• Results of operations

• Segment results

• Liquidity and capital resources

• Regulatory matters

• Critical accounting policies and estimates

EXECUTIVE SUMMARY
The Scotts Miracle-Gro Company ("Scotts Miracle-Gro") and its subsidiaries
(collectively, together with Scotts Miracle-Gro, the "Company", "we" or "us")
are dedicated to delivering strong, consistent financial results and outstanding shareholder returns by providing products of superior quality and value in order to enhance consumers' outdoor living environments. We are a leading manufacturer and marketer of consumer branded products for lawn and garden care and professional horticulture in North America and Europe. We are Monsanto's exclusive agent for the marketing and distribution of consumer Roundup® non-selective herbicide products within the United States and other contractually specified countries. We have a presence in similar consumer branded and professional horticulture products in Australia, the Far East, Latin America and South America. In the United States, we operate Scotts LawnService®, the second largest residential lawn care service business, and Smith & Hawken®, an outdoor living and garden lifestyle category brand. Our operations are divided into the following reportable segments: Global Consumer, Global Professional, Scotts LawnService® and Corporate & Other. The Corporate & Other segment consists of the Smith & Hawken® business and corporate general and administrative expenses. On July 8, 2009, we announced that we will cease operating the Smith & Hawken® business by the end of the calendar year. As a leading consumer branded lawn and garden company, our marketing efforts are largely focused on building brand and product awareness to inspire consumers and create retail demand. We have successfully applied this consumer marketing focus for a number of years, consistently investing approximately 5% of our annual net sales in advertising to support and promote our products and brands. We continually explore new and innovative ways to communicate with consumers. We believe that we receive a significant return on these marketing expenditures and anticipate a similar level of advertising and marketing investments in the future, with the continuing objective of driving category growth and increasing market share.
Our sales are susceptible to global weather conditions. For instance, periods of wet weather can adversely impact sales of certain products, while increasing demand for other products. We believe that our diversified product line provides some mitigation to this risk. We also believe that our broad geographic diversification further reduces this risk.

                                       Percent Net Sales by Quarter
                                     2008            2007          2006
                  First Quarter         10.4 %           9.5 %       9.3 %
                  Second Quarter        32.1 %          34.6 %      33.6 %
                  Third Quarter         39.3 %          38.2 %      38.9 %
                  Fourth Quarter        18.2 %          17.7 %      18.2 %

Due to the nature of our lawn and garden business, significant portions of our products ship to our retail customers during the second and third fiscal quarters. Our annual sales are further concentrated in the second and third fiscal quarters by retailers who increasingly rely on our ability to deliver products "in season" when consumers buy our products, thereby reducing retailers' inventories.

Management focuses on a variety of key indicators and operating metrics to monitor the health and performance of our business. These metrics include consumer purchases (point-of-sale data), market share, net sales (including unit volume, pricing, product mix and foreign exchange movements), organic sales growth (net sales growth excluding the impact of foreign exchange movements and product recalls), gross profit margins, income from operations, net income and earnings per share. To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges, which management believes are not indicative of the ongoing earnings capabilities of our businesses. We also focus on measures to optimize cash flow and return on invested capital, including the management of working capital and capital expenditures.
Product Registration and Recall Matters
In April 2008, we learned that a former associate apparently deliberately circumvented our policies and U.S. Environmental Protection Agency ("U.S. EPA") regulations under the Federal Insecticide, Fungicide, and Rodenticide Act of 1947, as amended ("FIFRA"), by failing to obtain valid registrations for products and/or causing invalid product registration forms to be submitted to regulators. Since that time, we have been cooperating with the U.S. EPA in its civil investigation into pesticide product registration issues involving the Company and with the U.S. EPA and the U.S. Department of Justice (the "U.S. DOJ") in a related criminal investigation. In late April of 2008, in connection with the U.S. EPA's investigation, we conducted a consumer-level recall of certain consumer lawn and garden products and a Scotts LawnService® product. Subsequently, we agreed with the U.S. EPA on a Compliance Review Plan for conducting a comprehensive, independent review of our product registration records. Pursuant to the Compliance Review Plan, an independent third-party firm, Quality Associates Incorporated ("QAI"), has been reviewing all of our U.S. pesticide product registration records, some of which are historical in nature and no longer support sales of our products. The U.S. EPA investigation and the QAI review process identified several issues affecting registrations which resulted in the temporary suspension of sales and shipments of the products affected. In addition, as the QAI review process or our internal review has identified FIFRA registration issues or potential FIFRA registration issues (some of which appear unrelated to the former associate), we have endeavored to stop selling or distributing the affected products until the issues could be resolved with the U.S. EPA.
QAI has completed a review of substantially all of our registrations, advertising and related promotional support with respect to our registered pesticide products. While we do not expect the results of the QAI review process to significantly affect our fiscal 2009 sales, the registration review process has not concluded, and we continue to cooperate with the U.S. EPA and U.S. DOJ in their related investigations.
While we believe that the FIFRA compliance review process is substantially complete, the U.S. EPA and U.S. DOJ investigations and the review process continue and may result in future state, federal or private rights of action including fines and/or penalties with respect to known or potential additional product registration issues. Until the U.S. EPA and U.S. DOJ investigations and the compliance review process are complete, we cannot fully quantify the extent of additional issues. At this time, we cannot reasonably determine the scope or magnitude of possible liabilities that could result from known or potential additional product registration issues, and no reserves for these potential liabilities have been established as of June 27, 2009. However, it is possible that such liabilities, including fines, penalties and/or judgments, could be material and have an adverse effect on our financial condition, results of operations or cash flows.
On September 26, 2008, the Company, doing business as Scotts LawnService®, was named as a defendant in a purported class action filed in the U.S. District Court for the Eastern District of Michigan relating to certain pesticide products. In the suit, Mark Baumkel, on behalf of himself and the purported classes, seeks an unspecified amount of damages, plus costs and attorneys' fees, for alleged claims involving breach of contract, unjust enrichment and violation of the Michigan consumer protection act. Given the preliminary stages of the proceedings, we have not established any related reserves and intend to vigorously contest the plaintiff's assertions.
In fiscal 2008, we conducted a voluntary recall of most of our wild bird food products due to a formulation issue. The wild bird food products had been treated with pest control additives to avoid insect infestation, especially at retail stores. While the pest control additives had been labeled for use on certain stored grains that can be processed for human and/or animal consumption, they were not labeled for use on wild bird food products. This voluntary recall was completed prior to the end of fiscal 2008, and we do not expect any material impact to our fiscal 2009 financial condition, results of operations or cash flows as a result of such recall.
As a result of these registration and recall matters, we have reversed sales associated with estimated returns of affected products, recorded charges for affected inventory and recorded other registration and recall-related costs. The impacts of these adjustments were pre-tax charges of $6.4 million and $10.2 million for the three-month periods, and $22.0 million and $41.0 million for the nine-month periods, ended June 27, 2009 and June 28, 2008, respectively. Although we have begun to reduce our need for third-party professional services related to the recall and registration matters, we nevertheless expect to incur $8 million to $12 million in additional charges,

exclusive of potential fines, penalties, and/or judgments, related to the recalls and known registration issues, including those associated with more aggressively addressing impacted inventory as permitted by the U.S. EPA. We are committed to providing our customers and consumers with products of superior quality and value to enhance their lawns, gardens and overall outdoor living environments. We believe consumers have come to trust our brands based on the superior quality and value they deliver, and that trust is highly valued. We also are committed to conducting business with the highest degree of ethical standards and in adherence to the law. While we are disappointed in these events, we believe we have made significant progress in addressing the issues and restoring customer and consumer confidence in our products.

RESULTS OF OPERATIONS
The following table sets forth the components of income and expense as a
percentage of net sales for the three- and nine-month periods ended June 27,
2009 and June 28, 2008:

                                           THREE MONTHS ENDED               NINE MONTHS ENDED
                                        JUNE 27,         JUNE 28,        JUNE 27,        JUNE 28,
                                          2009             2008            2009            2008
                                               (UNAUDITED)                     (UNAUDITED)
Net sales                                   100.0 %          100.0 %         100.0 %         100.0 %
Cost of sales                                61.5             63.8            63.3            65.5
Cost of sales - other charges                 0.2                -             0.1               -
Cost of sales - product
registration and recall matters               0.3                -             0.3             0.9

Gross profit                                 38.0             36.2            36.3            33.6
Operating expenses:
Selling, general and administrative          18.7             17.7            23.8            23.0
Product registration and recall
matters                                       0.2              0.5             0.5             0.3
Impairment and other charges                    -             10.5               -             5.0
Other income, net                            (0.1 )           (0.5 )          (0.1 )          (0.4 )

Income from operations                       19.2              8.0            12.1             5.7
Interest expense                              1.1              1.9             1.8             2.7

Income before income taxes                   18.1              6.1            10.3             3.0
Income taxes                                  6.6              4.2             3.7             2.0

Net income                                   11.5 %            1.9 %           6.6 %           1.0 %

Net sales for the third quarter and first nine months of fiscal 2009 increased by 9.3% and 4.9%, respectively, versus the comparable periods of fiscal 2008. Foreign exchange movements decreased sales growth for the third quarter and nine months ended June 27, 2009 by 3.6% and 4.3%, respectively. Additionally, product returns related to recall matters in 2008 had the impact of decreasing net sales, thereby increasing sales growth for the third quarter and nine months ended June 27, 2009 by 0.5% and 1.0%, respectively. Organic net sales growth, which excludes the impact of foreign exchange movements and product recalls, was 12.2% and 8.0% for the third quarter and first nine months of fiscal 2009, respectively. In the Global Consumer segment, organic net sales grew by 18.4% and 12.5% for the third quarter and first nine months, respectively, driven primarily by increased sales in North America. Global Professional organic net sales declined by 14.8% and 6.6%, respectively, for the third quarter and nine months ended June 27, 2009. Organic net sales for the Scotts LawnService® segment decreased by 9.7% and 4.8% for the three and nine months ended June 27, 2009, respectively. Smith & Hawken® organic net sales decreased by 11.5% and 17.5% for the third quarter and first nine months of fiscal 2009, respectively. On a consolidated basis, we anticipate fiscal 2009 organic net sales to increase by 7% to 8% compared to fiscal 2008.
As a percentage of net sales, gross profit was 38.0% for the third quarter of fiscal 2009 compared to 36.2% for the third quarter of fiscal 2008. For the first nine months of fiscal 2009, our gross profit percentage increased to 36.3% from 33.6% in the comparable period of fiscal 2008. In the third quarter of fiscal 2009, we recorded a charge of approximately $2.7 million to adjust Smith & Hawken® inventory to its estimated realizable value. Excluding other charges and product registration and recall matters, gross profit for both the third quarter and first nine months of fiscal 2009 increased 210 basis points. The fiscal 2009 third quarter and year-to-date gross profit rate increases were driven by increased selling prices net of increased commodity costs, and cost productivity improvements. Excluding the impact of other charges and product registration and recall matters, for fiscal 2009 we anticipate the increase in gross profit as a percentage of net sales to be consistent with trends from the first nine months of the year.

Selling, General and Administrative ("SG&A"):

                                           THREE MONTHS ENDED               NINE MONTHS ENDED
                                        JUNE 27,         JUNE 28,        JUNE 27,        JUNE 28,
                                          2009             2008            2009            2008
                                              (IN MILLIONS)                   (IN MILLIONS)
                                               (UNAUDITED)                     (UNAUDITED)
Advertising                            $     62.5       $     59.3      $    122.8      $    123.8
Other selling, general and
administrative                              173.8            143.3           476.4           423.7
Amortization of intangibles                   2.7              4.3             8.9            12.1

                                       $    239.0       $    206.9      $    608.1      $    559.6

Selling, general and administrative ("SG&A") expenses increased $32.1 million, or 15.5%, to $239.0 million for the third quarter and $48.5 million, or 8.7%, to $608.1 million for the first nine months of fiscal 2009. Excluding the impact of foreign exchange rates, SG&A expenses for the third quarter and first nine months of fiscal 2009 increased 19.2% and 12.6%, respectively. Advertising expense grew by 5.4% in the third quarter of fiscal 2009 driven by increased investment in the North America Consumer business. Advertising expense year-to-date has decreased by 0.8% which is comprised of a 7.6% increase in North America Consumer spending, offset by declines in Scotts LawnService® and International Consumer. The increase in other SG&A for the third quarter and year-to-date was primarily driven by increased spending for selling, technology and research and development, increased pension costs, and increased variable compensation and retention costs. We expect full-year growth in SG&A of 10% to 11% with the increase versus year-to-date driven by aggressive fourth quarter marketing plans and year-over-year changes in variable compensation. We recorded $3.1 million and $14.8 million of SG&A-related product registration and recall costs during the third quarter and first nine months of fiscal 2009, respectively, which primarily related to third-party compliance review, legal and consulting fees. For the quarter and nine months ended June 28, 2008, we recorded $5.6 million and $6.8 million of SG&A-related product registration and recall costs, respectively.
As a result of a significant decline in the market value of the Company's common shares during the latter half of the third fiscal quarter ended June 28, 2008, the Company's market value of invested capital was approximately 60% of the similar impairment metric used in our fourth quarter fiscal 2007 annual impairment testing. Management determined this was an indicator of possible goodwill impairment and, therefore, interim impairment testing was performed as of June 28, 2008. The Company's third quarter fiscal 2008 interim impairment review resulted in a non-cash charge of $123.3 million, $101.9 million net of taxes, to reflect the decline in the fair value of certain goodwill and other assets as evidenced by the decline in the market value of the Company's common shares. Of this impairment charge, $80.8 million was for goodwill, $23.2 million related to indefinite-lived tradenames, $18.3 million was for SFAS 144 long-lived assets and $1.0 million related to inventory. On a reportable segment basis, $71.8 million of the impairment charge was in Global Consumer, $31.4 million was in Global Professional, with the remaining $20.1 million in Corporate & Other.
Interest expense for the third quarter and first nine months of fiscal 2009 was $13.7 million and $45.9 million, respectively, compared to $22.1 million and $64.6 million for the third quarter and first nine months of fiscal 2008. The decrease was primarily due to a decline in our borrowing rates, as well as the favorable impact of foreign exchange rates and a reduction in average debt outstanding. Weighted-average interest rates decreased by 171 basis points and 120 basis points during the third quarter and first nine months of fiscal 2009, respectively, as compared to the same periods of fiscal 2008. Average borrowings also decreased by $144.8 million and $155.4 million for the third quarter and first nine months of fiscal 2009, respectively.
Income tax expense was calculated assuming an effective tax rate of 36.3% for fiscal 2009, versus 67.5% for fiscal 2008. The effective tax rate for fiscal 2008 was significantly higher primarily due to the goodwill impairment charge recorded in the third quarter of fiscal 2008, which was not deductible for tax purposes. The effective tax rate used for interim reporting purposes was based on management's best estimate of factors impacting the effective tax rate for the full fiscal year. Factors affecting the estimated effective tax rate include assumptions as to income by jurisdiction (domestic and foreign), the availability and utilization of tax credits and the existence of elements of income and expense that may not be taxable or deductible, as well as other items. The estimated effective tax rate is subject to revision in later interim periods and at fiscal year end as facts and circumstances change during the course of the fiscal year. There can be no assurance that the effective tax rate estimated for interim financial reporting purposes will approximate the effective tax rate determined at fiscal year end.
Diluted average common shares used in the diluted net income per common share calculation were 66.1 million for the third quarter of fiscal 2009 compared to 65.3 million for the same period a year ago. Diluted average common shares used in the diluted net income

per common share calculation were 65.8 million for the nine months ended June 27, 2009 compared to 65.5 million for the comparable period in fiscal 2008. Diluted average common shares for the third quarter and first nine months of fiscal 2009 included 1.1 million and 0.9 million equivalent shares, respectively, to reflect the effect of the assumed conversion of dilutive stock options, restricted stock, restricted stock units, performance shares and stock appreciation right awards. For the third quarter and first nine months of fiscal 2008, diluted average common shares included 0.7 million and 1.1 million equivalent shares, respectively. The changes in diluted average common shares are primarily driven by the fluctuation in the Company's share price.
SEGMENT RESULTS
Our operations are divided into the following segments: Global Consumer, Global Professional, Scotts LawnService® and Corporate & Other. The Corporate & Other segment consists of Smith & Hawken® and corporate general and administrative expenses. Segment performance is evaluated based on several factors, including income from operations before amortization, product registration and recall costs, and impairment, restructuring and other charges, which are not generally accepted accounting principles measures. Management uses this measure of operating profit to gauge segment performance because we believe this measure is the most indicative of performance trends and the overall earnings potential of each segment.
The following table sets forth net sales by segment:

                                          THREE MONTHS ENDED            NINE MONTHS ENDED
                                       JUNE 27,       JUNE 28,       JUNE 27,       JUNE 28,
                                         2009           2008           2009           2008
                                            (IN MILLIONS)                 (IN MILLIONS)
                                             (UNAUDITED)                   (UNAUDITED)
Global Consumer                        $ 1,077.2      $   935.3      $ 2,093.2      $ 1,922.7
Global Professional                         75.4           98.7          215.4          260.6
Scotts LawnService®                         79.0           87.4          150.6          158.1
Corporate & Other                           48.6           54.9           99.8          121.0

Segment total                            1,280.2        1,176.3        2,559.0        2,462.4
Roundup® amortization                       (0.2 )         (0.2 )         (0.6 )         (0.6 )
Product registration and recall
matters - returns                              -           (5.2 )         (0.3 )        (24.2 )

Consolidated                           $ 1,280.0      $ 1,170.9      $ 2,558.1      $ 2,437.6

The following table sets forth operating income (loss) by segment:

                                               THREE MONTHS ENDED               NINE MONTHS ENDED
                                            JUNE 27,         JUNE 28,        JUNE 27,        JUNE 28,
                                              2009             2008            2009            2008
                                                  (IN MILLIONS)                   (IN MILLIONS)
                                                   (UNAUDITED)                     (UNAUDITED)
Global Consumer                            $    265.2       $    207.9      $    428.9      $    349.1
Global Professional                               5.2             11.9            27.1            34.6
Scotts LawnService®                              21.6             20.6            (2.3 )          (9.4 )
Corporate & Other                               (34.3 )           (9.0 )        (109.7 )         (59.5 )

Segment total                                   257.7            231.4           344.0           314.8
Roundup® amortization                            (0.2 )           (0.2 )          (0.6 )          (0.6 )
Other amortization                               (2.7 )           (4.3 )          (8.9 )         (12.1 )
Product registration and recall matters          (6.4 )          (10.2 )         (22.0 )         (41.0 )
Impairment and other charges                     (2.7 )         (123.3 )          (2.7 )        (123.3 )

Consolidated                               $    245.7       $     93.4      $    309.8      $    137.8

Global Consumer
Global Consumer segment net sales were $1.08 billion for the third quarter and $2.09 billion for the first nine months of fiscal 2009, an increase of 15.2% and 8.8% from the third quarter and first nine months of fiscal 2008, respectively. Organic net sales growth for the third quarter and first nine months of fiscal 2009 was 18.4% and 12.5%, respectively, including the favorable impact of price increases of 6.8% and 7.8%. Foreign exchange movements decreased net sales by 3.2% and 3.7% for the third quarter and first nine months of fiscal 2009, respectively.
Organic net sales in North America increased 20.4% and 15.0% for the third quarter and first nine months of fiscal 2009, respectively. Organic net sales growth includes the favorable impact of higher selling prices, which increased North American sales by 6.7% and 8.0% for the third quarter and first nine months of fiscal 2009, respectively. Sales of our products to consumers at retail (point-of-

sales) for our three largest U.S. customers increased by 19.3% and 16.7% for the quarter and year-to-date, respectively, driven by higher sales in all major categories, led by growing media, lawn fertilizers, and plant foods. Organic net sales in Europe increased by 6.2% and 0.4% for the third quarter and first nine months of fiscal 2009, respectively. Strong growth in the United Kingdom, led by the growing media and lawn fertilizer categories, and Eastern Europe has been offset by declines in sales in France and Central Europe caused by inventory de-load by retailers and a slow pesticide season.
Global Consumer segment operating income increased by $57.3 million and $79.8 million in the third quarter and first nine months of fiscal 2009, respectively. Excluding foreign exchange movements, segment operating income increased by $61.3 million and $87.3 million in the third quarter and first nine months of fiscal 2009, respectively. The increase in operating income was primarily driven by the increase in net sales accompanied by improvement in gross margin rates of 290 and 230 basis points for the third quarter and first nine months of fiscal 2009, respectively. The increase in gross margin rates was . . .