UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)


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

FOR THE QUARTERLY PERIOD ENDED ~~DECEMBER 31, 2005~~APRIL 1, 2006


o		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 1-13292

THE SCOTTS MIRACLE-GRO COMPANY

(Exact Name of Registrant as Specified in Its Charter)


OHIO		31-1414921
(State or Other Jurisdiction of		~~31-1414921~~(I.R.S. Employer Identification No.)
Incorporation or Organization)		~~(I.R.S. Employer Identification No.)~~

14111 SCOTTSLAWN ROAD, MARYSVILLE, OHIO 43041
(Address of Principal Executive Offices) (Zip Code)

(937) 644-0011
(Registrant’s Telephone Number, Including Area Code)

NO CHANGE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

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

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

Large ~~accelerated filer~~Accelerated FilerþR Accelerated ~~filer~~Filero£ Non-accelerated ~~filer~~Filero£

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

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


			~~OUTSTANDING AT FEBRUARY 3, 2006~~

~~67,964,740~~

The number of Common Shares, ~~voting, no~~without par value, of the registrant outstanding as of May 4, 2006 was 67,314,532.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS

(IN MILLIONS EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

THREE MONTHS ENDED
DECEMBER 31, JANUARY 1,
2005 2005
Net sales $ 249.5 $ 246.5
Cost of sales 196.0 185.4

Gross profit 53.5 61.1

Operating expenses:
Selling, general and administrative 126.0 129.6
Impairment, restructuring and other charges 5.7 22.2
Other income, net (1.6 ) (0.2 )

Loss from operations (76.6 ) (90.5 )

Interest expense 7.1 10.4

Loss before income taxes (83.7 ) (100.9 )

Income taxes (benefit) (31.0 ) (38.4 )

Loss from continuing operations (52.7 ) (62.5 )
Loss from discontinued operations — (0.2 )

Net loss $ (52.7 ) $ (62.7 )

BASIC LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period 68.0 66.0

Basic loss per common share:
Loss from continuing operations $ (0.78 ) $ (0.95 )
Loss from discontinued operations — —

Net loss $ (0.78 ) $ (0.95 )

DILUTED LOSS PER COMMON SHARE:
Weighted-average common shares outstanding during the period 68.0 66.0

Diluted loss per common share:
Loss from continuing operations $ (0.78 ) $ (0.95 )
Loss from discontinued operations — —

Net loss $ (0.78 ) $ (0.95 )

Dividends declared per common share $ 0.125 $ —


	THREE MONTHS ENDED						SIX MONTHS ENDED
	APRIL 1,			APRIL 2,			APRIL 1,			APRIL 2,
	2006			2005			2006			2005
Net sales	$	907.5		$	813.4		$	1,157.0		$	1,059.9
Cost of sales		561.0			485.8			757.0			671.2
Cost of sales – restructuring and other		0.1			—			0.1			—

Gross profit		346.4			327.6			399.9			388.7
Operating expenses:
Selling, general and administrative		183.2			178.4			309.2			308.0
Impairment, restructuring and other charges		1.0			1.0			6.7			23.2
Other (income) expense, net		(0.8	)		1.0			(2.4	)		0.8

Income from operations		163.0			147.2			86.4			56.7
Interest expense		12.5			12.9			19.6			23.3

Income before income taxes		150.5			134.3			66.8			33.4
Income taxes		55.7			51.0			24.7			12.7

Income from continuing operations		94.8			83.3			42.1			20.7
Loss from discontinued operations		—			(0.1	)		—			(0.3	)

Net income	$	94.8		$	83.2		$	42.1		$	20.4


BASIC INCOME PER COMMON SHARE:
Weighted-average common shares outstanding during the period		67.5			66.6			67.9			66.2

Basic income per common share:
Income from continuing operations	$	1.40		$	1.25		$	0.62		$	0.31
Loss from discontinued operations		—			—			—			—

Net income	$	1.40		$	1.25		$	0.62		$	0.31


DILUTED INCOME PER COMMON SHARE:
Weighted-average common shares outstanding during the period		69.6			68.2			70.0			68.0

Diluted income per common share:
Income from continuing operations	$	1.36		$	1.22		$	0.60		$	0.30
Loss from discontinued operations		—			—			—			—

Net income	$	1.36		$	1.22		$	0.60		$	0.30


Dividends declared per common share	$	0.125		$	—		$	0.250		$	—

See notes to condensed, consolidated financial statements

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

(UNAUDITED)


	THREE MONTHS ENDED						SIX MONTHS ENDED
	DECEMBER 31,			JANUARY 1,			APRIL 1,			APRIL 2,
	2005			2005			2006			2005
OPERATING ACTIVITIES
Net loss	$	(52.7	)	$	(62.7	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net income							$	42.1		$	20.4
Adjustments to reconcile net income to net cash used in operating activities:
Impairment of intangible assets		1.0			22.0			1.0			22.0
Stock-based compensation expense		4.3			2.3			8.7			4.6
Depreciation		12.2			12.5			25.1			24.7
Amortization		3.5			3.4			7.3			7.1
Deferred taxes		—			(9.5	)		—			2.4
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable		82.0			56.6			(581.3	)		(493.9	)
Inventories		(222.2	)		(181.2	)		(200.1	)		(170.7	)
Prepaid and other current assets		(2.8	)		(1.4	)		(11.2	)		(12.8	)
Accounts payable		59.9			50.0			110.1			125.9
Accrued taxes and liabilities		(117.3	)		(62.1	)		18.7			46.8
Restructuring reserves		(5.0	)		(1.9	)		7.4			(1.0	)
Other non-current items		2.9			3.0			10.9			8.0
Other, net		0.2			(1.7	)		2.6			0.5

Net cash used in operating activities		(234.0	)		(170.7	)		(558.7	)		(416.0	)


INVESTING ACTIVITIES
Redemption of available for sale securities		—			57.2			—			57.2
Investment in property, plant and equipment		(14.3	)		(5.0	)		(26.6	)		(11.6	)
Investment in acquired businesses, net of cash acquired		(97.7	)		(70.3	)		(102.0	)		(76.6	)

Net cash used in investing activities		(112.0	)		(18.1	)		(128.6	)		(31.0	)


FINANCING ACTIVITIES
Borrowings under revolving and bank lines of credit		337.2			132.9			691.4			408.5
Repayments under revolving and bank lines of credit		(33.9	)		(14.2	)		(4.9	)		(35.3	)
Repayments of term loans		—			(1.0	)		—			(2.0	)
Dividends paid		(8.5	)		—			(16.8	)		—
Purchase of common shares		(1.2	)		—			(45.9	)		—
Financing fees, net		—			(0.4	)		—			(0.5	)
Payments on seller notes		(0.5	)		(1.9	)		(3.1	)		(5.5	)
Cash received from the exercise of stock options		7.5			11.8			14.2			15.7

Net cash provided by financing activities		300.6			127.2			634.9			380.9


Effect of exchange rate changes on cash		3.0			(24.9	)		(0.5	)		(14.9	)

Net decrease in cash		(42.4	)		(86.5	)		(52.9	)		(81.0	)
Cash and cash equivalents at beginning of period		80.2			115.6			80.2			115.6

Cash and cash equivalents at end of period	$	37.8		$	29.1		$	27.3		$	34.6


Supplemental cash flow information
Interest paid, net of interest capitalized		8.6			13.1			15.7			21.1
Income taxes paid (received)		0.7			(2.4	)
Income taxes (received) paid								(16.4	)		2.3

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)


		UNAUDITED										UNAUDITED
		DECEMBER 31,			JANUARY 1,			SEPTEMBER 30,				APRIL 1,			APRIL 2,			SEPTEMBER 30,
		2005			2005			2005				2006			2005			2005
ASSETS	ASSETS										ASSETS
Current assets:
Cash and cash equivalents		$	37.8		$	29.1		$	80.2			$	27.3		$	34.6		$	80.2
Accounts receivable, less allowances of $10.1, $20.7 and $11.4, respectively			250.8			252.7			323.3
Accounts receivable, less allowances of $13.5, $22.5 and $11.4, respectively													915.8			798.2			323.3
Inventories, net			558.8			501.2			324.9				537.9			486.1			324.9
Prepaid and other assets			63.5			71.4			59.4				70.8			83.2			59.4

Total current assets			910.9			854.4			787.8				1,551.8			1,402.1			787.8

Property, plant and equipment, net of accumulated depreciation of $336.9, $315.3 and $322.4, respectively			361.0			343.8			337.0
Property, plant and equipment, net of accumulated depreciation of $349.8, $346.7 and $322.4, respectively													359.8			335.7			337.0
Goodwill			450.5			430.6			432.9				457.3			428.5			432.9
Intangible assets, net			472.3			467.3			439.5				470.0			459.4			439.5
Other assets			21.2			19.4			21.7				20.5			21.0			21.7

Total assets		$	2,215.9		$	2,115.5		$	2,018.9			$	2,859.4		$	2,646.7		$	2,018.9


LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY										LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt		$	13.9		$	20.5		$	11.1			$	11.5		$	24.5		$	11.1
Accounts payable			215.7			196.7			151.7				266.6			270.9			151.7
Accrued liabilities			224.5			238.5			314.7				310.7			302.7			314.7
Accrued taxes			(20.1	)		(5.3	)		8.7				43.6			37.0			8.7

Total current liabilities			434.0			450.4			486.2				632.4			635.1			486.2

Long-term debt			679.1			727.2			382.4				1,064.0			967.8			382.4
Other liabilities			126.5			110.0			124.1				133.5			125.3			124.1

Total liabilities			1,239.6			1,287.6			992.7				1,829.9			1,728.2			992.7

Commitments and contingencies (notes 3 and 8)

Shareholders’ equity:
Common shares and capital in excess of $.01 stated value per share, 68.1,66.4, 67.8 shares issued, respectively			503.2			447.2			491.3
Common shares and capital in excess of $.01 stated value per share, 67.5, 66.6 and 67.8 shares issued, respectively													501.4			452.8			491.3
Retained earnings			530.6			436.7			591.5				616.9			520.0			591.5
Treasury stock, at cost;.03 shares			(1.2	)		—			—
Treasury shares, at cost; 0.7 shares													(33.0	)		—			—
Accumulated other comprehensive loss			(56.3	)		(56.0	)		(56.6	)			(55.8	)		(54.3	)		(56.6	)

Total shareholders’ equity			976.3			827.9			1,026.2				1,029.5			918.5			1,026.2

Total liabilities and shareholders’ equity		$	2,215.9		$	2,115.5		$	2,018.9			$	2,859.4		$	2,646.7		$	2,018.9

NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

The Scotts Miracle-Gro Company (“Scotts Miracle-Gro”) and its subsidiaries (collectively, the “Company”) are engaged in the manufacture, marketing and sale of lawn and garden care products. The Company’s major customers include home improvement centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers, food and drug stores, commercial nurseries and greenhouses, and specialty crop growers. The Company’s products are sold primarily in North America and the European Union. We also operate the Scotts LawnService^® business which provides lawn and tree and shrub fertilization, insect control and other related services in the United ~~States. Effective October 2, 2004, Scotts acquired~~States and Smith & Hawken^®, a leading brand in the outdoor living and gardening lifestyle category. ~~Smith & Hawken~~^® ~~products are sold in the United States through its 57 retail stores as well as through catalog and internet sales.~~ Effective November 18, 2005, we entered the North America wild bird food category with the acquisition of Gutwein & Co. Inc. (“Gutwein”).

Due to the nature of our lawn and garden business, the majority of our shipments to retailers occur in the second and third fiscal quarters. On a combined basis, net sales for the second and third fiscal quarters generally represent 70% to 75% of our annual net sales. As a result of the seasonal nature of our business, results for the first six months of our ~~first~~ fiscal ~~quarter~~year are not indicative of the full year.

ORGANIZATION AND BASIS OF PRESENTATION

The Company’s condensed, consolidated financial statements are unaudited; however, in the opinion of management, these condensed, consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America. The condensed, consolidated financial statements include the accounts of Scotts Miracle-Gro and all wholly-owned and majority-owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. The Company’s criteria for consolidating entities is based on majority ownership (as evidenced by a majority voting interest in the entity) and an objective evaluation and determination of effective management control. Interim results reflect all normal and recurring adjustments and are not necessarily indicative of results for a full year. The interim financial statements and notes are presented as specified by Regulation S-X of the Securities and Exchange Commission, and should be read in conjunction with the financial statements and accompanying notes in Scotts Miracle-Gro’s fiscal 2005 Annual Report on Form 10-K.

~~RESTRUCTURING MERGER~~

On March 18, 2005, The Scotts Company consummated the restructuring of its corporate structure into a holding company structure by merging The Scotts Company into a newly-created, wholly-owned, second-tier Ohio limited liability company subsidiary, The Scotts Company LLC, pursuant to the Agreement and Plan of Merger, dated as of December 13, 2004, by and among The Scotts Company, The Scotts Company LLC and Scotts Miracle-Gro (the “Restructuring Merger”). As a result of the Restructuring Merger, each of The Scotts Company’s common shares, without par value, issued and outstanding immediately prior to the consummation of the Restructuring Merger was automatically converted into one fully paid and nonassessable common share, without par value, of Scotts Miracle-Gro. Scotts Miracle-Gro is the public company successor to The Scotts Company. Following the consummation of the Restructuring Merger, The Scotts Company LLC is the successor to The Scotts Company and is a direct, wholly-owned subsidiary of Scotts Miracle-Gro, the new parent holding company.

STOCK SPLIT

On November 9, 2005, the Company executed a 2-for-1 stock split to shareholders of record on November 2, 2005. All share and per share information included in these condensed, consolidated financial statements and notes thereto have been adjusted to reflect this stock split for all periods presented.

REVENUE RECOGNITION

Revenue is recognized when title and risk of loss transfer, which generally occurs when products are received by the customer. Provisions for estimated returns and allowances are recorded at the time revenue is recognized based on historical rates of returns and are periodically adjusted for known changes in return levels. Shipping and handling costs are included in ~~costs~~cost of sales. Scotts LawnService^® revenues are recognized at the time service is provided to the customer.

programs and special purchasing incentives. Promotion costs (including allowances and rebates) incurred during the year are expensed to interim periods in relation to revenues and are recorded as a reduction of net sales. Accruals for expected payouts under these programs are included in the “Accrued liabilities” line in the Condensed, Consolidated Balance Sheets.

ADVERTISING

The Company advertises its branded products through national and regional media. Advertising costs incurred during the year are expensed to interim periods in relation to revenues. All advertising costs, except for external production costs, are expensed within the fiscal year in which such costs are incurred. External production costs for advertising programs are deferred until the period in which the advertising is first aired.

Scotts ~~LawnService~~^®LawnService® promotes its service offerings primarily through direct response mail campaigns. External costs associated with these campaigns that qualify as direct response advertising costs are deferred and recognized as advertising expense in proportion to revenues over a period not beyond the end of the subsequent calendar year. The costs deferred at ~~December 31, 2005, January~~April 1, 2006, April 2, 2005 and September 30, 2005 were ~~$2.0~~$5.6 million, ~~$0.7~~$2.2 million and $2.4 million, respectively.

STOCK-BASED COMPENSATION AWARDS

Beginning in fiscal 2003, the Company began expensing prospective grants of employee stock-based compensation awards in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” The Company adopted SFAS 123(R), “Share-Based Payment” effective October 1, 2005, following the modified prospective application approach. The Company was already in substantial compliance with SFAS 123(R) at the adoption date as the standard closely parallels SFAS 123. The adoption of SFAS 123(R) did not have a significant effect on the Company’s results of operations for the ~~period~~three or six-month periods ended ~~December 31, 2005.~~April 1, 2006.

The Company grants share-based awards annually to officers, other key employees, and non-employee directors. Historically, these awards primarily ~~include~~included stock options with exercise prices equal to the market price of the underlying common shares on the date of grant with a term of 10 years. The Company also has issued stock appreciation rights (“SARs”) awards with a stated price determined by the closing price of the Company’s common shares on the date of the grant. Stock appreciation rights result in less dilution than option awards as the SAR holder receives a net share settlement upon exercise. In recent years, the Company also has begun to grant awards of restricted stock. These share-based awards ~~have~~had been made under plans approved by the shareholders in 1992, 1996, and 2003. Generally, in respect of grants to employees, a three-year cliff vesting schedule is used for all share-based awards unless decided otherwise by the Compensation and Organization Committee of the Board of Directors. Grants to non-employee directors typically vest in one year or less. The Company has traditionally used newly issued shares to satisfy the exercise of stock options. Beginning in fiscal 2006, the Company has used treasury shares, as available, to satisfy the exercise of stock options.

On January 26, 2006, the shareholders of the Company approved the 2006 Long-Term Incentive Plan, providing for the availability of an additional 4.9 million common shares of the Company for ~~grant~~grants under the terms of the plan. As of ~~January 31,~~April 1, 2006, the Company had approximately 5.0 million common shares not subject to outstanding awards and available into support of the grant of new share-based awards.

The following is a recap of the share-based awards granted over the periods indicated:


	FOR THE THREE MONTHS ENDED
	DECEMBER 31,		JANUARY 1,		SIX MONTHS ENDED
	2005		2005		APRIL 1, 2006		APRIL 2, 2005
Key employees
Options		729,900		912,600		763,400		927,600
Stock appreciation rights		—		—
Performance shares		30,000		—		30,000		—
Restricted stock		157,400		101,000		159,800		101,000
Board of Directors — Options		—		—		126,000		147,000

Total share-based awards		917,300		1,013,600		1,079,200		1,175,600

Fair value at grant dates (in millions)	$	17.3	$	13.0

Aggregate fair value at grant dates (in millions)					$	19.0	$	14.7

~~The exercise price for option awards~~

Total share-based compensation and the ~~stated price for stock appreciation rights awards were determined by the closing price of the Company’s common shares~~tax benefit recognized on the ~~date of grant. Stock-based~~ compensation expense ~~recorded~~was as follows for the three months ended December 31, 2005 and January 1, 2005 $4.3 million, and $2.3 million, respectively. Stock appreciation rights result in less dilution than option awards as the SAR holder receives a net share settlement upon exercise.periods indicated:


	THREE MONTHS ENDED				SIX MONTHS ENDED
	APRIL 1, 2006		APRIL 2, 2005		APRIL 1, 2006		APRIL 2, 2005
	(IN MILLIONS)				(IN MILLIONS)
Share-based compensation	$	4.4	$	2.3	$	8.7	$	4.6
Tax benefit recognized		1.6		0.9		3.2		1.7

Stock Options/SARs

Aggregate option and stock appreciation right award activity consists of the following (options/SARs in millions):


	Fiscal Year ended September 30, 2005										Weighted Average		Weighted Average
	No. of			WTD. Avg.		WTD. Avg. Remaining Contractual	Aggregate Intrinsic	No. of Options			Exercise Price		Remaining	Aggregate
	Options/SARs			Exercise Price		Term	Value	/ SARs			Per Share		Contractual Term	Intrinsic Value
Balance at September 30, 2005		6.4		$	23.09
													(IN MILLIONS)
Balance, September 30, 2005									6.4		$	23.09
Granted		0.7		$	42.58				0.9			43.74
Exercised		(0.4	)	$	20.08				(0.7	)		20.59
Forfeited		(0.1	)	$	18.38				(0.1	)		31.83

Balance at December 31, 2005		6.6		$	25.41	7.3 years	$130.9 million
Balance, April 1, 2006									6.5			26.06	6.2 years	$	128.1

Exercisable at December 13, 2005		3.8		$	19.36	4.7 years	$98.3 million
Exercisable, April 1, 2006									3.8			19.59	4.5 years		99.4

The fair value of each award granted has been estimated on the grant date using ~~the~~a binomial ~~lattice-based~~ model ~~for fiscal 2006 and 2005. The fair value of each option award is estimated on the date of grant~~ using ~~a lattice-based option valuation model that uses~~ the assumptions noted in the following table. Expected ~~volatilities are~~volatility is based on implied volatilities from traded options on the Company’s ~~stock,~~common shares and historical volatility of the Company’s ~~stock, and other factors. The Company uses~~stock. Historical data, including demographic factors impacting historical ~~data~~exercise behavior, is used to estimate option exercise and employee termination within the valuation ~~model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.~~model. The expected ~~term~~life shown below is used for purposes of ~~options granted~~calculating expected volatility while the risk neutral expected life that is ~~derived from the~~an output of the ~~option valuation~~ model ~~and~~of 6.26 years represents the ~~period of time that options granted are~~ expected ~~to be outstanding.~~option holding period. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The weighted-average assumptions for awards granted for the six-month periods ended April 1, 2006 and April 2, 2005 are as follows:

LONG-LIVED ASSETS

Management assesses the recoverability of long-lived assets being amortized whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an impairment has occurred, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value.

Management also assesses the recoverability of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill and intangible assets not being amortized are reviewed for impairment at least annually during the first fiscal quarter. If it is determined that an impairment of intangible assets has occurred, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds its estimated fair value.

The Company performed its annual impairment analysis during the first quarter of fiscal 2006 and recorded a $1.0 million charge. ~~The~~A fiscal 2005 impairment charge of $22.0 million was for the U.K. consumer business, reflecting a reduction in the value of the business resulting primarily from the decline in the profitability of its growing media business and unfavorable category mix trends.

~~LOSS~~EARNINGS PER COMMON SHARE

~~Basic loss~~The following represents a reconciliation from basic earnings per ~~common~~ share ~~is computed based on the weighted average number~~to diluted earnings per share. Options to purchase 0.1 million and 0.8 million shares of common shares were outstanding ~~each period. Diluted loss per common share is computed based on the weighted-average number of common shares~~at April 1, 2006 and dilutive potential common shares (stock options, restricted stock, performance shares and stock appreciation rights) outstanding each period. Because of the first quarter loss, common stock equivalentsApril 2, 2005, respectively, but were not included in the ~~calculation~~computation of diluted ~~loss~~earnings per share because ~~to do so would have been anti-dilutive. These common stock equivalents equate to 2.1 million~~the options’ exercise prices were greater than the average market price of the underlying common shares and, ~~1.8~~therefore, the impact would be antidilutive.


	THREE MONTHS ENDED				SIX MONTHS ENDED
	APRIL 1, 2006		APRIL 2, 2005		APRIL 1, 2006		APRIL 2, 2005
	(IN MILLIONS, EXCEPT PER SHARE DATA)
Determination of common shares:
Average common shares outstanding		67.5		66.6		67.9		66.2
Assumed conversion of dilutive stock options and awards		2.1		1.6		2.1		1.8

Diluted average common shares outstanding		69.6		68.2		70.0		68.0

Basic earnings per common share	$	1.40	$	1.25	$	0.62	$	0.31
Diluted earnings per common share		1.36		1.22		0.60		0.30

On October 27, 2005, we announced that Scotts Miracle-Gro’s Board of Directors had approved a $500.0 million share repurchase program. This repurchase program is authorized for five years and we currently anticipate allocating approximately $100.0 million per year on the program. Through April 1, 2006, we have reacquired 971,200 shares of our common stock to be held in treasury at an aggregate cost of $45.9 million. A total of 266,967 shares ~~for~~of our common stock held in treasury have been reissued to support the ~~periods ended December 31, 2005 and January 1, 2005, respectively.~~exercise of employee held stock options.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed, consolidated financial statements and accompanying notes. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from the estimates.

REVISIONS AND RECLASSIFICATIONS

Certain revisions and reclassifications have been made into prior ~~periods~~years’ financial statements to conform to fiscal 2006 ~~classifications.~~reclassifications.

Effective with our fiscal 2005 Form 10-K and 2005 Annual Report to Shareholders, we made changes to our Condensed, Consolidated

Statements of Operations that management believes improve the overall presentation. As such, the fiscal 2005 quarterly condensed, consolidated financial statements presented therein have been revised to reflect these changes. With respect to the Marketing Agreement with Monsanto, we have made two presentational changes. First, we have reclassified as net sales the amounts previously reported as net commission from the Marketing Agreement. Second, net sales and cost of sales have been adjusted to reflect certain reimbursements and costs associated with the Marketing Agreement on a gross basis that were previously reported on a net basis, with no effect on gross profit or net income. See further details regarding these matters in Note 3. Furthermore, we have simplified the presentation of Selling, General and Administrative (“SG&A”) expenses presented on the face of the Condensed, Consolidated Statement of Operations.

2. DETAIL OF INVENTORIES, NET

Inventories, net of provisions for slow moving and obsolete inventory of ~~$16.1~~$17.0 million, ~~$20.1~~$20.4 million, and $16.3 million, respectively, consisted of:


	DECEMBER 31,		JANUARY 1,		SEPTEMBER 30,		APRIL 1,		APRIL 2,		SEPTEMBER 30,
	2005		2005		2005		2006		2005		2005
			(IN MILLIONS)						(IN MILLIONS)
Finished goods	$	414.3	$	366.7	$	216.0	$	404.5	$	371.0	$	216.0
Work-in-process		41.3		38.9		31.4		32.4		30.4		31.4
Raw materials		103.2		95.6		77.5		101.0		84.7		77.5

	$	558.8	$	501.2	$	324.9	$	537.9	$	486.1	$	324.9

3. MARKETING AGREEMENT

Under the terms of the Marketing Agreement with Monsanto, the Company is Monsanto’s exclusive agent for the domestic and international marketing and distribution of consumer Roundup^{^®} herbicide products. Under the terms of the Marketing Agreement, the Company is entitled to receive an annual commission from Monsanto in consideration for the performance of the Company’s duties as agent. The Marketing Agreement also requires the Company to make annual payments to Monsanto as a contribution against the overall expenses of the consumer Roundup^® business.

The annual gross commission under the Marketing Agreement is calculated as a percentage of the actual earnings before interest and income taxes (EBIT), as defined in the Marketing Agreement, of the consumer Roundup^® business. Each year’s percentage varies in accordance with the terms of the Marketing Agreement based on the achievement of two earnings thresholds and on commission rates that vary by threshold and program year. As the first earnings threshold is typically not achieved until our second fiscal quarter, there is no gross commission income in the first quarter.

The annual contribution payment as defined in the Marketing Agreement is $20.0 million; however, portions of the annual contribution payments for the first three years of the Marketing Agreement were deferred. Through July 2, 2005, the Company recognized a periodic charge associated with the annual contribution payments equal to the required payment for that period. The Company had not recognized a charge for the portions of the contribution payments that were deferred until the time those deferred amounts were due under the ~~teams~~terms of the Marketing Agreement. Based on the then available facts and circumstances, the Company considered this method of accounting to be appropriate. Factors considered in this determination included the likely term of the Marketing Agreement, the Company’s ability to terminate the Marketing Agreement without paying the deferred amounts, the Company’s assessment that the Marketing Agreement could have been terminated at any balance sheet date without incurring significant economic consequences as a ~~results~~result of such action and the fact that a significant portion of the deferred amount could never have been paid, even if the Marketing Agreement iswere not terminated prior to 2018, unless significant earnings targets were exceeded.

During the quarter ended July 2, 2005, the Company updated its assessment of the amounts deferred and previously considered a contingent obligation under the Marketing Agreement. Based on the then recent strong performance ofand other economic developments surrounding the consumer Roundup^® business, ~~and other economic developments surrounding~~ the business, the company believes that the deferred contribution amounts then outstanding would be paid in full between 2010 and 2012 under the terms of the Marketing Agreement. In management’s judgement,Company concluded it is probable that the deferred contribution payment that totaled $45.7 million as of July 2, 2005 would be paid. ~~As such,~~Since the recognition of this contingent obligation is for previously deferred contribution payments under the Marketing Agreement, the Company recorded ~~a $45.7 million~~this liability ~~for the deferred contribution payments,~~ with a ~~corresponding~~ charge to net sales in the quarter ended July 2, 2005. This amount bore interest at 8% until it was paid in October 2005. The deferred contribution balance was recorded as a current liability at September 30, 2005.

Under the terms of the Marketing Agreement, the Company performs certain functions, primarily manufacturing conversion, selling

and marketing support costs, on behalf of Monsanto in the conduct of the consumer Roundup^® business. The actual costs incurred for these activities are charged to and reimbursed by Monsanto, for which the Company recognizes no gross profit or net income. Prior to the fourth quarter of fiscal 2005, these costs were recognized in the consolidated statements of operations on a net basis as a recovery of incurred costs. ~~Effective with the fourth quarter of fiscal 2005, the~~The Company ~~now~~ records costs incurred under the Marketing Agreement for which the Company is the primary obligor on a gross basis, recognizing such costs in “Cost of sales” and the reimbursement of these costs in “Net sales,” with no effect on gross profit or net income. As disclosed in ~~“Note~~Note 22 — ~~Quarterly~~“Quarterly Consolidated Financial Information (Unaudited)” ~~of the Notes~~ to the Consolidated Financial Statements included in the Company’s fiscal 2005 Annual Report on Form 10-K, net sales and cost of sales for the quarters in fiscal 2005 were revised to reflect this change. The related ~~revenues~~net sales and cost of sales were ~~$8.2~~$10.0 million and ~~$9.6~~$11.0 million for the three-month periods and $18.2 million and $20.7 million for the six-month periods ended ~~December 31, 2005~~April 1, 2006 and ~~January 1,~~April 2, 2005, respectively.

Net sales also have been revised to reflect the net commission associated with the Marketing Agreement. Prior to the fourth quarter of fiscal 2005, the elements of net commission were reported as separate line items in the ~~condensed, consolidated statements~~Condensed, Consolidated Statements of ~~operations.~~Operations. The following table displays elements of the Marketing Agreement included in “Net sales.”

8. CONTINGENCIES

Management continually evaluates the Company’s contingencies, including various lawsuits and claims which arise in the normal course of business, product and general liabilities, worker’s compensation, property losses and other fiduciary liabilities for which the Company is self-insured or retains a high exposure limit. Self-insurance reserves are established based on actuarial estimates. Legal costs incurred in connection with the resolution of claims, lawsuits and other contingencies generally are expensed as incurred. In the opinion of management, its assessment of contingencies is reasonable and related reserves, in the aggregate, are adequate; however, there can be no assurance that future quarterly or annual operating results will not be materially affected by final resolution of these matters. The following matters are the more significant of the Company’s identified contingencies.

~~Reference should~~Environmental Matters

In 1997, the Ohio EPA initiated an enforcement action against the Company with respect to alleged surface water violations and inadequate treatment capabilities at the Marysville, Ohio facility seeking corrective action under the federal Resource Conservation and Recovery Act. The action related to discharges from on-site waste water treatment and several discontinued on-site disposal areas.

Pursuant to a Consent Order entered by the Union County Common Pleas Court in 2002, the Company is actively engaged in restoring the site to eliminate exposure to waste materials from the discontinued on-site disposal areas.

At April 1, 2006, $3.3 million was accrued for environmental and regulatory matters, primarily related to the Marysville facility. Most of the accrued costs are expected to be paid in fiscal 2006 and 2007; however, payments could be made for a period thereafter. While the amounts accrued are believed to ~~“Note 16 – Contingencies”~~be adequate to ~~Consolidated Financial Statements included~~cover known environmental exposures based on current facts and estimates of likely outcome, the adequacy of these accruals is based on several significant assumptions:

•		that all significant sites that must be remediated have been identified;

•		that there are no significant conditions of contamination that are unknown to us; and

•		that with respect to the agreed judicial Consent Order in Ohio, potentially contaminated soil can be remediated in place rather than having to be removed and only specific stream segments will require remediation as opposed to the entire stream.

If there is a significant change in the facts and circumstances surrounding these assumptions, it could have a material impact on the ultimate outcome of these matters and our results of operations, financial position and cash flows.

U.S. Horticultural Supply, Inc. (F/K/A E.C. Geiger, Inc.)

On November 5, 2004, U.S. Horticultural Supply, Inc. (“Geiger”) filed suit against the Company in the U.S. District Court for the Eastern District of Pennsylvania. This complaint alleges that the Company conspired with another distributor, Griffin Greenhouse Supplies, Inc., to restrain trade in the horticultural products market, in violation of Sections 1 and 57 of the Sherman Antitrust Act. Geiger has not specified the amount of monetary damages it is seeking. A motion to dismiss the complaint has been filed and is pending.

The Company intends to vigorously defend against Geiger’s claims. The Company believes that Geiger’s claims are without merit and that the likelihood of an unfavorable outcome is remote. Therefore, no accrual has been established related to this matter. However, the Company cannot predict the ultimate outcome with certainty. If the above action is determined adversely to the Company, the result could have a material adverse effect on the Company’s ~~fiscal~~results of operations, financial position and cash flows. Because Geiger has not specified an amount of monetary damages in the case (which may be trebled under the anti-trust statutes) and discovery has not yet commenced, any potential exposure that the Company may face cannot be reasonably estimated at this time.

Other

1113

~~2005 Annual Report on Form 10-K. Pending material environment~~associated with the cases and, ~~legal proceedings~~accordingly, no accrual or reserves have ~~not changed significantly from those disclosed~~been recorded in the consolidated financial statements. There can be no assurance that these cases, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material adverse effect on the Company’s financial condition or its results of operations.

The Company has pursued and continues to pursue insurance coverage for a number of cases alleging injuries that the lawsuits claim resulted from exposure to asbestos-containing products, apparently based on the Company’s historic use of vermiculite in certain of its products. We recovered a substantial portion of our past defense costs from one carrier during the second quarter of fiscal ~~2005 Annual Report~~2006 and that carrier has agreed to cover most of our defense costs in the future, subject to policy limits. Approximately $9.1 million has been recorded during the second quarter of fiscal 2006 and has been included in the “Selling, general and administrative” line of the Condensed, Consolidated Statement of Operations. The carrier also agreed to cover a portion of our future costs. We continue to pursue coverage from other carriers, although there can be no assurance as to the results of these efforts.

The Company is involved in other lawsuits and claims which arise in the normal course of business. These claims individually and in the aggregate are not expected to result in a material adverse effect on ~~Form 10-K.~~the Company’s results of operations, financial position or cash flows.

9. ACQUISITIONS

Effective October 3, 2005, the Company acquired all the outstanding shares of Rod McLellan Company for approximately $21.0 million in cash. Rod McLellan Company, a provider of soil and landscape products in the western U.S., operates three soil-manufacturing facilities in California and Oregon with approximately 100 employees. This business will be strategically integrated into our existing growing media business.

Effective November 18, 2005, the Company acquired all the outstanding shares of Gutwein, for approximately $77.0 million in cash. Gutwein’s annual revenues approximate $85.0 million in the growing wild bird food category. Gutwein’s Morning Song^{^®} products are sold at leading mass retailers, grocery, pet and general merchandise stores. Gutwein has 140 employees and operates five production facilities. This is the Company’s first acquisition in this category, offering the opportunity to expand our share of the outdoor living market.

Preliminary purchase accounting allocations have been recorded for both Rod McLellan Company and Gutwein, including the allocation of the purchase price to assets acquired and liabilities assumed, based on their estimated fair values at the date of acquisitions. The Company expects to finalize purchase accounting for the acquisitions prior to the end of fiscal 2006.

~~Pro~~On a pro forma basis, net sales ~~net loss, and net loss per common share~~ for the three and six months ended ~~January 1,~~April 2, 2005 would ~~not~~ have been ~~significantly different~~$841.9 million and $1,107.5 million, respectively (an increase of $28.5 million and $47.6 million, respectively) had the acquisitions of Rod McLellan Company and Gutwein occurred as of October 1, 2004. The pro forma reported net income would have increased by $2.2 million or 3 cents per diluted common share for both the three and six months ended April 2, 2005.

~~10.~~

10. SEGMENT INFORMATION

The Company is divided into the following segments — North America, Scotts LawnService^®, International, and Corporate & Other. ~~The North America segment primarily consists of the Lawns, Gardens, Ortho~~^®~~, Canada and North American Professional business groups as well as the North American portion of the Roundup~~^® ~~commission.~~ This division of reportable segments is consistent with how the segments report to and are managed by senior management of the Company. ~~Prior year amounts have been reclassified to conform with certain modifications to the Company’s reporting structure in fiscal 2006.~~

The North America segment manufactures, markets and sells dry, granular slow-release lawn fertilizers, combination lawn fertilizer and control products, grass seed, spreaders, water-soluble, liquid and continuous-release garden and indoor plant foods, plant care products, potting, garden and lawns soils, pottery, mulches and other growing media products, pesticide products and a full line of horticulture products. Products are marketed to mass merchandisers, home improvement centers, large hardware chains, warehouse clubs, distributors, nurseries, garden centers and specialty crop growers in the United States, Canada, Latin America, South America, Australia, and Asia-Pacific. The recently acquired businesses of Rod McLellan Company and Gutwein & Co. are being integrated into the North America segment.

~~The Scotts LawnService~~^® segment provides lawn fertilization, disease and insect control and other related services such as core aeration primarily to residential consumers through company-owned branches and franchises. In most company-operated locations, Scotts LawnService^® ~~also offers tree and shrub fertilization, disease and insect control treatments and, in our larger branches, an exterior barrier pest control service.~~

The International segment provides products similar to those described above for the North America segment to consumers primarily in Europe. The Corporate & Other segment consists of the Smith & Hawken^® ~~business and corporate, general and administrative expenses.~~


	THREE MONTHS						SIX MONTHS
	ENDED						ENDED
	APRIL 1,			APRIL 2,			APRIL 1,			APRIL 2,
	2006			2005			2006			2005
	(IN MILLIONS)						(IN MILLIONS)
Net sales:
North America	$	700.5		$	602.8		$	826.2		$	718.0
Scotts LawnService^®		29.8			21.6			53.4			42.5
International		150.2			164.7			208.5			234.2
Corporate & Other		27.0			24.3			68.9			65.2

	$	907.5		$	813.4		$	1,157.0		$	1,059.9


Operating income (loss):
North America	$	175.3		$	166.1		$	143.9		$	136.8
Scotts LawnService^®		(13.6	)		(12.2	)		(24.9	)		(20.5	)
International		24.6			30.5			19.4			24.6
Corporate & Other		(18.4	)		(32.6	)		(37.9	)		(53.9	)

Segment total		167.9			151.8			100.5			87.0
Roundup^® amortization		(0.2	)		(0.8	)		(0.4	)		(1.7	)
Amortization		(3.6	)		(2.8	)		(6.9	)		(5.4	)
Impairment of intangibles		—			—			(1.0	)		(22.0	)
Restructuring		(1.1	)		(1.0	)		(5.8	)		(1.2	)

	$	163.0		$	147.2		$	86.4		$	56.7


	FOR THE THREE MONTHS
	ENDED
	DECEMBER 31,			JANUARY 1,
	2005			2005
	(IN MILLIONS)
Net sales:
North America	$	125.6		$	115.3
Scotts LawnService^®		23.6			20.9
International		58.3			69.5
Corporate & Other		42.2			41.6

Segment total		249.7			247.3
Roundup^® amortization		(0.2	)		(0.8	)


	$	249.5		$	246.5


Operating loss:
North America	$	(28.5	)	$	(29.5	)
Scotts LawnService^®		(11.3	)		(8.2	)
International		(5.1	)		(5.9	)
Corporate & Other		(22.5	)		(21.3	)

Segment total		(67.4	)		(64.9	)
Roundup^® amortization		(0.2	)		(0.8	)
Amortization		(3.3	)		(2.6	)
Impairment of intangibles		(1.0	)		(22.0	)
Restructuring		(4.7	)		(0.2	)


	$	(76.6	)	$	(90.5	)


	DECEMBER 31,			JANUARY 1,			��	SEPTEMBER 30,
		2005			2005				2005	APRIL 1,		APRIL 2,		SEPTEMBER 30,
										2006		2005		2005
				(IN MILLIONS)								(IN MILLIONS)
Total assets:
North America	$	1,385.9		$	1,213.7			$	1,219.3	$	1,894.8	$	1,636.1	$	1,219.3
Scotts LawnService^®		132.5			122.6				146.7		150.7		136.1		146.7
International		505.7			579.6				463.1		609.8		665.1		463.1
Corporate & Other		191.8			199.6				189.8		204.1		209.4		189.8

										$	2,859.4	$	2,646.7	$	2,018.9
	$	2,215.9		$	2,115.5			$	2,018.9

THE SCOTTS MIRACLE-GRO COMPANY
CONDENSED, CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED ~~DECEMBER 31, 2005~~APRIL 1, 2006
(IN MILLIONS)
(UNAUDITED)


				SUBSIDIARY			NON-												SUBSIDIARY			NON-
	PARENT			GUARANTORS			GUARANTORS			ELIMINATIONS			CONSOLIDATED			PARENT			GUARANTORS			GUARANTORS			ELIMINATIONS			CONSOLIDATED
Net sales	$	—		$	178.9		$	70.6		$	—		$	249.5		$	—		$	719.5		$	188.0		$	—		$	907.5
Cost of sales		—			148.0			48.0			—			196.0			—			443.5			117.5			—			561.0
Cost of sales – restructuring and other																	—			—			0.1			—			0.1

Gross profit		—			30.9			22.6			—			53.5			—			276.0			70.4			—			346.4
Operating expenses:
Selling, general and administrative		—			97.9			28.1			—			126.0			—			144.7			38.5			—			183.2
Impairment, restructuring and other charges		—			4.5			1.2			—			5.7			—			(0.2	)		1.2			—			1.0
Equity loss in subsidiaries		49.4			—			—			(49.4	)		—
Equity income in subsidiaries																	(98.1	)		—			—			98.1			—
Intracompany allocations		—			(1.7	)		1.7			—			—			—			(6.7	)		6.7			—			—
Other income, net		—			(1.3	)		(0.3	)		—			(1.6	)		—			(0.6	)		(0.2	)		—			(0.8	)

Loss from operations		(49.4	)		(68.5	)		(8.1	)		49.4			(76.6	)
Income from operations																	98.1			138.8			24.2			(98.1	)		163.0
Interest expense		3.3			1.1			2.7			—			7.1			3.3			5.0			4.2			—			12.5

Loss before income taxes		(52.7	)		(69.6	)		(10.8	)		49.4			(83.7	)
Income tax benefit		—			(30.7	)		(0.3	)		—			(31.0	)
Income before income taxes																	94.8			133.8			20.0			(98.1	)		150.5
Income taxes																	—			43.9			11.8			—			55.7

Net loss	$	(52.7	)	$	(38.9	)	$	(10.5	)	$	49.4		$	(52.7	)
Net income																$	94.8		$	89.9		$	8.2		$	(98.1	)	$	94.8

THE SCOTTS MIRACLE-GRO COMPANY
CONDENSED, CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE ~~THREE~~SIX MONTH PERIOD ENDED ~~DECEMBER 31, 2005~~APRIL 1, 2006
(IN MILLIONS)
(UNAUDITED)


				SUBSIDIARY			NON-												SUBSIDIARY			NON-
	PARENT			GUARANTORS			GUARANTORS			ELIMINATIONS			CONSOLIDATED			PARENT			GUARANTORS			GUARANTORS			ELIMINATIONS			CONSOLIDATED
OPERATING ACTIVITIES
Net loss	$	(52.7	)	$	(38.9	)	$	(10.5	)	$	49.4		$	(52.7	)
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment of intangibles assets		—			—			1.0			—			1.0
Net income (loss)																$	42.1		$	51.0		$	(2.3	)	$	(48.7	)	$	42.1
Adjustments to reconcile net income to net cash used in operating activities:
Impairment of intangible assets																	—			—			1.0			—			1.0
Stock-based compensation expense		—			4.3			—			—			4.3			—			8.7			—			—			8.7
Depreciation		—			10.6			1.6			—			12.2			—			21.8			3.3			—			25.1
Amortization		—			1.9			1.6			—			3.5			—			3.7			3.6			—			7.3
Equity loss in subsidiaries		49.4			—			—			(49.4	)		—
Equity income in subsidiaries																	(48.7	)		—			—			48.7			—
Net change in certain components of working capital		—			(160.5	)		(44.9	)		—			(205.4	)		1.4			(503.3	)		(154.5	)		—			(656.4	)
Net changes in other assets and liabilities and other adjustments		—			4.8			(1.7	)		—			3.1			—			6.8			6.7			—			13.5

Net cash used in operating activities		(3.3	)		(177.8	)		(52.9	)		—			(234.0	)		(5.2	)		(411.3	)		(142.2	)		—			(558.7	)


INVESTING ACTIVITIES
Investment in property, plant and equipment		—			(9.2	)		(5.1	)		—			(14.3	)		—			(19.8	)		(6.8	)		—			(26.6	)
Investment in acquired businesses, net of cash acquired		(97.1	)		(0.6	)		—			—			(97.7	)		(98.0	)		(4.0	)		—			—			(102.0	)

Net cash used in investing activities		(97.1	)		(9.8	)		(5.1	)		—			(112.0	)		(98.0	)		(23.8	)		(6.8	)		—			(128.6	)


FINANCING ACTIVITIES
Borrowings under revolving and bank lines of credit		—			106.8			230.4			—			337.2			—			416.9			274.5			—			691.4
Repayments under revolving and bank lines of credit		—			(8.0	)		(25.9	)		—			(33.9	)		—			(2.0	)		(2.9	)		—			(4.9	)
Dividends paid		(8.5	)		—			—			—			(8.5	)		(16.8	)		—			—			—			(16.8	)
Purchase of common stock		(1.2	)		—			—			—			(1.2	)
Purchase of common shares																	(45.9	)		—			—			—			(45.9	)
Payments on seller notes		—			(0.5	)		—			—			(0.5	)		—			(3.1	)		—			—			(3.1	)
Cash received from the exercise of stock options		7.5			—			—			—			7.5			14.2			—			—			—			14.2
Intracompany financing		102.6			52.0			(154.6	)		—			—			151.7			(8.7	)		(143.0	)		—			—

Net cash provided by financing activities		100.4			150.3			49.9			—			300.6			103.2			403.1			128.6			—			634.9


Effect of exchange rate changes on cash		—			—			3.0			—			3.0			—			—			(0.5	)		—			(0.5	)

Net decrease in cash		—			(37.3	)		(5.1	)		—			(42.4	)		—			(32.0	)		(20.9	)		—			(52.9	)
Cash and cash equivalents, beginning of period		—			42.5			37.7			—			80.2			—			42.5			37.7			—			80.2

Cash and cash equivalents, end of period	$	—		$	5.2		$	32.6		$	—		$	37.8		$	—		$	10.5		$	16.8		$	—		$	27.3

THE SCOTTS MIRACLE-GRO COMPANY
CONDENSED, CONSOLIDATING BALANCE SHEET
AS OF ~~DECEMBER 31, 2005~~APRIL 1, 2006
(IN MILLIONS)
(UNAUDITED)


																	SUBSIDIARY		NON-
			SUBSIDIARY			NON-									PARENT		GUARANTORS		GUARANTORS			ELIMINATIONS			CONSOLIDATED
	PARENT		GUARANTORS			GUARANTORS			ELIMINATIONS			CONSOLIDATED
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	5.2		$	32.6		$	—		$	37.8		$	—	$	10.5	$	16.8		$	—		$	27.3
Accounts receivable, net		—		148.8			102.0			—			250.8			—		657.7		258.1			—			915.8
Inventories, net		—		440.6			118.2			—			558.8			—		419.8		118.1			—			537.9
Prepaid and other assets		—		40.1			23.4			—			63.5			—		53.6		17.2			—			70.8

Total current assets		—		634.7			276.2			—			910.9			—		1,141.6		410.2			—			1,551.8
Property, plant and equipment, net		—		315.2			45.8			—			361.0			—		314.2		45.6			—			359.8
Goodwill		—		334.7			115.8			—			450.5			—		340.1		117.2			—			457.3
Intangible assets, net		—		351.8			120.5			—			472.3			—		349.0		121.0			—			470.0
Other assets		10.7		10.2			0.3			—			21.2			9.6		9.9		1.0			—			20.5
Investment in affiliates		875.4		—			—			(875.4	)		—			930.2		—		—			(930.2	)		—
Intracompany assets		290.2		—			—			(290.2	)		—			291.2		—		—			(291.2	)		—

Total assets	$	1,176.3	$	1,646.6		$	558.6		$	(1,165.6	)	$	2,215.9		$	1,231.0	$	2,154.8	$	695.0		$	(1,221.4	)	$	2,859.4


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt	$	—	$	3.8		$	10.1		$	—		$	13.9		$	—	$	2.3	$	9.2		$	—		$	11.5
Accounts payable		—		166.2			49.5			—			215.7			—		197.6		69.0			—			266.6
Accrued liabilities		—		135.1			89.4			—			224.5			1.5		202.8		106.4			—			310.7
Accrued taxes		—		(24.1	)		4.0			—			(20.1	)		—		35.6		8.0			—			43.6

Total current liabilities		—		281.0			153.0			—			434.0			1.5		438.3		192.6			—			632.4
Long-term debt		200.0		115.4			363.7			—			679.1			200.0		431.0		433.0			—			1,064.0
Other liabilities		—		104.2			22.3			—			126.5			—		104.9		28.6			—			133.5
Intracompany liabilities		—		149.6			140.6			(290.2	)		—			—		137.8		153.4			(291.2	)		—

Total liabilities		200.0		650.2			679.6			(290.2	)		1,239.6			201.5		1,112.0		807.6			(291.2	)		1,829.9
Shareholders’ equity		976.3		996.4			(121.0	)		(875.4	)		976.3			1,029.5		1,042.8		(112.6	)		(930.2	)		1,029.5

Total liabilities and shareholders’ equity	$	1,176.3	$	1,646.6		$	558.6		$	(1,165.6	)	$	2,215.9		$	1,231.0	$	2,154.8	$	695.0		$	(1,221.4	)	$	2,859.4

THE SCOTTS MIRACLE-GRO COMPANY
CONDENSED, CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED ~~JANUARY 1,~~APRIL 2, 2005
(IN MILLIONS)
(UNAUDITED)


				SUBSIDIARY			NON-												SUBSIDIARY			NON-
	PARENT			GUARANTORS			GUARANTORS			ELIMINATIONS			CONSOLIDATED			PARENT			GUARANTORS			GUARANTORS		ELIMINATIONS			CONSOLIDATED
Net sales	$	61.9		$	103.8		$	80.8		$	—		$	246.5		$	441.1		$	177.9		$	194.4	$	—		$	813.4
Cost of sales		46.0			86.2			53.2			—			185.4			268.0			98.7			119.1		—			485.8

Gross profit		15.9			17.6			27.6			—			61.1			173.1			79.2			75.3		—			327.6
Operating expenses:
Selling, general and administrative		68.4			30.2			31.0			—			129.6			107.2			32.6			38.6		—			178.4
Impairment, restructuring and other charges		0.3			—			21.9			—			22.2			0.9			—			0.1		—			1.0
Equity loss in subsidiaries		27.0			—			—			(27.0	)		—
Equity income in subsidiaries																	(45.7	)		—			—		45.7			—
Intracompany allocations		(6.9	)		2.8			4.1			—			—			(6.5	)		(1.7	)		8.2		—			—
Other income, net		0.4			(0.8	)		0.2			—			(0.2	)
Other (income) expense, net																	(0.5	)		(1.1	)		2.6		—			1.0

Loss from operations		(73.3	)		(14.6	)		(29.6	)		27.0			(90.5	)
Income from operations																	117.7			49.4			25.8		(45.7	)		147.2
Interest expense (income)		11.0			(2.3	)		1.7			—			10.4			11.4			(2.3	)		3.8		—			12.9

Loss before income taxes		(84.3	)		(12.3	)		(31.3	)		27.0			(100.9	)
Income tax benefit		(21.8	)		(4.7	)		(11.9	)		—			(38.4	)
Income before income taxes																	106.3			51.7			22.0		(45.7	)		134.3
Income taxes																	23.0			19.7			8.3		—			51.0

Loss from continuing operations		(62.5	)		(7.6	)		(19.4	)		27.0			(62.5	)
Income from continuing operations																	83.3			32.0			13.7		(45.7	)		83.3
Loss from discontinued operations		(0.2	)		—			—			—			(0.2	)		(0.1	)		—			—		—			(0.1	)

Net loss	$	(62.7	)	$	(7.6	)	$	(19.4	)	$	27.0		$	(62.7	)
Net income																$	83.2		$	32.0		$	13.7	$	(45.7	)	$	83.2

THE SCOTTS MIRACLE-GRO COMPANY
CONDENSED, CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE ~~THREE~~SIX MONTHS ENDED ~~JANUARY 1,~~APRIL 2, 2005
(IN MILLIONS)
(UNAUDITED)


				SUBSIDIARY			NON-												SUBSIDIARY			NON-
	PARENT			GUARANTORS			GUARANTORS			ELIMINATIONS			CONSOLIDATED			PARENT			GUARANTORS			GUARANTORS			ELIMINATIONS			CONSOLIDATED
OPERATING ACTIVITIES
Net loss	$	(62.7	)	$	(7.6	)	$	(19.4	)	$	27.0		$	(62.7	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net income (loss)																$	20.4		$	24.4		$	(5.7	)	$	(18.7	)	$	20.4
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Impairment of intangible assets		—			—			22.0			—			22.0			—			—			22.0			—			22.0
Stock-based compensation expense		2.3			—			—			—			2.3			4.6			—			—			—			4.6
Depreciation		8.9			1.6			2.0			—			12.5			17.7			3.2			3.8			—			24.7
Amortization		0.9			1.3			1.2			—			3.4			1.9			2.7			2.5			—			7.1
Deferred taxes		0.5			—			(10.0	)		—			(9.5	)
Equity loss in subsidiaries		27.0			—			—			(27.0	)		—
Deferred taxes (benefit)																	1.5			2.4			(1.5	)		—			2.4
Equity income in subsidiaries																	(18.7	)		—			—			18.7			—
Net change in certain components of working capital		(78.2	)		(18.2	)		(43.6	)		—			(140.0	)		(280.2	)		(73.0	)		(152.5	)		—			(505.7	)
Net changes in other assets and liabilities and other adjustments		—			0.5			0.8			—			1.3			0.5			3.0			5.0			—			8.5

Net cash used in operating activities		(101.3	)		(22.4	)		(47.0	)		—			(170.7	)		(252.3	)		(37.3	)		(126.4	)		—			(416.0	)


INVESTING ACTIVITIES
Redemption of available for sale securities		57.2			—						—			57.2			57.2			—						—			57.2
Investment in property, plant and equipment		(3.3	)		(1.0	)		(0.7	)		—			(5.0	)		(8.3	)		(1.7	)		(1.6	)		—			(11.6	)
Investment in acquired businesses, net of cash acquired		—			(70.3	)		—			—			(70.3	)		—			(76.6	)		—			—			(76.6	)

Net cash provided by (used in) investing activities		53.9			(71.3	)		(0.7	)		—			(18.1	)		48.9			(78.3	)		(1.6	)		—			(31.0	)


FINANCING ACTIVITIES
Borrowings under revolving and bank lines of credit		14.5			—			118.4			—			132.9			14.5			—			394.0			—			408.5
Repayments under revolving and bank lines of credit		—			—			(14.2	)		—			(14.2	)		(15.2	)		—			(20.1	)		—			(35.3	)
Repayments of term loans		(1.0	)		—			—			—			(1.0	)		(2.0	)		—			—			—			(2.0	)
Financing fees, net		(0.3	)		—			(0.1	)		—			(0.4	)		(0.4	)		—			(0.1	)		—			(0.5	)
Payments on seller notes		—			(1.9	)		—			—			(1.9	)		(0.7	)		(4.8	)		—			—			(5.5	)
Cash received from the exercise of stock options		11.8			—			—			—			11.8			15.7			—			—			—			15.7
Intracompany financing		(55.7	)		95.0			(39.3	)		—			—			125.9			120.7			(246.6	)		—			—

Net cash provided by (used in) financing activities		(30.7	)		93.1			64.8			—			127.2
Net cash provided by financing activities																	137.8			115.9			127.2			—			380.9


Effect of exchange rate changes on cash		—			—			(24.9	)		—			(24.9	)		—			—			(14.9	)		—			(14.9	)

Net decrease in cash		(78.1	)		(0.6	)		(7.8	)		—			(86.5	)
Net (decrease) increase in cash																	(65.6	)		0.3			(15.7	)		—			(81.0	)
Cash and cash equivalents, beginning of period		82.4			1.3			31.9			—			115.6			82.4			1.3			31.9			—			115.6

Cash and cash equivalents, end of period	$	4.3		$	0.7		$	24.1		$	—		$	29.1		$	16.8		$	1.6		$	16.2		$	—		$	34.6

THE SCOTTS MIRACLE-GRO COMPANY
CONDENSED, CONSOLIDATING BALANCE SHEET
AS OF ~~JANUARY 1,~~APRIL 2, 2005
(IN MILLIONS)
(UNAUDITED)


																	SUBSIDIARY			NON-
				SUBSIDIARY			NON-								PARENT		GUARANTORS			GUARANTORS		ELIMINATIONS			CONSOLIDATED
	PARENT			GUARANTORS			GUARANTORS		ELIMINATIONS			CONSOLIDATED
ASSETS
Current assets:
Cash and cash equivalents	$	4.3		$	0.7		$	24.1	$	—		$	29.1		$	16.8	$	1.6		$	16.2	$	—		$	34.6
Accounts receivable, net		25.2			114.2			113.3		—			252.7			333.8		202.3			262.1		—			798.2
Inventories, net		257.6			103.6			140.0		—			501.2			240.5		113.3			132.3		—			486.1
Prepaid and other assets		36.6			6.1			28.7		—			71.4			49.3		11.3			22.6		—			83.2

Total current assets		323.7			224.6			306.1		—			854.4			640.4		328.5			433.2		—			1,402.1
Property, plant and equipment, net		185.0			112.5			46.3		—			343.8			181.1		111.0			43.6		—			335.7
Goodwill		19.9			282.5			128.2		—			430.6			19.9		284.4			124.2		—			428.5
Intangible assets, net		17.6			306.7			143.0		—			467.3			15.8		307.1			136.5		—			459.4
Other assets		19.3			—			0.1		—			19.4			20.9		0.1			—		—			21.0
Investment in affiliates		1,194.2			—			—		(1,194.2	)		—			1,244.1		—			—		(1,244.1	)		—
Intracompany assets		—			325.4			—		(325.4	)		—			—		303.2			—		(303.2	)		—

Total assets	$	1,759.7		$	1,251.7		$	623.7	$	(1,519.6	)	$	2,115.5		$	2,122.2	$	1,334.3		$	737.5	$	(1,547.3	)	$	2,646.7


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of debt	$	5.0		$	4.1		$	11.4	$	—		$	20.5		$	5.0	$	2.9		$	16.6	$	—		$	24.5
Accounts payable		98.1			37.9			60.7		—			196.7			125.9		61.3			83.7		—			270.9
Accrued liabilities		99.3			26.9			112.3		—			238.5			133.4		49.8			119.5		—			302.7
Accrued taxes		(6.9	)		0.6			1.0		—			(5.3	)		33.1		1.4			2.5		—			37.0

Total current liabilities		195.5			69.5			185.4		—			450.4			297.4		115.4			222.3		—			635.1
Long-term debt		618.0			4.1			105.1		—			727.2			601.4		3.5			362.9		—			967.8
Other liabilities		99.2			(3.6	)		14.4		—			110.0			100.4		(2.5	)		27.4		—			125.3
Intracompany liabilities		19.1			—			306.3		(325.4	)		—			204.5		—			98.7		(303.2	)		—

Total liabilities		931.8			70.0			611.2		(325.4	)		1,287.6			1,203.7		116.4			711.3		(303.2	)		1,728.2
Shareholders’ equity		827.9			1,181.7			12.5		(1,194.2	)		827.9			918.5		1,217.9			26.2		(1,244.1	)		918.5

Total liabilities and shareholders’ equity	$	1,759.7		$	1,251.7		$	623.7	$	(1,519.6	)	$	2,115.5		$	2,122.2	$	1,334.3		$	737.5	$	(1,547.3	)	$	2,646.7

THE SCOTTS MIRACLE-GRO COMPANY
CONDENSED, CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2005
(IN MILLIONS)


														SUBSIDIARY		NON-
			Subsidiary		Non-							PARENT		GUARANTORS		GUARANTORS		ELIMINATIONS			CONSOLIDATED
	Parent		Guarantors		Guarantors		Eliminations			Consolidated
ASSETS
Current Assets:
Current assets:
Cash and cash equivalents	$	—	$	42.5	$	37.7	$	—		$	80.2	$	—	$	42.5	$	37.7	$	—		$	80.2
Accounts receivable, net		—		240.3		83.0		—			323.3		—		240.3		83.0		—			323.3
Inventories, net		—		232.5		92.4		—			324.9		—		232.5		92.4		—			324.9
Prepaid and other assets		—		40.1		19.3		—			59.4		—		40.1		19.3		—			59.4

Total current assets		—		555.4		232.4		—			787.8		—		555.4		232.4		—			787.8
Property, plant and equipment, net		—		294.7		42.3		—			337.0		—		294.7		42.3		—			337.0
Goodwill		—		314.9		118.0		—			432.9		—		314.9		118.0		—			432.9
Intangible assets, net		—		315.4		124.1		—			439.5		—		315.4		124.1		—			439.5
Other assets		10.6		10.8		0.3		—			21.7		10.6		10.8		0.3		—			21.7
Investment in affiliates		1,660.5		—		—		(1,660.5	)		—		1,660.5		—		—		(1,660.5	)		—
Intracompany assets		—		606.9		—		(606.9	)		—		—		606.9		—		(606.9	)		—

Total assets	$	1,671.1	$	2,098.1	$	517.1	$	(2,267.4	)	$	2,018.9	$	1,671.1	$	2,098.1	$	517.1	$	(2,267.4	)	$	2,018.9


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:

Current liabilities:
Current portion of debt	$	—	$	4.1	$	7.0	$	—		$	11.1	$	—	$	4.1	$	7.0	$	—		$	11.1
Accounts payable		—		110.2		41.5		—			151.7		—		110.2		41.5		—			151.7
Accrued liabilities		—		222.5		92.2		—			314.7		—		222.5		92.2		—			314.7
Accrued taxes		—		5.2		3.5		—			8.7		—		5.2		3.5		—			8.7

Total current liabilities		—		342.0		144.2		—			486.2		—		342.0		144.2		—			486.2
Long-term debt		200.0		16.1		166.3		—			382.4		200.0		16.1		166.3		—			382.4
Other liabilities		—		102.2		21.9		—			124.1		—		102.2		21.9		—			124.1
Intracompany liabilities		444.9		—		162.0		(606.9	)		—		444.9		—		162.0		(606.9	)		—

Total liabilities		644.9		460.3		494.4		(606.9	)		992.7		644.9		460.3		494.4		(606.9	)		992.7
Shareholders’ equity		1,026.2		1,637.8		22.7		(1,660.5	)		1,026.2		1,026.2		1,637.8		22.7		(1,660.5	)		1,026.2
																				��
Total liabilities and shareholders’ equity	$	1,671.1	$	2,098.1	$	517.1	$	(2,267.4	)	$	2,018.9	$	1,671.1	$	2,098.1	$	517.1	$	(2,267.4	)	$	2,018.9

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

OVERVIEW

Management’s Discussion and Analysis (“MD&A”) is organized in the following sections:

~~Executive summary~~

~~Results of operations~~

~~Segment Discussion~~

~~Liquidity and capital resources~~

•		Executive summary

•		Results of operations

•		Segment results

•		Liquidity and capital resources

On November 9, 2005, Scotts Miracle-Gro implemented a 2-for-1 stock split of ~~the~~its common shares to shareholders of record on November 2, 2005. As of ~~December 31, 2005,~~April 1, 2006, on a split-adjusted basis, Scotts Miracle-Gro had approximately ~~68.0~~70.0 million diluted common shares outstanding. All share and per share information referred to in this MD&A and elsewhere in this Form 10-Q has been adjusted to reflect this stock split for all periods presented.

Effective with our fiscal 2005 Form 10-K and 2005 Annual Report to Shareholders, we have made changes to our Consolidated Statements of Operations that management believes improve the overall presentation. As such, the fiscal 2005 quarterly financial statements presented therein have been revised to reflect these changes. With respect to the Amended and Restated Exclusive Agency and Marketing Agreement (the “Marketing Agreement”) with Monsanto Company (“Monsanto”), we have made two presentational changes. First, we have reclassified as net sales the amounts previously reported as net commission from the Marketing Agreement. Second, net sales and cost of sales have been adjusted to reflect certain reimbursements and costs associated with the Marketing Agreement on a gross basis that were previously reported on a net basis, with no effect on gross profit or net income. See further details regarding these matters in Note 3 to the Condensed, Consolidated Financial Statements (Unaudited) included in Part I, Item I of this quarterly report on Form 10-Q. Furthermore, we have simplified the presentation of selling, general and administrative (“SG&A”) expenses presented on the face of the Condensed, Consolidated Statement of Operations. Details of this line item are included in the Results of Operations section of this MD&A.

Executive Summary

We are dedicated to delivering strong, consistent financial results and outstanding shareholder returns by providing consumers with products of superior quality and value to enhance their outdoor living environments. We are a leading manufacturer and marketer of consumer branded products for lawn and garden care and professional horticulture in North America and Europe. We are Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup^® non-selective herbicide products within the United States and other contractually specified countries. We ~~recently~~ entered the North America wild bird food category with the acquisition of Gutwein & Co. Inc. (“Gutwein”) in November 2005. We have a presence in Australia, the Far East, Latin America and South America. Also, in the United States, we operate what we believe to be the second largest residential lawn service business, Scotts LawnService^®. In fiscal 2006, our operations are divided into the following reportable segments: North America (including the Rod McLellan Company and Gutwein acquisitions discussed below), Scotts LawnService^®, International, and Corporate & Other. The Corporate & Other segment consists of our Smith & Hawken^® direct-to-consumer business, and corporate general and administrative expenses.

As a leading consumer branded lawn and garden company, we focus our marketing efforts, including advertising and consumer research, on creating consumer demand to pull products through the retail distribution channels. In the past three years, we have spent approximately 5% of our net sales annually on media advertising to support and promote our products and brands. We have applied this consumer marketing focus for the past several years, and believe that we receive a significant return on these marketing expenditures. We expect to continue our marketing efforts focused toward the consumer and make additional targeted investments in consumer marketing in the future to continue to drive sales and market share growth. In fiscal 2006, we expect to increase advertising spending 18% to 20% as we reinvest a portion of our selling, general and administrative cost savings to strengthen our brands and relationships with consumers.

Our sales are susceptible to global weather conditions. For instance, periods of wet weather can adversely impact sales of certain products, while increasing demand for other products. We believe that acquisitions have somewhat diversified both our product line risk and geographic risk to weather conditions.

Management focuses on a variety of key indicators and operating metrics to monitor the health and performance of our business. These metrics include consumer purchases (point-of-sale data), market share, net sales (including volume, pricing and foreign exchange), gross profit margins, income from operations, net income and earnings per share. To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges. We also focus on measures to optimize cash flow and return on invested capital, including the management of working capital and capital expenditures.

The 2005 long-term strategic improvement plan (“Project Excellence”), initiated in June 2005, is focused on improving organizational effectiveness, implementing better business processes, reducing SG&A expenses, and increasing spending on consumer marketing and innovation. ~~While we have generated strong financial performance over~~We are in the ~~past several years, management believes even greater results can be achieved. We expect~~process of reinvesting $25 million of our Project Excellence ~~related~~ SG&A savings ~~of $50 to $60 million~~ for fiscal 2006 ~~with approximately one-half being reinvested~~ in consumer marketing, technology and innovation. ~~The balance of these~~Additional Project Excellence savings are expected to increase fiscal 2006 pre-tax earnings by $25 to $30 million. ~~Though December 31, 2005, we~~We have incurred approximately ~~$29.7~~$5.8 million in restructuring charges associated with Project ~~Excellence. We continue to explore additional Project~~ Excellence ~~savings opportunities, which may result in future restructuring related costs.~~for the first six months of fiscal 2006 and approximately $32.1 million since the inception of the project.

We continue to view strategic acquisitions as a means to enhance our strong core businesses. In October 2004, we invested $73.6 million in the acquisition of Smith & Hawken^®, a leading brand in the outdoor living and gardening lifestyle category. Effective October 3, 2005, we acquired all the outstanding shares of Rod McLellan Company (“RMC”) for ~~a total of~~approximately $21.0 million in cash. RMC is a leading branded producer and marketer of soil and landscape products in the western U.S. This business ~~will be~~is being integrated into our existing Growing Media business. Effective November 18, 2005, we acquired all the outstanding shares of Gutwein for approximately $77.0 million in cash. Through its Morning Song^® brand, Gutwein is a leader in the growing U.S. wild bird food category, generating approximately ~~$85~~$85.0 million in annual revenues. Morning Song^® products are sold at leading mass retailers, grocery, pet and general merchandise stores. This is our first acquisition in the wild birdseed category and we are excited about the opportunity to leverage the strengths of both organizations to drive continued growth in this category. We continue to invest in the growth of our Scotts LawnService^® business, making over $95 million in acquisitions over the past five years.

Prior to fiscal 2005, we had not paid dividends on our common shares. Based on the levels of cash flow generated by our business in recent years and our improving financial condition, on June 22, 2005, we announced that Scotts Miracle-Gro’s Board of Directors approved an annual dividend of 50-cents per share, to be paid in 12.5-cent quarterly increments beginning in the fourth quarter of fiscal 2005. ~~Our first and second~~We have paid quarterly dividends ~~were paid~~ on September 1, 2005, ~~and~~ December 1, 2005 ~~respectively.~~and February 23, 2006. In addition to the 2-for-1 stock split noted earlier, on October 27, 2005, Scotts Miracle-Gro’s Board of Directors approved a $500 million share repurchase program. This repurchase program is authorized for five years and we currently anticipate allocating approximately $100 million per year to the program. Through April 1, 2006, we have reacquired 971,200 shares of our common shares to be held in treasury at an aggregate cost of $45.9 million. A total of 266,967 shares of our common shares held in treasury have been reissued to support the exercise of employee held stock options.

2326

Net sales for the ~~three~~second quarter and first six months ~~ended December 31, 2005 were $249.5 million, an increase~~ of ~~1.2% from net sales~~fiscal 2006, grew 11.6% and 9.2%, respectively, versus the comparable periods of ~~$246.5 million for the three months ended January 1,~~fiscal 2005. The impact of foreign exchange rates reduced sales growth for the second quarter and first six months by 130 basis points and 90 basis points, respectively. Excluding Morning Song^®, sales increased for the second quarter by ~~2.8%, while recent acquisitions~~2.1% and ~~a reduction in the Roundup contribution expense favorably impacted sales growth~~ for the ~~quarter~~first six months by ~~5.5%~~2.5%. Excluding Morning Song^® and ~~0.8%, respectively. Excluding these factors,~~foreign exchange, sales for the quarter ~~declined $5.5~~and first six months increased $88.5 million or ~~2.2%~~10.9% and $80.2 million or 7.6%, respectively, primarily due to strong growth in our lawn fertilizer, growing media and garden fertilizer businesses offset by ongoing retailer initiatives to reduce inventory levels and further push their purchases closer to consumer take away. ~~Net~~In recent years, net sales for our ~~first~~second quarter typically comprise between 9%34% to ~~11%~~36% of our total fiscal year net ~~sales. Therefore,~~sales, while sales for the first ~~quarter net~~six months have comprised 43% to 45%. There can be no assurance that a similar sales ~~trends are generally not indicative of~~trend will occur for our full fiscal 2006 year.

SG&A expenses were ~~$107.8~~$129.9 million in the second quarter and $237.8 million for the first ~~quarter~~six months of fiscal 2006, compared to ~~$112.4~~$134.6 million for the second quarter and $246.9 million for the first ~~quarter~~six months of fiscal 2005. The decrease in SG&A expenses for the second quarter and first six months reflects a $9.1 million and $10.1 million benefit, respectively, from an insurance recovery relating to past legal costs incurred in our defense of lawsuits regarding our use of vermiculite. We are reinvesting a portion of the insurance recovery to strengthen our business, including further advertising and marketing support for our brands, of which $1.8 million was ~~largely due to~~incurred in the second quarter. Increases in SG&A spending occurred in our rapidly expanding Scotts LawnService^® business in the amount of $4.5 million for the second quarter and $7.3 million for the first six months, while our wild bird food business added $1.5 million and $1.9 million in spending during the second quarter and first six months, respectively. The second quarter and first six months also benefited from savings generated by Project Excellence ~~and lower outside legal fees, partially~~ offset by ~~increased spending to support the continued growth of Scotts LawnService~~^® ~~and higher~~an increase in stock-based compensation ~~expense. Approximately $2.2~~expense of $2.1 million offor the ~~decrease in~~quarter and $4.1 million for the first six months. SG&A expense ~~was~~benefited by approximately $2.1 million and $4.2 million for the second quarter and year-to-date period, respectively, due to foreign exchange.

North America segment net sales were ~~$125.6~~$700.5 million in the quarter and $826.2 million for the first ~~quarter~~six months of fiscal 2006, an increase of ~~8.9%~~16.2% and 15.1% from ~~net sales of $115.3 million for~~ the quarter and first ~~quarter~~six months of fiscal ~~2005. This increase was driven largely by the recent acquisitions of Gutwein and RMC, and increases in Growing Media and professional sales, offset by declines in Lawns, Controls and Plant Food sales.~~2005, respectively. Excluding the impact of ~~acquisitions,~~the Morning Song^® acquisition, North ~~American~~America sales ~~declined $3.2 million or 2.8%, primarily~~increased 13.5 % and 11.3% for the quarter and first six months of fiscal 2006, respectively. Lawn and garden fertilizers and growing media sales drove the increase, partially offset by a 5% reduction in the sales of Ortho^® controls products in the quarter and year-to-date periods principally due to ~~ongoing retailer initiatives to reduce inventory levels and further push their purchases closer to consumer take away. In contrast, point-of-sales~~poor weather in the west. Point-of-sales at our top three customers in the North America segment increased ~~13%~~14.0% for the quarter and 14.9% for the year-to-date period, showing continued strong consumer demand for our products. It is important to note that our first quarter falls at the end of the growing season for North America and typically represents less than 10% of annual sales for this segment. The consumer take away in our first fiscal quarter relates in part to product sold-in during the fourth quarter of our prior fiscal year, contributing to this discrepancy between retailer purchases and consumer take away of our products. Over the course of a complete season, retailer purchases and consumer take away of our products should roughly align.

International

Net sales for the International segment in the second quarter and first ~~quarter~~six months of fiscal 2006 were ~~$58.3~~$150.2 million and $208.5 million, respectively, a decrease of ~~$11.2 million, or 16.1%~~8.8% and 11.0%, versus the second quarter and first ~~quarter~~six months of fiscal 2005. Excluding the effect of exchange rates, net sales decreased by ~~$4.9 million or 7.2%. This decrease in net sales was largely due to the phasing of preseason orders primarily in France~~1.3% and ~~the United Kingdom, as well as changes in distributor arrangements leading to more direct sales to retail customers resulting in shipments being delayed into our second fiscal quarter.~~

~~The International operating loss~~3.7% for the second quarter and first six months, respectively. The retail environment in Europe is challenging with category sales down; however we have secured solid listing improvements coming into this season. Year-to-date consumer take away is down about 20% in the U.K. and 14% in France. We believe our listing improvements should result in market share gains that may provide sales growth leverage.

Operating income for the quarter and first six months of fiscal 2006 ~~improved~~declined by ~~$0.8~~$5.9 million and $5.2 million, respectively, as lower sales and gross margins were ~~more than~~partially offset by reduced SG&A ~~spending and the impact of foreign exchange rates.~~spending.

Corporate & ~~other~~Other

Net sales for this segment increased $2.7 million for the quarter and $3.7 million year to date. These increases are primarily due to our Smith & Hawken business and driven by revenues relating to our exclusive arrangement with Target that kicked off this spring. The net expense for Corporate & Other ~~increased~~decreased by ~~$1.2~~$14.2 million in the quarter and $16.0 million for the first ~~quarter~~six months of ~~2006, as a~~fiscal 2006. A higher Smith & Hawken^® operating loss, increased spending on wellness initiatives, and higher stock-based compensation expenses were more than offset by savings generated from Project Excellence and ~~lower~~a benefit of $9.1 million from a recovery from one of our insurance carriers related to legal ~~spending.~~expenses incurred in the last several years to defend ourselves in several lawsuits regarding our use of vermiculite.

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operating activities was ~~$234.0~~$558.7 million and ~~$170.7~~$416.0 million for the ~~fiscal quarters~~six months ended ~~December 31,~~April 1, 2006 and April 2, 2005, ~~and January 1, 2005,~~ respectively. The increase in cash used in operating activities during the first quarter of fiscal 2006 is primarily attributable to higher inventories, as we initiated production of certain products earlier than in fiscal 2005 in response to concerns over the availability of certain input materials resulting from supply disruptions related to last summer’s hurricanes in North America, and to a lesser extent increases input costs and recent acquisitions. The use of cash in the first six months of our fiscal ~~quarter~~year is due to the seasonal nature of our operations. ~~The first quarter is the low point for net sales while at the same time we are building~~We build up inventories in preparation for the spring selling season ~~that gets underway in our second fiscal quarter.~~and accounts receivable increase significantly due to heavy March shipments.

Cash used in investing activities was ~~$112.0~~$128.6 million and ~~$18.1~~$31.0 million for the ~~fiscal quarters~~six months ended ~~December 31, 2005~~April 1, 2006 and ~~January 1,~~April 2, 2005, respectively. Our acquisitions of Gutwein and RMC required a net cash outlay of approximately ~~$97.7~~$98.0 million in the first quarter of 2006, which ~~were~~was financed with borrowings under our existing lines of credit. Our acquisition of Smith & Hawken^® in the first quarter of fiscal 2005 required a cash outlay of approximately $70.0 million financed in large part through the redemption of $57.2 million of investments. ~~Other capital~~Capital spending of ~~$14.3~~$26.6 million was done in the normal course of business, compared to the ~~$5.0~~$11.6 million spent in the first ~~quarter~~half of fiscal ~~2005.~~2006. The increase in first ~~quarter~~half capital spending was partially due to approximately $4.0 million ~~associated with the acquisition of~~spent acquiring peat bogs in Scotland.

Financing activities provided cash of ~~$300.6~~$634.9 million and ~~$127.2~~$380.9 million for the ~~fiscal quarters~~six months ended ~~December 31, 2005~~April 1, 2006 and ~~January 1,~~April 2, 2005, respectively. The higher financing needs in the first ~~quarter~~half of fiscal 2006 were due to an increase in accounts receivable, a higher level of pre-season inventory build, acquisitions, ~~and~~ higher capital spending, the purchase of common shares for treasury stock in accordance with our previously announced share repurchase program, and the payment of quarterly cash dividends initiated in the ~~first~~fourth quarter of ~~2006.~~fiscal 2005. Also, first ~~quarter~~half fiscal 2005 investing activities were partially funded by the sale of securities. Our more efficient borrowing arrangements negotiated toward the end of fiscal 2005 allowed us to pay-down debt, eliminating the need for short-term investments, which were not carried into fiscal 2006.

Our primary sources of liquidity are cash generated by operations and borrowings under our revolving credit agreement. Our

revolving credit agreement consists of a ~~$1.0~~$1.05 billion multi-currency revolving credit commitment (increased from $1.0 billion in February 2006), that extends through July 21, 2010. We may also request an additional ~~$150~~$100 million in revolving credit commitments, subject to approval from our lenders. As of ~~December 31, 2005,~~April 1, 2006, there was ~~$515.9~~$179.1 million of availability under our revolving credit agreement. Furthermore, as of ~~December 31, 2005,~~April 1, 2006, we also had ~~$200.0~~$200 million of 6 5/8% Senior Subordinated Notes outstanding. At ~~December 31, 2005,~~April 1, 2006, we were in compliance with all of our debt covenants.

Prior to September 2005, we had not paid dividends on our common shares. Based on the levels of cash flow generated by our business in recent years and our improving financial condition, ~~in June 2005, we announced that Scotts Miracle-Gro’s~~our Board of Directors approved an annual dividend of 50-cents per share to be paid at 12.5 cents each quarter beginning in the fourth quarter of fiscal 2005. Our ~~first and~~ second ~~quarterly dividends were~~quarter dividend was paid on ~~September 1, 2005 and December 1, 2005.~~

February 23, 2006. On ~~January 26,~~May 4, 2006, wethe Company announced that ~~the~~Scotts Miracle-Gro’s Board of Directors ~~of Scotts Miracle-Gro~~ approved the ~~fiscal 2006 second~~third quarter dividend, ~~of 12.5 cents per share, payable February 23,~~with anticipated payment on June 1, 2006 tofor shareholders of record ~~February 9,~~as of May 18, 2006.

On October 27, 2005, we announced that Scotts Miracle-Gro’s Board of Directors had approved a ~~$500.0~~$500 million share repurchase program. This repurchase program is authorized for five ~~years and we~~years. We currently anticipate allocating approximately ~~$100.0~~$100 million per year on the program. Through ~~December 31, 2005,~~April 1, 2006, we ~~expended $1.2 million under this program.~~have reacquired 971,200 shares of our common shares to be held in treasury at an aggregate cost of $45.9 million. A total of 266,967 shares of our common shares held in treasury have been reissued to support the exercise of employee held stock options. As of ~~February 3,~~May 4, 2006, a total of ~~371,200~~1.2 million common shares with a cost of ~~$17.5~~$55.0 million had been repurchased under this program. We did not ~~repurchase~~purchase any common shares in fiscal 2005.

All of our off-balance sheet financing is in the form of operating leases that are disclosed in the notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

We are party to various pending judicial and administrative proceedings arising in the ordinary course of business. These include, among others, proceedings based on accidents or product liability claims and alleged violations of environmental laws. We have reviewed our pending environmental and legal proceedings, including the probable outcomes, reasonably anticipated costs and expenses, availability and limits of our insurance coverage and have established what we believe to be appropriate reserves. We do not believe that any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on our liquidity, financial condition or results of operations.

In our opinion, cash flows from operations and capital resources will be sufficient to meet debt service and working capital needs during fiscal 2006 and thereafter for the foreseeable future. However, we cannot ensure that our business will generate sufficient cash flow from operations or that future borrowings will be available under our credit facilities in amounts sufficient to pay indebtedness or fund other liquidity needs. Actual results of operations will depend on numerous factors, many of which are beyond our control.

~~ENVIRONMENTAL MATTERS~~

~~We are subject~~ Reference should be made to ~~local, state, federal and foreign environmental protection laws and regulations with respect to our business operations and believe we are operating~~Item 1A. Risk Factors, in substantial compliance with, or taking action aimed at ensuring compliance with, such laws and regulations. We are involved in several legal actions with various governmental agencies related to environmental matters. While it is difficult to quantify the potential financial impact of actions involving environmental matters, particularly remediation costs at waste disposal sites and future capital expenditures for environmental control equipment, in the opinion of management, the ultimate liability arising from such environmental matters, taking into account established reserves, should not have a material adverse effect on our financial position. However, there can be no assurance that the resolution of these matters will not materially affect future quarterly or annual results of operations, financial position and cash flows. Additional information on environmental matters affecting us is provided in the fiscal 2005this Annual Report on Form 10-K ~~under~~for a more complete discussion of risks associated with the ~~“ITEM 1. BUSINESS — ENVIRONMENTAL AND REGULATORY CONSIDERATIONS”~~Company’s debt and ~~“ITEM 3. LEGAL PROCEEDINGS” sections.~~our credit facility and related covenants.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preceding discussion and analysis of the consolidated results of operations and financial position should be read in conjunction with our Condensed, Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. Our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 includes additional information about the Company, our operations, our financial position, our critical accounting policies and accounting estimates, and should be read in conjunction with this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks have not changed significantly from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

ITEM 4. CONTROLS AND PROCEDURES

With the participation of the Company’s principal executive officer and principal financial officer, the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s principal executive officer and principal financial officer have concluded that:

	(A)		information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and the other reports that the Company files or submits under the Exchange Act would be accumulated and communicated to the Company’s management, including its principal executive officer and principal financial ~~officers,~~officer, as appropriate to allow timely decisions regarding required ~~disclosure,~~disclosure; and

	(B)		information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and the other reports that the Company files or submits under the Exchange Act would be recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and

Report on Form 10-Q to ensure that material information relating to the Company and its consolidated subsidiaries is made known to them, particularly during the period in which the Company’s periodic reports, including this Quarterly Report on Form 10-Q, are being prepared.

In addition, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended ~~December 31, 2005,~~April 1, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~Pending~~The pending material legal ~~proceedings~~proceeding disclosure with material developments since the first quarter of fiscal 2006 is as follows:

Other

The Company has been named a defendant in a number of cases alleging injuries that the lawsuits claim resulted from exposure to asbestos-containing products, apparently based on the Company’s historic use of vermiculite in certain of its products. The complaints in these cases are not specific about the plaintiffs’ contacts with the Company or its products. The Company in each case is one of numerous defendants and none of the claims seeks damages from the Company alone. The Company believes that the claims against it are without merit and is vigorously defending them. It is not currently possible to reasonably estimate a probable loss, if any, associated with the cases and, accordingly, no accrual or reserves have ~~not changed significantly from those disclosed~~been recorded in the Company’s ~~Annual Report~~condensed, consolidated financial statements. There can be no assurance that these cases, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material adverse effect on ~~Form 10-K~~the Company, its financial condition or its results of operations.

The Company has pursued and continues to pursue insurance coverage for these cases through litigation. We recovered a substantial portion of our past defense costs from one carrier during the second quarter of fiscal ~~year ended September 30, 2005.~~2006 and that carrier has agreed to cover most of our defense costs in the future, subject to policy limits. We continue to pursue coverage from other insurers.

ITEM ~~IA.~~1A. RISK FACTORS

Cautionary Statement on ~~forward-looking~~Forward-Looking Statements

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 this Quarterly Report on Form 10-Q and in other contexts relating to future growth and profitability targets and strategies designed to increase total shareholder value. Forward-looking statements also include, but are not limited to, information regarding our future economic and financial condition, the plans and objectives of our management and our assumptions regarding our performance and these plans and objectives.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. We desire to take advantage of the “safe harbor” provisions of that Act.

Some forward-looking statements that we make in this Quarterly Report on Form 10-Q and in other contexts represent challenging goals for the Company, and the achievement of these goals is 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 included in Part I, ~~Item IA~~“Item 1A. Risk ~~Factors of~~Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005. All forward-looking statements attributable to us or persons working on our behalf are expressly qualified in their entirety by those cautionary statements.

The risk factors described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

~~(c)~~

The following table shows the purchases of common shares of Scotts Miracle-Gro made by or on behalf of the Company or any “affiliated purchaser” of Scotts Miracle-Gro as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, for each of the three months in the quarter ended ~~December 31, 2005:~~April 1, 2006:

Total Number of Average Price Total Number of Shares Purchased as Part Approximate Dollar Value of Shares that May
Period Shares Purchased Paid Per Share of Publicly Announced Plans or Programs¹ Yet Be Purchased Under the Plans or Program(s)
October 1 through 31, 2005 0 — 0 $ 100,000,000
November 1 through 30, 2005 0 — 0 100,000,000
December 1 through 31, 2005 25,600 $ 47.22 25,600 98,791,202
Total 25,600 $ 47.22 25,600 98,791,202


							Approximate Dollar
					Total Number of		Value of Common Shares
					Common Shares		that May Yet Be
	Total Number of				Purchased as Part		Purchased
	Common Shares		Average Price		of Publicly Announced		Under the Plans or
Period	Purchased		Paid Per Share		Plans or Programs(1)		Programs
January 1 through January 31, 2006		295,600	$	46.58		295,600	$	85,023,405
February 1 through February 28, 2006		200,000		48.92		200,000		75,239,113
March 1 through April 1, 2006		450,000		46.99		450,000		54,093,394

Total		945,600	$	47.27		945,600


1		~~The Company~~Scotts Miracle-Gro repurchases its common shares under a share repurchase program that was approved by the Board of Directors and publicly announced on October 27, 2005 (the “Share Repurchase Program”). Under the Share Repurchase Program, ~~the Company~~Scotts Miracle-Gro is authorized to purchase up to $100 million of ~~the Company’s~~Scotts Miracle-Gro common shares through September 30, 2006.

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

~~The Annual Meeting of Shareholders of Scotts Miracle-Gro (the “Annual Meeting”) was held in Marysville, Ohio on January 26, 2006.~~

~~The result of the vote of the shareholders in the election of three directors, for terms of three years each, is as follows:~~

VOTES
NOMINEE VOTES FOR WITHHELD
Arnold W. Donald 62,418,062 1,898,577
Mindy F. Grossman 63,977,362 339,277
Gordon F. Brunner 63,803,089 513,550

Each of the nominees was elected. The other directors whose terms of office continue after the Annual Meeting are Mark R. Baker, Joseph P. Flannery, James Hagedorn, Katherine Hagedorn Littlefield, Karen G. Mills, Patrick J. Norton and Stephanie M. Shern.

~~The amendment and restatement of The Scotts Miracle-Gro Company Discounted Stock Purchase Plan was approved. The result of the vote was:~~

VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
58,741,480 435,901 187,384 4,951,874

~~The Scotts Miracle-Gro Company 2006 Long-Term Incentive Plan was approved. The result of the vote was:~~

VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
46,529,593 12,671,983 163,189 4,951,875

~~The Scotts Company LLC Executive/Management Incentive Plan was approved. The result of the vote was:~~

VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
55,817,451 3,388,612 158,701 4,951,875

~~The proposal submitted by Mr. John C. Harrington to declassify the Company’s Board of Directors was not approved. The result of the vote was:~~

VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
26,968,697 31,968,320 427,747 4,951,875

ITEM 5. OTHER INFORMATION

(a) ~~On February 9, 2006, the Company and~~Performance Measures for The Scotts Company LLC entered into a Third Amendment to Employment Agreement and Covenant Not to Compete with Robert F. Bernstock, effective as of October 1, 2005 (the “Bernstock Third Amendment”). The following description of the Bernstock Third Amendment is qualified in its entirety by reference to the actual terms of the Bernstock Third Amendment, which is filed with this Quarterly Report on Form 10-Q as Exhibit 10(c). The Bernstock Third Amendment amends the terms of Mr. Bernstock’s Employment Agreement and Covenant Not to Compete effective as of October 1, 2004 (the “Employment Agreement”) to (a) amend his title and duties to President and Chief Operating Officer of The Scotts Company LLC effective October 1, 2005 and President of the Company effective December 9, 2005; (b) clarify that during the term of his Employment Agreement, a change in Mr. Bernstock’s assignments or duties will not constitute “Constructive Termination”, as defined in Paragraph 2(c) of his Employment Agreement, if, in any given fiscal year, Mr. Bernstock does not lose supervision or reporting relationships over business functions or segments that have generated $100 million or more of revenue in the prior fiscal year, or which constitute a core business function of the Company; (c) increase Mr. Bernstock’s base annual salary to $660,000; (d) amend Mr. Bernstock’s benefit plan participation to provide that Mr. Bernstock: (i) will be entitled to participate in all of the Company’s and Scotts LLC’s benefit programs for senior management executives; (ii) will receive holidays and sick leave in accordance with the Company’s policies for senior executive officers; (iii) will receive an automobile allowance of no more than $2,000 annually; and (iv) for himself and, in some circumstances, members of his immediate family will receive use of one or more Company-owned or leased and Company operated aircraft in accordance with the Company’s standard executive flight and travel policies, in any event not to exceed more than thirty hours of personal use per year; and (e) provided he completes at least six years of full-time continuous employment with the Company, the Company will extend active employee health care benefits required to be available to Mr. Bernstock for a limited period (“COBRA Coverage”) under Part Six of Title One of ERISA, until Mr. Bernstock attains the age of sixty-five years (or, in the event of Mr. Bernstock’s death, would have attained the age of sixty-five years) or becomes entitled to benefits under the Federal “Medicare Part A” program, whichever shall first occur. The Bernstock Third Amendment also amended the Employment Agreement to specifically provide that the Employment Agreement will be administered in a manner reasonably expected to avoid any penalties under Section 409A of the Internal Revenue Code of 1986, as amended.Executive/Management Incentive Plan

~~On October 12, 2005, the~~The Compensation and Organization Committee of the Board of Directors of Scotts Miracle-Gro on December 9, 2005 established the performance measures under The Scotts Company ~~approved the award of nonqualified stock options (“NSOs”~~LLC Executive/Management Incentive Plan (the “EMIP Plan”) ~~to purchase 16,900 common shares (33,800 common shares as adjusted~~ for the ~~2-for-1 stock split distributed on November 9, 2005)~~annual cash incentive (i.e., bonus) award payable to ~~Mr. Robert F. Bernstock, which award was evidenced by the Company’s specimen form of award agreement for awards granted to~~ employees under the Company’s 2003 Stock Option and Incentive Equity Plan. The following description of the award agreement is qualified in its entirety by reference to the actual terms of the award agreement, which is filed with this Quarterly Report on Form 10-Q as Exhibit 10(d). Each NSO represents the right to purchase one common share of the Company. The exercise price for each common share purchased is $42.50 (as adjusted for the 2-for-1 stock split distributed on November 9, 2005). The NSOs will vest on October 12, 2008 and expire on October 12, 2015.

~~Also on October 12, 2005, the Compensation and Organization Committee~~ of the Company participating in the EMIP Plan, including each of the named executive officers of Scotts Miracle-Gro, with respect to the full fiscal year ending on September 30, 2006.

The shareholders of Scotts Miracle-Gro approved the ~~award~~EMIP Plan at the 2006 Annual Meeting of ~~3,200 shares of Restricted Stock (6,400 shares of Restricted Stock as adjusted for the 2-for-1 stock split~~Shareholders held on November 9, 2005) to Mr. Bernstock which award was evidenced by the Company’s specimen form of award agreement for awards granted to employees under the Company’s 2003 Stock Option and Incentive Equity Plan. The following descriptionJanuary 26, 2006. A copy of the ~~award agreement is qualified in its entirety by reference to the actual terms of the award agreement, which is~~EMIP Plan was filed ~~with this Quarterly Report on Form 10-Q~~ as Exhibit ~~10(e). Each restricted share represents a contingent right~~10.4 to receive one common share of the Company. The shares of Restricted Stock will mature into an equal number of common shares of the Company if Mr. Bernstock is actively employed by the Company on October 12, 2008. Mr. Bernstock will have the right to vote the common shares underlying the Restricted Stock. However, the Company will defer distribution of any dividends that are declared on the common shares underlying the shares of Restricted Stock until such time as the restriction is satisfied.

On February 9, 2006, the Company and Mr. Bernstock entered into amendments (the “Award Amendments”) to the award agreements evidencing the October 12, 2005 grants of NSOs covering 33,800 common shares (as adjusted) and 6,400 shares of Restricted Stock (as adjusted) to Mr. Bernstock. The following description of the Award Amendments is qualified in its entirety by reference to the actual terms of the Award Amendments, which are filed respectively with this Quarterly Report on Form 10-Q as Exhibits 10(f) and 10(g). These Award Amendments serve to make the general terms and conditions specified in the award agreements consistent with the termination provisions included in Mr. Bernstock’s Employment Agreement, as amended. Each Award Amendment provides that: (a) if Mr. Bernstock’s employment is terminated for cause, other than due to “Constructive Termination” as defined in Mr. Bernstock’s Employment Agreement, the award may expire earlier than its expiration date as provided in the Company’s 2003 Stock Option and Incentive Equity Plan based on those events; (b) Mr. Bernstock’s NSO and Restricted Stock awards are noncancellable, unless Mr. Bernstock consents in writing; and (c) the Company may amend or terminate the 2003 Stock Option and Incentive Equity Plan at any time, but may not cancel or terminate Mr. Bernstock’s award without his written consent. Mr. Bernstock’s awards will vest, become exercisable, or mature, as applicable, in the event of his termination of employment by the Company for any reason other than for “Cause”, or a resignation following “Constructive Termination,” in each case as such terms are defined in the Employment Agreement.

~~As previously reported in the Company’s~~Scotts Miracle-Gro’s Current Report on Form 8-K dated and filed on ~~December 14, 2005, on December 9, 2005,~~February 2, 2006. Each participant’s target incentive opportunity under the ~~Compensation and Organization Committee~~EMIP Plan is a percentage of the ~~Company awarded 10,000 performance shares to Robert F. Bernstock. A copy of The Scotts Miracle-Gro Company 2003 Stock Option~~participant’s base salary and ~~Incentive Equity Plan Award Agreement for Nondirectors evidencing this award is filed with this Quarterly Report on Form 10-Q as Exhibit 10(a).~~

~~The Company is filing with this Current Report on Form 8-K~~ the ~~specimen forms~~amount of the ~~Award Agreements~~actual bonus payment could range from zero to two hundred and fifty percent of the target incentive opportunity, based upon the extent to which the pre-established annual performance measures are met or exceeded. The performance measures under the EMIP Plan for the fiscal year ending on September 30, 2006 are based on net income, return on invested capital, cash flow, customer satisfaction/service and net sales. All award payouts are dependent upon the satisfaction of a consolidated net income “funding trigger,” below which no incentive payments will be ~~used~~made to ~~evidence~~any participant. The target incentive opportunity established for each of the following types of awards to be granted under The Scotts Miracle-Gro Company 2006 Long-Term Incentive Plan: (a) time-based incentive stock options for employees; (b) time-based nonqualified stock options for employees; (c) time-based restricted stock for employees; (d) time-based/cash-settled stock appreciation rights for employees; (e) time-based/stock-settled stock appreciation rights for employees; (f) time-based restricted stock units for employees; and (g) performance shares for employees. These specimen forms of Award Agreementnamed executive officers are ~~filed with this Quarterly Report on Form 10-Q as Exhibit 10(b).~~set forth below:


Name and Principal Position	Target incentive opportunity (Percentage of Base Salary)
James Hagedorn, Chief Executive Officer and Chairman of the Board		90	%
Robert F. Bernstock, President		65	%
Christopher L. Nagel, Executive Vice President and Chief Financial Officer		55	%
David M. Aronowitz, Executive Vice President, General Counsel and Corporate Secretary		55	%
Denise S. Stump, Executive Vice President Global Human Resources		55	%

ITEM 6. EXHIBITS

See Index to Exhibits at page 3335 for a list of the exhibits included herewith.

3133

THE SCOTTS MIRACLE-GRO COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE ~~FISCAL QUARTER~~QUARTERLY PERIOD ENDED ~~DECEMBER 31, 2005~~APRIL 1, 2006

INDEX TO EXHIBITS


EXHIBIT NO.	DESCRIPTION	LOCATION
~~10(a)~~4(a)	Joinder Agreement, dated as of February 23, 2006, made by SMG Growing Media, Inc., as a Subsidiary Borrower, in favor of JPMorgan Chase Bank, N.A., as administrative agent for the Lenders from time to time parties to the Revolving Credit Agreement, dated as of July 21, 2005, by and among The Scotts Miracle-Gro Company; the Subsidiary Borrowers from time to time parties thereto; the Lenders from time to time parties thereto; Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents; Bank of Tokyo-Mitsubishi Trust Company, ~~2003 Stock Option~~BNP Paribas, CoBank, ACB, Harris, N.A., Rabobank International, and ~~Incentive Equity Plan Award Agreement for Nondirectors, effective~~Suntrust Bank, as ~~of December 9, 2005, between The Scotts Miracle-Gro Company and RobertF. Bernstock, in respect of grant of 10,000 Performance Shares.~~Documentation Agents	*

~~10(b)~~4(b)	~~Specimen form~~Joinder Agreement, dated as of ~~Award~~February 23, 2006, made by Gutwein & Co., Inc., as a Subsidiary Borrower, in favor of JPMorgan Chase Bank, N.A., as administrative agent for the Lenders from time to time parties to the Revolving Credit Agreement, ~~to evidence Time-Based Nonqualified Stock Options for Employees under~~dated as of July 21, 2005, by and among The Scotts Miracle-Gro Company; the Subsidiary Borrowers from time to time parties thereto; the Lenders from time to time parties thereto; Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents; Bank of Tokyo-Mitsubishi Trust Company, ~~2006 Long-Term Incentive Plan.~~BNP Paribas, CoBank, ACB, Harris, N.A., Rabobank International, and Suntrust Bank, as Documentation Agents	*

~~10(c)~~4(c)	~~Third~~Assumption Agreement, dated as of February 23, 2006, made by SMG Growing Media, Inc. and Rod McLellan Company, as Grantors, in favor of JPMorgan Chase Bank, N.A., as administrative agent for the Lenders from time to time parties to the Revolving Credit Agreement, dated as of July 21, 2005, by and among The Scotts Miracle-Gro Company; the Subsidiary Borrowers from time to time parties thereto; the Lenders from time to time parties thereto; Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents; Bank of Tokyo-Mitsubishi Trust Company, BNP Paribas, CoBank, ACB, Harris, N.A., Rabobank International, and Suntrust Bank, as Documentation Agents	*

4(d)	Assumption Agreement, dated as of February 23, 2006, made by Gutwein & Co., Inc., as Grantor, in favor of JPMorgan Chase Bank, N.A., as administrative agent for the Lenders from time to time parties to the Revolving Credit Agreement, dated as of July 21, 2005, by and among The Scotts Miracle-Gro Company; the Subsidiary Borrowers from time to time parties thereto; the Lenders from time to time parties thereto; Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents; Bank of Tokyo-Mitsubishi Trust Company, BNP Paribas, CoBank, ACB, Harris, N.A., Rabobank International, and Suntrust Bank, as Documentation Agents	*


EXHIBIT NO.	DESCRIPTION	LOCATION
4(e)	First Amendment, ~~to Employment Agreement and Covenant Not to Compete, executed February 9,~~dated as of March 2, 2006, to ~~be effective~~the Revolving Credit Agreement, dated as of ~~October 1,~~July 21, 2005, ~~between~~ by and among The Scotts Miracle-Gro Company; the Subsidiary Borrowers from time to time parties thereto; the Lenders from time to time parties thereto; the Syndication Agents and Documentation Agents named therein; and JPMorgan Chase Bank, N.A., as administrative agent for the Lenders	*

4(f)	Commitment Increase Supplement, dated February 24, 2006, to the Revolving Credit Agreement, dated as of July 21, 2005, by and among The Scotts Miracle-Gro Company; the Subsidiary Borrowers from time to time parties thereto; the Lenders from time to time parties thereto; Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents; Bank of Tokyo-Mitsubishi Trust Company, BNP Paribas, CoBank, ACB, Harris, N.A., Rabobank International, and Suntrust Bank, as Documentation Agents; and JPMorgan Chase Bank, N.A., as Administrative Agent (executed and delivered by Suntrust Bank)	*

4(g)	Commitment Increase Supplement, dated February 24, 2006, to the Revolving Credit Agreement, dated as of July 21, 2005, by and among The Scotts Miracle-Gro Company; the Subsidiary Borrowers from time to time parties thereto; the Lenders from time to time parties thereto; Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents; Bank of Tokyo-Mitsubishi Trust Company, BNP Paribas, CoBank, ACB, Harris, N.A., Rabobank International, and Suntrust Bank, as Documentation Agents; and JPMorgan Chase Bank, N.A., as Administrative Agent (executed and delivered by Bank of America, N.A.)	*

4(h)	Commitment Increase Supplement, dated February 24, 2006, to the Revolving Credit Agreement, dated as of July 21, 2005, by and among The Scotts Miracle-Gro Company; the Subsidiary Borrowers from time to time parties thereto; the Lenders from time to time parties thereto; Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents; Bank of Tokyo-Mitsubishi Trust Company, BNP Paribas, CoBank, ACB, Harris, N.A., Rabobank International, and Suntrust Bank, as Documentation Agents; and JPMorgan Chase Bank, N.A., as Administrative Agent (executed and delivered by JPMorgan Chase Bank, N.A.)	*

4(i)	Commitment Increase Supplement, dated February 24, 2006, to the Revolving Credit Agreement, dated as of July 21, 2005, by and among The Scotts Miracle-Gro Company; the Subsidiary Borrowers from time to time parties thereto; the Lenders from time to time parties thereto; Bank of America, N.A. and Citicorp North America, Inc., as Syndication Agents; Bank of Tokyo-Mitsubishi Trust Company, BNP Paribas, CoBank, ACB, Harris, N.A., Rabobank International, and Suntrust Bank, as Documentation Agents; and JPMorgan Chase Bank, N.A., as Administrative Agent (executed and delivered by Citicorp North America, Inc.)	*

10(a)	The Scotts Company LLC Executive/Management Incentive Plan	Incorporated herein by reference to Scotts’ Current Report on Form 8-K dated and filed February 2, 2006 (File No. 1-13292) [Exhibit 10.4]

10(b)	The Scotts Miracle-Gro Company ~~The Scotts Company LLC and Robert F. Bernstock.~~2006 Long-Term Incentive Plan	*Incorporated herein by reference to Scotts’ Current Report on Form 8-K dated and filed February 2, 2006 (File No. 1-13292) [Exhibit 10.2]

10(c)	Specimen form of Award Agreement used to evidence Time-Based Nonqualified Stock Options for Non-Employee Directors under The Scotts Miracle-Gro Company 2006 Long-Term Incentive Plan	Incorporated herein by reference to Scotts’ Current Report on Form 8-K dated and filed February 2, 2006 (File No. 1-13292) [Exhibit 10.3]

10(d)	The Scotts Miracle-Gro Company ~~2003~~Discounted Stock ~~Option~~Purchase Plan (As Amended and ~~Incentive Equity Plan Award Agreement for Nondirectors, effective~~Restated as of ~~October 12, 2005, between The Scotts Miracle-Gro Company and RobertF. Bernstock, in respect of grant of Nonqualified Stock Options to purchase 16,900 common shares (33,800 common shares as adjusted for~~January 26, 2006; Reflects 2-for-1 Stock Split ~~distributed~~Distributed on November 9, 2005).	*Incorporated herein by reference to Scotts’ Current Report on Form 8-K dated and filed February 2, 2006 (File No. 1-13292) [Exhibit 10.1]

~~10(e)~~	~~The Scotts Miracle-Gro Company 2003 Stock Option and Incentive Equity Plan Award Agreement for Nondirectors, effective as of October 12, 2005, between The Scotts Miracle-Gro Company and RobertF. Bernstock, in respect of grant of 3,200 shares of Restricted Stock (6,400 as adjusted for 2-for-1 Stock Split distributed on November 9, 2005).~~	*

~~10(f)~~	Amendment to The Scotts Miracle-Gro Company 2003 Stock Option and Incentive Equity Plan Award Agreement for Nondirectors, dated February 9, 2006, between The Scotts Miracle-Gro Company and Robert F. Bernstock in respect of grant of Nonqualified Stock Options to purchase 33,800 common shares (as adjusted).	*

~~10(g)~~	Amendment to The Scotts Miracle-Gro Company 2003 Stock Option and Incentive Equity Plan Award Agreement for Nondirectors, dated February 9, 2006 between The Scotts Miracle-Gro Company and Robert F. Bernstock, in respect of grant of 6,400 shares Restricted Stock (as adjusted).	*

31(a)	Rule 13a-14(a)/~~15-14(a)~~15d-14(a) Certification (Principal Executive Officer)	*

31(b)	Rule 13a-14(a)/~~15-14(a)~~15d-14(a) Certification (Principal Financial Officer)	*

32	Section 1350 Certification (Principal Executive Officer and Principal Financial Officer)	*


*		Filed herewith

3336


		PAGE NO.
PART I. FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Condensed, Consolidated Statements of Operations — Three ~~month periods~~and six months ended ~~December 31, 2005~~April 1, 2006 and ~~January 1,~~April 2, 2005		3
	Condensed, Consolidated Statements of Cash Flows — ~~Three month periods~~Six months ended ~~December 31, 2005~~April 1, 2006 and ~~January 1,~~April 2, 2005		4
	Condensed, Consolidated Balance Sheets — ~~December 31, 2005, January~~April 1, 2006, April 2, 2005 and September 30, 2005		5
	Notes to Condensed, Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2225
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		2831
Item 4.	Controls and Procedures		2831
PART II. OTHER INFORMATION:
Item 1.	Legal Proceedings		2932
Item 1A.	Risk Factors		2932
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
~~Item 4.~~	~~Submission of Matters to a Vote of Security Holders~~		3032
Item 5.	Other Information		3033
Item 6.	Exhibits		3133
Signatures				3234
Index to Exhibits			3335
~~Exhibit 10(A)~~EX-4(A)
~~Exhibit 10(B)~~EX-4(B)
~~Exhibit 10(C)~~EX-4(C)
~~Exhibit 10(D)~~EX-4(D)
~~Exhibit 10(E)~~EX-4(E)
~~Exhibit 10(F)~~EX-4.F
~~Exhibit 10(G)~~EX-4.G
~~Exhibit 31.1~~EX-4.H
~~Exhibit 31.2~~EX-4.I
~~Exhibit 32~~EX-31(A)
EX-31(B)
EX-32


	No. of			Fair Value at
	Shares			Date of Grant
Balance at September 30, 2005		114,400			32.07
Granted		187,400			43.61
Fully vested		(10,600	)		41.18
Forfeited		—			—

Balance at December 31, 2005		291,200			39.16


				Weighted
				Average Grant-
	No. of Shares			Date Fair Value Per Share
Nonvested balance at September 30, 2005		114,400		$	32.07
Granted (including 30,000 performance shares)		189,800			43.47
Vested		(12,000	)		40.27
Forfeited		(2,400	)		42.51

Non-vested balance at April 1, 2006		289,800			39.11


	FOR THE THREE
	MONTHS ENDED
	December 31,			January 1,			SIX MONTHS ENDED
	2005			2005			APRIL 1, 2006			APRIL 2, 2005
Market price volatility		22.9	%		23.9	%		23.0	%		23.9	%
Risk-free interest rates	��	4.0	%		3.7	%		4.4	%		3.7	%
Expected dividend yield		0.6	%		0.0	%		1.2	%		—
Expected life of options/SARs		6.19			6.15
Weighted-average grant-date fair value
per share of options/SARs	$	12.53		$	10.57
Expected life of options/SARs in years								6.19			6.15
Weighted-average grant-date fair value per share							$	12.09		$	10.57


	FOR THE THREE MONTHS ENDED
	DECEMBER 31,			JANUARY 1,			THREE MONTHS ENDED						SIX MONTHS ENDED
	2005			2005			APRIL 1, 2006			APRIL 2, 2005			APRIL 1, 2006			APRIL 2, 2005
	(IN MILLIONS)						(IN MILLIONS)						(IN MILLIONS)
Gross commission	$	—		$	—		$	18.1		$	22.2		$	18.2		$	22.2
Contribution expenses		(5.0	)		(6.3	)		(5.0	)		(6.3	)		(10.0	)		(12.5	)
Deferred contribution charge		—			—			—			—			—			—
Amortization of marketing fee								(0.2	)		(0.8	)		(0.4	)		(1.7	)

Amortization of marketing fee	(0.2		)	(0.8		)
Net commission expense		(5.2	)		(7.1	)
Net commission income								12.9			15.1			7.8			8.0
Reimbursements associated with Marketing Agreement		8.2			9.6			10.0			11.0			18.2			20.7

Total net sales associated with Marketing Agreement	$	3.0		$	2.5		$	22.9		$	26.1		$	26.0		$	28.7


	Percent Net Sales by Quarter
	2005			2004			2003

First Quarter		10.4	%		8.7	%		9.0	%
Second Quarter		34.3	%		35.2	%		35.1	%
Third Quarter		38.0	%		38.2	%		37.7	%
Fourth Quarter		17.3	%		17.9	%		18.2	%


	FOR THE
	THREE MONTHS ENDED						THREE MONTHS ENDED						SIX MONTHS ENDED
	DECEMBER 31,			JANUARY 1,			APRIL 1,			APRIL 2,			APRIL 1,			APRIL 2,
	2005			2005			2006			2005			2006			2005
	(UNAUDITED)						(UNAUDITED)						(UNAUDITED)
Net sales		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		78.6			75.2			61.8			59.7			65.4			63.3

Gross profit		21.4			24.8			38.2			40.3			34.6			36.7
Operating expenses:
Selling, general and administrative		50.4			52.7			20.2			21.9			26.7			29.1
Impairment, restructuring and other charges		2.3			9.0			0.1			0.1			0.6			2.2
Other expense (income), net		(0.6	)		(0.1	)		(0.1	)		0.1			(0.2	)		0.1

Loss from operations		(30.7	)		(36.8	)
Income from operations								18.0			18.2			7.5		��	5.3
Interest expense		2.8			4.2			1.4			1.6			1.7			2.2

Loss before income taxes		(33.5	)		(41.0	)
Income tax benefit		(12.4	)		(15.6	)
Income before income taxes								16.6			16.6			5.8			3.1
Income taxes								6.1			6.3			2.1			1.2

Net loss		(21.1	)		(25.4	)
Income from continuing operations								10.5			10.3			3.7			1.9


	(C)		the Company’s disclosure controls and procedures are effective as of the end of the fiscal quarter covered by this Quarterly


	Total Number of		Average Price		Total Number of Shares Purchased as Part		Approximate Dollar Value of Shares that May
Period	Shares Purchased		Paid Per Share		of Publicly Announced Plans or Programs¹		Yet Be Purchased Under the Plans or Program(s)
October 1 through 31, 2005		0		—		0	$	100,000,000
November 1 through 30, 2005		0		—		0		100,000,000
December 1 through 31, 2005		25,600	$	47.22		25,600		98,791,202
Total		25,600	$	47.22		25,600		98,791,202


			VOTES
NOMINEE	VOTES FOR		WITHHELD
Arnold W. Donald		62,418,062		1,898,577
Mindy F. Grossman		63,977,362		339,277
Gordon F. Brunner		63,803,089		513,550


VOTES FOR	VOTES AGAINST		ABSTENTIONS		BROKER NON-VOTES
58,741,480		435,901		187,384		4,951,874


		THE SCOTTS MIRACLE-GRO COMPANY

		/s/ ~~CHRISTOPHER~~Christopher L. ~~NAGEL~~Nagel

		Christopher L. Nagel
		Date: ~~February 9,~~May 10, 2006
		Executive Vice President and Chief Financial Officer,
		(Principal Financial and Principal Accounting Officer) ~~(Duly~~
		(Duly Authorized Officer)