**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





(Mark
      One)


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





For
      the
      quarterly period ended June 30, 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
      August 31, 2007, there were 22,072,549 shares of Common Stock, par value $0.01
      per share, outstanding.











**HINES
      HORTICULTURE, INC.**





TABLE
      OF
      CONTENTS







**PART
      I. FINANCIAL INFORMATION**




Page No.Item 1.
            Financial Statements (unaudited)Condensed Consolidated Balance Sheets
              as of
              June 30, 2007 and
              December 31, 2006
            2Condensed Consolidated Statements of
              Operations for the Three
              and Six Months Ended June 30, 2007 and 2006
            3Condensed Consolidated Statements of
              Cash
              Flows for the Six
              Months Ended June 30, 2007 and 2006
            4Notes to the Condensed Consolidated
              Financial
              Statements
            5Item 2.
            Management's Discussion and Analysis
              of
              Financial Condition and
              Results of Operations
            13Item 3.
            Quantitative and Qualitative Disclosures
              About Market Risk
            24Item 4.
            Controls and Procedures
            24**Part
                II. Other
                Information**Item 1.
            Legal Proceedings
            26Item 1A.
            Risk Factors
            26Item 6.
            Exhibits
            26Signature
            27Index to Exhibits
            28




Note: Items
      2,
      3, 4, and 5 of Part II are omitted because they are not applicable.









**PART
        I. FINANCIAL INFORMATION**
  Item
        1.
        Financial Statements




**HINES
        HORTICULTURE, INC.**
 **CONDENSED
          CONSOLIDATED BALANCE SHEETS** **June
            30, 2007 and December 31, 2006**
 **(Dollars
              in thousands, except share data)**
 (unaudited)


**June
                  30, 2007**
              
              **December
                  31, 2006********ASSETS**CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              8,914
              
              $
              108Accounts
                  receivable, net
              
              
              36,904
              
              
              11,594Inventories
              
              
              125,613
              
              
              146,775Consigned
                  inventories
              
              
              1,799
              
              
              542Prepaid
                  expenses and other current assets
              
              
              1,694
              
              
              1,662Assets
                  held for sale
              
              
              -
              
              
              32,652Total
                  current assets
              
              
              174,924
              
              
              193,333FIXED
                  ASSETS, net
              
              
              84,281
              
              
              85,470DEFERRED
                  FINANCING COSTS, net
              
              
              4,971
              
              
              5,361DEFERRED
                  INCOME TAXES
              
              
              5,343
              
              
              6,082GOODWILL
              
              
              -
              
              
              38,818OTHER
                  ASSETS
              
              
              12,017
              
              
              11,304$
              281,536
              
              $
              340,368**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**CURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              17,142
              
              $
              15,113Accrued
                  liabilities
              
              
              8,271
              
              
              5,216Accrued
                  payroll and benefits
              
              
              4,956
              
              
              4,282Accrued
                  interest
              
              
              4,574
              
              
              4,667Borrowings
                  on revolving credit facility
              
              
              -
              
              
              3,128Liabilities
                  related to assets held for sale
              
              
              -
              
              
              471Deferred
                  income taxes
              
              
              32,942
              
              
              44,165Financing
                  obligation
              
              
              -
              
              
              47,032Total
                  current liabilities
              
              
              67,885
              
              
              124,074LONG-TERM
                  DEBT
              
              
              175,000
              
              
              175,000FINANCING
                  OBLIGATION
              
              
              16,689
              
              
              16,689OTHER
                  LIABILITIES
              
              
              15,513
              
              
              15,363COMMITMENTS
                  AND CONTINGENCIES (Note 12)SUBSEQUENT
                  EVENTS (Note 15)SHAREHOLDERS'
                  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 June 30, 2007 and December
                  31,
                  2006
              
              
              221
              
              
              221Additional
                  paid-in capital
              
              
              128,781
              
              
              128,781Accumulated
                  deficit
              
              
              (122,553
              )
              
              (119,760
              )Total
                  shareholders' equity
              
              
              6,449
              
              
              9,242$
              281,536
              
              $
              340,368


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




2




**CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **Three
          and Six Months Ended June 30, 2007 and 2006**
 **(Dollars
            in thousands, except share data and per share data)**
 **(Unaudited)**




Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,2007
              
              2006
              
              2007
              
              2006Sales,
                  net
              
              $
              117,572
              
              $
              124,354
              
              $
              170,896
              
              $
              170,788Cost
                  of goods sold
              
              
              63,286
              
              
              66,836
              
              
              92,083
              
              
              93,236Gross
                  profit
              
              
              54,286
              
              
              57,518
              
              
              78,813
              
              
              77,552Distribution
                  expenses
              
              
              26,157
              
              
              27,739
              
              
              37,632
              
              
              37,858Selling,
                  general and administrative expenses
              
              
              16,667
              
              
              17,872
              
              
              30,782
              
              
              29,205Other
                  operating expenses
              
              
              16
              
              
              1,115
              
              
              37
              
              
              1,876Goodwill
                  impairment charge
              
              
              38,818
              
              
              -
              
              
              38,818
              
              
              -Asset
                  impairment charge
              
              
              -
              
              
              -
              
              
              1,107
              
              
              -Total
                  operating expenses
              
              
              81,658
              
              
              46,726
              
              
              108,376
              
              
              68,939Operating
                  (loss) income
              
              
              (27,372
              )
              
              10,792
              
              
              (29,563
              )
              
              8,613Other
                  expensesInterest
                  expense, net
              
              
              4,891
              
              
              5,178
              
              
              9,732
              
              
              10,335Amortization
                  and write-off of deferred financing costs
              
              
              237
              
              
              378
              
              
              1,735
              
              
              7495,128
              
              
              5,556
              
              
              11,467
              
              
              11,084(Loss)
                  income from continuing operations before income taxes
              
              
              (32,500
              )
              
              5,236
              
              
              (41,030
              )
              
              (2,471
              )Income
                  tax (benefit) provision
              
              
              (9,291
              )
              
              2,127
              
              
              (12,649
              )
              
              (947
              )(Loss)
                  income from continuing operations
              
              
              (23,209
              )
              
              3,109
              
              
              (28,381
              )
              
              (1,524
              )Income
                  (loss) from discontinued operations, net of income taxes
              
              
              25,616
              
              
              (3,558
              )
              
              25,588
              
              
              (3,217
              )Net
                  income (loss)
              
              $
              2,407
              
              $
              (449
              )
              $
              (2,793
              )
              $
              (4,741
              )Basic
                  and diluted (loss) earnings per share:(Loss)
                  income from continuing operations
              
              $
              (1.05
              )
              $
              0.14
              
              $
              (1.29
              )
              $
              (0.07
              )Income
                  (loss) from discontinued operations, net of income taxes
              
              
              1.16
              
              
              (0.16
              )
              
              1.16
              
              
              (0.15
              )Net
                  income (loss) per common share
              
              $
              0.11
              
              $
              (0.02
              )
              $
              (0.13
              )
              $
              (0.21
              )Weighted
                  average shares outstanding--Basic and Diluted
              
              
              22,072,549
              
              
              22,072,549
              
              
              22,072,549
              
              
              22,072,549




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




3




**HINES
      HORTICULTURE, INC.**


**CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **Six
          Months Ended June 30, 2007 and 2006**
 **(Dollars
            in thousands)**
 **(Unaudited)**


Six
                Months Ended June 30,2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (2,793
            )
            $
            (4,741
            )(Income)
                loss from discontinued operations
            
            
            (25,588
            )
            
            3,217Adjustments
                  to reconcile loss from continuing operations to net cash provided
                  by
                  operating activities:Depreciation
            
            
            4,696
            
            
            4,085Accretion
                on asset retirement obligations
            
            
            31
            
            
            30Amortization
                and write-off of deferred financing costs
            
            
            1,735
            
            
            749Asset
                impairment charge
            
            
            1,107
            
            
            -Goodwill
                impairment charge
            
            
            38,818
            
            
            -Deferred
                income taxes
            
            
            (12,649
            )
            
            (947
            )(Gain)
                loss on sale of assets
            
            
            (6
            )
            
            16Change
                in working capital accounts:Accounts
                receivable
            
            
            (25,310
            )
            
            (36,112
            )Inventories
            
            
            19,654
            
            
            24,702Prepaid
                expenses, other current assets and other assets
            
            
            (831
            )
            
            346Accounts
                payable and accrued liabilities
            
            
            7,930
            
            
            13,082Net
                cash provided by continuing operations
            
            
            6,794
            
            
            4,427Net
                cash (used in) provided by discontinued operations
            
            
            (3,719
            )
            
            1,039Net
                cash provided by operating activities
            
            
            3,075
            
            
            5,466CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of fixed assets
            
            
            (3,843
            )
            
            (3,493
            )Proceeds
                from sale of fixed assets
            
            
            6
            
            
            1Net
                cash used in continuing operations
            
            
            (3,837
            )
            
            (3,492
            )Net
                cash provided by (used in) discontinued operations
            
            
            14,043
            
            
            (26
            )Net
                cash provided by (used in) investing activities
            
            
            10,206
            
            
            (3,518
            )CASH
                FLOWS FROM FINANCING ACTIVITIESBorrowings
                on revolving credit facility
            
            
            73,925
            
            
            164,813Repayments
                on revolving credit facility
            
            
            (77,053
            )
            
            (174,893
            )Financing
                obligation
            
            
            -
            
            
            14,297Payments
                of deferred financing costs
            
            
            (1,347
            )
            
            (150
            )Net
                cash (used in) provided by financing activities
            
            
            (4,475
            )
            
            4,067NET
                CHANGE IN CASH
            
            
            8,806
            
            
            6,015CASH
                and CASH EQUIVALENTS, beginning of period
            
            
            108
            
            
            62CASH,
                end of period
            
            $
            8,914
            
            $
            6,077Supplemental
                disclosure of cash flow information:Cash
                paid for interest during the period, net of amounts
                capitalized
            
            $
            9,567
            
            $
            10,216Cash
                paid for income taxes
            
            $
            1
            
            $
            1,046






The
        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 eight commercial
      nursery facilities located in Arizona, California, Oregon, South Carolina and
      Texas. Hines markets its products to retail and commercial customers throughout
      the United States and Canada.




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





2. New
      Accounting Standards:





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




In
      June
      2006, the FASB issued 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.




5




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





4. Discontinued
      Operations:





*Miami
      Property Sales*




On
      November 7, 2005, the Company sold 122 acres of unimproved property in Miami,
      Florida (“Miami Property”) 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.




6




Summarized
      financial information for discontinued operations is set forth
      below:




Three
                  months ended
              
              Six
                  months endedJune
                  30,
              
              June
                  30,
              
              June
                  30,
              
              June
                  30,2007
              
              2006
              
              2007
              
              2006Sales,
                  net
              
              $
              19
              
              $
              30,776
              
              $
              58
              
              $
              41,251Income
                  (loss) before income taxes
              
              
              42,342
              
              
              (5,982
              )
              
              42,295
              
              
              (5,408
              )Income
                  tax provision (benefit)
              
              
              16,726
              
              
              (2,424
              )
              
              16,707
              
              
              (2,191
              )Income
                  (loss) from discontinued operations,net
                  of income taxes
              
              $
              25,616
              
              $
              (3,558
              )
              $
              25,588
              
              $
              (3,217
              )





The
      Company’s consolidated financial statements for the three and six months ended
      June 30, 2006, have been restated to reflect discontinued operations. 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
              
              $
              1,193Fixed
                  assets, net
              
              
              16,445Deferred
                  income taxes
              
              
              15,014Assets
                  held for sale
              
              $
              32,652Deferred
                  income taxes
              
              $
              471Liabilities
                  related to assets held for sale
              
              $
              471




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 be 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
      six months ended June 30, 2007 and 2006, shares related to employee stock
      options in the amount of 760,566 and 861,860, 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
      has been approved by the shareholders, permits the grant of stock options,
      stock
      appreciation rights, restricted stock, performance awards and any combination
      of
      the foregoing to certain directors, officers and employees of the Company and
      its subsidiaries. Option awards are generally granted with an exercise price
      equal to or greater than the market price of the Company’s stock at the date of
      grant; those option awards generally vest over a period of four years subject
      to
      continuous service and have 10-year contractual terms.




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




There
      were no stock option grants during the six months ended June 30, 2007 and
      2006.




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


2007Weighted
                  AverageShares
              
              Exercise
                  PriceOutstanding
                  at December 31, 2006
              
              
              828,414
              
              $
              6.20Granted
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -Cancelled
              
              
              (67,848
              )
              
              6.36Outstanding
                  - June 30, 2007
              
              
              760,566
              
              $
              6.18Exercisable
              
              
              760,566
              
              $
              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 June 30,
      2007. The Company had no options outstanding on June 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 4.13 years at June 30, 2007.
      As
      of June 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
              
              4.11
              
              $4.53$5.50
              
              545,066
              
              4.78
              
              5.50$6.00
                  to $8.00
              
              33,000
              
              2.33
              
              6.73$11.00
              
              101,500
              
              1.10
              
              11.00Total
              
              760,566
              
              4.13
              
              $6.18




8




8. Inventories:




Inventories
      consisted of the following:


June
                  30,
              
              December
                  31,2007
              
              2006Nursery
                  stock
              
              $
              117,506
              
              $
              138,376Materials
                  and supplies
              
              
              8,107
              
              
              8,399Inventories
              
              $
              125,613
              
              $
              146,775Consigned
                  inventories
              
              $
              1,799
              
              $
              542




In
      the
      quarter ended March 31, 2007, the Company recorded a lower of cost or market
      adjustment of approximately $800 associated with its Trenton, South Carolina
      facility. In the quarter ended June 30, 2006, the Company recorded inventory
      write-offs for scrap and excess inventory of approximately $5,000 also related
      to its Trenton, South Carolina facility due to adverse weather conditions and
      continued poor operating results.





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
      to,
      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.  Accordingly, the Company did not need a waiver
      under the Senior Credit Facility relating to its failure to timely file this
      Form 10-Q for the second quarter of 2007.




*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 0.75%.
      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 1.75%. As of June
      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. On June 30, 2007 the Company had unused
      borrowing capacity of approximately $77,000 after applying the borrowing base
      limitations and letters of credits to its available borrowings.




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




10




*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.




*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 June 30, 2007 the Company believes the amount it has accrued for the probable
      estimated claim and related insurance recovery is sufficient.




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





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. 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
      to
      obtain alternative financing for our debt on reasonable terms or otherwise.
      In
      that event, in order to pay the principal of our debt, we would be required
      to
      sell our equity securities, which would be made more difficult by the recent
      delisting of our common stock, sell our assets or take other actions which
      could
      adversely impact our business, operations and shareholders. The foregoing
      actions may not enable us to pay the entire principal of our debt.




11


14. Fixed
      Asset Impairment:




As
      a
      result of continuing operating losses experienced at the Company’s Trenton,
      South Carolina facility during the quarter ended March 31, 2007, and based
      on
      the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” the Company determined that the carrying values of the
      related long-lived assets were further impaired. On July 26, 2007, the Company
      received approval from its Board of Directors to pursue the sale of this
      facility. The fair value used to determine the $1,100 impairment charge was
      based on estimates of fair value, including a third party letter of intent
      to
      purchase the facility. The impairment charge was recorded as a component of
      operating loss in the first quarter of 2007 condensed consolidated statements
      of
      operations.





15. Subsequent
      Events:




Effective
      July 17, 2007, Robert A. Ferguson, who served as Chief Executive Officer,
      President and a director of the Company, was terminated and is no longer
      employed by or serves as an officer of the Company and its subsidiary. Mr.
      Ferguson will be entitled to receive (i) one time severance payment of $650,
      less applicable withholding, (ii) a lump sum cash payment delivered by no later
      than April 20, 2008 equal to a pro rata portion of Mr. Ferguson’s bonus for the
      2007 fiscal year (determined upon the basis of the pro rata portion of Hines'
      sales to the date of termination as compared to the sales for the full fiscal
      year) and (iii) the Company shall continue to pay Mr. Ferguson’s health
      insurance benefits for the period beginning July 18, 2007 and ending August
      17,
      2008.




Also
      effective July 17, 2007, Stephen Avery, who served as Vice President of
      Operational Excellence & Human Resources of the Company, resigned from the
      Company. In connection with Mr. Avery's departure, the Company entered into
      a
      Confidential Resignation Agreement and General Release with Mr. Avery on July
      17, 2007. Pursuant to the terms of the Avery Resignation Agreement and in
      consideration for the releases and agreements of Mr. Avery contained therein,
      Mr. Avery will be entitled to receive (i) a one time severance payment of
      approximately $104, less applicable withholding; (ii) the pro rata portion
      of
      any bonus which Mr. Avery otherwise would have been entitled to receive had
      Mr.
      Avery otherwise been employed by the Company on the last day of the 2007 fiscal
      year, which bonus shall be paid at the same time that other bonuses for such
      ended fiscal year are paid to other employees of the Company, consistent with
      past practices; and (iii) the Company continued to pay Mr. Avery’s health
      insurance benefits from July 18, 2007 to August 31, 2007.




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




On
      July
      26, 2007, the Company received approval from its Board of Directors to pursue
      the sale of its Trenton, South Carolina facility. On August 29, 2007, the
      Company entered into an asset purchase agreement to sell substantially all
      of
      the land and assets located at its Trenton, South Carolina facility. The gross
      sales price of the Trenton, South Carolina facility was $5,700 and is subject
      to
      typical representations and warranties and indemnities. As of June 30, 2007,
      the
      carrying values of the assets associated with the Trenton, South Carolina
      facility consisted of property and equipment of $4,800 and inventory of
      $505.




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




On
      August
      28, 2007, G. Ronald Morris resigned as a member of the Board of Directors.
      Mr.
      Morris had served as a member of the Board of Directors since March 2001 and
      was
      a member of the Compensation Committee, Audit Committee and the Nomination
      and
      Corporate Governance committee.




12


**Item
      2.** **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**




*Unless
      the context otherwise requires, the term (1) “Hines Horticulture” means
      Hines Horticulture, Inc., a Delaware corporation, (2) the term “Hines
      Nurseries” means Hines Nurseries, Inc., a California corporation, and a wholly
      owned subsidiary of Hines Horticulture and (3) the terms “we,” “us” and
“our” mean, collectively, the combined entity of Hines Horticulture and its
      wholly owned subsidiary.*




***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 and the Company’s
      Quarterly Report on Form 10-Q filed on August 23, 2007.




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




***Overview***




We
      are a
      leading national supplier of ornamental shrubs, color plants and container-grown
      plants and our continuing operations consist of eight commercial nursery
      facilities located in Arizona, California, Oregon, South Carolina and Texas.
      We
      produce approximately 5,900 varieties of ornamental shrubs and color plants
      and
      we sell to more than 1,180 retail and commercial customers, representing more
      than 6,670 outlets throughout the United States and Canada. As of June 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 2024. In addition, we had approximately
      $53.0
      million in net operating loss carryforwards for state income tax reporting
      purposes. Our state net operating losses in certain states begin expiring in
      2008.




13




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 June 30, 2007, we
      had
      a current deferred liability for deferred income taxes of $32.9 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
      June 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.
      The total book value of assets related to the sale was approximately $0.5
      million. The Option Agreement provided that the gross purchase price of the
      property be $15.1 million. On April 3, 2006, we sold the property for a net
      purchase price of $14.3 million. Total proceeds from the Option Agreement and
      sale of the property were $16.9 million, which included $2.6 million in option
      payments previously received.




Under
      the
      terms of the Option Agreement, we are able to transition off the property
      in three phases from 2006 to 2008. The first phase of transition was completed
      on July 1, 2006 and consisted of 24 acres. The second phase of transition 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 position with respect to this property. In
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 98, we
      recorded the proceeds as a financing obligation. When we complete the
      transition, which is expected to be completed on July 1, 2008, we will remove
      the net book value of the assets and expect to recognize a gain of $16.3
      million.




14




***Sale
      of Trenton, South Carolina Facility***




On
      July
      26, 2007, we received approval from our Board of Directors to pursue the sale
      of
      our Trenton, South Carolina facility. On August 29, 2007, we entered into an
      asset purchase agreement to sell substantially all of the land and assets
      located at our Trenton, South Carolina facility. The gross sales price of the
      Trenton, South Carolina facility was $5.7 million and is subject to typical
      representations and warranties and indemnities.




***Delisting
      from Nasdaq***




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




***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 “Accounting
      for Leases,” 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.





**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.




15




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




*Net
      Sales.* Net
      sales
      of $117.6 million for the three months ended June 30, 2007 decreased $6.8
      million, or 5.5%, from net sales of $124.4 million for the comparable period
      in
      2006. The decrease in net sales was mainly due to adverse weather in the Midwest
      and Northeast occurring early in the second quarter.




*Gross
      Profit.* Gross
      profit of $54.3 million for the three months ended June 30, 2007 decreased
      $3.2
      million, or 5.6%, from gross profit of $57.5 million for the comparable period
      in 2006. Gross profit as a percentage of sales for the quarter decreased to
      46.2% from 46.3% for the comparable period in 2006. The slight decrease in
      gross
      profit was mainly due to a lower of cost or market adjustment and an excess
      inventory write off totaling $2.0 million recorded at our Trenton, South
      Carolina facility and the decrease in net sales, as discussed above. This was
      partially offset by an increase in gross profit margins at our other facilities
      as lower cost inventory produced in 2006 was sold.




*Distribution
      Expenses.* Distribution
      expenses of $26.2 million for the three months ended June 30, 2007 decreased
      $1.6 million, or 5.7%, from $27.7 million for the comparable period in 2006.
      This decrease was mainly due to decreased sales volume. As a percentage of
      net
      sales, distribution expenses for the quarter decreased to 22.2% from 22.3%
      for
      the comparable period of 2006.




*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses of $16.7 million for the three months ended
      June 30, 2007 decreased by $1.2 million, or 6.7%, from $17.9 million for the
      comparable period in 2006. Selling expenses of $9.5 million for the three months
      ended June 30, 2007 decreased $2.9 million from $12.4 million for the comparable
      period in 2006. The decrease in selling expenses was mainly due to decreased
      sales. General and administrative expenses of $7.2 million for the three months
      ended June 30, 2007 increased $1.7 million from $5.5 million for the comparable
      period in 2006. The increase in general and administrative expenses was mainly
      due to an increase of $2.1 million in personnel costs and higher costs related
      to the implementation of certain provisions of the Sarbanes-Oxley Act of 2002
      and an increase of $0.3 million in legal and professional fees related to
      additional work performed in connection with our 2006 fiscal year and other
      matters. These amounts were offset by decreases in other general and
      administrative expenses.




*Other
      Operating Expenses.* Other
      operating expenses for the three months ended June 30, 2007 were nominal
      compared to $1.1 million for the comparable period in 2006. Other operating
      expenses for the second quarter of 2006 consisted primarily of consulting fees
      relating to our productivity improvement initiatives.




*Goodwill
      Impairment Charge.* Goodwill
      impairment charge for the three months ended June 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. This impairment
      charge was recorded as a result of our carrying value of equity exceeding our
      fair value at June 30, 2007.




*Operating
      (Loss) Income.* Operating
      loss for the three months ended June 30, 2007 was $27.4 million compared to
      an
      operating income of $10.8 million for the comparable period in 2006. The swing
      from income to loss was mainly due to the goodwill impairment charge and reduced
      gross profits, which were partially offset by the decrease in distribution
      and
      selling and general and administrative expenses in the period.




*Other
      Expenses.* Other
      expenses of $5.1 million for the three months ended June 30, 2007 decreased
      $0.4
      million, or 7.7%, from $5.6 million for the comparable period in 2006 primarily
      due to lower interest expense as a result of lower outstanding
      debt.




*Income
      Tax (Benefit) Provision.* Income
      tax benefit was $9.3 million for the three months ended June 30, 2007 compared
      to a provision of $2.1 million for the comparable period in 2006. Our effective
      income tax rate was 28.6% for the three months ended June 30, 2007, down from
      40.6% from the comparable period a year ago  The swing from provision to
      benefit is primarily due to a loss from continuing operations before income
      taxes, offset by a lower effective income tax rate.  The decline in the
      effective income tax rate is due to the write-off of goodwill during the three
      months ended June 30, 2007. This impairment charge is non-deductible for income
      tax purposes.




*(Loss)
      Income from Continuing Operations.* Loss
      from continuing operations of $23.2 million for the three months ended June
      30,
      2007 decreased $26.3 million, from income of $3.1 million for the comparable
      period in 2006. The loss from continuing operations for the three months ended
      June 30, 2007 was attributable to the goodwill impairment charge and other
      factors discussed above.




16




*(Loss)
      Income from Discontinued Operations, Net of Income Taxes.* Income
      from discontinued operations, net of income taxes, was $25.6 million for the
      three months ended June 30, 2007 compared to a loss from discontinued
      operations, net of income taxes, of $3.6 million for the comparable period
      in
      2006. The swing from loss to income was primarily due to the gain recognized
      on
      the Miami Property sale and the sale of the last remaining parcel of land in
      Miami, Florida, which consisted of 79 acres of land and
      improvements.




*Net
      Income (Loss).* ** Net
      income of $2.4 for the three months ended June 30, 2007 increased $2.9 million
      compared to a net loss of $0.4 million for the comparable period in 2006. The
      swing from net loss to net income was mainly attributable to the gain recorded
      on the Miami Property sale, offset by the goodwill impairment charge, as well
      as
      other factors discussed above.




**Six
      Months Ended June 30, 2007 compared to Six Months Ended June 30,
      2006**




*Net
      Sales.* Net
      sales
      of $170.9 million for the six months ended June 30, 2007 increased by $0.1
      million, or 0.1%, from net sales of $170.8 million for the comparable period
      in
      2006. Sales for the six months ended June 30, 2007 were flat compared to a
      year
      ago primarily due to increases in sales in the Northwest and Southwest, which
      were offset by decreases in the Northeast and Midwest.




*Gross
      Profit.* Gross
      profit of $78.8 million for the six months ended June 30, 2007 increased $1.3
      million, or 1.6%, from gross profit of $77.6 million for the comparable period
      in 2006. Gross profit as a percentage of sales for the six months ended June
      30,
      2007 increased to 46.1% from 45.4% for the comparable period in 2006. The
      increase in gross profit and gross profit margin was mainly a result of lower
      cost inventory produced in 2006 and sold in 2007, which increases were partially
      offset by $2.8 million of lower of cost or market and excess inventory
      adjustments recorded during the first six months of 2007.




*Distribution
      Expenses.* Distribution
      expenses of $37.6 million for the six months ended June 30, 2007 decreased
      $0.2
      million, or 0.6%, from $37.9 million for the comparable period in 2006. As
      a
      percentage of net sales, distribution expenses for the period decreased to
      22.0%
      from 22.2% for the comparable period of 2006.




*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses of $30.8 million for the six months ended
      June 30, 2007 increased by $1.6 million, or 5.4%, from $29.2 million for the
      comparable period in 2006. Selling expenses of $17.2 million for the six months
      ended June 30, 2007 decreased $1.7 million from $18.9 million for the comparable
      period in 2006. The decrease in selling expenses was mainly due to a reduction
      in commission related compensation of $1.4 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 $0.3 million which also contributed to the
      decrease. General and administrative expenses of $13.6 million for the six
      months ended June 30, 2007 increased $3.2 million from $10.3 million for the
      comparable period in 2006. The increase in general and administrative expenses
      was mainly due to an increase of $3.3 million in personnel costs and higher
      costs related to the implementation of certain provisions of the Sarbanes-Oxley
      Act of 2002 and an increase of $0.5 million in legal and professional fees
      related to additional work performed in connection with our 2006 fiscal year
      and
      other matters. These amounts were offset by a decrease in other general and
      administrative expenses.




*Other
      Operating Expenses.* Other
      operating expenses for the six months ended June 30, 2007 were nominal compared
      to $1.9 million for the comparable period in 2006. Other operating expenses
      for
      the six months ended June 30, 2006 consisted primarily of consulting fees
      relating to our productivity improvement initiatives.




*Goodwill
      Impairment Charge.* Goodwill
      impairment charge for the six months ended June 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 as a result of our carrying value of equity
      exceeding our fair value at June 30, 2007.




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




*Operating
      (Loss) Income.* Operating
      loss for the six months ended June 30, 2007 was $29.6 million compared to
      operating income of $8.6 million for the comparable period in 2006. The
      swing from income to loss was mainly due to the goodwill impairment charge,
      which was partially offset by the decrease in distribution and selling and
      general and administrative expenses in the six months ended June 30, 2007.




17




*Other
      Expenses.* Other
      expenses of $11.5 million for the six months ended June 30, 2007 increased
      $0.4
      million, or 3.5%, from $11.1 million for the comparable period in 2006. The
      increase is primarily due to the write off of deferred financing costs
      associated with the termination of our previous senior credit facility, offset
      by lower interest expense due to lower outstanding debt.




*Income
      Tax Benefit.* Our
      effective income tax rate was 30.8% for the
      six months ended June 30, 2007, down from 38.3% for the comparable period a
      year
      ago.  Income tax benefit was $12.6 million for the six months ended June
      30, 2007 compared to $0.9 million for the comparable period in 2006.  The
      increase in income tax benefit is primarily due to lower income from continuing
      operations before income taxes, offset by a lower effective income tax
      rate. The
      decline in the effective income tax rate is due to the write off of goodwill
      during the six months ended June 30, 2007. This impairment charge is
      non-deductible for income tax purposes.




*(Loss)
      Income from Continuing Operations.* Loss
      from continuing operations of $28.4 million for the six months ended June 30,
      2007 increased $26.9 million, from a loss of $1.5 million for the comparable
      period in 2006. The increase in the 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 $25.6 million for the
      six
      months ended June 30, 2007 compared to a loss from discontinued operations,
      net
      of income taxes, of $3.2 million for the comparable period in 2006. The swing
      from loss to income was primarily due the gain on the Miami Property sale of
      $39.9 million and the sale of the last remaining parcel of land in Miami,
      Florida, which consisted of 79 acres of land and improvements.




*Net
      Loss.* ** Net
      loss
      of $2.8 million for the six months ended June 30, 2007 decreased $1.9
      million compared to a loss of $4.7 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. 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
      would be made more difficult by the recent delisting of our common stock, sell
      our assets or take other actions which could adversely impact our business,
      operations and shareholders. The foregoing actions may not enable us to pay
      the
      entire principal of our debt.




Net
      cash
      provided by operating activities of continuing operations was $6.8 million
      for
      the six months ended June 30, 2007 compared to $4.4 million for the comparable
      period in 2006. The increase in cash provided by operating activities of
      continuing operations was mainly due to a decrease in working capital levels,
      resulting primarily from smaller increases in accounts receivable balances
      at
      June 30, 2007 when compared with June 30, 2006. The smaller increase in accounts
      receivable resulted mainly from our facility dispositions.




Net
      cash
      used in operating activities of discontinued operations was $3.7 million for
      the
      six months ended June 30, 2007 compared to cash provided by operating activities
      of discontinued operations of $1.0 million for the comparable period in 2006.
      The swing from cash provided by to cash used in operating activities of
      discontinued operations was mainly due to a decrease in accounts payable and
      accrued liabilities resulting from the sale of our Northeast
      facilities.




Net
      cash
      used in investing activities from continuing operations was $3.8 million for
      the
      six months ended June 30, 2007 compared to $3.5 million for the same period
      a
      year ago. The increase in cash used in investing activities was mainly due
      to an
      increase in capital expenditures related to our Winters South expansion as
      we
      continue to transition off of our Lagoon Valley and our Irvine, California
      facilities.




18




Net
      cash
      provided by investing activities from discontinued operations was $14.0 million
      for the six months ended June 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 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
      six months ended June 30, 2007 compared to net cash provided of $4.1 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
      financing obligation of $14.3 million incurred in 2006 as well as $1.3 million
      of deferred financing costs incurred in 2007 in connection with our Senior
      Credit Facility. These amounts were partially offset by a reduction in net
      borrowings on our Senior Credit Facility compared to the same period a year
      ago.




We
      typically draw down our revolving loan in the first and fourth quarters to
      fund
      our seasonal inventory buildup and seasonal operating expenses. Based on past
      history, approximately 72-74% of our sales generally occur in the first half
      of
      the year, generally allowing us to reduce borrowing under our revolving loan
      in
      the second and third quarters. On June 30, 2007, we had unused borrowing
      capacity of approximately $77.0 million after applying the borrowing base
      limitations and letters of credit to our available borrowings.




At
      June
      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 June 30, 2007.


Payments
                  Due by PeriodContractual
                  Cash Obligations
              
              Total
              
              Less
                  than 1 year
              
              1-3
                  years
              
              4-5
                  years
              
              After
                  5 years(In
                  millions)Revolving
                  facility
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Senior
                  notes
              
              
              175.0
              
              
              -
              
              
              -
              
              
              175.0
              
              
              -Interest
              
              
              97.7
              
              
              19.6
              
              
              39.3
              
              
              38.8
              
              
              -Operating
                  leases
              
              
              8.0
              
              
              3.0
              
              
              3.5
              
              
              1.2
              
              
              0.3Total
              
              $
              280.7
              
              $
              22.6
              
              $
              42.8
              
              $
              215.0
              
              $
              0.3




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




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 .




***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. The Senior Credit Facility was used to refinance the outstanding
      revolving loans under the previous senior credit facility.




19




*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. 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 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.  Accordingly, we did not need a waiver under the Senior Credit
      Facility relating to our failure to timely file this Form 10-Q for the second
      quarter of 2007.




*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 0.75%. 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 1.75%. At June 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 June 30, 2007 we had unused borrowing capacity of approximately
      $77.0 million after applying the borrowing base limitations and letters of
      credit to our available borrowings.




20




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. On or after October 1, 2007, we are entitled, at our option, to
      redeem all or a portion of the Senior Notes at redemption prices ranging from
      100.000% to 105.125%, depending on the redemption date, plus accrued and unpaid
      interest.




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




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




**Critical
      Accounting Policies**




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




*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.




21




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




*Sales
      Returns and Allowances* :
      Amounts
      accrued for sales returns and allowances are maintained at a level believed
      adequate by management to absorb probable losses in the trade receivable due
      to
      sales returns and discounts and allowances. The provision rate is established
      by
      management using the following criteria: past sales returns experience, current
      economic conditions and other relevant factors, and are re-evaluated on a
      quarterly basis. The allowance is netted against sales. Allowances are provided
      at the time 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 June 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.




*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.




22




*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 current replacement cost. We generally determine current replacement
      cost on a site by site basis. Nursery stock also includes plants that are not
      yet ready for sale.  Our ornamental nursery stock has an average growing
      period of approximately eighteen months. All nursery stock is classified as
      a
      current asset based on our normal operating cycle.  Materials and supplies
      not yet used in the production process are stated at the lower of cost
      (first-in, first-out) or market.




*Income
      Taxes*




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




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




As
      of
      June 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.




*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.




23




*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 June 30, 2007 the carrying amount and estimated fair value of our debt was
      $175.0 million and $140.4 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.





**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.




24




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:





sWe
      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.





sWe
      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.





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




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




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




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




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




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.




25




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





**PART
      II. OTHER INFORMATION**





**Item
      1.Legal
      Proceedings**





On
      July
      18, 2006, Mr. Jean-Paul filed an action against us and other defendants in
      the
      Eleventh Judicial Circuit, Dade County, Florida, alleging negligence in
      connection with an automobile accident involving one of our trailers and a
      third-party carrier.  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 June 30, 2007 we believe the
      amount we have accrued for the probable estimated claim and related insurance
      recovery at December 31, 2006 is sufficient.




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 Report on Form 10-Q for
      the quarter ended March 31, 2007  and
      except as set forth below.




**Our
      nursery facility in Irvine, California is entirely on leased land and we do
      not
      expect the leases to be extended beyond their current
      terms.**




Our
      nursery facility and headquarters in Irvine, California are entirely on leased
      land. In 2003, we entered into an amended lease agreement for this facility
      in
      which 63 new acres were added and the lease expiration schedule was changed.
      Under the amended lease agreement, the lease on 114 acres expired on June 30,
      2006, the lease on 140 acres expired on December 31, 2006 and the lease on
      the
      remaining 288 acres expires on December 31, 2010. On January 1, 2007, we entered
      into another amendment of the 140 acre lease that expired on December 31, 2006,
      which amendment extended our lease on 50 of the 140 acres until June 30, 2007.
      We do not expect the lease on the remaining 288 acres to be extended beyond
      its
      current terms. For the 204 acres that expired in 2006, we transitioned a
      majority of the production to our Winters, California facility and the remaining
      production to the parcel recently added to our facility in Irvine. For the
      50
      acres that expired on June 30, 2007 we have completed the process of
      transitioning capacity off this portion of land similar to the 204 acres that
      expired in 2006. For the 288 acres that will expire at the end of 2010, we
      will
      be required to establish new production facilities or transition production
      to
      existing facilities. We may incur substantial costs in connection with the
      establishment of these new production facilities or the transition of production
      to existing facilities.




We
      may
      not be successful in establishing suitable replacement production facilities
      or
      in transitioning production to existing facilities. If we are unsuccessful
      in
      these efforts, our net sales, cash flows and operating income could be
      materially adversely affected. In addition, when we vacate the facility in
      2010,
      we currently estimate that we will incur approximately $1.3 million in removal
      and asset retirement obligations. We may incur significant expenses beyond
      what
      we have forecasted if additional retirement obligations are required.
      Significant costs in excess of our estimates could have a material adverse
      effect on our business, financial position, results of operations and operating
      cash flows.




**Our
      business will suffer if certain senior executives discontinue employment with
      us
      or if we are unable to recruit and retain highly skilled
      staff.**




Our
      success is largely dependent on the skills, experience and efforts of our senior
      management, including James R. Tennant (President and Chief Executive Officer)
      and Claudia M. Pieropan ( Chief
      Financial Officer, Secretary and Treasurer ).
      Mr.
      Tennant was elected President and Chief Executive Officer in July 2007, upon
      the
      departure from the Company of Robert A. Ferguson. The loss of services of one
      or
      more members of our senior management can interrupt and otherwise adversely
      affect our business. We do not maintain key-man life insurance policies on
      any
      members of management. No members of senior management are bound by non-compete
      agreements, and if any such members were to depart and subsequently compete
      with
      us, such competition could have a material adverse effect on us. Our business
      also depends on our ability to continue to recruit, train and retain skilled
      employees, particularly skilled growers and sales personnel. The loss of the
      services of any key personnel, or our inability to hire new personnel with
      the
      requisite skills, could impair our ability to develop new products or enhance
      existing products, sell products to our customers or manage our business
      effectively.





**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. Pieropan
              Chief
                Financial Officer,
              Secretary
                and Treasurer
              (Principal
                financial officer
              and
                duly authorized officer)Date:
              September 7, 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 and Consent 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
            Limited
                Waiver to Loan and Security Agreement, dated May 29, 2007, by and
                among
                Hines Nurseries, Inc., and Bank of America, N.A., PNC Bank, National
                Association and GMAC Commercial Finance LLC. (1)10.3
            Limited
                Waiver to Loan and Security Agreement, dated June 21, 2007, by and
                among
                Hines Nurseries, Inc., and Bank of America, N.A., PNC Bank, National
                Association and GMAC Commercial Finance LLC. (1)10.4
            Limited
                Waiver to Loan and Security Agreement, dated June 28, 2007, by and
                among
                Hines Nurseries, Inc., and Bank of America, N.A., PNC Bank, National
                Association and GMAC Commercial Finance LLC. (1)10.5
            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. (2)31.1
              
              31.2
              
              32.1
              
              32.2
            Certification
                of Chief Executive Officer Pursuant To Rules 13a-14(a) and 15d-14(a)
                under
                the Securities Exchange Act of 1934, as amended. (+)
              
              Certification
                of Chief Financial Officer Pursuant To Rules 13a-14(a) and 15d-14(a)
                under
                the Securities Exchange Act of 1934, as amended. (+)
              
              Certification
                of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350. Rule
                13a-14(d)/15d-14(d) (+)
              
              Certification
                of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350. Rule
                13a-14(d)/15d-14(d) (+)


_____________


+
      Filed
      herewith





(1)
              (2)
            Incorporated
                by reference to Hines Horticulture, Inc.’s Form10-K
                filed onJuly
                10,2007.
              Incorporated
                by reference to Hines Horticulture, Inc.’s Form 8-K filed on August 15,
                2007.








28