reduction in work force due to the strategic reorganization
which occurred in the second quarter of 2005. In addition, there was a decrease
in the variable costs of selling expenses due to lower net sales. Distribution
expenses of $49.7 million for the six months ended June 30, 2006 decreased $2.1
million, or 4.0%, from $51.8 million for the comparable period in 2005. The
decrease in distribution expenses was mainly due to the decline in sales, as
discussed above. As a percentage of sales, distribution costs increased due to
higher diesel fuel costs and increased third party carrier charges, which were
primarily driven by more expensive diesel fuel.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$12.1 million for the six months ended June 30, 2006 increased $0.4 million, or
3.4%, from $11.7 million for the comparable period in 2005. The increase in
general and administrative expenses is primarily due to an increase in staffing
in IT and Finance for SOX 404 compliance related work, partially offset by a
decrease in payroll and benefits as a result of the reduction in work force due
to the strategic reorganization which occurred in the second quarter of 2005.

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

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

     OPERATING INCOME. Operating income of $2.3 million for the six months ended
June 30, 2006 decreased by $31.8 million, or 93.3%, from $34.1 million for the
comparable period in 2005. The decline in operating income resulted from lower
sales volume, gross profit decline and the second quarter asset impairment
charge in the Northeast, partially offset by a decrease in selling and
distribution expenses.

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

     INCOME TAX (BENEFIT) PROVISION. Our effective tax rate was 41.0% for the
six months ended June 30, 2006, unchanged from the comparable period in 2005.
Benefit from income tax was $3.6 million for the six months ended June 30, 2006
compared to provision for income tax of $9.0 million for the comparable period
in 2005.

     NET (LOSS) INCOME. Net loss for the six months ended June 30, 2006 of $5.2
million was $18.2 million less than net income of $13.0 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 asset impairment charge
taken during the second quarter and other factors discussed above.

                                    Page 17
<PAGE>

     LIQUIDITY AND CAPITAL RESOURCES

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

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

     Net cash provided by investing activities was $10.8 million for the six
months ended June 30, 2006 compared to net cash used in investing activities of
$4.1 million for the same period a year ago. The increase in cash provided by
investing activities was mainly due to the receipt of $14.4 million of cash
proceeds from the Lagoon Valley land sale and a $1.7 million reduction in
capital expenditures during the period partially offset by a $1.1 million
reduction in land sale option payments relating to our leased Irvine properties.
Capital expenditures during the period mainly consisted of general maintenance
capital and expenditures related to our Irvine capacity relocation project.

     Net cash used in financing activities was $10.2 million for the six months
ended June 30, 2006 compared to $10.5 million for the same period in 2005. Net
cash used in financing operations primarily represents the repayment of debt for
each respective period. The decline in net cash used in financing activities for
the six months ended June 30, 2006 is due to the impacts of cash generated and
used in operating and investing activities as discussed above. At June 30, 2006,
we had fully repaid the revolver balance and had cash on hand of $6.1 million.

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

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

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

<TABLE>
                                                                      PAYMENTS DUE BY PERIOD
                                                  -------------------------------------------------------------
                                                    Less than         (DOLLARS IN MILLIONS)           After
Contractual Cash Obligations          Total          1 year         1-3 years       4-5 years        5 years
                                  -------------   -------------   -------------   -------------   -------------
<S>                               <C>             <C>             <C>             <C>             <C>
Senior Notes ..................   $       175.0   $          --   $          --   $          --   $       175.0
Interest ......................           102.3            18.9            55.0            28.4              --
Operating Leases...............            16.8             4.0             5.5             1.4             5.9
                                  -------------   -------------   -------------   -------------   -------------
Total .........................   $       294.1   $        22.9   $        60.5   $        29.8   $       180.9
                                  =============   =============   =============   =============   =============
</TABLE>


                                    Page 18
<PAGE>


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

     OUR SENIOR CREDIT FACILITY

     We entered into our Senior Credit Facility on September 30, 2003. Hines
Nurseries and its domestic operating subsidiaries are borrowers under the Senior
Credit Facility. The credit facility currently consists of a revolving loan with
availability of up to $100.0 million (subject to borrowing base limits). The
revolving loan also permits us to obtain letters of credit up to a sub-limit.

     The Senior Credit Facility was amended by the First Amendment to Credit
Agreement dated as of June 30, 2005 (the "First Amendment"), then again pursuant
to a Waiver Regarding Financial Covenants dated as of October 13, 2005 (the
"Waiver"), and by the Second Amendment to Credit Facility dated as of February
3, 2006 (the "Second Amendment"). On November 8, 2005, in accordance with the
Waiver, at our request the availability of the revolving loan was reduced from
$145.0 million to $120.0 million (subject to borrowing base limits). On August
8, 2006, in accordance with the Third Amendment to the Senior Credit Facility,
the Senior Credit Facility was amended again and the availability of the
revolving loan was reduced from $120.0 million to $100.0 million (subject to
borrowing base limits).

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

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

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

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

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

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

                                    Page 19
<PAGE>

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

     INTEREST RATE; FEES. The interest rate on the loans under the Senior Credit
Facility may be, at our option, prime rate loans or London Inter Bank Offering
Rate ("LIBOR") rate loans. Prime rate loans under the revolving loan bear
interest at the prime lending rate plus an additional amount that ranges from
0.75% to 1.75%, depending on our consolidated leverage ratio. As of June 30,
2006, the applicable margin for prime rate loans was 1.75% for the revolving
loan. As of August 8, 2006, in connection with the Third Amendment, Prime rate
loans under the revolving loan bear interest at the prime lending rate plus an
additional amount that ranges from 1.00% to 2.00%, depending on our consolidated
leverage ratio.

     LIBOR rate loans under the revolving loan bear interest at the LIBOR rate
plus an additional amount that ranges from 1.75% to 2.75%, depending on our
consolidated leverage ratio. As of June 30, 2006, the applicable margin for
LIBOR rate loans was 2.75% for the revolving loan. As of August 8, 2006, in
connection with the Third Amendment, LIBOR rate loans under the revolving loan
bear interest at the LIBOR rate plus an additional amount that ranges from 2.00%
to 3.00%, depending on our consolidated leverage ratio. In addition to paying
interest on outstanding principal, we are required to pay a commitment fee on
the daily average unused portion of the revolving loan which accrues based on
the utilization of the revolving loan.

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

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

     OUR SENIOR NOTES

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

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

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

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

                                    Page 20
<PAGE>

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

     CRITICAL ACCOUNTING POLICIES

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

     REVENUE RECOGNITION.

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

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

     SALES RETURNS AND ALLOWANCES.

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

     ALLOWANCE FOR DOUBTFUL ACCOUNTS.

     The allowance for bad debts is maintained at a level believed by management
to adequately reflect the probable losses in the trade receivable due to
customer defaults, insolvencies or bankruptcies. The provision is established by
management using the following criteria: customer credit history, customer
current credit rating and other relevant factors. The provision is re-evaluated
on a quarterly basis. Provisions to bad debt expense charged against income
increase the allowance. All recoveries on trade receivables previously charged
off are credited to 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. In connection with the Third Amendment and
required asset sales, we re-evaluated our four nursery facilities in the
Northeast as well as assets located in Miami, Florida and determined that three
of the Northeast facilities exceeded the estimated undiscounted future cash
flows associated with the use of the assets and therefore deemed those assets
unrecoverable. As a result, we reduced the carrying value of the assets to the
fair value of those assets as determined by a recent appraisal performed by
Cushman & Wakefield, Inc. and recorded an impairment charge of approximately
$8.0 million in our statements of operations for the period ended June 30, 2006.

                                    Page 21
<PAGE>

     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.

     In March 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") 47, "Accounting for Conditional Asset Retirement
Obligations." FIN 47 clarifies the accounting for conditional asset retirement
obligations as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations." A conditional asset retirement obligation is an unconditional
legal obligation to perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that may or may not
be within the control of the entity. Therefore, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation under SFAS No. 143 if the fair value of the liability can be
reasonably estimated. We have identified and recorded a liability of
approximately $0.8 million in connection with its known conditional asset
retirement obligations. As we continue to evaluate and identify additional asset
retirement obligations, additional liabilities will be recorded.

     NEW ACCOUNTING STANDARDS.

     In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109." FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109, "Accounting for Income
Taxes." FIN 48 is effective for all uncertainty in income taxes recognized in
financial statement in fiscal years beginning after December 15, 2006. We do not
believe that the adoption of FIN 48 will have a material impact on its
consolidated financial position, results of operations or cash flows.

     ACCOUNTING STANDARDS ADOPTED

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

     EFFECTS OF INFLATION

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                    Page 22
<PAGE>

     We also manage our interest rate risk by balancing the amount of our fixed
and variable long-term debt. For fixed-rate debt, interest rate changes affect
the fair market value of such debt but do not impact earnings or cash flows.
Conversely, for variable-rate debt, interest rate changes generally do not
affect the fair market value of such debt but do impact future earnings and cash
flows, assuming other factors are held constant. At June 30, 2006, the carrying
amount and estimated fair value of our long-term debt was $175.0 million and
$167.1 million, respectively. Assuming that the anticipated sales of assets are
completed, we believe that future borrowings on our variable rate debt will be
minimal, therefore any change in applicable interests rates should not have a
material impact on our financial statements.

ITEM 4.  CONTROLS AND PROCEDURES

     Based on the evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended), our principal executive officer and our
principal financial officer have concluded that such controls and procedures
were effective as of the end of the period covered by this report. There was no
change in our internal control over financial reporting that occurred during the
fiscal quarter covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 1A.  RISK FACTORS

     There have been no material changes to the risk factors as disclosed in the
Company's 2005 annual report on Form 10-K, as amended, filed with the Securities
and Exchange Commission except that the Company hereby updates the following
risk factors with regard to certain cost estimates regarding our leased
facilities in Irvine, California, risks associated with our debt and Senior
Credit Facility, and risks which we face in connection with sudden oak death as
described below:

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

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

     We may not be successful in executing our transition plan or establishing
suitable replacement production facilities. If we are unsuccessful in these
efforts, our net sales, cash flows and operating income could be materially
adversely affected. In addition, as of June 30, 2006, we estimate that we will
incur approximately a total of $0.2 million of removal and remediation costs
when we vacate 254 acres in 2006 and $0.5 million of removal and remediation
costs when we vacate 288 acres in 2010. We may incur significant expenses beyond
what we have forecasted if additional remedial action is required. Significant
costs in excess of our estimates could have a material adverse effect on our
business, financial position, results of operations and operating cash flow.

                                    Page 23
<PAGE>

THE TERMS OF OUR DEBT MAY LIMIT OUR ABILITY TO PLAN FOR OR RESPOND TO CHANGES IN
OUR BUSINESS AND THE TERMS OF OUR SENIOR CREDIT FACILITY REQUIRE THAT WE SELL
CERTAIN ASSETS AT AN AGGREGATE MINIMUM PRICE. OUR FAILURE TO COMPLY WITH THE
COVENANTS IN OUR SENIOR CREDIT FACILITY AND OTHER INDEBTEDNESS COULD HAVE A
MATERIAL ADVERS IMPACT ON OUR BUSINESS AND OPERATIONS.

     We have an amended Senior Credit Facility that consists of a revolving
facility with availability of up to $100.0 million (subject to borrowing base
limits). Our Senior Credit Facility and the indenture governing the Senior Notes
issued by Hines Nurseries contain covenants that restrict our ability to, among
other things:

         o    incur additional debt or issue certain preferred stock;

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

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

         o    make investments, loans or advances;

         o    make capital expenditures;

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

         o    enter into sale and leaseback transactions;

         o    prepay or defease specified debt;

         o    enter into transactions with affiliates;

         o    enter into specified hedging arrangements;

         o    merge, consolidate or sell our assets; or

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

     Pursuant to the terms of our Senior Credit Facility as amended by the Third
Amendment, we are required to sell our four color nurseries located in the
Northeast and certain assets located in Miami, Florida by no later than December
31, 2006 and these sales are required to generate a predetermined minimum amount
of aggregate proceeds. There can be no assurance that we will be able to sell
these assets by the end of 2006 and for the required minimum amount of aggregate
proceeds.

     In addition, we have failed to comply with certain of our financial
covenants in our Senior Credit Facility in the past and have had to obtain
waivers in connection therewith. There can be no assurance that we will be able
to comply with such covenants in the future or that we will be able to obtain
waivers of such non-compliance.

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

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

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<PAGE>

     SOD is caused by a fungus-like pathogen recently identified by scientists
in California and named Phytophthora ramorum ("P. ramorum"). Since its
appearance in 1995, P. ramorum has killed thousands of coast live oak, black
oak, tan oak and Shreve oak in Northern California. P. ramorum can also infect
the leaves and branches of other plants referred to as SOD host plants.
Currently, approximately 100 plant species grown by commercial nurseries have
been identified as SOD hosts or associated hosts

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

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

     We held our Annual Meeting of Stockholders on June 1, 2006 at which meeting
our stockholders elected six directors and ratified the appointment of
PricewaterhouseCoopers LLP as our independent public accountants for the 2006
fiscal year.

     The following individuals were elected as directors and received the number
of votes indicated below:

 Name of Nominee                Votes For          Against        Abstentions
 ---------------                ---------          -------        -----------

Stan R. Fallis                  10,121,253            -              288,707
Robert A. Ferguson              10,053,343            -              356,617
G. Ronald Morris                10,121,538            -              288,422
Thomas R. Reusche               10,119,353            -              290,607
James R. Tenant                 10,121,538            -              288,422
Paul R. Wood                     6,386,288            -            4,023,672


     For the ratification of PricewaterhouseCoopers LLP as our independent
registered public accountants, 10,255,481 votes were cast in favor, 35,878 votes
were cast against and there were 118,600 abstentions.

ITEM 5.  OTHER INFORMATION.

     MATERIAL CONTRACTS

     On August 8, 2006, Hines Nurseries and Hines SGUS Inc., each a subsidiary
of Hines Horticulture, entered into the Third Amendment and Limited Waiver to
Credit Agreement (the "Amendment") to its existing Credit Agreement dated as of
September 30, 2003 with the various financial institutions party thereto and
Deutsche Bank Trust Company Americas as administrative agent for the lenders.
The Amendment waives 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 Amendment also establishes a reduction in the aggregate
revolving loan commitment under the credit facility from $120 million to $100
million (subject to borrowing base limits) and institutes a maximum revolving
utilization restriction that ranges between $10.8 million and $23.3 million. The
Amendment also increases the interest rate spread by twenty-five basis points on
outstanding prime and LIBOR borrowings and increases unused line fees. In
addition, the Amendment establishes new fixed charges covenant ratios beginning
in the fourth quarter of 2006. Finally, under the Amendment, the Company is
required to generate a pre-determined amount of aggregate proceeds from the sale
of four nursery facilities in the Northeast and assets in Miami, Florida by no
later than December 31, 2006.

     The Amendment was entered into between the Company and its existing lenders
under its current credit facility. A copy of the Amendment is filed as Exhibit
10.1 to this Form 10-Q and is incorporated herein by reference.

     On August 9, 2006, Hines Horticulture entered into a severance agreement
with each of Steven Avery and Jeffrey Dunbar (each, the "Employee"). Each
Employee is an executive officer and the severance agreements provide each
Employee with six months severance as well as certain bonus payments in the
event the Employee is terminated by the Company without "Cause" (as defined in
the severance agreement) or the Employee resigns for "Good Reason" (as defined
in the severance agreement). The severance agreements also contain certain other
terms and conditions including provisions which provide that the Employees agree
to non-disparagement and non-solicitation provisions. Copies of the severance
agreements are filed as exhibits to this Form 10-Q as Exhibits 10.4 and 10.5 and
are incorporated herein by reference.

                                    Page 25
<PAGE>

     COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

     On August 8, 2006, the Company's Board of Directors approved the Company's
plan to sell four nursery facilities located in Danville, Pennsylvania,
Pipersville, Pennsylvania, Utica, New York and Newark, New York, as well as
assets located in Miami, Florida, all in accordance with the requirement under
the Amendment to the Credit Agreement that such facilities and assets be sold by
the Company by December 31, 2006.

     The Company anticipates that the sales of these assets may involve both
cash and non-cash charges, including lease and contract termination expenses,
employee severance costs, asset impairment charges, environmental remediation
costs, accelerated depreciation, inventory mark-downs and asset write-offs.
Currently, the Company is unable in good faith to make a determination of an
estimate or a range of these charges (except with regard to the impairment
charge mentioned below) and is therefore unable to make a determination
regarding the total amount of costs expected to be incurred in connection with
these actions and the amount of the total charges that will result in future
cash expenditures.

     MATERIAL IMPAIRMENTS

     As required by SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company has performed impairment tests on the individual
facilities expected to be sold by December 31, 2006. These facilities include
the Company's four nursery facilities located in the Northeast as well as
certain assets located in Miami, Florida. These impairment tests determined that
the carrying value of the long-lived assets for three of the Northeast
facilities exceeded the estimated undiscounted future cash flows associated with
the use of the assets and therefore were deemed unrecoverable. As a result, the
Company reduced the carrying value of the assets to the fair value of those
assets as determined by a recent appraisal. The impairment charge of
approximately $8.0 million was recorded in the statements of operations for the
period ended June 30, 2006.

ITEM 6.  EXHIBITS

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

                                    Page 26
<PAGE>

                                    SIGNATURE

         PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.

                            HINES HORTICULTURE, INC.
                            (REGISTRANT)



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

Date:  August 14, 2006


                                    Page 27
<PAGE>


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

                                INDEX TO EXHIBITS

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

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

     10.2       Offer Letter between Hines Horticulture, Inc. and Steve Avery.
                (1)(*)

     10.3       Offer Letter between Hines Horticulture, Inc. and Jeffrey
                Dunbar. (2)(*)

     10.4       Severance Agreement between Hines Horticulture, Inc. and Steven
                Avery dated August 9, 2006. (+)(*)

     10.5       Severance Agreement between Hines Horticulture, Inc. and Jeffrey
                Dunbar dated August 9, 2006 (+)(*)

     23.1       Consent to Referencing Cushman & Wakefield of Pennsylvania, Inc.
                dated August 8, 2006 (+)(*)

     23.2       Consent to Referencing Cushman & Wakefield of New York, Inc.
                dated August 11, 2006 (+)(*)

     31.1       Certification of Chief Executive Officer Pursuant To Rules
                13a-14(a) and 15d-14(a) under the Securities Exchange Act of
                1934, as amended. (+)

     31.2       Certification of Chief Financial Officer Pursuant To Rules
                13a-14(a) and 15d-14(a) under the Securities Exchange Act of
                1934, as amended. (+)

     32.1       Certification of Chief Executive Officer Pursuant To 18 U.S.C.
                Section 1350. Rule 13a-14(d)/15d-14(d) (+)

     32.2       Certification of Chief Financial Officer Pursuant To 18 U.S.C.
                Section 1350. Rule 13a-14(d)/15d-14(d) (+)


________________

+ Filed herewith

* Management contract or compensatory arrangement.

(1) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed on
May 5, 2006.

(2) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed on
May 18, 2006.

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