**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





(Mark
      One)


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





For
      the
      quarterly period ended September 30, 2007





OR





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





For
      the
      transition period from___________________ to _____________________





Commission
      File Number


000-24439





**HINES
      HORTICULTURE, INC.**


(Exact
      name of registrant as specified in its charter)





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





12621
      Jeffrey Road


Irvine,
      California 92620


(Address
      of principal executive offices) (Zip Code)





(949)
      559-4444


(Registrant's
      telephone number, including area code)





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


Yes(
      X
      )   No(   )





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





Large
                accelerated filer (  )
            
            Accelerated
                filer (  )
            
            Non-accelerated
                filer (X)





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes(
       )     No(X)





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





As
      of
      November 6, 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**





Page
                No.Item
                1.
            Financial
                Statements (unaudited)Condensed
                Consolidated Balance Sheets as of September 30, 2007
              and
                December 31, 2006
            
            
            2Condensed
                Consolidated Statements of Operations for the
              Three
                and Nine Months Ended September 30, 2007 and 2006
            
            
            3Condensed
                Consolidated Statements of Cash Flows for the
              Nine
                Months Ended September 30, 2007 and 2006
            
            
            4Notes
                to the Condensed Consolidated Financial Statements
            
            
            5Item
                2.
            Management's
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            
            
            12Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            
            23Item
                4.
            Controls
                and Procedures
            
            
            24**Part
                II. Other Information**Item
                1.
            Legal
                Proceedings
            
            
            26Item
                1A.
            Risk
                Factors
            
            
            26Item
                6.
            Exhibits
            
            
            26Signature
            
            
            27Index
                to Exhibits
            
            
            28Note: Items
                2, 3, 4, and 5 of Part II are omitted because they are not
                applicable.









1





**PART
                I. FINANCIAL INFORMATION**Item
                1.     Financial Statements**HINES
                HORTICULTURE, INC.****CONDENSED
                CONSOLIDATED BALANCE SHEETS****September
                30, 2007 and December 31, 2006****(Dollars
                in thousands, except share data)****(unaudited)****September
                30,**
              **2007**
            
            
            **December
                31,**
              **2006****ASSETS**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            7,434
            
            
            $
            108Accounts
                receivable, net
            
            
            18,575
            
            
            
            11,594Inventories
            
            
            135,708
            
            
            
            140,982Consigned
                inventories
            
            
            1,099
            
            
            
            542Prepaid
                expenses and other current assets
            
            
            1,373
            
            
            
            1,662Assets
                held for sale
            
            
            -
            
            
            
            41,415Total
                current assets
            
            
            164,189
            
            
            
            196,303FIXED
                ASSETS, net
            
            
            78,865
            
            
            
            79,534DEFERRED
                FINANCING COSTS, net
            
            
            4,723
            
            
            
            5,361DEFERRED
                INCOME TAXES
            
            
            5,260
            
            
            
            9,048GOODWILL
            
            
            -
            
            
            
            38,818OTHER
                ASSETS
            
            
            12,017
            
            
            
            11,304$
            265,054
            
            
            $
            340,368**LIABILITIES
                AND SHAREHOLDERS' (DEFICIT) EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            12,666
            
            
            $
            15,113Accrued
                liabilities
            
            
            4,782
            
            
            
            5,216Accrued
                payroll and benefits
            
            
            4,673
            
            
            
            4,282Accrued
                interest
            
            
            8,992
            
            
            
            4,667Borrowings
                on revolving credit facility
            
            
            -
            
            
            
            3,128Liabilities
                related to assets held for sale
            
            
            -
            
            
            
            2,760Deferred
                income taxes
            
            
            27,938
            
            
            
            41,876Financing
                obligation
            
            
            16,689
            
            
            
            47,032Total
                current liabilities
            
            
            75,740
            
            
            
            124,074LONG-TERM
                DEBT
            
            
            175,000
            
            
            
            175,000FINANCING
                OBLIGATION
            
            
            -
            
            
            
            16,689OTHER
                LIABILITIES
            
            
            15,549
            
            
            
            15,363COMMITMENTS
                AND CONTINGENCIES (Note 12)SUBSEQUENT
                EVENTS (Note 14)SHAREHOLDERS'
                (DEFICIT) EQUITYPreferred stockAuthorized - 2,000,000 shares, $0.01 par value; none
                outstanding
            
            
            -
            
            
            
            -Common
                stockAuthorized - 60,000,000 shares, $0.01 par value;Issued and outstanding - 22,072,549 shares at September 30,
                2007and December 31, 2006
            
            
            221
            
            
            
            221Additional
                paid-in capital
            
            
            128,781
            
            
            
            128,781Accumulated
                deficit
            
            
            (130,237
            )
            
            
            (119,760
            )Total
                shareholders' (deficit) equity
            
            
            (1,235
            )
            
            
            9,242$
            265,054
            
            
            $
            340,368The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.




2





**HINES
                HORTICULTURE, INC.****CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS****Three
                and Nine Months Ended September 30, 2007 and
                2006****(Dollars
                in thousands, except share data and per share
                data)****(Unaudited)**Three
                Months Ended
              September
                30,
            
            
            Nine
                Months Ended
              September
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006Sales,
                net
            
            $
            31,777
            
            
            $
            35,775
            
            
            $
            195,128
            
            
            $
            198,880Cost
                of goods sold
            
            
            16,893
            
            
            
            20,500
            
            
            
            98,513
            
            
            
            107,912Gross
                profit
            
            
            14,884
            
            
            
            15,275
            
            
            
            96,615
            
            
            
            90,968Distribution
                expenses
            
            
            8,124
            
            
            
            8,024
            
            
            
            43,187
            
            
            
            43,165Selling,
                general and administrative expenses
            
            
            13,501
            
            
            
            11,765
            
            
            
            43,875
            
            
            
            40,439Other
                operating expenses
            
            
            1,353
            
            
            
            407
            
            
            
            1,390
            
            
            
            2,283Goodwill
                impairment charge
            
            
            -
            
            
            
            -
            
            
            
            38,818
            
            
            
            -Total
                operating expenses
            
            
            22,978
            
            
            
            20,196
            
            
            
            127,270
            
            
            
            85,887Operating
                (loss) income
            
            
            (8,094
            )
            
            
            (4,921
            )
            
            
            (30,655
            )
            
            
            5,081Other
                expensesInterest
                expense, net
            
            
            4,439
            
            
            
            4,636
            
            
            
            14,171
            
            
            
            14,971Amortization
                and write-off of deferred financing costs
            
            
            244
            
            
            
            648
            
            
            
            1,979
            
            
            
            1,3974,683
            
            
            
            5,284
            
            
            
            16,150
            
            
            
            16,368Loss
                from continuing operations before income taxes
            
            
            (12,777
            )
            
            
            (10,205
            )
            
            
            (46,805
            )
            
            
            (11,287
            )Income
                tax benefit
            
            
            (5,039
            )
            
            
            (3,984
            )
            
            
            (14,922
            )
            
            
            (4,406
            )Loss
                from continuing operations
            
            
            (7,738
            )
            
            
            (6,221
            )
            
            
            (31,883
            )
            
            
            (6,881
            )Income
                (loss) from discontinued operations, net of income taxes
            
            
            54
            
            
            
            (24,031
            )
            
            
            21,406
            
            
            
            (28,112
            )Net
                loss
            
            $
            (7,684
            )
            
            $
            (30,252
            )
            
            $
            (10,477
            )
            
            $
            (34,993
            )Basic
                and diluted (loss) earnings per share:Loss
                from continuing operations
            
            $
            (0.35
            )
            
            $
            (0.28
            )
            
            $
            (1.44
            )
            
            $
            (0.31
            )Income
                (loss) from discontinued operations, net of income taxes
            
            
            0.00
            
            
            
            (1.09
            )
            
            
            0.97
            
            
            
            (1.27
            )Net
                loss per common share
            
            $
            (0.35
            )
            
            $
            (1.37
            )
            
            $
            (0.47
            )
            
            $
            (1.59
            )Weighted
                average shares outstanding--Basic and Diluted
            
            
            22,072,549
            
            
            
            22,072,549
            
            
            
            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****Nine
                Months Ended September 30, 2007 and 2006****(Dollars
                in thousands)****(Unaudited)**Nine
                Months Ended September 30,2007
            
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (10,477
            )
            
            $
            (34,993
            )(Income)
                loss from discontinued operations
            
            
            (21,406
            )
            
            
            28,112Adjustments
                to reconcile loss from continuing operations to net cash(used
                in) provided by operating activities:Depreciation
            
            
            6,557
            
            
            
            5,766Accretion
                on asset retirement obligations
            
            
            81
            
            
            
            46Amortization
                and write-off of deferred financing costs
            
            
            1,979
            
            
            
            1,397Goodwill
                impairment charge
            
            
            38,818
            
            
            
            -Deferred
                income taxes
            
            
            (14,922
            )
            
            
            (4,406
            )(Gain)
                loss on sale of assets
            
            
            (117
            )
            
            
            19Change
                in working capital accounts:Accounts
                receivable
            
            
            (6,981
            )
            
            
            (7,099
            )Inventories
            
            
            4,396
            
            
            
            17,588Prepaid
                expenses, other current assets and other assets
            
            
            (369
            )
            
            
            1,163Accounts
                payable and accrued liabilities
            
            
            3,903
            
            
            
            7,878Net
                cash provided by continuing operations
            
            
            1,462
            
            
            
            15,471Net
                cash used in discontinued operations
            
            
            (4,023
            )
            
            
            (3,843
            )Net
                cash (used in) provided by operating activities
            
            
            (2,561
            )
            
            
            11,628CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of fixed assets
            
            
            (5,277
            )
            
            
            (7,660
            )Proceeds
                from sale of fixed assets
            
            
            129
            
            
            
            -Net
                cash used in continuing operations
            
            
            (5,148
            )
            
            
            (7,660
            )Net
                cash provided by (used in) discontinued operations
            
            
            19,505
            
            
            
            (45
            )Net
                cash provided by (used in) investing activities
            
            
            14,357
            
            
            
            (7,705
            )CASH
                FLOWS FROM FINANCING ACTIVITIESBorrowings
                on revolving credit facility
            
            
            74,047
            
            
            
            164,813Repayments
                on revolving credit facility
            
            
            (77,175
            )
            
            
            (174,893
            )Financing
                obligation
            
            
            -
            
            
            
            14,297Payments
                of deferred financing costs
            
            
            (1,342
            )
            
            
            (320
            )Net
                cash (used in) provided by financing activities
            
            
            (4,470
            )
            
            
            3,897NET
                CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            7,326
            
            
            
            7,820CASH
                and CASH EQUIVALENTS, beginning of period
            
            
            108
            
            
            
            62CASH
                and CASH EQUIVALENTS, end of period
            
            $
            7,434
            
            
            $
            7,882Supplemental
                disclosure of cash flow information:Cash
                paid for interest during the period, net of amounts
                capitalized
            
            $
            9,592
            
            
            $
            10,465Cash
                paid for income taxes
            
            $
            71
            
            
            $
            1,112The
                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 continuing operations consist of seven commercial
      nursery facilities located in Arizona, California, Oregon 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 FASB Interpretation No. (“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 Statement of Financial
      Accounting Standard (“SFAS”) No. 109, “Accounting for Income Taxes.” FIN 48 is
      effective for 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 other 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 (including normal recurring adjustments), which are
      necessary for a fair statement of the consolidated financial position, results
      of operations and cash flows of the Company as of and for the periods
      indicated.  The Company presumes that users of the interim financial
      information herein have read or have access to the Company's audited
      consolidated financial statements for the preceding fiscal year and that the
      adequacy of additional disclosure needed for a fair presentation may be
      determined in that context.




Accordingly,
      footnotes and other disclosures, which would substantially duplicate the
      disclosures contained in the Company’s Form 10-K for the year ended
      December 31, 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.






5







4.
            Discontinued
                Operations:





*Miami
      Property Sales*


On
      November 7, 2005, the Company sold 122 acres of unimproved property in Miami,
      Florida (“Miami Property”) for $47,040. In accordance with SFAS No. 98
“Accounting for Leases,” the Company 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 vacated the remaining 89 acres
      on
      October 2, 2006, and subleased the property until June 30, 2007.  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 recognized
      the sale of the property, including the recognition of the previously deferred
      gain of $39,912, as a component of discontinued operations in the accompanying
      condensed consolidated statements of operations.  In addition, as part
      of the recognition of the sale, the Company removed the long-lived assets and
      the financing obligation of $7,116 and $47,032, respectively, associated with
      the Miami Property.





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
      recorded 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 in the
      quarter ended March 31, 2007.





*Trenton,
      South Carolina Facility*


On
      July
      26, 2007, the Company decided to sell its Trenton, South Carolina facility.
      On
      August 29, 2007, the Company sold substantially all of the land and assets
      located at this facility.  The gross sales price of the facility was
      $5,650.  The purchase agreement contains typical representations,
      warranties and indemnification provisions. The Company recognized a gain of
      approximately $147 as a component of discontinued operations in the quarter
      ended September 30, 2007.


6


Summarized
      financial information for discontinued operations is set forth
      below:





Three
                months ended
            
            
            Nine
                months endedSeptember
                30,
            
            
            September
                30,
            
            
            September
                30,
            
            
            September
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006Sales,
                net
            
            $
            782
            
            
            $
            10,844
            
            
            $
            8,385
            
            
            $
            59,778Income
                (loss) before income taxes
            
            $
            89
            
            
            
            (40,074
            )
            
            $
            35,382
            
            
            $
            (46,871
            )Income
                tax provision (benefit)
            
            
            35
            
            
            
            (16,043
            )
            
            
            13,976
            
            
            
            (18,759
            )Income
                (loss) from discontinued operations,net
                of income taxes
            
            $
            54
            
            
            $
            (24,031
            )
            
            $
            21,406
            
            
            $
            (28,112
            )





The
      Company’s consolidated financial statements for the three and nine months ended
      September 30, 2006, have been restated to reflect discontinued
      operations.  The consolidated balance sheet as of December 31, 2006
      has been restated to reflect discontinued operations of the Company's Trenton,
      South Carolina facility.  As of December 31, 2006, the components of assets
      and liabilities of discontinued operations in the consolidated balance sheets
      included in assets, and liabilities related to assets, held for sale are as
      follows:





December
                31,2006Inventories
            
            $
            6,986Fixed
                assets, net
            
            
            22,381Deferred
                income taxes
            
            
            12,048Assets
                held for sale
            
            $
            41,415Deferred
                income taxes
            
            $
            2,760Liabilities
                related to assets held for sale
            
            $
            2,760





5.
            Goodwill:





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 have been
      impaired.  Accordingly, the Company performed the first step used to
      identify potential impairment in accordance with SFAS No. 142 by comparing
      the
      fair value of the Company’s reporting unit 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
      an analysis of the implied fair value of goodwill, which indicated that goodwill
      was fully impaired.  The Company recognized a goodwill impairment
      charge of $38,818 in the quarter ended June 30, 2007.




6.
            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 and
      nine months ended September 30, 2007 and 2006, shares related to employee stock
      options in the amount of 738,268 and 847,227, respectively, were excluded from
      the computation of diluted earnings per share because the effect would have
      been
      anti-dilutive.


7


7.
            Stock-Based
                Compensation:





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





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





There
      were no stock option grants during the nine months ended September 30, 2007
      and
      2006; accordingly, there was no determination of fair value during this
      period.





A
      summary
      of the status of the Company’s stock option plan as of September 30, 2007
      follows:





WeightedAverageShares
            
            
            Exercise
                PriceOutstanding
                at December 31, 2006
            
            
            828,414
            
            
            $
            6.20Granted
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Cancelled
            
            
            (90,146
            )
            
            
            6.32Outstanding
                - September 30, 2007
            
            
            738,268
            
            
            $
            6.18Exercisable
            
            
            738,268
            
            
            $
            6.18





The
      aggregate intrinsic value represents the difference between the exercise prices
      of the underlying awards and the quoted price of the Company’s common stock for
      those awards that have an exercise price below the quoted price on September
      30,
      2007. The Company had no options outstanding on September 30, 2007 with an
      exercise price below the quoted price of the Company’s common stock resulting in
      an aggregate intrinsic value of $0.





The
      weighted average remaining contractual life was 3.84 years at September 30,
      2007.  As of September 30, 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
            
            
            
            3.87
            
            
            $
            4.53$5.50
            
            
            
            525,568
            
            
            
            4.50
            
            
            
            5.50$6.00
                to $8.00
            
            
            
            33,000
            
            
            
            2.08
            
            
            
            6.73$11.00
            
            
            
            98,700
            
            
            
            0.84
            
            
            
            11.00Total
            
            
            
            738,268
            
            
            
            3.84
            
            
            $
            6.18





8


8.
            Inventories:





Inventories
      consisted of the following:





September
                30,
            
            
            December
                31,2007
            
            
            2006Nursery
                stock
            
            $
            127,518
            
            
            $
            134,079Materialsand
                supplies
            
            
            8,190
            
            
            
            6,903Inventories
            
            $
            135,708
            
            
            $
            140,982Consigned
                inventories
            
            $
            1,099
            
            
            $
            542




9.
            Senior
                Credit Facility:


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





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





*Restrictions;
      Covenants; Defaults*.  The 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
      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 Senior Credit
      Facility, and may accelerate payment of the indebtedness under the Senior Credit
      Facility, upon the occurrence of an event of default, including the failure
      to
      comply with the covenants contained in the Senior Credit
      Facility.   Upon the occurrence and during the continuance of an
      event of default, the interest rate will increase by 2.00%.





*Limited
      Waivers to 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 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 Senior Credit Facility, among other things, to
      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 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.  On July 31, 2007, the Company obtained an
      additional waiver under the Senior Credit Facility to extend the date of
      delivering its quarterly financial statements for the fiscal quarter ended
      March
      31, 2007 to August 30, 2007.  The Company filed its Form 10-Q for the
      quarter ended March 31, 2007 with the Securities and Exchange Commission on
      August 23, 2007.  While the lenders under the 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 Senior Credit
      Facility.





*Interest
      Rate; Fees*.  The interest rate on the loans under the 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
      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 Senior Credit
      Facility.  Currently, the applicable margin for base rate loans is
      1.0%.  LIBOR rate loans under the 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 Senior
      Credit Facility.  Currently, the applicable margin for LIBOR rate
      loans is 2.0%.  As of September 30, 2007, the Company had no
      outstanding borrowings under the Senior Credit Facility.


9


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 Senior Credit
      Facility which accrues based on the utilization of the Senior Credit
      Facility.  Additionally, the Company is required to pay a fee for each
      letter of credit outstanding under the 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 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 Senior
      Credit Facility and all fees or other amounts owing by the Company with respect
      thereto (less certain amounts) minus the amount of the availability block under
      the 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 Senior Credit Facility.  After applying
      the borrowing base limitations and letters of credit to its available
      borrowings, on September 30, 2007, the Company had unused borrowing capacity
      of
      approximately $41,100.  As of September 30, 2007, the Company did not
      have any borrowings outstanding on its Senior Credit Facility.





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.





*Maturity
      Date; Prepayments*.  Amounts outstanding under the Senior Credit
      Facility mature on January 18, 2012 and the Company may prepay amounts
      outstanding under the 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 Senior Credit Facility may be cancelled and the Company
      may be required to immediately repay the outstanding amount of the Senior Credit
      Facility, together with accrued interest and all other amounts accrued under
      the
      Senior Credit Facility.







10.
              Long
                  Term Debt:
 ***Senior
        Notes.***





On
      September 30, 2003, Hines Nurseries issued $175,000 of senior subordinated
      notes
      that mature on October 1, 2011 (the "Senior Notes"). The Senior Notes bear
      interest at the rate of 10.25% per annum and are 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:*
      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 the Company’s Senior
      Credit Facility.





10


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


11.
                Vacaville
                      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 was completed on August 31, 2007 and consists of approximately 88
      acres.  The final phase of the transition will be on July 1, 2008, and
      will consist of approximately 56 acres. 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.


12.
              Contingencies:
  *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 January
      2008.  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 September 30, 2007 the Company believes the amount it has accrued for the
      probable estimated claim is sufficient.  We have also recorded an
      asset at December 31, 2006 for the probable insurance recovery.





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.




13.
            Liquidity:





Our
      primary sources of liquidity have historically been funds generated by
      operations and borrowings under our senior credit facility.  However,
      over the past eighteen months, we have also generated funds through asset
      sales.  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, due to a decrease in net
      sales and increased operating expenses for the three and nine months ended
      September 30, 2007, this resulted in cash used in operating activities for
      the three month period ended September 30, 2007.  The covenants
      under our Senior Credit Facility and our Senior Notes 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 t o
      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 could 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.


14.
              Subsequent
                    Events:





On October
      10, 2007, The Nasdaq Stock Market issued a press release announcing that
      effective October 22, 2007 it would delist the common stock of the Company,
      which was suspended on August 8, 2007, and has not traded on NASDAQ since that
      time.








11


**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.*





***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” and “scheduled” and similar expressions. Our actual results or
      outcomes may differ materially from those anticipated. Readers are cautioned
      not
      to place undue reliance on these forward-looking statements, which speak only
      as
      of the date the statement was made. We undertake no obligation to publicly
      update or revise any forward-looking statements, whether as a result of new
      information, future events or otherwise. For any forward-looking statements,
      we
      claim the protection of the safe harbor for forward-looking statements in
      Section 27A of the Securities Act of 1933 and Section 21E of the Securities
      Exchange Act of 1934.




There
      are
      a number of risks, uncertainties and important factors that might cause actual
      results to differ from any results expressed or implied by such forward looking
      statements.  In addition to the risks, uncertainties and other factors
      discussed elsewhere in this Form 10-Q, the risks, uncertainties and other
      factors that could cause or contribute to actual results differing materially
      from those expressed or implied in the forward looking statements include,
      without limitation, those set forth under Part II. Item 1A - Risk Factors in
      the
      Company’s Annual Report on Form 10-K filed on July 10, 2007, as amended on
      September 24, 2007, and the Company’s Quarterly Reports for the first and second
      quarters of 2007 on Form 10-Q filed with the SEC on August 23, 2007 and
      September 7, 2007, respectively.





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.


***Executive
        Summary***
 
 Although
        sales increased in 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,
        including freezing weather early in the quarter and heavy rainfall mid-quarter
        when we typically experience our most significant sales for the
        year.  Sales in the third quarter of 2007 continued to decline
        compared to the third quarter of 2006.  This decline in net sales was
        due primarily to the severe drought experienced in the Southeast, which
        decreased the demand for our products, including most notably our shrubs.
        In
        addition, our major customers focused on efforts to reduce store inventories,
        therefore affecting replenishment orders.
  In
        addition, although we had higher gross margins for the nine months ended
        September 30, 2007 compared to a year ago, we incurred additional general
        and
        administrative costs primarily due to an increase in personnel costs, higher
        costs related to the implementation of section 404 of the Sarbanes-Oxley
        Act of
        2002 and an increase in legal and professional fees related to additional
        work
        performed in connection with our 2006 fiscal year audit.
  We
        have
        taken several steps in our endeavors to improve the future of our company’s
        performance as summarized below.
  ·
                Divested
                    under-performing
                    facilities
 ·
                On
                    January 18, 2007, we entered
                    into a new Senior Credit Facility that increased our available
                    borrowings,
                    as well as removed all financial
                    covenants
 ·
                Made
                    significant senior
                    management changes
 ·
                We
                    are implementing improved
                    inventory product mix realignment procedures consisting of developing
                    systems and processes to better align the product mix of our
                    current
                    on-hand inventory and future inventory production with capacity
                    and
                    forecasted customer
                    demand.
 ·
                Centralized
                    certain core
                    corporate functions
 ·
                Appointed
                    additional
                    non-executive, independent members of the Board of
                    Directors
 ·
                As
                    announced on October 10, 2007
                    we retained the services of an investment banking firm to assist
                    management and the Board of Directors in evaluating other potential
                    strategic alternatives
  12
 Despite
        these endeavors, cash generated by continuing operations alone will not be
        sufficient to meet our anticipated working capital, capital expenditures
        and
        debt service requirements for at least the next twelve
        months.  However, we expect borrowings available under our Senior
        Credit Facility along with cash generated by continuing operations will be
        sufficient to meet these needs for at least the next twelve
        months.  We do not anticipate that our cash flows from continuing
        operations will be sufficient to repay the principal of the 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 could be made more difficult by the
        recent delisting of our common stock), sell our assets or take other actions.
        There can be no assurances that the foregoing actions will enable us to pay
        the
        principal of the Senior Notes or that we will be successful in our attempts
        to
        complete such actions or that such actions can be accomplished on commercially
        reasonable terms or otherwise.




***Overview***
  We
        are a
        leading national supplier of ornamental shrubs, color plants and container-grown
        plants and our continuing operations consist of seven commercial nursery
        facilities located in Arizona, California, Oregon and Texas. We produce
        approximately 5,900 varieties of ornamental shrubs and color plants and we
        sell
        to more than 1,100 retail and commercial customers, representing more than
        6,550
        outlets throughout the United States and Canada. As of September 30, 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 and state 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 and state 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”). 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 2023. In addition, as of December
        31, 2006, 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 September 30, 2007,
      we had a current liability for deferred income taxes of $27.9 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
      September 30, 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 statute of limitation period.





***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.





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 was
      completed on August 31, 2007 and consisted of approximately 88 acres. The third
      phase of the transition will be on July 1, 2008, and will consist of
      approximately 56 acres. 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 with respect to this property. In accordance with
      Statement of Financial Accounting Standards (“SFAS”) No. 98 "Accounting for
      Leases," 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.





13





***Discontinued
      Operations***





*Miami
      Property Sales*


On
      November 7, 2005, we sold 122 acres of unimproved property in Miami, Florida
      (“Miami Property”) for $47.0 million.  In accordance with SFAS No. 98, we
      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 vacated the remaining 89 acres on
      October 2, 2006, and subleased the property until June 30, 2007.  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 recognized the sale of the property, including
      the recognition of the previously deferred gain of $39.9 million, as a component
      of discontinued operations in the accompanying condensed consolidated statements
      of operations.  In addition, as part of the recognition of the sale,
      we removed the long-lived assets and the financing obligation of $7.1 million
      and $47.0 million, respectively, associated with the Miami
      Property.





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
      recorded a net gain of $2.5 million from the sale as a component of discontinued
      operations.





*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 in the quarter ended
      March 31, 2007.





*Trenton,
      South Carolina Facility*


On
      July
      26, 2007, we decided to sell our Trenton, South Carolina facility. On
      August 29, 2007, we sold substantially all of the land and assets located at
      the
      facility.  The gross sales price of the facility was approximately
      $5.7 million. The purchase agreement contains typical representations,
      warranties and indemnification provisions.  We recognized a gain of
      approximately $0.1 million as a component of discontinued operations in the
      quarter ended September 30, 2007.





***Inventory
      Product Mix Realignment***





We
      are
      implementing improved inventory product mix realignment procedures consisting
      of
 developing systems and processes to better align the product mix of our
      current on-hand inventory and future inventory production with capacity and
      forecasted customer demand.





**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.




14




**Three
      Months Ended September 30, 2007 compared to Three Months Ended September 30,
      2006**







*Net
      Sales.*Net sales of $31.8 million for the three months ended
      September 30, 2007 decreased $4.0 million, or 11.2%, from net sales of $35.8
      million for the comparable period in 2006.  The decline in sales
      was due to decreased sales in the Southeast region of approximately $1.2
      million. The region is currently experiencing a severe drought.  In
      addition, our major customers focused on efforts to reduce store inventories,
      therefore affecting replenishment orders.




*Gross
      Profit.*  Gross profit of $14.9 million for the three months ended
      September 30, 2007 decreased $0.4 million, or 2.6%, from gross profit of $15.3
      million for the comparable period in 2006.  Gross profit as a
      percentage of sales for the quarter increased to 46.8% from 42.7% for the
      comparable period in 2006.  The decrease in gross profit is mainly
      attributed to the decrease in net sales.  The increase in gross profit
      margin was due to the lower cost inventory produced in 2006 and sold in the
      third quarter of 2007.  The lower cost of inventory was due to our
      labor productivity initiatives undertaken throughout 2006 which helped increase
      labor efficiencies.




*Distribution
      Expenses.*Distribution expenses of $8.1 million for the three
      months ended September 30, 2007 increased $0.1 million, or 1.2%, from $8.0
      million for the comparable period in 2006.  As a percentage of net
      sales, distribution expenses for the quarter increased to 25.6% from 22.4%
      for
      the comparable period of 2006 due to increased common carrier
      expenses.




*Selling,
      General and Administrative Expenses.*  Selling, general and
      administrative expenses of $13.5 million for the three months ended September
      30, 2007 increased by $1.7 million, or 14.8%, from $11.8 million for the
      comparable period in 2006.  Selling expenses of $6.6 million for the
      three months ended September 30, 2007 increased $0.4 million from $6.2 million
      for the comparable period in 2006.  General and administrative
      expenses of $6.9 million for the three months ended September 30, 2007 increased
      $1.3 million from $5.6 million for the comparable period in 2006.  We
      continue to incur increased personnel costs and higher costs related to the
      implementation of Section 404 of the Sarbanes-Oxley Act of
      2002.




*Other
      Operating Expenses.*Other operating expense of $1.4 million for the three
      months ended September 30, 2007 increased $0.9 million from $0.4 million for
      the
      comparable period in 2006.  Other operating expenses for the third
      quarter of 2007 were mainly due to expenses related to severance expense of
      approximately $1.2 million.




*Operating
      Loss.*Operating loss of $8.1 million for the three months ended September
      30, 2007 increased $3.2 million, or 64.5%, from $4.9 million for the comparable
      period in 2006.  The increase in operating loss was mainly due to the
      decrease in net sales and the increase in selling and general administrative
      costs and other operating expenses.




*Other
      Expenses.*Other expenses of $4.7 million for the three months
      ended September 30, 2007 decreased $0.6 million, or 11.4%, from $5.3 million
      for
      the comparable period in 2006.  The decrease in other expenses was
      mainly due to a decrease in interest expense and deferred financing
      expense.  The decrease in interest expense is attributable to lower
      overall outstanding debt and the decrease in deferred financing expense is
      due
      to the write-off of a portion of the deferred financing cost in connection
      with
      the third amendment to our previous senior credit facility in 2006 which did
      not
      recur in the third quarter of 2007.




*Income
      Tax Benefit.*Income tax benefit was $5.0 million for the three months
      ended September 30, 2007 compared to $4.0 million for the comparable period
      in
      2006.  Our effective income tax rate was 39.4% for the three months
      ended September 30, 2007, up from 39.0% from the comparable period a year
      ago.




*Loss
      from Continuing Operations.*  Loss from continuing operations of
      $7.7 million for the three months ended September 30, 2007 increased $1.5
      million, or 24.4%, from $6.2 million for the comparable period in
      2006.  The increase in loss from continuing operations was mainly due
      to a decrease in net sales and the other factors discussed above.




*Income
      (Loss) from Discontinued Operations, Net of Income Taxes.*  Income
      from discontinued operations, net of income taxes, was $0.1 million for the
      three months ended September 30, 2007 compared to a loss from discontinued
      operations, net of income taxes, of $24.0 million for the comparable period
      in
      2006.  The decrease in loss from discontinued operations, net of
      income taxes was mainly due to the majority of our discontinued operations
      having been disposed of in prior periods.  The loss from discontinued
      operations in 2006 was primarily due to exit and disposal costs and asset and
      other impairment charges.




*Net
      Loss.***Net loss
      of $7.7
      million for the three months ended September 30, 2007 decreased $22.6 million
      from a loss of $30.3 million for the comparable period in 2006.  The
      decrease in net loss is mainly attributable to the decrease in net loss from
      discontinued operations, offset by the increase in loss from continued
      operations as discussed above.





15





**Nine
      Months Ended September 30, 2007 compared to Nine Months Ended September 30,
      2006**





*Net
      Sales.*Net sales of $195.1 million for the nine months ended
      September 30, 2007 decreased $3.8 million, or 1.9%, from net sales of $198.9
      million for the comparable period in 2006.  The decrease in net sales
      was mainly due to the severe drought conditions in the Southeast and our major
      customers focusing on efforts to reduce store inventories, therefore affecting
      replenishment orders in the third quarter of 2007.




*Gross
      Profit*.  Gross profit of $96.6 million for the nine months ended
      September 30, 2007 increased $5.6 million, or 6.2%, from gross profit of $91.0
      million for the comparable period in 2006.  Gross profit as a
      percentage of sales for the nine months ended September 30, 2007 increased
      to
      49.5% from 45.7% for the comparable period in 2006.  The increase in
      gross profit and gross profit margin was mainly due to lower cost inventory
      produced in 2006 and sold in 2007.  These increases were partially
      offset by $2.8 million of lower cost or market and excess inventory adjustments
      recorded during the first six months of 2007.




*Distribution
      Expenses.*Distribution expenses of $43.2 million for the nine
      months ended September 30, 2007 decreased a nominal amount from $43.2 million
      for the comparable period in 2006.  As a percentage of net sales,
      distribution expenses for the period increased to 22.1% from 21.7% for the
      comparable period of 2006.




*Selling,
      General and Administrative Expenses.*  Selling, general and
      administrative expenses of $43.9 million for the nine months ended September
      30,
      2007 increased by $3.4 million, or 8.5%, from $40.4 million for the comparable
      period in 2006.  Selling expenses of $23.6 million for the nine months
      ended September 30, 2007 decreased $1.2 million from $24.8 million for the
      comparable period in 2006.  The decrease in selling expense is mainly
      due to the decrease in net sales and the reduction in commission related
      compensation of $0.3 million, which was caused by a shift in sales from
      customers with higher commission-based compensation to customers with lower
      commission-based compensation.   In addition, there was a
      reduction in third-party merchandising costs of $0.4 million which also
      contributed to the decrease.  General and administrative expenses of
      $20.3 million for the nine months ended September 30, 2007 increased $4.6
      million from $15.7 million for the comparable period in 2006.  The
      increase in general and administrative expenses was mainly due to an increase
      in
      personnel costs of $2.6 million, higher costs of $1.0 million related to the
      implementation of Section 404 of
      the Sarbanes-Oxley Act of 2002 and an increase in legal and professional fees
      of
      $1.2 million related to additional work performed in connection with our 2006
      fiscal year audit and other matters.




*Other
      Operating Expenses.*Other operating expenses of $1.4 million for the nine
      months ended September 30, 2007 decreased $0.9 million, or 39.1%, from $2.3
      million for the comparable period in 2006.  Other operating expenses
      consisted primarily of expenses related to severance expense of approximately
      $1.2 million incurred in the third quarter of 2007.  Other operating
      expenses for the nine month period ended September 30, 2006 consisted of
      consulting fees relating to our productivity initiative.




*Goodwill
      Impairment Charge.*  Goodwill impairment charge for the nine
      months ended September 30, 2007 was $38.8 million.  This impairment
      charge was recorded as a result of the second step test performed in accordance
      with SFAS No. 142, “Goodwill and Other Intangible Assets,” which indicated that
      our goodwill was fully impaired in the second quarter of 2007.  This
      impairment charge was recorded in the second quarter ended June 30,
      2007.




*Operating
      (Loss) Income.*Operating loss for the nine months ended September 30, 2007
      was $30.7 million compared to operating income of $5.1 million for the
      comparable period in 2006.  The swing from income to loss was mainly
      due to the goodwill impairment charge and an increase in selling and general
      administrative expenses offset by the increase in gross profit.




*Other
      Expenses.*Other expenses of $16.2 million for the nine months
      ended September 30, 2007 decreased $0.2 million, or 1.3%, from $16.4 million
      for
      the comparable period in 2006.  The decrease in other expenses of $0.2
      million is primarily due to a decrease in interest expense of approximately
      $0.8
      million offset by an increase of $0.6 million in deferred financing
      expense.  The decrease in interest expense is due to lower overall
      outstanding debt, and the increase in deferred financing expense is mainly
      due
      to the termination of our previous senior credit facility in January
      2007.




*Income
      Tax Benefit*.  Income tax benefit was $14.9 million for the nine months
      ended September 30, 2007 compared to $4.4 million for the comparable period
      in
      2006.   The increase in income tax benefit resulted from the
      increase in loss from continued operations before income taxes.  Our
      effective income tax rate was 31.9% for the nine months ended September 30,
      2007, down from 39.0% from the comparable period a year
      ago.   The decline in the effective income tax rate is due to the
      write-off of goodwill in the quarter ended June 30, 2007.   A
      portion of this impairment charge is not deductible for income tax
      purposes.




16






*Loss
      from Continuing Operations.*  Loss from continuing operations of
      $31.9 million for the nine months ended September 30, 2007 increased $25.0
      million, from a loss of $6.9 million for the comparable period in
      2006.  The increase in loss from continuing operations was
      attributable to the goodwill impairment charge and other factors discussed
      above.




*Income
      (Loss) from Discontinued Operations, Net of Income Taxes.*  Income
      from discontinued operations, net of income taxes, was $21.4 million for the
      nine months ended September 30, 2007 compared to a loss from discontinued
      operations, net of income taxes, of $28.1 million for the comparable period
      in
      2006. The swing from loss to income was primarily due to the gain on the Miami
      Property sale of $39.9 million and the gain of $2.5 million on the sale of
      the
      last remaining parcel of land in Miami, Florida, which consisted of 79 acres
      of
      land and improvements in the second quarter of 2007.




*Net
      Loss.***Net loss
      of $10.5
      million for the nine months ended September 30, 2007 decreased $24.5 million
      compared to a loss of $35.0 million for the comparable period in
      2006.  The decrease in net loss was mainly attributable to the
      increase in income from discontinued operations, offset by the loss from
      continuing 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,
      over the past eighteen months, we have also generated funds through asset
      sales.   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, due to a decrease in net sales and
      increased operating expenses for the three and nine months ended September
      30,
      2007, this resulted in cash used in operating activities for the three
      month period ended September 30, 2007.  The covenants under our Senior
      Credit Facility (as defined below) and our Senior Notes (as defined below)
      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 could 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
      provided by operating activities of continuing operations was $1.5 million
      for
      the nine months ended September 30, 2007 compared to net cash provided by
      operating activities of continuing operations of $15.5 million for the
      comparable period in 2006. The decrease in cash provided by operating activities
      of continuing operations was mainly due to a decrease in net loss and an
      increase in working capital levels resulting primarily from a smaller decrease
      in inventories in the current nine months ended 2007 versus the same period
      in
      2006.  The increase in inventories is mainly due to the decline in net
      sales.  These amounts were partially offset by the change in deferred
      income taxes as a result of the decline in net loss.





Net
      cash
      used in operating activities of discontinued operations was $4.0 million for
      the
      nine months ended September 30, 2007 compared to $3.8 million for the comparable
      period in 2006.  This increase in cash used in operating activities of
      discontinued operations was due to a larger decrease in accounts payable and
      accrued liabilities resulting from the sale of our Northeast facilities and
      our
      Trenton, South Carolina facility.





Net
      cash
      used in investing activities from continuing operations was $5.1 million for
      the
      nine months ended September 30, 2007 compared to $7.7 million for the same
      period a year ago. The decrease in cash used in investing activities was mainly
      due to a decrease in capital expenditures for the nine month period ended
      September 30, 2007.





17


Net
      cash
      provided by investing activities from discontinued operations was $19.5 million
      for the nine months ended September 30, 2007 compared to nominal cash used
      in
      investing activities of discontinued operations for the comparable period in
      2006.  The increase in cash provided by investing activities from
      discontinued operations was mainly due to proceeds received from the sale of
      three of our Northeast and Trenton facilities and our last remaining property
      located in Miami, Florida.





Net
      cash
      used in financing activities from continuing operations was $4.5 million for
      the
      nine months ended September 30, 2007 compared to net cash provided of $3.9
      million for the same period in 2006. The swing from net cash provided by
      financing activities to net cash used in financing activities was primarily
      due
      to the cash received of $14.3 million in 2006 for the sale of the Lagoon Valley
      facility classified as a financing obligation as well as $1.3 million of
      deferred financing costs incurred in 2007 in connection with entering into
      our
      Senior Credit Facility in January 2007 as described
      below.  Additionally, net borrowings on our Senior Credit
      Facility compared to the same period a year ago were smaller.





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 September 30, 2007, we had unused borrowing
      capacity of approximately $41.1 million after applying the borrowing base
      limitations and letters of credit to our available borrowings.





At
      September 30, 2007, we had no outstanding debt under our Senior Credit Facility
      and we had $175.0 million principal amount of our Senior Notes
      outstanding.





We
      do not
      have any off balance sheet financing or any financial arrangements with related
      parties, other than operating leases. The following table discloses aggregate
      information about our contractual obligations and commercial commitments for
      our
      continuing operations as of September 30, 2007.





Payments
                Due by PeriodContractual
                Cash Obligations
            
            Total
            
            
            Less
                than
              1
                year
            
            
            1-3years
            
            
            4-5years
            
            
            After
              5
                years(In
                millions)Revolving
                facility
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Senior
                notes
            
            
            175.0
            
            
            
            -
            
            
            
            -
            
            
            
            175.0
            
            
            
            -Interest
            
            
            87.7
            
            
            
            19.6
            
            
            
            58.6
            
            
            
            9.5
            
            
            
            -Operating
                leases
            
            
            7.2
            
            
            
            2.8
            
            
            
            3.8
            
            
            
            0.5
            
            
            
            0.1Contractual
                obligations
            
            
            1.6
            
            
            
            0.6
            
            
            
            1.0
            
            
            
            -
            
            
            
            -Total
            
            $
            271.5
            
            
            $
            23.0
            
            
            $
            63.4
            
            
            $
            185.0
            
            
            $
            0.1




We
        believe that cash generated by continuing operations alone will not be
        sufficient to meet our anticipated working capital, capital expenditures
        and
        debt service requirements for at least the next twelve
        months.  However, we expect borrowings available under our Senior
        Credit Facility along with cash generated by continuing operations will be
        sufficient to meet these needs for at least the next twelve
        months.  We do not anticipate that our cash flows from continuing
        operations will be sufficient to repay the principal of the 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 could be made more difficult by the
        recent delisting of our common stock, sell our assets or take other actions.
        There can be no assurances that the foregoing actions will enable us to pay
        the
        principal of the Senior Notes or that we will be successful in our attempts
        to
        complete such actions or that such actions can be accomplished on commercially
        reasonable terms or otherwise.  As announced on October 10, 2007, we
        are in the process of evaluating our strategic alternatives.


The
      following is a summary of certain
      material terms of our Senior Credit Facility entered into on January 18, 2007
      and Hines Nurseries’ 10.25% Senior Notes due 2011.




18


***Senior
      Credit Facility***





On
      January 18, 2007, we entered into a Loan and Security Agreement (the “Senior
      Credit Facility”) that expires in 2012.  The Senior Credit Facility
      consists of a $100.0 million credit facility, which includes a $15.0 million
      letter of credit subline.





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





*Restrictions;
      Covenants; Defaults*.  The 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
      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 Senior Credit
      Facility, and may accelerate payment of the indebtedness under the Senior Credit
      Facility, upon the occurrence of an event of default, including the failure
      to
      comply with the covenants contained in the Senior Credit
      Facility.   Upon the occurrence and during the continuance of an
      event of default, the interest rate will increase by 2.00%.





*Limited
      Waivers to 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 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 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
      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.  On July 31, 2007, we obtained an additional waiver under the
      Senior Credit Facility to extend the date of delivering our quarterly financial
      statements for the fiscal quarter ended March 31, 2007 to August 30,
      2007. We filed our Form 10-Q for the quarter ended March 31, 2007 with
      the Securities and Exchange Commission on August 23, 2007. While the lenders
      under the 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 Senior Credit
      Facility.





*Interest
      Rate; Fees*.  The interest rate on the loans under the Senior
      Credit Facility may be, at our option, base rate loans or London Interbank
      Offering Rate (“LIBOR”) loans.  Base rate loans under the 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 Senior Credit Facility.  Currently, the applicable
      margin for base rate loans is 1.0%.  LIBOR rate loans under the 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 Senior Credit Facility.  Currently, the applicable margin
      for LIBOR rate loans is 2.0%. At September 30 2007, we had no outstanding
      borrowings under our Senior Credit Facility.





In
      addition to paying interest on outstanding principal, we are required to pay
      a
      commitment fee on the daily average unused portion of the Senior Credit Facility
      which accrues based on the utilization of the Senior Credit
      Facility.  Additionally, we are required to pay a fee for each letter
      of credit outstanding under the 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 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 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
      Senior Credit Facility, which is currently $15.0 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 Senior Credit Facility. On September 30, 2007 we had unused borrowing
      capacity of approximately $41.1 million after applying the borrowing base
      limitations and letters of credit to our available
      borrowings.


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 Senior Credit
      Facility mature on January 18, 2012 and we may prepay amounts outstanding under
      the 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 Senior Credit Facility may be cancelled and we may
      be
      required to immediately repay the outstanding amount of the Senior Credit
      Facility, together with accrued interest and all other amounts accrued under
      the
      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, 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.  Currently 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.  The provision rate is re-evaluated on a quarterly
      basis. The allowance is netted against sales.  Allowances are provided
      at the time 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 receivable
      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 of our reporting unit to the book
      value
      of our equity. If our book value of equity exceeds fair value, 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.  In the quarter ended June
      30, 2007, we recorded a full impairment of our goodwill.  As of
      September 30, 2007 we have no goodwill on our condensed consolidated balance
      sheet.





*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, 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 market determined 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 and state income
      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
      September 30, 2007, the statute of limitations for federal income tax purposes
      has closed for all tax years prior to the year ended December 31,
      2004.  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, 2003.  The Company
      has not entered into any agreements for federal income tax purposes or state
      income tax purposes to extend any statute 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 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.  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 FASB Interpretation No. (“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
      other 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 September 30, 2007 the carrying
      amount and estimated fair value of our debt was $175.0 million and $119.0
      million, respectively.  We believe that the future borrowings on our
      variable rate debt will be minimal; therefore, any changes in applicable
      interest rates should not have a material impact on our financial
      statements.


23


**Item
      4.  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.








24


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.





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.





25


**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 our 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 us and other defendants.  The
      first filed claim is scheduled for trial in January 2008.  We are defended
      in these actions by our insurance carrier, and are fully insured with respect
      to
      this matter, beyond a deductible.  As of September 30, 2007 we believe the
      amount we have accrued for the probable estimated claim at December 31, 2006
      is
      sufficient.  We have also recorded an asset at December 31, 2006 for
      the probable insurance recovery.





From
      time
      to time, we are 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 us. Management believes, however, that the ultimate
      resolution of such matters will not have a material adverse impact on our
      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 our Annual
      Report on Form 10-K for the fiscal year ended 2006, except for the updated
      and additional risk factors included in our Quarterly Reports on Form 10-Q
      for
      the quarter ended March 31, 2007 and June 30, 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
              officerand duly authorized officer)


Date:  November
      14, 2007








27





HINES
      HORTICULTURE, INC.


QUARTERLY
      REPORT ON FORM 10-Q


FOR
      THE
      FISCAL QUARTER ENDED June 30, 2007





INDEX
      TO
      EXHIBITS




Exhibit
                No.
            Description10.1
            Limited
                Waiver to Loan and Security Agreement, dated August 14, 2007, by
                and among
                Hines Nurseries, Inc., and Bank of America, N.A., PNC Bank, National
                Association and GMAC Commercial Finance
                LLC.  (1)10.2
            Asset
                Purchase Agreement by and between Hines Nurseries, Inc Palmetto
                Perennials, LLC and Layman Holdings, LLC dated August 29, 2007.
                (2)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





(1)
            Incorporated
                by reference toExhibit 10.1 to Hines Horticulture, Inc.’s Form 8-K filed
                on August 15, 2007.(2)
            Incorporated
              by reference to Exhibit 10.1 to Hines Horticulture, Inc.’s Form 8-K filed
              on September 4, 2007.


















28