**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





(Mark
      One)


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





For
      the
      quarterly period ended March 31, 2007





OR





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





For
      the
      transition period from _________________ to _________________





Commission
      File Number


000-24439





**HINES
      HORTICULTURE, INC.**


(Exact
      name of registrant as specified in its charter)





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





12621
      Jeffrey Road


Irvine,
      California 92620


(Address
      of principal executive offices) (Zip Code)





(949)
      559-4444


(Registrant's
      telephone number, including area code)





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


Yes
x  
No
o





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 o
            
            Accelerated
                filer o
            
            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
o    
      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
      July 31, 2007, there were 22,072,549 shares of Common Stock, par value $0.01
      per
      share, outstanding.










**HINES
      HORTICULTURE, INC.**





TABLE
      OF
      CONTENTS




**Part
                  I. Financial
                  Information**Item 1.
              Financial Statements (unaudited)
              Page
                  No.Condensed
                  Consolidated Balance Sheets as of March 31, 2007and
                  December 31, 2006
              2Condensed
                  Consolidated Statements of Operations for theThree
                  Months Ended March 31, 2007 and 2006
              3Condensed
                  Consolidated Statements of Cash Flows for theThree
                  Months Ended March 31, 2007 and 2006
              4Notes to the Condensed Consolidated
                Financial
                Statements
              5Item 2.
              Management's Discussion and Analysis
                of
                Financial Conditionand
                Results of Operations
              13Item 3.
              Quantitative and Qualitative Disclosures
                About Market Risk
              23Item 4T.
              Controls and Procedures
              24**Part
                  II. Other
                  Information**Item 1.
              Legal Proceedings
              25Item 1A.
              Risk Factors
              25Item 5.
              Other Information
              26Item 6.
              Exhibits
              26Signature
              27Index to Exhibits
              28Note:Items
                2, 3, and 4 of Part II are omitted because they are not
                applicable.







**PART
                  I. FINANCIAL INFORMATION**Item
                  1.Financial
                  Statements**HINES
                  HORTICULTURE, INC.****CONDENSED
                  CONSOLIDATED BALANCE SHEETS****March
                  31, 2007 and December 31, 2006****(Dollars
                  in thousands, except share data)****(unaudited)****March
                  31, 2007**
              
              **December
                  31, 2006****ASSETS**CURRENT
                  ASSETS:Cash
              
              $
              24
              
              $
              108Accounts
                  receivable, net
              
              
              40,709
              
              
              11,594Inventories
              
              
              156,045
              
              
              146,775Consigned
                  inventories
              
              
              1,491
              
              
              542Prepaid
                  expenses and other current assets
              
              
              3,020
              
              
              1,662Assets
                  held for sale
              
              
              27,501
              
              
              32,652Total
                  current assets
              
              
              228,790
              
              
              193,333FIXED
                  ASSETS, net
              
              
              84,931
              
              
              85,470DEFERRED
                  FINANCING COSTS, net
              
              
              5,158
              
              
              5,361DEFERRED
                  INCOME TAXES
              
              
              5,413
              
              
              6,082GOODWILL
              
              
              38,818
              
              
              38,818OTHER
                  ASSETS
              
              
              11,952
              
              
              11,304$
              375,062
              
              $
              340,368**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**CURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              22,857
              
              $
              15,113Accrued
                  liabilities
              
              
              8,297
              
              
              5,216Accrued
                  payroll and benefits
              
              
              4,494
              
              
              4,282Accrued
                  interest
              
              
              9,173
              
              
              4,667Borrowings
                  on revolving credit facility
              
              
              30,476
              
              
              3,128Liabilities
                  related to assets held for sale
              
              
              -
              
              
              471Deferred
                  income taxes
              
              
              41,259
              
              
              44,165Financing
                  obligation
              
              
              47,032
              
              
              47,032Total
                  current liabilities
              
              
              163,588
              
              
              124,074LONG-TERM
                  DEBT
              
              
              175,000
              
              
              175,000FINANCING
                  OBLIGATION
              
              
              16,689
              
              
              16,689COMMITMENTS
                  AND CONTINGENCIESSUBSEQUENT
                  EVENTS (Note 13)OTHER
                  LIABILITIES
              
              
              15,743
              
              
              15,363SHAREHOLDERS'
                  EQUITYPreferred
                  stockAuthorized
                  - 2,000,000 shares, $0.01 par value; none outstanding
              
              
              -
              
              
              -Common
                  stockAuthorized
                  - 60,000,000 shares, $0.01 par value;Issued
                  and outstanding - 22,072,549 shares at March 31, 2007 and December
                  31,
                  2006
              
              
              221
              
              
              221Additional
                  paid-in capital
              
              
              128,781
              
              
              128,781Accumulated
                  deficit
              
              
              (124,960
              )
              
              (119,760
              )Total
                  shareholders' equity
              
              
              4,042
              
              
              9,242$
              375,062
              
              $
              340,368The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




2




**HINES
                  HORTICULTURE, INC.****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS****Three
                  Months Ended March 31, 2007 and 2006****(Dollars
                  in thousands, except share data and per share
                  data)****(Unaudited)**Three
                  Months Ended March 31,2007
              
              2006Sales,
                  net
              
              $
              53,324
              
              $
              46,434Cost
                  of goods sold
              
              
              28,797
              
              
              26,400Gross
                  profit
              
              
              24,527
              
              
              20,034Distribution
                  expenses
              
              
              11,475
              
              
              10,119Selling,
                  general and administrative expenses
              
              
              14,115
              
              
              11,333Other
                  operating expenses
              
              
              21
              
              
              761Asset
                  impairment charges
              
              
              1,107
              
              
              -Total
                  operating expenses
              
              
              26,718
              
              
              22,213Operating
                  loss
              
              
              (2,191
              )
              
              (2,179
              )Other
                  expensesInterest
                  expense, net
              
              
              4,841
              
              
              5,157Amortization
                  and write-off of deferred financing costs
              
              
              1,498
              
              
              3716,339
              
              
              5,528Loss
                  from continuing operations before income taxes
              
              
              (8,530
              )
              
              (7,707
              )Income
                  tax benefit
              
              
              (3,358
              )
              
              (3,074
              )Loss
                  from continuing operations
              
              
              (5,172
              )
              
              (4,633
              )(Loss)
                  income from discontinued operations, net of income taxes
              
              
              (28
              )
              
              341Net
                  loss
              
              $
              (5,200
              )
              $
              (4,292
              )Basic
                  and diluted (loss) earnings per share:Loss
                  from continuing operations
              
              $
              (0.23
              )
              $
              (0.21
              )(Loss)
                  income from discontinued operations, net of income taxes
              
              
              (0.00
              )
              
              0.02Net
                  loss per common share
              
              $
              (0.24
              )
              $
              (0.19
              )Weighted
                  average shares outstanding--basic and diluted
              
              
              22,072,549
              
              
              22,072,549The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.


3




**HINES
                  HORTICULTURE, INC.****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS****Three
                  Months Ended March 31, 2007 and 2006****(Dollars
                  in thousands)****(Unaudited)**Three
                  Months Ended March 31,2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (5,200
              )
              $
              (4,292
              )Loss
                  (income) from discontinued operations
              
              
              28
              
              
              (341
              )Adjustments
                  to reconcile loss from continuing operations to net cashprovided
                  by (used in) operating activities:Depreciation
              
              
              2,340
              
              
              1,986Accretion
                  on asset retirement obligations
              
              
              26
              
              
              15Amortization
                  and write-off of deferred financing costs
              
              
              1,498
              
              
              371Gain
                  on sale of assets
              
              
              (7
              )
              
              (1
              )Asset
                  impairment charges
              
              
              1,107
              
              
              -Deferred
                  income taxes
              
              
              (3,358
              )
              
              (3,074
              )Change
                  in working capital accounts:Accounts
                  receivable
              
              
              (29,115
              )
              
              (21,914
              )Inventories
              
              
              (10,402
              )
              
              (9,726
              )Prepaid
                  expenses, other current assets and other assets
              
              
              (2,090
              )
              
              (752
              )Accounts
                  payable and accrued liabilities
              
              
              17,977
              
              
              19,175Net
                  cash used in continuing operations
              
              
              (27,196
              )
              
              (18,553
              )Net
                  cash used in discontinued operations
              
              
              (3,611
              )
              
              (8,415
              )Net
                  cash used in operating activities
              
              
              (30,807
              )
              
              (26,968
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchases
                  of fixed assets
              
              
              (2,119
              )
              
              (887
              )Proceeds
                  from sale of fixed assets
              
              
              6
              
              
              -Net
                  cash used in continuing operations
              
              
              (2,113
              )
              
              (887
              )Net
                  cash provided by discontinued operations
              
              
              6,783
              
              
              24Net
                  cash provided by (used in) investing activities
              
              
              4,670
              
              
              (863
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESBorrowings
                  on revolving credit facility
              
              
              42,751
              
              
              65,257Repayments
                  on revolving credit facility
              
              
              (15,403
              )
              
              (37,278
              )Payments
                  of deferred financing costs
              
              
              (1,295
              )
              
              (150
              )Net
                  cash provided by financing activities
              
              
              26,053
              
              
              27,829NET
                  CHANGE IN CASH
              
              
              (84
              )
              
              (2
              )CASH,
                  beginning of period
              
              
              108
              
              
              62CASH,
                  end of period
              
              $
              24
              
              $
              60Supplemental
                  disclosure of cash flow information:Cash
                  paid for interest during the period, net of amounts
                  capitalized
              
              $
              183
              
              $
              478Cash
                  paid for income taxes
              
              $
              1
              
              $
              1,046The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.




4




**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 subsidiary Hines
      Nurseries, Inc. (“Hines Nurseries”). Unless otherwise specified, references to
“Hines” or the “Company” refer to Hines Horticulture, Inc. and its
      subsidiary.





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





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




2.
            New Accounting
                Standards:




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





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 the Statement of Financial Accounting Standard (“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. If needed, any interest and penalties associated with
      uncertain tax positions will be recorded as interest expense and selling,
      general and administrative expenses, respectively *.* The
      Company’s adoption of FIN 48 did not have an impact on its consolidated
      financial position, results of operations and cash flows.





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


3.
              Unaudited Financial
                  Information:


The
      unaudited financial information furnished herein, in the opinion of management,
      reflects all adjustments (consisting of only normal recurring adjustments),
      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.




5


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




4.
                Discontinued
                    Operations:


*Miami
      Property Sales*


On
      November 7, 2005, the Company sold 122 acres of unimproved property in Miami,
      Florida (“Miami Property Sale”) for $47,040. In accordance with SFAS No. 98
“Accounting for Leases,” the Company has recorded the proceeds as a financing
      obligation. In accordance with an amendment to the existing senior credit
      facility, the proceeds from the Miami Property Sale were used to pay off the
      entire outstanding balance of the term loan and the residual amount was used
      to
      pay down the revolving credit facility. As part of the Miami Property Sale,
      the
      Company entered into a two-year lease agreement with the buyer while
      transitioning operations to other locations. The Company leased the entire
      property for a one year period, with a thirty-day extension right, and then
      vacated approximately 33 acres. The Company leased the remaining 89 acres until
      June 30, 2007, during which time the Company subleased the property. The Company
      paid the buyer rent of five hundred dollars per acre annually during the lease
      term plus fifty percent of the rent the Company received from subleasing the
      property. In addition, the Company is entitled to additional amounts if the
      buyer is successful in obtaining zoning for a certain number of residential
      lots. On June 30, 2007, the Company exited the lease and expects to recognize
      a
      gain of $39,912 as a component of discontinued operations in the quarter ended
      June 30, 2007.





On
      April
      18, 2007, the Company completed the sale of its last parcel of land in Miami,
      Florida, which consisted of approximately 79 acres of land and certain
      improvements thereon, for $7,152. In the second quarter of 2007, the Company
      will record a net gain of $2,547 from the sale as a component of discontinued
      operations.





*Northeast
      Facilities*


In
      August
      2006, the Company made a decision to pursue the sale of the four Northeast
      nursery operations as provided for in the Company’s credit facility in place at
      the time of the decision. These operations consisted of the Company’s facilities
      in Danville and Pipersville, Pennsylvania and Newark and Utica, New York.





On
      November 15, 2006, the Company sold its nursery facility in Pipersville,
      Pennsylvania, for $5,368, of which $1,125 was deferred as it is contingent
      upon
      certain entitlements for the construction of additional greenhouses on certain
      real property which was previously leased by the Company. The sale of this
      facility resulted in a loss of $1,238, which was recorded as a component of
      discontinued operations in the quarter ended December 31, 2006.





On
      January 10, 2007, the Company completed the sale of certain real property,
      inventory and other assets located at the nursery facilities in Danville,
      Pennsylvania and Utica and Newark, New York for $6,783. The Company recognized
      a
      loss of $78 as a component of discontinued operations.





Summarized
      financial information for discontinued operations is set forth
      below:


Three
                  months endedMarch
                  31,
              
              March
                  31,2007
              
              2006Sales,
                  net
              
              $
              39
              
              $
              10,475(Loss)
                  income before income taxes
              
              
              (47
              )
              
              574Income
                  tax (benefit) provisions
              
              
              (19
              )
              
              233(Loss)
                  income from discontinued operations
              
              $
              (28
              )
              $
              341


The
      quarter ended March 31, 2006 has been restated to reflect the discontinued
      operations. As of March 31, 2007 and December 31, 2006, the components of assets
      and liabilities of discontinued operations in the consolidated balance sheets
      under assets, and liabilities related to assets held for sale are as
      follows:




6




March
                  31,
              
              December
                  31,2007
              
              2006Inventories
              
              $
              -
              
              $
              1,193Fixed
                  assets, net
              
              
              11,818
              
              
              16,445Deferred
                  income taxes
              
              
              15,683
              
              
              15,014Assets
                  held for sale
              
              $
              27,501
              
              $
              32,652Deferred
                  income taxes
              
              $
              -
              
              $
              471Liabilities
                  related to assets held for sale
              
              $
              -
              
              $
              471
  5.
                  Earnings Per
                      Share:


Earnings
      per share (“EPS”) are calculated in accordance with SFAS No. 128, “Earnings
      per Share,” which requires the Company to report both basic earnings per share,
      based on the weighted-average number of common shares outstanding, and diluted
      earnings per share, based on the weighted-average number of common shares
      outstanding adjusted to include the potentially dilutive effect of outstanding
      stock options and warrants using the treasury stock method. For the three months
      ended March 31, 2007 and 2006, shares related to the employee stock options
      of
      820,716 and 868,415, respectively, were excluded from the computation of diluted
      earnings per share because they would have been anti-dilutive.


6.
                  Stock-Based
                      Compensation:


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





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





There
      were no stock option grants during the three months ended March 31, 2007 and
      2006.





A
      summary
      of the status of the Company’s stock option plan as of March 31, 2007
      follows:




2007Weighted
                  AverageShares
              
              Exercise
                  PriceOutstanding
                  at December 31, 2006
              
              
              828,414
              
              $
              6.20Granted
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -Cancelled
              
              
              (7,698
              )
              
              6.79Outstanding
                  at March 31, 2007
              
              
              820,716
              
              $
              6.19Exercisable
              
              
              820,716
              
              $
              6.19




The
      aggregate intrinsic value represents the difference between the exercise prices
      of the underlying awards and the quoted price of the Company’s common stock for
      those awards that have an exercise price below the quoted price on March 31,
      2007. The Company had no options outstanding on March 31, 2007 with an exercise
      price below the quoted price of the Company’s common stock resulting in an
      aggregate intrinsic value of $0.




7




The
      weighted average remaining contractual life was 4.44 years at March 31, 2007.
      As
      of March 31, 2007 expiration dates ranged from June 22, 2008 to February 18,
      2013.


**Outstanding
                  and Exercisable**Average
              
              WeightedNumber
                  of
              
              Remaining
              
              Average
                  ofRange
                  of Exercise Price
              
              Options
              
              Contract
                  Life
              
              Exercise
                  Price$3.32
                  to $5.00
              
              
              81,000
              
              
              4.36
              
              $
              4.53$5.50
              
              
              596,416
              
              
              5.11
              
              
              5.50$6.00
                  to $8.00
              
              
              33,000
              
              
              2.58
              
              
              6.73$11.00
              
              
              110,300
              
              
              1.35
              
              
              11.00Total
              
              
              820,716
              
              
              4.44
              
              $
              6.19


7.
                  Inventories:


Inventories
      consisted of the following:


March
                  31,
              
              December
                  31,2007
              
              2006Nursery
                  stock
              
              $
              145,497
              
              $
              138,376Materials
                  and supplies
              
              
              10,548
              
              
              8,399Inventories
              
              $
              156,045
              
              $
              146,775Consigned
                  inventories
              
              $
              1,491
              
              $
              542




During
      the quarter ended March 31, 2007, the Company recorded a lower of cost or market
      adjustment of approximately $780 associated with its Trenton facility, which
      is
      included in cost of sales in the accompanying Condensed Consolidated Statements
      of Operations.


8.
                    Senior Credit
                        Facility:
 ***(a)
              Old Senior Credit Facility***





On
      September 30, 2003, the Company amended and restated its senior credit facility
      (“Old Senior Credit Facility”). Hines Nurseries and its domestic operating
      subsidiaries were borrowers under the Old Senior Credit Facility. The Old Senior
      Credit Facility originally consisted of a revolving facility with availability
      of up to $145,000 (subject to borrowing base limits), which was eventually
      reduced through amendments to the Old Senior Credit Facility to $100,000
      (subject to borrowing base limits). The revolving facility also permitted the
      Company to obtain letters of credit up to a sub-limit. On January 18, 2007,
      the
      Old Senior Credit Facility was terminated and replaced with a new credit
      facility as described below.





***(b)
      New Senior Credit Facility***





On
      January 18, 2007, Hines Nurseries entered into a Loan and Security Agreement
      (the “New Senior Credit Facility”) that expires in 2012. The New Senior Credit
      Facility consists of a $100,000 credit facility, which includes a $15,000 letter
      of credit subline. The New Senior Credit Facility was used to refinance the
      outstanding revolving loans under the Old Senior Credit Facility.





*Guarantees;
      Collateral* .
      The
      obligations under the New Senior Credit Facility are guaranteed by the Company.
      Borrowings under the New Senior Credit Facility are collateralized by
      substantially all of the Company’s and Hines Nurseries’ assets.





*Restrictions;
      Covenants; Defaults* .
      The New
      Senior Credit Facility includes customary events of default and other customary
      covenants, including, but not limited to, a fixed charge coverage ratio test,
      restrictions on certain types of activities, transactions and payments,
      including distributions and dividends from Hines Nurseries to Hines
      Horticulture, reporting covenants and others. The New Senior Credit Facility
      also includes standard provisions related to conditions of borrowing and
      customary representations and warranties. The lenders may terminate their
      obligation to make loans under the New Senior Credit Facility, and may
      accelerate payment of the indebtedness under the New Senior Credit Facility,
      upon the occurrence of an event of default, including the failure to comply
      with
      the covenants contained in the New Senior Credit Facility. Upon the occurrence
      and during the continuance of an event of default, the interest rate will
      increase by 2%.





8


*Limited
      Waiver to New Senior Credit Facility* .
      On
      April 30, 2007, Hines Nurseries obtained a waiver from the financial
      institutions pursuant to which the lenders waived certain defaults under the
      New
      Senior Credit Facility and extended the deadline for filing the financial
      statements for the fiscal year ended December 31, 2006 and for the fiscal
      quarter ended March 31, 2007 to May 28, 2007. On May 29, 2007,
      the Company obtained an additional waiver under the Loan Agreement to, among
      other things, extend the date of filing such financial statements from
      May 28, 2007 to June 28, 2007. On June 21, 2007, the Company obtained
      an additional waiver under the New Senior Credit Facility to extend the date
      of
      delivering its quarterly financial statements for the fiscal quarter ended
      March
      31, 2007 to July 31, 2007. Effective July 31, 2007, the Company obtained an
      additional waiver under the New Senior Credit Facility to extend the date of
      delivering its quarterly financial statements for the fiscal quarter ended
      March
      31, 2007 to August 31, 2007. While the lenders under the New Senior Credit
      Facility required the filing of the Company’s Form 10-Q for the first quarter of
      2007 within a specified time period as a condition to its waiver of the
      Company’s failure to, among other things, timely deliver its annual financials
      for fiscal year 2006, there is no requirement for the Company to file a Form
      10-Q or deliver quarterly financial statements under the New Senior Credit
      Facility. Accordingly, the Company does not need a waiver under the New Senior
      Credit Facility relating to its failure to timely file the Form 10-Q for the
      second quarter of 2007.





*Interest
      Rate; Fees* .
      The
      interest rate on the loans under the New Senior Credit Facility may be, at
      the
      Company’s option, base rate loans or London Interbank Offering Rate (“LIBOR”)
      loans. Base rate loans under the New Senior Credit Facility bear interest at
      the
      lender’s prime rate plus an additional amount that ranges from 0.50% to 1.25%,
      depending on the Company’s average availability of borrowing under the New
      Senior Credit Facility. Currently, the applicable margin for base rate loans
      is
      0.75%. LIBOR rate loans under the New Senior Credit Facility bear interest
      at
      the LIBOR rate plus an additional amount that ranges from 1.50% to 2.25%,
      depending on the Company’s average availability of borrowing under the New
      Senior Credit Facility. Currently, the applicable margin for LIBOR rate loans
      is
      1.75%. At March 31 2007, the Company’s borrowing rate was 7.462%





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 New Senior
      Credit Facility which accrues based on the utilization of the New Senior Credit
      Facility. Additionally, the Company is required to pay a fee for each letter
      of
      credit outstanding under the Loan Agreement equal to the applicable margin
      for
      LIBOR rate loans to be shared by the lenders and a fronting fee of 0.125% to
      the
      individual issuer of a letter of credit.





*Availability;
      Borrowing Base.* Availability of borrowing under the New Senior Credit Facility is subject to
      a
      borrowing base consisting of the lesser of (i) the amount equal to the aggregate
      amount of the revolving loan commitment minus the aggregate amount of all
      letters of credit outstanding under the New Senior Credit Facility and all
      fees
      or other amounts owed by the Company with respect thereto (less certain amounts)
      minus the amount of the availability block under the New Senior Credit Facility,
      which is currently $15,000 but which shall be reduced to $0 at such time as
      the
      Company achieves a fixed charge coverage ratio of at least 1.1:1 for two
      consecutive fiscal quarters and (ii) the amount equal to 85% of eligible
      accounts receivable plus the lesser of (a) during the period commencing on
      December 31 of each calendar year and ending on April 30 each calendar year,
      the
      lesser of 65% of eligible inventory or 85% of the appraised net orderly
      liquidation value of eligible inventory or (b) during the period commencing
      on
      May 1 of each calendar year and ending on December 30 each calendar year, the
      lesser of 55% of eligible inventory or 85% of the appraised net orderly
      liquidation value of eligible inventory minus the sums of the reserves provided
      for in the New Senior Credit Facility. On March 31, 2007 the Company had unused
      borrowing capacity of approximately $45,900 after applying the borrowing base
      limitations and letters of credits to its available borrowings. Outstanding
      borrowings as of March 31, 2007 were $30,476.




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., the Company’s
      second largest customer, may not exceed 30% of total eligible accounts
      receivable at any time.





9


*Maturity
      Date; Prepayments* .
      Amounts
      outstanding under the New Senior Credit Facility mature on January 18, 2012
      and
      the Company may prepay amounts outstanding under the New Senior Credit Facility
      without fees or penalties, subject to the payment of costs associated with
      the
      prepayment of any LIBOR rate loans.





*Change
      of Control* .
      In the
      event of a change of control, the commitments of the lenders under the New
      Senior Credit Facility may be cancelled and the Company may be required to
      immediately repay the outstanding amount of the New Senior Credit Facility,
      together with accrued interest and all other amounts accrued under the Loan
      Agreement.


9.
                  Long-Term
                      Debt:


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





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




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





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


10.
                    Vacaville Property
                        Sale:


On
      March
      1, 2006, the Company received notice that Triad Communities, L.P. exercised
      its
      option to purchase, pursuant to the previously disclosed Option Agreement dated
      April 30, 2003 (“Option Agreement”), the Company’s 168-acre property in
      Vacaville, California. The total book value of assets related to the sale was
      $484. The Option Agreement provided for a gross purchase price of $15,100.
      On
      April 3, 2006, the Company sold the property for a net purchase price of
      $14,297. Total proceeds from the Option Agreement and sale of the property
      were
      $16,900, which included $2,551 in option payments previously received.





Under
      the
      terms of the Option Agreement, the Company is able to transition off the
      property in three phases from 2006 to 2008. The first phase of transition was
      completed on July 1, 2006 and consisted of 24 acres. The second phase of
      transition will be August 31, 2007 and the third phase of the transition will
      be
      July 1, 2008, and will consist of approximately 88 acres and 56 acres,
      respectively. The Company is continuing to develop replacement acreage and
      infrastructure at its 842-acre Winters South facility in Northern California.
      Because the Company is not paying rent, the Company is in a sale-leaseback
      with
      continuing involvement position with respect to this property. In accordance
      with SFAS No. 98, the Company has recorded the proceeds as a financing
      obligation. When the Company completes the transition on July 1, 2008, the
      Company will remove the net book value of the assets and expects to recognize
      a
      gain of approximately $16,330.


10
 11.
                    Contingencies:


On
      July
      18, 2006, Mr. Jean-Paul filed an action against the Company and other defendants
      in the Eleventh Judicial Circuit, Dade County, Florida, alleging negligence
      in
      connection with an automobile accident involving one of the Company’s trailers
      and a third-party carrier.  On March 6, 2007, additional plaintiffs filed
      an action related to this incident in the same court, alleging negligence and
      vicarious liability for negligence against the Company and other
      defendants.  The first filed claim is scheduled for trial in August
      2007.  The Company is defended in these actions by its insurance carrier,
      and is fully insured with respect to this matter, beyond a deductible.  As
      of March 31, 2007 the Company believes the amount it has accrued for the
      probable estimated claim and related insurance recovery is
      sufficient.





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. 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.


12.
                  Liquidity:





Our
      primary sources of liquidity have historically been funds generated by
      operations and borrowings under our Senior Credit Facility. However, for the
      year ended December 31, 2006 and the quarter ended March 31, 2007, our operating
      cash flows were negative. The seasonal nature of our operations results in
      a
      significant fluctuation in certain components of working capital (primarily
      accounts receivable and inventory) during the growing and selling cycles. As
      a
      result, operating activities during the first and fourth quarters use
      significant amounts of cash, and in contrast, operating activities for the
      second and third quarters historically have generated cash as we ship inventory
      and collect accounts receivable. The covenants under our Senior Credit Facility
      may affect our ability to operate our business, may limit our ability to take
      advantage of business opportunities as they arise and may adversely affect
      the
      conduct of our current business. A breach of a covenant in our debt instruments
      could cause acceleration of a significant portion of our outstanding
      indebtedness. In the event we breach the covenants in our debt instruments
      and
      we are unable to obtain waivers in connection therewith, we may not be able
      to
      obtain alternative financing for our debt on reasonable terms or otherwise.
      In
      that event, in order to pay the principal of our debt, we would be required
      to
      sell our equity securities, which would be made more difficult by the recent
      delisting of our common stock, 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.


13.
                    Subsequent
                        Events:


Effective
      July 17, 2007 Robert A. Ferguson, who served as Chief Executive Officer,
      President and a director of the Company, was terminated and is no longer
      employed by or serves as an officer of the Company and its subsidiary. Also
      effective July 17, 2007, Stephen Avery, who served as Vice President of
      Operational Excellence & Human Resources of the Company, resigned from the
      Company.





Following
      the departure of Robert A. Ferguson from the Company, the Board of Directors
      of
      the Company elected James Tennant as Chief Executive Officer and President
      of
      the Company, effective July 17, 2007. Mr. Tennant has served as a Director
      of
      the Company since October 1998 and as Chairman of the Board since April
      2007.





As
      a
      result of continuing operating losses experienced at the Company’s Trenton,
      South Carolina facility during the quarter ended March 31, 2007, and based
      on
      the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” the Company determined that the carrying values of the
      related long-lived assets were further impaired. On July 26, 2007, the Company
      received approval from its Board of Directors to pursue the sale of this
      facility. The fair value used to determine the $1,100 impairment charge was
      based on a third party letter of intent to purchase the facility received on
      August 6, 2007. The impairment charge was recorded as a component of operating
      loss in the accompanying March 31, 2007 condensed consolidated statements of
      operations. The sale of this facility is expected to close in the third quarter
      of 2007. In addition, because of unseasonably cold weather and poor operating
      performance at the Company’s Trenton facility in the second quarter of 2007, the
      Company determined that it could not sell all inventory on hand and scrapped
      approximately $2,000 of inventory during the quarter ended June 30, 2007. This
      write-off will be recorded in the quarter ended June 30, 2007.





11


In
      accordance with SFAS No. 142 “Goodwill and Other Intangible Assets,” the Company
      has one reporting unit for goodwill impairment testing. During the quarter
      ended
      June 30, 2007, the Company’s stock price significantly declined, and due to
      continuing losses, circumstances indicated goodwill may be impaired.
      Accordingly, the Company performed the first step used to identify potential
      impairment in accordance with SFAS No. 142 “Goodwill and Other Intangible
      Assets,” by comparing the Company’s reporting unit fair value to the underlying
      carrying amount of its net assets, including goodwill. Based on this analysis,
      it was determined that the carrying amount of the Company’s reporting unit
      exceeded fair value. Accordingly, as of June 30, 2007, the Company performed
      a
      preliminary analysis of the implied fair value of goodwill, which indicated
      that
      goodwill is fully impaired. The Company expects to recognize a goodwill
      impairment charge of $38,818 in the quarter ended June 30, 2007.




On
      August
      6, 2007, the Company received notification from the Nasdaq Stock Market, Inc.
      that a Nasdaq Listing Qualifications Panel has determined to delist the
      Company’s securities and accordingly, suspended trading of the Company’s shares
      on Nasdaq on August 8, 2007. This action was the result of the Nasdaq Panel’s
      agreement with previous Nasdaq determinations that the Company had not filed
      its
      Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 pursuant
      to
      Marketplace Rule 4310(c)(14) and that the Company failed to maintain the minimum
      stockholders’ equity requirement for continued listing on The Nasdaq Global
      Market.




12




**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 and (3) the terms “we,” “us” and
“our” mean, collectively, the combined entity of Hines Horticulture and its
      wholly owned subsidiary.*





***Executive
      Summary***





On
      January 10, 2007, we completed the sale of certain real property, inventory
      and
      other assets located at the nursery facilities in Danville, Pennsylvania, Utica,
      and Newark, New York for a loss of $0.1 million, which was recorded as a
      component of discontinued operations in the quarter ended March 31, 2007. These
      sales were part of the facility and property dispositions as mandated by the
      third amendment to our old senior credit facility.




On
      January 18, 2007 we entered into a new Senior Credit Facility that expires
      in
      2012. This new Senior Credit Facility replaced our old senior credit facility
      and has increased our available borrowings, as well as removed all financial
      covenants. This, in turn, has given us greater flexibility as we endeavor to
      stabilize the Company’s performance.




The
      performance at our Trenton, South Carolina facility has been declining over
      the
      past fifteen months. The continual decline in performance has resulted in fixed
      asset impairment charges, lower of cost or market adjustments and excess
      inventory write offs. In addition to the inventory write-offs and long-lived
      asset impairment charges recorded in our 2006 financial statements, an
      additional lower of cost or market adjustment of $0.8 million and a fixed asset
      impairment charge of $1.1 million were recorded in the quarter ended March
      31,
      2007. We expect to record an additional adjustment for the write-off of scrap
      and excess inventory in the second quarter of 2007 in the amount of
      approximately $2.0 million because of adverse weather conditions and continued
      poor results occurring in the second quarter of 2007. On July 26, 2007, the
      Board of Directors gave management approval to seek the sale of this facility.
      On August 6, 2007, we received a letter of intent from a third party nursery
      operator to purchase the Trenton, South Carolina facility.




Although
      sales were up for the three months ended March 31, 2007 compared to the same
      period a year ago, we experienced weaker sales in the second quarter of 2007
      compared to the second quarter of 2006. The decline in net sales was due
      primarily to adverse weather conditions in the Midwest and Northeast. For the
      sixth months ended June 30, 2007, our net sales were relatively flat compared
      to
      the same period a year ago.




Our
      primary sources of liquidity have historically been funds generated by
      operations and borrowings under our Senior Credit Facility. However, for the
      year ended December 31, 2006 and the quarter ended March 31, 2007, our operating
      cash flows were negative. The seasonal nature of our operations results in
      a
      significant fluctuation in certain components of working capital (primarily
      accounts receivable and inventory) during the growing and selling cycles. As
      a
      result, operating activities during the first and fourth quarters use
      significant amounts of cash, and in contrast, operating activities for the
      second and third quarters historically have generated cash as we ship inventory
      and collect accounts receivable. However, if we continue to incur operating
      losses, our ability to fund our operations and repay our debt could be
      affected.




***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, our 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,” “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.





13


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 filed on July 10, 2007.





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





***Overview***




We
      are a
      leading national supplier of ornamental shrubs, color plants and container-grown
      plants and our continuing operations consist of eight commercial nursery
      facilities located in Arizona, California, Oregon, South Carolina and Texas.
      We
      produce approximately 5,900 varieties of ornamental shrubs and color plants
      and
      we sell to more than 1,180 retail and commercial customers, representing more
      than 6,670 outlets throughout the United States and Canada. As of March 31,
      2007, Hines Horticulture produced and distributed horticultural products through
      its wholly owned subsidiary, Hines Nurseries.




***United
      States Tax Matters***




As
      a
      result of our business activities, we qualify for a special exception under
      the
      U.S. federal tax code that allows us to use the cash method of accounting for
      federal income tax purposes. Under the cash method, sales are included in
      taxable income when payments are received and expenses are deducted as they
      are
      paid. We derive significant tax benefits by being able to deduct the cost of
      inventory as the cost is incurred. As a result of our ability to utilize the
      cash method of accounting, we have historically generated net operating losses
      for federal income tax purposes and have not been required to pay cash income
      taxes. During 2005, we were required to pay federal cash income taxes in the
      form of alternative minimum tax as a result of the sale of land in Miami,
      Florida (“Miami Property Sale”). At December 31, 2006, we had approximately
      $54.0 million in net operating loss carryforwards for federal income tax
      purposes, which begin to expire in 2024. In addition, we had approximately
      $53.0
      million in net operating loss carryforwards for state income tax reporting
      purposes. Our state net operating losses in certain states begin expiring in
      2008.




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




The
      use
      of the cash method of accounting for federal income tax purposes results in
      a
      current deferred tax liability for accounting purposes. At March 31, 2007,
      we
      had a current deferred liability for deferred income taxes of $41.3 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.





As
      of
      March 31, 2007, the statue of limitations for federal income tax purposes has
      closed for all tax years prior to the year ended December 31, 2003. The same
      is
      true for state income tax purposes except for Arizona, California and Texas
      for
      which the statute of limitations is closed for all tax years prior to the year
      ended December 31, 2002. The Company has not entered into any agreements for
      federal income tax purposes or state income tax purposes to extend any statue
      of
      limitation period.





14


***Seasonality***





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





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





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





Under
      the
      terms of the Option Agreement, we are able to transition off the property
      in three phases from 2006 to 2008. The first phase of transition was completed
      on July 1, 2006 and consisted of 24 acres. The second phase of transition will
      be August 31, 2007 and the third phase of the transition will be July 1, 2008,
      and will consist of approximately 88 acres and 56 acres, respectively. We are
      continuing to develop replacement acreage and infrastructure at our
      842-acre Winters South facility in Northern California. Because we
      are not paying rent, we are in a sale-leaseback with continuing involvement
      position with respect to this property. In accordance with Statement of
      Financial Accounting Standards (“SFAS”) No. 98, we recorded the proceeds as a
      financing obligation. When we complete the transition, which is expected to
      be
      completed on July 1, 2008, we will remove the net book value of the assets
      and
      expect to recognize a gain of $16.3 million.





***Discontinued
      Operations***





*Miami
      Property Sales*


On
      November 7, 2005, we sold 122 acres of unimproved property in Miami, Florida
      (“Miami Property Sale”) for $47.0 million. In accordance with SFAS No. 98,
“Accounting for Leases,” we have recorded the proceeds as a financing
      obligation. In accordance with an amendment to the existing senior credit
      facility, the proceeds from the Miami Property Sale were used to pay off the
      entire outstanding balance of the term loan and the residual amount was used
      to
      pay down the revolving credit facility. As part of the Miami Property Sale,
      we
      entered into a two-year lease agreement with the buyer while transitioning
      operations to other locations. We leased the entire property for a one year
      period, with a thirty-day extension right, and then vacated approximately 33
      acres. We leased the remaining 89 acres until June 30, 2007, during which time
      we subleased the property. We paid the buyer rent of five hundred dollars per
      acre annually during the lease term plus fifty percent of the rent we received
      from subleasing the property. In addition, we are entitled to additional amounts
      if the buyer is successful in obtaining zoning for a certain number of
      residential lots. On June 30, 2007, we exited the lease and expect to recognize
      a gain of $39.9 million as a component of discontinued operations in the quarter
      ended June 30, 2007.





On
      April
      18, 2007, we completed the sale of our last remaining parcel of land in Miami,
      Florida, which consisted of approximately 79 acres of land and certain
      improvements thereon, for $7.2 million. In the second quarter of 2007 we expect
      to record a net gain of $2.5 million from the sale as a component of
      discontinued operations.





15




*Northeast
      Facilities*


In
      August
      2006, we made a decision to pursue the sale of our four Northeast nursery
      operations. These operations consisted of our facilities in Danville and
      Pipersville, Pennsylvania and Newark and Utica, New York.





On
      November 15, 2006, we sold our nursery facility in Pipersville, Pennsylvania
      for
      $5.4 million, of which approximately $1.1 million was deferred as it is
      contingent upon certain entitlements for the construction of additional
      greenhouses on certain real property which was previously leased by us. The
      sale
      of this facility resulted in a loss of $1.2 million, which was recorded as
      a
      component of discontinued operations in the quarter ended December 31,
      2006





On
      January 10, 2007, we completed the sale of certain real property, inventory
      and
      other assets located at the nursery facilities in Danville, Pennsylvania and
      Utica and Newark, New York for $6.8 million. We recognized a loss of $0.1
      million as a component of discontinued operations.





**Results
      of Operations**





The
      following discussion of results of operations should be read in conjunction
      with
      our condensed consolidated financial statements and related notes included
      elsewhere in this Quarterly Report on Form 10-Q.




**Three
      Months Ended March 31, 2007 compared to Three Months Ended March 31,
      2006**




*Net
      Sales.* Net
      sales
      of $53.3 million for the three months ended March 31, 2007 increased $6.9
      million, or 14.8%, from net sales of $46.4 million for the comparable period
      in
      2006. The increase in net sales was mainly due to strong sales in the Northwest
      and Southwest. Sales in the Southeast were flat compared to last year and sales
      in the Northeast and Midwest were down from a year ago.




*Gross
      Profit.* Gross
      profit of $24.5 million for the three months ended March 31, 2007 increased
      $4.5
      million, or 22.4%, from gross profit of $20.0 million for the comparable period
      in 2006. Gross profit as a percentage of sales for the quarter increased to
      46.0% from 43.1% for the comparable period in 2006. The increase in gross profit
      and gross profit margin was mainly due to the increase in net sales, as
      discussed above. This was offset by a lower of cost or market adjustment of
      $0.8
      million recorded at our Trenton, South Carolina facility.




*Distribution
      Expenses.* Distribution
      expenses of $11.5 million for the three months ended March 31, 2007 increased
      $1.4 million, or 13.4%, from $10.1 million for the comparable period in 2006.
      This increase was mainly due to increased sales volume. As a percentage of
      net
      sales, distribution expenses for the quarter decreased to 21.5% from 21.8%
      for
      the comparable period of 2006.




*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses of $14.1 million for the three months ended
      March 31, 2007 increased by $2.8 million, or 24.5%, from $11.3 million for
      the
      comparable period in 2006. Selling expenses of $7.7 million for the three months
      ended March 31, 2007 increased $1.2 million from $6.5 million for the comparable
      period in 2006. The increase in selling expenses was mainly due to increased
      sales and a higher amount of third party product merchandising costs which
      have
      been increasingly required by certain customers. Third party merchandising
      costs
      are typically more expensive than utilizing our in-house merchandising labor
      force. General and administrative expenses of $6.4 million for the three months
      ended March 31, 2007 increased $1.5 million from $4.8 million for the comparable
      period in 2006. The increase in general and administrative expenses was mainly
      due to an increase in personnel, higher costs related to the implementation
      of
      Sarbanes-Oxley, an increase in legal and professional fees related to additional
      work performed in connection with our 2006 fiscal year, and an increase in
      data
      processing and maintenance expenses.




*Other
      Operating Expenses.* Other
      operating expenses for the three months ended March 31, 2007 were nominal
      compared to $0.8 million for the comparable period in 2006. Other operating
      expenses for the first quarter of 2006 consisted primarily of consulting fees
      relating to our productivity improvement initiatives.




*Asset
      Impairment Charges.* Asset
      impairment charges of $1.1 million for the quarter ended March 31, 2007 were
      recorded in connection with our Trenton, South Carolina facility, resulting
      from
      continued poor operating performance.




16


*Operating
      Loss.* Operating
      loss for the three months ended March 31, 2007 and 2006 was $2.2 million.
      Although operating loss for the first quarter of 2007 was flat compared to
      a
      year ago, gross profit for the period increased $4.5 million and other operating
      expenses decreased $0.7 million; these were offset by an increase in
      distribution expenses of $1.4 million and an increase of $2.8 million in selling
      and general administrative expenses.




*Other
      Expenses.* Other
      expenses of $6.3 million for the three months ended March 31, 2007 increased
      $0.8 million, or 14.7%, from $5.5 million for the comparable period in 2006
      primarily due to the write off of deferred financing costs of $1.3 million
      in
      connection with retiring and replacing our Senior Credit Facility in January
      2007. This was offset by lower interest expense primarily as a result of lower
      outstanding debt.




*Income
      Tax Benefit.* Our
      effective income tax rate was 39.4% for the three months ended March 31, 2007,
      down slightly from 39.9% from the comparable period a year ago. Benefit from
      income taxes was $3.4 million for the three months ended March 31, 2007 compared
      to $3.1 million for the comparable period in 2006. The increase in income tax
      benefit is primarily due to a larger loss from continuing operations before
      income taxes.




*Loss
      from Continuing Operations.* Loss
      from continuing operations of $5.2 million for the three months ended March
      31,
      2007 increased $0.5 million, or 11.6%, from $4.6 million for the comparable
      period in 2006. The increase in the loss from continuing operations was
      attributable to increased selling and general administrative expenses, asset
      impairment charges, the write off of deferred financing costs and other factors
      discussed above.




*(Loss)
      Income from Discontinued Operations, Net of Income Taxes.* Loss
      from discontinued operations, net of income taxes, was nominal for the three
      months ended March 31, 2007 compared to income from discontinued operations,
      net
      of income taxes, of $0.3 million for the comparable period in 2006. The swing
      from income to loss was primarily due to the decreased sales of discontinued
      operations.




*Net
      Loss.* ** Net
      loss
      for the three months ended March 31, 2007 of $5.2 million increased $0.9 million
      compared to $4.3 million for the comparable period in 2006. The increase in
      net
      loss was mainly attributable to the increase in loss from continuing and
      discontinued operations, as discussed above.





**Liquidity
      and Capital Resources**





Our
      primary sources of liquidity have historically been funds generated by
      operations and borrowings under our Senior Credit Facility. However, for the
      year ended December 31, 2006 and the quarter ended March 31, 2007, our operating
      cash flows were negative. The seasonal nature of our operations results in
      a
      significant fluctuation in certain components of working capital (primarily
      accounts receivable and inventory) during the growing and selling cycles. As
      a
      result, operating activities during the first and fourth quarters use
      significant amounts of cash, and in contrast, operating activities for the
      second and third quarters historically have generated cash as we ship inventory
      and collect accounts receivable. The covenants under our Senior Credit Facility
      may affect our ability to operate our business, may limit our ability to take
      advantage of business opportunities as they arise and may adversely affect
      the
      conduct of our current business. A breach of a covenant in our debt instruments
      could cause acceleration of a significant portion of our outstanding
      indebtedness. In the event we breach the covenants in our debt instruments
      and
      we are unable to obtain waivers in connection therewith, we may not be able
      to
      obtain alternative financing for our debt on reasonable terms or otherwise.
      In
      that event, in order to pay the principal of our debt, we would be required
      to
      sell our equity securities, which would be made more difficult by the recent
      delisting of our common stock, 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
      used in operating activities of continuing operations was $27.2 million for
      the
      three months ended March 31, 2007 compared to $18.6 million for the comparable
      period in 2006. The increase in cash used in operating activities of continuing
      operations was mainly due to an increase in working capital levels, resulting
      primarily from increased accounts receivable balances at March 31, 2007. The
      increase in accounts receivable resulted mainly from the increase in net sales.





Net
      cash
      used in operating activities of discontinued operations was $3.6 million for
      the
      three months ended March 31, 2007 compared to $8.4 million for the comparable
      period in 2006. The decrease in cash used in operating activities of
      discontinued operations was mainly due to the winding down of the discontinued
      facilities, which resulted in less working capital requirements.





Net
      cash
      used in investing activities from continuing operations was $2.1 million for
      the
      three months ended March 31, 2007 compared to $0.9 million for the same period
      a
      year ago. The increase in cash used in investing activities was mainly due
      to an
      increase of $1.2 million in capital expenditures during the period. Capital
      expenditures during the period consisted mainly of expenditures related to
      our
      Winters South expansion as we continue to transition off of our Lagoon Valley
      property and our Irvine, California facility.





17


Net
      cash
      provided by investing activities from discontinued operations was $6.8 million
      for the three months ended March 31, 2007 compared to $24 thousand for the
      comparable period in 2006. The increase in cash provided by investing activities
      from discontinued operations was due to $6.8 million of proceeds received on
      the
      sale of three of our Northeast facilities.




Net
      cash
      provided by financing activities from continuing operations was $26.1 million
      for the three months ended March 31, 2007 compared $27.8 million for the same
      period in 2006. The decrease in net cash provided by financing activities was
      primarily due to $1.3 million of deferred financing costs incurred in connection
      with our new Senior Credit Facility, partially offset by a small reduction
      in
      net borrowings on our revolver compared to the same period a year ago.





We
      typically draw down our revolving loan in the first and fourth quarters to
      fund
      our seasonal inventory buildup and seasonal operating expenses. Based on past
      history, approximately 72-74% of our sales generally occur in the first half
      of
      the year, generally allowing us to reduce borrowing under our revolving loan
      in
      the second and third quarters. On March 31, 2007 we had unused borrowing
      capacity of approximately $45.9 million after applying the borrowing base
      limitations and letters of credits to our available borrowings.





At
      March
      31, 2007, we had $30.5 million outstanding under our Senior Credit Facility
      and
      we had $175.0 million principal amount of our Senior Notes outstanding.





We
      do not
      have any off balance sheet financing or any financial arrangements with related
      parties, other than operating leases. The following table discloses aggregate
      information about our contractual obligations and commercial commitments for
      our
      continuing operations as of March 31, 2007.




Payments
                  Due by PeriodContractual
                  Cash Obligations
              
              Total
              
              Less
                  than 1 year
              
              1-3
                  years
              
              4-5
                  years
              
              After
                  5 years(In
                  millions)Revolving
                  facility
              
              $
              30.5
              
              $
              30.5
              
              $
              -
              
              $
              -
              
              $
              -Senior
                  notes
              
              
              175.0
              
              
              -
              
              
              -
              
              
              175.0
              
              
              -Interest
              
              
              97.7
              
              
              19.6
              
              
              39.3
              
              
              38.8
              
              
              -Operating
                  leases
              
              
              8.6
              
              
              3.1
              
              
              3.6
              
              
              1.5
              
              
              0.4Total
              
              $
              311.8
              
              $
              53.2
              
              $
              42.9
              
              $
              215.3
              
              $
              0.4


We
      believe that cash generated by operations and from borrowings expected to be
      available under our New 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. We do not anticipate that our cash flows
      from operations will be sufficient to repay the principal of the Senior Notes
      (“Senior Notes”) issued by Hines Nurseries when they come due in 2011.
      Accordingly, in order to pay the principal of the Senior Notes, we will be
      required to refinance our debt, sell our equity securities, which would be
      made
      more difficult by the recent delisting of our common stock, sell our assets
      or
      take other actions. The foregoing actions may not enable us to pay the principal
      of the Senior Notes or may not be permitted by the terms of our debt instruments
      then in effect.




The
      following is a summary of certain material terms of our Old senior credit
      facility as of December 31, 2006, our New Senior Credit Facility entered into
      on
      January 18, 2007 and Hines Nurseries’ 10.25% Senior Notes due 2011.





***Old
      Senior Credit Facility***





On
      September 30, 2003, we amended and restated our old senior credit facility
      (“Old
      Senior Credit Facility”). Hines Nurseries and its domestic operating
      subsidiaries were borrowers under the Old Senior Credit Facility. The Old Senior
      Credit Facility originally consisted of a revolving facility with availability
      of up to $145 million (subject to borrowing base limits), which was eventually
      reduced through amendments to the Old Senior Credit Facility to $100 million
      (subject to borrowing base limits). The revolving facility also permitted us
      to
      obtain letters of credit up to a sub-limit. On January 18, 2007, the Old Senior
      Credit Facility was terminated and replaced with a new credit facility as
      described below.





18


***New
      Senior Credit Facility***





On
      January 18, 2007, we entered into a Loan and Security Agreement (the “New Senior
      Credit Facility”) that expires in 2012. The New Senior Credit Facility consists
      of a $100 million credit facility, which includes a $15 million letter of credit
      subline. The New Senior Credit Facility was used to refinance the outstanding
      revolving loans under the Old Senior Credit Facility.





*Guarantees;
      Collateral* .
      The
      obligations under the New Senior Credit Facility are guaranteed by us.
      Borrowings under the New Senior Credit Facility are collateralized by
      substantially all of our assets.





*Restrictions;
      Covenants; Defaults* .
      The New
      Senior Credit Facility includes customary events of default and other customary
      covenants, including, but not limited to, a fixed charge coverage ratio test,
      restrictions on certain types of activities, transactions and payments,
      including distributions and dividends from Hines Nurseries to Hines
      Horticulture, reporting covenants and others. The New Senior Credit Facility
      also includes standard provisions related to conditions of borrowing and
      customary representations and warranties. The lenders may terminate their
      obligation to make loans under the New Senior Credit Facility, and may
      accelerate payment of the indebtedness under the New Senior Credit Facility,
      upon the occurrence of an event of default, including the failure to comply
      with
      the covenants contained in the New Senior Credit Facility. Upon the occurrence
      and during the continuance of an event of default, the interest rate will
      increase by 2%.





*Limited
      Waiver to New Senior Credit Facility* .
      On
      April 30, 2007, we obtained a waiver from the financial institutions pursuant
      to
      which the lenders waived certain defaults under the New Senior Credit Facility
      and extended the deadline for filing the financial statements for the fiscal
      year ended December 31, 2006 and for the fiscal quarter ended March 31,
      2007 to May 28, 2007. On May 29, 2007, we obtained an additional
      waiver under the New Senior Credit Facility to, among other things, extend
      the
      date of filing such financial statements from May 28, 2007 to June 28,
      2007. On June 21, 2007, we obtained an additional waiver under the New Senior
      Credit Facility to extend the date of delivering our quarterly financial
      statements for the fiscal quarter ended March 31, 2007 to July 31, 2007.
      Effective July 31, 2007, we obtained an additional waiver under the New Senior
      Credit Facility to extend the date of delivering our quarterly financial
      statements for the fiscal quarter ended March 31, 2007 to August 31, 2007.
      While
      the lenders under the New Senior Credit Facility required the filing of our
      Form
      10-Q for the first quarter of 2007 within a specified time period as a condition
      to its waiver of our failure to, among other things, timely deliver our annual
      financials for fiscal year 2006, there is no requirement for us to file a Form
      10-Q or deliver quarterly financial statements under the New Senior Credit
      Facility. Accordingly, we do not need a waiver under the New Senior Credit
      Facility relating to our failure to timely file the Form 10-Q for the second
      quarter of 2007.





*Interest
      Rate; Fees* .
      The
      interest rate on the loans under the New Senior Credit Facility may be, at
      our
      option, base rate loans or London Interbank Offering Rate (“LIBOR”) loans. Base
      rate loans under the New Senior Credit Facility bear interest at the lender’s
      prime rate plus an additional amount that ranges from 0.50% to 1.25%, depending
      on our average availability of borrowing under the New Senior Credit Facility.
      Currently, the applicable margin for base rate loans is 0.75%. LIBOR rate loans
      under the New Senior Credit Facility bear interest at the LIBOR rate plus an
      additional amount that ranges from 1.50% to 2.25%, depending on our average
      availability of borrowing under the New Senior Credit Facility. Currently,
      the
      applicable margin for LIBOR rate loans is 1.75%. At March 31 2007, our borrowing
      rate was 7.462%.





In
      addition to paying interest on outstanding principal, we are required to pay
      a
      commitment fee on the daily average unused portion of the New Senior Credit
      Facility which accrues based on the utilization of the New Senior Credit
      Facility. Additionally, we are required to pay a fee for each letter of credit
      outstanding under the New Senior Credit Facility equal to the applicable margin
      for LIBOR rate loans to be shared by the lenders and a fronting fee of 0.125%
      to
      the individual issuer of a letter of credit.





*Availability;
      Borrowing Base.* Availability of borrowing under the New Senior Credit Facility is subject to
      a
      borrowing base consisting of the lesser of (i) the amount equal to the aggregate
      amount of the revolving loan commitment minus the aggregate amount of all
      letters of credit outstanding under the New Senior Credit Facility and all
      fees
      or other amounts owed by us with respect thereto (less certain amounts) minus
      the amount of the availability block under the Loan Agreement, which is
      currently $15 million but which shall be reduced to $0 at such time as we
      achieve a fixed charge coverage ratio of at least 1.1:1 for two consecutive
      fiscal quarters and (ii) the amount equal to 85% of eligible accounts receivable
      plus the lesser of (a) during the period commencing on December 31 of each
      calendar year and ending on April 30 each calendar year, the lesser of 65%
      of
      eligible inventory or 85% of the appraised net orderly liquidation value of
      eligible inventory or (b) during the period commencing on May 1 of each calendar
      year and ending on December 30 each calendar year, the lesser of 55% of eligible
      inventory or 85% of the appraised net orderly liquidation value of eligible
      inventory minus the sums of the reserves provided for in the New Senior Credit
      Facility. On March 31, 2007 we had unused borrowing capacity of approximately
      $45.9 million after applying the borrowing base limitations and letters of
      credits to our available borrowings. Outstanding borrowings as of March 31,
      2007
      were $30.5 million.





19


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.





*Maturity
      Date; Prepayments* .
      Amounts
      outstanding under the Loan Agreement mature on January 18, 2012 and we may
      prepay amounts outstanding under the Loan Agreement without fees or penalties,
      subject to the payment of costs associated with the prepayment of any LIBOR
      rate
      loans.





*Change
      of Control* .
      In the
      event of a change of control, the commitments of the lenders under the New
      Senior Credit Facility may be cancelled and we may be required to immediately
      repay the outstanding amount of the New Senior Credit Facility, together with
      accrued interest and all other amounts accrued under the New Senior Credit
      Facility.





***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 its domestic subsidiary, 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
      was permitted to 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. 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.





*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 United States generally
      accepted accounting principles 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.




20


*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 has occurred, the
      sales price is fixed or determinable and collection is reasonably assured.





Sales
      with pay by scan arrangements are recognized when the products are sold by
      the
      retailer. Under this program, retailers do not take ownership of the inventory
      at their stores until the product is scanned at the check out register. Revenue
      is recorded at the point the retailer sells our product to their
      customer.





*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 receivable due
      to
      sales returns and 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, and are re-evaluated on a
      quarterly basis. The allowance is netted against sales. Allowances are provided
      at the time of revenue is recognized in accordance with SFAS No. 48,
“Revenue Recognition When Right of Return Exists.”





*Accounts
      Receivable and Allowance for Doubtful Accounts:* Trade
      accounts receivables are recorded at the invoiced amount and do not bear
      interest. The allowance for doubtful accounts is our best estimate of the amount
      of probable credit losses in our existing accounts receivable. The allowance
      for
      doubtful accounts is maintained at a level believed adequate by management
      to
      reflect the probable losses in the trade receivable due to customer default,
      insolvency or bankruptcy. The provision is established by management using
      the
      following criteria: customer credit history, historical write-offs, customer
      current credit rating and other relevant factors, and is re-evaluated on a
      quarterly basis. Past due balances over 90 days and over a specified amount
      are
      reviewed individually for collectibility. The allowance is increased by
      provisions to bad debt expense and charged to general and administrative
      expenses.  All recoveries on trade receivables previously charged off are
      credited to bad debt expense, while direct charge-offs of trade receivables
      are
      deducted from the allowance.





*Goodwill*





In
      accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
      is not amortized, but instead is subject to an annual impairment review. Each
      of
      our locations represents a component of a single reporting unit as they each
      have similar economic characteristics, as defined in SFAS No. 142. As our
      operations are comprised of one reporting unit, we review the recoverability
      of
      our goodwill by comparing the fair value to the book value of equity. If our
      book value of equity exceeds fair value, the goodwill is written down to its
      implied fair value. We evaluate the carrying value of goodwill in the fourth
      quarter of each year and when events and circumstances indicate that the assets
      may be impaired.





*Accrued
      Liabilities*





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 liabilities are maintained at levels believed by our
      management to adequately reflect our probable claims obligations. In addition,
      we accrue for additional amounts for claims that are expected to settle for
      more
      than the deductible amounts. These additional amounts are recorded in other
      liabilities and are offset by an equal amount in other assets, in the
      accompanying condensed consolidated balance sheets, as these potential
      additional losses are fully insured.





21


*Operating
      Leases*





We
      lease
      certain land, office, trucks and warehouse facilities under various renewable
      long-term operating leases, which expire through 2013. All of the leases we
      enter into are accounted for in accordance with SFAS No. 13, “Accounting for
      Leases.” Certain of these leases include escalation clauses based upon changes
      in the consumer price index and/or the fair rental value of leased land and
      are
      accounted for on a straight-line basis over the term of the lease. Contingent
      rentals are not considered minimum lease payments and are included in rent
      expense as they are incurred. Rent concessions or lessor provided incentives
      are
      included in the minimum lease payments or are offset to rent expense in the
      case
      of non-contingent rentals. For contingent rentals, such concessions or
      incentives are recorded as an offset to rent expense as incurred.





*Inventories*





We
      determine the cost of inventory of nursery stock by accumulating costs
      associated with getting the plants ready for sale.  These costs include
      direct labor, overhead, materials (soil, water, containers, stakes, and
      chemicals) and normal scrap.   Abnormal scrap is charged to cost of
      goods sold when incurred. Scrap occurs at both our nursery facilities and,
      in
      some cases, at the retailer, if the scrap relates to unsold consigned inventory
      associated with the pay by scan program.  Abnormal scrap includes scrap
      incurred outside of historically determined statistical levels. Abnormal scrap
      in many cases is caused by natural causes such as hurricanes or extreme
      freezes.  In addition, abnormal scrap also occurs when we determine we have
      excess or obsolete inventories, which can occur as a result of adverse changes
      in the market or incorrect forecasting of customer demand.  Costs are
      accumulated until the time of harvest, which for us means that they are ready
      for sale.  We allocate costs to individual plants in inventory using a
      methodology designed to estimate the relative value of the plants using factors
      such as plant size and growing cycle. We carry our inventory at the lower of
      cost or current replacement cost. We generally determine current replacement
      cost on a site by site basis. Nursery stock also includes plants that are not
      yet ready for sale.  Our ornamental nursery stock has an average growing
      period of approximately eighteen months. All nursery stock is classified as
      a
      current asset based on our normal operating cycle.  Materials and supplies
      not yet used in the production process are stated at the lower of cost
      (first-in, first-out) or market.





*Income
      Taxes*





Our
      operations are agricultural in nature and we derive significant benefits by
      qualifying to use the cash method of accounting for federal tax purposes. We
      record income taxes under the asset and liability method, whereby deferred
      tax
      assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases, and for
      operating loss and tax credit carryforwards. Deferred tax assets and liabilities
      are measured using enacted tax rates expected to apply in the years in which
      those temporary differences are expected to be recovered or settled. The effect
      on deferred tax assets and liabilities of a change in tax rates is recognized
      in
      income in the period that includes the enactment date. Management evaluates
      the
      need to establish a valuation allowance for deferred tax assets based upon
      the
      amount of existing temporary differences, the period in which they are expected
      to be recovered and expected levels of taxable income. A valuation allowance
      to
      reduce deferred tax assets is established when it is “more likely than not” that
      some or all of the deferred tax assets will not be realized.





We
      accrue
      a liability for tax exposure items relating to matters where we do not believe
      it is probable that the tax position will be sustained.  New laws and new
      interpretations of laws and rulings by tax authorities may affect the liability
      for potential tax assessments. Due to the subjectivity and complex nature of
      the
      underlying issues, actual payments or assessments may differ from estimates.
      To
      the extent our estimates differ from actual payments or assessments, income
      tax
      expense is adjusted.





As
      of
      March 31, 2007, the statute of limitations for federal income tax purposes
      has
      closed for all tax years prior to the year ended December 31, 2003. The same
      is
      true for state income tax purposes except for Arizona, California and Texas
      for
      which the statute of limitations is closed for all tax years prior to the year
      ended December 31, 2002. The Company has not entered into any agreements for
      federal income tax purposes or state income tax purposes to extend any statue
      of
      limitation period.





22


*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. Should the review indicate that the asset
      is
      not recoverable our carrying value of the asset would be reduced to its
      estimated fair value, which is generally measured by future discounted cash
      flows.





*New
      Accounting Standards*





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





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. If needed, any
      interest and penalties associated with uncertain tax positions will be recorded
      as interest expense and selling, general and administrative expenses,
      respectively. The adoption of FIN 48 did not have an impact on our
      consolidated financial position, results of operations and cash
      flows.





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





*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 and commodity prices. We do not enter into
      transactions designed to mitigate market risks for trading or speculative
      purposes.





We
      have
      one fixed rate and one variable rate debt instrument. For the fixed-rate debt,
      interest rate changes affect the fair market value of such debt but do not
      impact earnings or cash flows. Conversely, for the 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 March 31, 2007 the carrying amount and estimated fair value of our debt
      was
      $205.5 million and $184.5 million, respectively. Given the current balance
      of
      our variable rate debt, we estimate a change in interest costs of approximately
      $0.3 million for every one-percentage change in applicable interest
      rates.





23




**Item
      4T. Controls and Procedures**




The
      Company carried out an evaluation, under the supervision and with the
      participation of the Chief Executive Officer and Chief Financial Officer, of
      the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures, as defined in Securities Exchange Act of 1934 Rules 13a-15(e)
      and 15d-15(e), as of the end of the period covered by this Quarterly Report
      on
      Form 10-Q. Based upon that evaluation, the Company’s Chief Executive
      Officer and Chief Financial Officer concluded that, solely as a result of the
      material weaknesses referenced below, the Company’s disclosure controls and
      procedures were not effective as of the end of the period covered by this
      report.





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





●  We
      did
      not have adequate policies and procedures and adequate review and oversight
      relating to the recording of inventory. For example, there was no policy or
      mechanism in place to identify abnormal scrap using statistical metrics, and
      there was no appropriate process in place to analyze the net realizable value
      of
      inventory. These deficiencies represent a material weakness in internal control
      over financial reporting because they could lead to material misstatements
      in
      our consolidated financial statements.





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





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





All
      identified errors related to the material weaknesses described above have been
      corrected in connection with the restatement of the consolidated financial
      statements for the applicable periods in our 2006
      Annual Report on Form 10-K, filed on July 10, 2007, and in our amended Quarterly
      Reports on Form 10-Q/A for each quarter of 2006, filed on July 10,
      2007 .





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





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





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





24


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





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





**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





On
      July
      18, 2006, Mr. Jean-Paul filed an action against the Company and other defendants
      in the Eleventh Judicial Circuit, Dade County, Florida, alleging negligence
      in
      connection with an automobile accident involving one of the Company’s trailers
      and a third-party carrier.  On March 6, 2007, additional plaintiffs filed
      an action related to this incident in the same court, alleging negligence and
      vicarious liability for negligence against the Company and other
      defendants.  The first filed claim is scheduled for trial in August
      2007.  The Company is defended in these actions by its insurance carrier,
      and is fully insured with respect to this matter, beyond a deductible.  As
      of March 31, 2007 the Company believes the amount it has accrued for the
      probable estimated claim and related insurance recovery at December 31, 2006
      is
      sufficient.





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. 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
      2006 annual report on Form 10-K filed with the Securities and Exchange
      Commission, except as amended to include the risk factors set forth
      below.





**Our
      stock has been delisted from the Nasdaq Stock Market, which will negatively
      impact market liquidity and may adversely affect the market price of our common
      stock.**





On
      August
      6, 2007, we received notification from the Nasdaq Stock Market, Inc. that a
      Nasdaq Listing Qualifications Panel decided to delist our securities and
      accordingly, Nasdaq suspended trading of our shares at the open of business
      on
      August 8, 2007. The market liquidity of our common stock will likely be
      adversely affected and the market price of our common stock could decrease.




**As
      a result of the delays in filing our periodic reports, we were required to
      obtain certain waivers in connection with the delivery of financial statements
      and related matters under our credit facility. In the future, we may require
      additional waivers under our credit facility and the indenture for our senior
      notes in the event we experience unexpected delays in filing our periodic
      reports or as a result of other matters, and the failure to obtain the necessary
      waivers could have a material adverse effect on our business, financial
      condition and results of operations.**





We
      have
      previously obtained waivers, and may in the future seek additional waivers,
      under our credit facility. For example, we obtained a waiver waiving certain
      potential breaches of representations and covenants under our credit facility
      and extending to May 28, 2007 the deadlines for us to deliver our annual
      financial statements for the fiscal year ended December 31, 2006 and quarterly
      financial statements for the fiscal quarter ended March 31, 2007. On
      May 29, 2007, we obtained an additional waiver under our credit facility
      to, among other things, extend the date of filing such financial statements
      from
      May 28, 2007 to June 28, 2007. We subsequently obtained additional
      waivers to extend the date of delivering our quarterly financial statements
      for
      the fiscal quarter ended March 31, 2007 to August 31, 2007. We have delivered
      to
      our bank the financial statements contained in our Annual Report on Form 10-K
      for the fiscal year ended December 31, 2006 and our Quarterly Report on Form
      10-Q for the first quarter of 2007 within the specified timeframes. While the
      lenders under our credit facility required the filing of our Quarterly Report
      on
      Form 10-Q for the first quarter of 2007 within a specified time period as a
      condition to its waiver of our failure to, among other things, timely deliver
      our annual financials for fiscal year 2006, there is no requirement for us
      to
      file a Form 10-Q or deliver quarterly financial statements under the credit
      facility entered into in January 2007.





25


Under
      our
      indenture for our senior notes, the trustee and the holders of at least 25%
      in
      principal amount of the outstanding notes under the indenture have the right
      to
      notify us if they believe we have breached a representation or covenant under
      the indenture and may declare an event of default. In addition, the lenders
      under our credit facility may declare an event of default if we breach a
      representation or covenant under the credit facility. If one or more events
      of
      default occur, we believe we will be given a period of time by our lenders
      in
      which to cure such events of default or obtain necessary waivers, except in
      limited circumstances. If we do not cure the events of default or obtain
      necessary waivers within the required time periods or certain extended time
      periods, the maturity of our public and bank debt could be accelerated and
      our
      ability to incur additional indebtedness could be restricted. Moreover, defaults
      under our indenture and credit facility could trigger cross-default provisions.
      There can be no assurance that any additional waivers will be received in the
      future on a timely basis, if at all, or that any waivers obtained, including
      the
      waivers we have already obtained, will extend for a sufficient period of time
      to
      avoid an acceleration event, an event of default or other restrictions on our
      business operations. The failure to obtain such waivers could have a material
      adverse effect on our business, financial condition and results of
      operations.





**As
      a result of the significant decrease in the price of our stock during the second
      quarter of 2007, we recorded an impairment charge related to our goodwill during
      the second quarter of 2007.**





SFAS
      No.
      142 “Goodwill and Other Intangible Assets” requires that goodwill be tested for
      impairment at least annually or whenever evidence of potential impairment
      exists. During the second quarter of 2007, we performed the first step used
      to
      identify potential impairment in accordance with SFAS No. 142 by comparing
      the
      fair value of our reporting unit with its carrying amount, including goodwill.
      Based on this analysis, we determined that the carrying amount of our reporting
      units exceeded its fair value. Accordingly, as of June 30, 2007, we performed
      a
      preliminary analysis of the implied fair value of goodwill, which indicated
      that
      goodwill is fully impaired. As previously disclosed, we expect to recognize
      a
      goodwill impairment charge of approximately $38.8 million in the quarter ended
      June 30, 2007.





**Item
      5. Other Information**





Item
      2.05.   Costs associated with exit or disposal
      activities.




As
      a
      result of continuing operating losses experienced at our Trenton, South Carolina
      facility during the quarter ended March 31, 2007, and based on the provisions
      of
      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
we determined that the carrying values of the related long-lived assets were
      impaired. On July 26, 2007, we received approval from our Board of Directors
      to
      pursue the sale of this facility. The fair value used to determine the $1.1
      million impairment charge was based on a third party letter of intent to
      purchase the facility received on August 6, 2007. The impairment charge was
      recorded as a component of operating loss in the March 31, 2007 condensed
      consolidated statements of operations. The sale of this facility is expected
      to
      close in the third quarter of 2007.





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


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





26




**SIGNATURE**





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


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


Date:
      August 23, 2007




27




HINES
      HORTICULTURE, INC.


QUARTERLY
      REPORT ON FORM 10-Q


FOR
      THE
      FISCAL QUARTER ENDED MARCH 31, 2007





INDEX
      TO
      EXHIBITS




Exhibit
                No.
            
            Description10.1
            
            Asset
                Purchase Agreement by and among Hines Nurseries, Inc., KW Mohawk
                Valley
                LLC, 621 East Maple LLC, Danville PA LLC, KW Utica LLC, KW Newark
                LLC and
                KW Danville LLC dated January 9, 2007 (1)10.2
            
            Commercial
                Contract by and between Hines Nurseries, Inc. and F & J Farms, LLC
                dated January 10, 2007 (1)10.3
            
            Loan
                and Security Agreement, dated January 18, 2007, by and between Hines
                Nurseries, Inc., Bank of America, N.A., as agent and a lender, Banc
                of
                America Securities LLC, as lead arranger and book manager and the
                financial institutions party thereto from time to time.
                (2)10.4
            
            Commercial
                Contract by and between Hines Nurseries, Inc. and Garden Depot, Corp.
                effective March 1, 2007 (3)10.5
            
            Severance
                and Release Agreement between Michael Trebing and Hines Horticulture,
                Inc.
                dated March 19, 2007. (4)*10.6
            
            Amendment
                to Amended and Restated Ground Lease dated January 1, 2007 by and
                between
                The Irvine Company and Hines Horticulture, Inc. (5)10.7
            
            Amendment
                No. 1 to Loan and Security Agreement dated as of February 28, 2007,
                by and
                among Hines Nurseries, Inc., the parties hereto as lenders and Bank
                of
                America, N.A., in its capacity as agent for Lenders.
                (5)10.8
            
            Amendment
                No. 2 to Loan and Security Agreement dated as of March 7, 2007, by
                and
                among Hines Nurseries, Inc., the parties hereto as lenders and Bank
                of
                America, N.A., in its capacity as agent for Lenders.
                (5)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 January 17,
                2007.(2)
            Incorporated
                by reference to Hines Horticulture, Inc.’s Form 8-K filed on January 24,
                2007.(3)
            Incorporated
                by reference to Hines Horticulture, Inc.’s Form 8-K filed on March 7,
                2007.(4)
            Incorporated
                by reference to Hines Horticulture, Inc.’s Form 8-K filed on March 23,
                2007.(5)
            Incorporated
                by reference to Hines Horticulture, Inc.’s Form 10-K filed on July 10,
                2007.




28