About Calloway's Nursery, Inc.

Founded in 1986, Calloway's Nursery, Inc. operates 26 retail nursery stores in the four largest metropolitan areas in Texas: Dallas, Fort Worth, Houston and San Antonio, reaching a combined population of 11.4 million.

Operations

The Company's first four retail stores opened in the Dallas market in 1987. Since that time, the Company has grown to 26 retail stores: 16 Calloway's Nursery stores in the Dallas and Fort Worth markets, 3 Cornelius Nurseries retail stores in the Houston market and 7 Calloway's Nursery retail stores in the San Antonio market.

Locations are selected on the basis of demographic data, traffic patterns and shopping habits. All 26 retail stores are Company-operated.

In fiscal 1999 the Company acquired certain assets of Cornelius Nurseries, Inc. and two affiliated entities (the "Cornelius Acquisition"). The Cornelius Acquisition added three retail stores in the Houston market, a growing operation near Houston and two wholesale distribution centers (one in Houston and one near Austin).

In fiscal 2001 the Company adopted a formal plan to dispose of the wholesale operations, which had been a part of its wholesale and growing segment. In fiscal 2002 the Company adopted a formal plan to dispose of its Turkey Creek Farms ("Turkey") growing operation, and discontinued the plant material that it produced. In fiscal 2003 the company adopted a formal plan to dispose of its Miller Plant Farms ("Miller") growing operations, and discontinued the plant material that it produced. In fiscal 2003 the Company sold both Turkey and Miller. See Note 21 to Consolidated Financial Statements for a discussion of the discontinued operations.

In fiscal 2002 the Company entered the San Antonio market by leasing seven former nursery locations. This new market entry did not constitute a business combination.

The Company focuses on quality and breadth of selection in bedding plants and nursery stock, complemented by other related garden products such as soil amendments and fertilizers. Apart from Christmas, approximately two- thirds of its retail sales are derived from living plants. The remaining one-third is made up of products that primarily relate to their care and nurturing.

All retail stores sell Christmas merchandise. The Houston market stores have developed a stronger and more financially beneficial focus on Christmas than have the Dallas, Fort Worth and San Antonio market stores.

Industry

Texas is the third largest retail market in the United States for "green industry" sales, which includes (i) wholesale grower sales, (ii) landscape-related sales, and (iii) home center and mass merchandiser retail sales and (iv) retail nursery sales (which includes the Company's retail stores).

According to the Office of the Comptroller of Public Accounts, Texas green industry sales increased from approximately $6.3 billion in 1997 to approximately $8.0 billion in 2001.

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However, retail nursery sales have declined each year from 1997 - 2001, from approximately $1.8 billion in 1997 to approximately $1.5 billion in 2002. The most rapid growth for green industry sales over that period has been in home center and mass merchandiser retail sales.

The Company has retail stores in the four (4) largest markets in Texas, the Dallas and Fort Worth markets, the Houston market and the San Antonio market. Together, these four markets accounted for approximately 38% of Texas' retail nursery sales in 2001.

Suppliers

The wholesale market for living plants, related gardening products and Christmas merchandise is highly competitive. The Company uses dozens of suppliers for its living plants, related gardening products and Christmas merchandise, and there are readily available alternative sources for substantially all of the products sold by the Company. The Company has not encountered significant difficulties in procuring merchandise to sell. The company considers its relations with suppliers to be good.

Employees

The Company's employees are not covered by collective bargaining agreements. The Company has not experienced any work stoppages. The company considers its relations with employees to be good.

Competition

The retail nursery business is highly competitive. In the Dallas, Fort Worth, Houston and San Antonio markets, the Company competes with both:

- Other retail nurseries, and

- Home centers and mass merchandisers.

There are hundreds of retail nurseries in the Dallas, Fort Worth, Houston and San Antonio markets.

The home centers and mass merchandisers include The Home Depot, Lowe's and Wal-Mart. These competitors are much larger than the Company and have many more store locations in the Dallas, Fort Worth, Houston and San Antonio markets. Additionally, they attract customers for other products and have operations which are not as dependent on the spring planting season to cover year around operating costs.

In 2003 The Home Depot opened six free-standing nursery stores known as "Landscape Supply" in the Dallas and Fort Worth markets, most in close proximity to the Company's retail stores. The Home Depot has stated that Landscape Supply will be "focusing on the professional landscapers and avid do-it-yourself garden enthusiasts." The retail nature of the Landscape Supply stores and the retail orientation of its merchandise have added to the competitive environment in the Dallas and Fort Worth markets, and the Company does not know whether or not this chain will enter the other major markets in which the Company operates.

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The Company has experienced reduced consumer demand for its living plants and related gardening products in most of its market areas over the past two years. Such reduced demand is the result of many factors, including, but not limited to: economic conditions, weather patterns and competition in the Dallas, Fort Worth, Houston and San Antonio markets. Management does not believe that the Landscape Supply stores, by themselves, had a significant impact on the Company's results of operations for the year ended September 30, 2003, but no assurance can be given with regard to the long range impact of this new chain on the Company's operations.

Seasonality

The retail nursery business is highly seasonal. About 40% of sales occur in the third fiscal quarter, which has been the Company's best quarter.

CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Form 10-K Report contains forward-looking statements. The Company is including this cautionary statement for the express purpose of providing the Company with the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to all forward-looking statements. Several important factors, in addition to the specific factors discussed in connection with such forward-looking statements individually, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements contained in this Report.

Expected future results, products and service performance or other non-historical facts are forward-looking and reflect management's current perspective on existing trends and information. These statements involve risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, the seasonality of its business, geographic concentration, the impact of weather and other growing conditions, the ability to manage growth, the impact of competition, the ability to obtain future financing, the ability to finance redemption of mandatorily redeemable preferred stock, government regulations, market risks associated with variable-rate debt, and other risks and uncertainties defined from time to time in the Company's Securities and Exchange Commission filings.

Therefore, each reader of this report is cautioned to consider carefully the risk factors listed above, as well as any specific factors discussed with a forward-looking statement in this Report and disclosed in the Company's filings with the Securities and Exchange Commission, as such risks and factors, in some cases, have affected, and in the future (together with other factors) could affect, the Company's ability to implement its business strategy and may cause actual results to differ materially from those contemplated by the statements expressed in this Report.

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