<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

                                   (Mark One)

           (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                       For the quarter ended June 30, 2002

          ( ) 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
                                     0-24439

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


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

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

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

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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( )

As of July 31, 2002 there were 22,072,549 shares of Common Stock, par value
$0.01 per share, outstanding.
================================================================================


<PAGE>


                            HINES HORTICULTURE, INC.


                                      INDEX

                          PART I. FINANCIAL INFORMATION


Item 1.  Financial Statements                                          Page No.

         Consolidated Balance Sheets as of
         June 30, 2002 (unaudited) and December 31, 2001                 1

         Consolidated Statements of Operations for the Three Months
         and Six Months Ended June 30, 2002 and 2001 (unaudited)         2

         Consolidated Statements of Cash Flows for the
         Six Months Ended June 30, 2002 and 2001 (unaudited)             3

         Notes to the Consolidated Financial Statements                  4

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                       14

Item 3.  Quantitative and Qualitative Disclosures About Market Risk      30


                           PART II. OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders             31


Item 6.  Exhibits and Reports on Form 8-K                                31

         Signatures                                                      32



Note: Items 1, 2, 3 and 5 of Part II are omitted because they are not
      applicable.


<PAGE>
<TABLE>

                                  HINES HORTICULTURE, INC.
                                CONSOLIDATED BALANCE SHEETS
                            June 30, 2002 and December 31, 2001
                         (Dollars in thousands, except share data)
<CAPTION>

                                                               June 30,      December 31,
                                                                2002             2001
                                                             -------------   -------------
                                                              (Unaudited)
<S>                                                          <C>             <C>
ASSETS
------
CURRENT ASSETS:
        Cash                                                 $        288    $          -
        Accounts receivable, net of allowance for
           doubtful accounts of $1,269 and $1,303                  72,190          28,182
        Inventories                                               141,998         164,675
        Prepaid expenses and other current assets                   9,517           2,322
        Assets of discontinued operations                               -          40,134
                                                             -------------   -------------

                                    Total current assets          223,993         235,313
                                                             -------------   -------------

FIXED ASSETS, net of accumulated depreciation
   and depletion of $33,891 and $30,106                           140,628         142,387
DEFERRED FINANCING EXPENSES, net of
   accumulated amortization of $10,642 and $8,357                   8,856           8,317
ASSETS OF DISCONTINUED OPERATIONS                                       -          95,029
DEFFERED INCOME TAX                                                     -           7,727
GOODWILL                                                          121,897         121,371
                                                             -------------   -------------
                                                             $    495,374    $    610,144
                                                             =============   =============

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

CURRENT LIABILITIES:
        Accounts payable                                     $     13,285    $     12,824
        Accrued liabilities                                        17,436           8,450
        Accrued payroll and benefits                               11,585           7,091
        Accrued interest                                            5,942           2,904
        Long-term debt, current portion                             3,584          43,159
        Borrowings on revolving credit facility                    64,500         100,000
        Liabilities of discontinued operations                          -          37,097
        Deferred income taxes                                      73,024          64,874
                                                             -------------   -------------

                               Total current liabilities          189,356         276,399
                                                             -------------   -------------

LONG-TERM DEBT                                                    178,492         209,639

DERIVATIVE LIABILITY                                                7,406           7,117

DEFERRED INCOME TAXES                                              13,257               -
LIABILITIES OF DISCONTINUED OPERATIONS                                  -          28,244
COMMITMENTS AND CONTINGENCIES                                           -               -
SHAREHOLDERS' EQUITY
        Common Stock
           Authorized - 60,000,000 shares $.01 par value;
           Issued and outstanding - 22,072,549 shares
           at June 30, 2002 and December 31, 2001                     221             221

        Additional paid in capital                                128,781         128,781
        Deficit                                                   (15,408)        (33,282)
        Accumulated other comprehensive loss                       (6,731)         (6,975)
                                                             -------------   -------------

                              Total shareholders' equity          106,863          88,745
                                                             -------------   -------------

                                                             $    495,374    $    610,144
                                                             =============   =============

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


                                          Page 1
</TABLE>
<PAGE>
<TABLE>

                                                HINES HORTICULTURE, INC.
                                         CONSOLIDATED STATEMENTS OF OPERATIONS
                                Three Months and Six Months Ended June 30, 2002 and 2001
                                       (Dollars in thousands, except share data)
                                                      (Unaudited)
<CAPTION>
                                                          Three Months Ended June 30,       Six Months Ended June 30,
                                                             2002            2001            2002             2001
                                                         -------------   -------------   -------------   -------------
<S>                                                      <C>             <C>             <C>             <C>

Sales, net                                               $    182,146    $    174,181    $    250,869    $    241,938
Cost of goods sold                                             86,221          79,294         120,537         112,008
                                                         -------------   -------------   -------------   -------------

    Gross profit                                               95,925          94,887         130,332         129,930
                                                         -------------   -------------   -------------   -------------

Selling and distribution expenses                              46,765          42,641          67,501          61,894
General and administrative expenses                             7,931           8,682          13,432          13,774
Other operating income                                              -               -          (2,103)              -
Amortization of goodwill                                            -             933               -           1,818
                                                         -------------   -------------   -------------   -------------
    Total operating expenses                                   54,696          52,256          78,830          77,486
                                                         -------------   -------------   -------------   -------------

    Operating income                                           41,229          42,631          51,502          52,444

Other expenses
   Interest                                                     6,751           7,582          13,462          15,770
   Interest rate swap agreement expense (income)                1,777            (472)            763           1,520
   Amortization of deferred financing expenses                  1,131           1,138           2,285           2,277
                                                         -------------   -------------   -------------   -------------
                                                                9,659           8,248          16,510          19,567
                                                         -------------   -------------   -------------   -------------

Income before provision for income taxes,
  discontinued operation, and extraordinary items              31,570          34,383          34,992          32,877

Income tax provision                                           12,947          14,068          14,350          13,452
                                                         -------------   -------------   -------------   -------------

Income from continuing operations                              18,623          20,315          20,642          19,425

(Loss) income from discontinued operations, net of tax         (3,198)          1,757          (1,742)          3,849

Extraordinary item, net of tax benefit                              -               -          (1,026)              -
                                                         -------------   -------------   -------------   -------------

Net income                                               $     15,425    $     22,072    $     17,874    $     23,274
                                                         =============   =============   =============   =============


Basic and diluted earnings per share:

Income per common share from
  continuing operations                                  $       0.84    $       0.92    $       0.93    $       0.88

(Loss) income per common share from
  discontinued operations                                $      (0.14)   $       0.08    $      (0.07)   $       0.17

Extraordinary item                                       $          -    $          -    $      (0.05)   $          -
                                                         -------------   -------------   -------------   -------------
Net income per common share                              $       0.70    $       1.00    $       0.81    $       1.05
                                                         =============   =============   =============   =============

Weighted average shares outstanding--Basic                 22,072,549      22,072,549      22,072,549      22,072,549
                                                         =============   =============   =============   =============
Weighted average shares outstanding--Diluted               22,162,549      22,079,234      22,136,021      22,090,284
                                                         =============   =============   =============   =============

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

                                                        Page 2
</TABLE>
<PAGE>
<TABLE>

                               HINES HORTICULTURE, INC.
                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                        Six Months Ended June 30, 2002 and 2001
                       (Dollars in thousands, except share data)
                                      (Unaudited)
<CAPTION>

                                                                 2002         2001
                                                              ----------   ----------
<S>                                                           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                $  17,874    $  23,274
    Loss (income) from discontinued operations                    1,742       (3,849)
    Adjustments to reconcile net income to
      net cash provided by operating activities -
         Depreciation, depletion and amortization                 4,305        5,974
         Amortization of deferred financing costs                 2,285        2,277
         Interest rate swap agreement expense                       763        1,520
         Gain on sale of assets                                  (2,103)           -
         Extraordinary item (net of tax)                          1,026            -
         Deferred income taxes                                   14,350       13,440
                                                              ----------   ----------
                                                                 40,242       42,636
Change in working capital accounts
    Accounts receivable                                         (44,008)     (43,920)
    Inventories                                                  22,677       16,527
    Prepaid expenses and other current assets                     1,019       (1,587)
    Accounts payable and accrued liabilities                     10,541       20,991
                                                              ----------   ----------
      Change in working capital accounts                         (9,771)      (7,989)
                                                              ----------   ----------

Net cash provided by operating activities                        30,471       34,647

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of fixed assets                                     (3,323)     (12,948)
    Net cash (used in) provided by discontinued operations       (4,320)       4,631
    Proceeds from sale of discontinued operations               123,429            -
    Proceeds from sale of land                                    3,116            -
    Acquisitions, adjusted                                       (1,426)      (8,311)
                                                              ----------   ----------
        Net cash provided by (used in) investing activities     117,476      (16,628)
                                                              ----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES
    Borrowings on revolving line of credit                       90,432       76,900
    Repayments on revolving line of credit                     (125,932)     (88,900)
    Repayments of long-term debt                               (107,959)      (6,049)
    Deferred financing costs incurred                            (4,200)           -
    Repayments of notes receivables from stock sales                  -           30
                                                              ----------   ----------
        Net cash used in financing activities                  (147,659)     (18,019)
                                                              ----------   ----------

NET INCREASE IN CASH                                                288            -

CASH, beginning of period                                             -            -
                                                              ----------   ----------
CASH, end of period                                           $     288    $       -
                                                              ==========   ==========

Supplemental disclosure of cash flow information:
    Cash paid for interest                                    $  11,674    $  17,774
    Cash paid for income taxes                                $     477    $     404


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


                                        Page 3
</TABLE>

<PAGE>

                            HINES HORTICULTURE, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
                             JUNE 30, 2002 AND 2001
                                   (UNAUDITED)

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

         As of June 30, 2002, Hines Horticulture, Inc. ("Hines" or the
"Company"), a Delaware corporation, produces and distributes horticultural
products through two operating divisions: (i) its Nursery division, and (ii) its
Color division. The Nursery division and Color division make up the green goods
business. The green goods business is conducted through Hines Nurseries, Inc.
("Hines Nurseries"), a wholly owned subsidiary of Hines. Hines Nurseries is a
leading national supplier of ornamental shrubs, color plants and container-grown
plants with commercial nursery facilities located in Arizona, California,
Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and Texas.
Hines Nurseries markets its products to retail and commercial customers
throughout the United States.

         As of December 31, 2001, the Company also had a third division, the
growing media business. The growing media business was conducted through Sun Gro
Horticulture, Inc. ("Sun Gro-U.S."), a wholly owned subsidiary of Hines
Nurseries, Sun Gro-U.S.'s wholly owned subsidiary, Sun Gro Horticulture Canada
Ltd. ("Sun Gro-Canada"), and Sun Gro-Canada's direct and indirect Canadian
subsidiaries.

         During December 2001, the Company's Board of Directors approved and
authorized management to proceed with a planned sale of Sun Gro Canada and the
assets of Sun Gro-U.S. to a Canadian income fund. On March 27, 2002, the Company
sold the assets of Sun Gro-U.S. and the stock of Sun Gro Canada, its growing
media business, to the Sun Gro Horticulture Income Fund, a newly established
Canadian income fund. The assets sold included 14 facilities located across
Canada and the United States and control of approximately 50,000 acres of peat
bogs in Canada. Hines will no longer harvest, produce or sell peat moss or have
the rights to the Sunshine, Parkland Fairway, Black Gold, Lakeland Grower,
Alberta Rose, Nature's and Gardener's Gold trade names. Hines received net
proceeds of approximately $120,000 from the sale, which were used to pay down
outstanding bank debt. The Company recognized a $1,900 loss, net of tax, from
the sale of its growing media business for the six months ended June 30, 2002.
The Company's current operations consist solely of its Nursery and Color
divisions.

         The consolidated financial statements include the accounts of Hines and
its wholly owned subsidiaries after elimination of inter-company accounts and
transactions. In 2001 the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 144 (Accounting for the Impairment
or Disposal of Long-lived Assets), and accordingly, the Company's consolidated
financial statements have been restated to reflect the financial position,
results of operations and cash flows of the Sun Gro business as "Discontinued
Operations." Refer to Note 8 "Guarantor/Non-guarantor Disclosures" for
information about the Company's guarantors for the six months ended June 30,
2002.

                                     Page 4
<PAGE>


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

         The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments (consisting of only normal recurring
adjustments), which are necessary to state fairly 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, except in
regard to material contingencies or recent significant events, may be determined
in that context.

         Accordingly, footnote and other disclosures, which would substantially
duplicate the disclosures contained in the Form 10-K, filed on April 1, 2002 by
Hines Horticulture, Inc. under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), have been omitted. The financial information herein is not
necessarily representative of a full year's operations.

3.       Earnings Per Share:
         -------------------

         Earnings per share are calculated in accordance with SFAS No. 128
(Earnings per Share), which requires the Company to report both basic earnings
per share, based on the weighted-average number of common shares outstanding,
and diluted earnings per share, based on the weighted-average number of common
shares outstanding adjusted to include the potentially dilutive effect of
outstanding stock options and warrants. For the six months ended June 30, 2002,
the incremental shares related to 440 warrants outstanding resulted in a
difference between basic and diluted earnings per share. Additionally, for the
six months ended June 30, 2002, shares related to the underlying employee stock
options in the amount of 2,213 were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive.

4.       Adoption Of Accounting Pronouncements:
         --------------------------------------

         In October 2001, the FASB issued SFAS No. 144 (Accounting for the
Impairment or Disposal of Long-Lived Assets). SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of), and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30 (Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions), for the disposal of a segment of a business. SFAS No. 144 shall
be effective for financial statements issued for fiscal year beginning after
December 15, 2001, but early adoption is encouraged. The Company adopted SFAS
No. 144 in 2001.

         Effective January 1, 2001, Hines adopted the provisions of SFAS No.
133, (Accounting for Derivative Instruments and Hedging Activities), as amended.
Adopting the provisions of SFAS No. 133 on January 1, 2001 resulted in a
cumulative after-tax charge to Accumulated Other Comprehensive Income as of
January 1, 2001 of $2,334, representing the fair value of the interest rate
agreement, net of tax. This amount is being amortized as interest rate agreement
expense over the term of the debt. For the six months ended June 30, 2002, the
Company recognized a pre-tax loss of $763 reported as Interest rate swap
agreement expense in the Consolidated Statements of Operations related to the
change in the fair value of the interest rate agreement.

                                     Page 5
<PAGE>

         For the twelve months ended December 31, 2002, the Company anticipates
that $560, net of tax, will be charged to the Other Comprehensive Income account
related to the interest rate swap agreement.

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

         Inventories consisted of the following:

                                                        June 30,    December 31,
                                                          2002          2001
                                                       -----------   -----------
         Nursery stock                                 $  132,014    $  155,096
         Material and supplies                              9,984         9,579
                                                       -----------   -----------
         Inventory from continuing operations             141,998       164,675
         Discontinued operations                                -        14,054
                                                       -----------   -----------
         Total inventory                               $  141,998    $  178,729
                                                       ===========   ===========

6.       Comprehensive Income:
         ---------------------

         Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to the Company's
stockholders. The Company's comprehensive income is composed of cumulative
foreign currency translation adjustments and the change in valuation of
derivative instruments. The components of comprehensive income during the six
months ended June 30, 2002 and 2001, were as follows:

                                                       Six Months Ended June 30,
                                                          2002          2001
                                                       -----------   -----------

         Net income                                    $   17,874    $   23,274
         Cumulative foreign currency
             translation adjustments                          (36)         (216)
         Transaction impact upon
             adoption of FAS 133                                -        (2,334)
         Loss on derivatives
             reclassified to earnings                         280           279
                                                       -----------   -----------
         Comprehensive (loss) income                   $   18,118    $   21,003
                                                       ===========   ===========

7.       New Accounting Pronouncements:
         ------------------------------

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 (Business Combinations) and SFAS No. 142 (Goodwill and Other
Intangible Assets). SFAS No. 141, among other things, eliminates the use of the
pooling of interests method of accounting for business combinations. Under the
provisions of SFAS No. 142, goodwill will no longer be amortized, but will be
subject to a periodic test for impairment based upon fair values. SFAS No. 141
is effective for all business combinations initiated after June 30, 2001. SFAS
No. 142 is effective for the Company beginning January 1, 2002. SFAS No. 142
requires that goodwill be tested annually for impairment using a two-step
process.

                                     Page 6
<PAGE>

         The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step.

         The second step of the goodwill impairment test measures the amount of
the impairment loss (measured as of the beginning of the year of adoption), if
any, and must be completed by the end of the Company's fiscal year. The
Company's goodwill impairment analysis has not yet been completed. The current
estimate of the impairment charge related to goodwill as of January 1, 2002 is
in the range of $40,000 to $70,000 before tax, pending completion of the
impairment analysis, and is expected to be recorded in the third quarter of the
2002 fiscal year, effective as of January 1, 2002. For the six months ended June
30, 2001 and the year ended December 31, 2001, the Company reported goodwill
amortization of $1,818 and $3,686, respectively, excluding discontinued
operations. As of June 30, 2002, the Company had $121,897 of goodwill.

         In August 2001, Financial Accounting Standards Board issued SFAS No.
143 (Accounting for Asset Retirement Obligations). SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It would be effective for the Company beginning with its 2003 financial
statements. The Company is in the process of evaluating the impact of SFAS No.
143 on its financial statements and will adopt the provisions of this statement
in the first quarter of fiscal year 2003.

         In April 2002, Financial Accounting Standards Board issued SFAS No. 145
(Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections). SFAS No. 145 addresses financial accounting and
reporting for the extinguishments of debt, leases and intangible assets of motor
carriers. It would be effective for the Company beginning with its 2003
financial statements. The Company is in the process of evaluating the impact of
SFAS No. 145 on its financial statements and will adopt the provisions of this
statement in the first quarter of fiscal year 2003.

8.       Segment Information and Guarantor/Non-guarantor Disclosures:
         ------------------------------------------------------------

         Prior to the sale of the growing media business on March 27, 2002, the
Senior Subordinated Notes issued by Hines Nurseries ("the issuer") were
guaranteed by Hines ("the parent guarantor") and by certain subsidiaries of
Hines including Sun Gro-U.S. After the March 27, 2002 sale of the growing media
business, Hines and Enviro-Safe Laboratories, Inc. are the remaining guarantors
and such guarantees are full, unconditional and joint and several. Separate
financial statements of Hines Nurseries are not presented and Hines Nurseries is
not filing separate reports under the Exchange Act because management believes
that they would not be material to investors.

         The following consolidating information shows (a) Hines on a parent
company basis only as the parent guarantor (carrying its investment in its
subsidiary under the equity method), (b) Hines Nurseries as the issuer (carrying
its investment in its subsidiary under the equity method), (c) for periods prior
to March 27, 2002, Sun Gro-U.S. as subsidiary guarantor (carrying its investment
in Sun Gro-Canada under the equity method), (d) for periods prior to March 27,
2002, Sun Gro-Canada and its direct and indirect subsidiaries, as subsidiary
non-guarantors, (e) eliminations necessary to arrive at the information for the
parent guarantor and its direct and indirect subsidiaries on a consolidated
basis and (f) the parent guarantor on a consolidated basis, as follows:



                                     Page 7
<PAGE>


         o    Consolidating balance sheets as of June 30, 2002 (unaudited) and
              December 31, 2001;

         o    Consolidating statements of operations for the three months and
              six months ended June 30, 2002 and 2001 (unaudited); and

         o    Consolidating statements of cash flows for the six months ended
              June 30, 2002 and 2001 (unaudited).





                                     Page 8
<PAGE>
<TABLE>

                                            Guarantor / Non-guarantor Disclosures
                                                 Consolidating Balance Sheet
                                                    As of June 30, 2002
                                                   (Dollars in thousands)
<CAPTION>

                                               ----------------------------------------------------------------------------
                                                               Nursery      Growing Media
                                                               Segment         Segment
                                                                            (Discontinued
                                                                              Operations)
                                               ----------------------------------------------------------------------------
                                                   Hines
                                               Horticulture     Hines
                                                  (Parent     Nurseries        Sun Gro                       Consolidated
                                                Guarantor)     (Issuer)      Horticulture    Eliminations        Total
                                               ----------------------------------------------------------------------------
<S>                                              <C>           <C>           <C>             <C>               <C>
     ASSETS
     ------
Current assets:
    Cash                                         $         -   $      288    $        -      $       -         $      288
    Accounts receivable, net                               -       72,190             -              -             72,190
    Inventories                                            -      141,998             -              -            141,998
    Prepaid expenses and other current assets              -        9,517         8,214         (8,214)             9,517
    Deferred income taxes                                  -            -             -              -                  -
                                               ----------------------------------------------------------------------------
              Total current assets               $         -   $  223,993    $    8,214      $  (8,214)        $  223,993
                                               ----------------------------------------------------------------------------

Fixed assets, net                                          -      140,628             -              -            140,628
Deferred financing expenses, net                           -        8,856             -              -              8,856
Goodwill, net                                              -      121,897             -              -            121,897
Deferred income taxes                                  2,922       28,417             -        (31,339)                 -
Investments in subsidiaries                          111,773            -             -       (111,773)                 -
                                               ----------------------------------------------------------------------------
                                                 $   114,695   $  523,791    $    8,214     $ (151,326)        $  495,374
                                               ============================================================================
    LIABILITIES AND SHAREHOLDERS' EQUITY
    ------------------------------------

Current liabilities:
    Accounts payable                             $         -   $   13,285    $        -      $       -         $   13,285
    Accrued liabilities                                    -       17,436         8,214         (8,214)            17,436
    Accrued payroll and benefits                           -       11,585             -              -             11,585
    Accrued interest                                       -        5,942             -              -              5,942
    Long-term debt, current portion                        -        3,584             -              -              3,584
    Borrowings on revolving credit facility                -       64,500             -              -             64,500
    Deferred income taxes                                  -       73,024             -              -             73,024
    Intercompany accounts                              7,832       (7,832)            -              -                  -
                                               ----------------------------------------------------------------------------
              Total current liabilities                7,832      181,524         8,214         (8,214)           189,356
                                               ----------------------------------------------------------------------------

Long-term debt                                             -      178,492             -              -            178,492
Derivative liability                                       -        7,406             -              -              7,406
Deferred income taxes                                      -       44,596             -        (31,339)            13,257
Shareholders' equity
    Common stock                                         221       17,971             -        (17,971)               221
    Additional paid in capital                       128,781       21,362             -        (21,362)           128,781
    Retained earnings (deficit)                      (15,408)      73,935             -        (73,935)           (15,408)
    Accumulated other comprehensive loss              (6,731)      (1,495)            -          1,495             (6,731)
                                               ----------------------------------------------------------------------------
              Total shareholders' equity             106,863      111,773             -       (111,773)           106,863
                                               ----------------------------------------------------------------------------
                                                 $   114,695   $  523,791    $    8,214     $ (151,326)        $  495,374
                                               ============================================================================


                                                           Page 9
<PAGE>
                                      Guarantor / Non-guarantor Disclosures - (Continued)
                                                 Consolidating Balance Sheet
                                                   As of December 31, 2001
                                                   (Dollars in thousands)

                                               ----------------------------------------------------------------------------
                                                               Nursery      Growing Media
                                                               Segment         Segment
                                                                            (Discontinued
                                                                              Operations)
                                               ----------------------------------------------------------------------------
                                                   Hines
                                               Horticulture     Hines
                                                  (Parent     Nurseries        Sun Gro                       Consolidated
                                                Guarantor)     (Issuer)      Horticulture    Eliminations        Total
                                               ----------------------------------------------------------------------------

       ASSETS
       ------

Current assets:
    Cash                                         $         -   $        -    $        -     $        -         $        -
    Accounts receivable, net                               -       28,182        22,878              -             51,060
    Inventories                                            -      164,675        14,054              -            178,729
    Prepaid expenses and other current assets              -        2,322         3,202              -              5,524
    Deferred income taxes                                  -            -           384           (384)                 -
                                               ----------------------------------------------------------------------------
                     Total current assets        $         -   $  195,179    $   40,518     $     (384)        $  235,313
                                               ----------------------------------------------------------------------------

Fixed assets, net                                          -      150,638        67,651              -            218,289
Deferred financing expenses, net                         250        8,067             -              -              8,317
Goodwill, net                                              -      121,371        19,127              -            140,498
Deferred income taxes                                    253       28,417         3,153        (24,096)             7,727
Investments in subsidiaries                           96,038        4,115        12,308       (112,461)                 -
                                               ----------------------------------------------------------------------------
                                                 $    96,541   $  507,787    $  142,757     $ (136,941)        $  610,144
                                               ============================================================================

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

Current liabilities:
    Accounts payable                             $         -   $   12,824    $    5,840     $        -         $   18,664
    Accrued liabilities                                    -        8,450           879              -              9,329
    Accrued payroll and benefits                           -        7,091         2,139              -              9,230
    Accrued interest                                       -        2,904             -              -              2,904
    Long-term debt, current portion                        -       43,159        21,113              -             64,272
    Borrowings on revolving credit facility                -      100,000             -              -            100,000
    Deferred income taxes                                  -       64,874         7,510           (384)            72,000
    Intercompany accounts                              7,796      (58,993)       51,197              -                  -
                                               ----------------------------------------------------------------------------
                Total current liabilities              7,796      180,309        88,678           (384)           276,399
                                               ----------------------------------------------------------------------------

Long-term debt                                             -      209,639        15,959              -            225,598
Interest rate swap agreement                               -        7,117             -              -              7,117
Deferred income taxes                                      -       20,943        15,438        (24,096)            12,285
Shareholders' equity
    Common stock                                         221       17,971        15,914        (33,885)               221
    Additional paid in capital                       128,781       21,362         7,666        (29,028)           128,781
    Retained earnings (deficit)                      (33,282)      52,221         4,302        (56,523)           (33,282)
    Accumulated other comprehensive loss              (6,975)      (1,775)       (5,200)         6,975             (6,975)
                                               ----------------------------------------------------------------------------
               Total shareholders' equity             88,745       89,779        22,682       (112,461)            88,745
                                               ----------------------------------------------------------------------------

                                                 $    96,541   $  507,787    $  142,757     $ (136,941)        $  610,144
                                               ============================================================================



                                                          Page 10
<PAGE>
                                     Guarantor / Non-guarantor Disclosures - (Continued)
                                            Consolidating Statement of Operations
                                        For the six month period ended June 30, 2002
                                                   (Dollars in thousands)

                                               ----------------------------------------------------------------------------
                                                               Nursery      Growing Media
                                                               Segment         Segment
                                                                            (Discontinued
                                                                              Operations)
                                               ----------------------------------------------------------------------------
                                                   Hines
                                               Horticulture       Hines
                                                  (Parent       Nurseries      Sun Gro                       Consolidated
                                                Guarantor)       (Issuer)    Horticulture    Eliminations        Total
                                               ----------------------------------------------------------------------------

    Sales, net                                   $         -   $  250,869    $   31,150     $   (1,583)        $  280,436
    Cost of goods sold                                     -      120,537        16,929         (1,583)           135,883
                                               ----------------------------------------------------------------------------
        Gross Profit                                       -      130,332        14,221              -            144,553
    Operating expenses                                 6,259       88,157       (13,954)             -             80,462
                                               ----------------------------------------------------------------------------
        Operating income                              (6,259)      42,175        28,175              -             64,091
                                               ----------------------------------------------------------------------------
    Other expenses:
       Interest                                            -       14,184           528              -             14,712
       Interest - intercompany                             -         (722)          722              -                  -
       Amortization of deferred financing
          expenses, other                            (21,464)      (4,655)            -         29,167              3,048
                                               ----------------------------------------------------------------------------
                                                     (21,464)       8,807         1,250         29,167             17,760
                                               ----------------------------------------------------------------------------

    Income (loss) before provision for income taxes   15,205       33,368        26,925        (29,167)            46,331
    Income tax (benefit) provision                    (2,669)      10,628        19,472              -             27,431
                                               ----------------------------------------------------------------------------
    Net income before extraordinary item              17,874       22,740         7,453        (29,167)            18,900
    Extraordinary item                                     -        1,026             -              -              1,026
                                               ----------------------------------------------------------------------------
    Net income                                   $    17,874   $   21,714    $    7,453     $  (29,167)        $   17,874
                                               ============================================================================



<PAGE>

                                      Guarantor / Non-guarantor Disclosures - Continued
                                            Consolidating Statement of Operations
                                       For the three month period ended June 30, 2002
                                                   (Dollars in thousands)

                                               ----------------------------------------------------------------------------
                                                               Nursery      Growing Media
                                                               Segment         Segment
                                                                            (Discontinued
                                                                              Operations)
                                               ----------------------------------------------------------------------------
                                                   Hines
                                               Horticulture       Hines
                                                  (Parent       Nurseries      Sun Gro                       Consolidated
                                                Guarantor)       (Issuer)    Horticulture    Eliminations        Total
                                               ----------------------------------------------------------------------------
    Sales, net                                   $         -   $  182,146    $        -     $        -         $  182,146
    Cost of goods sold                                     -       86,221             -              -             86,221
                                               ----------------------------------------------------------------------------
        Gross Profit                                       -       95,925             -              -             95,925
    Operating expenses                                     -       54,696         5,200              -             59,896
                                               ----------------------------------------------------------------------------
        Operating income                                   -       41,229        (5,200)             -             36,029
                                               ----------------------------------------------------------------------------

    Other expenses:
       Interest                                            -        7,765             -              -              7,765
       Interest - intercompany                             -            -             -              -                  -
       Amortization of deferred financing
          expenses, other                            (15,378)       4,979             -         12,293              1,894
                                               ----------------------------------------------------------------------------
                                                     (15,378)      12,744             0         12,293              9,659
                                               ----------------------------------------------------------------------------

    Income before provision for income taxes          15,378       28,485        (5,200)       (12,293)            26,370
    Income tax provision                                 (47)      12,994        (2,002)             -             10,945
                                               ----------------------------------------------------------------------------
    Net income                                   $    15,425   $   15,491    $   (3,198)    $  (12,293)        $   15,425
                                               ============================================================================



                                                          Page 11

<PAGE>
                                     Guarantor / Non-guarantor Disclosures - (Continued)
                                            Consolidating Statement of Operations
                                        For the six month period ended June 30, 2001
                                                   (Dollars in thousands)

                                               ----------------------------------------------------------------------------
                                                               Nursery      Growing Media
                                                               Segment         Segment
                                                                            (Discontinued
                                                                              Operations)
                                               ----------------------------------------------------------------------------
                                                   Hines
                                               Horticulture     Hines
                                                  (Parent     Nurseries        Sun Gro                       Consolidated
                                                Guarantor)     (Issuer)      Horticulture    Eliminations        Total
                                               ----------------------------------------------------------------------------

    Sales, net                                   $         -   $  241,938    $   78,748     $  (15,159)        $  305,527
    Cost of goods sold                                     -      112,008        49,885        (15,159)           146,734
                                               ----------------------------------------------------------------------------
        Gross Profit                                       -      129,930        28,863              -            158,793
    Operating expenses                                     -       77,486        17,923              -             95,409
                                               ----------------------------------------------------------------------------
        Operating income                                   -       52,444        10,940              -             63,384
                                               ----------------------------------------------------------------------------
    Other expenses:
       Interest                                            -       17,834         2,246              -             20,080
       Interest - intercompany                             -       (2,064)        2,064              -                  -
       Amortization of deferred financing
          expenses, other                            (23,162)        (325)            -         27,284              3,797
                                               ----------------------------------------------------------------------------
                                                     (23,162)      15,445         4,310         27,284             23,877
                                               ----------------------------------------------------------------------------

    Income (loss) before provision for income taxes   23,162       36,999         6,630        (27,284)            39,507
    Income tax (benefit) provision                      (112)      13,564         2,781              -             16,233
                                               ----------------------------------------------------------------------------
    Net income                                   $    23,274   $   23,435    $    3,849     $  (27,284)        $   23,274
                                               ============================================================================



<PAGE>

                                      Guarantor / Non-guarantor Disclosures - Continued
                                            Consolidating Statement of Operations
                                       For the three month period ended June 30, 2001
                                                   (Dollars in thousands)

                                               ----------------------------------------------------------------------------
                                                               Nursery      Growing Media
                                                               Segment         Segment
                                                                            (Discontinued
                                                                              Operations)
                                               ----------------------------------------------------------------------------
                                                   Hines
                                               Horticulture     Hines
                                                  (Parent     Nurseries        Sun Gro                       Consolidated
                                                Guarantor)     (Issuer)      Horticulture    Eliminations        Total
                                               ----------------------------------------------------------------------------
    Sales, net                                   $         -   $  174,181    $   35,921     $   (5,328)        $  204,774
    Cost of goods sold                                     -       79,294        21,783         (5,328)            95,749
                                               ----------------------------------------------------------------------------
        Gross Profit                                       -       94,887        14,138              -            109,025   -
    Operating expenses                                     -       52,256         9,049              -             61,305
                                               ----------------------------------------------------------------------------
        Operating income                                   -       42,631         5,089              -             47,720
                                               ----------------------------------------------------------------------------

    Other expenses:
       Interest                                            -        8,515         1,065              -              9,580
       Interest - intercompany                             -         (933)          933              -                  -
       Amortization of deferred financing
          expenses, other                            (22,016)      (1,227)        2,114         21,795                666
                                               ----------------------------------------------------------------------------
                                                     (22,016)       6,355         4,112         21,795             10,246
                                               ----------------------------------------------------------------------------

    Income before provision for income taxes          22,016       36,276           977        (21,795)            37,474
    Income tax provision                                 (56)      14,124         1,334              -             15,402
                                               ----------------------------------------------------------------------------
    Net income                                   $    22,072   $   22,152    $     (357)    $  (21,795)        $   22,072
                                               ============================================================================



                                                          Page 12
<PAGE>


                                      Guarantor / Non-guarantor Disclosures - Continued
                                            Consolidating Statement of Cash Flows
                                           For the six months ended June 30, 2002
                                                   (Dollars in thousands)


                                               ----------------------------------------------------------------------------
                                                               Nursery      Growing Media
                                                               Segment         Segment
                                                                            (Discontinued
                                                                              Operations)
                                               ----------------------------------------------------------------------------
                                                   Hines
                                               Horticulture       Hines
                                                  (Parent       Nurseries      Sun Gro                       Consolidated
                                                Guarantor)       (Issuer)    Horticulture    Eliminations        Total
                                               ----------------------------------------------------------------------------

Cash provided by (used in) operating activities  $         -   $   26,049    $   (2,233)    $        -         $   23,816
                                               ----------------------------------------------------------------------------

Cash flows from investing activities:
     Purchase of fixed assets, net                         -       (3,323)       (2,503)             -             (5,826)
     Sales proceeds                                        -        3,116       127,338              -            130,454
     Acquisitions, adjusted                                -         (526)            -              -               (526)
                                               ----------------------------------------------------------------------------
         Net cash (used in) provided by
            investing activities                           -         (733)      124,835              -            124,102
                                               ----------------------------------------------------------------------------

Cash flows from financing activities:
     Repayments on revolving line of credit                -      (35,500)            -              -            (35,500)
     Intercompany advances (repayments)                    -       92,840       (92,840)             -                  -
     Repayments of long-term debt                          -      (95,959)      (12,000)             -           (107,959)
     Deferred financing costs                              -       (4,200)            -              -             (4,200)
     Dividends received (paid)                             -       17,791       (17,791)             -                  -
                                               ----------------------------------------------------------------------------
         Net cash used in financing activities             -      (25,028)     (122,631)             -           (147,659)
                                               ----------------------------------------------------------------------------

     Effect of exchange rate changes on cash
            and cash equivalents                           -            -            29              -                 29
                                               ----------------------------------------------------------------------------

Net increase in cash                                       -          288             -              -                288
Cash, beginning of year                                    -            -             -              -                  -
                                               ----------------------------------------------------------------------------
Cash, end of period                              $         -   $      288    $        -     $        -         $      288
                                               ============================================================================


                                                          Page 13a
<PAGE>

                                      Guarantor / Non-guarantor Disclosures - Continued
                                            Consolidating Statement of Cash Flows
                                           For the six months ended June 30, 2001
                                                   (Dollars in thousands)

                                               ----------------------------------------------------------------------------
                                                               Nursery      Growing Media
                                                               Segment         Segment
                                                                            (Discontinued
                                                                              Operations)
                                               ----------------------------------------------------------------------------
                                                   Hines
                                               Horticulture       Hines
                                                  (Parent       Nurseries      Sun Gro                       Consolidated
                                                Guarantor)       (Issuer)    Horticulture    Eliminations        Total
                                               ----------------------------------------------------------------------------

Cash provided by operating activities            $        -    $   34,647    $    8,881     $        -         $   43,528
                                               ----------------------------------------------------------------------------

Cash flows from investing activities:
     Purchase of fixed assets, net                        -       (12,948)       (1,801)             -            (14,749)
     Proceds from sales of fixed assets                   -             -            70              -                 70
     Acquisitions, adjusted                               -        (8,311)            -              -             (8,311)
                                               ----------------------------------------------------------------------------
         Net cash used in investing activities            -       (21,259)       (1,731)             -            (22,990)
                                               ----------------------------------------------------------------------------

Cash flows from financing activities:
     Repayments on revolving line of credit               -       (12,000)            -              -            (12,000)
     Intercompany advances (repayments)                 (30)        3,418        (3,388)             -                  -
     Repayments of long-term debt                         -        (6,049)       (3,035)             -             (9,084)
     Dividends received (paid)                            -         1,243        (1,243)             -                  -
     Repayments of notes receivables from
            stock sales                                  30             -             -              -                 30
                                               ----------------------------------------------------------------------------
         Net cash used in financing activities            -       (13,388)       (7,666)             -            (21,054)
                                               ----------------------------------------------------------------------------

     Effect of exchange rate changes on cash
            and cash equivalents                          -             -           516              -                516
                                               ----------------------------------------------------------------------------

Net decrease in cash                                      -             -             -              -                  -
Cash, beginning of year                                   -             -             -              -                  -
                                               ----------------------------------------------------------------------------
Cash, end of period                              $        -    $        -    $        -     $        -         $        -
                                               ============================================================================



                                                          Page 13b
</TABLE>

<PAGE>



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

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

                  This report contains forward-looking statements. Hines desires
         to take advantage of the safe harbor provisions of the Private
         Securities Litigation Reform Act of 1995 and is including this
         statement for the express purpose of availing itself of the protections
         of the safe harbor with respect to all forward-looking statements.
         Several important factors, in addition to the specific factors
         discussed in connection with such forward-looking statements
         individually, could affect the future results of the Company and could
         cause those results to differ materially from those expressed in the
         forward-looking statements contained herein.

                  The Company's estimated or anticipated future results,
         products and service performance or other non-historical facts are
         forward-looking and reflect Hines' current perspective of existing
         trends and information. These statements involve risks and
         uncertainties that cannot be predicted or quantified and, consequently,
         actual results may differ materially from those expressed or implied by
         such forward-looking statements. Such risks and uncertainties include,
         among others, the continued ability of Hines to access water, the
         impact of growing conditions, risks associated with customer
         concentration, future acquisitions and the ability to integrate such
         acquisitions in a timely and cost effective manner, the ability to
         manage growth, the impact of competition, the ability to obtain future
         financing or to satisfy payment obligations under existing financing,
         limitations of Hines' substantial leverage and debt restrictions,
         government regulations and other risks and uncertainties described from
         time to time in Hines' Securities and Exchange Commission filings.

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

         SALE OF SUN GRO BUSINESS

               On March 27, 2002, the Company completed the sale of its growing
         media business to Sun Gro Horticulture Income Fund, a newly established
         Canadian income fund. The assets sold included 14 facilities located
         across Canada and the United States and control of approximately 50,000
         acres of peat bogs in Canada.



                                    Page 14
<PAGE>


               Hines will no longer harvest, produce or sell peat moss or have
         the rights to the Sunshine, Parkland Fairway, Black Gold, Lakeland
         Grower, Alberta Rose, Nature's and Gardener's Gold trade names. Hines
         received net proceeds of approximately $120 million from the sale,
         which were used to pay down outstanding bank debt.

               In connection with the sale of the Sun Gro growing media
         business, Hines entered into a supply agreement with a subsidiary of
         the Fund to purchase peat moss and other growing media products to be
         used in the Company's green goods business.

               The Company's Consolidated Financial Statements included in this
         Form 10-Q reflect the financial position, results of operations and
         cash flows of the Sun Gro business as "discontinued operations." In
         accordance with SFAS No. 144 (Accounting for the Impairment or Disposal
         of Long-lived Assets), the Company's consolidated financial statements
         have been restated to reflect the financial position, results of
         operations and cash flows of the Sun Gro business as "discontinued
         operations."

         OVERVIEW

               GENERAL. Hines is one of the largest commercial nursery
         operations in North America, producing one of the broadest assortments
         of container-grown plants in the industry. The Company sells its
         nursery products primarily to the retail segment, which includes
         premium independent garden centers, as well as leading home centers and
         mass merchandisers, such as Home Depot, Lowe's, Wal-Mart and Target.

               SEASONALITY. The Company's nursery business, like that of its
         competitors, is highly seasonal. The Company has experienced, and
         expects to continue to experience, significant variability in net
         sales, operating income and net income on a quarterly basis.

               ACQUISITIONS. In the three years ended December 31, 2001, the
         Company completed, in connection with its nursery business, one
         acquisition in 1999 and two acquisitions in 2000, all of which have
         been accounted for under the purchase method. Accordingly, the purchase
         prices were allocated to certain assets and liabilities based on their
         respective fair market values. The excess of the purchase price over
         the estimated fair market value of the net assets acquired relating to
         each transaction was accounted for as goodwill. Beginning January 1,
         2002, goodwill will no longer be amortized, but will be subject to a
         periodic test for impairment based upon fair values. Refer to Note 7
         "New Accounting Pronouncements" for information on the goodwill
         impairment testing.

               TAX MATTERS. The Company derives significant benefits under the
         U.S. federal tax code by qualifying to use the cash method of
         accounting for federal income tax purposes. Under the cash method,
         sales are included in taxable income when payments are received and
         expenses are deducted as they are paid. The primary benefit the Company
         receives is the ability to deduct the cost of inventory as it is
         incurred.


                                    Page 15
<PAGE>

               As a result of the Company's ability to deduct its growing costs
         under the farming exception, the Company has generally not been
         required to pay cash income taxes and has generated net operating
         losses for federal income tax purposes. If the Company's ability to use
         the cash method of accounting for federal income tax purposes was
         limited or eliminated, the Company's cash income tax payments could
         increase significantly. At December 31, 2001, the Company had
         approximately $51.6 million in net operating loss carryforwards for
         federal income tax reporting purposes. As a result of the sale of the
         Sun Gro business, the Company expects to utilize a significant amount
         of these net operating loss carryforwards in 2002 for federal income
         tax reporting purposes. As a result, the Company anticipates it will
         pay cash income taxes for federal purposes in the future. The Company
         is currently paying cash income taxes for state income tax purposes in
         certain states due to the differing rules regarding the carryforward of
         net operating losses.

               At June 30, 2002, the Company has a current liability for
         deferred income taxes of $73,024. Because the majority of the items to
         which this liability relates are comprised of current assets and
         current liabilities in the balance sheet (such as inventory, accounts
         receivable, accounts payable, etc.) this deferred tax item is also
         characterized as current. The classification of this liability as a
         current item does not mean that it will be paid within the next year.

         CRITICAL ACCOUNTING POLICIES

               The preparation of financial statements in conformity with
         generally accepted accounting principles requires management 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. Management believes that the following
         areas represent its most critical accounting policies related to actual
         results that may vary from those estimates.

               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 discounts and allowances. The provision rate is established by
         management using the following criteria: past sales returns experience,
         current economic conditions and other relevant factors. The rate is
         re-evaluated on a quarterly basis. The allowance is increased by
         provisions for sales discounts and allowances charged against income.
         The Company records revenue, net of sales discounts and allowances,
         when the risk of ownership is transferred to the customer. Allowances
         are provided at the time of revenue is recognized in accordance with
         SFAS No. 48 (Revenue Recognition When Right of Return Exists).

               ALLOWANCE FOR DOUBTFUL ACCOUNTS: The allowance for bad debts is
         maintained at a level believed by management to adequately reflect the
         probable losses in the trade receivables due to customer defaults,
         insolvencies or bankruptcies.

               The provision is established by management using the following
         criteria: customer credit history, customer current credit rating and
         other relevant factors. The provision is re-evaluated on a quarterly
         basis. The allowance is increased by provisions to bad debt expense
         charged against income.

                                    Page 16
<PAGE>

               All recoveries on trade receivables previously charged off are
         credited to the accounts receivable recovery account charged against
         income, while direct charge-offs of trade receivables are deducted from
         the allowance.

               ACCOUNTING FOR GOODWILL IMPAIRMENT: Beginning January 1, 2002,
         under the provisions of SFAS No. 142, goodwill will no longer be
         amortized, but will be subject to a periodic test for impairment based
         upon fair values. SFAS No. 142 requires that goodwill be tested
         annually for impairment using a two-step process. The first step is to
         identify a potential impairment and, in transition, this step must be
         measured as of the beginning of the fiscal year. However, a company has
         six months from the date of adoption to complete the first step.

               The second step of the goodwill impairment test measures the
         amount of the impairment loss (measured as of the beginning of the year
         of adoption), if any, and must be completed by the end of the Company's
         fiscal year. The goodwill impairment analysis has not yet been
         completed. The current estimate of the impairment charge related to
         goodwill as of January 1, 2002 is in the range of $40.0 million to
         $70.0 million before tax, pending completion of the impairment
         analysis, and is expected to be recorded in the third quarter of the
         2002 fiscal year, effective as of January 1, 2002. For the six months
         ended June 30, 2001 and the year ended December 31, 2001, the Company
         reported goodwill amortization of $1.8 million and $3.7 million
         respectively, excluding discontinued operations. As of June 30, 2002,
         the Company had $121.9 million of goodwill.

         RESULTS OF OPERATIONS

         THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS
         ENDED JUNE 30, 2001

               NET SALES. Net sales of $182.1 million for the three months ended
         June 30, 2002 increased $7.9 million, or 4.5%, from net sales of $174.2
         million for the comparable period in 2001 due primarily to strong sales
         across the board in the West with somewhat weaker early spring sales in
         the East and Midwest. The Eastern part of the country experienced
         weather extremes during the second quarter, going from drought
         conditions in April to virtually constant rain in early to mid-May.
         However, as the weather finally improved in June, consumers in the East
         and Midwest purchased green goods reflecting pent up demand for lawn
         and garden products. In addition, given Kmart's uncertain financial
         situation, the Company reduced its second quarter sales to the large
         retailer by approximately $4.8 million from the second quarter of 2001.

               GROSS PROFIT. Gross profit of $95.9 million for the three months
         ended June 30, 2002 increased $1.0 million, or 1.1%, from gross profit
         of $94.9 million for the comparable period in 2001 primarily due to the
         higher sales as discussed above. As a percent of net sales, gross
         margins decreased to 52.7% from 54.5% of net sales mainly due to lower
         sales in our southeast markets, which typically carry higher margins,
         and increased scrap rates primarily related to lower Kmart sales.

                                    Page 17
<PAGE>

               SELLING AND DISTRIBUTION EXPENSES. Selling and distribution
         expenses of $46.8 million for the three months ended June 30, 2002
         increased $4.2 million, or 9.9%, from $42.6 million for the comparable
         period in 2001. The increase was primarily due to the higher sales,
         additional sales and merchandising personnel in place to support the
         peak spring selling season and higher distribution costs. Distribution
         costs increased significantly as the Company completed its transition
         to a unitized delivery mode for many of its nursery products, and
         expedited product shipments across the country to meet improved retail
         demand as the weather improved.

               GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
         expenses of $7.9 million for the three months ended June 30, 2002
         decreased $0.8 million, or 9.2%, from $8.7 million for the comparable
         period in 2001. The decrease is primarily attributable to efforts by
         the Company to reduce costs, improve efficiencies and consolidate many
         of its operational activities.

               OPERATING INCOME. Operating income of $41.2 million for the three
         months ended June 30, 2002 decreased $1.4 million, or 3.3%, from $42.6
         million for the comparable period in 2001 primarily due to the higher
         selling and distribution expenses as discussed above. As a percentage
         of net sales, operating income decreased to 22.6% from 24.5% due
         primarily to the lower gross margins and the higher selling and
         distribution expenses as discussed above.

               OTHER EXPENSES. Other expenses of $9.7 million for the three
         months ended June 30, 2002 increased $1.5 million, or 18.3%, from $8.2
         million for the comparable period in 2001. The increase was primarily
         attributable to a charge of $1.8 million, reflecting a mark-to-market
         adjustment for the Company's $75.0 million interest rate swap
         agreement. This adjustment arose from a change in the swap's valuation
         since the previous quarter end, which is based on long-term interest
         rate expectations. By contrast, the swap related adjustment for the
         comparable period in 2001 resulted in income of $0.5 million. The
         mark-to-market charge was offset somewhat by lower interest expense of
         $0.8 million, which resulted from using the net proceeds from the sale
         of the Sun Gro business and of the sale of an additional 22.5 acres of
         land to reduce debt. As a result of the debt reduction, interest
         expense is expected to be lower during the remainder of 2002 when
         compared to 2001.

               PROVISION FOR INCOME TAXES. The Company's effective income tax
         rate was 41.0% and 40.9% for the three months ended June 30, 2002 and
         2001, respectively.

               INCOME FROM CONTINUING OPERATIONS. Net income from continuing
         operations of $18.6 million for the three months ended June 30, 2002
         decreased $1.7 million from net income of $20.3 million for the
         comparable period in 2001. The decrease was primarily due to lower
         operating income and higher other expenses as discussed above.

               (LOSS) INCOME FROM DISCONTINUED OPERATIONS. The loss from
         discontinued operations of $3.2 million reflects adjustments to the
         sale of the Sun Gro business reported in the first quarter. The
         adjustments result from changes in estimates related to working capital
         adjustments, which occurred subsequent to the sale.


                                    Page 18
<PAGE>

               NET INCOME. Net income decreased to $15.4 million for the three
         months ended June 30, 2002 compared to $22.1 million in the comparable
         period in 2001 due to the lower income from continuing operations and
         the loss from discontinued operations as discussed above.

         SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS
         ENDED JUNE 30, 2001

               NET SALES. Net sales of $250.9 million for the six months ended
         June 30, 2002 increased $9.0 million, or 3.7%, from net sales of $241.9
         million for the comparable period in 2001 due primarily to strong sales
         in the Company's northeast and southwest markets. This was somewhat
         offset by sluggish sales in the southeast markets due to the late
         emergence of spring in those markets. Sales in the Company's northeast
         color region were strong due to the impact of newly established store
         service programs. These programs enable us to offer a broader selection
         of green goods and streamline ordering and in-store merchandising
         activities with our customers. In addition, given Kmart's uncertain
         financial situation, the Company reduced its six months ended June 30,
         2002 sales to the large retailer by approximately $6.4 million from the
         six months ended June 30, 2001.

               GROSS PROFIT. Gross profit of $130.3 million for the six months
         ended June 30, 2002 increased $0.4 million, or 0.3%, from gross profit
         of $129.9 million for the comparable period in 2001. As a percent of
         net sales, gross margins decreased to 52.0% from 53.7% of net sales
         mainly due to the lower sales in our southeast markets, which typically
         carry higher margins, and increased scrap rates primarily related to
         the lower Kmart sales.

               SELLING AND DISTRIBUTION EXPENSES. Selling and distribution
         expenses of $67.5 million for the six months ended June 30, 2002
         increased $5.6 million, or 9.0%, from $61.9 million for the comparable
         period in 2001. The increase was primarily due to the higher sales,
         additional sales and merchandising personnel in place to support the
         peak spring selling season and higher distribution costs. Distribution
         costs increased significantly as the Company transitioned to a unitized
         delivery mode for many of its nursery products, and expedited product
         shipments across the country to meet surges in retail demand as the
         weather improved.

               GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
         expenses of $13.4 million for the six months ended June 30, 2002
         decreased $0.4 million, or 2.9%, from $13.8 million for the comparable
         period in 2001. The decrease is primarily attributable to efforts by
         the Company to reduce costs, improve efficiencies and consolidate many
         of its operational activities.

               OTHER OPERATING INCOME. Other operating income of $2.1 million
         for the six months ended June 30, 2002 represents primarily the net
         gain from the sale of our property in Hillsboro, Oregon.

               OPERATING INCOME. Operating income of $51.5 million for the six
         months ended June 30, 2002 decreased $0.9 million, or 1.7%, from $52.4
         million for the comparable period in 2001. As a percentage of net
         sales, operating income decreased to 20.5% from 21.7% due primarily to
         the lower gross margins and the higher distribution costs as discussed
         above.

                                    Page 19
<PAGE>

               OTHER EXPENSES. Other expenses of $16.5 million for the six
         months ended June 30, 2002 decreased $3.1 million, or 15.8%, from $19.6
         million for the comparable period in 2001. The decrease was primarily
         attributable to lower interest expenses and a mark-to-market charge of
         $0.8 million relating to the Company's $75 million interest rate swap
         agreement as compared to a charge of $1.5 million for the comparable
         period in 2001. This adjustment results from the quarterly change in
         the swap's valuation, which is based on long-term interest rate
         expectations. As a result of the Company using the net proceeds from
         the sale of the Sun Gro business and of the sale of an additional 22.5
         acres of land to reduce debt, interest expense is expected to be lower
         during the remainder of 2002 when compared to 2001.

               PROVISION FOR INCOME TAXES. The Company's effective income tax
         rate was 41.0% and 40.9% for the six months ended June 30, 2002 and
         2001, respectively.

               INCOME FROM CONTINUING OPERATIONS. Net income from continuing
         operations of $20.6 million for the six months ended June 30, 2002
         increased $1.2 million from net income of $19.4 million for the
         comparable period in 2001. The increase was primarily due to Other
         Expense, as discussed above.

               (LOSS) INCOME FROM DISCONTINUED OPERATIONS. The net loss from
         discontinued operations of $1.7 million includes a loss of $1.9
         million, net of tax, from the sale of the Sun Gro business and net
         income of $0.2 million from the operations of Sun Gro through the date
         of sale.

               EXTRAORDINARY ITEM. The extraordinary item of $1.0 million, net
         of tax, represents the write-off of unamortized financing costs
         resulting from the early extinguishment of debt which occurred as a
         result of using the net proceeds received from the sale of the Sun Gro
         business to pay down outstanding debt before its maturity.

               NET INCOME. Net income decreased to $17.9 million for the six
         months ended June 30, 2002 compared to $23.3 million in the comparable
         period in 2001 primarily due to the loss from discontinued operations
         and the extraordinary item as discussed above.

         LIQUIDITY AND CAPITAL RESOURCES

                  The Company has historically satisfied its working capital
         requirements through operating cash flow and seasonal borrowings under
         its revolving credit facilities. Due to the highly seasonal nature of
         its operations, the Company historically borrows under its revolving
         credit facilities to fund peak needs.

                  On March 27, 2002, the Company completed the sale of the Sun
         Gro business and received net proceeds of approximately $120.0 million,
         which were used to pay down outstanding bank debt. In addition, the
         Company completed the sale of 22.5 acres of land located in Hillsboro,
         Oregon in March 2002, and used the net proceeds of approximately $2.9
         million to pay down outstanding bank debt.

                                    Page 20
<PAGE>

         The Company used $107.9 million of the proceeds from the sale of the
         Sun Gro business and the sale of land to reduce long-term debt with the
         remaining amount of $15.0 million used to reduce the amount outstanding
         under its working capital revolver.

                  The Company's net debt position (short and long term-debt) at
         June 30, 2002 was $246.6 million compared to net debt of $389.9 million
         at December 31, 2001, which included long-term debt from discontinued
         operations. The decrease in debt compared to December 31, 2001 was due
         to the Company using the net proceeds from the sale of the Sun Gro
         business and the sale of 22.5 acres in Hillsboro, Oregon to reduce
         debt.

                  Net cash provided by operating activities was $30.5 million
         for the six months ended June 30, 2002 compared to $34.6 million for
         the comparable period in 2001. Because the Company's working capital
         improvement plan began in 2001, the 2001 comparable period was
         favorably impacted by a one-time improvement relating to a change in
         accounts payable and accrued liabilities. As part of the plan, the
         Company sought and obtained extended payment terms from a significant
         number of vendors. These factors thereby increased its accounts payable
         and accrued liabilities amounts for the six months ended June 30, 2001.

                  The seasonal nature of the Company's operations results in a
         significant increase in certain components of working capital
         (primarily accounts receivable and inventory) during the growing and
         selling cycles. As a result, operating activities during the first and
         fourth quarters use significant amounts of cash, and in contrast,
         operating activities for the second and third quarters generate
         substantial cash as the Company ships inventory and collects accounts
         receivable.

                  Net cash provided by investing activities was $117.5 million
         for the six months ended June 30, 2002 compared to a net use of cash of
         $16.6 million for the comparable period in 2001. The increase was
         primarily due to the proceeds received from the sale of the Sun Gro
         business and the sale of the Oregon property.

                  Net cash used in financing activities was $147.7 million for
         the six months ended June 30, 2002 compared to $18.0 million for the
         comparable period in 2001. The increase in net cash used was primarily
         related to the use of the proceeds from the sale of the Sun Gro
         business and the sale of the Oregon property to pay down outstanding
         bank debt in the amount of $107.9 million and to pay financing costs of
         $4.2 million.

                  The Company typically draws under its revolving credit
         facilities in the first and fourth quarters to fund its seasonal
         inventory buildup of green goods products and seasonal operating
         expenses. Approximately 74% of the Company's sales of nursery products
         occur in the first half of the year, generally allowing the Company to
         reduce borrowings under its revolving credit facilities in the second
         and third quarters. On August 9, 2002, the Company had unused borrowing
         capacity of $61.8 million under its $115.0 million working capital
         revolver facility within the Amended Senior Credit Facility. In
         addition, the Company had fully repaid its $30.0 million seasonal
         revolver facility which can only be utilized between February 1 and
         June 15.

                                    Page 21
<PAGE>

         The Company's capital expenditures were approximately $3.3 million for
         the six months ended June 30, 2002 and included the continued
         implementation of our ERP information system, the completion of acreage
         expansion plans at our South Carolina facility which we began in 2001
         and the purchase of nursery related structures, machinery and
         equipment. The Company's capital expenditures for 2002 are expected to
         be approximately $8.0 to $9.0 million.

                  The Company's primary sources of liquidity are funds generated
         by operations and borrowings under its Amended Senior Credit Facility,
         which matures on December 31, 2004, as amended. As at June 30, 2002,
         this facility is comprised of a $115.0 million working capital
         revolver, a $30.0 million seasonal revolving loan commitment, which can
         only be utilized for the period between February 1 and June 15, a New
         Term Loan in the amount of $51.4 million and a Tranche B Term Loan in
         the amount of $51.1 million. Borrowings under the Amended Senior Credit
         Facility are secured by substantially all the Company's assets. The
         Amended Senior Credit Facility places various restrictions on the
         Company, including, but not limited to, limitations on the Company's
         ability to incur additional debt, limitations on capital expenditures
         and limitations on dividends the Company can pay to shareholders. The
         Amended Senior Credit Facility requires the Company to meet specific
         covenants and financial ratios. At the Company's option, the interest
         rate on the loans under the Amended Senior Credit Facility may be base
         rate loans, which is the higher of the prime rate or the rate which is
         1/2 of 1% in excess of the federal funds effective rate, or Eurodollar
         rate loans.

                  Base rate loans under the working capital revolving loan and
         the New Term Loan bear interest at the base rate plus an additional
         amount which ranges from 1.00% to 3.00%, depending on the Company's
         consolidated leverage ratio. Base rate loans under the seasonal working
         capital revolver bear interest at the base rate plus 2.25% and under
         the Tranche B Term Loan at the base rate plus an additional amount
         between 2.75% and 3.00%, depending on the Company's consolidated
         leverage ratio. Currently, the applicable margin for base rate loans is
         (i) 2.50% for working capital revolving loans, (ii) 2.50% for the New
         Term Loan and (iii) 2.75% for the Tranche B Term Loan.

                  Eurodollar rate loans under the working capital revolving loan
         and the New Term Loan bear interest at the Eurodollar rate plus an
         additional amount that ranges from 2.00% to 4.00%, depending on the
         Company's consolidated leverage ratio. Eurodollar rate loans under the
         seasonal working capital revolver bear interest at the Eurodollar rate
         plus 3.25% and under the Tranche B Term Loan at the Eurodollar rate
         plus an additional amount between 3.75% and 4.00%, depending on the
         Company's consolidated leverage ratio. Currently, the applicable margin
         for Eurodollar rate loans is (i) 3.50% for working capital revolving
         loans, (ii) 3.50% for the New Term Loan and (iii) 3.75% for the Tranche
         B Term Loan.

                  Principal repayments due under the Company's Amended Senior
         Credit Facility total $17.5 million in 2003 and $84.9 million in 2004.
         The expiration of the Company's seasonal working capital facility has
         been extended to June 15, 2004. Madison Dearborn Capital Partners, L.P.
         ("MDCP"), our principal shareholder, provided a guarantee for the
         extension of the $30 million seasonal revolving loan commitment under
         the Amended Senior Credit Facility.


                                    Page 22
<PAGE>

                  If MDCP is required to make any payment with respect to its
         guarantee on the seasonal revolving loan commitment, the Company would
         be required to issue to MDCP an additional warrant to purchase a number
         of shares of the Company's common stock equal to the amount of such
         payment divided by the then-current market price of the Company's
         common stock.

                  Effective February 1, 2002 the Company's Amended Senior Credit
         Facility was amended to, among other things:

         (i)      Permit the sale of the Sun Gro business upon receipt of
                  minimum net cash proceeds of $105.0 million (which was
                  completed in March 2002),
         (ii)     To the extent net cash proceeds from the sale of the Sun Gro
                  business exceeded $105.0 million, allow the Company to retain
                  up to $8.25 million for capital expenditure reinvestment over
                  the 2002 fiscal year,
         (iii)    Permit the property sale of Minter Bridge so long as all the
                  net cash proceeds were applied to the permanent prepayment of
                  debt,
         (iv)     Amend the mandatory prepayment provisions of the existing
                  Amended Senior Credit Facility to allow the application of the
                  net proceeds from the sale of the Sun Gro business to prepay
                  amortization payments under the Term Loans in direct (or
                  forward) rather than inverse order of maturities,
         (v)      Combine the post pay-down Acquisition Term Loan and the
                  Domestic Term Loan into one term loan facility, the New Term
                  Loan, and reset the amortization schedule,
         (vi)     Extend to December 31, 2004 maturities under the existing
                  working capital revolving loans and the New Term Loan,
         (vii)    Reset the financial covenants that establish minimum EBITDA
                  levels, minimum interest coverage ratios and net worth levels
                  and maximum leverage ratios and capital expenditure amounts,
         (viii)   Extend through June 15, 2004 the Company's ability to utilize
                  the seasonal revolving loan commitments in the amount of $30.0
                  million guaranteed by its majority shareholder, MDCP, and
                  alter the availability period for the seasonal revolving loans
                  to make them available the period between February 1 and June
                  15 for each year until maturity,
         (ix)     Increase the sub-limit for letters of credit that may be
                  issued under the working capital revolver from $3.0 million to
                  $7.5 million,
         (x)      Shorten the maturity of the Tranche B Term Loan to December
                  31, 2004,
         (xi)     Increase the interest rate on the New Term Loan and working
                  capital revolver by 1/2%, and
         (xii)    Pay amendment fees of 3/4% to extending lenders under the New
                  Term Loan, the working capital revolver and the seasonal
                  revolver and 1/4% to the lenders under the Tranche B Term Loan

                  All other significant terms and conditions of the Amended
         Senior Credit Facility remain unchanged.

                  In addition, Hines Nurseries (the issuer and our wholly owned
         subsidiary) has outstanding $78.0 million of Senior Subordinated Notes
         (the "Notes") due October of 2005.

                                    Page 23
<PAGE>

                  The Company has fully and unconditionally guaranteed the
         issuer's obligations under the Notes and the Notes are redeemable, in
         whole or in part, at the option of the Company, on or after October 15,
         2000 at a redemption price of 106.00% of the principal amount thereof
         plus accrued interest, if any, to the date of redemption. Upon a change
         of control, each holder will have the right to require the Company to
         repurchase such holder's Notes at a price equal to 105.00% of the
         principal amount thereof plus accrued interest, if any, to the date of
         repurchase.

                  The Notes currently bear interest at 12.75% per annum, and the
         indenture pursuant to which the Notes were issued imposes a number of
         restrictions on our operating subsidiaries, including their ability to
         incur additional indebtedness, to make certain restricted payments
         (including dividends to the Company), to make certain asset
         dispositions, to incur additional liens and to enter into significant
         transactions. A breach of a material term of the indenture for the
         Notes or other material indebtedness that results in the acceleration
         of the indebtedness under the Notes also constitutes an event of
         default under the Amended Senior Credit Facility. In addition, the
         Company is obligated to pay a premium at maturity equal to 5.00% of the
         principal amount of the Notes to be repaid. The Company is accreting
         this premium over the term of the maturity of the Notes as additional
         interest expense. At June 30, 2002, the amount of the premium was $1.4
         million and, based on the $78.0 million of Notes outstanding, is
         expected to be $3.9 million upon maturity.

                  At June 30, 2002, the Company had the following contractual
         obligations (payments due by period, in millions):

                                   2002      2003      2004     2005      Total
                                  -------  -------   -------   -------   -------
       Tranche B Term Loan        $     -  $     -   $  51.1   $     -   $  51.1
       New Term Loan                    -     17.5      33.8         -      51.3
       Senior Subordinated Notes        -        -         -      81.9      81.9
       Other obligations              0.1      0.1         -         -       0.2
                                  -------  -------   -------   -------   -------
       Total                      $   0.1  $  17.6   $  84.9   $  81.9   $ 184.5
                                  =======  =======   =======   =======   =======

                  Hines does not have any off balance sheet financing or any
         financial arrangements with any related parties, except for operating
         leases, which are disclosed in the Notes to Consolidated Financial
         Statements included in the Company's Annual Report on Form 10-K.

                  In our opinion, cash generated by operations and from
         borrowings available under the Amended Senior Credit Facility will be
         sufficient to meet the Company's anticipated working capital, capital
         expenditures and debt service requirements through 2002 and thereafter
         for the foreseeable future. However, we cannot ensure that we will
         generate sufficient cash flow from operations, that anticipated
         operating improvements will be realized on schedule or at all, or that
         future borrowings will be available under our credit facility in
         amounts sufficient to pay indebtedness or fund our liquidity needs.
         Actual results of operations will depend on numerous factors, many of
         which are beyond our control. We cannot ensure that we will be able to
         refinance any indebtedness, including our amended credit facility, on
         commercially reasonable terms or at all.



                                    Page 24
<PAGE>

         FORWARD LOOKING STATEMENTS AND RISK FACTORS

                  We have made and will make "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 in our Annual Report, Forms
         10-K and 10-Q and in other contexts relating to our future prospects,
         our operations and our strategies. Forward-looking statements include,
         but are not limited to, information regarding our future economic
         performance and financial condition, the plans and objectives of our
         management and our assumptions regarding our performance and these
         plans and objectives.

                  The forward-looking statements that we make in our Annual
         Report, Forms 10-K and 10-Q and in other contexts represent challenging
         goals for our company, and the achievement of these goals and our
         operations are subject to a variety of risks and assumptions and
         numerous factors beyond our control. Important factors that could cause
         actual results to differ materially from the forward-looking statements
         we make are described below. The following risk factors should not be
         considered a definitive list of all risks associated with our
         operations and should be read in conjunction with the risks and
         uncertainties contained in our other filings with the Securities and
         Exchange Commission.

          WEATHER; GENERAL AGRICULTURAL RISKS

                  Adverse weather or production difficulties occurring at a time
         of peak production or sales (in the first half of the calendar year),
         particularly on weekends during the peak gardening season, could cause
         declines in net sales and operating income that could have a material
         adverse effect on the Company. The Company's operations may also be
         adversely affected by disease, freezing conditions, snow, drought or
         other inclement weather. There can be no assurance that future weather
         conditions will not have a material adverse effect on the Company.
         Agricultural production is highly dependent upon the availability of
         water. The Company's facilities receive their water from a variety of
         sources, including on-site wells, reservoirs and holding ponds,
         municipal water districts and irrigation water supplied to local
         districts by facilities owned and operated by the United States acting
         through the Department of Interior Bureau of Reclamation. The loss or
         reduction of access to water at any of the company's facilities could
         have a material adverse effect on the Company.

         SEASONALITY; VARIABILITY OF QUARTERLY RESULTS AND CERTAIN CHANGES

                  The Company's business, like that of its competitors, is
         highly seasonal. In 2001, approximately 74% of net sales and
         approximately 108% of operating profits occurred in the first half of
         the year, with approximately 53% of net sales and approximately 88% of
         operating profits occurring in the second quarter of 2001. The Company
         has experienced, and expects to continue to experience, significant
         variability in net sales, operating income and net income on a
         quarterly basis. The principal factor contributing to this variability
         is weather, particularly on weekends during the peak gardening season,
         which could cause declines in net sales and operating income that could
         have a material adverse effect on the Company.


                                    Page 25
<PAGE>

         Other factors that may contribute to this variability include:

                  -        weather conditions during peak growing and gardening
                           seasons;
                  -        shifts in demand for live plant products;
                  -        changes in product mix, service levels and pricing by
                           the Company and its competitors;
                  -        the effect of acquisitions; - the economic stability
                           of the retail customers; and
                  -        the Company's relationship with each of its retail
                           customers.

         CUSTOMER CONCENTRATION; DEPENDENCE ON HOME DEPOT

                  Our top 10 customers together accounted for approximately 74%
         of our fiscal year 2001 net sales. Our largest customer, Home Depot,
         accounted for approximately 44% of our fiscal year 2001 net sales.
         These customers hold significant positions in the retail lawn and
         garden market. Management expects that a small number of customers will
         continue to account for a substantial portion of the Company's net
         sales for the foreseeable future. The Company does not have long-term
         contracts with any of its retail customers, and there can be no
         assurance that they will continue to purchase its products.

                  The loss of, or a significant adverse change in, the Company's
         relationship with Home Depot or any other major customer could have a
         material adverse effect on the Company. The loss of, or a reduction in
         orders from, any significant retail customers, losses arising from
         retail customers' disputes regarding shipments, fees, merchandise
         condition or related matters, or the Company's inability to collect
         accounts receivable from any major retail customer could have a
         material adverse effect on the Company. In addition, there can be no
         assurance that revenue from customers that have accounted for
         significant revenue in past periods, individually or as a group, will
         continue, or if continued, will reach or exceed historical levels in
         any period.

         KMART BANKRUPTCY

                  Kmart, one of our top customers, filed for bankruptcy relief
         under Chapter 11 of the bankruptcy code on January 22, 2002. Following
         such filing, we recommenced shipping products to Kmart. If Kmart does
         not successfully emerge from its bankruptcy reorganization, the loss
         of, or reduction in, orders or the Company's inability to collect
         accounts receivables from Kmart, could have a material adverse effect
         on the Company, its business and operations During the six months ended
         June 30, 2002 the Company's net sales to Kmart were approximately $7.5
         million, a decrease of $6.4 million from the comparable period in 2001.

                  The Company recently proposed a modification of the terms
         under which it makes sales to Kmart, which they declined. Accordingly,
         the Company believes that this is likely to further reduce future sales
         to Kmart. As noted above, for the six months ended June 30, 2002 the
         Company had approximately $7.5 million of sales to Kmart and for the
         six-month period ended December 31, 2001 had net sales of approximately
         $3.2 million to Kmart.

                                    Page 26
<PAGE>

         SUBSTANTIAL LEVERAGE

                  We have a significant amount of debt. Our substantial
         indebtedness could have important consequences for you. For example, it
         could:

                  -        make it more difficult for us to satisfy our
                           obligations;
                  -        increase our vulnerability to general adverse
                           economic and industry conditions;
                  -        require us to dedicate a substantial portion of cash
                           flows from operations to payments on our
                           indebtedness, which would reduce cash flows available
                           to fund working capital, capital expenditures, and
                           other general corporate requirements;
                  -        limit our flexibility in planning for, or reacting
                           to, changes in our business and the industry in which
                           we operate;
                  -        place us at a competitive disadvantage compared to
                           our competitors that have less debt; - limit our
                           ability to borrow additional funds; and
                  -        expose us to risks inherent in interest rate
                           fluctuations because some of our borrowings are at
                           variable rates of interest, which could result in
                           higher interest expense in the event of increases in
                           interest rates.

                  Our ability to make payments on and to refinance our
         indebtedness and to fund planned capital expenditures will depend on
         our ability to generate cash in the future. To some extent, this is
         subject to general economic, financial, competitive, legislative,
         regulatory and other factors that are beyond our control.

                  We may need to refinance all or a portion of our indebtedness
         on or before maturity. We cannot assure that we will be able to
         refinance any of our indebtedness on commercially reasonable terms or
         at all.

         COVENANT RESTRICTIONS

                  Our credit facility and the indenture governing our
         outstanding Notes contain restrictive covenants that require us to
         maintain specified financial ratios and satisfy other financial
         condition tests. Our ability to meet those financial ratios and tests
         can be affected by events beyond our control, and we cannot assure you
         that we will meet those tests. A breach of any of these covenants could
         result in a default under our credit facility and/or the Notes, the
         lenders and/or noteholders could elect to declare all of our
         outstanding indebtedness to be immediately due and payable and
         terminate all commitments to extend further credit. We cannot be sure
         that our lenders or the noteholders would waive a default or that we
         could pay the indebtedness in full if it were accelerated.

         GOVERNMENTAL REGULATIONS; MINIMUM WAGE

                  The Company is subject to certain federal, state and local
         health, safety and environmental laws and regulations regarding the
         production, storage and transportation of certain of its products and
         the disposal of its waste.

                                    Page 27
<PAGE>

                  Certain of the Company's operations and activities, such as
         water runoff from its production facilities and the use of certain
         pesticides, are subject to regulation by the United States
         Environmental Protection Agency (the "EPA") and similar state and local
         agencies. These agencies may regulate or prohibit the use of such
         products, procedures or operations, thereby affecting the Company's
         operations and profitability. In addition, the Company must comply with
         a broad range of environmental laws and regulations. Additional or more
         stringent environmental laws and regulations may be enacted in the
         future and such changes could have a material adverse effect on the
         Company. The Company uses reclamation water as one of the sources of
         water for a few of its production facilities. Federal reclamation laws
         and regulations govern the use and pricing of reclamation water,
         including availability of subsidized water rates. Changes in the law
         could have a material adverse effect on the Company.

                  In addition, the Company is subject to the Fair Labor
         Standards Act as well as various federal, state and local regulations
         that govern matters such as minimum wage requirements, overtime and
         working conditions. A large number of the Company's seasonal employees
         are paid at or slightly above the applicable minimum wage level and,
         accordingly, changes in such laws and regulations could have a material
         adverse effect on the Company by increasing its costs.

         MADISON DEARBORN CAPITAL PARTNERS, L.P. OWNS APPROXIMATELY 54% OF
         THE OUTSTANDING COMMON SHARES OF HINES ON A FULLY DILUTED BASIS.

                  Madison Dearborn Capital Partners, L.P. ("MDCP") owns
         approximately 54% of the outstanding commons shares of Hines on a fully
         diluted basis and has sufficient voting power to significantly
         influence the election of directors and the approval of other actions
         requiring the approval of our shareholders.

         COMPETITION

                  The wholesale nursery industry is highly competitive.
         Competition in the nursery products segment of the lawn and garden
         industry is based principally on the breadth of product offering,
         consistent product quality and availability, customer service and
         price. The nursery products segment is highly fragmented.

                  According to the 1997 Census of Agriculture released by the
         USDA's National Agricultural Statistics Service, the nursery business
         is comprised of approximately 30,000 primarily small and regionally
         based growers, with the top 100 growers accounting for approximately
         22% of the industry volume. Management believes Hines Nurseries is one
         of only two growers able to serve every major regional market in North
         America; the Company's only national competitor being Monrovia Nursery
         Company. In each of its markets, Hines competes with regional growers
         such as Color Spot Nurseries, Inc. in the West, Clinton Nurseries in
         the Northeast, Zelenka Nurseries in the Midwest, Wight Nurseries in the
         South and many other smaller regional and local growers. Hines
         Nurseries' key competitive advantages are its ability to provide
         consistent, high quality products in large volumes, its nationwide
         distribution and its value-added services.


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<PAGE>

         DEPENDENCE ON MANAGEMENT

                  The Company's success is largely dependent on the skills,
         experience and efforts of its senior management. The loss of services
         of one or more members of the Company's senior management could have a
         material adverse effect on the Company. The Company does 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 the
         Company, such competition could have a material adverse effect on the
         Company.



                                    Page 29

<PAGE>


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                  As part of its ongoing business, the Company is exposed to
         certain market risks, including fluctuations in interest rates, foreign
         exchange rates, commodity prices and its common stock price. The
         Company does not enter into transactions designed to mitigate its
         market risks for trading or speculative purposes.

                  In May 2000, the Company entered into an interest rate swap
         and cap agreement ("interest rate agreement") to hedge $75.0 million of
         its loan facility. The interest rate agreement effectively changes the
         Company's exposure on its variable rate interest payments to fixed rate
         interest payments of 7.13% based on the 3-month LIBOR rate in effect at
         the beginning of each quarterly period, with a maximum rate of 8%. The
         interest rate agreement matures in February 2005. At June 30, 2002, the
         estimated fair value of the interest rate agreement was $7.4 million.

                  The Company also manages its interest rate risk by balancing
         the amount of its fixed and variable long-term debt. For fixed-rate
         debt, interest rate changes affect the fair market value of such debt
         but do not impact earnings or cash flows. Conversely, for variable rate
         debt, interest rate changes generally do not affect the fair market
         value of such debt but do impact future earnings and cash flows,
         assuming other factors are held constant.


                                    Page 30
<PAGE>


                           PART II. OTHER INFORMATION

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

         The Company held its Annual Meeting of Stockholders on May 30, 2002 at
         which the stockholders of the Company elected seven directors and
         ratified the appointment of PricewaterhouseCoopers LLP as the Company's
         independent public accountants for the 2002 fiscal year.

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

         Name of Nominee           Votes For         Against       Abstentions
         ---------------           ---------         -------       -----------
         Douglas D. Allen          18,442,330       2,543,398          0
         Stan R. Fallis            18,442,330       2,543,398          0
         G. Ronald Morris          18,442,330       2,543,398          0
         Thomas R. Reusche         18,442,330       2,543,398          0
         James R. Tennant          18,442,330       2,543,398          0
         Stephen P. Thigpen        18,442,330       2,543,398          0
         Paul R. Wood              18,442,330       2,543,398          0

                  For the ratification of PricewaterhouseCoopers LLP as the
         Company's independent public accountants, 18,456,426 votes were cast in
         favor, 2,525,798 votes were cast against and there were 3,504
         abstentions.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

               (a) Exhibits

               Exhibit 99.1  Certification of Chief Executive Officer Pursuant
                             To 18 U.S.C. Section 1350, As Adopted Pursuant To
                             Section 906 Of The Sarbanes-Oxley Act of 2002.

               Exhibit 99.2  Certification of Chief Financial Officer Pursuant
                             To 18 U.S.C. Section 1350, As Adopted Pursuant To
                             Section 906 Of The Sarbanes-Oxley Act of 2002.


               (b) Reports on Form 8-K

               Current Report on Form 8-K dated April 10, 2002, setting forth
               the completion of the sale of all the issued and outstanding
               shares of Sun Gro Horticulture Canada Ltd. and certain rights and
               assets of Sun Gro Horticulture, Inc.


               Items 1, 2, 3 and 5 of Part II are not applicable and have been
               omitted.



                                    Page 31
<PAGE>



                                    SIGNATURE


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


                                              HINES HORTICULTURE, INC.
                                              (REGISTRANT)



                                              By: /s/ Claudia M. Pieropan
                                                  ---------------------------
                                                  Claudia M. Pieropan
                                                  CHIEF FINANCIAL OFFICER
                                                  (Principal financial officer
                                                  and duly authorized officer)



Date: August 14, 2002




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