UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K
(Mark One)

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

For the fiscal year ended September 30, 1997

( ) 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 1-11593

THE SCOTTS COMPANY
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(Exact name of registrant as specified in its charter)

OHIO 31-1199481
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) No.)

14111 SCOTTSLAWN ROAD, MARYSVILLE, OHIO 43041
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 937-644-0011

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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9 7/8% Senior Subordinated Notes due August New York Stock Exchange
1, 2004

Common Shares, Without Par Value (18,676,480 New York Stock Exchange
Common Shares outstanding at December 1,
1997)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )

The aggregate market value of the voting stock held by non-affiliates of the
registrant at December 1, 1997 was $540,612,452.

DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE PROXY STATEMENT FOR REGISTRANT'S 1998 ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD FEBRUARY 18, 1998, ARE INCORPORATED BY REFERENCE INTO
PART III HEREOF.
2

PART I

Dollars are in millions in this Form 10-K except per share data and except
where indicated otherwise.

ITEM 1. BUSINESS

The Scotts Company ("Scotts"), through its wholly-owned subsidiaries,
Hyponex Corporation ("Hyponex"), Scotts-Sierra Horticultural Products Company
("Sierra"), Republic Tool and Manufacturing Corp. ("Republic"), Scotts'
Miracle-Gro Products, Inc. ("Scotts' Miracle-Gro"), Miracle Holdings Limited
("Miracle Holdings") and their respective subsidiaries (collectively, the
"Company"), is one of the oldest and most widely recognized manufacturers of
products used to grow and maintain landscapes: lawns, gardens and golf courses.
The Company's Scotts(R) and Turf Builder(R) (for consumer lawn care),
Miracle-Gro(R) and Miracid(R) (for consumer garden care) and Osmocote(R) (for
professional horticulture) brands command market-leading shares more than double
those of the next ranked competitors, in the referenced consumer or professional
subgroup. The Company's long history of technical innovation, its reputation for
quality and service and its marketing tailored to the needs of do-it-yourselfers
and professionals have enabled the Company to maintain leadership in its markets
while delivering consistent growth in the Company's net sales. Do-it-yourselfers
and professionals purchase through different distribution channels and have
different information and product needs. Accordingly, the Company has
historically had two business groups, Consumer and Professional, to serve its
domestic markets, as well as an International Group to serve its markets outside
of North America. In fiscal 1997, the Company reorganized into six business
groups comprised of Consumer Lawns, Consumer Gardens and Consumer Organics
(together, the "Consumer Business Group"), the Professional Business Group, the
International Business Group, and an Operations Group.

CONSUMER BUSINESS GROUP

PRODUCTS

The Company's consumer products include: lawn fertilizers, lawn fertilizer
combination products and lawn control products, garden tools, walk-behind and
riding mowers, grass seed, lawn spreaders and lawn and garden carts; garden and
indoor plant care products; potting soils and other organics products.

CONSUMER LAWNS PRODUCTS. Among the Company's most important consumer
products are lawn fertilizers, such as Scotts Turf Builder(R), and lawn
fertilizer combination products, such as Scotts Turf Builder(R) with Plus 2(TM)
Weed Control and Scotts Turf Builder(R) with Halts(R) Crabgrass Preventer.
Typically, these are patented, homogeneous, controlled-release products which
provide complete controlled feeding for consumers' lawns for up to two months
without the risk of damage to the lawn presented by less expensive controlled-
and non-controlled-release products. Some of the Company's products are
specially formulated for geographical differences and some, such as Bonus(R) S
(to control weeds in Southern grasses), are distributed to limited areas. Lawn
control products prevent or control lawn problems, and include products such as
Scotts(R) Halts(R) Crabgrass Preventer, Scotts(R) Lawn Fungus Control, Scotts(R)
Moss Control Granules, Scotts(R) Diazinon Lawn Insect Control and GrubEx(R)
Season Long Grub Control. The Company's lawn fertilizers, combination products
and control products are sold in dry, granular form.
Management estimates that in fiscal 1997, the Company's share of the U.S.
do-it-yourself consumer lawn chemicals products market was approximately 53%,
more than double that of the second leading brand.
The Company sells numerous varieties and blends of high quality grass seed,
many of them proprietary, designed for different uses and geographies.
Management estimates that the Company's share of the U.S. consumer grass seed
market (includes PatchMaster(R) products) was approximately 35% in fiscal 1997.
Because the Company's granular lawn care products perform best when applied
evenly and accurately, the Company sells a line of spreaders specifically
manufactured and developed for use with its products. For fiscal 1997, this line
included the SpeedyGreen(R) and EasyGreen(R) rotary spreaders, the
PrecisionGreen(R), EvenGreen(R) and AccuGreen(R) drop spreaders, and the
HandyGreen(R) II hand-held rotary spreader, all marketed under the Scotts(R)
brand name. For fiscal 1998, the line will consist of three sizes of
SpeedyGreen(R) rotary spreaders, three sizes of AccuGreen(R) drop spreaders and
the HandyGreen(R) II, all marketed under the Scotts(R) brand name.
Management estimates that the Company's share of the U.S. market for lawn
spreaders and lawn and garden carts was approximately 46% in fiscal 1997.
The Company has a licensing agreement in place with Union Tools, Inc.
("Union") under which Union, in return for the payment of royalties, is granted
the right to produce and market a line of garden tools bearing the Scotts(R)
trademark. The Company also is a party to a licensing agreement with American
Lawn Mower Company ("American") under which American, in return for the payment
of royalties, is granted the right to produce and market a line of push-type
walk-behind lawn mowers bearing the Scotts(R) trademark. Also, the Company is a
party to a licensing

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agreement with The Home Depot and Murray, Inc. under which, in return for the
payment of royalties, that retailer markets a line of motorized walk-behind and
riding lawnmowers bearing the Scotts(R)trademark, with the mowers currently
manufactured by Murray, Inc. These mowers are sold exclusively through The Home
Depot retail stores. In management's estimation, the Company did not have a
material share of the markets for these products in fiscal 1997.

CONSUMER GARDENS PRODUCTS. The Company sells a complete line of
water-soluble fertilizers under the Miracle-Gro(R) brand name. These products
are primarily used for garden fertilizer application. The Company also produces
and sells a line of boxed Scotts(R) Plant Foods, garden and landscape
fertilizers, Osmocote(R) controlled-release garden fertilizers, and hose-end
feeders.
Scotts' Miracle-Gro markets and distributes the country's leading line of
water-soluble plant foods. These products are designed to be dissolved in water,
creating a dilute nutrient solution which is poured over plants or sprayed
through an applicator and rapidly absorbed by their roots and leaves.
Miracle-Gro(R) All-Purpose Water-Soluble Plant Food is the leading product
in the Miracle-Gro(R) line. Other water-soluble plant foods in the product line
include Miracid(R) for acid loving plants, Miracle-Gro(R) for Roses,
Miracle-Gro(R) for Tomatoes and Miracle-Gro(R) for Lawns. Scotts' Miracle-Gro
also sells a line of hose-end applicators for water-soluble plant foods, through
the Miracle-Gro No-Clog Garden and Lawn Feeder line, which allow consumers to
apply water-soluble fertilizers to large areas quickly and easily with no mixing
or measuring required. Scotts' Miracle-Gro also markets a line of products for
houseplant use including Liquid Miracle-Gro(R), African Violet Food, Plant Food
Spikes, Leaf Shine and Orchid Food.
Management estimates that in fiscal 1997, the Company's share of the garden
fertilizer segment was 51%, and its share of the indoor plant foods market was
approximately 33%.

CONSUMER ORGANICS PRODUCTS. The Company sells a complete line of organics
products for indoor and outdoor uses under the Hyponex(R), Scotts(R), Peters
Professional(R) and other labels. These products include retail potting soils,
topsoil, humus, peat, manures, soil conditioners, barks and mulches. These
products are primarily regionally formulated to respond to varying consumer
expectations and to utilize the suitable but varying raw materials available in
different areas of the country.
Management estimates that during fiscal 1997, it had approximately a 24%
market share of the consumer large-bag outdoor landscaping product market, and
approximately a 39% market share of the consumer potting soil market.

CONSUMER BUSINESS GROUP STRATEGY

The Company believes that it has achieved its leading position in the
do-it-yourself lawn care and garden markets on the basis of its strong marketing
programs, its sophisticated technology, the superior quality and value of its
products, and the service it provides its customers. The Company seeks to
maintain and expand its market position by emphasizing these qualities and
taking advantage of the name and reputation of its many strong brands such as
Scotts(R), Miracle-Gro(R) and Hyponex(R). Through its Scotts(R), Hyponex(R),
Miracle-Gro(R) and Peters(R) labels, the Company has also focused on increasing
sales of its higher margin organics products such as potting soils.
The Company is the market leader in the lawn, garden and organics sections
of the growing lawn and garden market. United States population trends indicate
that the consumer segment age of 40 and older, who represent the largest group
of lawn and garden product users, will grow by 28% from 1996 to 2010, a growth
rate more than twice that of the total population.
Drawing upon its strong research and development capabilities, the Company
intends to continue to develop and introduce new and innovative lawn and garden
products. The Company believes that its ability to introduce successful new
consumer products has been a key element in the Company's growth. New consumer
products in recent years include: AccuGreen(R) and SpeedyGreen(R) spreaders
(fiscal 1994), which are shipped and sold fully assembled; Scotts(R) planting
soils (fiscal 1994), a line of ready-to-use, value-added soils which help
simplify the do-it-yourself gardener's task and deliver superior growing
performance; YardAll(R)(fiscal 1995), an extra-large lawn and garden cart;
Miracle-Gro(R) Quick Start (fiscal 1996), a liquid starter solution for newly
planted or young plants; GrubEx(R) (fiscal 1996), providing season-long lawn
protection against grubs; the redesigned HandyGreen(R) II (fiscal 1996), a
hand-held rotary spreader with an arm support; two new grass seed products,
Mirage(TM) and Spring-Up(R) (fiscal 1996), grass seed blends for rapid seeding
in the Spring; and Scotts(R) potting soils and a complete line of indoor soil
amendments (fiscal 1997) such as vermiculite, perlite and charcoal in resealable
stand-up bags. In fiscal 1998, the Company plans to introduce: the No-Clog-4 in
1(TM), which allows for sprinkler feeding of fertilizer for gardens and lawns;
the Scotts(R) Master Collection(TM), a line of timed-release garden fertilizers;
a new line of Miracle-Gro(R) potting mix and soil amendment products; and an
expanded assortment of professional nursery quality potting mixes for consumers
under the Scotts Pro Gro(R) and Miracle-Gro(R)brands.

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The Company also seeks to capitalize upon the competitive advantages
stemming from its position as the leading nationwide supplier of a full line of
consumer lawn and garden products. The Company believes that this gives it an
advantage in selling to retailers, who value the efficiency of dealing with a
limited number of suppliers.
The Company continues to utilize Hyponex's composting expertise by
maintaining agreements with municipalities and waste haulers to compost yard
waste. The Company has 12 compost facilities. In addition to receiving service
fees, the Company substitutes the resulting compost for a portion of the raw
materials in Hyponex and other Company products.

MARKETING AND PROMOTION

Consumer Lawns products are sold by a 79-person direct sales force to
headquarters of national, regional and local chains. This sales force, most of
whom have college degrees and prior sales experience, also recruits and
supervises approximately 250 seasonal part-time merchandisers and in-store
weekend counselors, in connection with the Company's increased emphasis on
in-store retail merchandising of lawn and garden products, a strategy the
Company intends to continue for fiscal 1998. The Consumer Lawns Group also
employs distributors on a selective basis. Most retail sales of the Company's
lawn products occur on weekends during the Spring and Fall. In recent years, the
percentage of this Group's sales to home improvement centers has increased.
Consumer Garden products are sold by a 14-person sales force to a network
of hardware and lawn and garden wholesale distributors, with certain sales made
directly to some retailers. The Consumer Organics Group utilizes a 13-person
direct sales force to cover the headquarters of national and regional chains,
local accounts of significant size and distributors who sell to smaller
accounts. The Consumer Organics Group's sales force hires and directs a network
of outside merchandising service companies to provide seasonal in-store retail
merchandising and re-order support on a national basis. The percentage of
Consumer Business Group sales to mass merchandisers, warehouse-type clubs and
large buying groups continues to increase as a percentage of sales. The top ten
accounts (which include two buying groups of independent retailers) represented
70% of the Consumer Business Group sales in fiscal 1996 and 73% in fiscal 1997.
The Consumer Lawns Group continues to support independent retailers with a
special line of products, marketed under the Lawn Pro(R) name. These products
include the 4-Step(TM) program, introduced in 1984, which encourages consumers
to purchase four products at one time (fertilizer plus crabgrass preventer,
fertilizer plus weed control, fertilizer plus insect control and a special
fertilizer for Fall application). The Company promotes the 4-Step(TM) program as
providing consumers with all their annual lawn care needs for, on average, less
than one-third of what a lawn care service would cost. The Company believes the
Lawn Pro(R) program has helped the Company to grow its business with independent
retailers while they face increasing competition from mass merchandisers and
home improvement centers.
The Company supports its sales efforts with extensive advertising and
promotional programs. Because of the importance of the Spring sales season in
the marketing of consumer lawn, garden and organics products, the Company
focuses advertising and promotional efforts on this period. Through advertising
and other promotional efforts, the Company encourages consumers to make the bulk
of their lawn, garden and organics purchases in the early months of Spring in
order to moderate the risk to its consumer sales which may result from bad
weekend weather. During fiscal 1997, the Consumer Lawns Group initiated a radio
and television advertising program in order to build consumer product usage in
the Fall, a recommended time to plant grass seed and plants. The Consumer Lawns
Group also promotes a Turf Builder(R) annual program for home centers and mass
merchandisers. This program encourages consumers to purchase their entire year's
supply of Turf Builder(R) products in early Spring, for application in the early
Spring, late Spring, Summer and Fall. The Consumer Organics Group uses a
consumer rebate program for selected Hyponex(R) products to encourage early and
multiple purchases in the Spring.
In fiscal 1995, the Company introduced a promotional allowance to retailers
designed to provide retailers with the ability to customize and differentiate
promotions of Scotts(R) lawn and organics products. Also in fiscal 1995, the
Company expanded a marketing program which provided incentives to retailers to
purchase a portion of their 1995 calendar fourth quarter and 1996 lawn
fertilizer product requirements early. The Company and retailers have viewed
these types of programs as important to the production, distribution and
marketing of these seasonal products.
In fiscal 1996, the Company replaced pre-season incentive programs to
retailers with more efficient promotional allowances, increased consumer media
advertising and in-store merchandising support as part of the Company's "pull"
advertising strategy. The Company increased advertising support and reduced
promotional allowances further in fiscal 1997. Please see the discussion in the
section of this Report entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Fiscal 1997 compared with fiscal
1996".
The fiscal 1998 marketing strategies for the Consumer Lawns Group are to
continue the efforts begun in prior years to improve the Company's relationship
with consumers and retail customers, including: carefully directed consumer
research, to increase understanding of its markets, sales trends and consumer
needs; increased media

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advertising, with continuation of television advertising featuring real-life
stories of people's experiences with Scotts(R) products, and of weekend radio
advertising emphasizing that "this weekend" is the best time to apply selected
Scotts(R) products; simplification of the product line; addressing
"just-in-time" customer purchasing through expanded use of distributors and
continued use of the "never-out" program, by which the Company builds pre-season
inventory of select high-volume products, which enhances the Company's ability
to timely and completely fill customer orders; and increased use of retail
merchandisers to enhance communications with consumers at the point of sale.
The Consumer Lawns Group also expects to use Scotts(R) and Miracle-Gro(R)
consumer brand recognition to market the newly formed "Scotts(R) Lawn Service".
In January 1995, Scotts entered into a licensing agreement with a lawn care
service company, Emerald Green Lawn Service ("Emerald Green"), which allows
Emerald Green to use the Scotts(R) name and logo in its marketing efforts.
Emerald Green applies Scotts(R) products exclusively. In October 1997, Scotts
increased its equity interest in Emerald Green from 28% to 64%, and announced
the formation of Scotts(R) Lawn Service.
The fiscal 1998 marketing strategy for the Consumer Gardens Group is to:
continue efforts to consolidate certain package sizes in the Miracle-Gro(R),
Scotts(R) ornamental and Osmocote(R) fertilizer lines; implement packaging
improvements; continue cost-reduction and quality enhancement efforts throughout
all product lines; increase the level of national network television
advertising; and use Scotts' Miracle-Gro's sales and distribution network for
Scotts(R) garden products.
The strategy for the Consumer Organics Group is to expand its market share
of the potting soil and specialty planting soil market, while becoming the
industry's low-cost producer of the more commodity-oriented outdoor landscaping
products such as topsoil, manures and barks/mulches. The Company expects to grow
its share of the potting and planting soil markets by: developing products and
national marketing programs which utilize its strong Hyponex(R), Scotts(R),
Peters Professional(R)and Miracle-Gro(R) brand names on high-quality potting
mixes, with innovative and consumer-preferred packaging; expanding the
distribution of Scotts(R) and Miracle-Gro(R) potting mix products into Canada;
and conducting consumer research to better understand market needs.
An important part of the Company's sales effort is its national toll-free
Consumer Helpline, on which its "lawn consultants" answer questions about the
Company's products and give general lawn care advice to consumers. The Company's
lawn consultants responded to approximately 400,000 telephone and written
inquiries in fiscal 1997, which is consistent with the number of inquiries in
prior years .
Backing up the Company's marketing effort is its well-known Scotts(R)
No-Quibble Guarantee(TM), instituted in 1958, which promises consumers a full
refund if for any reason they are not satisfied with the results after using the
Company's products. Refunds under this guarantee have consistently amounted to
less than 0.4% of net sales for the Consumer Business Group on an annual basis.
In September 1997, the Company opened an Internet web site at
www.scottscompany.com, which provides lawn care and gardening information for
the consumer and special sections for the Professional Business Group's
customers, along with corporate and investment information. Do-it-yourself
consumer topics include basic lawn care and gardening tips, problem solving,
frequently asked questions, houseplant care, landscaping with trees and shrubs,
and product guides. An arrangement with the National Gardening Association (NGA)
provides access to a database of more than 3,000 gardening questions with
answers by NGA's staff horticulturists. The site also provides an e-mail link to
the Company's Consumer Helpline for answers to lawn care questions. The
Professional Turf section delivers information for turf managers, by providing
the Company's complete professional product guide, a Technical Representative
locator and information aimed at turf maintenance workers and golf course
superintendents. The Professional Horticulture section points nursery and
greenhouse growers to their nearest distributor, delivers the latest news from
the Horticulture business of the Professional Business Group of the Company, and
directs users to customer service.

COMPETITION

The consumer lawn and garden market is highly competitive. The most
significant competitors for the consumer lawn care business are lawn care
service companies. Service Master, which owns the Tru Green Company, ChemLawn(R)
and Barefoot Grass(R) lawn care service businesses, operates nationally and is
significantly larger than the Company. In the do-it-yourself lawn care and
consumer gardens markets, the Company's products compete primarily against
regional products and private label products produced by various suppliers and
sold by such companies as Kmart Corporation. These products compete across the
entire range of the Company's consumer product line. In addition, certain of the
Company's consumer products compete against branded fertilizers, pesticides and
combination products marketed by such companies as Monsanto Company (Ortho(R)
and Greensweep(R)), Lebanon Chemical Corp. (Greenview(R)), United Industries
Corporation (Peters(R) water-soluble fertilizers for the consumer market) and
IMC Vigoro.
Most competitors, with the exception of lawn care service companies, sell
their products at prices lower than those of the Company. The Company competes
primarily on the basis of its strong brand names, consumer advertising

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campaigns, quality, value, service and technological innovation. The Company's
competitive position is also supported by its national sales force and its
unconditional guarantee. There can be no assurance, however, that additional
competition from new or existing competitors will not erode the Company's share
of the consumer market or its profit margins. In fiscal 1997, The Home Depot,
one of the Company's largest retail customers, established a program to feature
Vigoro(R) brand lawn fertilizer along with Scotts(R) lawn fertilizer products,
with regional brands no longer being offered in most of The Home Depot stores.
For fiscal 1997, volume sales growth of Scotts(R) brand lawn fertilizers to The
Home Depot continued under this program.
The Company's Consumer Organics business faces primarily regional
competitors who are able to compete very effectively on the basis of price in
the areas near their plants where they can reach customers with a lower cost of
freight. The low cost of entry to establish a commodity organics bagging
facility and the ready availability of raw materials make it likely that the
large-bag outdoor market will remain price competitive and lower margin into the
future. Customers require short lead-times, with very high on-time and complete
fill rates. These demands, combined with the high cost of freight, require the
Consumer Organics business to continually evaluate production locations to
strengthen its network and reduce its costs.

BACKLOG

The majority of annual consumer product orders (other than Consumer
Organics products which are normally ordered in season on an "as needed" basis)
are received from retailers during the months of October through April and are
shipped during the months of January through April. As of November 28, 1997,
orders on hand for retailers totaled approximately $62.9 compared to
approximately $61.5 on the same date in fiscal 1996. All such orders are
expected to be filled in fiscal 1998.

PROFESSIONAL BUSINESS GROUP

THE MARKET

The Company sells its professional products to golf courses, commercial
nurseries and greenhouses, schools and sportsfields, multi-family housing
complexes, business and industrial sites, lawn and landscape services and
specialty crop growers. The Professional Group's two core businesses are
ProTurf(R), the professionally managed turf market, and Horticulture, the
nursery and greenhouse markets. In fiscal 1997, the Professional Business Group
served such high-profile golf courses as Augusta National (Georgia), Cypress
Point and Pebble Beach (California), Desert Mountain (Arizona), Oakmont Country
Club (Pennsylvania), Colonial Country Club (Texas) and Medinah Country Club
(Illinois). Sports complexes such as Fenway Park, Camden Yards, Wrigley Field,
Yankee Stadium and the Rose Bowl are professional customers, as are major
commercial nursery/greenhouse operations such as Monrovia, Hines and Imperial.
Golf courses and highly visible turf areas accounted for approximately 56%
of the Company's Professional Business Group sales in fiscal 1997. During fiscal
1997, the Company sold products to approximately 49% of the over 15,700 golf
courses in North America, including 72 of Golf Digest's top 100 U.S. courses.
Management estimates, based on an independent bi-annual market survey and other
information available to the Company, that the Company's share of its target
North American golf course high value turf fertilizer and control products
market was approximately 20% in fiscal 1997.
According to the National Golf Foundation, approximately 350 new golf
courses have been constructed annually during the last three years. Management
believes that the increase in the number of courses, the concentration of the
growth in the West/South with a longer growing/maintenance season, the
increasing playing time requiring more course maintenance and the trend toward
more highly maintained courses should contribute to sales growth in the golf
course market.
Horticulture sales accounted for approximately 44% of the Company's
Professional Business Group sales in fiscal 1997. The Company sold products to
thousands of nursery, greenhouse and specialty crop growers through a network of
over 100 horticultural distributors. The Company estimates that its leading
share of the North American horticultural market was approximately 25% in fiscal
1997.
Management believes the increasing acceptance of controlled-release
fertilizers in horticultural/agricultural applications due to performance
advantages, labor savings and water quality concerns should contribute to sales
growth in the horticulture market. However, competitive product technologies may
also make inroads into the horticultural and turf markets.

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PRODUCTS

The Company's professional products, marketed under such brand names as
ProTurf(R), Osmocote(R), Miracle-Gro(R), Peters(R), Metro-Mix(R) and
Terra-Lite(R), include a broad line of sophisticated controlled-release
fertilizers, water-soluble fertilizers, control products (herbicides,
insecticides, fungicides and growth regulators), wetting agents, organics
products, grass seed and application devices. The fertilizer lines utilize a
range of proprietary controlled-release fertilizer technologies, including
Polyform(R), Contec(TM), Poly-S(R), Osmocote(R) and ScottKote(R), and
proprietary water-soluble fertilizer technologies, including Peters(R) and
Miracle-Gro Excel(TM). The Company applies these technologies to meet a wide
range of professional customer needs, ranging from quick-release greenhouse
fertilizers to controlled-release fairway/greens fertilizers to extended-release
nursery fertilizers that last up to a year or more.
The Company works very closely with basic pesticide manufacturers to secure
access to, and if possible, exclusive positions on, advanced control chemistry
which can be formulated on granular carriers, including fertilizers, or
formulated as a liquid application. In fiscal 1997, at least seven professional
products featured exclusive control technologies, including such products as the
TGR(R) growth regulator line, Turplex(R) bioinsecticide, Prograss(R) and
Confront(R) herbicides, and Talstar(R) and Astro(R) insecticides and miticides.
Application devices include both rotary and drop action spreaders. Over 20
proprietary grass seed varieties are part of the professional line. The Sierra
acquisition in December 1993 added an established line of soil-less mixes in
which controlled-release and water-soluble fertilizers, wetting agents and
control products can be incorporated to customize potting media for nurseries
and greenhouses.

BUSINESS STRATEGY

The Company's Professional Business Group focuses its sales efforts on the
middle and high end of the professional market and generally does not compete
for sales of commodity products. Demand for the Company's professional products
is primarily driven by product quality, performance and technical support. The
Company seeks to meet these needs with a range of sophisticated, specialized
products that are sold by a professional, agronomically-trained sales force.
A primary focus of the Professional Business Group's strategy is to provide
innovative high-value new products to its professional customers. Extensive new
product development efforts begun in fiscal 1997 are expected to lead to several
significant new product introductions in fiscal 1998 and years following.
The Company intends to take advantage of its strong position in the golf
course segment to increase sales of Sierra's products to those users, and
intends to expand the distribution of Scotts(R) nursery products in the
commercial horticultural segment in which Sierra has a strong position.
The Professional Business Group also is working to increase market coverage
by focusing on various professional market niches. In 1965, the Company
established its first specialized professional sales force, focusing on golf
courses. Since 1985, it has established separate sales forces and/or sales
managers for sports fields, golf course architects and construction companies,
and the international market of the Professional Business Group. In fiscal 1992,
the Company introduced a fairway application service for golf courses. This
service has been expanded and is now available in 16 markets. In January 1995,
Scotts entered into a licensing agreement with Emerald Green, which allows
Emerald Green to use the Scotts(R) name and logo in its marketing efforts. In
October 1997, Scotts increased its equity interest in Emerald Green from 28% to
64%. See "Consumer Business Group - Marketing and Promotion."

MARKETING AND PROMOTION

The Professional Business Group's sales force consists of 96 territory
managers. Many territory managers are experienced former golf course
superintendents or nursery managers and most have degrees in agronomy,
horticulture or similar disciplines. Territory managers work closely with golf
course and sports field superintendents, turf and nursery managers, and other
landscape professionals. In addition to marketing the Company's products, the
Company's territory managers provide consultation, testing services, and advice
regarding maintenance practices, including individualized comprehensive programs
incorporating various products for use at specified times throughout the year.
The professional grower business is served primarily through an extensive
network of distributors, all with substantial experience in the horticulture
market, with territory managers spending the majority of their time with
growers.
To reach potential purchasers, the Company uses trade advertising and
direct mail, and sponsors seminars throughout the country. In addition, the
Company maintains a special toll-free hotline for its professional customers.
The professional customer service department responded to over 45,000 telephone
inquiries in fiscal 1997.

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COMPETITION

In the professional turf and horticulture markets, the Company faces a
broad range of competition from numerous companies ranging in size from
multi-national chemical and fertilizer companies such as Monsanto and DowElanco
Company, to smaller specialized companies such as Lesco, Inc. and Lebanon
Chemical Corp., to local fertilizer manufacturers and blenders. Portions of this
market are served by large agricultural fertilizer companies, while other
segments are served by specialized, research-oriented companies. In certain
areas of the country, particularly Florida, a number of companies have begun to
offer turf care services, including product application, to golf courses. In
addition, the higher margins available for sophisticated products to treat
high-value crops continue to attract large and small chemical producers and
formulators, some of which have larger financial resources and research
departments than the Company. Also, the influence of mass merchandisers, with
significant buying power, has increased the cost consciousness of horticulture
growers. While the Company believes that its reputation, turf and ornamental
market focus, expertise in product development and professional sales force
should enable it to continue to maintain and build its share of the professional
market, there can be no assurance that the Company's market share or margins
will not continue to be eroded in the future by new or existing competitors.

BACKLOG

A large portion of professional product orders is received during the
months of August through November and is filled during the months of September
through November. As of November 28, 1997, orders on hand from professional
customers totaled approximately $8.3 compared with $9.4 on the same date in
1996. All such orders are expected to be filled in fiscal 1998.

INTERNATIONAL BUSINESS GROUP

THE MARKET

The International Business Group regularly sells its products to both
consumer and professional users in over 40 countries. Management believes that
growth potential should exist in both markets. The Company has established
business entities in many of the markets with significant potential.
Consumer lawn and garden products are sold under the Scotts(R) label in
Australia, Canada, the European Union, New Zealand and South America. In
addition, products bearing the Miracle-Gro(R) trademark are marketed in Canada,
the Caribbean, Australia, New Zealand and the United Kingdom (the "U.K."). The
Company's Hyponex(R) line of products is present in Japan as a result of a
long-term agreement with Hyponex Japan Corporation, Ltd., an unaffiliated
entity.
Professional markets include both the horticulture and turf industries. The
International Business Group markets professional products in Africa, Australia,
Canada, the Caribbean, European Union, Japan, Latin America, Mexico, the Middle
East, New Zealand, South America and Southeast Asia. Horticultural products
mainly carry the Scotts(R), Sierra(R), Peters(R) and Osmocote(R) labels. Turf
products primarily use the Scotts(R) trademark.
In January 1997, the Company purchased other investors' approximately
two-thirds interest in Miracle Holdings which the Company did not own. Miracle
Garden Care Limited ("MGC"), a wholly-owned subsidiary of Miracle Holdings, has
leading positions in the U.K. in a number of lawn and garden market categories.
Its major consumer brands include Weedol(R), Pathclear(R), and Grasshopper(R).
MGC distributes key Scotts(R) branded consumer items such as Miracle-Gro(R),
Scotts Lawn Builder(R) and Osmocote(R). Products are sold by a 17-person direct
sales force to do-it-yourself and gardening retailers.
On December 12, 1997, the Company acquired, for approximately $78.0,
Levington Group Limited, which through its subsidiaries (collectively,
"Levington"), is the leading producer of consumer and professional lawn
fertilizer and growing media in the U.K. Management believes this acquisition
offers the potential to expand the Company's presence in European consumer
markets. Levington's sales for the fiscal year ended June 30, 1997 were $75.1.

BUSINESS STRATEGY

An increasing portion of the Company's sales and earnings is derived from
customers in foreign countries. In fiscal 1997, following the acquisition of the
remaining interest in Miracle Holdings, the International Business Group
re-located its headquarters office to an area outside of London in the U.K. The
Company's managers also travel abroad regularly to visit its facilities,
distributors and customers. The Company's own employees manage its affairs in
Europe, Australia, Malaysia, Mexico, the Caribbean and the Philippines. The
International Business Group plans to expand its international business in both
the consumer and professional markets, and has considered expansion through
appropriate acquisition opportunities. The Company believes that the technology,
quality and value that are widely associated

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with its brands domestically should be able to be transferred to the global
marketplace. The Company intends to continue to market internationally through
both direct sales and distributor arrangements.
Management believes the International Business Group is well-positioned to
obtain an increased share of the international market. The Company has a broad,
diversified product line made up of value-added fertilizers which can be
targeted to market segments of consumer, turf, horticulture and high value
agricultural crops. Also, the Company has the capability to sell worldwide
through its extensive distributor network. However, there can be no assurance
that the Company's market share or margins will not be eroded by new or existing
competitors, or that an increased share of the international market will be
obtained.
Any significant changes in international economic conditions,
expropriations, changes in taxation and regulation by United States and/or
foreign governments could have a substantial effect upon the international
business of the Company. Management believes, however, that these risks are not
unreasonable in view of the opportunities for profit and growth available in
foreign markets. The Company's international earnings and cash flows are subject
to variations in currency exchange rates, which derive from sales and purchases
of the Company's products made in foreign currencies. The Company has
historically entered into forward foreign exchange contracts and purchased
currency options to hedge its exposure to fluctuations in foreign currency
exchange rates. These contracts generally involve the exchange of one currency
for a second currency at some future date. Counterparties to these contracts are
major financial institutions. Gains and losses on these contracts generally
offset gains and losses on the assets, liabilities and transactions being
hedged. Effective in the second quarter of fiscal 1997, the Company
significantly reduced this program, while it reassesses its foreign exchange
policy in light of actions taken internally to reduce such exposures.

COMPETITION

The International Business Group's consumer business faces strong
competition in the lawn and garden market, particularly in Australia, Canada and
the U.K. Competitors in Australia include Chisso-Asahi, Debco and Yates.
Competitors in the U.K. include Solaris, PBI and various local companies.
Competitors in Canada include Nu-Gro, So-Green and IMC Vigoro. The Company has
historically responded to competition with superior technology, excellent trade
relationships, competitive prices, broad distribution and strong advertising and
promotional programs.
The international professional products market of the International
Business Group is very competitive, particularly in the controlled-release and
water-soluble fertilizer segments. Numerous United States and European companies
are pursuing these segments internationally, including Pursell Industries,
Lesco, Lebanon Chemical Corp., IMC Vigoro, Noram, BASF, Norsk Hydro, Haifa
Chemicals Israel, Kemira and private label companies. Historically, the
Company's response to competition in the professional markets has been to adapt
its technology to solve specific user needs which are identified by developing
close working relationships with key users.

MATTERS RELATING TO THE COMPANY GENERALLY

PATENTS, TRADEMARKS AND LICENSES

The "Scotts(R)", "Miracle-Gro(R)" and "Hyponex(R)" brand names and logos,
as well as a number of product trademarks, including "Turf Builder(R)", "Lawn
Pro(R)", "ProTurf(R)", "Osmocote(R)" and "Peters(R)", are federally and
internationally registered and are considered material to the Company's
business. The Company regularly monitors its trademark registrations, which are
generally effective for ten years, so that it can renew those nearing
expiration. In 1989, the Company assigned rights to certain Hyponex(R)
trademarks to Hyponex Japan Corporation, Ltd., an unaffiliated entity. In July
1995, Sierra granted a non-exclusive license to Peters Acquisition Corporation,
now owned by United Industries, to use the Peters(R) trademark in the United
States consumer market. In October 1996, Scotts became the exclusive licensee of
the trademark Nutralene(R) from Omnicology, Inc. for the U.S. and Mexico, in
connection with the marketing and sale of products containing this nitrogen
fertilizer.
As of September 30, 1997, the Company held over 100 patents on processes,
compositions, grasses, and mechanical spreaders and has several additional
patent applications pending. Patent protection generally extends 20 years from
the filing date, and many of the Company's patents extend well into the next
decade. The Company also holds exclusive and nonexclusive patent licenses from
certain chemical suppliers permitting the use and sale of patented pesticides.
During fiscal years 1996 and 1997, the Company secured new U.S. patents for:
controlled-release fertilizers which enhance aquaculture production; coated
fertilizers having two separate coatings, which provide delayed start of
fertilization; and three Kentucky Bluegrass varieties with high turf performance
characteristics.
The Company's methylene-urea product composition patent which covers Scotts
Turf Builder(R), Scotts Turf Builder(R) with Weed Control and Scotts Turf
Builder with Halts(R) Crabgrass Preventer, is deemed material by the Company and
is due to expire in March 2000. The Company believes that the high entry costs
of manufacturing needed to replicate this process and the value of the Scotts(R)
brand should lessen the likelihood of product duplication by any competitor.

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RESEARCH AND DEVELOPMENT

The Company has a long history of innovation, and its research and
development successes can be measured in terms of sales of new products and by
the Company's patents. Most of the Company's fertilizer products, many of its
grasses and many of its mechanical devices are covered by one or more of the
approximately 100 U.S. and international patents owned by the Company.
The Company maintains a premier research and development organization
headquartered in the Dwight G. Scott Research Center in Marysville, Ohio
("Scotts Research"). The Company also operates three research field stations
located in Florida, Texas and Oregon. These field stations facilitate evaluation
of products in a variety of climatic conditions, an integral part of the
Company's product development, quality assurance and competitive product
analysis programs. Research to develop new and improved application devices is
conducted at Republic's manufacturing facility in Carlsbad, California. Taken
together, the research and development effort maintains a focus on superior
agronomic performance for lawn, turf and horticultural applications through
products which are cost-effective and easy to use. The knowledge and concepts
used to formulate products for the professional turf and plant protection
markets are also used to provide similar results for the do-it-yourself market.
In addition to the Marysville research and development organization, Scotts
Europe, B.V. (Netherlands) maintains a research and development facility devoted
to the Osmocote(R) controlled-release fertilizer line produced in Heerlen, The
Netherlands. MGC leases a facility in the U.K. for formulating plant protection
products in the consumer and professional markets.
Since its introduction of the first home lawn fertilizer in 1928, the
Company has used its research and development strengths to build the
do-it-yourself and professional markets. Technology continues to be a Company
hallmark. In fiscal 1992, the Company introduced Poly-S(R), a patented
proprietary controlled-release fertilizer technology. In fiscal 1993,
ScottKote(R), another controlled-release technology primarily for the nursery
market, was introduced. Since the Hyponex acquisition in 1988, the Company's
research and development organization has worked to improve the quality and
reduce the production cost of branded organics products, in particular potting
soils. One of the results of this effort was the introduction, in fiscal 1994,
of a line of value-added, premium-quality potting soils and planting mixes sold
under the Scotts(R) brand, and in fiscal 1997, a similar line under the
Miracle-Gro(R) brand.
Through the acquisition of Sierra, Scotts was able to obtain patents for
technological advancements in water-soluble fertilizers. In fiscal 1996, Scotts
secured a patent on the use of urea phosphate in water-soluble fertilizers used
as the basis for the Peters Excel(R) (and Miracle-Gro Excel(TM), for fiscal
1998) brands of fertilizers, having previously obtained a solution and method
patent for such product line. Also during fiscal 1997, the Company completed
installation of a dedicated turfgrass genetic engineering laboratory in its
existing Scotts Research facility, to research and potentially develop turfgrass
varieties with improved characteristics such as resistance to disease, insects
and herbicides. Research in fiscal 1997 also focused on improving the quality
and durability of the Company's consumer lawn fertilizer packaging. The Company
implemented plans to use plastic packaging for all consumer lawn products to be
shipped in fiscal 1998. The Company's professional product line will also begin
to use plastic packaging for products shipped in fiscal 1998.
Research has also focused on durability, precision and reduced production
costs of the Republic-produced spreaders. Recently, Republic completely
redesigned the consumer line of walk-behind spreaders with quality and
performance improvements on each model.
Sierra pioneered the use of controlled-release fertilizers for the
horticultural markets with the introduction of Osmocote(R) in the 1960's. This
polymer-encapsulated technology has achieved a large share of the horticultural
markets due to its ability to meet the strict performance requirements of
professional growers. Scotts' and Sierra's research and development efforts have
been fully integrated and are focused on cost reduction and product/process
innovation.
During fiscal 1997, the Company developed new products in several branded
lines including Scotts(R) professional turf products; Osmocote(R)
controlled-release fertilizer; Miracle-Gro(R) granular lawn food products;
Scotts(R) spreaders; and PatchMaster(R) flowering seed/fertilizer mix. Also
during fiscal 1997, several new organics products were introduced under the
Miracle-Gro(R) brand, which included Miracle-Gro(R) Perlite, Miracle-Gro(R)
Potting Mix, Miracle-Gro(R) African Violet Potting Mix and Miracle-Gro(R) Seed
Starter Potting Mix.
Combined Company research and development expenses were approximately $10.0
(1.1% of net sales) for fiscal 1997 including environmental and regulatory
expenses. This compares to $11.0 (1.5% of net sales) and $10.6 (1.4% of net
sales) for fiscal 1995 and 1996, respectively.

SEASONALITY

The Company's business is highly seasonal with between 66% and 72% of sales
occurring in the second and third fiscal quarters combined. Please also see the
discussion in "Consumer Business Group -- Backlog" and "Professional Business
Group -- Backlog."

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FORWARD-LOOKING STATEMENTS

The Company has made and will make certain forward-looking statements in
its Annual Report, Form 10-K and in other contexts relating to future growth and
profitability targets, and strategies designed to increase total shareholder
value. These forward-looking statements represent challenging goals for the
Company, and achievement thereof is subject to a variety of risks and
assumptions. These are more fully discussed in the section of this Report
entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Forward-Looking Statements."

OPERATIONS GROUP

PRODUCTION FACILITIES

The manufacturing plant for consumer and professional fertilizer products
marketed under the Scotts(R) label is located in Marysville, Ohio. Manufacturing
for such products is also conducted by approximately 40 contract manufacturers.
In fiscal 1995, a new facility opened at Marysville for producing Poly-S(R), a
proprietary controlled-release fertilizer. Demand for Turf Builder(R), Poly-S(R)
and other products results in the Company expanding operations (generally from
October through May) of its fertilizer processing and packaging lines from five
days per week, three-shift operations to seven days, three-shift operations when
necessary to prepare for the peak demand periods. The Company currently operates
its Marysville plants seven days per week. Sierra(R) controlled-release
fertilizers are produced in Charleston, South Carolina, Milpitas, California and
Heerlen, The Netherlands. At the Heerlen facility, expansion has been completed
to permit the blending of products which utilize both Scotts and Sierra
proprietary technology. Production schedules at Sierra's facilities vary to meet
demand. The Company's Taylor Seed Packaging Plant, located on a separate site in
Marysville, was sold in November 1996, and seed blending and packaging
outsourced to various packaging companies located on the West Coast near seed
growers. Hyponex's organics products are processed and packaged in over 23
locations throughout the United States. The Company operates 12 composting
facilities where yard waste (grass clippings, leaves, and twigs) is converted to
raw materials for the Company's organics products. Operations at these
composting facilities have been integrated with the Company's 23 organics
bagging facilities. The Company also utilizes 20 contract production locations
for organics products. The Company's lawn spreaders are produced at the Republic
facility in Carlsbad, California. Both Hyponex's and Republic's operations vary
their production schedules to meet demand. The majority of Miracle-Gro(R)
water-soluble fertilizers is contract-manufactured in three facilities located
in Ohio, Texas and Florida. Miracle-Gro(R) granular and water-soluble
fertilizers, liquid herbicides and pesticides for the international markets, are
produced in East Yorkshire (Howden), Great Britain. Peters(R) and a portion of
Miracle-Gro(R) water-soluble fertilizers are produced at a facility in
Allentown, Pennsylvania, owned by an unrelated third party, J.R. Peters, Inc.
and related entities ("JRP").
After the sale of the Peters(R) consumer water-soluble fertilizer ("CWSF")
business in July 1995, the Company's Allentown facility produced CWSF products
under a Long-Term Supply Agreement (the "Agreement") with the buyer. Upon the
sale of the Allentown facility to JRP in July 1997, all of the Company's rights
and obligations as supplier under the Agreement and as licensor under the
license to use the Peters(R) trademark in the consumer market, were assigned to
JRP. Also, in connection with the sale, Scotts, Sierra and Scotts' Miracle-Gro
entered into a supply agreement pursuant to which the Company agreed to purchase
established minimums of water-soluble fertilizer products and minor element
mixes from JRP during each of fiscal years 1998 through 2002.
Resin used for producing Osmocote(R) controlled-release fertilizer in the
United States is manufactured at Sierra-Sunpol Resins, a joint venture company
which is 97% owned by Sierra.
Management believes that each of its facilities is well-maintained and
suitable for its purpose. However, due to the seasonal nature of the Company's
business, the Company's plants operate at maximum capacity during the peak
production periods. Therefore, an unplanned serious production interruption
could have a substantial adverse affect on the Company's sales of the affected
product lines.

CAPITAL EXPENDITURES

Capital expenditures totaled $28.6 and $18.2 for the fiscal years ended
September 30, 1997 and 1996, respectively. Of the major expenditures in fiscal
1997, approximately $9.0 was spent on a 450,000 square-foot expansion of the
Company's existing Marysville distribution facility, which allowed the Company
to consolidate several other local area warehouses and to direct-ship to more
customers. To allow for conversion to plastic packaging, $6.0 was spent on the
installation of new equipment at the Marysville manufacturing plant, and an
additional $6.5 was spent to upgrade components of a fertilizer production line
to current technology. The Company expects that capital expenditures during
fiscal 1998 will total approximately $38.0. The Company anticipates that
approximately $19.0 will be spent to

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convert the final Turf Builder(R) processing line to one utilizing current
technology. The conversion is expected to increase total site capacity by
approximately 20%.

PURCHASING

The key ingredients in the Company's fertilizer and control products are
various commodity and specialty chemicals including vermiculite, phosphates,
urea, potash, herbicides, insecticides and fungicides. The Company obtains its
raw materials from various sources, which the Company presently considers to be
adequate. No one source is considered to be essential to any of the Company's
Consumer, Professional or International Business Groups, or to its business as a
whole. The Company has never experienced a significant interruption of supply.
Raw materials for Scotts' Miracle-Gro include phosphates, urea and potash.
The Company considers its sources of supply for these materials to be adequate.
All of the products sold by Scotts' Miracle-Gro (other than those produced by
MGC) are produced under contract by independent fertilizer blending and
packaging companies.
Sierra purchases granular, homogeneous fertilizer substrates to be coated,
and the resins for coating. These resins are primarily supplied domestically by
Sierra-Sunpol Resins, a 97%-owned subsidiary of Sierra.
Sphagnum peat, bark, peat, humus, vermiculite and manure constitute
Hyponex's most significant raw materials. At current production levels, the
Company estimates Hyponex's peat reserves to be sufficient for its near-term
needs in all locations. Bark products are obtained from sawmills and other wood
residue producers and manure is obtained from a variety of sources, such as feed
lots and mushroom growers. The Company is currently substituting composted yard
waste for some organics raw materials and continues to expand this practice.
Raw materials for Republic include various engineered resins and metals,
all of which are available from a variety of vendors.

DISTRIBUTION

The primary distribution centers for the Company's Scotts(R) products are
located near the Company's headquarters in central Ohio. The Company's expansion
of its Marysville distribution facility was completed in December 1997. See
"Operations Group--Capital Expenditures." The Company's products are shipped by
rail and truck. While the majority of truck shipments is made by contract
carriers, a portion is made by the Company's own fleet of leased trucks.
Inventories are also maintained in contract field or public warehouses located
in major markets.
The products of Scotts' Miracle-Gro are warehoused and shipped from five
contract packagers located throughout the United States. These contract
packagers ship full truckloads of product via common carrier to lawn and garden
distributors. Inventories of MGC's consumer products for the European market,
which are produced at the East Yorkshire (Howden) facility, are distributed
through a public warehouse near the facility. Distributors are used for MGC's
professional products.
Most organics products have low sales value per unit of weight, making
freight costs significant to profitability. Therefore, the Organics Business
Group has located all of its 23 plant/distribution locations near large
metropolitan areas in order to minimize shipping costs and to be near raw
material sources. The Group uses its own fleet of approximately 70 trucks as
well as contract haulers to transport its products from plant/distribution
points to retail customers. Large-bag outdoor landscaping products and much of
the indoor potting soil products are shipped directly to retail stores. A
portion of the Company's indoor potting soil and additive products is shipped to
retailers' distribution centers for redistribution to their stores.
Sierra's products are produced at two fertilizer and two organics
manufacturing facilities located in the United States and one fertilizer
manufacturing facility located in Heerlen, The Netherlands. The majority of
shipments is via common carriers to nearby distributors' warehouses.
Republic-produced, Scotts(R) branded spreaders are shipped via common
carrier to regional warehouses serving the Company's retail network, or are
shipped through the Company's distribution network. A portion of Republic's
spreader line and its private label lines is sold free-on-board (FOB) Carlsbad
with transportation arranged by the customer.

SIGNIFICANT CUSTOMERS

The Home Depot and Kmart Corporation represented approximately 16.1% and
11.9%, respectively, of the Company's sales in fiscal 1997 and 11.4% and 2.7%,
respectively, of the Company's outstanding trade accounts receivable at
September 30, 1997, which reflects their significant position in the retail lawn
and garden market. The loss of either of these customers or a substantial
decrease in the amount of their purchases could have a material adverse effect
on the Company's business.

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EMPLOYEES

The Company's corporate culture is a blend of the history, heritage and
culture of The Scotts Company and the companies Hyponex, Sierra, Miracle-Gro,
Republic and Miracle Holdings, all of which were acquired over the past ten
years. The Company provides a comprehensive benefits program to all full-time
associates. As of September 30, 1997, the Company employed approximately 2,075
full-time workers in the United States (including all subsidiaries). An
additional 308 full-time employees are located outside the United States. As of
September 30, 1997, full-time workers averaged approximately ten years
employment with the Company or its predecessors. During peak production periods,
the Company engages as many as 875 temporary workers in the United States. The
Company's U.S. employees are not members of a union, with the exception of 20 of
Sierra's employees at its Milpitas facility, who are represented by the
International Chemical Workers Union.

ENVIRONMENTAL AND REGULATORY CONSIDERATIONS

Federal, state and local laws and regulations relating to environmental
matters affect the Company in several ways. All products containing pesticides
must be registered with the United States Environmental Protection Agency
("United States EPA") (and in many cases, similar state and foreign agencies)
before they can be sold. The inability to obtain or the cancellation of any such
registration could have an adverse effect on the Company's business. The
severity of the effect would depend on which products were involved, whether
another product could be substituted and whether the Company's competitors were
similarly affected. The Company attempts to anticipate regulatory developments
and maintain registrations of, and access to, substitute chemicals, but there
can be no assurance that it will continue to be able to avoid or minimize these
risks. Fertilizer and organics products (including manures) are also subject to
state labeling regulations. Grass seed is also subject to federal and state
labeling regulations.
In addition, the use of certain pesticide and fertilizer products is
regulated by various local, state, federal and foreign environmental and public
health agencies. These regulations may include requirements that only certified
or professional users apply the product or that certain products be used only on
certain types of locations (such as "not for use on sod farms or golf courses"),
may require users to post notices on properties to which products have been or
will be applied, may require notification of individuals in the vicinity that
products will be applied in the future or may ban the use of certain
ingredients. The Company believes it is operating in substantial compliance
with, or taking action aimed at ensuring compliance with, such laws and
regulations. Compliance with such regulations and the obtaining of registrations
does not assure, however, that the Company's products will not cause injury to
the environment or to people under all circumstances. 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 the Company's financial position; however, there can be no assurance
that future quarterly or annual operating results will not be materially
affected by the resolution of these matters.
State and federal authorities generally require Hyponex to obtain permits
(sometimes on an annual basis) in order to harvest peat and to discharge water
run-off or water pumped from peat deposits. The state permits typically specify
the condition in which the property must be left after the peat is fully
harvested, with the residual use typically being natural wetland habitats
combined with open water areas. Hyponex is generally required by these permits
to limit its harvesting and to restore the property consistent with the intended
residual use. In some locations, Hyponex has been required to create water
retention ponds to control the sediment content of discharged water.
State, federal and local agencies regulate the disposal, handling and
storage of waste and air and water discharges from Company facilities. During
fiscal 1997, the Company had approximately $0.4 in environmental capital
expenditures and $1.5 in other environmental expenses, compared with
approximately $0.9 in environmental capital expenditures and $0.4 in other
environmental expenses in fiscal 1996. The Company has budgeted $1.5 in
environmental capital expenditures and $1.2 in other environmental expenses for
fiscal 1998.

OHIO ENVIRONMENTAL PROTECTION AGENCY

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In February 1997, the Company learned that the Ohio Environmental
Protection Agency ("OEPA") was referring certain matters relating to
environmental conditions at the Company's Marysville site, including the
existing wastewater treatment plants and the discontinued on-site waste disposal
areas, to the Ohio Attorney General's Office ("OAG"). Representatives from the
OEPA, the OAG and the Company subsequently met on several occasions, and
continue to meet, to discuss these issues.
In June 1997, the Company received formal notice of an enforcement action
and draft Findings and Orders ("F&O") from the OEPA. The draft F&O elaborated on
the subject of the referral to the OAG alleging: potential surface water
violations relating to possible historical sediment contamination possibly
impacting water quality; inadequate treatment capabilities of the Company's
existing and currently permitted wastewater treatment plants; and that the
Marysville site is subject to corrective action under the Resource Conservation
Recovery Act ("RCRA"). In late July 1997, the Company received a draft judicial
consent order from the OAG which covers many of the same issues contained in the
draft F&O including RCRA corrective action.
In accordance with the Company's past efforts to enter into Ohio's VAP, the
Company submitted to the OEPA a "Demonstration of Sufficient Evidence [of] VAP
Eligibility Compliance" on July 8, 1997. Among other issues contained in the VAP
submission, was a description of the Company's ongoing efforts to assess
potential environmental impacts of the discontinued on-site waste disposal areas
as well as potential remediation efforts. Pursuant to the statutes covering VAP,
an eligible participant in the program is not subject to State enforcement
actions for those environmental matters being addressed. On October 21, 1997,
the Company received a letter from the Director of the OEPA denying VAP
eligibility based upon the timeliness of and completeness of the submittal. The
Company has appealed the Director's action to the Environmental Review Appeals
Commission.
The Company is continuing to meet with the OAG and the OEPA in an effort to
negotiate an amicable resolution of these issues but is unable at this stage to
predict the outcome of the negotiations. The Company believes that it has viable
defenses to the State's enforcement action, including that it had been
proceeding under VAP to address certain environmental issues, and will assert
those defenses in any such action.
The Company does not believe the ultimate outcome of any proceedings which
may result from the OEPA's referral of these matters to the OAG will have a
material adverse affect on the business or the financial condition of the
Company but is unable, at this stage, to predict the outcome of the issues. Many
of the issues raised by the State are already being investigated and addressed
by the Company during the normal course of conducting business.

LAFAYETTE

In July 1990, the Philadelphia District of the U.S. Army Corps of Engineers
("Corps") directed that peat harvesting operations be discontinued at Hyponex's
Lafayette, New Jersey facility, based on its contention that peat harvesting and
related activities result in the "discharge of dredged or fill material into
waters of the United States" and therefore require a permit under Section 404 of
the Clean Water Act. In May 1992, the United States filed suit in the U.S.
District Court for the District of New Jersey seeking a permanent injunction
against such harvesting, and civil penalties in an unspecified amount. If the
Corps' position is upheld, it is possible that further harvesting of peat from
this facility would be prohibited. The Company is defending this suit and is
asserting a right to recover its economic losses resulting from the government's
actions. The suit was placed in administrative suspense during fiscal 1996 in
order to allow the Company and the government an opportunity to negotiate a
settlement, and it remains suspended while the parties develop, exchange and
evaluate technical data. In July 1997, the Company's wetlands consultant
submitted to the government a draft remediation plan. Management does not
believe that the outcome of this case will have a material adverse effect on the
Company's operations or its financial condition. Furthermore, management
believes the Company has sufficient raw material supplies available such that
service to customers will not be materially adversely affected by continued
closure of this peat harvesting operation.

HERSHBERGER

In September 1991, the Company was identified by the OEPA as a Potentially
Responsible Party ("PRP") with respect to a site in Union County, Ohio (the
"Hershberger site") that has allegedly contained waste which included hazardous
substances whose transportation, treatment or disposal the Company allegedly
arranged. Pursuant to an Administrative Order with the OEPA, the Company,
together with four other PRPs identified to date, investigated the extent of
contamination in the Hershberger site. The investigation confirmed that the site
presents a low degree of risk and that the hazardous substances identified are
not compounds generally used by the Company. However, due to the fact that the
Company was originally named as a PRP, and due to the potential joint and
several liability of PRPs, the Company has chosen to participate in an agreed
voluntary remedial action at the site. The workplan for the remedial action has
been approved by the OEPA. Such action is to consist of leachate collection and
treatment/disposal, landfill cap repair, landfill gas management, ground water
monitoring and institutional and engineering site controls. It is expected that
in fiscal 1998, the Company and the four other named PRPs will execute an
Administrative Order on Consent with the OEPA, by which the named PRPs will fund
the referenced remedial action. Management does not

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14
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believe that such obligations will have a material adverse effect on the
Company's results of operations or financial condition.

FIFRA

In January 1996, the United States EPA served a Complaint and Notice of
Opportunity for Hearing upon Sierra's wholly-owned subsidiary, Scotts-Sierra
Crop Protection Company ("Crop Protection"). The Complaint alleged labeling
violations under the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA") during fiscal 1992 and 1993 and proposed penalties totaling $0.8, the
maximum allowable under FIFRA according to management's calculations. In
February 1997, the United States EPA's Motion for Accelerated Decision was
granted on the issue of liability, with the amount of the civil penalty to be
resolved at hearing. The hearing is scheduled for February 1998. Based upon Crop
Protection's good faith compliance actions and the United States EPA's policies
regarding penalty reductions, management believes Crop Protection's liability in
this action is substantially less than the maximum. The Company does not believe
that the outcome of this proceeding will have a material adverse effect on its
financial condition or results of operations.

YEAR 2000

The Company has developed a long-term information systems strategy, one
aspect of which is to address exposures related to the impact on its computer
systems of the Year 2000 issues. Key financial, information and operational
systems have been assessed and plans developed in order to mitigate the Year
2000 issues. These plans include conversion of in-house developed software and
upgrades to purchased software. The Company is currently in various stages of
completing these conversions and upgrades: some upgrades have already been made,
while detailed conversion plans are being developed. Management believes its
plans will adequately address the Year 2000 issues and does not currently
anticipate a material impact on the Company as a result of addressing these
issues. However, if such conversions and upgrades are not made, or are not
timely completed, the Year 2000 issues could have a material impact on the
operations of the Company.

ITEM 2. PROPERTIES

The Company has fee or leasehold interests in approximately 60 facilities.
The Company owns approximately 829 acres at its Marysville, Ohio
headquarters. It owns three research facilities in Apopka, Florida; Cleveland,
Texas; and Gervais, Oregon. The Company leases warehouse space throughout the
country as needed. Republic leases its 20-acre spreader facility in Carlsbad,
California.
The Company's 23 organics bagging facilities are located nationwide in 19
states. Twenty are owned by the Company. Most facilities include production
lines, warehouses, offices and field processing areas.
The Company operates 12 composting facilities whose operations have been
integrated with the Company's existing organics bagging facilities. Five of
these composting sites are leased and are located in California, Indiana, Oregon
and Illinois. Five other composting sites are utilized through agreements with
the municipalities of Greensboro, North Carolina; Shreveport, Louisiana;
Spokane, Washington; Independent Hill, Virginia; and Balls Ford, Virginia. Two
other sites are located at bagging facilities in Wisconsin and California.
The Company owns two Sierra manufacturing facilities in Fairfield,
California and Heerlen, The Netherlands, and, as a result of the acquisition of
Miracle Holdings, owns a manufacturing facility in East Yorkshire (Howden),
Great Britain. It leases two Sierra manufacturing facilities in Milpitas,
California and North Charleston, South Carolina.
The Company leases the land upon which Scotts' Miracle-Gro headquarters is
located in Port Washington, New York.
It is the opinion of the Company's management that its facilities are
adequate to serve their intended purposes at this time and that its property
leasing arrangements are stable. Please also see the discussion of the Company's
production facilities in "ITEM 1. BUSINESS -- Operations Group -- Production
Facilities" above.

ITEM 3. LEGAL PROCEEDINGS

As noted in the discussion of "Environmental and Regulatory Considerations"
in ITEM 1. BUSINESS, the Company is involved in several pending environmental
matters. 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 Company is involved in other lawsuits and claims which arise in the
normal course of its business. In the opinion of management, these claims
individually and in the aggregate are not expected to result in a material
adverse effect on the Company's financial position or operations.

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

There were no matters submitted to a vote of the security holders during
the fourth quarter of the fiscal year covered by this Report.

EXECUTIVE OFFICERS OF REGISTRANT

The executive officers of Scotts, their positions and, as of December 1,
1997, their ages and years with Scotts (and its predecessors) are set forth
below.

Years with
the Company
(and its
Name Age Position(s) Held Predecessors)
- ---------------------- --- ------------------------------------------------- -------------

Charles M. Berger 61 Chairman of the Board, President and Chief 1
Executive Officer
Horace Hagedorn 82 Vice Chairman of the Board 48
James Hagedorn 42 Director and Executive Vice President, U.S. 10
Business Groups
Jean H. Mordo 52 Executive Vice President and Chief Financial 9 months
Officer
John Kenlon 66 President, Consumer Gardens Group 37
Ronald E. Justice 52 Senior Vice President, Operations Group 2
Michael P. Kelty, 47 Senior Vice President, Professional Business
Ph.D. Group 18
G. Robert Lucas 54 Senior Vice President, General Counsel and 7 months
Secretary
Lawrence M. McCartney 57 Senior Vice President, Information 23
Systems
Joseph M. Petite 47 Senior Vice President, Organics Business Group 9
James L. Rogula 63 Senior Vice President, Consumer Lawns Group 2
L. Robert Stohler 56 Senior Vice President, International Business 2
Group
Rosemary L. Smith 50 Vice President, Human Resources 24

Executive officers serve at the discretion of the Board of Directors (and
in the case of: Mr. Berger, Mr. James Hagedorn, Mr. Mordo, Mr. Kenlon, Mr. Lucas
and Mr. McCartney, pursuant to employment agreements; and Mr. Horace Hagedorn,
pursuant to a consulting agreement).
The business experience of each of the persons listed above during the past
five years is as follows:
Mr. Berger was elected Chairman of the Board, President and Chief Executive
Officer of Scotts in August 1996. Mr. Berger came to Scotts from H. J. Heinz
Company, where he served as Chairman, President and Chief Executive Officer of
Weight Watchers International, a Heinz affiliate, from November 1978 to
September 1994. From October 1994 to August 1996, he was Chairman and CEO of
Heinz India Pvt. Ltd. (Bombay); and he served as Managing Director and CEO of
Heinz-Italy (Milan), the largest Heinz profit center in Europe, from August 1975
to November 1978. During his 32-year career at Heinz, he also held the positions
of General Manager, Marketing, for all Heinz U.S. grocery products; Marketing
Director for Heinz UK (London) and Director of Corporate Planning at Heinz World
Headquarters. He is also a former director of Stern's Miracle-Gro Products, Inc.
("Miracle-Gro Products").
Mr. Horace Hagedorn was named Vice Chairman of the Board and Director of
Scotts, and Chairman of the Board and Chief Executive Officer of Scotts'
Miracle-Gro, in May 1995. In March 1997, he retired as an officer of Scotts'
Miracle-Gro. Mr. Hagedorn founded Miracle-Gro Products in 1950 and served as
Chief Executive Officer of Miracle-Gro Products from 1985 until May 1995. Horace
Hagedorn is the father of James Hagedorn.
Mr. James Hagedorn was named Executive Vice President, U.S. Business
Groups, in October 1996. From May 1995 to October 1996, he served as Senior Vice
President, Consumer Gardens Group, of Scotts. Mr. Hagedorn has also been
Executive Vice President of Scotts' Miracle-Gro since May 1995. He was Executive
Vice President of Miracle-Gro Products from 1989 until May 1995. He was
previously an officer and an F-16 pilot in the United States Air Force. James
Hagedorn is the son of Horace Hagedorn.
Mr. Mordo was named Executive Vice President and Chief Financial Officer in
January 1997. From 1992 through 1996, he served as Senior Vice President and
Chief Financial Officer of Pratt and Whitney Aircraft, a division of United
Technologies Corporation.

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17

Mr. Kenlon was named President, Consumer Gardens Group, of Scotts in
December 1996. He remains Chief Operating Officer and President of Scotts'
Miracle-Gro, positions held since May 1995. Mr. Kenlon was the President of
Miracle-Gro Products from 1985 until May 1995. Mr. Kenlon began his association
with the Miracle-Gro companies in 1960.
Mr. Justice was named Senior Vice President, Operations Group, of Scotts in
July 1995. From 1992 to 1995, he was Vice President of Operations for
Continental Baking, a producer of bread and cake bakery products and a
subsidiary of Ralston Purina Company.
Dr. Kelty was named Senior Vice President, Professional Business Group, of
Scotts in July 1995. Dr. Kelty had been Senior Vice President, Technology and
Operations, of Scotts from 1994 to July 1995. From 1988 to 1994, he served first
as Director, then as Vice President, of Research and Development of Scotts.
Prior to that, Dr. Kelty was the Director of Advanced Technology, Research of
Scotts, and from 1983 to 1987, he was Director, Chemical Technology Development,
of Scotts and its predecessors.
Mr. Lucas was named Senior Vice President, General Counsel and Secretary of
Scotts in May 1997. From 1990 until the time he joined Scotts, Mr. Lucas was a
partner with the law firm Vorys, Sater, Seymour and Pease ("VSSP"). From 1993 to
the time he joined Scotts, he was the lead outside counsel at VSSP representing
the Company. Mr. Lucas is a director of Bob Evans Farms, Inc.
Mr. McCartney has served as Senior Vice President, Information Systems, of
Scotts since April 1996. From February 1989 to December 1995, he served as Vice
President, Information Systems, of Scotts. From December 1995 to April 1996, Mr.
McCartney continued his association with Scotts in a non-officer role.
Mr. Petite was named Senior Vice President, Organics Business Group, of
Scotts in December 1996. From July 1996 to December 1996, he served as Vice
President, Organics Business Group, of Scotts. From November 1995 to July 1996,
Mr. Petite served as Vice President, Strategic Planning of Scotts. From April
1989 to November 1995, he was Vice President of Marketing, Consumer Business
Group of Scotts.
Mr. Rogula was named Senior Vice President, Consumer Lawns Group, of Scotts
in October 1996. He served as Senior Vice President, Consumer Business Group, of
Scotts from January 1995 to October 1996. From 1990 until the time he joined
Scotts, he was President of The American Candy Company, a producer of
non-chocolate candies. He is also a former director of Miracle-Gro Products.
Mr. Stohler was named Senior Vice President, International Business Group,
of Scotts in December 1996. From November 1995 to December 1996, he served as
Vice President, International Business Group of Scotts. From 1994 to 1995, he
was President of Rubbermaid Europe S.A., a marketer of plastic housewares, toys,
office supplies and janitorial and food service products. From 1992 to 1994, he
was Vice President and Chief Financial Officer of Synthes (USA), a marketer and
manufacturer of implants and surgical instruments for orthopedic health care.
Ms. Smith was named Vice President, Human Resources of Scotts in October
1996. From April 1991 to October 1996, she was Director, Human Resources, and
from January 1986 to March 1991, she was Director, Compensation & Benefits, of
Scotts. Ms. Smith first joined Scotts in 1973.

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18

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common shares of Scotts trade on the New York Stock Exchange ("NYSE")
under the symbol "SMG".

Sales Prices
------------------------
High Low
- ------------------------------------------------------

Fiscal 1996
1st quarter $21 7/8 $18 7/8
2nd quarter 21 1/4 16 1/8
3rd quarter 18 3/4 16 1/2
4th quarter 19 3/8 16 3/4
Fiscal 1997
1st quarter $20 1/2 $17 3/4
2nd quarter 24 7/8 19 1/2
3rd quarter 29 3/4 22 7/8
4th quarter 30 9/16 25 5/8

Scotts has not paid dividends on the common shares in the past and does not
presently plan to pay dividends on the common shares. It is presently
anticipated that earnings will be retained and reinvested to support the growth
of the Company's business. The payment of any future dividends on common shares
will be determined by the Board of Directors of Scotts in light of conditions
then existing, including the Company's earnings, financial condition and capital
requirements, restrictions in financing agreements, business conditions and
other factors.
As of December 1, 1997, Scotts estimates there were approximately 6,500
shareholders including holders of record and Scotts' estimate of beneficial
holders.
In a series of private placements during July and August 1997, Scotts
issued put options with respect to 0.3 common shares providing the right to sell
to Scotts one Scotts common share at a fixed price. The puts mature on December
19, 1997 and can only be exercised at maturity. Strike prices ranged from $25.00
to $25.74 per share. Scotts received a premium for the issue of $0.2.

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19

ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY

THE SCOTTS COMPANY AND SUBSIDIARIES

(in millions except per share For the fiscal year ended September 30,
amounts) 1993(1) 1994(2) 1995(3) 1996 1997(4)
- ------------------------------------------------------------------------------------------------------------------

OPERATING RESULTS:
Sales $ 466.0 606.3 732.8 751.9 900.8
Gross profit $ 154.4 202.2 234.0 239.5 327.2
Income from operations $ 43.8 59.3 62.6 27.8 96.3
Income (loss) before extraordinary
items and accounting changes $ 21.0 23.9 22.4 (2.5) 39.5
Income (loss) applicable to common
shareholders $ 7.9 22.9 18.8 (12.3) 29.7
Net cash provided by operating
activities $ 24.7 9.9 4.4 82.3 121.1
Depreciation and Amortization $ 18.1 21.9 25.7 29.3 30.4
EBITDA $ 61.9 81.2 88.3 57.1 126.7
FINANCIAL POSITION:
Working capital $ 88.5 140.6 227.0 181.1 146.5
Investment in property, plant and
equipment $ 15.2 33.4 23.6 18.2 28.6
Property, plant and equipment, net $ 98.8 140.1 148.8 139.5 146.1
Total assets $ 321.6 528.6 809.0 731.7 787.6
Total debt $ 93.2 247.3 272.5 225.3 221.3
Total shareholders' equity $ 143.0 168.2 380.8 364.3 389.2
RATIOS:
Operating margin % 9.4 9.8 8.5 3.7 10.7
EBITDA margin % 13.3 13.4 12.0 7.6 14.1
Interest coverage
(EBITDA/interest) 7.3 4.6 3.4 2.2 4.7
Current ratio 2.4 2.3 2.8 2.6 2.1
Total debt to total capitalization % 39.5 59.5 41.7 38.2 36.2
Return on average shareholders'
equity % 5.0 14.7 8.2 (0.7) 10.5
Price to earnings 45.9 12.7 22.4 nm 19.4
PER SHARE DATA:
Income (loss) per common share
before extraordinary items and
accounting changes $ 1.07 1.27 0.99 (0.65) 1.35
Income (loss) per common share $ 0.40 1.22 0.99 (0.65) 1.35
Shareholders' equity $ 7.66 9.01 11.92 11.44 12.19
Stock price at year-end $ 18.38 15.50 22.13 19.25 26.25
Stock price range High $ 20.50 20.13 23.88 21.88 30.56
Low $ 14.25 15.25 14.75 16.13 17.75
OTHER:
Average common shares outstanding 19.6 18.7 18.7 18.8 18.6
Common shares used in income
(loss) per common share
calculation 19.7 18.8 22.6 18.8 29.3
Preferred stock dividends $ -- -- 3.6 9.8 9.8

- ---------

NOTE: Prior year presentations have been changed to conform to fiscal 1997
presentation; these changes did not impact net income.

(1) Includes Republic from November 1992.

(2) Includes Sierra from December 16, 1993.

(3) Includes Scotts' Miracle-Gro from May 19, 1995.

(4) Includes MGC from January 3, 1997.

nm Not meaningful

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20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of the consolidated results of
operations for the fiscal years ended September 30, 1997, 1996 and 1995 and the
financial condition at September 30, 1997 and 1996 should be read in conjunction
with the Consolidated Financial Statements and Notes included elsewhere in this
Report. Dollars are in millions except per share data.

RESULTS OF OPERATIONS

The following table sets forth the components of income and expense for the
three years ended September 30, 1997 on a percentage-of-sales basis:

Fiscal Year Ended September 30, Period to Period % Change
------------------------------- -------------------------------
1997 1996 1995 1997 v. 1996 1996 v. 1995
- --------------------------------------------------------------------------------------------------------

Sales 100.0% 100.0% 100.0% 19.8% 2.6%
Cost of sales 63.7 68.1 68.1 11.9 2.7
----- ----- -----
Gross profit 36.3 31.9 31.9 36.6 2.4
Advertising and promotion 9.3 9.2 8.3 21.2 14.4
Selling, general and
administrative 14.5 15.5 14.9 11.9 6.6
Amortization of goodwill and
other intangibles 1.1 1.2 0.8 15.9 46.7
Other expense (income), net 0.7 2.3 (0.6) nm nm
----- ----- -----
Income from operations 10.7 3.7 8.5 246.4 (55.6)
Interest expense 3.0 3.5 3.5 0.8% 0.8%
----- ----- -----
Income before income taxes 7.7 0.2 5.0 nm nm
Income taxes 3.3 0.5 1.9 nm nm
----- ----- -----
Net income (loss) 4.4 (0.3) 3.1 nm nm
Preferred stock dividends 1.1 1.3 0.5 nm nm
----- ----- -----
Income (loss) applicable to
common shareholders 3.3% (1.6)% 2.6% nm nm
===== ===== =====

- ---------

nm Not meaningful

The following table sets forth sales by business unit for the three years
ended September 30, 1997:

Fiscal Year Ended September 30, Period to Period % Change
-------------------------------- -------------------------------
1997 1996 1995 1997 v. 1996 1996 v. 1995
- --------------------------------------------------------------------------------------------------------

Consumer Lawns $304.1 $228.9 $277.8 32.9% (17.6)%
Consumer Gardens 133.2 115.3 38.5 15.5 199.5
Consumer Organics 183.0 181.1 187.8 1.1 (3.6)
------ ------ ------
Consumer 620.3 525.3 504.1 18.1 4.2
------ ------ ------
Professional 165.9 160.7 167.6 3.2 (4.1)
International 114.6 65.9 61.1 73.9 7.9
------ ------ ------
Consolidated $900.8 $751.9 $732.8 19.8% 2.6%
====== ====== ======

FISCAL 1997 COMPARED WITH FISCAL 1996

Sales in fiscal 1997 were $900.8, an increase of $148.9 or 19.8% over
fiscal 1996. On a pro forma basis, assuming the remaining two-thirds interest in
MGC was acquired at the beginning of fiscal 1996, fiscal 1997 sales would have
been $912.2, an increase of 13.3% over fiscal 1996 pro forma sales of $804.9.
Further adjusting for the impact on fiscal 1996 sales of the fiscal 1995
Consumer Lawns group's retailer early purchase program, management estimates
consolidated sales would have increased 6.4% in fiscal 1997.
Consumer segment sales totaled $620.3, an increase of 18.1% over fiscal
1996. After adjusting for the estimated impact of the fiscal 1995 early purchase
program on the Consumer Lawns group's fiscal 1996 sales, management estimates
that fiscal 1997 Consumer segment sales increased 7.4%. This reflects strong
sales volume gains in the

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21

Consumer Gardens (15.5%) and Consumer Lawns (8.2%) operating groups. Consumer
Organics sales were up slightly as this group emphasized increased
profitability, not sales growth, in fiscal 1997.
Professional segment sales increased 3.2% to $165.9 in fiscal 1997.
Beginning late in fiscal 1996, this group refocused its strategy on growth in
its core ProTurf(R) and Horticultural product lines, and significantly curtailed
certain initiatives that increased sales in prior years, but had little bottom
line contribution.
International segment sales increased to $114.6 in fiscal 1997, up 73.9%
over fiscal 1996. Reflecting the Company's International growth strategy, sales
for this segment were 12.7% of consolidated revenues in fiscal 1997, up from
8.8% in fiscal 1996. Including MGC on a pro forma basis, International sales
increased 6.0% from $118.9 in fiscal 1996 to $126.0 in fiscal 1997. The
year-to-year pro forma sales comparison for International was negatively
impacted by approximately 1% as a result of unfavorable exchange rate movements.
Gross profit increased to 36.3% of sales in fiscal 1997, a 4.4% improvement
compared to 31.9% in fiscal 1996. This improvement is attributable to the
discontinuance of promotional programs that drove out-of-season sales, the
discontinuance of lower margin Professional and Consumer products, and
manufacturing and distribution efficiencies.
Operating expenses increased $19.2 or 9.1%. Operating expenses were 25.6%
of sales compared to 28.2% in the prior year. Excluding operating asset
valuation charges in both periods and restructuring charges in fiscal 1996,
operating expenses were 25.0% of sales in fiscal 1997 compared to 25.8% in
fiscal 1996.
Advertising and promotion expenses increased by $14.7 or 21.2% to $83.9. As
a percentage-of-sales, advertising and promotion expenses increased to 9.3% from
9.2%. Reflecting the "pull" marketing strategy of the Lawns and Gardens groups
of the Consumer segment, U.S. consumer media advertising increased $5.6 or 22.5%
in fiscal 1997. The inclusion of MGC [$6.4] in fiscal 1997, as well as higher
trade allowances and cooperative advertising, also contributed to the overall
advertising and promotional expense increase in 1997. The Company believes
retailer promotions and cooperative advertising are an integral part of the
consumer lawn and garden care business, but to a lesser extent than practiced in
prior years.
Selling, general and administrative expenses increased $13.9 or 11.9% to
$130.5. As a percentage-of-sales, selling, general and administrative expense
decreased from 15.5% to 14.5%. The overall increase in this expense category
reflects the inclusion of MGC [$8.0], higher selling and general management
incentives and profit sharing expenses, increased emphasis on in-store
merchandisers, and higher spending on certain support functions.
Amortization of goodwill and other intangibles increased as a result of the
inclusion of MGC.
Other expense (income), net for fiscal 1997 included approximately $6.0 in
charges related to the disposal of and valuation charges related to certain
assets. These charges were partially offset by higher Scotts(R) brand name
licensing royalties. During fiscal 1996, Scotts recorded $4.9 in severance costs
related to workforce reductions and $12.8 in write-downs and write-offs for
various under-utilized or idle assets, including several plant closings.
Primarily as a result of higher sales volumes, improved manufacturing and
distribution efficiencies, and other cost improvements, income from operations
increased by $68.5 or 246.4% to $96.3. Income from operations increased to 10.7%
from 3.7% as a percentage-of-sales. Excluding asset valuation charges in both
years and severance expense in fiscal 1996, income from operations was 11.4% in
fiscal 1997 compared to 6.1% in fiscal 1996.
Interest expense increased $0.2 or 0.8% in fiscal 1997. Excluding MGC
related borrowings, interest expense decreased by approximately $3.8 or 14.3%,
primarily due to a $69.2 reduction in average borrowings for the year. MGC
related interest expense was approximately $4.0, reflecting both acquisition
debt and seasonal working capital requirements, from the January 3, 1997
effective date of the acquisition transaction.
The Company's effective tax rate was 43.2% in fiscal 1997 compared to
302.3% in fiscal 1996. The high effective tax rate in fiscal 1996 was
attributable to the low level of reported pre-tax income and non-tax deductible
amortization of goodwill and certain intangibles. Additional information on the
effective income tax rate is described in Note 9 to the Company's Consolidated
Financial Statements.
During fiscal 1997, the Company reported net income of $39.5 or $1.35 per
common share compared with a net loss of $2.5 or $0.65 per common share in
fiscal 1996. The return to profitability in 1997 was attributable to a variety
of factors, including: the refocused, "pull" directed marketing strategy of the
Consumer Lawns group compared to the retailer early purchase program that
severely discounted this unit's leading branded products; sales volume increases
in the Consumer Gardens group; Consumer Organics and Professional group
strategies that focused on profitable growth and eliminated sales of marginal
products and to unprofitable distribution channels; improved weather conditions
in fiscal 1997 in most key markets; improved manufacturing and distribution
efficiencies, and other cost improvements; and lower interest expense before the
impact of MGC related borrowings.

FISCAL 1996 COMPARED WITH FISCAL 1995

Sales for the fiscal year ended September 30, 1996 totaled $751.9, an
increase of $19.1 or 2.6% from the prior year. Compared to fiscal 1995 pro forma
sales of $821.2, including Miracle-Gro from October 1, 1994, sales decreased

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22

by $69.3 or 8.4%. Compared to fiscal 1995 pro forma, fiscal 1996 sales declined
principally due to the discontinuance of the Consumer Lawn group's retailer
early purchase program, which encouraged retailers to build their inventories
substantially in advance of the spring selling season and had the impact of
shifting sales into the latter four months of fiscal 1995. Further adjusting
fiscal 1996 and fiscal 1995 sales for management's estimate regarding the impact
of this program, consolidated sales increased approximately 1.5%. Sales volumes
were also unfavorably impacted by unusually poor Spring season weather
conditions in North America and Northern Europe and rationalization of certain
products, including the divestiture of the Peters(R) line of consumer
water-soluble fertilizer ("CWSF") products.
Consumer segment sales were $525.3, an increase of 4.2% over 1996. On a pro
forma basis, Consumer segment sales were down 10.5%. Further adjusting for
management's estimate regarding the impact of the Consumer Lawns group's
retailer early purchase program on both fiscal 1996 and 1995, Consumer segment
sales increased 3.5%. The fully adjusted sales increase reflects the positive
impact of expanded distribution of Miracle-Gro(R) Extra Long Lasting Lawn Food
in the first full season following the Scotts/Miracle-Gro merger transactions
and modest price increases, offset by the rationalization of certain products as
the Scotts(R) branded garden fertilizers were integrated into the Miracle-Gro(R)
product line and by poor Spring weather in fiscal 1996, which impacted all
operating groups.
Professional segment sales decreased 4.1% to $160.7 in 1996, primarily as a
result of poor Spring and Summer weather, and the curtailment of certain end of
season discounting programs in 1996, partially offset by modest price increases.
International segment sales increased $4.8 or 7.9% in 1996, principally due
to strong sales gains in the Asia/ Pacific and Latin American regions partially
offset by poor Spring weather in Northern Europe.
During 1995, the Peters(R) line of CWSF products generated net sales of
$5.4. This line was divested in 1995 under a Federal Trade Commission consent
order pursuant to the merger transactions with Miracle-Gro.
Gross profit increased $5.5 or 2.4% to $239.5, remaining constant as a
percentage-of-sales at 31.9%. A number of factors combined to create a flat
gross margin percentage. The primary positive factors were the inclusion of the
relatively high gross margin Miracle-Gro business for the first full season in
1996, and manufacturing and distribution efficiencies resulting from cost
control and operating performance initiatives. The principal negative factors
were inventory valuation charges for product phase-outs as part of the Company's
plan to simplify and focus its product offerings, lower production volumes that
increased unit costs, and to a lesser extent, unfavorable sales mix resulting
from the discontinuance of the Consumer Lawns group's early purchase program.
Operating expenses increased $40.3 or 23.5% to $211.7 in fiscal 1996 from
$171.4 in fiscal 1995. Operating expenses were 23.4% of sales in fiscal 1995
compared to 28.2% in fiscal 1996. Excluding asset valuation and restructuring
charges in fiscal 1996, and the gain from the Peters(R) CWSF product line sale
in fiscal 1995, operating expenses were 25.8% and 24.0% of sales in fiscal 1996
and 1995, respectively.
Advertising and promotion expenses increased by $8.7 or 14.4%, from 8.3% of
sales in fiscal 1995 to 9.2% of sales in fiscal 1996. The inclusion of
Miracle-Gro for the first full year in fiscal 1996, increased advertising and
promotion expense by $11.8 in fiscal 1996. Higher Consumer Lawns group media
spending of $5.6 was offset by lower cooperative advertising and promotional
spending, which were down $9.9. The shift in fiscal 1996 to media advertising
from promotional cooperative advertising represents the first year of the
Consumer segment's re-directed strategy on brand-building, "pull" advertising.
The discontinuance of the Consumer Lawns group's retailer early purchase program
reduced year-to-date promotional expense.
Selling, general and administrative expense increased $7.2 or 6.6% to
$116.6 in fiscal 1996. As a percentage-of-sales, selling, general and
administrative expense increased to 15.5% from 14.9%. The increase in this
expense category is a result of the inclusion of Miracle-Gro, expansion of the
International sales and marketing infrastructure, and to a lesser extent, higher
bad debts, associate medical and dental expenses, and external legal costs
offset by the partial year impact of cost reduction programs.
Amortization of goodwill and other intangibles increased as a result of a
full year impact of Miracle-Gro in fiscal 1996 compared to approximately four
months in fiscal 1995.
Other expense (income), net for fiscal 1996, included approximately $17.7
of charges resulting from initiatives designed to reduce costs, increase
operating efficiencies and return the Company to profitability. These charges
were for severance costs associated with restructurings and write-downs of
various under-utilized or idle assets, including several plant closings. In
fiscal 1995, the Company recorded $4.2 of other income related to the
divestiture of the Peters(R) U.S. line of CWSF products.
Interest expense increased $0.2 to $26.5 in fiscal 1996. The increase was a
result of higher average borrowings in the first eight months of fiscal 1996,
reflecting incremental receivables associated with the Consumer Lawns group's
retailer early purchase program and the first year impact of Miracle-Gro's
seasonal working capital requirements. Average borrowings increased to
approximately $317.5 in fiscal 1996, $23.5 higher than fiscal 1995. Higher
average

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23

borrowings were partially offset by a decrease in the average variable interest
rate for the Company of approximately 0.5%.
The Company's effective tax rate in fiscal 1996 was 302.3%, compared to
38.3% in fiscal 1995. Excluding unusual charges (income) in both years, the
effective tax rate would have been 52.4% in fiscal 1996 versus 43.4% in fiscal
1995. Including unusual charges, the high effective tax rate in fiscal 1996 is
attributable to non-tax deductible amortization of goodwill and certain
intangibles in the U.S., combined with the low level of reported pre-tax income.
Additional information on the effective tax rate is described in Note 9 to the
Company's Consolidated Financial Statements.
During fiscal 1996, the Company reported a net loss of $2.5, compared to
net income of $22.4 in fiscal 1995. Excluding unusual charges (income) and the
inventory writedown (totaling approximately $13 in fiscal 1996 and ($4.2) in
fiscal 1995, on an after tax basis), the Company would have reported net income
of $10.5 in fiscal 1996 versus net income of $18.2 in fiscal 1995. The decline
in net income before unusual items in fiscal 1996 is primarily due to lower
sales as a result of the discontinuance of the Consumer Lawns group retailer
early purchase program and poor Spring weather impacting all business groups,
lower gross margins due to lower than planned manufacturing volumes and
unfavorable sales mix, and higher investment in consumer directed media,
partially offset by the positive impact as a result of the inclusion of
Miracle-Gro for a full year in fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities was $121.1, $82.3 and $4.4 in fiscal
1997, 1996 and 1995, respectively. The fiscal 1997 improvements were driven by
higher earnings and improved working capital management. The seasonal nature of
the Company's sales results in a significant increase in working capital
(primarily accounts receivable and inventory) during the first half of the
fiscal year, with the third quarter being a significant cash collection period.
Cash used in investing activities totaled $72.5, $17.4 and $6.7 in fiscal
1997, 1996 and 1995, respectively. The fiscal 1997 increase was partially
attributable to the acquisition of the remaining two-thirds interest in MGC for
approximately $46.6 effective January 3, 1997. Net capital investments were
$25.9 in fiscal 1997, compared to $17.4 in fiscal 1996 and $22.9 in fiscal 1995.
These capital investments were financed with cash provided by operations and
utilization of available credit facilities. The largest project was an
approximately $9.0 expansion of the Company's Marysville distribution facility,
estimated to generate annual distribution expense savings of at least $1.5
beginning in fiscal 1998. The Company's Fourth Amended and Restated Credit
Agreement (the "Credit Agreement") restricts annual capital investments to
$50.0.
Financing activities used $46.2, $61.1 and $2.7 in fiscal 1997, 1996 and
1995, respectively. Financing activities are principally supported by the
Company's Credit Agreement. The lower level of debt repayment in fiscal 1997
reflects the usage of higher operating cash flows to support the additional
investment in MGC and higher net capital investments.
Total debt as of September 30, 1997 was $221.3, down $4.0 from $225.3 a
year earlier. Borrowings associated with MGC as of September 30, 1997 totaled
$66.9, including $44.9 related to the additional investment to obtain the
remaining ownership interest in that business in January 1997.
Shareholders' equity as of September 30, 1997 was $389.2, a $24.9 increase
compared to September 30, 1996. This increase was primarily attributable to net
income of $39.5, Convertible Preferred Stock dividends of $9.8, an unfavorable
change in the cumulative foreign currency adjustment of $6.5 and net treasury
stock activity of $1.6.
The primary sources of liquidity for the Company are funds generated by
operations and borrowings under the Company's Credit Agreement. The Credit
Agreement was amended in December 1996 to increase the available line-of-credit
from $375 to $425 and allow up to the equivalent of $100 of the available credit
to be borrowed in U.K. Pounds Sterling.
The Company has foreign exchange rate risk related to International group
operations and cash flows. The Company has historically entered into forward
foreign exchange contracts and purchased currency options to hedge its exposure
to fluctuations in foreign currency exchange rates. These contracts generally
involve the exchange of one currency for a second currency at some future date.
Counterparties to these contracts are major financial institutions. Gains and
losses on these contracts generally offset gains and losses on the assets,
liabilities and transactions being hedged. Effective in the second quarter of
1997, the Company significantly reduced this program, while it reassesses its
foreign exchange policy in light of actions taken internally to reduce such
exposures.
Realized and unrealized foreign exchange gains and losses are recognized
and offset foreign exchange gains or losses on the underlying exposures.
Unrealized gains and losses that are designated and effective as hedges on such
transactions are deferred and recognized in income in the same period as the
hedged transactions.
As of September 30, 1997, the Company's European operations had foreign
exchange risk in various European currencies tied to the Dutch Guilder. These
currencies include the Belgian Franc, German Mark, Spanish Peseta, French

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23
24

Franc, British Pound, Italian Lire, Australian Dollar and U.S. Dollar. The
Company's U.S. operations had foreign exchange rate risk in the Canadian Dollar,
Dutch Guilder and the British Pound which are tied to the U.S. Dollar.
In the opinion of the Company's management, cash flows from operations and
capital resources will be sufficient to meet debt service and working capital
needs during fiscal 1998.

ENVIRONMENTAL MATTERS

The Company is subject to local, state, federal and foreign environmental
protection laws and regulations with respect to its business operations and
believes it is operating in substantial compliance with, or taking action aimed
at ensuring compliance with, such laws and regulations. The Company is involved
in several environmental related legal actions with various governmental
agencies. 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 the Company's financial position; however,
there can be no assurance that future quarterly or annual operating results will
not be materially affected by the resolution of these matters. Additional
information on environmental matters affecting the Company is provided in Note
11 to the Company's Consolidated Financial Statements and in this Annual Report
on Form 10-K under the "BUSINESS" and "LEGAL PROCEEDINGS" sections.

ACCOUNTING ISSUES

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). SFAS 128 establishes standards for computing and presenting earnings per
share ("EPS"). SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding during the period. This statement also requires dual
presentation of basic EPS and diluted EPS on the face of the income statement
for all periods presented. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. The
Company plans to adopt SFAS 128 in the first quarter of 1998 for the year ended
September 30, 1998. If SFAS 128 had been adopted at September 30, 1997, basic
and diluted EPS would be:

Fiscal Year Ended September 30,
----------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------

Basic EPS $1.60 $(0.65) $1.01
Diluted EPS $1.35 $(0.65) $0.99

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." Each standard is effective for financial statements for
fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses).
SFAS No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. The Company plans to adopt SFAS No. 130 as required in fiscal 1999.
Based on the Company's current operations, the effect of foreign currency
translation is the only significant difference between comprehensive income and
historically reported net income.
SFAS No. 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement
defines business segments as components of an enterprise about which separate
financial information is available and used internally for evaluating segment
performance and decision making on resource allocations. SFAS No. 131 requires
reporting a measure of segment profit or loss, certain specific revenue and
expense items, and segment assets; and other reporting about geographic and
customer matters. Based on the guidelines of SFAS No. 131 and current internal
management reporting, the Company has determined its business is comprised of
three reportable segments: Consumer Products (the Lawns, Gardens and

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25

Organics business groups), Professional Products and International. Management
believes that the business segments identified and set forth in Note 14 to the
Company's Consolidated Financial Statements are substantially in compliance with
SFAS No. 131.

YEAR 2000

RECENT DEVELOPMENTS

On December 12, 1997, the Company acquired, for approximately $78.0,
Levington Group Limited, which through its subsidiaries (collectively,
"Levington") is the leading producer of consumer and professional lawn
fertilizer and growing media in the U.K. Management believes this acquisition
offers the potential to expand the Company's presence in European consumer
markets. Levington's sales for the fiscal year ended June 30, 1997 were $75.1.
The Company utilized its existing Credit Agreement to fund such
acquisition. The Credit Agreement was amended in November 1997 to increase the
U.K. Pounds Sterling sub-tranche from $100 to $200 and to allow a subsidiary of
the Company to become a U.K. Borrower as that term is defined in the amendment.

MANAGEMENT'S OUTLOOK

Fiscal 1997 was another significant year for The Scotts Company. Strong
results from all business groups delivered net income of $39.5 and operating
cash flow of $121.1 in fiscal 1997. These results reflect the positive outcome
of the difficult, but necessary restructuring steps taken in fiscal 1996, that
resulted in a net loss of $2.5. More importantly, the strong financial results
of fiscal 1997 represent the base year in the Company's long-term strategy for
profitable growth.
Looking forward to fiscal 1998 and beyond, the Company has established the
following broad tenets to its strategic plan:

(1) Promote and capitalize on the strengths of the Scotts(R),
Miracle-Gro(R) and Hyponex(R) industry-leading brands. This
involves a commitment to our investors and retail partners that we
will support these brands through advertising and promotion
unequaled in the lawn and garden consumables market. In the
Professional categories of our business, it signifies a commitment
to our customers to provide value and an integral element in their
long-term success;

(2) A commitment to continuously study and improve our knowledge of
the market, the consumer and the competition;

(3) Simplification of our product lines and business processes, to
focus on those that deliver value, evaluate marginal ones and
eliminate those that lack future prospects; and

(4) Achieve world leadership in operations, leveraging technology and
know-how to deliver outstanding customer service and quality.

As part of its growth strategy, the Company may also consider acquisition
opportunities in new or related markets.
Within the Company's four-year strategic plan, management has established
challenging, but realistic, financial goals, including:

(1) Sales growth of 6% to 8% in core businesses;

(2) An aggregate operating margin improvement of at least 2% over the
next four years; and

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26

(3) Minimum compounded annual EPS growth of 15%.

FORWARD-LOOKING STATEMENTS

The Company has made and will make certain forward-looking statements in
its Annual Report, Form 10-K and in other contexts relating to future growth and
profitability targets, and strategies designed to increase total shareholder
value. The Private Securities Litigation Reform Act of 1995 (the "Act") 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. The Company
desires to take advantage of the "safe harbor" provisions of the Act.
These forward-looking statements represent challenging goals for the
Company, and the achievement thereof is subject to a variety of risks and
assumptions. These forward-looking statements include, but are not limited to,
information regarding the future economic performance and financial condition of
the Company, the plans and objectives of the Company's management, and the
Company's assumptions regarding such performance and plans. Therefore, it is
possible that the Company's future actual financial results may differ
materially from those expressed in these forward-looking statements due to a
variety of factors, including:

- Weather conditions in North America and Europe which have a
significant impact on the timing of sales in the Spring selling
season and overall annual sales;

- Continued marketplace acceptance of the Company's Consumer Lawns and
Consumer Gardens groups' "pull" advertising marketing strategies,
particularly in the Consumer Lawns group which refocused its general
marketing strategy beginning in fiscal 1996;

- The Company's ability to maintain profit margins on its products, to
produce its products on a timely basis, and to maintain and develop
additional production capacity as necessary to meet demand;

- Competition among lawn and garden care product producers supplying
the consumer and professional markets, both in North America and
Europe;

- Competition between and the recent consolidation within the retail
outlets selling lawn and garden care products produced by the
Company;

- Public perceptions regarding the safety of the products produced and
marketed by the Company;

- Inherent risks of international development, including currency
exchange rates, economic conditions and regulatory and cultural
difficulties or delays in the Company's development outside the
United States;

- Changes in economic conditions in the United States and the impact
of changes in interest rates; and

- The ability of the Company to improve its processes and business
practices to keep pace with the economic, competitive and
technological environment, including successfully addressing the
Year 2000 issues.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For the fiscal year ended September 30, 1997, the disclosure under Item 305
of Regulation S-K is not required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and other information required by this Item are
contained in the financial statements, footnotes thereto and schedules listed in
the Index on page F-1 herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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27

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

In accordance with General Instruction G(3), the information contained
under the captions "BENEFICIAL OWNERSHIP OF SECURITIES OF THE COMPANY--Voting
Restrictions on the Miracle-Gro Shareholders", and "--Section 16(a) Beneficial
Ownership Reporting Compliance" and "ELECTION OF DIRECTORS" in the Registrant's
definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be
held on February 18, 1998 to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934 (the "Proxy Statement"), is incorporated herein by reference. The
information regarding executive officers required by Item 401 of Regulation S-K
is included in Part I hereof under the caption "Executive Officers of
Registrant."

ITEM 11. EXECUTIVE COMPENSATION

In accordance with General Instruction G(3), the information contained
under the captions "EXECUTIVE COMPENSATION" and "ELECTION OF
DIRECTORS--Compensation of Directors" in the Registrant's Proxy Statement, is
incorporated herein by reference. Neither the report of the Compensation and
Organization Committee of the Registrant's Board of Directors on executive
compensation nor the performance graph included in the Registrant's Proxy
Statement shall be deemed to be incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

In accordance with General Instruction G(3), the information contained
under the caption "BENEFICIAL OWNERSHIP OF SECURITIES OF THE COMPANY" in the
Registrant's definitive Proxy Statement, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In accordance with General Instruction G(3), the information contained
under the captions "BENEFICIAL OWNERSHIP OF SECURITIES OF THE COMPANY" and
"EXECUTIVE COMPENSATION--Certain Relationships and Related Transactions" in the
Registrant's definitive Proxy Statement, is incorporated herein by reference.

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28

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) DOCUMENTS FILED AS PART OF THIS REPORT

1 and 2. Financial Statements and Financial Statement Schedules:

The response to this portion of Item 14 is submitted as a separate section
of this Annual Report on Form 10-K. Reference is made to "Index to Consolidated
Financial Statements and Financial Statement Schedules" beginning at Page F-1.
The following financial statement schedule of The Scotts Company, for the
fiscal years ended September 30, 1997, 1996, and 1995 is filed as part of this
Report and should be read in conjunction with the Consolidated Financial
Statements and Notes thereto.

Schedule II Valuation and Qualifying Accounts for the years ended September 30, 1997, 1996
and 1995.

Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.

3. Exhibits:

Exhibits filed with this Annual Report on Form 10-K are attached hereto.
For a list of such exhibits, see "Index to Exhibits" beginning at page E-1. The
following table provides certain information concerning executive compensation
plans and arrangements required to be filed as exhibits to this Annual Report on
Form 10-K.

EXECUTIVE COMPENSATORY PLANS AND ARRANGEMENTS

Exhibit
No. Description Location
- --------------------------------------------------------------------------------------------------

10(a) The Scotts Company Associates' Pension Incorporated herein by reference to
Plan as amended effective January 1, the Registrant's Annual Report on Form
1989 and December 31, 1995 (the 10-K for the fiscal year ended
"Pension Plan") September 30, 1996 (File No. 1-11593)
[Exhibit 10(a)]
10(b) First Amendment to the Pension Plan *
10(c) Third Restatement of The Scotts Incorporated herein by reference to
Company Profit Sharing and Savings the Registrant's Annual Report on Form
Plan 10-K for the fiscal year ended
September 30, 1996 (File No. 1-11593)
[Exhibit 10(b)]
10(d) First Amendment to the Third *
Restatement of The Scotts Company
Profit Sharing and Savings Plan
10(e) The O.M. Scott & Sons Company Excess Incorporated herein by reference to
Benefit Plan, effective October 1, the Annual Report on Form 10-K of The
1993 Scotts Company, a Delaware corporation
("Scotts Delaware") for the fiscal
year ended September 30, 1993 (File
No. 0-19768) [Exhibit 10(h)]
10(f) The Scotts Company 1992 Long Term Incorporated herein by reference to
Incentive Plan Scotts Delaware's Registration
Statement on Form S-8 filed on March
26, 1993 (Registration No. 33-60056)
[Exhibit 4(f)]

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29

Exhibit
No. Description Location
- --------------------------------------------------------------------------------------------------

10(g) The Scotts Company 1997 Executive *
Annual Incentive Plan
10(h) The Scotts Company 1996 Stock Option Incorporated herein by reference to
Plan (as amended through March 12, the Registrant's Quarterly Report on
1997) Form 10-Q for the fiscal quarter ended
March 29, 1997 (File No. 1-11593)
[Exhibit 10(a)]
10(i) The Scotts Company Incentive Pay *
Deferral Plan
10(j) Employment Agreement, dated as of May Incorporated herein by reference to
19, 1995, between the Registrant and the Registrant's Annual Report on Form
James Hagedorn 10-K for the fiscal year ended
September 30, 1995 (File No. 1-11593)
[Exhibit 10(p)]
10(k) Employment Agreement, dated as of May Incorporated herein by reference to
19, 1995, among Stern's Miracle-Gro the Registrant's Annual Report on Form
Products, Inc. (nka Scotts' 10-K for the fiscal year ended
Miracle-Gro Products, Inc.), the September 30, 1996 (File No. 1-11593)
Registrant and Horace Hagedorn [Exhibit 10(j)]
10(l) Consulting Agreement, dated July 9, *
1997, among Scotts' Miracle-Gro
Products, Inc., the Registrant and
Horace Hagedorn
10(m) Employment Agreement, dated as of May Incorporated herein by reference to
19, 1995, among Stern's Miracle-Gro the Registrant's Annual Report on Form
Products, Inc. (nka Scotts' 10-K for the fiscal year ended
Miracle-Gro Products, Inc.), the September 30, 1996 (File No. 1-11593)
Registrant and John Kenlon [Exhibit 10(k)]
10(n) Employment Agreement, dated as of Incorporated herein by reference to
August 7, 1996, between the Registrant the Registrant's Annual Report on Form
and Charles M. Berger 10-K for the fiscal year ended
September 30, 1996 (File No. 1-11593)
[Exhibit 10(l)]
10(o) Stock Option Agreement, dated as of Incorporated herein by reference to
August 7, 1996, between the Registrant the Registrant's Annual Report on Form
and Charles M. Berger 10-K for the fiscal year ended
September 30, 1996 (File No. 1-11593)
[Exhibit 10(m)]
10(p) Letter Agreement, dated December 23, *
1996, between the Registrant and Jean
H. Mordo
10(q) Specimen form of Stock Option *
Agreement for Non-Qualified Stock
Options
10(r) Letter Agreement, dated April 10, *
1997, between the Registrant and G.
Robert Lucas
10(s) Letter Agreement, dated October 29, *
1997, as amended, between the
Registrant and Lawrence McCartney

- ---------------
* Filed herewith.

(b) REPORTS ON FORM 8-K

The Registrant filed no Current Reports on Form 8-K for the last quarter of
the period covered by this Report.

See Item 14(a)(3) above.

(d) FINANCIAL STATEMENT SCHEDULES

The response to this portion of Item 14 is submitted as a separate section
of this Annual Report on Form 10-K. See Item 14(a)(2) above.

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30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

THE SCOTTS COMPANY

Dated: December 11, 1997 By: /s/ CHARLES M. BERGER
--------------------------------------
Charles M. Berger, Chairman of the
Board,
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.

SIGNATURES TITLE DATE
- ----------------------------------- ---------------------------------------- ------------------

/s/ JAMES B BEARD Director December 11, 1997
- -----------------------------------
James B Beard

/s/ CHARLES M. BERGER Chairman of the Board/President/ December 11, 1997
- ----------------------------------- Chief Executive Officer
Charles M. Berger

/s/ JOHN S. CHAMBERLIN Director December 11, 1997
- -----------------------------------
John S. Chamberlin

/s/ JOSEPH P. FLANNERY Director December 11, 1997
- -----------------------------------
Joseph P. Flannery

/s/ HORACE HAGEDORN Vice Chairman/Director December 11, 1997
- -----------------------------------
Horace Hagedorn

/s/ JAMES HAGEDORN Executive Vice President/Director December 11, 1997
- -----------------------------------
James Hagedorn

/s/ ALBERT E. HARRIS Director December 11, 1997
- -----------------------------------
Albert E. Harris

/s/ JOHN KENLON Director December 11, 1997
- -----------------------------------
John Kenlon

/s/ KAREN GORDON MILLS Director December 11, 1997
- -----------------------------------
Karen Gordon Mills

/s/ JEAN H. MORDO Executive Vice President/Chief Financial December 11, 1997
- ----------------------------------- Officer/ Principal Accounting Officer
Jean H. Mordo

/s/ JOHN M. SULLIVAN Director December 11, 1997
- -----------------------------------
John M. Sullivan

/s/ L. JACK VAN FOSSEN Director December 11, 1997
- -----------------------------------
L. Jack Van Fossen

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31

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

FORM 10-K
ANNUAL REPORT
--------------

Consolidated Financial Statements of The Scotts Company and Subsidiaries
Report of Management F-2
Report of Independent Accountants F-2
Consolidated Statements of Operations for the years ended September 30, 1997, F-3
1996 and 1995
Consolidated Statements of Cash Flows for the years ended September 30, 1997, F-4
1996 and 1995
Consolidated Balance Sheets at September 30, 1997 and 1996 F-5
Consolidated Statements of Changes in Shareholders' Equity for the years ended F-6
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-7 to F-22
Schedules Supporting the Consolidated Financial Statements:
Report of Independent Accountants on Financial Statement Schedules F-23
Valuation and Qualifying Accounts for the years ended September 30, 1997, 1996 F-24 to F-26
and 1995

Schedules other than those listed above are omitted since they are not required
or are not applicable, or the required information is shown in the Consolidated
Financial Statements or Notes thereto.

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F- 1
32

REPORT OF MANAGEMENT

Management of The Scotts Company is responsible for the preparation,
integrity and objectivity of the financial information presented in this Form
10-K. The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles appropriate in the circumstances
and, accordingly, include some amounts that are based on management's best
judgments and estimates.
Management is responsible for maintaining a system of accounting and
internal controls which it believes are adequate to provide reasonable assurance
that assets are safeguarded against loss from unauthorized use or disposition
and that the financial records are reliable for preparing financial statements.
The selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures, and a
program of internal audits are important objectives of these control systems.
The financial statements have been audited by Coopers & Lybrand L.L.P.,
independent accountants, selected by the Board of Directors. The independent
accountants conduct a review of internal accounting controls to the extent
required by generally accepted auditing standards and perform such tests and
related procedures as they deem necessary to arrive at an opinion on the
fairness of the financial statements in accordance with generally accepted
accounting principles.
The Board of Directors, through its Audit Committee consisting solely of
non-management directors, meets periodically with management, internal audit
personnel and the independent accountants to discuss internal accounting
controls and auditing and financial reporting matters. The Audit Committee
reviews with the independent auditors the scope and results of the audit effort.
Both internal audit personnel and the independent accountants have access to the
Audit Committee with or without the presence of management.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
of The Scotts Company

We have audited the accompanying consolidated balance sheets of The Scotts
Company and Subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Scotts
Company and Subsidiaries as of September 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997, in conformity with generally accepted
accounting principles.

Coopers & Lybrand L.L.P.
Columbus, Ohio

October 24, 1997
Except for Note 16
to the consolidated financial statements,
as to which the date is December 12, 1997.

----
F- 2
33

THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
for the fiscal years ended September 30, 1997, 1996 and 1995
(in millions except per share amounts)

1997 1996 1995
- ---------------------------------------------------------------------------------------------------

Sales $900.8 $751.9 $732.8
Cost of sales 573.6 512.4 498.8
------ ------ ------
Gross profit 327.2 239.5 234.0
------ ------ ------
Advertising and promotion 83.9 69.2 60.5
Selling, general and administrative 130.5 116.6 109.4
Amortization of goodwill and other
intangibles 10.2 8.8 6.0
Other expense (income), net 6.3 17.1 (4.5)
------ ------ ------
Income from operations 96.3 27.8 62.6
Interest expense 26.7 26.5 26.3
------ ------ ------
Income before income taxes 69.6 1.3 36.3
Income taxes 30.1 3.8 13.9
------ ------ ------
Net income (loss) 39.5 (2.5) 22.4
Preferred stock dividends 9.8 9.8 3.6
------ ------ ------
Income (loss) applicable to common
shareholders $ 29.7 $(12.3) $ 18.8
====== ====== ======

Income (loss) per common share $ 1.35 $(0.65) $ 0.99
====== ====== ======
Common shares used in income (loss) per
common share computation 29.3 18.8 22.6
====== ====== ======

See Notes to Consolidated Financial Statements

----
F- 3
34

THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the fiscal years ended September 30, 1997, 1996 and 1995
(in millions)

1997 1996 1995
- ---------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 39.5 $ (2.5) $ 22.4
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 16.6 16.8 16.1
Amortization 13.8 12.5 9.6
Other expense (income), net 5.6 15.0 (4.2)
Deferred income taxes (1.5) (5.7) (2.6)
Changes in assets and liabilities:
Accounts receivable 18.3 66.1 (35.2)
Inventories 17.3 (4.9) (23.0)
Prepaid and other current assets 0.4 2.1 (2.1)
Accounts payable 1.1 (16.9) 12.0
Accrued liabilities 12.7 0.6 9.6
Other, net (2.7) (0.8) 1.8
------ ------ ------
Net cash provided by operating activities 121.1 82.3 4.4
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (28.6) (18.2) (23.6)
Proceeds from sale of equipment 2.7 0.8 0.7
Investment in affiliate (46.6) -- (0.2)
Cash acquired in merger transactions with
Miracle-Gro -- -- 6.4
Proceeds from Peters(R) divestiture -- -- 10.0
------ ------ ------
Net cash used in investing activities (72.5) (17.4) (6.7)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on term and other debt -- -- (27.1)
Net (payments) borrowings under revolving
credit (28.7) (48.5) 27.4
Net (payments) borrowings under bank line of
credit (8.6) 1.9 (1.8)
Dividends on Class A Convertible Preferred
Stock (9.8) (12.2) (1.1)
Other, net 0.9 (2.3) (0.1)
------ ------ ------
Net cash used in financing activities (46.2) (61.1) (2.7)
------ ------ ------

Effect of exchange rate changes on cash -- (0.2) 1.3
------ ------ ------
Net increase (decrease) in cash 2.4 3.6 (3.7)
Cash, beginning of period 10.6 7.0 10.7
------ ------ ------
Cash, end of period $ 13.0 $ 10.6 $ 7.0
====== ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest (net of amount capitalized) $ 24.2 $ 25.5 $ 23.8
Income taxes paid 20.5 4.4 11.3
Dividends declared not paid 2.4
Businesses acquired:
Fair value of assets acquired 115.9 235.6
Liabilities assumed and minority interest (69.2) (39.9)
Debt issued 44.9
Class A Convertible Preferred Stock issued 177.3
Warrants issued 14.4

See Notes to Consolidated Financial Statements

----
F- 4
35

THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and 1996
(in millions)

1997 1996
- -------------------------------------------------------------------------------------------------

ASSETS
Current Assets:
Cash $ 13.0 $ 10.6
Accounts receivable, less allowance for uncollectible
accounts of $5.7 in 1997 and $4.1 in 1996 104.3 110.4
Inventories 146.1 148.8
Prepaid and other assets 22.4 22.1
------ ------
Total current assets 285.8 291.9
------ ------
Property, plant and equipment, net 146.1 139.5
Goodwill, net 215.6 180.2
Other intangibles, net 136.6 106.5
Other assets 3.5 13.6
------ ------
Total Assets $787.6 $731.7
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line and other short-term debt $ 1.5 $ 2.2
Accounts payable 54.1 46.3
Accrued liabilities 57.8 42.6
Accrued taxes 25.9 19.7
------ ------
Total current liabilities 139.3 110.8
------ ------
Term debt, less current portion 219.8 223.1
Other liabilities 39.3 33.5
------ ------
Total Liabilities 398.4 367.4
------ ------
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred Stock, no par value 177.3 177.3
Common shares, no par value per share, $.01 stated value
per share, issued 21.1 shares in 1997 and 1996 0.2 0.2
Capital in excess of par value 207.8 207.6
Retained earnings 50.1 20.4
Cumulative foreign currency translation account (4.3) 2.2
Treasury stock, 2.4 shares in 1997 and 2.5 shares in
1996, at cost (41.9) (43.4)
------ ------
Total Shareholders' Equity 389.2 364.3
------ ------
Total Liabilities and Shareholders' Equity $787.6 $731.7
====== ======

See Notes to Consolidated Financial Statements

----
F- 5
36

THE SCOTTS COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
for the fiscal years ended September 30, 1997, 1996 and 1995
(in millions)

Class A Cumulative
Convertible Foreign
Preferred Stock Common Shares Capital in Treasury Stock Currency
---------------- ---------------- Excess of Retained ---------------- Translation
Shares Amount Shares Amount Par Value Earnings Shares Amount Account Total
- ---------------------------------------------------------------------------------------------------------------------------

Balance, September
30, 1994 21.1 $0.2 $193.4 $ 13.9 (2.4) $(41.4) $ 2.1 $168.2
Issuance of common
shares held in
treasury 0.4 0.4
Net income 22.4 22.4
Dividends (3.6) (3.6)
Foreign currency
translation 2.0 2.0
Issuance of Class A
Convertible
Preferred Stock .195 $177.3 177.3
Issuance of
warrants 14.4 14.4
Options outstanding (0.3) (0.3)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September
30, 1995 .195 177.3 21.1 0.2 207.5 32.7 (2.4) (41.0) 4.1 380.8
Issuance of common
shares held in
treasury 0.1 0.4 7.4 7.5
Purchase of common
stock (0.5) (9.8) (9.8)
Net loss (2.5) (2.5)
Dividends (9.8) (9.8)
Foreign currency
translation (1.9) (1.9)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September
30, 1996 .195 177.3 21.1 0.2 207.6 20.4 (2.5) (43.4) 2.2 364.3
Issuance of common
shares held in
treasury 0.2 0.1 1.5 1.7
Net Income 39.5 39.5
Dividends (9.8) (9.8)
Foreign currency
translation (6.5) (6.5)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September
30, 1997 .195 $177.3 21.1 $0.2 $207.8 $ 50.1 (2.4) $(41.9) $(4.3) $389.2
- ---------------------------------------------------------------------------------------------------------------------------

See Notes to Consolidated Financial Statements

----
F- 6
37

THE SCOTTS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALL AMOUNTS ARE IN MILLIONS EXCEPT PER SHARE DATA OR AS OTHERWISE NOTED.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

The Scotts Company is engaged in the manufacture and sale of lawn care and
garden products. The Company's major customers include mass merchandisers, home
improvement centers, large hardware chains, independent hardware stores,
nurseries, garden centers, food and drug stores, golf courses, professional
sports stadiums, lawn and landscape service companies, commercial nurseries and
greenhouses, and specialty crop growers. The Company's products are sold in the
United States, Canada, the United Kingdom, the European Union, the Caribbean,
Southeast Asia, the Middle East, Africa, Australia, New Zealand, Mexico, Japan,
and several Latin American Countries.

ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of The Scotts
Company ("Scotts") and its wholly-owned subsidiaries, Hyponex Corporation
("Hyponex"), Republic Tool and Manufacturing Corp. ("Republic"), Scotts-Sierra
Horticultural Products Company ("Sierra"), Scotts' Miracle-Gro Products, Inc.
("Miracle-Gro"), and Miracle Holdings Limited ("Miracle Holdings"),
collectively, the "Company". All material intercompany transactions have been
eliminated.

REVENUE RECOGNITION

Revenue generally is recognized when products are shipped. For certain
large multi-location customers, revenue is recognized when products are shipped
to intermediate locations and ownership is acknowledged by the customer.

RESEARCH AND DEVELOPMENT

All costs associated with research and development are charged to expense
as incurred. Expense for fiscal 1997, 1996 and 1995 was $10.0, $10.6, and $11.0,
respectively.

ADVERTISING AND PROMOTION

The Company advertises its branded products through national and regional
media, and through cooperative advertising programs with retailers. Retailers
are also offered pre-season stocking and in-store promotional allowances.
Certain products are also promoted with direct consumer rebate programs. Costs
for these advertising and promotional programs are generally expensed ratably
over the year in relation to revenues or related performance measures.

INCOME TAXES

The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of the assets and
liabilities using enacted tax rates.

NET INCOME PER COMMON SHARE

Net income per common share is based on the weighted-average number of
common shares and dilutive common share equivalents (stock options, convertible
preferred stock and warrants) outstanding each period.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying disclosures. The most significant of these estimates
are related to the allowance for doubtful accounts, inventory valuation
reserves, expected useful lives assigned to property, plant and equipment and
goodwill and other intangible assets, legal and environmental accruals,
post-retirement benefits, marketing promotional and consumer rebate liabilities,
income taxes and contingencies. Although these estimates are based on

----
F- 7
38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

management's best knowledge of current events and actions the Company may
undertake in the future, actual results ultimately may differ from the
estimates.

INVENTORIES

Inventories are principally stated at the lower of cost or market,
determined by the FIFO method; however, certain inventories of Hyponex
(primarily organics products) are accounted for by the LIFO method. At September
30, 1997 and 1996, approximately 13.8% and 15.0% of inventories, respectively,
are valued at the lower of LIFO cost or market. Inventories include the cost of
raw materials, labor and manufacturing overhead.
The Company makes provisions for obsolete or slow-moving inventories as
necessary to properly reflect inventory value. Inventories, net of provisions of
$11.8 and $8.7 as of September 30, 1997 and 1996, respectively, consisted of:

1997 1996
----------------------------------------------------------------

Finished Goods............................. $102.8 $ 96.7
Raw Materials.............................. 42.8 51.9
------ ------
FIFO Cost.................................. 145.6 148.6
LIFO Reserve............................... 0.5 0.2
------ ------
$146.1 $148.8
------ ------

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including significant improvements, are
stated at cost. Expenditures for maintenance and repairs are charged to
operating expenses as incurred. When properties are retired, or otherwise
disposed of, the cost of the asset and the related accumulated depreciation are
removed from the accounts.
Depletion of applicable land is computed on the units-of-production method.
Depreciation of other property, plant and equipment is provided on the
straight-line method and is based on the estimated useful economic lives of the
assets as follows:

Land improvements............................... 10-25 years
Buildings....................................... 10-40 years
Machinery and equipment......................... 3-15 years
Furniture and fixtures.......................... 6-10 years
Software........................................ 3- 4 years

Property, plant and equipment at September 30, 1997 and 1996 consisted of
the following:

1997 1996
---------------------------------------------------------------

Land and improvements................... $ 27.6 $ 28.4
Buildings............................... 44.9 44.3
Machinery and equipment................. 136.8 137.8
Furniture and fixtures.................. 11.5 11.5
Software................................ 3.2 1.8
Construction in progress................ 24.5 10.5
------ ------
248.5 234.3
Less accumulated depreciation........... 102.4 94.8
------ ------
$146.1 $139.5
------ ------

INTANGIBLE ASSETS

Goodwill arising from business acquisitions is amortized over 40 years on a
straight-line basis. Other intangible assets consist primarily of patents and
debt issuance costs. Debt issuance costs are being amortized over the terms of
the various agreements. Patents and trademarks are being amortized on a
straight-line basis over periods varying from 7 to 40 years. Accumulated
amortization at September 30, 1997 and 1996 was $68.9 and $55.8, respectively.
Goodwill and identifiable trademarks associated with the January 3, 1997
purchase of the remaining interest in Miracle Holdings, including its
subsidiary, Miracle Garden Care Limited ("MGC"), are $40.5 and $37.1,
respectively, as of September 30, 1997. See Note 3.

----
F- 8
39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company management periodically assesses the recoverability of goodwill,
trademarks and other intangible assets by determining whether the amortization
of such assets over the remaining lives can be recovered through projected
undiscounted net cash flows produced by such assets. In fiscal 1995, goodwill
was reduced by $3.5 related to the disposition of the Peters([) U.S. consumer
water-soluble fertilizer business.

FOREIGN EXCHANGE INSTRUMENTS

The Company has historically entered into forward foreign exchange
contracts and purchased currency options to hedge its exposure to fluctuations
in foreign currency exchange rates. These contracts generally involve the
exchange of one currency for a second currency at some future date.
Counterparties to these contracts are major financial institutions. Gains and
losses on these contracts generally offset gains and losses on the assets,
liabilities and transactions being hedged. Effective in the second quarter of
fiscal 1997, the Company significantly reduced this program, while it reassesses
its foreign exchange policy in light of actions taken internally to reduce such
exposures.
Realized and unrealized foreign exchange gains and losses are recognized
and offset foreign exchange gains or losses on the underlying exposures.
Unrealized gains and losses that are designated and effective as hedges on such
transactions are deferred and recognized in income in the same period as the
hedged transactions. The net unrealized loss deferred at September 30, 1997 was
not material.
At September 30, 1997, the Company's European operations had foreign
exchange risk in various European currencies tied to the Dutch Guilder. These
currencies are the Australian Dollar, Belgian Franc, German Mark, Spanish
Peseta, Italian Lire, French Franc, British Pound and U.S. Dollar. The Company's
U.S. operations had foreign exchange rate risk in the Canadian Dollar, Dutch
Guilder and British Pound which are tied to the U.S. Dollar. As of September 30,
1997, MGC had outstanding forward foreign exchange contracts with a contract
value of approximately 15.1 Dutch Guilders. These contracts have maturity dates
ranging from March 12, 1998 to March 30, 1998.
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the U.S. dollar are translated into U.S.
dollar equivalents at year-end exchange rates. Translation gains and losses are
accumulated as a separate component of shareholders' equity. Income and expense
items are translated at average monthly exchange rates. Cumulative foreign
currency translation balances were a loss of $4.3 and a gain of $2.2 as of
September 30, 1997 and 1996, respectively. Foreign currency transaction gains
and losses are included in determining net income.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 1997 classifications.

2. OTHER EXPENSE (INCOME), NET

Other expense (income), net consisted of the following for the fiscal years
ended September 30:

1997 1996 1995
---------------------------------------------------------------------------

Royalty income.............................. $(2.0) $(1.0) $(0.9)
Asset valuation charges..................... 6.0 12.8 --
Restructuring severance..................... 0.3 4.9 --
Foreign currency loss....................... -- 1.2 0.3
Gain on divestiture......................... -- -- (4.2)
Other, net.................................. 2.0 (0.8) 0.3
---- ----- -----
Total....................................... $ 6.3 $17.1 $(4.5)
---- ----- ----

During fiscal 1997, the Company recorded $6.0 asset valuation charges
related to the sale of a water-soluble fertilizer plant, the write-down of
packaging equipment rendered obsolete by the changeover to plastic packaging and
provisions for other under-utilized productive assets.
During fiscal 1996, the Company recorded $17.7 of unusual, non-recurring
charges as part of management's plan to reduce costs, improve operating
efficiencies and return to future profitable growth. This program was
substantially completed as of September 30, 1996 and included the cost of
exiting certain facilities, asset impairments due to production and product
realignments, and employee severance costs. These unusual charges included: (1)
$4.9 for severance costs due to the elimination of 140 associate positions; (2)
$3.5 for previously deferred packaging costs for

----
F- 9
40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

products that are being eliminated or for planned packaging changes; and (3)
$9.3 related to the write-down of various under-utilized or idle assets,
including several plant closings.

3. MERGERS AND ACQUISITIONS

MGC

Effective January 3, 1997, the Company acquired the approximately
two-thirds interest in Miracle Holdings which the Company did not already own
for approximately $46.6. Miracle Holdings owns MGC, a manufacturer and
distributor of lawn and garden products in the United Kingdom.
The following unaudited pro forma results of operations give effect to the
Miracle Holdings acquisition as if it had occurred on October 1, 1995.

1997 1996
----------------------------------------------------------------

Net sales.................................. $912.2 $804.9
Net income................................. 38.4 (2.4)
Income per common share.................... 1.31 (0.64)
------ ------

The pro forma information provided does not purport to be indicative of
actual results of operations if the Miracle Holdings acquisition had occurred as
of October 1, 1995, and is not intended to be indicative of future results or
trends.

MIRACLE-GRO

Effective May 19, 1995, the Company completed the merger transactions with
Stern's Miracle-Gro Products, Inc. ("Miracle-Gro Products") and affiliated
companies (the "Miracle-Gro Companies") for an aggregate purchase price of
approximately $195.7. The consideration was comprised of $195.0 face amount of
Class A Convertible Preferred Stock of Scotts with a fair value of $177.3,
warrants to purchase 3.0 common shares of Scotts with a fair value of $14.4 and
$4.0 of estimated transaction costs. The Preferred Stock has a dividend yield of
5.0% and is convertible into common shares of Scotts at $19.00 per share. The
warrants are exercisable for 1.0 common shares at $21.00 per share, 1.0 common
shares at $25.00 per share and 1.0 common shares at $29.00 per share. The fair
value of the warrants has been included in capital in excess of par value in the
Company's balance sheet. See Note 7 for additional information.
The Miracle-Gro Companies are engaged in the marketing and distribution of
plant foods and lawn and garden products primarily in the United States and
Canada and Europe. On December 31, 1994, Miracle-Gro Products Limited ("MG
Limited"), a subsidiary of Miracle-Gro, entered into an agreement to exchange
its equipment and a license for distribution of Miracle-Gro products in certain
areas of Europe for an approximately one-third equity interest in MGC. As
previously mentioned, the remaining approximately two-thirds interest was
purchased effective January 3, 1997.
The Federal Trade Commission ("FTC") in granting permission for the
acquisition of the Miracle-Gro Companies, required that the Company divest its
Peters(R) line of consumer water-soluble fertilizers. See Note 2.
The merger transactions have been accounted for using the purchase method.
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of the
acquisition. The excess of purchase price over the estimated fair values of the
net assets acquired ("goodwill") of approximately $87.2 and trademarks of $90.0
are being amortized on a straight-line basis over 40 years. The Miracle-Gro
Companies' results of operations have been included in the Consolidated
Statements of Operations from the acquisition date of May 19, 1995.

4. PENSION

Scotts and Sierra have defined benefit pension plans covering substantially
all full-time U.S. associates who have completed one year of eligible service
and reached the age of 21. The benefits under these plans are based on years of
service and the associates' average final compensation for the Scotts plan and
for Sierra salaried employees and stated amounts for Sierra hourly employees.
The Company's funding policy, consistent with statutory requirements and tax
considerations, is based on actuarial computations using the Projected Unit
Credit method.
In September 1997, management, in conjunction with the decision to offer a
new defined contribution retirement savings plan to Company associates, decided
to suspend benefits under the above-defined benefit plans. The decision will
significantly consolidate the number of retirement plans that are currently
sponsored by the Company. The

----
F- 10
41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

suspension of benefits under the defined benefit plans was accounted for as a
curtailment under SFAS No. 88 ("Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits").
The gain recognized from the reduction of the projected benefit obligation was
offset by the recognition of previously unrecognized net losses and obligations.
The following table sets forth the plans' funded status and the related
amounts recognized in the Consolidated Balance Sheets, as well as the funded
status of the plans prior to curtailment.

September 30,

--------------------------------------

Post- Pre-
Curtailment Curtailment
1997 1997 1996
----------------------------------------------------------------------------

Actuarial present value of benefit
obligations:
Accumulated benefit obligation:
Vested benefits........... $ (42.5) $ (42.5) $(35.7)
Nonvested benefits........ (7.4) (7.4) (7.2)
Additional obligation for
projected compensation
increases.................... -- (10.8) (9.4)
------- ------- -----
Projected benefit obligation for
service rendered to date......... (49.9) (60.7) (52.3)
Plan assets at fair value,
primarily corporate bonds, U.S.
bonds and cash equivalents....... 53.9 53.9 48.1
------- ------- -----
Plan assets greater (less) than
projected benefit obligations.... 4.0 (6.8) (4.2)
Unrecognized net asset being
amortized over 11 1/2 years...... -- 0.2 (0.1)
Unrecognized net loss.............. -- 10.3 7.0
------- ------- -----
Prepaid pension costs.............. $ 4.0 $ 3.7 $ 2.7
------- ------- -----

Pension cost includes the following components:

Fiscal year ended
September 30,

----------------------

1997 1996 1995
---------------------------------------------------------------------------

Service cost................................... $ 1.9 $ 1.8 $ 1.7
Interest cost.................................. 4.1 3.8 3.3
Actual return on plan assets................... (7.0) (4.3) (5.1)
Net amortization and deferral.................. 2.8 0.6 2.0
----- ---- - ---- -
Net pension cost............................... $ 1.8 $ 1.9 $ 1.9
---- ---- ----

The weighted-average settlement rate used in determining the actuarial
present value of the projected benefit obligation was 7.25% as of September 30,
1997 and 8% as of September 30, 1996 and 1995. Future compensation was assumed
to increase 4% annually for fiscal 1997, 1996 and 1995. The expected long-term
rate of return on plan assets was 9% in fiscal 1997, 1996 and 1995.

----
F- 11
42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the funded status and the related amounts
recognized in the Consolidated Balance Sheets for defined benefit plans which
exist as of September 30, 1997 for MGC and Scotts Europe B.V. on a combined
basis:

Actuarial present value of benefit obligation:
Accumulated benefit obligation:
Vested benefits.................................. $(13.8)
Non-vested benefits.............................. --
Additional obligation for projected compensation
increases........................................ (4.1)
------
Projected benefit obligation for service rendered to
date............................................... (17.9)
Plan assets at fair value............................ 14.7
------
Plan assets less than projected benefit obligation... (3.2)
Unrecognized liability............................... 0.3
------
Net pension liability................................ $ (2.9)
-----

The Company has a non-qualified supplemental pension plan covering certain
employees which provides for incremental pension payments from the Company's
funds so that total pension payments equal amounts that would have been payable
from the Company's pension plans if it were not for limitations imposed by
income tax regulations. Similar to the qualified plans, benefits under this plan
were also suspended effective September 1997. Prior to curtailment, the
projected benefit obligation under this non-funded plan was $1.7 and the
recorded obligation net of unrecognized items was $1.1. The recorded obligation
at September 30, 1997 was increased to $1.4 based on management's decision to
curtail the plan. The projected benefit obligation was $1.9 at September 30,
1996. Pension expense for the plan was $0.2, $0.3 and $0.4 in fiscal 1997, 1996
and 1995, respectively.

5. ASSOCIATE BENEFITS

The Company provides comprehensive major medical benefits to some of its
retired associates and their dependents. Substantially all of the Company's
associates become eligible for these benefits if they retire at age 55 or older
with more than ten years of service. The plan requires certain minimum
contributions from retired associates and includes provisions to limit the
overall cost increases the Company is required to cover. The Company funds its
portion of retiree medical benefits on a pay-as-you-go basis.
Prior to October 1, 1993, the Company effected several changes in plan
provisions, primarily related to current and ultimate levels of retiree and
dependent contributions. Retirees as of October 1, 1993 are entitled to benefits
existing prior to these plan changes. These plan changes resulted in a reduction
in unrecognized prior service cost, which is being amortized over future years.
Net periodic postretirement benefit cost includes the following components:

Fiscal year ended
September 30,

----------------------

1997 1996 1995
-------------------------------------------------------------------

Service cost--benefits attributed to
associate
service during the year............ $ 0.3 $ 0.4 $ 0.4
Interest cost on accumulated
postretirement
benefit obligation................. 1.1 1.5 1.5
Amortization of prior service costs and
gains
from changes in assumptions........ (1.2) (0.9) (0.9)
---- ---- ----
Net periodic postretirement benefit
cost................................. $ 0.2 $ 1.0 $ 1.0
---- ---- ----

----
F- 12
43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the retiree medical plan status reconciled
to the amount included in the Consolidated Balance Sheets, as of September 30,
1997 and 1996.

1997 1996
----------------------------------------------------------------

Accumulated postretirement benefit
obligation:
Retirees................................. $ 7.8 $10.6
Fully eligible active plan
participants........................... 0.4 0.2
Other active plan participants........... 7.6 7.3
----- -----
Total accumulated postretirement
benefit obligation....................... 15.8 18.1
Unrecognized prior service cost.............. 5.8 6.8
Unrecognized gain from
changes in assumptions................... 5.0 2.3
----- -----
Accrued postretirement benefit cost $26.6 $27.2
----- -----

The discount rates used in determining the accumulated postretirement
benefit obligation were 7.25% and 8.0% in fiscal 1997 and 1996, respectively.
For measurement purposes, an 8.5% and 9% annual rate of increase in per capita
cost of covered retiree medical benefits was assumed for 1997 and 1996,
respectively; the rate was assumed to decrease gradually to 5.5% through the
year 2004 and remain at that level thereafter. A 1% increase in the health care
cost trend rate assumptions would increase the accumulated postretirement
benefit obligation as of September 30, 1997 and 1996 by $1.0 and $1.2,
respectively.
Both Scotts and Hyponex have defined contribution profit sharing plans.
Both plans provide for associates to become participants following one year of
service. The Hyponex plan also requires associates to have reached the age of 21
for participation. The plans provide for annual contributions which are entirely
at the discretion of the respective Board of Directors. Contributions are
allocated among the participants employed as of the last day of the calendar
year, based upon participants' earnings. Each participant's share of the annual
contributions vest according to the provisions of the plans. The Company has
provided a profit sharing provision for the plans of $2.3, $0.9 and $1.5 for
fiscal 1997, 1996 and 1995, respectively. The Company's policy is to deposit the
contributions with the trustee in the following year.
Sierra has a savings and investment plan ("401K Plan") for certain salaried
U.S. employees. Participants may make voluntary contributions to the plan
between 2% and 16% of their compensation. Sierra contributes the lesser of 50%
of each participant's contribution or 3% of each participant's compensation.
Sierra's contributions for fiscal 1997 and 1996 were not material.
The Company is self-insured for certain health benefits up to $0.2 per
occurrence per individual. The cost of such benefits is recognized as expense in
the period the claim occurred. This cost was $7.9, $9.4 and $7.9 in fiscal 1997,
1996 and 1995, respectively. The Company is self-insured for State of Ohio
workers compensation up to $0.5 per claim. Claims in excess of stated limits of
liability and claims for workers compensation outside of the State of Ohio are
insured with commercial carriers.

6. DEBT

September 30,

------------------

1997 1996
----------------------------------------------------------------

Revolving credit line...................... $121.8 $125.7
9 7/8% Senior Subordinated Notes $100 face
amount (net of unamortized discount)..... 99.4 99.4
Capital lease obligations and other........ 0.1 0.2
------ ------
221.3 225.3
Less current portions...................... 1.5 2.2
------ ------
$219.8 $223.1
------ ------

----
F- 13
44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturities of term debt and capital leases for the next five fiscal years
are as follows:

(in millions)
-------------------------------------------------------------

1998................................................. 1.5
1999................................................. --
2000................................................. 120.4
2001................................................. --
2002................................................. --
Thereafter........................................... 100.0

On December 23, 1996, the Company entered into an amendment to the Fourth
Amended and Restated Credit Agreement (the "Agreement") with Chase Manhattan
Bank ("Chase") and various participating banks. The amendment provides, on an
unsecured basis, up to $425 to the Company, which represents an increase of $50
to the revolving credit facility, and establishes a $100 sub-tranche to be
available in U.K. Pounds Sterling.
Other provisions of the Agreement, including an uncommitted advance
facility and a committed revolving credit facility through the scheduled
termination date of March 31, 2000, remain substantially the same. The Agreement
contains a requirement limiting the maximum amount borrowed to $225 for a
minimum of 30 consecutive days each fiscal year.
Interest pursuant to the competitive advance facility is determined by
auction. Interest pursuant to the revolving credit facility is at a floating
rate initially equal, at the Company's option, to the Alternate Base Rate as
defined in the Agreement without additional margin or the Eurodollar Rate as
defined in the Agreement plus a margin of .3125% per annum, which margin may be
decreased to .25% or increased up to .625% based on the changes in the unsecured
debt ratings of the Company. Applicable interest rates for the various borrowing
facilities ranged from 5.86% to 8.50% at September 30, 1997. The Agreement
provides for the payment of an annual administration fee of $0.1 and a facility
fee of .1875% per annum, which fee may be reduced to .15% or increased up to
.375% based on the unsecured debt ratings of the Company.
The Agreement contains certain financial and operating covenants, including
maintenance of interest coverage ratios, maintenance of consolidated net worth,
and restrictions on additional indebtedness and capital expenditures. Dividends
and stock repurchases are restricted only in the event of default.
At September 30, 1997, the Company had available an unsecured $2.0 line of
credit with a bank, which is renewable annually. Amounts outstanding at
September 30, 1997 and 1996 were $1.4 and $2.0, respectively.
On July 19, 1994, the Company issued $100.0 principal amount of 9 7/8%
Senior Subordinated Notes. The Notes are subject to redemption, at the option of
the Company, in whole or in part at any time on or after August 1, 1999 at a
declining premium to par until 2001 and at par thereafter and are not subject to
sinking fund requirements. The fair market value of the 9 7/8% Senior
Subordinated Notes, estimated based on the quoted market prices for same or
similar issues, was approximately $107.8 at September 30, 1997. The Notes are
subject to certain covenants limiting, among other things, indebtedness of
subsidiaries, dividends and other payment restrictions.

7. SHAREHOLDERS' EQUITY
(in millions except per share amounts and certain number of shares specifically
noted)

Stock 1997 1996
------------------------------------------------------------------

Class A Convertible Preferred
Stock, no par value:
Authorized................... .195 shares .195 shares
Issued....................... .195 shares .195 shares
Common shares, no par value
Authorized................... 50.0 shares 50.0 shares
Issued....................... 21.1 shares 21.1 shares

Effective with the Miracle-Gro Companies merger transactions, $195.0 face
amount of Class A Convertible Preferred Stock was issued as part of the purchase
price. This Preferred Stock is convertible into 10.3 common shares at $19.00 per
common share. Additionally, warrants to purchase 3.0 common shares of Scotts
were issued as part of the purchase price. The warrants are exercisable for 1.0
common shares at $21.00 per share, 1.0 common shares at $25.00 per share and 1.0
common shares at $29.00 per share. The exercise term for the warrants expires
Septem-

----
F- 14
45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ber 2003. The fair value of the warrants at issuance has been included in
capital in excess of par value in the Company's balance sheet.
The Class A Convertible Preferred Stock has certain voting restrictions and
limits the shareholders from acquiring additional voting securities of the
Company. The Class A Convertible Preferred Stock is subject to redemption at any
time after May 19, 2000 for $0.001 per share plus accrued unpaid dividends. Both
the Class A Convertible Preferred Stock and the warrants have limits on
transferability.
Under The Scotts Company 1992 Long Term Incentive Plan (the "Plan"), stock
options, stock appreciation rights and performance share awards were granted to
officers and other key employees of the Company. The Plan also provided for the
grant of stock options to non-employee directors of the Company. The maximum
number of common shares that may be issued upon the exercise of options granted
under the Plan is 1.7, plus the number of shares surrendered to exercise options
(other than director options) granted under the Plan, up to a maximum of 1.0
surrendered shares.
Under The Scotts Company 1996 Stock Option Plan (the "1996 Plan"), stock
options may be granted to officers, other key employees and non-employee
directors of the Company. The maximum number of common shares that may be issued
under the 1996 Plan is 3.0.
Aggregate stock option activity consists of the following (Number of shares
in following table are actual):

Fiscal Year Ended September 30,

------------------------------------------------------------------------------

1997 1996 1995
----------------------- ----------------------- -----------------------
Number of Wtd. Avg. Number of Wtd. Avg. Number of Wtd. Avg.
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------

Balance at October 1............. 1,546,016 $16.7289 1,662,125 $16.5122 1,364,589 $16.3619
Options granted.................. 1,130,500 20.1776 482,000 18.2900 435,420 17.4788
Options exercised................ (81,520) 12.7233 (429,558) 17.1706 (26,870) 16.2450
Options canceled................. (8,166) 19.2678 (168,551) 18.1324 (111,014) 19.2273
-------- -------- -------- -------- -------- --------
Balance at September 30.......... 2,586,830 $18.3515 1,546,016 $16.7288 1,662,125 $16.5122
--------- --------- --------- --------- -------- ---------
Exercisable at September 30...... 1,520,825 $17.3021 1,150,688 $16.2284 575,938 $14.9759

The following summarizes certain information pertaining to stock options
outstanding and exercisable at September 30, 1997 (Number of shares in following
table are actual):

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Range of No. of Remaining Exercise No. of Exercise
Exercise Prices Options Life Price Options Price
- ---------------------------------------------------------------------------------------------------------------------

$9.90........................................... 86,364 4.08 $ 9.9000 86,364 $ 9.9000
$15.50-$17.75................................... 1,104,932 6.83 16.7020 1,021,929 16.6822
$18.00-$20.75................................... 947,534 9.01 19.1020 194,202 18.3387
$21.13-$22.89................................... 345,000 8.78 21.4464 188,331 21.5199
$26.25-$28.00................................... 103,000 9.74 26.6911 29,999 26.5416
-------- --------- -------- ---------
2,586,830 $18.3515 1,520,825 $17.3021
-------- --------- -------- ---------

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which changes the measurement,
recognition and disclosure standards for stock-based compensation. The Company,
as allowable, has adopted SFAS No. 123 for disclosure purposes only.
The fair value of each option granted has been estimated on the grant date
using the Black-Scholes option-pricing model based on the following assumptions
for those granted in fiscal 1997 and 1996: (1) expected market-price volatility
of 22.48% and 21.85%, respectively; (2) risk-free interest rates of 6.6% and
6.1%, respectively; and (3) expected life of options of 6 years. The estimated
weighted-average fair value of options granted during fiscal 1997 and 1996 are
$8.8 and $3.2, respectively.

----
F- 15
46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Had compensation expense been recognized for fiscal 1997 and 1996 in
accordance with provisions of SFAS No. 123, the Company would have recorded net
income and earnings per share as follows:

1997 1996
----------------------------------------------------------------

Net income (loss) used in per share
calculation............................... $37.3 $(12.9)
Net Income (loss) per share................. $1.27 $ (.69)

8. NET INCOME (LOSS) PER COMMON SHARE

The following table presents information necessary to calculate net income
(loss) per common share.

Year Ended September 30,
------------------------
1997 1996 1995
------------------------------------------------------------------

Net income (loss) $39.5 $ (2.5) $22.4
Class A Convertible Preferred Stock
dividend -- (9.8) --
----- ------ -----
Income (loss) used in income (loss)
per common share calculation $39.5 $(12.3) $22.4
===== ====== =====
Weighted-average common shares
outstanding during the period 18.6 18.8 18.7
Assuming conversion of Class A
convertible Preferred Stock 10.3 -- 3.7
Assuming exercise of options 0.3 -- 0.2
Assuming exercise of warrants 0.1 -- --
----- ------ -----
Weighted-average number of common
shares outstanding and dilutive
common share equivalents 29.3 18.8 22.6
===== ====== =====

Income (loss) per common share $1.35 $(0.65) $0.99
----- ----- -----

The earnings per share computation is based on the weighted-average number
of common shares and dilutive common share equivalents (stock options, Class A
Convertible Preferred Stock and warrants) outstanding during each period. The
common share equivalents were not considered in the loss per share computation
for the year ended September 30, 1996 because they were antidilutive for such
period.
For fiscal 1997, 1996 and 1995, fully diluted income per common share is
considered to be the same as primary income per common share.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 establishes standards for computing and presenting earnings per share
("EPS"). FAS 128 replaces the presentation of primary EPS with a presentation of
basic EPS which excludes dilution and is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding during the period. This statement also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement for all periods
presented. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The Company plans to
adopt FAS 128 in the first quarter of fiscal 1998. If FAS 128 had been adopted
at September 30, 1997, basic and diluted EPS would have been:

YEAR ENDED SEPTEMBER 30,

------------------------

1997 1996 1995
------------------------------------------------------------------

Basic EPS $1.60 $(0.65) $1.01
Diluted EPS $1.35 $(0.65) $0.99

----
F- 16
47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. INCOME TAXES

The provision for income taxes consists of the following:

YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
------------------------------------------------------------------

Currently payable:
Federal............................. $21.6 $ 4.2 $ 9.4
State............................... 3.4 2.5 2.6
Foreign............................. 6.6 2.8 4.5
Deferred:
Federal............................. (1.3) (5.1) (2.2)
State............................... (0.2) (0.6) (0.4)
----- ----- -----
Income tax expense.................... $30.1 $ 3.8 $13.9
----- ----- -----

The components of the net deferred tax asset are as follows:

SEPTEMBER 30,
-----------------
1997 1996
-----------------------------------------------------------------

Assets
Accounts receivable....................... $ (0.3) $ 1.0
Inventories............................... 6.8 5.6
Accrued liabilities....................... 11.0 10.5
Postretirement benefits................... 10.5 10.7
Other..................................... 5.6 4.5
----- -----
Gross deferred tax assets................. 33.6 32.3
Liabilities
Property, plant and equipment............. (21.3) (19.1)
----- -----
Net asset................................. $ 12.3 $ 13.2
----- -----

The net current and non-current components of deferred income taxes
recognized in the Consolidated Balance Sheets at September 30 are:

1997 1996
-----------------------------------------------------------------

Net current asset $ 19.0 $ 18.4
Net non-current liability (6.7) (5.2)
----- -----
Net asset $ 12.3 $ 13.2
----- -----

A reconciliation of the Federal corporate income tax rate and the effective
tax rate on income before income taxes is summarized below:

YEAR ENDED SEPTEMBER 30,
-------------------------
1997 1996 1995
----------------------------------------------------------------

Statutory income tax rate........... 35.0% 35.0% 35.0%
Pension amortization................ 0.1 6.3 0.1
Meals and entertainment............. 0.4 17.6 0.9
Peters sale......................... -- -- (3.0)
Goodwill amortization and other
permanent differences resulting
from purchase accounting.......... 4.2 206.9 3.4
State taxes, net of federal
benefit........................... 3.0 97.6 4.4
Reversal of previous tax
contingencies..................... (0.8) (42.0) (3.9)
Equity income of affiliate.......... -- (13.8) 0.7
Other............................... 1.3 (5.3) 0.7
---- ----- ----
Effective income tax rate........... 43.2% 302.3% 38.3%
---- ---- ----

----
F- 17
48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company acquired certain tax credit carryforwards in connection with
its acquisition of Sierra. Net operating loss carryforwards in foreign
jurisdictions total $3.4, of which $3.0 can be carried forward indefinitely. The
use of these acquired carryforwards is subject to limitations imposed by the tax
laws of each applicable country.

10. OPERATING LEASES

The Company leases buildings, land and equipment under various
noncancellable lease agreements for periods of two to six years. The lease
agreements generally provide that the Company pay taxes, insurance and
maintenance expenses related to the leased assets. Certain lease agreements
contain purchase options. At September 30, 1997, future minimum lease payments
were as follows:

1998................................................. $11.9
1999................................................. 8.4
2000................................................. 4.9
2001................................................. 3.3
2002................................................. 0.9
Thereafter........................................... 0.1
-----
Total minimum lease payments......................... $29.5
=====

The Company also leases transportation and production equipment under
various one-year operating leases, which provide for the extension of the
initial term on a monthly or annual basis. Total rental expenses for operating
leases were $12.3, $14.0 and $14.7 for fiscal 1997, 1996 and 1995, respectively.

11. COMMITMENTS AND CONTINGENCIES

Seed production agreements obligate the Company to make future purchases
based on estimated yields. Seed purchases under production agreements for fiscal
1997, 1996 and 1995 were approximately $13.5, $11.4 and $6.9, respectively. At
September 30, 1997, estimated annual seed purchase commitments were as follows:

1998............................................ $16.1
1999............................................ 15.9
2000............................................ 7.5
2001............................................ 4.7
2002............................................ 0.7

Management continually evaluates the Company's contingencies, including
various lawsuits and claims which arise in the normal course of business. 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 details are the
more significant of the Company's identified contingencies.

OHIO ENVIRONMENTAL PROTECTION AGENCY

The Company has been assessing and, as required, addressing certain
environmental issues regarding the wastewater treatment plants currently
operating at the Marysville facility. Specifically, it has been considering
whether to upgrade the existing treatment plants or to undertake to connect the
facility's wastewater system with the City of Marysville's municipal treatment
system. Additionally, the Company has been assessing, under Ohio's new Voluntary
Action Program ("VAP"), the possible remediation of several discontinued on-site
waste disposal areas dating back to the early operations of its Marysville
facility.
In February 1997, the Company learned that the Ohio Environmental
Protection Agency ("OEPA") was referring certain matters relating to
environmental conditions at the Company's Marysville site, including the
existing wastewater treatment plants and the discontinued on-site waste disposal
areas, to the Ohio Attorney General's Office ("OAG"). Representatives from the
OEPA, the OAG and the Company subsequently met on several occasions, and
continue to meet, to discuss these issues.
In June 1997, the Company received formal notice of an enforcement action
and draft Findings and Orders ("F&O") from the OEPA. The draft F&O elaborated on
the subject of the referral to the OAG alleging: potential surface water
violations relating to possible historical sediment contamination possibly
impacting water quality; inadequate treatment capabilities of the Company's
existing and currently permitted wastewater treatment plants; and that the

----
F- 18
49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Marysville site is subject to corrective action under the Resource Conservation
Recovery Act ("RCRA"). In late July 1997, the Company received a draft judicial
consent order from the OAG which covers many of the same issues contained in the
draft F&O including RCRA corrective action.
In accordance with the Company's past efforts to enter into Ohio's VAP, the
Company submitted to the OEPA a "Demonstration of Sufficient Evidence [of] VAP
Eligibility Compliance" on July 8, 1997. Among other issues contained in the VAP
submission, was a description of the Company's ongoing efforts to assess
potential environmental impacts of the discontinued on-site waste disposal areas
as well as potential remediation efforts. Pursuant to the statutes covering VAP,
an eligible participant in the program is not subject to State enforcement
actions for those environmental matters being addressed. On October 21, 1997,
the Company received a letter from the Director of the OEPA denying VAP
eligibility based upon the timeliness of and completeness of the submittal. The
Company has appealed the Director's action to the Environmental Review Appeals
Commission.
The Company is continuing to meet with the OAG and the OEPA in an effort to
negotiate an amicable resolution of these issues but is unable at this stage to
predict the outcome of the negotiations. The Company believes that it has viable
defenses to the State's enforcement action, including that it had been
proceeding under VAP to address certain environmental issues, and will assert
those defenses in any such action.
The Company does not believe the ultimate outcome of any proceedings which
may result from the OEPA's referral of these matters to the OAG will have a
material adverse effect on the business or the financial condition of the
Company but is unable, at this stage, to predict the outcome of the issues. Many
of the issues raised by the State are already being investigated and addressed
by the Company during the normal course of conducting business.

LAFAYETTE

HERSHBERGER

----
F- 19
50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FIFRA

YEAR 2000

12. CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade accounts receivable.
The Company sells its consumer products to a wide variety of retailers,
including mass merchandisers, home centers, independent hardware stores,
nurseries, garden outlets, warehouse clubs and local and regional chains.
Professional products are sold to golf courses, schools and sports fields,
nurseries, lawn care service companies and growers of specialty agriculture
crops.
In 1997 and 1996, two customers accounted for 16.1% and 11.9%, and 15.1%
and 13.9%, respectively, of consolidated net sales. In 1995, two customers
accounted for 14.4% and 13.1% of consolidated net sales.

13. NEW ACCOUNTING STANDARDS

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". Each standard is effective for financial statements for
fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses).
SFAS No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. The Company is evaluating this pronouncement and has not yet determined
the ultimate impact of this pronouncement on its future financial statements.
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. This
statement defines business segments as components of an enterprise about which
separate financial information is available and used internally for evaluating
segment performance and decision making on resource allocations. SFAS No. 131
requires reporting a measure of segment profit or loss, certain specific revenue
and expense items, and segment assets; and other reporting about geographic and
customer matters. The Company believes that the business segments identified and
set forth in Note 14 to the Consolidated Financial Statements are in substantial
compliance with SFAS No. 131.
See Note 8 for discussion of SFAS No. 128.

----
F- 20
51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. SEGMENT INFORMATION

The Company is divided into 3 reportable segments--Consumer Products,
Professional Products and International. The Consumer Products segment consists
of the North American Consumer Lawns, Consumer Gardens and Consumer Organics
operating units.
The Consumer Products segment specializes in dry, granular slow-release
lawn fertilizers, lawn fertilizer combination and lawn control products, grass
seed, spreaders, water-soluble and controlled-release garden and indoor plant
foods, plant care products, and potting soils, barks, mulches and other organics
products. Products are marketed to mass merchandisers, home improvement centers,
large hardware chains, nurseries and gardens centers.
The Professional Products segment is focused on a full line of turf and
horticulture products including controlled-release and water-soluble fertilizers
and plant protection products, grass seed, spreaders, custom application
services and potting media. Products are sold to golf courses, professional
baseball, football and soccer stadiums, lawn and landscape service companies,
commercial nurseries and greenhouses and specialty crop growers.
The International segment provides a broad range of controlled-release and
water-soluble fertilizers and related products, including ornamental
horticulture, turf and landscape, and consumer lawn and garden products which
are sold to all customer groups mentioned above.
The following tables summarizes certain segment information for fiscal
1997, 1996 and 1995. The Company did not assign interest expense of $26.8,
$26.5, or $26.3 for fiscal 1997, 1996 or 1995, respectively, to the reportable
segments.

North America
-------------------------
Consumer Professional Other/
Products Products International Corporate Total
- ---------------------------------------------------------------------------------------------------------------

Sales:
1997 $ 620.3 $165.9 $ 114.6 -- $900.8
1996 525.3 160.7 65.9 -- 751.9
1995 498.7 167.6 61.1 $ 5.4 732.8
Operating Income (Loss):
1997 88.2 15.0 19.4 (26.3) 96.3
1996 44.4 0.3 14.7 (31.6) 27.8
1995 47.9 9.0 11.7 (6.0) 62.6
Operating Margin:
1997 14.2% 9.0% 16.9% nm 10.7%
1996 8.5% 0.2% 22.3% nm 3.7%
1995 9.6% 5.4% 19.1% nm 8.5%
Depreciation and Amortization:
1997 $ 11.3 $ 1.7 $ 1.5 $ 15.9 $ 30.4
1996 12.4 1.7 0.4 14.8 29.3
1995 11.4 1.6 1.2 11.5 25.7
Capital Expenditures:
1997 17.6 4.2 2.2 4.6 28.6
1996 10.4 2.4 1.4 4.0 18.2
1995 14.0 2.5 4.4 2.7 23.6
Total Assets:
1997 256.1 94.3 62.6 374.6 787.6
1996 300.3 78.7 42.5 310.2 731.7

- ---------------
nm Not meaningful.

Other/Corporate operating loss for the years ended September 30, 1997, 1996
and 1995 primarily includes unusual charges described in Note 2 of $6.3, $17.1
and $(4.5), respectively; amortization of intangibles not assigned to business
segments of $10.0, $8.9 and $6.0, respectively; and corporate general and
administrative expense of $10.0, $5.6 and $4.5, respectively.

----
F- 21
52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other/Corporate assets primarily include all intangible assets (including
goodwill) not assigned to the business segments as well as deferred tax assets.

15. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations
for fiscal 1997 and 1996:

Fiscal 1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
- -------------------------------------------------------------------------------------------------------------

Net sales $100.2 $346.2 $299.0 $155.4 $900.8
Gross profit 32.6 138.4 110.7 45.5 327.2
Net income (loss) (6.0) 27.9 21.1 (3.5) 39.5
Net income (loss) per common
share (.45) .95 .70 (.32) 1.35
Common shares used in per share
calculation 18.6 29.3 29.9 18.7 29.3

Fiscal 1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
- -------------------------------------------------------------------------------------------------------------

Net sales $117.9 $251.2 $247.9 $134.8 $751.9
Gross profit 36.8 87.7 82.0 33.0 239.5
Net income (loss) (7.1) 10.6 7.6 (13.6) (2.5)
Net income (loss) per common
share (.51) .36 .26 (.86) (.65)
Common shares used in per share
calculation 18.7 29.4 29.4 18.6 18.8

(1) Fiscal 1997 results of operations included $6.0 of asset valuation
charges, $4.2 and $1.8 in the second and fourth quarters, respectively. Fiscal
1996 results of operations included $17.7 of unusual charges and a $3.1
inventory write-down on a pretax basis or $13.0 on a combined after tax basis.
These items reduced after tax earnings by $1.1, $1.7, $1.6, and $8.6 in the
first, second, third, and fourth quarters, respectively, in fiscal 1996.
(2) In the quarter ended March 29, 1997, the Company changed its method of
accounting for advertising expenses in interim periods. The newly adopted method
assigns anticipated advertising costs to interim periods based on projected
sales of advertised product categories and has been applied retroactive to the
beginning of fiscal 1997 (October 1, 1996). The change impacts interim periods
only; all current year advertising costs will be expensed within the fiscal
year. Management believes this method of interim accounting for advertising
costs provides better matching of revenues and expenses in interim periods, and
is consistent with companies in the consumer packaged goods industry.
This change in interim accounting had the effect of increasing advertising
expense for the first, second and fourth quarters of fiscal 1997 by $3.3, $4.6
and $0.5, respectively. Third quarter 1997 advertising expense decreased by
$8.4. Net income for the first, second and fourth quarters of fiscal 1997
decreased by $1.9 or $0.10 per share, $2.6 or $0.09 per share and $0.3 or $0.02
per share, respectively. Net income for the third quarter increased $4.8 or
$0.16 per share.
On a pro forma basis, assuming the new method of accounting for interim
advertising had been applied to fiscal 1996, first, second and fourth quarter
advertising expense would have increased $3.9, $2.0 and $1.5, respectively.
Third quarter 1996 advertising expense would have decreased $7.4. Net income for
the first, second and fourth quarters of fiscal 1996 would have decreased by
$2.2 or $0.12 per share, $1.2 or $0.04 per share and $0.8 or $0.05 per share.
Net income for the third quarter would have increased by $4.2 or $0.14 per
share.
(3) The Company's business is highly seasonal with between 66% and 72% of
sales occurring in the second and third fiscal quarters combined.

16. SUBSEQUENT EVENTS

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53

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES

To the Shareholders and Board of
Directors of The Scotts Company

Our report on the consolidated financial statements of The Scotts Company
is included on page F-2 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the financial statement schedules
listed in the Index on page F-1 of this Form 10-K.

In our opinion, the financial statement schedules referred to above, when
considered in relation to the consolidated financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.

Coopers & Lybrand L.L.P.
Columbus, Ohio

October 24, 1997
Except for Note 16 to the
consolidated financial statements,
as to which the date is December 12, 1997.

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F- 23
54

THE SCOTTS COMPANY AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
for the fiscal year ended September 30, 1997
(in millions)

Column B Column C Column D Column E Column F
Column A ------------------- -------- -------------------- ------------- -------------
- ------------------------------------- Balance at Reserves Additions charged to Deduction Balance at
Classification beginning of period Acquired costs and expenses from reserves end of period
- ---------------------------------------------------------------------------------------------------------------------

Valuation and qualifying accounts
deducted from the assets to which
they apply:
Inventory reserve $ 8.7 $2.0 $8.5 ($7.8) $11.8
Allowance for doubtful accounts 4.1 0.9 1.6 (0.9) 5.7
Other valuation and qualifying
account:
Product guarantee 0.2 -- 1.1 (1.1) 0.2

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55

THE SCOTTS COMPANY AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
for the fiscal year ended September 30, 1996
(in millions)

Column B Column C Column D Column E
Column A ------------------- -------------------- ------------- -------------
- ------------------------------------------------- Balance at Additions charged to Deduction Balance at
Classification beginning of period costs and expenses from reserves end of period
- ---------------------------------------------------------------------------------------------------------------------

Valuation and qualifying accounts deducted from
the assets to which they apply:
Inventory reserve $ 6.7 $8.0 ($6.0) $ 8.7
Allowance for doubtful accounts 3.4 3.4 (2.7) 4.1
Other valuation and qualifying account:
Product guarantee 0.1 1.2 (1.1) 0.2

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56

THE SCOTTS COMPANY AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
for the fiscal year ended September 30, 1995
(in millions)

Valuation and qualifying accounts deducted from
the assets to which they apply:
Inventory reserve $ 6.1 $3.0 ($2.4) $ 6.7
Allowance for doubtful accounts 2.9 2.0 (1.5) 3.4
Other valuation and qualifying account:
Product guarantee 0.1 0.9 (0.9) 0.1

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57

THE SCOTTS COMPANY

Annual Report on Form 10-K
for the Fiscal Year Ended September 30, 1997

INDEX TO EXHIBITS

EXHIBIT NO. DESCRIPTION LOCATION
- ------------ ---------------------------------------- ----------------------------------------

2 Amended and Restated Agreement and Plan Incorporated herein by reference to the
of Merger, dated as of May 19, 1995, Registrant's Current Report on Form 8-K
among Stern's Miracle-Gro Products, filed with the Securities and Exchange
Inc., Stern's Nurseries, Inc., Commission (the "SEC") on June 2, 1995
Miracle-Gro Lawn Products, Inc., (File No. 0-19768) [Exhibit 2(b)]
Miracle-Gro Products Limited, Hagedorn
Partnership, L.P., the general partners
of Hagedorn Partnership, L.P., Horace
Hagedorn, Community Funds, Inc., and
John Kenlon, the Registrant, and ZYX
Corporation
3(a) Amended Articles of Incorporation of the Incorporated herein by reference to the
Registrant as filed with the Ohio Registrant's Annual Report on Form 10-K
Secretary of State on September 20, 1994 for the fiscal year ended September 30,
1994 (File No. 0-19768) [Exhibit 3(a)]
3(b) Certificate of Amendment by Shareholders Incorporated herein by reference to the
to the Articles of Incorporation of the Registrant's Quarterly Report on Form
Registrant as filed with the Ohio 10-Q for the fiscal quarter ended
Secretary of State on May 4, 1995 April 2, 1995 (File No. 0-19768)
[Exhibit 4(b)]
3(c) Regulations of the Registrant Incorporated herein by reference to the
(reflecting amendments adopted by the Registrant's Quarterly Report on Form
shareholders of the Registrant on April 10-Q for the fiscal quarter ended April
6, 1995) 1, 1995 (File No. 0-19768) [Exhibit
4(c)]
4(a) Form of Series A Warrant Included in Exhibit 2 above
4(b) Form of Series B Warrant Included in Exhibit 2 above
4(c) Form of Series C Warrant Included in Exhibit 2 above
4(d) Fourth Amended and Restated Credit Incorporated herein by reference to the
Agreement, dated as of March 17, 1995, Registrant's Quarterly Report on Form
among the Registrant, Chemical Bank, the 10-Q for the fiscal quarter ended April
lenders party thereto and Chemical Bank, 1, 1995 (File No. 0-19768) [Exhibit
as agent (the "Credit Agreement") 4(d)]
4(e) First Amendment and Consent, dated as of Incorporated herein by reference to the
December 23, 1996, to the Credit Registrant's Annual Report on Form 10-K
Agreement among the Registrant, the for the fiscal year ended September 30,
lenders party thereto and The Chase 1996 (File No. 0-19768) [Exhibit 4(e)]
Manhattan Bank (formerly Chemical Bank),
as agent
4(f) Second Amendment and Consent, dated as *
of November 12, 1997, to the Credit
Agreement among the Registrant, Scotts
Holdings Limited, the lenders party
thereto and The Chase Manhattan Bank, as
agent
4(g) Subordinated Indenture, dated as of June Incorporated herein by reference to the
1, 1994, among The Scotts Company, a Registration Statement on Form S-3 of
Delaware corporation ("Scotts The Scotts Company, a Delaware
Delaware"), The O.M. Scott & Sons corporation ("Scotts Delaware") filed
Company ("OMS") and Chemical Bank, as with the SEC on June 1, 1994
trustee (Registration No. 33-53941) [Exhibit
4(b)]

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E- 1
58

EXHIBIT NO. DESCRIPTION LOCATION
- ------------ ---------------------------------------- ----------------------------------------

4(h) First Supplemental Indenture, dated as Incorporated herein by reference to
of July 12, 1994, among Scotts Delaware, Scotts Delaware's Current Report on Form
OMS and Chemical Bank, as trustee 8-K dated July 18, 1994 (File No.
0-19768) [Exhibit 4.1]
4(i) Second Supplemental Indenture, dated as Incorporated herein by reference to the
of September 20, 1994, among the Registrant's Annual Report on Form 10-K
Registrant, OMS, Scotts Delaware and for the fiscal year ended September 30,
Chemical Bank, as trustee 1994 (File No. 0-19768) [Exhibit 4(i)]
4(j) Third Supplemental Indenture, dated as Incorporated herein by reference to the
of September 30, 1994, between the Registrant's Annual Report on Form 10-K
Registrant and Chemical Bank, as trustee for the fiscal year ended September 30,
1994 (File No. 0-19768) [Exhibit 4(j)]
10(a) The Scotts Company Associates' Pension Incorporated herein by reference to the
Plan as amended effective January 1, Registrant's Annual Report on Form 10-K
1989 and December 31, 1995 (the "Pension for the fiscal year ended September 30,
Plan") 1996 (File No. 1-11593) [Exhibit 10(a)]
10(b) First Amendment to the Pension Plan *
10(c) Third Restatement of The Scotts Company Incorporated herein by reference to the
Profit Sharing and Savings Plan Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30,
1996 (File No. 1-11593) [Exhibit 10(b)]
10(d) First Amendment to the Third Restatement *
of The Scotts Company Profit Sharing and
Savings Plan
10(e) The O.M. Scott & Sons Company Excess Incorporated herein by reference to
Benefit Plan, effective October 1, 1993 Scotts Delaware's Annual Report on Form
10-K for the fiscal year ended September
30, 1993 (File No. 0-19768) [Exhibit
10(h)]
10(f) The Scotts Company 1992 Long Term Incorporated herein by reference to
Incentive Plan Scotts Delaware's Registration Statement
on Form S-8 filed on March 26, 1993
(Registration No. 33-60056) [Exhibit
4(f)]
10(g) The Scotts Company 1997 Executive Annual *
Incentive Plan
10(h) The Scotts Company 1996 Stock Option Incorporated herein by reference to the
Plan (as amended through March 12, 1997) Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March
29, 1997) (File No. 1-11593) [Exhibit
10(a)]
10(i) The Scotts Company Incentive Pay *
Deferral Plan
10(j) Employment Agreement, dated as of May Incorporated herein by reference to the
19, 1995, between the Registrant and Registrant's Annual Report on Form 10-K
James Hagedorn for the fiscal year ended September 30,
1995 (File No. 1-11593) [Exhibit 10(p)]
10(k) Employment Agreement, dated as of May Incorporated herein by reference to the
19, 1995, among Stern's Miracle-Gro Registrant's Annual Report on Form 10-K
Products, Inc. (nka Scotts' Miracle-Gro for the fiscal year ended September 30,
Products, Inc.), the Registrant and 1996 (File No. 1-11593) [Exhibit 10(j)]
Horace Hagedorn
10(l) Consulting Agreement, dated July 9, *
1997, among Scotts' Miracle-Gro
Products, Inc., the Registrant and
Horace Hagedorn

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E- 2
59

EXHIBIT NO. DESCRIPTION LOCATION
- ------------ ---------------------------------------- ----------------------------------------

10(m) Employment Agreement, dated as of May Incorporated herein by reference to the
19, 1995, among Stern's Miracle-Gro Registrant's Annual Report on Form 10-K
Products, Inc. (nka Scotts' Miracle-Gro for the fiscal year ended September 30,
Products, Inc.), the Registrant and John 1996 (File No. 1-11593) [Exhibit 10(k)]
Kenlon
10(n) Employment Agreement, dated as of August Incorporated herein by reference to the
7, 1996, between the Registrant and Registrant's Annual Report on Form 10-K
Charles M. Berger for the fiscal year ended September 30,
1996 (File No. 1-11593) [Exhibit 10(l)]
10(o) Stock Option Agreement, dated as of Incorporated herein by reference to the
August 7, 1996, between the Registrant Registrant's Annual Report on Form 10-K
and Charles M. Berger for the fiscal year ended September 30,
1996 (File No. 1-11593) [Exhibit 10(m)]
10(p) Letter Agreement, dated December 23, *
1996, between the Registrant and Jean H.
Mordo
10(q) Specimen form of Stock Option Agreement *
for Non-Qualified Stock Options
10(r) Letter Agreement, dated April 10, 1997, *
between the Registrant and G. Robert
Lucas
10(s) Letter Agreement, dated October 29, *
1997, as amended, between the Registrant
and Lawrence McCartney
11 Computation of Net Income Per Common *
Share
21 Subsidiaries of the Registrant *
23 Consent of Independent Accountants *
27 Financial Data Schedule *

- ---------------
* Filed herewith.

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E- 3