The Company’s most recent results provide good reason for our continued optimism. Fiscal 2006 was another record year for ScottsMiracle-Gro as we improved our market share and reported sales of $2.7 billion, up 14 percent from 2005. Adjusted net income improved 20 percent to a record $181.9 million. These strong results were driven by the strength of our core North American business,the continued momentum of Scotts LawnService and an effort launched in 2005, called Project Excellence, which reduced expenses by about $50 million before reinvestments.

Twenty percent growth in any year is worth noting. We are especially pleased that our record results in 2006 came in the face of continued raw material pressures as well as other challenges. For example, our International business was hampered by category declines in much of Europe and fell short of expectations, though it gained market share. Smith & Hawken was impacted by a supplier disruption and unexpected costs and posted a loss for the year, although sales improved 6 percent.

Overall, we’re pleased with our company-wide results for 2006, which allowed us to continue building upon a track record of long-term success and a commitment to excellence. In the past five years, sales and adjusted net income have improved by a compounded annual growth rate of 10 and 23 percent, respectively. Additionally, the business has generated more than $700 million of free cash flow since 2001, allowing us to steadily improve our balance sheet.This strength has provided us with significant flexibility as we consider our options in managing our business for continued long-term growth and enhanced shareholder value.

We are now poised to put that flexibility to work.

Shareholders benefit from strength
Given our strong performance and consistent cash flow, ScottsMiracle-Gro began paying a regular quarterly dividend in fiscal 2005 and, last year, launched a five-year $500 million share repurchase. In 2006, we began executing this program and repurchased approx-imately $90 million of shares. Now we have decided to be even more aggressive in returning cash to shareholders.

Based on our continued confidence in the core business, our Board of Directors has recently approved plans to return $750 million to shareholders in the second quarter of fiscal 2007. Up to $250 million of shares will be repurchased, with the balance to be distributed through a special dividend. To fund this program, we will be recapitalizing our balance sheet and increasing our debt facilities.

Even with the increased leverage, ScottsMiracle-Gro will maintain the ability to pursue targeted, strategic acquisitions in adjacent categories that leverage our core competencies. We will continue making the necessary investments in the existing portfolio to drive sustained growth, while also retaining the financial flexibility necessary to protect the Company against unforeseen events or operational downturns.

This recapitalization will create a more efficient capital structure based on the continued confidence in the strength and stability of our cash flows. It also recognizes there are no significant acquisitions currently on the horizon. Our strategy is for debt levels to return to equivalent 2006 levels by 2011, the end of our current strategic planning cycle.

During that period, investors also should expect to see a renewed focus on improving gross margins. Over the past three years, gross margins have been diluted by increased commodity prices, acquisitions and unfavorable product mix. Going forward, we will aggressively aim to improve margins through innovation, a focus on marketing higher-margin products and a pricing strategy focused on maintaining our margin rate.

We also must make a greater commitment to improving our return on invested capital. Although ROIC has improved by more than 200 basis points during the past five years, our improvements to this metric have been less impressive over the past two years. Our goal is to improve ROIC by at least another 150-250 basis points within five years.

Of course, the success of each of our business units will be key to our success. Let me providea brief overview on the results delivered by each of these businesses in 2006, as well as our outlookfor the future.

North America
In a season challenged by $3-a-gallon gasoline prices and concerns about the financial health of the consumer, our core business reported its best year ever in fiscal 2006. We increased by 18 percent our investment in advertising and consumer-focused trade programs, resulting in a 10-percent improvement in consumer purchases of our products, with strength in nearly every product category.

Strong consumer demand translated into ongoing support from our retail partners and a 15 percent increase in sales, 8 percent when excluding the impact of acquisitions. Operating profit in the business improved by 11 percent.

Our continued focus on customer service was evident again as our fill rates to our major retail partners exceeded 99 percent, an all-time high.

For 2007, we are optimistic that an array of targeted new lawn fertilizer products and continued excitement for Miracle-Gro® LiquaFeed® – which we introduced in 2006 – will result in strong consumer demand and sales growth in the high single digits. (NOTE: We provide a detailed discussion of our North American business on pages 6 through 15 of this report).

International
The overall European consumer lawn and garden market had a tough year in 2006, reinforcing our belief that a consolidation of this market is needed. Even without such an impetus, we have made progress and gained share in the marketplace. We were especially pleased that our European growing media business – which will continue to be a major focus – was up 16 percent for the year. In fact, sales of Miracle-Gro® branded soils in the UK increased nearly 50 percent, and we’re optimistic that we can continue to drive growth in the value-added growing media business, just as we have in the U.S.

For fiscal 2006, International sales declined 5 percent, or 2 percent excluding the impact of foreign exchange rates. Although the business remains solidly profitable, operating profits, excluding restructuring, declined by 17 percent.

There is no debate that this business unit has faced challenges in recent years and must improve. While we believe near-term consolidation in the market is unlikely without a catalyst, we remain firm in our belief that ScottsMiracle-Gro is well served in the long-term by maintaining its global presence.

We also remain optimistic that International can generate meaningful growth in the future and that its results can keep pace with the rest of the organization. To succeed against these goals, we must continue to outperform the competition and find further synergies between this business and North America.

Smith & Hawken
The potential of the outdoor living business remains obvious from the high level of interest in this competitive category. In Smith & Hawken, we are pleased to possess the most important brand in the space as well as an increasingly stronger understanding of the outdoor living consumer.

In its second year since we acquired this business, Smith & Hawken reported sales growth of 6 percent in 2006 while making significant strides in advancing our strategic plan. The first year of our partnership with Target exceeded our goals and set the stage for further improvement. During the year, we also opened two new flagship stores. We are excited by the potential of these new stores and the new merchandising opportunities they provide.

We also introduced a strong new management team, which is taking Smith & Hawken back to its roots with a greater focus on the gardening experience. While the business did not reach profitability in 2006, we are not discouraged. Investors should recognize Smith & Hawken was never planned to be a ‘quick win’ for ScottsMiracle-Gro. In taking a long-term approach to running this Company, we look to strike a balance between near-term wins and long-term opportunity. In that context, we’re convinced of the potential for outdoor living and look forward to continue making progress against our vision in 2007 and beyond.

Scotts LawnService
This fast-growing business maintained its momentum in 2006 with 29 percent sales growth, nearly all of which was organic. Our customer count grew by 12 percent to nearly 450,000 and our trailing 52-week retention rate at fiscal year-end was 70 percent, significantly better than our largest competitor.

We enjoyed better than expected results with our higher-end program offerings, which helped us offset lower sales of value-priced offerings as well as higher than expected product, labor and sales costs. And we believe we have continued opportunity to build the high end of the market going forward.

For 2007, we continue to expect sales growth in the business to exceed 15 percent, and we believe our goal to reach operating margins in the low teens remains achievable.

Our Vision: An Enduring Franchise
A year ago in this space, I wrote that we aspire to build “an enduring franchise,” in other words “an enterprise that continues to win in the marketplace by clearly owning the relationship with its consumers, leveraging its core strengths and continuing to distance itself from the competitors.”

We are firmly committed to this goal and it is one that I am confident we can reach. I am equally confident we can build an enduring franchise while also using our financial strength and flexibility to share our success with our shareholders.

I continue to believe that ScottsMiracle-Gro has evolved as one of the truly unique companies in America. As we celebrate our 100th anniversary as a consumer-focused company, I can speak for each of our more than 6,000 associates in saying we are proud of what we have accomplished.

More importantly, we are energized by the opportunities that still lie ahead.

Regards,

James Hagedorn
President, Chief Executive Officer
and Chairman
The Scotts Miracle-Gro Company
December 2006