SCOTTS COMPANY - 10-K Annual Report

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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, 2003

OR

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

For the transition period from ------------ to ------------

Commission file number 1-13292

THE SCOTTS COMPANY
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(Exact Name of Registrant as Specified in Its Charter)

OHIO 31-1414921
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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:

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 number of Common Shares of the registrant outstanding as of December 5, 2003
was 32,246,606.

Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No _ .

The aggregate market value of Common Shares (the only common equity of the
registrant) held by non-affiliates of the registrant computed by reference to
the price at which Common Shares were last sold as of the last business day of
the registrant's most recently completed second fiscal quarter (March 28, 2003)
was $1,084,902,162.60.

DOCUMENT INCORPORATED BY REFERENCE:

PORTIONS OF THE PROXY STATEMENT FOR REGISTRANT'S 2004 ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD JANUARY 29, 2004, ARE INCORPORATED BY REFERENCE INTO
PART III HEREOF.

PART I

ITEM 1. BUSINESS

GENERAL

The Scotts Company, an Ohio corporation, is the combination of two of the
most innovative companies in the consumer lawn and garden market: O.M. Scott &
Sons, which traces its heritage back to a company founded by O.M. Scott in
Marysville, Ohio in 1868, and Stern's Miracle-Gro Products, Inc., which traces
its heritage back to a company formed on Long Island by Horace Hagedorn and his
partner in 1951. In the mid 1900's, Scotts had become widely known for
innovation in the development of quality lawn fertilizers and grass seeds that
led to the creation of a new industry -- consumer lawn care. Today, we believe
the Scotts(R), Turf Builder(R), Miracle-Gro(R) and Ortho(R) brands are among the
most widely recognized brands in the U.S. consumer lawn and garden care
industry. We are also Monsanto's exclusive agent for the marketing and
distribution of consumer Roundup(R)* non-selective herbicide within the United
States and other contractually specified countries.

In fiscal 1995, through a stock for stock acquisition, Scotts and
Miracle-Gro joined forces in what became the start of several acquisitions of
other leading brands in the lawn and garden industry in North America and
Europe. In fiscal 1999, we acquired the Ortho(R) brand and exclusive rights to
market the consumer Roundup(R) brand, thereby adding industry-leading pesticides
and herbicides to our controls portfolio. In the late 1990's, we completed
several acquisitions in Europe which gave us well-known brands in France,
Germany and the United Kingdom. We have also rapidly expanded into the lawn care
service industry through our Scotts LawnService(R) business.

We believe that our market leadership in the lawn and garden category is
driven by our widely-recognized brands, consumer-focused marketing, superior
product performance, supply chain competency, highly knowledgeable field sales
and merchandising organization, and the strength of our relationships with major
retailers in our product categories.

We maintain an Internet website at http://www.scotts.com. (this uniform
resource locator, or URL, is an inactive textual reference only and is not
intended to incorporate our website into this Form 10-K). We file our reports
with the Securities and Exchange Commission (the "SEC") and make available, free
of charge, on or through this website, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and
information statements and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.

Any of the materials we file with the SEC may also be read and copied at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Information on the operation of the SEC's Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at http://www.sec.gov.

COMPETITIVE STRENGTHS

We believe we are the world's largest marketer of branded consumer lawn and
garden fertilizers, control products and value-added growing media products. We
have been able to achieve our market leading position through a combination of
internal growth, driven by product line extensions and award-winning advertising
campaigns, and acquisitions. Our portfolio of consumer brands includes the
following:

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* Roundup(R) is a registered trademark of Monsanto Technology LLC, a company
affiliated with Monsanto Company.

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In addition, we have the following significant brands in Europe:
Miracle-Gro(R) plant fertilizers, Weedol(R) and Pathclear(R) herbicides,
EverGreen(R) lawn fertilizers and Levington(R) growing media in the United
Kingdom, KB(R) and Fertiligene(R) in France, Celaflor(R), Nexa-Lotte(R) and
Substral(R) in Germany and Austria, and ASEF(R), KB(R) and Substral(R) in the
Benelux countries. Scotts' market leadership is evidenced by the brand
recognition across all product categories.

BUSINESS SEGMENTS

In fiscal 2003, we divided our business into four reporting segments:

- North American Consumer;
- Scotts LawnService(R);
- Global Professional; and
- International Consumer.

Financial information about these segments for the three years ended
September 30, 2003 is presented in Note 21 to the Consolidated Financial
Statements.

NORTH AMERICAN CONSUMER

In our North American Consumer segment, we manufacture and market products
that provide fast, easy and effective assistance to homeowners who seek to
nurture beautiful, weed and pest-free lawns, gardens and indoor plants. These
products are sold under brand names that people know and trust, and that
incorporate many of the best technologies available. These products include:

TURF BUILDER(R). We sell a complete line of granular lawn fertilizer and
combination products which include fertilizer and crabgrass control, weed
control or pest control under the Scotts(R) Turf Builder(R) brand name. The Turf
Builder(R) line of products is designed to make it easy for do-it-yourself
consumers to select and properly apply the right product in the right quantity
for their lawns.

MIRACLE-GRO(R). We sell a complete line of plant foods under the
Miracle-Gro(R) brand name. The leading product is a water-soluble plant food
that, when dissolved in water, creates a diluted nutrient solution which is
poured over plants or sprayed through an applicator and rapidly absorbed by a
plant's roots and leaves. Miracle-Gro(R) products are specially formulated to
give different kinds of plants the right kind of nutrition. While Miracle-Gro(R)
All-Purpose Water-Soluble Plant Food is the leading product in the Miracle-
Gro(R) line by market share, the Miracle-Gro(R) line includes other products
such as Miracle-Gro(R) Rose Plant Food, Miracle-Gro(R) Tomato Plant Food,
Miracle-Gro(R) Lawn Food and Miracle-Gro(R) Bloom Booster(R). Miracle-Gro
continues to develop ways to improve the convenience of its products for the
consumer. The Miracle-Gro(R) Garden Feeder provides consumers with an easy, fast
and effective way to feed all the plants in their garden. We also introduced a
high quality, slow release line of Miracle-Gro(R) plant foods for extended
feeding convenience sold as Miracle-Gro(R) Shake 'N Feed(R).

ORTHO(R). We sell a broad line of weed control, indoor and outdoor pest
control and plant disease control products under the Ortho(R) brand name.
Ortho(R) products are available in aerosol, liquid ready-to-use, concentrated,
granular and dust forms. Ortho(R) control products include Weed-B-Gon(R),
Brush-B-Gon(R), Bug-B-Gon(R), RosePride(R), Ortho-Klor(R), Ant-Stop(R),
Orthene(R) Fire Ant Killer, Ortho(R) Home Defense(R) and Flea-B-Gon(R).

GROWING MEDIA. We sell a complete line of growing media products for indoor
and outdoor uses under the Miracle-Gro(R), Scotts(R), Hyponex(R), Earthgro(R)
and Nature Scapes(R) brand names, as well as other labels. These products
include potting mix, garden soils, topsoil, manures, sphagnum peat and
decorative barks and mulches. The addition of the Miracle-Gro(R) brand name and
fertilizer to potting mix and garden soils has turned previously low-margin
commodity products into value-added category leaders.

ROUNDUP(R). In 1998, we entered into a long-term marketing agreement with
Monsanto and became Monsanto's exclusive agent for the marketing and
distribution of consumer Roundup(R) non-selective herbicide products in the
consumer lawn and garden market within the United States and other specified
countries, including Australia, Austria, Canada, France, Germany and the United
Kingdom.

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OTHER PRODUCTS. We manufacture and market several lines of high quality lawn
spreaders under the Scotts(R) brand name, including Scotts EdgeGuard(R) Total
Performance spreaders, SpeedyGreen(R) rotary spreaders, AccuGreen(R) drop
spreaders and Handy Green(R) II handheld lawn spreaders. We sell a line of
hose-end applicators for water-soluble plant foods such as Miracle-Gro(R)
products, a line of pottery products, and lines of applicators under the
Ortho(R), Dial 'N Spray(R), and Pull 'N Spray(R) trademarks for the application
of certain insect control products. We also sell numerous varieties and blends
of high quality grass seed, many of them proprietary, designed for different
conditions and geographies. These consumer grass seed products are sold under
the Scotts(R) Pure Premium(R), Scotts(R) Turf Builder(R), Scotts(R) and
PatchMaster(R) brands.

SCOTTS LAWNSERVICE(R)

In addition to our products, we provide residential lawn care, lawn
aeration, tree and shrub care and external pest control services through our
Scotts LawnService(R) business in the United States. These services consist
primarily of fertilizer, weed control, pest control and disease control
applications. Scotts LawnService(R) had 68 company operated locations serving 44
metropolitan markets, and 70 independent franchise locations as of September 30,
2003.

GLOBAL PROFESSIONAL

Through our Global Professional segment, we sell professional products to
commercial nurseries, greenhouses and specialty crop growers in North America
and internationally in many locations including Africa, Australia, the
Caribbean, the European Union, Japan, Latin America, the Middle East, New
Zealand and Southeast Asia.

Our professional products include a broad line of sophisticated
controlled-release fertilizers, water-soluble fertilizers, pesticide products,
wetting agents and growing media products which are sold under brand names that
include Banrot(R), Metro-Mix(R), Miracle-Gro(R), Osmocote(R), Peters(R),
Poly-S(R), Rout(R), ScottKote(R), Sierrablen(R), Shamrock(R) and Sierra(R).

Our branded plants business is also a part of the Global Professional
segment. This business arranges for the sale of high-quality annual plants to
retailers. The annuals are produced by independent growers according to a
defined protocol and branded with the Miracle-Gro(R) trademark, in accordance
with a licensing agreement. We receive a fee for each branded plant sold.

Our biotechnology activities are conducted within our Global Professional
segment. For more information, please see "Biotechnology".

For information concerning risks attendant to our foreign operations,
please see "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Forward-Looking Statements."

INTERNATIONAL CONSUMER

In our International Consumer segment, we sell consumer lawn and garden
products in over 25 countries outside of North America. Our International
Consumer segment also manages and markets the consumer Roundup(R) business on
behalf of Monsanto outside of North America under a long-term marketing
agreement.

Our International Consumer products and brand names vary from country to
country depending upon the market conditions, brand name strength and the nature
of our strategic relationships in a given country. For example, in the United
Kingdom, we sell Miracle-Gro(R) plant fertilizers, Weedol(R) and Pathclear(R)
herbicides, EverGreen(R) lawn fertilizers and Levington(R) growing media. Our
other international brands include KB(R) and Fertiligene(R) in France,
Celaflor(R), Nexa-Lotte(R) and Substral(R) in Germany and Austria, and ASEF(R),
KB(R) and Substral(R) in the Benelux countries.

For information concerning risks attendant to our foreign operations,
please see "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Forward-Looking Statements."

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RESEARCH AND DEVELOPMENT

We believe strongly in the benefits of research and development, and we
continually invest in research and development to improve existing or develop
new products, manufacturing processes and packaging and delivery systems. In
fiscal 2003, 2002 and 2001, we spent approximately 1.5% of our net sales, or
$30.4 million, $26.2 million and $24.7 million, respectively, on research and
development, of which $6.3 million, $5.3 million and $4.1 million, respectively,
was related to environmental and regulatory expenses. We believe that our
long-standing commitment to innovation has benefited us, as evidenced by a
portfolio of patents worldwide that support many of our fertilizers, grass seeds
and application devices. In addition to the benefits of our own research and
development, we benefit from the research and development activities of our
suppliers.

Our research and development worldwide headquarters is located at the
Dwight G. Scott Research Center in Marysville, Ohio. We also have research and
development facilities in Levington, the United Kingdom; Chazay, France;
Ingelheim, Germany; Heerlen, the Netherlands and Sydney, Australia, as well as
several research field stations located throughout the United States.

BIOTECHNOLOGY

We believe that the development and commercialization of innovative
products is an important key to our continued success.

We have a long history of dedication to responsible research in search of
better, more effective and easier to use products. In particular, we have worked
for over 75 years to create better products for the establishment and
maintenance of turfgrass. Biology and breeding have been a part of that research
and development for the past 40 years. We remain dedicated to being the
technology leader in turfgrass products. Today, that dedication results in
research into products that can be enhanced with biotechnology, as well as
products that can be improved through biology and breeding.

Before a product enhanced with biotechnology may be sold in the United
States, it must be "deregulated" by appropriate governmental agencies.
Deregulation involves compliance with the rules and regulations of, and
cooperation with, the United States Department of Agriculture, Animal and Plant
Health Inspection Service (the "USDA"), the United States Environmental
Protection Agency (the "U.S. EPA") and/or the Food and Drug Administration (the
"FDA"). Therefore, any product enhanced with biotechnology for which we seek
commercialization to the point of submitting a petition for deregulation will be
subjected to rigorous and thorough governmental regulatory review.

More specifically, as part of the deregulation process for any product
enhanced with biotechnology, we are required to present evidence to the USDA in
the form of scientifically rigorous studies showing that the product is not
substantially different from products of the same species that have not been
enhanced with biotechnology. We are also required to satisfy other agencies,
such as the U.S. EPA and the FDA, as to their appropriate areas of regulatory
authority. This process typically takes years to complete and also includes at
least two opportunities for public comment.

We submitted a petition for deregulation of a non-residential turfgrass
product enhanced with biotechnology to the USDA on April 30, 2002. This
turfgrass has been shown, through our research trials, to provide simple, more
flexible and better weed control for golf courses in a manner that we believe is
more environmentally friendly. The USDA requested additional information and
data. We determined that it was more expedient to withdraw the petition and
submit a revised petition that addressed the USDA's requests than to amend the
current petition. On October 3, 2002, we withdrew our petition. We prepared a
revised petition that addresses the USDA's requests and submitted it on April
14, 2003. That petition is still under review.

There can be no assurance that our petition for deregulation of this
turfgrass product enhanced with biotechnology will be approved, or that if
approved and commercially introduced, it will generate any revenues or
contribute to our earnings.

TRADEMARKS, PATENTS AND LICENSES

The Scotts(R), Miracle-Gro(R), Hyponex(R) and Ortho(R) brand names and
logos, as well as a number of product trademarks, including Turf Builder(R),
Osmocote(R) and Peters(R), are federally and/or internationally

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registered and are considered material to our business. We regularly monitor our
trademark registrations, which are generally effective for ten years, so that we
can renew those nearing expiration.

As of September 30, 2003, we held 98 issued patents in the United States
covering fertilizer, chemical and growing media compositions and processes,
grasses and application devices. Many of these patents have also been issued in
numerous countries around the world, bringing our total worldwide patents to
more than 434. International patents are subject to annual renewal, with patent
protection generally extending to 20 years from the date of filing. Many of our
patents extend well into the next decade. In addition, we continue to file new
patent applications each year. Currently, we have 181 pending patent
applications worldwide. We also hold exclusive and non-exclusive patent licenses
from various raw material suppliers, permitting the use and sale of additional
patented fertilizers and pesticides.

During fiscal 2003, we were granted a number of U.S. and international
patents. Some of the more significant new patents include the new EdgeGuard(R)
Spreader and "Autodose" liquid metering technology. Internationally, we continue
to extend patent coverage of our core fertilizer technologies
(controlled-release and water-soluble) and applicator technologies to additional
countries within our European and Asia/ Pacific markets. Some of the more
significant examples are: the extension of Osmocote(R) patents to Australia/New
Zealand; the extension of Poly-S(R) patents to Canada and Australia; and the
extension of Ortho(R) sprayer patents to Mexico and Finland.

Three patents are scheduled to expire in fiscal 2004. The loss of these
patents is not expected to materially affect the business. We have one patent
currently being opposed by a third party in Europe. An unfavorable ruling by the
European Patent Office could materially affect our indoor pest control market
share in Germany. A ruling is expected early in calendar year 2004.

ROUNDUP(R) MARKETING AGREEMENT

On September 30, 1998, we entered into a marketing agreement with Monsanto
and became Monsanto's exclusive agent for the marketing and distribution of
consumer Roundup(R) products (with additional rights to new products containing
glyphosate or other similar non-selective herbicides) in the consumer lawn and
garden market within the United States and other specified countries, including
Australia, Austria, Canada, France, Germany and the United Kingdom.

Under the marketing agreement, we and Monsanto are jointly responsible for
developing global consumer and trade marketing programs for Roundup(R). We have
assumed responsibility for sales support, merchandising, distribution and
logistics for Roundup(R). Monsanto continues to own the consumer Roundup(R)
business and provides significant oversight of its brand. In addition, Monsanto
continues to own and operate the agricultural Roundup(R) business.

We are compensated under the marketing agreement based on the success of
the consumer Roundup(R) business in the markets covered by the agreement. We
receive a graduated commission to the extent that the earnings before interest
and taxes of the consumer Roundup(R) business in the included markets exceed
specified thresholds. Regardless of these earnings, we are required to make an
annual contribution payment against the overall expenses of the Roundup(R)
business. For fiscal 2003, and until 2018 or the earlier termination of the
agreement, the minimum annual contribution payment is $25 million and may be
higher if certain significant earnings targets are achieved.

Our net commission under the marketing agreement is equal to the graduated
commission amount described above, less the applicable contribution payment and
amortization of the marketing rights advance payment. For fiscal 2003, the net
commission was $17.6 million. See Note 3 to the Consolidated Financial
Statements.

The marketing agreement has no definite term, except as it relates to the
European Union countries. With respect to the European Union countries, the
initial term of the marketing agreement extends through September 30, 2005.
After September 30, 2005, the parties may agree to renew the agreement with
respect to the European Union countries for three successive terms ending on
September 30, 2008, 2015 and 2018, with a separate determination being made by
the parties at the expiration of each such renewal term as to whether to
commence a subsequent renewal term. However, if Monsanto does not agree to any
of the renewal terms with respect to the European Union countries, the
commission structure will be recalculated in a manner likely to be favorable to
us.

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Monsanto has the right to terminate the marketing agreement upon certain
specified events of default by Scotts, including an uncured material breach,
material fraud, material misconduct or egregious injury to the Roundup(R) brand.
Monsanto also has the right to terminate the agreement upon a change of control
of Monsanto or the sale of the consumer Roundup(R) business. In addition,
Monsanto may terminate the agreement within specified regions, including North
America, for specified declines in the consumer Roundup(R) business.

We have rights similar to Monsanto's to terminate the marketing agreement
upon an uncured material breach, material fraud or material willful misconduct
by Monsanto. In addition, we may terminate the agreement upon Monsanto's sale of
the consumer Roundup(R) business or in certain other circumstances, in which
case we would not be able to collect the termination fee described below.

If Monsanto terminates the marketing agreement upon a change of control of
Monsanto or the sale of the consumer Roundup(R) business prior to September 30,
2008, we will be entitled to a termination fee in excess of $100 million. If we
terminate the agreement upon an uncured material breach, material fraud or
material willful misconduct by Monsanto, we will be entitled to receive a
termination fee in excess of $100 million if the termination occurs prior to
September 30, 2008. The termination fee declines over time from $100 million to
a minimum of $16 million for terminations after September 30, 2008.

Monsanto has agreed to provide us with notice of any proposed sale of the
consumer Roundup(R) business, allow us to participate in the sale process and
negotiate in good faith with us with respect to a sale. In the event that we
acquire the consumer Roundup(R) business in such a sale, we would receive credit
against the purchase price in the amount of the termination fee that would
otherwise have been paid to us upon termination by Monsanto of the marketing
agreement upon the sale. If Monsanto decides to sell the consumer Roundup(R)
business to another party, we must let Monsanto know whether we intend to
terminate the marketing agreement and forfeit any right to a termination fee or
whether we will agree to continue to perform under the agreement on behalf of
the purchaser, unless and until the purchaser terminates our services and pays
any applicable termination fee.

COMPETITION

Each of our segments participates in markets that are highly competitive.
Many of our competitors sell their products at prices lower than ours, and we
compete primarily on the basis of product quality, product performance, supply
chain efficiencies, value, brand strength and advertising.

In the North American consumer do-it-yourself lawn and garden markets and
pest control markets, we compete against "control label" products as well as
branded products. "Control label" products are those sold under a retailer-owned
label or a supplier-owned label, which are sold exclusively at a specific retail
chain. The control label products that we compete with include Vigoro(R)
products sold at Home Depot, Sta-Green(R) products sold at Lowe's, and KGro(R)
products sold at Kmart. Our competitors in branded lawn and garden products and
the consumer pest control markets include United Industries Corporation, Bayer
AG, Central Garden & Pet Company, Garden Tech, Enforcer Products, Inc., Green
Light Company and Lebanon Chemical Corp.

TruGreen-ChemLawn(R), a division of ServiceMaster, has the leading market
share in the U.S. lawn care service market and has a substantially larger share
of this market than our Scotts LawnService(R).

With respect to growing media products, in addition to nationally
distributed, branded competitive products, we face competition from regional
competitors who compete primarily on the basis of price for commodity growing
media business.

In the North American professional horticulture markets, we face a broad
range of competition from numerous companies ranging in size from multi-national
chemical and fertilizer companies such as Dow AgroSciences Company, Uniroyal
Chemical Corporation and Chisso-Asahi Fertilizer Co. Ltd., to smaller,
specialized companies such as Pursell Technologies, Inc., Sun Gro-U.S. (a
division of Hines Horticulture, Inc.) and Fafard, Inc. Some of these competitors
have significant financial resources and research departments.

The international professional horticulture markets in which we compete are
also very competitive, particularly the markets for controlled-release and
water-soluble fertilizer products. We have numerous U.S. and European
competitors in these international markets, including Pursell Industries, Inc.,
Compo GmbH,

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Norsk Hydro ASA, Haifa Chemicals Ltd. and Kemira Oyj. We also face competition
from control label products.

Internationally, we face strong competition in the consumer do-it-yourself
lawn and garden market, particularly in Europe. Our competitors in the European
Union include Bayer AG, Kali & Salz (Compo, Algoflash brands) and a variety of
local companies.

SIGNIFICANT CUSTOMERS

Approximately 69% of our worldwide sales in fiscal 2003 were made by our
North American Consumer segment. Within the North American Consumer segment,
approximately 38% of our sales in fiscal 2003 were made to Home Depot, 19% to
Wal*Mart, 14% to Lowe's and 5% to Kmart. We face strong competition for the
business of these significant customers. The loss of any of these customers or a
substantial decrease in the volume or profitability of our business with any of
these customers could have a material adverse effect on our earnings and
profits.

STRATEGIC INITIATIVES

INTERNATIONAL PROFIT IMPROVEMENT PLAN

In August 2002, we announced an initiative to reduce costs and improve the
profitability of our European consumer and professional businesses. The original
plan called for an investment of between $50 million and $60 million in these
businesses by the end of 2005. We now expect to invest between $45 million and
$55 million over this time frame by leveraging high-value, lower risk
initiatives to drive significant improvement in the profitability of these
businesses. Approximately 25% of the expected investment is for capital
expenditures, primarily for the installation of SAP, an Enterprise Resource
Planning (ERP) system, in our largest European operations (France, Germany and
the United Kingdom). The project also involves reorganization and
rationalization of our European supply chain, increased sales force productivity
and a shift to pan-European category management of our product portfolio that
will constitute approximately 75% of the expected investment. As part of this
initiative, restructuring and other charges will be incurred at various times.
For further information concerning the restructuring charges incurred in fiscal
years 2003, 2002 and 2001, see Note 4 to the Consolidated Financial Statements.

DEVELOPING STRONG RELATIONSHIPS WITH KEY RETAILERS

We believe that our leading brands and our industry-leading media
advertising make our products "traffic builders" at retail locations. In
addition, our leading full line of branded consumer lawn and garden products
gives us an advantage in selling to retailers who value the efficiency of
dealing with a limited number of suppliers. We have made significant investments
in the past few years to establish business development teams at Home Depot,
Wal*Mart, Lowe's and Kmart to work with their buyers and supply chain management
to maximize mutual sales opportunities and improve the efficient distribution of
products. In addition, we serve as the lawn and garden category advisor for
Wal*Mart and Kmart. We are also the largest supplier of consumer lawn and garden
products to the hardware co-op channel and made significant efforts in 2003 to
build our presence with the independent trade. In 2003, we were named supplier
of the year by four of our major retail partners: Home Depot and Wal*Mart, our
two largest customers in the United States, B&Q, our largest account in the
United Kingdom, and OBI, our largest do-it-yourself customer in Germany. We also
received preferred vendor status at Carrefour, our largest account in France.

ENHANCING MARKET LEADERSHIP THROUGH CONSUMER-FOCUSED BRAND MANAGEMENT

We intend to continue to execute our successful marketing strategies used
to strengthen our leading market positions. In fiscal 2003, we invested over $95
million on advertising better targeted to our key consumer audience and focused
on Scotts' product superiority. We believe that our approach to marketing, which
balances consumer-directed advertising (e.g. prime time television spots) with
retailer-oriented promotions, builds brand awareness and drives product sales
growth. We have grown sales, increased market share and expanded the lawn and
garden category over the past five years through successful execution of this
strategy for our four principal brands -- Scotts(R), Miracle-Gro(R), Ortho(R)
and Roundup(R). We market and distribute Roundup(R) brand products exclusively
to the consumer lawn and garden market in

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the United States and certain other countries on behalf of Monsanto. Our
strategy is to grow the overall consumer lawn and garden category and to capture
substantially all of this growth.

PURSUING ATTRACTIVE GROWTH INITIATIVES

We believe that the power of our brands provides us with significant
opportunities to extend our business to new products and channels. To pursue
these opportunities, at the end of fiscal 2002, we created a New Business
Development Group within North America. This group has and will continue to
focus on extending Scotts' brands into adjacent consumer lawn and garden
categories that are currently not characterized by branded, value-added
products. The group will also focus on exploiting underdeveloped sales channels,
such as grocery and drug stores, and improving our business with independent
retailers through a combination of tailored programs and unique products or
packaging. In fiscal 2003, we acquired two pottery distribution companies and
are finalizing plans to introduce branded, value-added products to the $1.2
billion United States pottery category in fiscal 2004.

EXPANDING SCOTTS LAWNSERVICE(R)

The number of lawn owners who want lawn and garden care but do not want to
do it themselves represents a significant portion of the total market. We
recognize that our portfolio of well-known brands provides us with a unique
ability to extend our brands into the lawn and garden service business. We
believe that the strength of our brands provides us with a significant
competitive advantage in acquiring new customers and we have spent the past
several years developing our Scotts LawnService(R) business model. The business
has grown significantly from revenues of approximately $42 million in fiscal
2001 to approximately $110 million in fiscal 2003. A significant portion of this
growth has been fueled by geographic expansion and acquisitions. We completed
approximately $30 million of lawn service acquisitions in fiscal 2003 and
anticipate continuing to make selective acquisitions in fiscal 2004 and beyond,
although at a slower pace than in recent years. Significant investments will
continue to be made in our Scotts LawnService(R) business infrastructure with
the focus being to continually improve our customer service throughout the
organization.

SUPPLY CHAIN EXCELLENCE

Over the past several years, we have focused on building world-class
manufacturing and distribution capabilities. We have successfully developed this
expertise through both significant investments and incorporation of supply chain
related metrics into our key business and incentive measures. We have invested,
and continue to invest, in systems to allow us to better capture and analyze
supply chain information. For instance, in fiscal 2001, we completed
implementation of the ERP software system for our North American businesses at a
cost of approximately $55 million. This level of investment and focus has
allowed us to develop what we believe is a significant competitive advantage in
serving our retail customers. We have significantly improved customer service
rates which, coupled with more closely tying shipments to when the consumer
purchases Scotts' products from the retail shelf, has allowed our customers to
improve inventory turns and reduce average inventory levels. The investments we
have made in our production facilities have improved manufacturing flexibility,
allowing us to improve our inventory turns and reduce our average inventory
levels as well.

SEASONALITY AND BACKLOG

Our business is highly seasonal with approximately 73% and 74% of our net
sales occurring in our combined second and third quarters of fiscal 2003 and
fiscal 2002, respectively.

Consistent with prior years, we anticipate that significant orders for the
upcoming spring season will start to be received late in the winter and continue
through the spring season. Historically, substantially all orders are received
and shipped within the same fiscal year with minimal carryover of open orders at
the end of the fiscal year.

RAW MATERIALS

We purchase raw materials for our products from various sources that we
presently consider to be adequate, and no one source is considered essential to
any of our segments or to our business as a

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9

whole. We are subject to market risk from fluctuating market prices of certain
raw materials, including urea and other chemicals as well as paper and plastic
products. Our objectives surrounding the procurement of these materials are to
ensure continuous supply and to minimize costs. We seek to achieve these
objectives through negotiation of contracts with favorable terms directly with
vendors. We do not enter into forward contracts or other market instruments as a
means of minimizing our risk exposures on these materials but, when appropriate,
we will procure a certain percentage of our needs in advance of the season to
secure pre-determined prices.

DISTRIBUTION

We manufacture products for our North American Consumer segment at our
facilities in Marysville, Ohio; Ft. Madison, Iowa and Temecula, California, as
well as use a number of third party contract packers. The primary distribution
centers for our North American Consumer segments are strategically placed mixing
warehouses across the United States, that are co-managed by Scotts and a third
party logistics provider.

Our Global Professional segment produces horticultural products at
company-owned fertilizer manufacturing facilities located in the United States,
and in Heerlen, the Netherlands. Certain products are also produced for the
Global Professional segment from other company-owned facilities and
subcontractors in the United States and Europe. The majority of shipments to
customers are made via common carriers through distributors in the United States
and a network of public warehouses and distributors in Europe.

We manufacture the non-growing media products for our International
Consumer business at our facilities in Howden, the United Kingdom and Bourth,
France, as well as use a number of third party contract packers. The primary
distribution centers for our International Consumer businesses are located in
the United Kingdom, France and Germany and are managed by a logistics provider.

The growing media products for our International Consumer segment unit are
produced at our facilities in Hatfield, the United Kingdom and Hautmont, France
and at a number of third party contract packers. Growing media products are
generally shipped direct without passing through either a distribution center or
mixing warehouse.

EMPLOYEES

As of September 30, 2003, we employed 2,962 full-time employees in the
United States and an additional 1,043 full-time employees located outside the
United States. During peak sales and production periods, we utilize seasonal and
temporary labor.

None of our U.S. employees are members of a union. Approximately 110 of our
full-time U.K. employees are members of the Transport and General Workers Union
and have full collective bargaining rights. An undisclosed number of our
full-time employees at our office in Ecully, France are members of the
Confederation Francaise Democratique du Travail and Confederation Generale du
Travail, participation in which is confidential under French law. In addition, a
number of union and non-union full-time employees are members of works councils
at three sites in Bourth, Hautmont and Ecully, France, and a number of non-union
employees are members of works councils in Ingelheim, Germany. In the
Waardenburg office in the Netherlands, a small number of the approximately 130
employees are members of a workers union, but we are not responsible for
collective bargaining negotiations with this union. In the Netherlands, we are
governed by the Works Councils Act with respect to the union. Works councils
represent employees on labor, employment matters and manage social benefits.

We consider our current relationships with our employees, both unionized
and non-unionized, in the United States and internationally, to be satisfactory.

ENVIRONMENTAL AND REGULATORY CONSIDERATIONS

Local, state, federal and foreign laws and regulations relating to
environmental matters affect us in several ways. In the United States, all
products containing pesticides must be registered with the U.S. EPA (and similar
state agencies) before they can be sold. The inability to obtain or the
cancellation of any such registration could have an adverse effect on our
business, the severity of which would depend on the products involved, whether
another product could be substituted and whether our competitors were similarly
affected. We attempt to anticipate regulatory developments and maintain
registrations of, and

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10

access to, substitute active ingredients, but there can be no assurance that we
will continue to be able to avoid or minimize these risks. Fertilizer and
growing media products are also subject to state and foreign labeling
regulations. Our manufacturing operations are subject to waste, water and air
quality permitting and other regulatory requirements of federal and state
agencies.

The Food Quality Protection Act, enacted by the United States Congress in
August 1996, establishes a standard for food-use pesticides, which standard is
the reasonable certainty that no harm will result from the cumulative effects of
pesticide exposures. Under this Act, the U.S. EPA is evaluating the cumulative
risks from dietary and non-dietary exposures to pesticides. The pesticides in
our products, certain of which may be used on crops processed into various food
products, are typically manufactured by independent third parties and continue
to be evaluated by the U.S. EPA as part of this exposure risk assessment. The
U.S. EPA or the third party registrant may decide that a pesticide we use in our
products will be limited or made unavailable to us. This occurred in recent
years with regard to diazinon and chlorpyrifos. We cannot predict the outcome or
the severity of the effect of these continuing evaluations.

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 to individuals in the vicinity that
products will be applied in the future or may ban the use of certain
ingredients. We believe that we are operating in substantial compliance with, or
taking action aimed at ensuring compliance with, these laws and regulations.

State and federal authorities generally require growing media facilities to
obtain permits (sometimes on an annual basis) in order to harvest peat and to
discharge storm 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. We are generally required by
these permits to limit our harvesting and to restore the property consistent
with the intended residual use. In some locations, these facilities have been
required to create water retention ponds to control the sediment content of
discharged water.

Regulations and environmental concerns also exist surrounding peat
extraction in the United Kingdom and the European Union. In August 2000, English
Nature, the nature conservation advisory body to the United Kingdom government,
notified us that three of our peat harvesting sites in the United Kingdom were
under consideration as possible "Special Areas of Conservation" under European
Union law. In April 2002, working in conjunction with Friends of the Earth
(United Kingdom), we reached agreement with English Nature to transfer our
interests in the properties and for the immediate cessation of all but a limited
amount of peat extraction on one of the three sites. As a result of this
agreement, we have withdrawn our objection to the proposed European designations
as Special Areas of Conservation and will undertake restoration work on the
sites, for which we will receive additional consideration from English Nature.
We believe that we have sufficient raw material supplies available to replace
the peat extracted from such sites.

REGULATORY ACTIONS

In June 1997, the Ohio Environmental Protection Agency (the "Ohio EPA")
initiated an enforcement action against us with respect to alleged surface water
violations and inadequate treatment capabilities at our Marysville, Ohio
facility and seeking corrective action under the federal Resource Conservation
and Recovery Act. The action relates to several discontinued on-site disposal
areas which date back to the early operations of the Marysville facility that we
had already been assessing and, in some cases, remediating, on a voluntary
basis. On December 3, 2001, an agreed judicial Consent Order was submitted to
the Union County Common Pleas Court and was entered by the court on January 25,
2002.

Now that the Consent Order has been entered, we have paid a $275,000 fine
and must satisfactorily remediate the Marysville site. We have continued our
remediation activities with the knowledge and oversight of the Ohio EPA. We
completed an updated evaluation of our expected liability related to this matter
based on the fine paid and remediation actions that we have taken and expect to
take in the

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11

future. As a result, we accrued an additional $3.0 million in the third quarter
of fiscal 2002 to increase our reserve based on the latest estimates.

In addition to the dispute with the Ohio EPA, we are negotiating with the
Philadelphia District of the U.S. Army Corps of Engineers regarding the terms of
site remediation and the resolution of the Corps' civil penalty demand in
connection with our prior peat harvesting operations at our Lafayette, New
Jersey facility. We are also addressing remediation concerns raised by the
Environment Agency of the United Kingdom with respect to emissions to air and
groundwater at our Bramford (Suffolk), the United Kingdom facility. We have
reserved for our estimates of probable costs to be incurred in connection with
each of these matters.

At September 30, 2003, $6.8 million was accrued for the environmental and
regulatory matters described herein. The most significant component of this
accrual is the estimated cost for site remediation of $4.5 million. Most of the
costs accrued as of September 30, 2003 are expected to be paid in fiscal 2004
and 2005; however, payments could be made for a period thereafter.

We believe that the amounts accrued as of September 30, 2003 are adequate
to cover our known environmental exposures based on current facts and estimates
of likely outcome. However, the adequacy of these accruals is based on several
significant assumptions, including the following:

- that we have identified all of the significant sites that must be
remediated;
- that there are no significant conditions of potential contamination that
are unknown to us; and
- that with respect to the agreed judicial Consent Order in Ohio, that
potentially contaminated soil can be remediated in place rather than
having to be removed and only specific stream segments will require
remediation as opposed to the entire stream.

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

During fiscal 2003, we made approximately $1.5 million in environmental
expenditures, compared with approximately $0.3 million in environmental capital
expenditures and $5.4 million in environmental expenditures for fiscal 2002.
Included in the $5.4 million is the $3.0 million increase in the accrual for
future costs related to site remediation as described above.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

For certain information concerning our international revenues and
long-lived assets, see "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Note 21 to the Consolidated
Financial Statements.

ITEM 2. PROPERTIES

We have fee or leasehold interests in approximately 140 properties.

We lease land from the Union County Community Improvement Corporation in
Marysville, Ohio for our headquarters and for our research and development
functions. We own property in Marysville, Ohio for our manufacturing and
distribution facilities. Combined, these facilities are situated on
approximately 875 acres of land.

The North American Consumer segment uses three additional research
facilities. We own one in Apopka, Florida, another in Gervais, Oregon, and a
third in Valley Center, California. We also own a production facility, which
encompasses 27 acres, in Fort Madison, Iowa and lease a spreader and other
durable components manufacturing facility in Temecula, California. We operate 24
growing media facilities in 18 states -- 18 of which are owned by us and six of
which are leased. Most of our growing media facilities include production lines,
warehouses, offices and field processing areas. We lease one compost facility,
located at a bagging facility in Lebanon, Connecticut. We also lease sales
offices in Atlanta, Georgia; Troy, Michigan; Wilkesboro, North Carolina; Rolling
Meadows, Illinois; and Bentonville, Arkansas.

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12

Scotts LawnService(R) conducts its company-owned operations from
approximately 68 leased facilities, primarily office/warehouse units in
industrial/office parks, across the United States serving 44 metropolitan
markets.

The Global Professional segment has offices in Marysville, Ohio and leases
an office in Waardenburg, the Netherlands and a manufacturing facility used to
produce and pack coated fertilizers in Heerlen, the Netherlands. We also lease
two manufacturing facilities for Global Professional horticultural products in
North Charleston, South Carolina and Travelers Rest, South Carolina and lease a
research facility in Waterloo, New York.

The International Consumer segment leases its U.K. office, located in
Godalming (Surrey); its French headquarters and local operations office, located
in Ecully; a German office, located in Ingelheim; an Australian office, located
in Baulkan Hills (New South Wales); and a Canadian office located in Toronto. We
own manufacturing facilities in Howden and Hatfield (East Yorkshire) in the
United Kingdom. We also own a blending and bagging facility for growing media in
Hautmont, France; and a plant in Bourth, France, that we use for formulating,
blending and packaging control products for the consumer market. We lease a
research and development facility in Chazay, France. Our site in Heerlen, the
Netherlands is both a research and development and a manufacturing site for
coated fertilizers for the consumer and professional markets. We maintain a
sales and research and development facility at our Ingelheim, Germany site and
own a research and development facility in Levington, the United Kingdom. We
lease a sales office in Sint Niklaas, Belgium.

We lease warehouse space throughout the United States and continental
Europe as needed.

We believe that our facilities are adequate to serve their intended
purposes at this time and that our property leasing arrangements are
satisfactory.

ITEM 3. LEGAL PROCEEDINGS

As noted in the discussion in "ITEM 1. BUSINESS -- Environmental and
Regulatory Considerations" and "ITEM 1. BUSINESS -- Regulatory Actions," we are
involved in several pending environmental matters. We believe that our
assessment of contingencies is reasonable and that related reserves, in the
aggregate, are adequate; however, there can be no assurance that the final
resolution of these matters will not have a material adverse affect on our
results of operations, financial position and cash flows.

Pending material legal proceedings are as follows:

AGREVO ENVIRONMENTAL HEALTH, INC.

On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") (which
subsequently changed its name to Aventis Environmental Health Science USA LP)
filed a complaint in the U.S. District Court for the Southern District of New
York (the "New York Action"), against Scotts, a subsidiary of Scotts, and
Monsanto seeking damages and injunctive relief for alleged antitrust violations
and breach of contract by Scotts and its subsidiary and antitrust violations and
tortious interference with contract by Monsanto. Scotts purchased a consumer
herbicide business from AgrEvo in May 1998. AgrEvo claims in the suit that
Scotts' subsequent agreement to become Monsanto's exclusive sales and marketing
agent for Monsanto's consumer Roundup(R) business violated the federal antitrust
laws. AgrEvo contends that Monsanto attempted to or did monopolize the market
for non-selective herbicides and conspired with Scotts to eliminate the
herbicide Scotts previously purchased from AgrEvo, which competed with
Monsanto's Roundup(R). AgrEvo also contends that Scotts' execution of various
agreements with Monsanto, including the Roundup(R) marketing agreement, as well
as Scotts' subsequent actions, violated agreements between AgrEvo and Scotts.

AgrEvo is requesting unspecified damages as well as affirmative injunctive
relief, and seeking to have the court invalidate the Roundup(R) marketing
agreement as violative of the federal antitrust laws. Under the indemnification
provisions of the Roundup(R) marketing agreement, Monsanto and Scotts each have
requested that the other indemnify against any losses arising from this lawsuit.

On June 29, 1999, AgrEvo also filed a complaint in the Superior Court of
the State of Delaware against two of Scotts' subsidiaries seeking damages for
alleged breach of contract. AgrEvo alleges that, under the contracts by which a
subsidiary of Scotts purchased a herbicide business from AgrEvo in May 1998, two
of

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13

Scotts' subsidiaries have failed to pay AgrEvo approximately $0.6 million.
AgrEvo is requesting damages in this amount, as well as pre- and post-judgment
interest and attorneys' fees and costs. Scotts' subsidiaries have moved to
dismiss or stay this action. On January 31, 2000, the Delaware court stayed
AgrEvo's action pending the resolution of a motion to amend the New York Action,
and the resolution of the New York Action.

On May 15, 2002, AgrEvo filed an additional, duplicative complaint that
makes the same claims that are made in the amended complaint in the New York
Action, described above. On June 6, 2002, Scotts moved to dismiss this
duplicative complaint as procedurally improper. There has been no ruling by the
court on Scotts' motion.

On January 10, 2003, Scotts filed a supplemental counterclaim against
AgrEvo for breach of contract. Scotts alleges that AgrEvo owes Scotts for
amounts that Scotts overpaid to AgrEvo. Scotts' counterclaim is now part of the
underlying litigation.

Scotts believes that AgrEvo's claims in these matters are without merit and
intends to vigorously defend against them. If the above actions are determined
adversely to Scotts, the result could have a material adverse effect on Scotts'
results of operations, financial position and cash flows. Any potential exposure
that Scotts may face cannot be reasonably estimated. Therefore, no accrual has
been established related to these matters.

CENTRAL GARDEN & PET COMPANY

SCOTTS V. CENTRAL GARDEN, SOUTHERN DISTRICT OF OHIO

On June 30, 2000, Scotts filed suit against Central Garden & Pet Company
("Central Garden") in the U.S. District Court for the Southern District of Ohio
(the "Ohio Action") to recover approximately $24 million in accounts receivable
and additional damages for other breaches of duty.

Central Garden filed counterclaims including allegations that Scotts and
Central Garden had entered into an oral agreement in April 1998 whereby Scotts
would allegedly share with Central Garden the benefits and liabilities of any
future business integration between Scotts and Monsanto. The court has dismissed
a number of Central Garden's counterclaims as well as Scotts' claims that
Central Garden breached other duties owed to Scotts. On April 22, 2002, a jury
returned a verdict in favor of Scotts of $22.5 million and for Central Garden on
its remaining counterclaims in an amount of approximately $12.1 million. Various
post-trial motions were filed. As a result of those motions, the trial court has
reduced Central Garden's verdict by $750,000, denied Central Garden's motion for
a new trial on two of its counterclaims and granted the parties pre-judgment
interest on their respective verdicts. On September 22, 2003, the court entered
a final judgment, which provided for a net award to Scotts of approximately $14
million, together with interest at 2.31% through the date of payment. Central
Garden has appealed and Scotts has cross-appealed from that final judgment.

Two counterclaims that the court permitted Central Garden to add on the eve
of trial were subsequently settled.

CENTRAL GARDEN V. SCOTTS & PHARMACIA, NORTHERN DISTRICT OF CALIFORNIA

On July 7, 2000, Central Garden filed suit against Scotts and Pharmacia in
the U.S. District Court for the Northern District of California (San Francisco
Division) alleging various claims, including breach of contract and violations
of federal antitrust laws, and seeking an unspecified amount of damages and
injunctive relief. On April 15, 2002, Scotts and Central Garden each filed
summary judgment motions in this action. On June 26, 2002, the court granted
summary judgment in favor of Scotts and dismissed all of Central Garden's then
remaining claims. The case is now pending on appeal in the United States Court
of Appeals.

CENTRAL GARDEN V. SCOTTS & PHARMACIA, CONTRA COSTA SUPERIOR COURT

On October 31, 2000, Central Garden filed a complaint against Scotts and
Pharmacia in the California Superior Court for Contra Costa County. That
complaint seeks to assert breach of contract claims and claims under Section
17200 of the California Business and Professions Code. On December 4, 2000,
Scotts and Pharmacia jointly filed a motion to stay this action based on the
pendency of prior lawsuits that

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14

involve the same subject matter. By order dated February 23, 2001, the Superior
Court stayed the action pending before it. The Court recently granted Scotts'
motion to lift the stay and is considering a motion to dismiss filed by Scotts.
Central Garden and Pharmacia have settled their claims relating to this action.

Although Scotts has prevailed consistently and extensively in the
litigation with Central Garden, the decisions in Scotts' favor are subject to
appeal. If, upon appeal or otherwise, the above actions are determined adversely
to Scotts, the result could have a material adverse affect on Scotts' results of
operations, financial position and cash flows. Scotts believes that it will
continue to prevail in the Central Garden matters and that any potential
exposure that Scotts may face cannot be reasonably estimated. Therefore, no
accrual has been established related to the claims brought against Scotts by
Central Garden, except for amounts ordered paid to Central Garden in the Ohio
Action. Scotts believes it has adequate reserves recorded for the amounts it may
ultimately be required to pay.

U.S. HORTICULTURAL SUPPLY, INC. (F/K/A E.C. GEIGER, INC.) V. SCOTTS, EASTERN
DISTRICT OF PENNSYLVANIA

On February 7, 2003, U.S. Horticultural Supply filed suit against Scotts in
the U.S. District Court for the Eastern District of Pennsylvania. U.S.
Horticultural Supply alleges claims of breach of contract, promissory estoppel,
and a violation of federal antitrust laws, and seeks an unspecified amount of
damages.

On March 14, 2003, Scotts filed a motion to dismiss the antitrust claim,
and a motion to dismiss, or in the alternative stay, the promissory estoppel
claims pending arbitration. The motion is pending. Discovery has commenced. No
trial date has been set.

Scotts believes that U.S. Horticultural Supply's claims are without merit
and intends to vigorously defend against them. If the above action is determined
adversely to Scotts, the result could have a material adverse effect on Scotts'
results of operations, financial position and cash flows. Any potential exposure
that Scotts may face cannot be reasonably estimated. Therefore, no accrual has
been established related to this matter.

SCOTTS V. AVENTIS S.A. AND STARLINK LOGISTICS, INC.

On August 9, 2002, Scotts filed suit against Aventis S.A. and its
wholly-owned subsidiary Starlink Logistics, Inc. in the U.S. District Court for
the Southern District of Ohio. In the complaint, Scotts alleges it is entitled
to injunctive and monetary relief arising from Aventis' and Starlink's
interference with Scotts' contractual right to purchase a company called
TechPac, L.L.C. from one of Aventis' former subsidiaries, Aventis CropScience.
The complaint alleges that pursuant to a contract between Scotts and a
predecessor-in-interest to Aventis CropScience, Aventis CropScience was
obligated to make a bona fide offer to sell its interest in TechPac to Scotts.
The complaint further alleges that Aventis directed Aventis CropScience to make
a belated sham offer to Scotts and that later, upon the sale of Aventis
CropScience to Bayer AG, Aventis transferred ownership of TechPac to Starlink,
an act which has made it impossible for Aventis CropScience's
successor-in-interest to make a bona fide offer to sell TechPac to Scotts.

In this suit, Scotts seeks to ensure that it is able to exercise its right
to receive a bona fide offer to acquire TechPac, and Scotts seeks to recover
compensatory and punitive damages in an amount as yet undetermined for Aventis'
and Starlink's interference with Scotts' right to receive such an offer. On
October 4, 2002, Starlink filed a motion to dismiss the complaint on
jurisdictional grounds. On December 17, 2002, Aventis filed a similar motion. A
referee has recommended that those motions be granted, and the question of
whether the referee's recommendation will be followed is currently pending
before the United States District Judge to whom the action is assigned. Scotts
intends to vigorously prosecute its claims against Aventis and Starlink. A trial
date has not been set.

SCOTTS V. UNITED INDUSTRIES, SOUTHERN DISTRICT OF FLORIDA

On April 15, 2002, Scotts and OMS Investments, Inc., a subsidiary of Scotts
that holds various Scotts intellectual property assets ("OMS Investments"),
filed a six count complaint against United Industries Corp. and Pursell
Industries, Inc. -- now known as U.S. Fertilizer Corporation -- for acts of (1)
federal trademark and trade dress infringement; (2) federal unfair competition;
(3) federal dilution; (4) common law trademark and trade dress infringement in
violation of Florida law and other applicable law; (5) common law unfair
competition in violation of Florida law and other applicable law; and (6)
dilution in
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15

violation of Florida law and other applicable law. The claims against U.S.
Fertilizer were subsequently resolved by a Settlement Agreement and Release
dated February 6, 2003. In this Settlement Agreement and Release, U.S.
Fertilizer acknowledged and agreed "that Scotts' trade dress as well the overall
color designs and design layout that are utilized on the packaging of Scotts'
Turf Builder(R) line as identified in the Civil Action (the "Turf Builder Trade
Dress") are valid, protectable, and non-functional trade dress." U.S. Fertilizer
is no longer a party to this action.

Shortly after filing the original complaint in this matter, Scotts filed
its motion for preliminary injunction, which motion sought an injunction
enjoining United Industries, pending trial, from manufacturing, producing,
shipping, distributing, advertising, promoting, displaying, selling or offering
for sale products in the then current packaging for its Spectracide(R) No Odor
Fire Ant Killer Ready-to-Use Dust product and from otherwise using any
trademarks, trade dress, packaging, promotional materials or other items which
incorporated or were confusingly similar to the trademarks and trade dress
featured in Scotts' Ortho(R) Orthene(R) Fire Ant Killer product packaging.
Despite finding that United Industries had intentionally copied Scotts' trade
dress, the trial court denied the motion for preliminary injunction. Scotts
appealed, but the United States Court of Appeals for the Eleventh Circuit
affirmed.

On December 13, 2002, Scotts filed an amended complaint. The amended
complaint contains the same causes of action as the original complaint, but
asserts additional grounds in support of plaintiffs' claim that United
Industries has infringed and diluted plaintiffs' Miracle-Gro(R) trade dress. The
amended complaint also revises certain of the allegations in the original
complaint to conform to facts recently learned.

United Industries subsequently filed its answer and counterclaim to the
amended complaint. This answer and counterclaim is virtually identical to its
original answer and counterclaim in that it seeks to cancel a specific Scotts'
Miracle-Gro(R) and Design trademark registration (Reg. No. 2,139,929) and
Scotts' pending Ortho(R) Orthene(R) Fire Ant Killer and Design trademark
application (Serial No. 76/126,545). We believe that this counterclaim is
without merit.

On April 21, 2003, the parties mediated the matters. While several points
of tentative agreement were reached, no settlement agreement has been reached or
entered into. Since then, the parties have exchanged drafts of a proposed
settlement agreement.

We do not anticipate incurring any damages relating to this action.

SCOTTS V. BAYER CROPSCIENCE, LP, SOUTHERN DISTRICT OF OHIO

On May 29, 2003, Scotts and OMS Investments, filed a four count complaint
against Bayer CropScience, LP ("Bayer") for acts of (1) federal unfair
competition; (2) federal dilution; (3) common law trade dress infringement and
unfair competition; and (4) copyright infringement. The complaint alleges that
Bayer's line of lawn fertilizer products infringes and dilutes Scotts'
proprietary rights in the packaging of its Turf Builder(R) and LawnPro(R) Super
Turf Builder(R) line of products. The complaint seeks both injunctive and
monetary relief.

Bayer filed its answer and affirmative defenses on June 19, 2003. Bayer
asserted no counterclaims. No discovery has commenced as the Court has yet to
issue a scheduling order or set a trial date.

OTHER

The Company recently has been named a defendant in a number of cases
alleging injuries that the lawsuits claim resulted from exposure to
asbestos-containing products. The complaints in these cases, which are in their
preliminary stages, are not specific about the plaintiffs' contacts with the
Company or its products. Scotts in each case is one of numerous defendants and
none of the claims seek damages from the Company alone. The Company intends to
vigorously defend the cases and does not believe they are material to the
Company's financial position or results of operations.

It is not currently possible to reasonably estimate a probable loss, if
any, associated with the cases and, accordingly, no accrual or reserves have
been recorded in the Company's consolidated financial statements as of September
30, 2003. There can be no assurance that these cases, whether as a result of
adverse outcomes or as a result of significant defense costs, will not have a
material adverse effect on the

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16

Company, its financial condition or its results of operations. The Company is
reviewing agreements and policies that may provide insurance coverage or
indemnity as to these claims.

We are involved in other lawsuits and claims which arise in the normal
course of our business. In our opinion, these claims individually and in the
aggregate are not expected to result in a material adverse effect on our results
of operations, financial position or cash flows.

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

There were no matters submitted to a vote of the security holders of The
Scotts Company during the fourth quarter of fiscal 2003.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of The Scotts Company, their positions and, as of
December 5, 2003, their ages and years with The Scotts Company (and its
predecessors) (referred to in this Supplemental Item as "Scotts") are set forth
below.

Executive officers serve at the discretion of the Board of Directors
pursuant to employment agreements or other arrangements.

The business experience of each of the individuals listed above during at
least the past five years is as follows:

Mr. Hagedorn was named Chairman of the Board in January 2003. He was named
President and Chief Executive Officer of Scotts in May 2001. He served as
President and Chief Operating Officer of Scotts from April 2000 to May 2001.
From December 1998 to April 2000, he served as President, Scotts North America.
He was previously Executive Vice President, U.S. Business Groups, of Scotts,
from October 1996 to December 1998. Mr. Hagedorn also serves as a director of
Scotts. Mr. Hagedorn is the son of Horace Hagedorn, Director Emeritus of Scotts,
and is the brother of Katherine Hagedorn Littlefield, a director of Scotts.

Dr. Kelty was named Vice Chairman and Executive Vice President of Scotts in
May 2001. He served as Group Executive Vice President, Technology and
Operations, of Scotts, from February 2000 to May 2001. He was previously
Executive Vice President, Technology and Operations, of Scotts, from February
1999 to February 2000. From July 1995 to February 1999, he was Senior Vice
President, Professional Business Group, of Scotts.

Mr. Aronowitz was named Executive Vice President, General Counsel and
Secretary of Scotts in October 2001. He was previously Senior Vice President,
Assistant General Counsel and Assistant Secretary of Scotts, from February 2000
to October 2001. From October 1998 until February 2000, Mr. Aronowitz was Vice
President and Assistant General Counsel of Scotts.

Mr. Farkouh was named Executive Vice President, International of Scotts in
October 2003. From October 2001 to October 2003, he served as Executive Vice
President, International Consumer Business Group of Scotts. From May 2001 to
October 2001, he served as Senior Vice President, International Consumer
Business Group, of Scotts, having served as interim Senior Vice President,
International Consumer Business Group from October 2000 to May 2001. From May
1999 to October 2000, he served as Senior Vice President, Zone 3, International,
having joined Scotts France SAS in January 1999. From January

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17

1997 to the time he joined Scotts, he was Vice President, Worldwide Lawn and
Garden Category Manager, of Monsanto Company.

Mr. Nagel was named Executive Vice President of Scotts in February 2003 and
Chief Financial Officer of Scotts in January 2003. From August 2001 to January
2003, he served as Senior Vice President, North American and Corporate Finance
of Scotts. From September 1998 to August 2001, Mr. Nagel served as Vice
President and Corporate Controller of Scotts. He was also interim Chief
Financial Officer from May 1999 to August 1999. He joined Scotts in September
1998.

Ms. Stump was named Executive Vice President, Global Human Resources, of
Scotts in February 2003. She was named Senior Vice President, Global Human
Resources of Scotts in October 2002. From July 2001 until October 2002, Ms.
Stump served as Vice President, Human Resources North America, of Scotts. From
September 2000 until July 2001, Ms. Stump served as Vice President, Human
Resources Technology and Operations, of Scotts. From April 1998 to September
2000, Ms. Stump served as Director, Human Resources, for the Ross Products
Division of Abbott Laboratories, a manufacturer and marketer of pediatric and
adult nutritional products.

Mr. Bernstock was named Executive Vice President and President, North
America of Scotts in June 2003. Mr. Bernstock served as Senior Vice President &
General Manager -- Air Fresheners, Food Products & Branded Commercial Markets of
Dial Corporation, a manufacturer and marketer of soap products, laundry
detergents, air fresheners and canned meats, from October 2002 to May 2003. From
January 2002 to September 2002, he served as Special Advisor to the Chairman and
Chief Executive Officer of Verticalnet, Inc., a provider of collaborative supply
chain solutions software, and as a consultant to Dial. From January 2001 to
January 2002, Mr. Bernstock served as Acting Chairman, President and Chief
Executive Officer of Atlas Commerce, Inc. ("Atlas"), a provider of collaborative
supply chain solutions software, prior to the acquisition of Atlas by
Verticalnet, Inc., in January 2002. From March 1998 to January 2001, he served
as President, Chief Executive Officer and a Director of Vlasic Foods
International Inc. ("Vlasic"), a producer, marketer and distributor of branded
convenience food products. On January 29, 2001, Vlasic and its United States
operating subsidiaries filed voluntary petitions for reorganization relief
pursuant to Chapter 11 of the United States Bankruptcy Code. From July 1997 to
March 1998, Mr. Bernstock served as Executive Vice President of Campbell Soup
Company, a manufacturer and marketer of prepared food products, and President of
its U.S. Grocery Division. Mr. Bernstock serves as a director of Verticalnet,
Inc.

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18

PART II

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

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

We have not paid dividends on the common shares in the past and do 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 our business. The payment of future dividends, if any, on common shares will
be determined by the Board of Directors of The Scotts Company in light of
conditions then existing, including our earnings, financial condition and
capital requirements, restrictions in financing agreements, business conditions
and other factors.

As of December 5, 2003, there were approximately 12,528 shareholders
including holders of record and our estimate of beneficial holders.

As part of the consideration for the Miracle-Gro merger in 1995, The Scotts
Company issued Series A Warrants, Series B Warrants and Series C Warrants to
purchase an aggregate of three million common shares of The Scotts Company.

Hagedorn Partnership, L.P. exercised the balance of its Series A Warrants
during the fourth quarter of fiscal 2003, all of which were exercised on a
cashless basis in accordance with the terms of the Series A Warrants, as
follows:

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19

All Series B Warrants and Series C Warrants had been exercised prior to the
commencement of the fourth quarter of fiscal 2003.

The Series A Warrants as well as the common shares issuable upon exercise
of the Series A Warrants were registered pursuant to a Registration Statement on
Form S-4 (Registration No. 33-57595) declared effective on March 15, 1995. If
and to the extent that the Securities and Exchange Commission were to determine
that such registration did not extend to the issuance of common shares of The
Scotts Company upon exercise of the Series A Warrants, The Scotts Company may
also be deemed to have issued the common shares in reliance upon the exemptions
from registration provided in Section 4(2) and other related provisions of the
Securities Act of 1933.

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20

ITEM 6. SELECTED FINANCIAL DATA

FIVE YEAR SUMMARY
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)

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

NOTE: Prior year presentations have been changed to conform to fiscal 2003
presentation; these changes did not impact net income.

(1) Includes Scotts LawnService(R) acquisitions from dates acquired.

(2) Includes Substral(R) brand acquired from Henkel KGaA from January 2001.

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21

(3) Includes Rhone-Poulenc Jardin (nka Scotts France SAS) from October 1998,
ASEF Holding BV from December 1998 and the non-Roundup(R) ("Ortho") business
from January 1999.

(4) Income from operations for fiscal 2003, 2002 and 2001 includes $17.1, $8.1
and $75.7 of restructuring and other charges, respectively. Gross profit for
fiscal 2003, 2002 and 2001 includes $9.1, $1.7 and $7.3 of restructuring and
other charges, respectively.

(5) EBITDA is defined as income from operations, plus depreciation and
amortization. We believe that EBITDA provides additional information for
determining our ability to meet debt service requirements. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles, and EBITDA does not necessarily indicate whether cash flow will
be sufficient to meet cash requirements. EBITDA margin is calculated as
EBITDA divided into net sales. Our measure of EBITDA may not be similar to
other similarly titled captions used by other companies. A numeric
reconciliation of EBITDA to income from operations is as follows:

(6) For fiscal 2002, we adopted EITF 00-25, "Accounting for Consideration from a
Vendor to a Retailer in Connection with the Purchase or Promotion of the
Vendor's Products" which requires that certain consideration from a vendor
to a retailer be classified as a reduction in sales. As had many other
companies, we had historically classified these as advertising and promotion
costs. The information for all periods presented reflects this new method of
presentation. Also, certain expenses previously recorded as advertising were
reclassified to marketing within selling, general and administrative
expenses.

(7) Basic and diluted earnings per share would have been as follows if the
accounting change for intangible assets adopted in the fiscal year beginning
October 1, 2001, had been adopted as of October 1, 1999:

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

OVERVIEW

Scotts is a leading manufacturer and marketer of consumer branded products
for lawn and garden care and professional horticulture in North America and
Europe. We also have a presence in Australia, the Far East, Latin America and
South America. Also, in the United States, we operate the second largest
residential lawn service business, Scotts LawnService(R). In fiscal 2003, our
operations were divided into four business segments: North American Consumer,
Scotts LawnService(R), Global Professional, and International Consumer. The
North American Consumer segment includes the Lawns, Gardening Products, Ortho(R)
and Canadian business groups. We are also Monsanto's exclusive agent for the
marketing and distribution of consumer Roundup(R) non-selective herbicide within
the United States and other contractually specified countries.

In fiscal 2003, we continued the rapid expansion of our Scotts
LawnService(R) business. Through acquisitions and internal growth, revenues
increased from approximately $42 million in fiscal 2001 to over $110 million in
fiscal 2003. We completed $30 million of lawn care acquisitions in fiscal 2003
and expect
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22

to continue to make selective acquisitions in fiscal 2004 and beyond, although
at a somewhat slower pace.

As a leading consumer branded lawn and garden company, we focus our
consumer marketing efforts, including advertising and consumer research, on
creating consumer demand to pull products through the retail distribution
channels. In the past three years, we have spent approximately 5% of our net
sales annually on media advertising to support and promote our products and
brands. We have applied this consumer marketing focus for the past several
years, and we believe that Scotts receives a significant return on these
marketing expenditures. We expect that we will continue to focus our marketing
efforts toward the consumer and make additional significant investments in
consumer marketing expenditures in the future to continue to drive market share
and sales growth. In fiscal 2004, we expect to increase advertising spending as
we deliver a new media message for the Ortho(R) line, increase our advertising
spending on selected brands in Europe and continue to have the largest share of
voice in our lawn and garden categories in North America.

Our sales are susceptible to global weather conditions, primarily in North
America and Europe. For instance, periods of wet weather like we experienced
this past spring in the United States adversely impacted fertilizer sales but
increased demand for certain pesticide products. We believe that our past
acquisitions have somewhat diversified both our product line risk and geographic
risk to weather conditions.

Historically, the majority of our shipments to retailers have occurred in
the second and third fiscal quarters. However, over the past two years,
retailers have reduced their pre-season inventories by relying on vendors to
deliver products "in season" when consumers seek to buy our products. This
change in retailer purchasing patterns and the increasing importance of Scotts
LawnService(R) revenues, has caused a sales shift from our second fiscal quarter
to the third and fourth fiscal quarters. Net sales by quarter were 9.5%, 35.4%,
37.2%, and 17.9%, respectively, of fiscal 2003 net sales. Concurrent with this
sales shift, and because of the expansion of Scotts LawnService(R), the Company
has experienced a shift in profitability from the second to third and fourth
fiscal quarters, with the third fiscal quarter now more profitable than the
second fiscal quarter. Results for the Company's fourth fiscal quarter,
historically a loss making quarter, improved substantially in fiscal 2003. We
expect the trend towards stronger third and fourth fiscal quarter sales and
profits to continue in fiscal 2004.

Beginning in fiscal 2003, the Company began expensing prospective grants of
employee stock-based compensation awards in accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", as amended by Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an
Amendment of SFAS No. 123". The fair value of future awards will be expensed
ratably over the vesting period, which has historically been three years, except
for grants to directors, which have a six-month vesting period. The related
compensation expense recorded in fiscal 2003 was $4.8 million.

In fiscal 2002, we adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets." This standard eliminates the
requirement to amortize indefinite-lived assets and goodwill. It also requires
an initial impairment test on all indefinite-lived assets as of the date of
adoption of this standard and impairment tests done at least annually
thereafter. As a result of adopting the standard as of October 1, 2001,
amortization expense for fiscal 2003 and 2002 was reduced by approximately $21.0
million in each year.

We completed our impairment analysis in the second quarter of fiscal 2002,
taking into account additional guidance provided by EITF 02-07, "Unit of Measure
for Testing Impairment of Indefinite-Lived Intangible Assets." As a result, a
pre-tax impairment charge related to the value of tradenames in our German,
French and United Kingdom consumer businesses of $29.8 million was recorded as
of October 1, 2001. After income taxes, the net charge was $18.5 million which
is recorded as a cumulative effect of a change in accounting principle. There
was no goodwill impairment as of the date of adoption. Upon completing the
annual impairment analysis in the first quarter of fiscal 2003, it was
determined that a charge for impairment was not required.

In fiscal 2002, we announced the International Profit Improvement Plan to
improve the operations and profitability of our European-based consumer and
professional businesses. By the end of 2005, we anticipate spending between $45
million and $55 million in the aggregate on various projects related to
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23

this plan, approximately 25% of which will be capital expenditures.
Approximately 75% of the total spending relates to the reorganization and
rationalization of our European supply chain, increased sales force productivity
and a shift to pan-European category management of our product portfolio. In the
fourth quarter of fiscal 2002, we announced the closure of a manufacturing plant
in Bramford, England. In the fourth quarter of fiscal 2002, $4.0 million of
severance and additional pension costs related to the closure were recorded and
reported as restructuring and other charges. The closure was completed in May
2003 with the transfer of United Kingdom fertilizer production to our Howden,
United Kingdom facility. For further information concerning the restructuring
charges incurred in fiscal years 2003, 2002 and 2001, see Note 4 to the
Consolidated Financial Statements.

In fiscal 2001, Scotts adopted accounting policies that required certain
amounts payable to customers or consumers related to the purchase of our
products to be recorded as a reduction in net sales rather than as advertising
and promotion expense (e.g., volume rebates and coupons). In fiscal 2002, Scotts
adopted EITF 00-25, "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products." This
standard requires Scotts to record certain of its cooperative advertising
expenditures as reductions of net sales rather than as advertising and promotion
expense. Results for prior fiscal years have been reclassified to conform to
this new presentation method for these expenses.

In fiscal 2001, restructuring and other charges of $75.7 million were
recorded for reductions in work force, facility closures, asset writedowns, and
other related costs. Certain costs associated with this restructuring
initiative, including costs related to the relocation of equipment, personnel
and inventory, were not recorded as part of the restructuring costs in fiscal
2001. These costs, which totaled $4.1 million, were recorded as they were
incurred in fiscal 2002 as required under generally accepted accounting
principles in the United States.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following discussion and analysis of the consolidated results of
operations and financial position should be read in conjunction with our
Consolidated Financial Statements included under "ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA"

Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to customer programs and incentives, product returns, bad debts,
inventories, intangible assets, income taxes, restructuring, environmental
matters, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The estimates that we believe are most
critical to our reporting of results of operations and financial position are as
follows:

- We have significant investments in property and equipment, intangible
assets and goodwill. Whenever changing conditions warrant, we review the
realizability of the assets that may be impacted. At least annually, we
review indefinite-lived intangible assets for impairment. The review for
impairment of long-lived assets, intangibles and goodwill takes into
account estimates of future cash flows. Our estimates of future cash
flows are based upon budgets and longer-range plans. These budgets and
plans are used for internal purposes and are also the basis for
communication with outside parties about future business trends. While we
believe the assumptions we use to estimate future cash flows are
reasonable, there can be no assurance that the expected future cash flows
will be realized. As a result, impairment charges that possibly should
have been recognized in earlier periods may not be recognized until later
periods if actual results deviate unfavorably from earlier estimates.

- We continually assess the adequacy of our reserves for uncollectible
accounts due from customers. However, future changes in our customers'
operating performance and cash flows or in general

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24

economic conditions could have an impact on their ability to fully pay
these amounts which could have a material impact on our operating
results.

- Reserves for product returns are based upon historical data and current
program terms and conditions with our customers. Changes in economic
conditions, regulatory actions or defective products could result in
actual returns being materially different than the amounts provided for
in our interim or annual results of operations.

- Reserves for excess and obsolete inventory are based on a variety of
factors, including product changes and improvements, changes in active
ingredient availability and regulatory acceptance, new product
introductions and estimated future demand. The adequacy of our reserves
could be materially affected by changes in the demand for our products or
regulatory actions.

- As described more fully in the Notes to the Consolidated Financial
Statements for the fiscal year ended September 30, 2003, we are involved
in significant environmental and legal matters which have a high degree
of uncertainty associated with them. We continually assess the likely
outcomes of these matters and the adequacy of amounts, if any, provided
for these matters. There can be no assurance that the ultimate outcomes
will not differ materially from our assessment of them. There can also be
no assurance that all matters that may be brought against us or that we
may bring against other parties are known to us at any point in time.

- We accrue for the estimated costs of customer volume rebates, cooperative
advertising, consumer coupons and other trade programs as the related
sales occur during the year. These accruals involve the use of estimates
as to the total expected program costs and the expected sales levels.
Historical results are also used to evaluate the accuracy and adequacy of
amounts provided at interim dates and year end. There can be no assurance
that actual amounts paid for these trade programs will not differ from
estimated amounts accrued. However, we believe any such differences would
not be material to our financial position or results of operations.

- We record income tax liabilities utilizing known obligations and
estimates of potential obligations. A deferred tax asset or liability is
recognized whenever there are future tax effects from existing temporary
differences and operating loss and tax credit carryforwards. Valuation
allowances are used to reduce deferred tax assets to the balance that is
more likely than not to be realized. We must make estimates and judgments
on future taxable income, considering feasible tax planning strategies
and taking into account existing facts and circumstances, to determine
the proper valuation allowance. When we determine that deferred tax
assets could be realized in greater or lesser amounts than recorded, the
asset balance and income statement reflects the change in the period such
determination is made. Due to changes in facts and circumstances and the
estimates and judgments that are involved in determining the proper
valuation allowance, differences between actual future events and prior
estimates and judgments could result in adjustments to this valuation
allowance. The Company uses an estimate of its annual effective tax rate
at each interim period based on the facts and circumstances available at
that time, while the actual effective tax rate is calculated at year-end.

- Also, as described more fully in the Notes to the Consolidated Financial
Statements, we have not accrued the deferred contribution under the
Roundup(R) marketing agreement with Monsanto or the per annum charges
thereon. We consider this method of accounting for the contribution
payments to be appropriate after consideration of the likely term of the
agreement, our ability to terminate the agreement without paying the
deferred amounts, and the fact that approximately $18.6 million of the
deferred amount is never paid, even if the agreement is not terminated
prior to 2018, unless significant earnings targets are exceeded. At
September 30, 2003, contribution payments and related per annum charges
of approximately $49.2 million had been deferred under the agreement.

NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE

The Financial Accounting Standards Board issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities -- an interpretation of ARB No. 51"
(FIN 46), in January 2003. This Interpretation explains how to identify variable
interest entities and how an enterprise assesses its interests in a variable
interest entity to decide whether to consolidate that entity. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do
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25

not effectively disperse risks among parties involved. Variable interest
entities that effectively disperse risks will not be consolidated unless a
single party holds an interest or combination of interests that effectively
recombines risks that were previously dispersed. The Company will be required to
adopt this interpretation in the first quarter of fiscal 2004. The Company is
still evaluating the provisions of FIN 46 and its related FASB Staff Positions
for applicability to the Company's Scotts LawnService(R) franchises are
currently being reviewed for application of this Interpretation. The Company has
no other special purpose entities that would be applicable under this
Interpretation.

RESULTS OF OPERATIONS

The following table sets forth the components of income and expense as a
percentage of net sales for the three years ended September 30, 2003:

The following table sets forth net sales by business segment for the three
years ended September 30, 2003:

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26

FISCAL 2003 COMPARED TO FISCAL 2002

Net sales for fiscal 2003 increased 9.2% to $1,910.1 million from $1,748.7
million in fiscal 2002.

North American Consumer segment net sales were $1,318.6 million in fiscal
2003, an increase of $75.7 million, or 6.1%, from net sales for fiscal 2002 of
$1,242.9 million. Within the North American Consumer segment, Lawns net sales in
fiscal 2003 increased a robust 11.2% due to strong acceptance of the new
Miracle-Gro(R) lawn fertilizer line at Wal*Mart and continued strong sales of
Turf Builder(R) lawn fertilizer, control products and grass seed. Gardening
Products sales, which include growing media and garden fertilizers, were
essentially flat year-over-year with higher sales of value-added Miracle-Gro(R)
potting mix and garden soils mainly offset by lower sales of commodity growing
media products. Ortho(R)'s net sales increased 2.1% in fiscal 2003, driven
largely by strong sales of selective and non-selective weed control products and
continued growth of the Ortho(R) Home Defense(R) indoor and perimeter pest
control product line, partially offset by lower outdoor insect control sales.
Several important outdoor insect control products are scheduled for re-launch
with increased advertising support in fiscal 2004.

Scotts LawnService(R) net sales increased 46.0% from $75.6 million in
fiscal 2002 to $110.4 million in fiscal 2003. The growth in net sales has been
largely fueled by geographic expansion and acquisitions. Spending on
acquisitions, including seller-financing, reached $30.6 million in fiscal 2003
versus $54.0 million in fiscal 2002. Fiscal 2002 was impacted by a major
acquisition late in the year, representing nearly one-half of fiscal 2002
acquisition spending and favorably impacting fiscal 2003 net sales.

Net sales for the International Consumer segment were $281.3 million in
fiscal 2003, an increase of $34.5 million, or 14.0%, compared to fiscal 2002.
Excluding the effects of currency fluctuations and non-recurring sales from
previous supply agreements, net sales increased approximately $5.0 million, or
2.0%, in fiscal 2003. Sales increased in all major countries except Germany
which experienced lower sales due to increased regulatory restrictions and
product line gaps that are being addressed in fiscal 2004.

Net sales for the Global Professional segment reached $199.8 million in
fiscal 2003, an increase of $16.4 million, or 8.9%, compared to fiscal 2002.
Excluding the effects of currency fluctuations, sales were essentially flat but
reflected a shift to more profitable controlled-release fertilizer sales due to
management's decision to exit certain lower margin growing media businesses.

Selling price changes were not material to net sales in fiscal 2003 or
fiscal 2002.

Gross profit increased $55.9 million in fiscal 2003 compared to fiscal
2002. As a percentage of net sales, gross profit was 36.2% of net sales in
fiscal 2003 compared to 36.3% in fiscal 2002. Favorable impacts were realized
from certain supply chain initiatives and higher volume. These benefits were
offset by unfavorable warehousing and material handling costs and product mix,
particularly in our Lawns business, which was also impacted by higher urea
costs. Lastly, restructuring and other expenses, included in cost of sales,
primarily related to International supply chain initiatives, increased from $1.7
million in fiscal 2002 to $9.1 million in fiscal 2003, reducing gross profit as
a percentage of net sales by 39 basis points.

The net commission earned from the Roundup(R) marketing agreement in fiscal
2003 was $17.6 million compared to $16.2 million in fiscal 2002. The increase
from the prior year is primarily due to strong underlying growth in Roundup(R)
sales, which drove the gross commission higher, partially offset by a $5.0
million increase in the contribution payment due to Monsanto, which increased
from $20.0 million in fiscal 2002 to $25.0 million in fiscal 2003.

Advertising expenses in fiscal 2003 were $97.7 million, an increase of
$15.5 million from fiscal 2002. The increase in advertising expenses is
primarily due to the re-launch of television media support for the Ortho(R) line
and media support for new product launches such as Miracle-Gro(R) Shake N'
Feed(R). Foreign currency fluctuations also increased reported advertising
expenses by $2.7 million.

Selling, general and administrative ("SG&A") expenses in fiscal 2003 were
$380.4 million compared to $336.0 million for fiscal 2002. Excluding the
expensing of stock-based compensation, infrastructure investment in the Scotts
LawnService(R) and restructuring and other charges, the Company's SG&A expenses
increased $22.6 million, or 7.6%, compared to 2002. This increase is primarily
due to investments to support our expansion into adjacent categories and
channels, investments to expand the functionality and capability of our business
development offices at our largest retailers, and foreign exchange fluctuations.

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27

SG&A expenses for Scotts LawnService(R) increased 50% from $30.8 million in
fiscal 2002 to $46.2 million in fiscal 2003, primarily due to growth in the
branch service network, supporting our plan to rapidly expand to a national
platform. SG&A restructuring and other expenses increased from $6.4 million in
fiscal 2002 to $8.0 million in fiscal 2003, primarily related to the
implementation of the International Profit Improvement Plan.

Amortization of goodwill and intangibles increased from $5.7 million in
fiscal 2002 to $8.6 million in fiscal 2003, primarily due to foreign currency
fluctuations and higher expenses related to the amortization of certain
intangibles, primarily related to customer lists acquired by Scotts
LawnService(R).

Other income, net was $10.8 million in fiscal 2003, compared to $12.0
million in fiscal 2002. The Company realized a net reduction of approximately $4
million from an agreement to cease peat extraction in the United Kingdom.
Increased Scotts LawnService(R) franchise fees and royalty income recorded in
fiscal 2002 partially off-set the reduction related to peat extraction.

Income from operations in fiscal 2003 was $232.5 million, compared to
$239.2 million in fiscal 2002. This decrease in income from operations reflects
higher net sales and gross profit, offset by greater investments in media
advertising and higher SG&A expenses, higher restructuring spending in Europe
(to support our International Profit Improvement Plan) and the adoption of an
accounting change to expense stock-based compensation awards.

For segment reporting purposes, earnings before interest, taxes and
amortization is used as the measure for income from operations ("operating
income"). On that basis, operating income in the North American Consumer segment
increased from $273.7 million in fiscal 2002 to $276.1 million in fiscal 2003,
on an increase in net sales from $1,242.9 million in fiscal 2002 to $1,318.6
million in fiscal 2003. Higher sales volume (primarily in the Lawns business)
and favorable volume-related manufacturing cost absorption were largely offset
by a decrease in gross profit margin as a percentage of net sales (due to
product mix and increased urea and warehousing costs), and higher media and SG&A
expenses.

Scotts LawnService's(R) operating income decreased from $8.8 million in
fiscal 2002 to $6.2 million in fiscal 2003 due to planned infrastructure
investments and higher field labor and truck costs, largely the result of poor
spring weather that delayed the start of the spring treatment season. These
higher costs more than offset increased margin resulting from higher net sales,
which were driven by geographic expansion and acquisitions.

International Consumer's operating income was $9.1 million in fiscal 2003,
compared to $16.3 million in fiscal 2002. The decrease in fiscal 2003 operating
income is largely due to planned restructuring expenses, as outlined in the
Company's International Profit Improvement Plan, and a non-recurring peat
transaction gain recognized in fiscal 2002. Foreign currency fluctuations also
favorably impacted operating income.

Global Professional's operating income increased from $13.4 million in
fiscal 2002 to $22.4 million in fiscal 2003 primarily due to higher gross profit
margins, largely driven by stringent cost controls and management's decision to
exit low margin commodity growing media. Foreign currency fluctuations also
favorably impacted operating income.

Interest expense decreased from $76.3 million in fiscal 2002 to $69.2
million in fiscal 2003. The decrease in interest expense was primarily due to
debt repayments and strong operating cash flow, which resulted in lower average
borrowing levels as compared to the prior year, and lower interest rates on our
credit revolver and variable rate term loans. The weighted average cost of debt
was 7.96% in fiscal 2003 compared to 8.30% in fiscal 2002.

Income tax expense for fiscal 2003 was $59.5 million, compared to $61.9
million in fiscal 2002. This decrease in income tax expense as compared to the
prior year primarily was the result of a reduction in the Company's effective
tax rate from 38.0% in 2002 to 36.4% in 2003, due to an adjustment of state
deferred income taxes resulting from a detailed review of state effective tax
rates, and increased utilization of foreign tax credits in fiscal 2003.

The Company reported income before cumulative effect of accounting changes
of $103.8 million for fiscal 2003, compared to $101.0 million in fiscal 2002.
After the charge of $29.8 million ($18.5 million, net of tax) for the impairment
of trade names in our German, French and United Kingdom businesses, net

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28

income for fiscal 2002 was $82.5 million, or $2.61 per diluted share, compared
to net income of $103.8 million, or $3.23 per diluted share, in fiscal 2003.

Average diluted shares outstanding increased from 31.7 million in fiscal
2002 to 32.1 million in fiscal 2003, due to option and warrant exercises and the
impact on common stock equivalents of a higher average share price in fiscal
2003.

FISCAL 2002 COMPARED TO FISCAL 2001

Net sales for fiscal 2002 increased 4.7% to $1,748.7 million from $1,670.4
million in fiscal 2001.

North American Consumer segment net sales were $1,242.9 million in fiscal
2002, an increase of $51.5 million, or 4.3%, from net sales for fiscal 2001 of
$1,191.4 million. Within the North American Consumer segment, Lawns net sales
increased in fiscal 2002 over 5.5% due to strong acceptance of our new
SummerGuard(R) product and continued strong sales of Turf Builder(R) lawn
fertilizer, control products and grass seed; Gardening Products net sales
increased over 11% due to continued strong performance of our value-added line
of Miracle-Gro(R) potting mix and garden soil with an off-setting decline of
5.5% in our garden fertilizers due primarily to a colder and wetter May (the
business peak sales month) in the Midwest and Eastern portions of the United
States. Ortho(R) net sales were down slightly in fiscal 2002. Despite an
increase in consumer purchases of certain product lines, overall Ortho(R) net
sales declined slightly in fiscal 2002 as we reduced national television
advertising support to reassess our campaign for this line and prepared for a
new campaign in fiscal 2003.

Scotts LawnService(R) net sales increased over 83% from $41.2 million in
fiscal 2001 to $75.6 million in fiscal 2002. The growth in net sales reflects
the growth in the business from the acquisitions completed in fiscal 2002, new
branch openings in late winter of 2001 and the growth in customers from our
spring 2002 and fall 2001 marketing campaigns. Spending on acquisitions,
including seller-financing, increased from nearly $18.0 million in fiscal 2001
to over $54.0 million in fiscal 2002. Due to one major acquisition, nearly
one-half of fiscal 2002's acquisition spending occurred in August 2002 resulting
in only a minor contribution to fiscal 2002's revenue growth.

Net sales for the International Consumer segment were $246.8 million in
fiscal 2002, which were $5.3 million, or 2.1%, lower than net sales for fiscal
2001. Excluding the effects of currency fluctuations, net sales declined over
$7.0 million from fiscal 2001 to fiscal 2002. Efforts by retailers to reduce
their inventory investment and more closely time their purchases to consumer
purchases contributed to the year over year sales decrease.

Net sales for the Global Professional segment were $183.4 million in fiscal
2002, which were $2.3 million, or 1.2%, lower than net sales for fiscal 2001.
The decline was primarily in North America where our customers, the end-user
growers, have been impacted by retailer initiatives to reduce inventory levels.

Selling price changes were not material to net sales in fiscal 2002 or
fiscal 2001.

Gross profit increased $38.5 million in fiscal 2002 from fiscal 2001. As a
percentage of net sales, gross profit was 36.3% of net sales in fiscal 2002
compared to 35.7% in fiscal 2001. In North America, cost savings from our supply
chain and purchasing initiatives to reduce manufacturing costs were partially
offset by lower absorption of fixed costs due to lower production levels.
Production levels were lowered in order to reduce North American inventory
levels, which declined over $92 million from the end of fiscal 2001 to the end
of fiscal 2002. Other factors affecting margins were better product mix,
particularly in our Lawns and Gardening Products businesses, and the increasing
contribution of our rapidly growing Scotts LawnService(R) business which has
higher margins than our other business units. Lastly, restructuring expenses
included in cost of sales declined from $7.3 million in fiscal 2001 to $1.7
million in fiscal 2002 which improved gross profit as a percentage of net sales
by 32 basis points.

The net commission earned from the Roundup(R) marketing agreement in fiscal
2002 was $16.2 million, compared to $20.8 million in fiscal 2001. The decrease
from the prior year is primarily due to a $5.0 million increase in the
contribution payment due to Monsanto to $20.0 million in fiscal 2002 from $15.0
million in fiscal 2001.

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29

Advertising expenses in fiscal 2002 were $82.2 million, a decrease of $6.9
million from advertising expenses in fiscal 2001 of $89.1 million. The decrease
in advertising expenses from the prior year is primarily due to efficiencies
from improved media buying and lower rates and reduced media spending on the
Ortho(R) line which was replaced with more in-store promotional support, which
is a marketing expense included in SG&A expenses.

SG&A expenses in fiscal 2002 were $336.0 million, compared to $392.5
million for fiscal 2001. The reduction is primarily due to restructuring and
other charges of $68.4 million in fiscal 2001 compared to only $6.4 million in
fiscal 2002. Excluding restructuring expenses in both fiscal years, the $3.0
million environmental charge in fiscal 2002 and SG&A expenses of the Scotts
LawnService(R) business from both fiscal 2002 and 2001 results, SG&A expenses
were $295.8 million, or 16.9% of net sales, in fiscal 2002 compared to $307.9
million, or 18.4%, of net sales in fiscal 2001 which reflects the benefits in
fiscal 2002 from the cost reduction efforts undertaken in 2001 through reduction
in workforce and other restructuring activities even though other costs such as
litigation-related legal expenses and information systems support expenses
increased in fiscal 2002 from fiscal 2001.

Fiscal 2002 includes $1.7 million of restructuring charges in costs of
sales related to the redeployment of inventory from closed plants and warehouses
and $2.4 million in SG&A expenses related to the relocation of personnel for the
restructuring activities initiated in fiscal 2001. Under generally accepted
accounting principles in the United States, these costs have been expensed in
the period incurred. Also, in the fourth quarter of fiscal 2002, approximately
$4.0 million in restructuring charges, primarily severance and pension costs,
related to the announced closure of a plant in Bramford, England were recorded.
In fiscal 2001, $7.3 million of restructuring and other charges were recorded in
cost of sales and $68.4 million in SG&A costs.

Amortization of goodwill and intangibles in fiscal 2002 declined to $5.7
million from $27.7 million in fiscal 2001, primarily due to the adoption of SFAS
No. 142 in fiscal 2002.

Other income was $12.0 million for fiscal 2002, compared to $8.5 million in
fiscal 2001. The increase is primarily due to the gain and other income from the
agreement for the cessation of peat extraction in the United Kingdom of
approximately $6.6 million. This gain was partially offset by lower royalty
income due to the phase out in 2002 of a lawn mower program at a major North
American retailer and a one-time insurance settlement gain in fiscal 2001.

Income from operations for fiscal 2002 was $239.2 million, compared with
$116.4 million for fiscal 2001. The increase in income from operations over the
prior year is the result of lower restructuring expenses, increased gross margin
from the increase in net sales, lower advertising spending, lower SG&A expenses,
and the effect of the change in accounting for amortization of indefinite-lived
assets.

Operating income in the North American Consumer segment increased from
$250.7 million for fiscal 2001 to $273.7 million for fiscal 2002 on an increase
in net sales from $1,191.4 million in fiscal 2001 to $1,242.9 million in fiscal
2002. Gross margin improvement from supply chain cost reductions, improved
product sales mix in Lawns and Gardening Products, and reduced media spending
levels were partially offset by lower overhead absorption due to reduced
production levels, a reduction in the Roundup(R) commission and decreased
licensing royalties.

Scotts LawnService's(R) operating income increased from $4.7 million in
fiscal 2001 to $8.8 million in fiscal 2002 due to the over 80% increase in net
sales driven by internal growth and acquisitions.

International Consumer operating income was $16.3 million for fiscal 2002,
compared to a loss of $4.0 million for fiscal 2001 even though net sales
declined to $246.8 million from $252.1 million during the periods. Operating
income increased due to the peat transaction with English Nature, lower spending
on SG&A, and lower restructuring charges which declined from $10.5 million in
fiscal 2001 to $4.5 million in fiscal 2002.

Global Professional operating income increased slightly to $13.4 million in
fiscal 2002 from $12.7 million in fiscal 2001 despite a slight reduction in net
sales due to cost controls implemented in fiscal 2002.

Interest expense for fiscal 2002 was $76.3 million, a decrease of $11.4
million from interest expense for fiscal 2001 of $87.7 million. The decrease in
interest expense was primarily due to a reduction in

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30

average borrowings as compared to the prior year due to increased profitability
and lower working capital, and lower interest rates on our debt. The weighted
average cost of debt was 8.30% in fiscal 2002 compared to 8.47% in fiscal 2001.

Income tax expense for fiscal 2002 was $61.9 million, compared with income
tax expense for fiscal 2001 of $13.2 million. The increase in income tax expense
from the prior year is the result of higher pre-tax income in fiscal 2002 for
the reasons noted above. The lower estimated income tax rate for fiscal 2002 of
38% compared to 46% for fiscal 2001 is primarily due to effect of the
elimination of amortization expense for book purposes that was not deductible
for tax purposes and higher earnings in fiscal 2002.

The Company reported income before cumulative effect of accounting changes
of $101.0 million for fiscal 2002, compared to $15.5 million for fiscal 2001.
After the charge of $29.8 million ($18.5 million, net of tax) for the impairment
of tradenames in our German, French and United Kingdom businesses, net income
for fiscal 2002 was $82.5 million, or $2.61 per diluted share, compared to net
income of $15.5 million, or $.51 per diluted share, in fiscal 2001. If SFAS No.
142 had been adopted as of the beginning of fiscal 2001 diluted earnings per
share for fiscal 2001 would have been $1.05 excluding impairment charges, if
any, that would have been recorded upon adoption at October 1, 2000. Diluted
earnings per share in fiscal 2002 would have been $3.19 per share if the
impairment charge was excluded.

Average diluted shares outstanding increased from 30.4 million in fiscal
2001 to 31.7 million in fiscal 2002 due to option and warrant exercises, and the
impact on common stock equivalents of a higher average share price in fiscal
2002.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities was $218.0 million for fiscal 2003,
compared to $233.6 million for fiscal 2002. Following a record year for cash
flow generation in fiscal 2002, cash flow provided by operating activities was
again very strong in fiscal 2003 due principally to increased profitability,
lower cash expenditures for restructuring and a reduction in taxes paid due to a
change in the tax treatment of trade programs from a cash to accrual basis. Cash
flow from operating activities in fiscal 2002 benefited from a $99 million
one-time reduction in domestic inventory levels from unusually high levels at
the end of fiscal 2001. The seasonal nature of our operations generally requires
cash to fund significant increases in working capital (primarily inventory)
during the first half of the year. Receivables and payables also build
substantially in the second quarter in line with increasing sales as the season
begins. These balances liquidate during the June through September period as the
lawn and garden season winds down.

As of the end of fiscal 2003, accounts receivable increased by $34.0
million, in line with reported fourth quarter net sales growth. Net sales in the
fourth quarter of fiscal 2003 were $343.1 million compared to $299.7 million in
the fourth fiscal quarter of 2002. Inventories increased $5.3 million in fiscal
2003 as compared to a $99.4 million reduction in fiscal 2002 as discussed above.
Accounts payable increased $43.8 million in fiscal 2003 due principally to
global cash management initiatives and to foreign currency fluctuations, which
increased reported payables by approximately $11 million.

The funded status of our pension plan decreased slightly in fiscal 2003
with improved investment performance being essentially offset by higher benefit
obligations, due to the effect of a 75 basis point decline in the interest rates
used to discount future benefit obligations, and the impact of foreign currency
translation on our international benefits plans. The unfunded status of our
curtailed defined benefit plans in the United States increased slightly from a
deficit of $29.2 million at September 30, 2002 to a deficit of $29.5 million at
September 30, 2003. Our International plans went from a deficit of $50.2 million
in fiscal 2002 to a deficit of $55.4 million in fiscal 2003. Employer
contributions to the plans in fiscal 2004 are not expected to increase
appreciably from fiscal 2003 contributions of $12.1 million.

Cash used in investing activities was $108.9 million in fiscal 2003,
roughly comparable to $113.0 million in the prior year. Payments on seller notes
increased because of required payments made on Scotts LawnService(R) deferred
purchase obligations in fiscal 2003. Cash payments on acquisitions decreased to
$20.4 million in fiscal 2003 from $31.0 million in fiscal 2002. Cash payments
related to Scotts LawnService(R) acquisitions were $17.2 million in fiscal 2003.
The total value of acquisitions by Scotts LawnService(R), including property and
equipment obtained in the acquisitions, in fiscal 2003 was $30.6 million,
compared to $54.8 million in fiscal 2002.

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31

Financing activities used cash of $59.0 million in fiscal 2003, compared to
a cash usage of $41.8 million the prior year. The increase in cash used in
financing activities was primarily due to mandatory repayments of borrowings on
our term loans in fiscal 2003. Proceeds from the exercises of stock options
increased to $21.4 million in fiscal 2003 from $19.7 million in fiscal 2002. In
addition to option exercises in fiscal 2003, 1.8 million warrants were exercised
by Hagedorn Partnership, L.P. in exchange for the issuance of 1.0 million shares
in a series of non-cash transactions.

Our primary sources of liquidity are funds generated by operations and
borrowings under our credit agreement. The credit agreement provided for
borrowings in the aggregate principal amount of $1.1 billion consisting of term
loan facilities in the aggregate amount of $525 million and a revolving credit
facility in the amount of $575 million. Due to paydowns on our term loans, the
amount remaining under the term loan facilities had been reduced to
approximately $326.5 million as of September 30, 2003. Also, as of September 30,
2003, approximately $6.9 million of the $575 million revolving credit facility
was committed for letters of credit; the balance of approximately $568.1 million
is available for use.

Total debt was $757.6 million as of September 30, 2003, a decrease of $71.8
million compared to total debt at September 30, 2002 of $829.4 million. The
decrease in debt compared to the prior year was primarily due to scheduled debt
repayments on our term loans during fiscal 2003 and payments made on Scotts
LawnService(R) seller notes. There were no borrowings on our revolver as of
September 30, 2003 or September 30, 2002 due to significantly improved cash
flows from operating activities in both years.

At September 30, 2003, we were in compliance with all debt covenants. The
credit agreement contains covenants on interest coverage and leverage. The
credit agreement and the 8 5/8% Senior Subordinated Note indenture agreement
also contain numerous negative covenants which we were also in compliance with
in fiscal 2003. There are no rating triggers in our credit agreement or the
Subordinated Note indenture agreement.

In October 2003, The Scotts Company completed a refinancing of its credit
agreement and its $400 million 8 5/8% Senior Subordinated Notes in a series of
transactions. The new credit agreement was entered into with a syndicate of
commercial banks and institutional lenders. The new credit agreement consists of
a $700 million multi-currency revolving credit commitment, expiring on October
22, 2008, and a $500 million term loan B facility, expiring on September 30,
2010. Repayment of the term loan B commences on March 31, 2004, with minimum
quarterly principal payments through June 30, 2010, followed by a balloon
maturity on September 30, 2010. Also, as part of the refinancing, $200 million
of 6 5/8% Senior Subordinated Notes due October 2013 were issued at par, with
interest payable semi-annually on May 15 and November 15.

Total cash was $155.9 million at September 30, 2003, an increase of $56.2
million from September 30, 2002. Due to restrictions in our debt agreements on
voluntary prepayments of indebtedness, we elected not to use the cash on hand at
September 30, 2003 to paydown indebtedness because voluntary paydowns
permanently reduce the total borrowing commitment available under the credit
facility. A mandatory excess cash flow prepayment of $24.4 million was made in
early fiscal 2003 based upon fiscal 2002's results of operations and cash flows.
Our year end cash effectively serves to reduce our average indebtedness by
reducing borrowings under the revolving credit facility to fund our seasonal
working capital needs.

We did not repurchase any treasury shares in fiscal 2003 or fiscal 2002. We
have not paid dividends on the common shares in the past and do 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 our business
or to pay down indebtedness. The payment of future dividends, if any, on common
shares will be determined by the Board of Directors of Scotts in light of
conditions then existing, including our earnings, financial condition and
capital requirements, restrictions in financing agreements, business conditions
and other factors.

All of our off balance sheet financing is in the form of operating leases
which are disclosed in the Notes to the Consolidated Financial Statements. As of
September 30, 2003, we had $11.4 million of outstanding guarantees, primarily
related to deferred purchase obligations on Scotts LawnService(R) acquisitions.
All material intercompany transactions are eliminated in our consolidated
financial statements. Certain transactions with executive officers are fully
described and disclosed in our

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32

proxy statement. Such transactions pertain primarily to office space provided to
and administrative services provided by Hagedorn Partnership, L.P. and do not
exceed $150,000 per annum.

In July 2002, The Scotts Company's Board of Directors approved the
International Profit Improvement Plan designed to significantly improve the
profitability of the international consumer and professional businesses. The
plan includes implementation of an SAP platform throughout Europe, as well as
efforts to optimize operations in the United Kingdom, France and Germany,
including the creation of a global supply chain. We now estimate that cash
outlays of between $45 million and $55 million will be required by the end of
fiscal 2005, of which approximately 25% will be capital expenditures, and
approximately 75% will be recorded as expenses to implement this plan. For
further information concerning the restructuring charges incurred in fiscal
years 2003, 2002 and 2001, see Note 4 to the Consolidated Financial Statements.

We are party to various pending judicial and administrative proceedings,
including those discussed in Note 16 to the Consolidated Financial Statements.
These include, among others, proceedings based on accidents or product liability
claims and alleged violations of environmental laws. We have reviewed our
pending environmental and legal proceedings, including the probable outcomes,
reasonably anticipated costs and expenses, availability and limits of our
insurance coverage and have established what we believe to be appropriate
reserves. We do not believe that any liabilities that may result from these
proceedings are reasonably likely to have a material adverse effect on our
liquidity, financial condition or results of operations.

The following table summarizes our future cash outflows for contractual
obligations as of September 30, 2003 (in millions):

In our opinion, cash flows from operating activities and capital resources
will be sufficient to meet debt service and working capital needs during fiscal
2004, and thereafter for the foreseeable future. However, we cannot ensure that
our business groups will generate sufficient cash flows from operating
activities or that future borrowings will be available under our credit
facilities in amounts sufficient to pay indebtedness or fund other liquidity
needs. Actual results of operations will depend on numerous factors, many of
which are beyond our control.

ENVIRONMENTAL MATTERS

We are subject to local, state, federal and foreign environmental
protection laws and regulations with respect to our business operations and
believe we are operating in substantial compliance with, or taking actions aimed
at ensuring compliance with, such laws and regulations. We are involved in
several legal actions with various governmental agencies related to
environmental matters. While it is difficult to quantify the potential financial
impact of actions involving environmental matters, particularly remediation
costs at waste disposal sites and future capital expenditures for environmental
control equipment, in the opinion of management, the ultimate liability arising
from such environmental matters, taking into account established reserves,
should not have a material adverse effect on our financial position. However,
there can be no assurance that the resolution of these matters will not
materially affect future quarterly or annual results of operations, financial
condition or cash flows of the Company. Additional information on environmental
matters affecting us is provided in "ITEM 1. BUSINESS -- Environmental and
Regulatory Considerations", "ITEM 1. BUSINESS -- Regulatory Actions" and "ITEM
3. LEGAL PROCEEDINGS".

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MANAGEMENT'S OUTLOOK

We are very pleased with the Company's performance in fiscal 2003. Despite
generally cool and wet spring weather conditions that delayed the start of the
lawn and garden season, and planned savings from the outsourcing of
transportation and logistics management that were not achieved, the Company
reported record net sales and earnings in fiscal 2003.

We set several challenging goals for fiscal 2003, including aggressive
sales growth and share gains within our core North American consumer lawn and
garden categories, continued rapid expansion of Scotts LawnService(R) and
implementation of the International Profit Improvement Plan. We also set
aggressive goals to improve customer service levels in our order processing and
supply chain organizations by moving to "real-time" consumer-based replenishment
of store inventory levels. We were successful in strengthening our relationships
with key accounts by focusing on improving in-season execution and by driving
more consumers to retailers' stores to purchase lawn and garden products. We
also had a second consecutive year of strong cash flow generation due to our
continuing focus on working capital management and capital expenditures.

While we continued the rapid expansion of Scotts LawnService(R), the
business fell considerably short of its aggressive sales and earnings growth
targets. Poor spring weather, which delayed the start of the spring treatment
season, was clearly a contributing factor.

However, the business also experienced customer service, infrastructure and
business integration challenges, due to its rapid growth, that are a primary
area of focus in the year ahead. Consequently, the pace of expansion will be
slower in fiscal 2004 and we anticipate making selective, but fewer,
acquisitions.

Our strong results in fiscal 2003 set the stage for another successful year
in fiscal 2004. We are committed to the continued improvement of our
International Consumer and Global Professional segments. We are progressing on
the International Profit Improvement Plan, which is a three-year plan to invest
in systems and to reorganize our International operations to drive sustainable,
profitable growth. We anticipate continued strong execution from our global
supply chain organization on several important purchasing, logistics and
manufacturing initiatives. We also plan to continue to invest aggressively in
media advertising and in-store merchandising and promotional initiatives to
drive sales growth and profitability in fiscal 2004. Our strategy is also to
develop new distribution channels, and to leverage our strong brands to enter
complementary adjacent product categories.

We believe fiscal 2004 will be another year of profitable growth, with
continued focus on improving our return on invested capital and strong cash flow
generation.

FORWARD-LOOKING STATEMENTS

We have made and will make "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 in our 2003 Annual Report, in this Form 10-K and in other
contexts relating to future growth and profitability targets and strategies
designed to increase total shareholder value. Forward-looking statements also
include, but are not limited to, information regarding our future economic and
financial condition, the plans and objectives of our management and our
assumptions regarding our performance and these plans and objectives.

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

Some forward-looking statements that we make in our 2003 Annual Report, in
this Form 10-K and in other contexts represent challenging goals for our
company, and the achievement of these goals is subject to a variety of risks and
assumptions and numerous factors beyond our control. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make are described below. All forward-looking statements
attributable to us or persons working on our behalf are expressly qualified in
their entirety by the following cautionary statements.

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- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH
AND PREVENT US FROM FULFILLING OUR OBLIGATIONS.

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

- make it more difficult for us to satisfy our obligations under
outstanding indebtedness and otherwise;

- increase our vulnerability to general adverse economic and industry
conditions;

- require us to dedicate a substantial portion of cash flows from
operating activities to payments on our indebtedness, which would
reduce the cash flows available to fund working capital, capital
expenditures, advertising, research and development efforts and other
general corporate requirements;

- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;

- place us at a competitive disadvantage compared to our competitors
that have less debt;

- limit our ability to borrow additional funds; and

- expose us to risks inherent in interest rate fluctuations because some
of our borrowings are at variable rates of interest, which could
result in higher interest expense in the event of increases in
interest rates.

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

We cannot provide assurance that our business will generate sufficient
cash flow from operating activities or that future borrowings will be
available to us under our Second Amended and Restated Credit Agreement
(the "New Credit Agreement") in amounts sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to
refinance all or a portion of our indebtedness, on or before maturity. We
cannot assure you that we would be able to refinance any of our
indebtedness on commercially reasonable terms or at all.

- RESTRICTIVE COVENANTS MAY ADVERSELY AFFECT US.

The New Credit Agreement and the indenture governing our 6 5/8% Senior
Subordinated Notes (the "New Indenture") contain restrictive covenants and
cross default provisions that require us to maintain specified financial
ratios. Our ability to satisfy those financial ratios can be affected by
events beyond our control, and we cannot assure you that we will satisfy
those ratios. A breach of any of these financial ratio covenants or other
covenants in the New Credit Agreement or the New Indenture could result in
a default under the New Credit Agreement and/or the New Indenture. Upon
the occurrence of an event of default under the New Credit Agreement
and/or the New Indenture, the lenders and/or noteholders could elect to
declare the applicable outstanding indebtedness to be immediately due and
payable and, in the case of our lenders under the New Credit Agreement,
terminate all commitments to extend further credit. We cannot be sure that
our lenders or the noteholders would waive a default or that we could pay
the indebtedness in full if it were accelerated.

- ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT FINANCIAL RESULTS.

Weather conditions in North America and Europe have a significant impact
on the timing of sales in the spring selling season and overall annual
sales. An abnormally cold spring throughout North America and/or Europe
could adversely affect both fertilizer and pesticide sales and, therefore,
our financial results.

- OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO PAY OBLIGATIONS AS
THEY COME DUE IN ADDITION TO OUR OPERATING EXPENSES.

Because our products are used primarily in the spring and summer, our
business is highly seasonal. For the past two fiscal years, more than 70%
of our net sales have occurred in the

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35

second and third fiscal quarters combined. Our working capital needs and
our borrowings peak near the middle of our second fiscal quarter because
we are generating fewer revenues while incurring expenditures in
preparation for the spring selling season. If cash on hand is insufficient
to pay our obligations as they come due, including interest payments on
our indebtedness, or our operating expenses, at a time when we are unable
to draw on our credit facility, this seasonality could have a material
adverse effect on our ability to conduct our business. Adverse weather
conditions could heighten this risk.

- PERCEPTIONS THAT THE PRODUCTS WE PRODUCE AND MARKET ARE NOT SAFE COULD
ADVERSELY AFFECT US.

We manufacture and market a number of complex chemical products, such as
fertilizers, growing media, herbicides and pesticides, bearing one of our
brand names. On occasion, allegations are made that some of our products
have failed to perform up to expectations or have caused damage or injury
to individuals or property. Based on reports of contamination at a third
party supplier's vermiculite mine, the public may perceive that some of
our products manufactured in the past using vermiculite are or may also be
contaminated. Public perception that our products are not safe, whether
justified or not, could impair our reputation, involve us in litigation,
damage our brand names and have a material adverse affect our business.

- THE NATURE OF CERTAIN OF OUR PRODUCTS AND OUR BUSINESS SUCCESS CONTRIBUTE
TO THE RISK THAT THE COMPANY WILL BE SUBJECTED TO LAWSUITS.

The nature of certain of our products and our business success contribute
to the risk that the Company will be subjected to lawsuits. The following
are among the factors that contribute to this litigation risk:

- We manufacture and market a number of complex chemical products bearing
our brand names, including fertilizers, growing media, herbicides and
pesticides. There is a portion of the population that perceives all
chemical products as potentially hazardous. This perception, regardless
of its merits, enhances the risk that the Company will be subjected to
product liability claims that allege harm from exposure to our products.
Product liability claims are brought against the Company from time to
time.

- A third party vendor supplied contaminated vermiculite ore to the
Company. Although our use of vermiculite ore from the contaminated
source ended over twenty years ago, our former relationship with this
supplier enhances the risk that the Company will be subjected to
personal injury and product liability claims relating to the use of
vermiculite in some of our products.

- We are a significant competitor in many of the markets in which we
compete. Our success in our markets enhances the risk that the Company
will be targeted by plaintiffs' lawyers, consumer groups, competitors
and others asserting antitrust claims. Antitrust claims are brought
against the Company from time to time. The Company believes that the
antitrust claims of which it is aware are without merit.

Please see "ITEM 3. LEGAL PROCEEDINGS" and Note 16 to the Consolidated
Financial Statements.

- BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF RETAIL
CUSTOMERS, THE LOSS OF ONE OR MORE OF, OR SIGNIFICANT DECLINE IN ORDERS
FROM, OUR TOP CUSTOMERS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.

North American Consumer net sales represent approximately 69% of our
worldwide net sales in fiscal 2003. Our top three North American retail
customers together accounted for 71% of our North American Consumer fiscal
2003 net sales and 79% of our outstanding accounts receivable as of
September 30, 2003. Home Depot, Wal*Mart and Lowe's represented
approximately 38%, 19% and 14%, respectively, of our fiscal 2002 North
American Consumer net sales. The loss of, or reduction in orders from,
Home Depot, Wal*Mart, Lowe's or any other significant customer could have
a material adverse effect on our business and our financial results, as
could customer disputes regarding shipments, fees, merchandise condition
or related matters. Our inability to collect accounts receivable from any
of these customers could also have a material adverse affect.

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36

We do not have long-term sales agreements or other contractual assurances
as to future sales to any of our major retail customers. In addition,
continued consolidation in the retail industry has resulted in an
increasingly concentrated retail base. To the extent such concentration
continues to occur, our net sales and income from operations may be
increasingly sensitive to a deterioration in the financial condition of,
or other adverse developments involving our relationship with, one or more
customers.

- THE HIGHLY COMPETITIVE NATURE OF THE COMPANY'S MARKETS COULD ADVERSELY
AFFECT THE ABILITY OF THE COMPANY TO GROW OR MAINTAIN REVENUES.

Each of our segments participates in markets that are highly competitive.
Many of our competitors sell their products at prices lower than ours, and
we compete primarily on the basis of product quality, product performance,
value, brand strength, supply chain competency and advertising. Some of
our competitors have significant financial resources and research
departments. The strong competition that we face in all of our markets may
prevent us from achieving our revenue goals, which may have a material
adverse affect on our financial condition and results of operations.

- IF MONSANTO WERE TO TERMINATE THE MARKETING AGREEMENT FOR CONSUMER
ROUNDUP(R) PRODUCTS WITHOUT BEING REQUIRED TO PAY ANY TERMINATION FEE, WE
WOULD LOSE A SUBSTANTIAL SOURCE OF FUTURE EARNINGS.

If we were to commit a serious default under the marketing agreement with
Monsanto for consumer Roundup(R) products, Monsanto may have the right to
terminate the agreement. If Monsanto were to terminate the marketing
agreement for cause, we would not be entitled to any termination fee, and
we would lose all, or a significant portion, of the significant source of
earnings and overhead expense absorption the marketing agreement provides.
Monsanto may also be able to terminate the marketing agreement within a
given region, including North America, without paying us a termination fee
if sales to consumers in that region decline:

- over a cumulative three fiscal year period; or

- by more than 5% for each of two consecutive fiscal years.

- HAGEDORN PARTNERSHIP, L.P. BENEFICIALLY OWNS APPROXIMATELY 34% OF OUR
OUTSTANDING COMMON SHARES.

Hagedorn Partnership, L.P. beneficially owns approximately 34% of our
outstanding common shares and has sufficient voting power to significantly
influence the election of directors and the approval of other actions
requiring the approval of our shareholders.

- COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH REGULATIONS COULD
INCREASE OUR COST OF DOING BUSINESS.

Local, state, federal and foreign laws and regulations relating to
environmental matters affect us in several ways. In the United States, all
products containing pesticides must be registered with the U.S. EPA and,
in many cases, similar state agencies before they can be sold. The
inability to obtain or the cancellation of any registration could have an
adverse effect on our business. The severity of the effect would depend on
which products were involved, whether another product could be substituted
and whether our competitors were similarly affected. We attempt to
anticipate regulatory developments and maintain registrations of, and
access to, substitute chemicals. We may not always be able to avoid or
minimize these risks.

The Food Quality Protection Act, enacted by the U.S. Congress in August
1996, establishes a standard for food-use pesticides: that a reasonable
certainty of no harm will result from the cumulative effect of pesticide
exposures. Under this Act, the U.S. EPA is evaluating the cumulative risks
from dietary and non-dietary exposures to pesticides. The pesticides in
our products, certain of which may be used on crops processed into various
food products, continue to be evaluated by the U.S. EPA as part of this
exposure risk assessment. It is possible that the U.S. EPA or a third
party active ingredient registrant may decide that a pesticide we use in
our products will be limited or made unavailable to us. For example, in
June 2000, DowAgroSciences, an active ingredient registrant, voluntarily
agreed to a gradual phase-out of residential uses of chlorpyrifos, an
active ingredient used in our lawn and garden products. In December 2000,
the U.S. EPA reached
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37

agreement with various parties, including manufacturers of the active
ingredient diazinon, regarding a phased withdrawal from retailers by
December 2004 of residential uses of products containing diazinon, also
used in our lawn and garden products. We cannot predict the outcome or the
severity of the effect of the U.S. EPA's continuing evaluations of active
ingredients used in our products.

The use of certain pesticide and fertilizer products is regulated by
various local, state, federal and foreign environmental and public health
agencies. Regulations regarding the use of some pesticide and fertilizer
products may include requirements that only certified or professional
users apply the product, that the products be used only in specified
locations or that certain ingredients not be used. Users may be required
to post notices on properties to which products have been or will be
applied and may be required to notify individuals in the vicinity that
products will be applied in the future. Even if we are able to comply with
all such regulations and obtain all necessary registrations, we cannot
assure you that our products, particularly pesticide products, will not
cause injury to the environment or to people under all circumstances. The
costs of compliance, remediation or products liability have adversely
affected operating results in the past and could materially affect future
quarterly or annual operating results.

The harvesting of peat for our growing media business has come under
increasing regulatory and environmental scrutiny. In the United States,
state regulations frequently require us to limit our harvesting and to
restore the property to an agreed-upon condition. In some locations, we
have been required to create water retention ponds to control the sediment
content of discharged water. In the United Kingdom, our peat extraction
efforts are also the subject of legislation.

In addition to the regulations already described, local, state, federal
and foreign agencies regulate the disposal, handling and storage of waste,
air and water discharges from our facilities. In June 1997, the Ohio EPA
initiated an enforcement action against us with respect to alleged surface
water violations and inadequate treatment capabilities at our Marysville
facility and is seeking corrective action under the Resource Conservation
Recovery Act. We have met with the Ohio EPA and the Ohio Attorney
General's office to negotiate an amicable resolution of these issues. On
December 3, 2001, an agreed judicial Consent Order was submitted to the
Union County Common Pleas Court and was entered by the court on January
25, 2002.

In fiscal 2003, we made $1.5 million in environmental expenditures
compared with approximately $0.3 million in environmental capital
expenditures and $5.4 million in other environmental expenses in fiscal
2002. We expect spending on environmental matters in fiscal 2004 will not
vary materially from the amount spent in fiscal 2003.

The adequacy of these estimated future expenditures is based on our
operating in substantial compliance with applicable environmental and
public health laws and regulations and several significant assumptions:

- that we have identified all of the significant sites that must be
remediated;

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

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

If there is a significant change in the facts and circumstances
surrounding these assumptions or if we are found not to be in substantial
compliance with applicable environmental and public health laws and
regulations, it could have a material impact on future environmental
capital expenditures and other environmental expenses and our results of
operations, financial position and cash flows.

- OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE TO
FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO THE COSTS OF INTERNATIONAL
REGULATION.

We currently operate manufacturing, sales and service facilities outside
of North America, particularly in the United Kingdom, Germany, France and
the Netherlands. In fiscal 2003,

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38

international sales accounted for approximately 20% of our total sales.
Accordingly, we are subject to risks associated with operations in foreign
countries, including:

- fluctuations in currency exchange rates;
- limitations on the conversion of foreign currencies into U.S. dollars;
- limitations on the remittance of dividends and other payments by foreign
subsidiaries;
- additional costs of compliance with local regulations; and
- historically, in certain countries, higher rates of inflation than in
the United States.

In addition, our operations outside the United States are subject to the
risk of new and different legal and regulatory requirements in local
jurisdictions, potential difficulties in staffing and managing local
operations and potentially adverse tax consequences. The costs related to
our international operations could adversely affect our operations and
financial results in the future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As part of our ongoing business, we are exposed to certain market risks,
including fluctuations in interest rates, foreign currency exchange rates and
commodity prices. We use derivative financial and other instruments, where
appropriate, to manage these risks. We do not enter into transactions designed
to mitigate our market risks for trading or speculative purposes.

INTEREST RATE RISK

We have various debt instruments outstanding at September 30, 2003 and 2002
that are impacted by changes in interest rates. As a means of managing our
interest rate risk on these debt instruments, we enter into interest rate swap
agreements to effectively convert certain variable rate debt obligations to
fixed rates.

At September 30, 2003 and 2002, Scotts had outstanding five and six
interest rate swaps, respectively, with major financial institutions that
effectively convert variable-rate debt to a fixed rate. The swaps have notional
amounts between $10 million and $25 million ($75 million and $95 million in
total, respectively) with three, four or five year terms commencing in January
1999. Under the terms of these swaps, the Company pays rates ranging from 3.75%
to 5.18% and receives three-month LIBOR.

The following table summarizes information about our derivative financial
instruments and debt instruments that are sensitive to changes in interest rates
as of September 30, 2003 and 2002. For debt instruments, the table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. For interest rate swaps, the table presents expected cash flows
based on notional amounts and weighted-average interest rates by contractual
maturity dates. Weighted-average variable rates are based on implied forward
rates in the yield curve at September 30, 2003 and 2002. The information is
presented in U.S. dollars (in millions):

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39

OTHER MARKET RISKS

Our market risk associated with foreign currency rates is not considered to
be material. Through fiscal 2003, we had only minor amounts of transactions that
were denominated in currencies other than the currency of the country of origin.
We are subject to market risk from fluctuating market prices of certain raw
materials, including urea and other chemicals and paper and plastic products.
Our objectives surrounding the procurement of these materials are to ensure
continuous supply and to minimize costs. We seek to achieve these objectives
through negotiation of contracts with favorable terms directly with vendors. We
do not enter into forward contracts or other market instruments as a means of
achieving our objectives or minimizing our risk exposures on these materials.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and other information required by this Item are
contained in the consolidated financial statements, notes thereto and schedules
listed in the "Index to Consolidated Financial Statements and Financial
Statement Schedules" on page 48 herein.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

With the participation of the principal executive officer and principal
financial officer of The Scotts Company (the "Registrant"), the Registrant's
management has evaluated the effectiveness of the Registrant's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the
period covered by this Annual Report on Form 10-K. Based upon that evaluation,
the Registrant's principal executive officer and principal financial officer
have concluded that:

- information required to be disclosed by the Registrant in this Annual
Report on Form 10-K would be accumulated and communicated to the
Registrant's management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions
regarding required disclosure;

- information required to be disclosed by the Registrant in this Annual
Report on Form 10-K would be recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms; and

- the Registrant's disclosure controls and procedures are effective as of
the end of the period covered by this Annual Report on Form 10-K to
ensure that material information relating to the Registrant and its
consolidated subsidiaries is made known to them, particularly during the
period in which the Registrant's periodic reports, including this Annual
Report on Form 10-K, are being prepared.

In addition, there were no changes in the Registrant's internal control
over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
that occurred during the Registrant's fiscal quarter ended

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40

September 30, 2003, that have materially affected, or are reasonably likely to
materially affect, the Registrant's internal control over financial reporting.

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 -- Section
16(a) Beneficial Ownership Reporting Compliance" and "PROPOSAL NUMBER
1 -- ELECTION OF DIRECTORS" in the Registrant's definitive Proxy Statement for
the 2004 Annual Meeting of Shareholders to be held on January 29, 2004 to be
filed with the SEC 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 of the Registrant
required by Item 401 of Regulation S-K is included in "SUPPLEMENTAL ITEM.
EXECUTIVE OFFICERS OF THE REGISTRANT."

The Board of Directors of the Registrant has adopted charters for each of
the Audit Committee, the Governance and Nominating Committee and the
Compensation and Organization Committee.

In accordance with the requirements of Section 303A(10) of the New York
Stock Exchange's Listed Company Manual, the Board of Directors of the Registrant
has adopted a Code of Business Conduct and Ethics covering the Registrant's
Board members and associates, including, without limitation, the Registrant's
principal executive officer, principal financial officer and principal
accounting officer. The Registrant intends to disclose the following on its
Internet website located at http://www.investor.scotts.com within five business
days following their occurrence: (A) the nature of any amendment to a provision
of its Code of Business Conduct and Ethics that (i) applies to the Registrant's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, (ii) relates to
any element of the code of ethics definition enumerated in Item 406(b) of SEC
Regulation S-K, and (iii) is not a technical, administrative or other
non-substantive amendment; and (B) a description (including the nature of the
waiver, the name of the person to whom the waiver was granted and the date of
the waiver) of any waiver, including an implicit waiver, from a provision of the
Code of Business Conduct and Ethics to the Registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions that relates to one or more
of the items set forth in Item 406(b) of SEC Regulation S-K.

The text of the Code of Business Conduct and Ethics, the Corporate
Governance Guidelines, the Governance and Nominating Committee Charter and the
Compensation and Organization Committee Charter all will be posted on the
Registrant's Internet website located at http://www.investor.scotts.com by
January 29, 2004. Interested persons may also obtain copies of the Code of
Business Conduct and Ethics without charge by writing to The Scotts Company,
Attention: Investor Relations, 14111 Scottslawn Road, Marysville, Ohio 43041.

ITEM 11. EXECUTIVE COMPENSATION

In accordance with General Instruction G(3), the information contained
under the captions "EXECUTIVE COMPENSATION -- Summary of Cash and Other
Compensation, -- Option/SAR Grants in 2003 Fiscal Year, -- Option Exercises in
2003 Fiscal Year and 2003 Fiscal Year-End Option/SAR Values, -- Executive
Retirement Plan, -- Pension Plans, and -- Employment Agreements and Termination
of Employment and Change-in-Control Arrangements" and "PROPOSAL NUMBER
1 -- ELECTION OF DIRECTORS -- Compensation of Directors" in the Registrant's
Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

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

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41

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",
"PROPOSAL NUMBER 1 -- ELECTION OF DIRECTORS" and "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" in the Registrant's Proxy Statement is incorporated herein
by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

In accordance with General Instruction G(3), the information contained
under the captions "AUDIT COMMITTEE MATTERS -- Fees of Independent Auditors
and -- THE SCOTTS COMPANY THE AUDIT COMMITTEE POLICIES AND PROCEDURES REGARDING
APPROVAL OF SERVICES PROVIDED BY THE INDEPENDENT AUDITOR" in the Registrant's
Proxy Statement is incorporated herein by reference.

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42

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

1 and 2. Financial Statements and Financial Statement Schedules:

The response to this portion of Item 15 is submitted as a separate
section of this Annual Report on Form 10-K. Reference is made to the "Index
to Consolidated Financial Statements and Financial Statement Schedules" on
page 48 herein.

3. Exhibits:

Exhibits filed with this Annual Report on Form 10-K are attached
hereto or incorporated herein by reference. For a list of such exhibits,
see "Index to Exhibits" beginning at page 99. 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.

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43

EXECUTIVE COMPENSATORY PLANS AND ARRANGEMENTS

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44

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45

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

* Filed herewith.

(b) REPORTS ON FORM 8-K

No Current Reports on Form 8-K were filed during the last quarter of
the period covered by this Annual Report on Form 10-K.

(c) EXHIBITS

Exhibits filed with this Annual Report on Form 10-K are attached hereto or
incorporated herein by reference. For a list of such exhibits, see "Index to
Exhibits" beginning at page 99.

(d) FINANCIAL STATEMENT SCHEDULES

The financial statement schedules filed with this Annual Report on Form
10-K are submitted in a separate section hereof. For a list of such financial
statement schedules, see "Index to Consolidated Financial Statements and
Financial Statement Schedules" on page 48 herein.

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46

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 8, 2003 By: /s/ JAMES HAGEDORN
--------------------------------------------
James Hagedorn, President,
Chief Executive Officer and
Chairman of the Board

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

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47

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

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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48

REPORT OF MANAGEMENT

Management of The Scotts Company is responsible for the preparation,
integrity and objectivity of the financial information presented in this Annual
Report on Form 10-K. The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America 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 is 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 elements of these control systems.

The financial statements have been audited by PricewaterhouseCoopers LLP,
independent auditors selected by the Board of Directors. The independent
auditors 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
in the United States of America.

The Board of Directors, through its Audit Committee consisting solely of
non-management directors, meets periodically with management, internal audit
personnel and the independent auditors 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 auditors have access to the Audit
Committee with or without the presence of management.

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49

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
The Scotts Company:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the financial position of The Scotts Company and its subsidiaries at September
30, 2003, and September 30, 2002, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2003,
in conformity with accounting principles generally accepted in the United States
of America. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 6 to the financial statements, effective October 1,
2001, the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets". Also, as discussed in Note 1 to the
financial statements, effective October 1, 2002, the Company adopted the
prospective method of recognizing the fair value of stock-based compensation in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation".

/s/ PRICEWATERHOUSECOOPERS LLP

Columbus, Ohio
December 5, 2003

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50

THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(IN MILLIONS, EXCEPT PER SHARE DATA)

See Notes to Consolidated Financial Statements.

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51

THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(IN MILLIONS)

See Notes to Consolidated Financial Statements.

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52

THE SCOTTS COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
(IN MILLIONS EXCEPT PER SHARE DATA)

See Notes to Consolidated Financial Statements.

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53

THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(IN MILLIONS)

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54

THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (CONTINUED)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(IN MILLIONS)

- ---------------
(a) Net of tax benefits of $1.3, $14.8, and $5.5 for fiscal 2003, 2002 and 2001,
respectively.

(b) Net of tax (expense) benefits of $(0.6), $0.3 and $1.1 for fiscal 2003, 2002
and 2001.

See Notes to Consolidated Financial Statements.

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55

THE SCOTTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

The Scotts Company and its subsidiaries (collectively "Scotts" or the
"Company") are engaged in the manufacture, marketing and sale of lawn and garden
care products. The Company's major customers include home improvement centers,
mass merchandisers, large hardware chains, independent hardware stores,
nurseries, garden centers, food and drug stores, commercial nurseries and
greenhouses, and specialty crop growers. The Company's products are sold
primarily in North America and the European Union. We also operate the Scotts
LawnService(R) business which provides lawn and tree and shrub fertilization,
insect control and other related services in the United States.

ORGANIZATION AND BASIS OF PRESENTATION

The Company's consolidated financial statements are presented in accordance
with accounting principles generally accepted in the United States of America.
The consolidated financial statements include the accounts of The Scotts Company
and all wholly-owned and majority-owned subsidiaries. All intercompany
transactions and accounts are eliminated in consolidation. The Company's
criteria for consolidating entities are based on majority ownership and an
objective evaluation and determination of effective management control.

REVENUE RECOGNITION

Revenue is recognized when products are shipped and when title and risk of
loss transfer to the customer. Provisions for estimated returns and allowances
are recorded at the time of shipment based on historical rates of returns as a
percentage of sales and are periodically adjusted for known changes in return
levels. Scotts LawnService(R) revenues are recognized at the time service is
provided to the customer.

Under the terms of the Marketing Agreement between The Scotts Company and
Monsanto, the Company in its role as exclusive agent performs certain functions,
such as sales support, merchandising, distribution and logistics on behalf of
Monsanto, and incurs certain costs in support of the consumer Roundup(R)
business. The actual costs incurred by Scotts on behalf of Roundup(R) are
recovered from Monsanto through the agency management and are treated solely as
a recovery of incurred costs. Revenue is not recognized in the Company's
consolidated financial statements for the recovery of these costs since the
services rendered are solely in support of the agency arrangement and not a part
of any principal line of business.

PROMOTIONAL ALLOWANCES

The Company promotes its branded products through cooperative advertising
programs with retailers. Retailers are also offered in-store promotional
allowances and rebates based on sales volumes. Certain products are also
promoted with direct consumer rebate programs and special purchasing incentives.
Promotion costs (including allowances and rebates) incurred during the year are
expensed to interim periods in relation to revenues and are recorded as a
reduction of net sales.

ADVERTISING

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

Scotts LawnService(R) promotes its service offerings through direct
response mail campaigns. The external costs associated with these campaigns are
deferred and recognized ratably and recorded as advertising expense in
proportion to revenues as advertising costs over a period not in excess of one
year. The costs deferred at September 30, 2003 and 2002 are $1.0 million and
$0.9 million, respectively.

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56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FRANCHISE OPERATIONS

The Company's Scotts LawnService(R) segment consists of 68 company-operated
locations serving 44 metropolitan markets, with an additional 70 independent
franchise locations at September 30, 2003. In fiscal 2002, there were 60
company-operated and 45 franchised locations. Franchise fee income and royalties
are not material to total income from operations.

RESEARCH AND DEVELOPMENT

All costs associated with research and development are charged to expense
as incurred. Expense for fiscal 2003, 2002 and 2001 was $30.4 million, $26.2
million and $24.7 million, respectively.

ENVIRONMENTAL COSTS

The Company recognizes environmental liabilities when conditions requiring
remediation are identified. The Company determines its liability on a site by
site basis and records a liability at the time when it is probable and can be
reasonably estimated. Expenditures which extend the life of the related property
or mitigate or prevent future environmental contamination are capitalized.
Environmental liabilities are not discounted or reduced for possible recoveries
from insurance carriers.

INTERNAL USE SOFTWARE

The Company accounts for the costs of internal use software in accordance
with Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". Accordingly, costs other than
reengineering costs are expensed or capitalized depending on whether they are
incurred in the preliminary project stage, application development stage or the
post-implementation/operation stage. As of September 30, 2003 and 2002, the
Company had $43.3 million and $35.8 million, respectively, in unamortized
capitalized internal use computer software costs. Amortization of these costs
was $9.0 million, $5.8 million and $4.3 million during fiscal 2003, 2002 and
2001, respectively.

EARNINGS PER COMMON SHARE

Basic earnings per common share is based on the weighted-average number of
common shares outstanding each period. Diluted earnings per common share is
based on the weighted-average number of common shares and dilutive potential
common shares (stock options, stock appreciation rights and warrants)
outstanding each period.

INVENTORIES

Inventories are stated at the lower of cost or market, principally
determined by the FIFO method; however, certain growing media inventories are
accounted for by the LIFO method. At September 30, 2003 and 2002, approximately
6% and 7% 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. Reserves for excess and
obsolete inventories were $22.0 million and $25.9 million at September 30, 2003
and 2002, respectively.

LONG-LIVED ASSETS

Property, plant and equipment, including significant improvements, are
stated at cost. Expenditures for maintenance and repairs are charged to expense
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
with the resulting gain or loss being reflected in results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 - 8 years

Interest is capitalized on all significant capital projects. The Company
capitalized $1.4 million, $1.1 million and $3.1 million of interest costs during
fiscal 2003, 2002 and 2001, respectively.

Management assesses the recoverability of property and equipment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable from its future undiscounted cash flows. If it is
determined that an impairment has occurred, an impairment loss is recognized for
the amount by which the carrying amount of the asset exceeds its estimated fair
value.

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents. The Company maintains
cash deposits in banks which from time to time exceed the amount of deposit
insurance available. Management periodically assesses the financial condition of
the institutions and believes that any potential credit loss is minimal.

FOREIGN EXCHANGE INSTRUMENTS

Gains and losses on foreign currency transaction hedges are recognized in
income and offset the foreign exchange gains and losses on the underlying
transactions. Gains and losses on foreign currency firm commitment hedges are
deferred and included in the basis of the transactions underlying the
commitments.

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 other comprehensive income and included
in shareholders' equity. Income and expense items are translated at the twelve
month average of the month end exchange rates. Foreign currency transaction
gains and losses are included in the determination of net income.

DERIVATIVE INSTRUMENTS

In the normal course of business, the Company is exposed to fluctuations in
interest rates and the value of foreign currencies. The Company has established
policies and procedures that govern the management of these exposures through
the use of a variety of financial instruments. The Company employs various
financial instruments, including forward exchange contracts and swap agreements,
to manage certain of the exposures when practical. By policy, the Company does
not enter into such contracts for the purpose of speculation or use leveraged
financial instruments. The Company's derivative activities are managed by the
Chief Financial Officer and other senior management of the Company in
consultation with the Finance Committee of the Board of Directors. These
activities include establishing a risk-management philosophy and objectives,
providing guidelines for derivative-instrument usage and establishing procedures
for control and valuation, counterparty credit approval and the monitoring and
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58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

reporting of derivative activity. The Company's objective in managing its
exposure to fluctuations in interest rates and foreign currency exchange rates
is to decrease the volatility of earnings and cash flows associated with changes
in the applicable rates and prices. To achieve this objective, the Company
primarily enters into forward exchange contracts and swap agreements whose
values change in the opposite direction of the anticipated cash flows.
Derivative instruments related to forecasted transactions are considered to
hedge future cash flows, and the effective portion of any gains or losses is
included in other comprehensive income until earnings are affected by the
variability of cash flows. Any remaining gain or loss is recognized currently in
earnings. The cash flows of the derivative instruments are expected to be highly
effective in achieving offsetting cash flows attributable to fluctuations in the
cash flows of the hedged risk. If it becomes probable that a forecasted
transaction will no longer occur, the derivative will continue to be carried on
the balance sheet at fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings.

To manage certain of its cash flow exposures, the Company has entered into
forward exchange contracts and interest rate swap agreements. The forward
exchange contracts are designated as hedges of the Company's foreign currency
exposure associated with future cash flows. The change in the value of the
amounts payable or receivable under forward exchange contracts are recorded as
adjustments to other income or expense. The interest rate swap agreements are
designated as hedges of the Company's interest rate risk associated with certain
variable rate debt. The change in the value of the amounts payable or receivable
under the swap agreements are recorded as adjustments to interest expense.

Unrealized gains or losses resulting from valuing these swaps at fair value
are recorded in other comprehensive income.

The Company adopted Statement of Financial Accounting Standards No. 133,
which is amended by Statement of Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities",
as of October 2000. Since adoption, there have been no gains or losses
recognized in earnings for hedge ineffectiveness or due to excluding a portion
of the value from measuring effectiveness.

STOCK-BASED COMPENSATION AWARDS

Beginning in fiscal 2003, the Company began expensing prospective grants of
employee stock-based compensation awards in accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" as amended by Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure -- an
Amendment of SFAS No. 123". The fair value of future awards will be expensed
ratably over the vesting period, which has historically been three years, except
for grants to members of the Board of Directors, which have a six month vesting
period.

In fiscal 2003, the Company granted 404,500 options to officers and other
key employees, 63,000 options to members of the Board of Directors and 239,000
stock appreciation rights to executive officers. The exercise price for the
option awards and the stated price for the stock appreciation rights awards were
determined by the closing price of the Company's common shares on the date of
grant. The related compensation expense recorded in fiscal 2003 was $4.8
million.

The Black-Scholes value of options granted in fiscal 2001 and fiscal 2002
was $10.0 million and $10.7 million, respectively. The Black-Scholes value of
all stock-based compensation grants awarded during fiscal 2003 was $13.1
million. Had compensation expense been recognized for the periods ended

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59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003, 2002 and 2001 in accordance with the recognition provisions
of SFAS No. 123, the Company would have recorded net income and net income per
share as follows:

The pro forma amounts shown above are not necessarily representative of the
impact on net income in future periods.

Prior to fiscal 2003, the Company accounted for stock options under APB 25,
"Accounting for Stock Issued to Employees" and, as allowable, adopted only the
disclosure provisions of SFAS No. 123.

USE OF ESTIMATES

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

RECLASSIFICATIONS

Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 2003 classifications.

NOTE 2. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS

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60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. MARKETING AGREEMENT

Effective September 30, 1998, the Company entered into an agreement with
Monsanto Company ("Monsanto") for exclusive domestic and international marketing
and agency rights to Monsanto's consumer Roundup(R) herbicide products. Under
the terms of the agreement, the Company is entitled to receive an annual
commission from Monsanto in consideration for the performance of its duties as
agent. The annual commission is calculated as a percentage of the actual
earnings before interest and income taxes (EBIT), as defined in the agreement,
of the Roundup(R) business. Each year's percentage varies in accordance with the
terms of the agreement based on the achievement of two earnings thresholds and
on commission rates that vary by threshold and program year.

The agreement also requires the Company to make fixed annual payments to
Monsanto as a contribution against the overall expenses of the Roundup(R)
business. The annual fixed payment is defined as $20 million. However, portions
of the annual payments for the first three years of the agreement are deferred.
No payment was required for the first year (fiscal 1999), a payment of $5
million was required for the second year and a payment of $15 million was
required for the third year so that a total of $40 million of the contribution
payments were deferred. Beginning in the fifth year of the agreement (fiscal
2003), the annual payments to Monsanto increase to at least $25 million, which
include per annum interest charges at 8%. The annual payments may be increased
above $25 million if certain significant earnings targets are exceeded. If all
of the deferred contribution amounts are paid prior to 2018, the annual
contribution payments revert to $20 million. Regardless of whether the deferred
contribution amounts are paid, all contribution payments cease entirely in 2018.

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61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is recognizing a charge each year associated with the annual
contribution payments equal to the required payment for that year. The Company
is not recognizing a charge for the portions of the contribution payments that
are deferred until the time those deferred amounts are paid. The Company
considers this method of accounting for the contribution payments to be
appropriate after consideration of the likely term of the agreement, the
Company's ability to terminate the agreement without paying the deferred
amounts, and the fact that approximately $18.6 million of the deferred amount is
never paid, even if the agreement is not terminated prior to 2018, unless
significant earnings targets are exceeded.

The express terms of the agreement permit the Company to terminate the
agreement only upon Material Breach, Material Fraud or Material Willful
Misconduct by Monsanto, as such terms are defined in the agreement, or upon the
sale of the Roundup(R) business by Monsanto. In such instances, the agreement
permits the Company to avoid payment of any deferred contribution and related
per annum charge. The Company's basis for not recording a financial liability to
Monsanto for the deferred portions of the annual contribution and per annum
charge is based on our assessment and consultations with our legal counsel and
the Company's independent accountants. In addition, the Company has obtained a
legal opinion from The Bayard Firm, P.A., which concluded, subject to certain
qualifications, that if the matter were litigated, a Delaware court would likely
conclude that the Company is entitled to terminate the agreement at will, with
appropriate prior notice, without incurring significant penalty, and avoid
paying the unpaid deferred amounts. We have concluded that, should the Company
elect to terminate the agreement at any balance sheet date, it will not incur
significant economic consequences as a result of such action.

The Bayard Firm was special Delaware counsel retained during fiscal 2000
solely for the limited purpose of providing a legal opinion in support of the
contingent liability treatment of the agreement previously adopted by the
Company and has neither generally represented or advised the Company nor
participated in the preparation or review of the Company's financial statements
or any SEC filings. The terms of such opinion specifically limit the parties who
are entitled to rely on it.

The Company's conclusion is not free from challenge and, in fact, would
likely be challenged if the Company were to terminate the agreement. If it were
determined that, upon termination, the Company must pay any remaining deferred
contribution amounts and related per annum charges, the resulting charge to
earnings could have a material impact on the Company's results of operations and
financial position. At September 30, 2003, contribution payments and related per
annum charges of approximately $49.2 million had been deferred under the
agreement. This amount is considered a contingent obligation and has not been
reflected in the financial statements as of and for the year then ended.

Monsanto has disclosed that it is accruing the $20 million fixed
contribution fee per year beginning in the fourth quarter of Monsanto's fiscal
year 1998, plus interest on the deferred portion.

The agreement has a term of seven years for all countries within the
European Union (at the option of both parties, the agreement can be renewed for
up to 20 years for the European Union countries). For countries outside of the
European Union, the agreement continues indefinitely unless terminated by either
party. The agreement provides Monsanto with the right to terminate the agreement
for an event of default (as defined in the agreement) by the Company or a change
in control of Monsanto or the sale of the Roundup(R) business. The agreement
provides the Company with the right to terminate the agreement in certain
circumstances including an event of default by Monsanto or the sale of the
Roundup(R) business. Unless Monsanto terminates the agreement for an event of
default by the Company, Monsanto is required to pay a termination fee to the
Company that varies by program year. The termination fee is $150 million for
each of the first five program years, gradually declines to $100 million by year
ten of the program and then declines to a minimum of $16 million if the program
continues for years 11 through 20.

In consideration for the rights granted to the Company under the agreement
for North America, the Company was required to pay a marketing fee of $32
million to Monsanto. The Company has deferred this amount on the basis that the
payment will provide a future benefit through commissions that will be earned
under the agreement and is amortizing the balance over ten years, which is the
estimated likely term of the agreement.

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62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. RESTRUCTURING AND OTHER CHARGES

2003 CHARGES

During fiscal 2003, the Company recorded $17.1 million of restructuring and
other charges.

Costs of $5.3 million for warehouse lease buyouts and relocation of
inventory associated with exiting certain warehouses in North America, and $3.8
million related to a plan to optimize our international supply chain were
included in cost of sales. Severance and consulting costs of $5.3 million for
the continued European integration efforts that began in the fourth quarter of
fiscal 2002, and $2.7 million of administrative facility exit costs in North
America were charged to selling, general and administrative expense. The
severance costs incurred in fiscal 2003 are related to the reduction of 78
administrative and production employees.

2002 CHARGES

During fiscal 2002, the Company recorded $8.1 million of restructuring and
other charges.

During the fourth quarter of fiscal 2002, the Company recorded $4.0 million
of restructuring and other charges associated with reductions of headcount from
the closure of a manufacturing facility in Bramford, England. This charge is
included in selling, general and administrative costs in the Consolidated
Statement of Operations and consists of severance and pension related costs.
Closure of the Bramford facility was completed in May 2003 with the transfer of
United Kingdom fertilizer production to our Howden, United Kingdom facility.
Severance costs incurred in fiscal 2002 are related to the reduction of 37
administrative and production employees.

Under accounting principles generally accepted in the United States of
America, certain restructuring costs related to relocation of personnel,
equipment and inventory are to be expensed in the period the costs are actually
incurred. During fiscal 2002, inventory relocation costs of approximately $1.7
million were incurred and paid and were recorded as restructuring and other
charges in cost of sales. Approximately $2.4 million of employee relocation and
related costs were also incurred and paid in fiscal 2002 and were recorded as
restructuring and other charges in operating expenses. These relocation charges
related to a plan to optimize the North American supply chain that was initiated
in the third and fourth quarters of fiscal 2001.

2001 CHARGES

During the third and fourth quarters of fiscal 2001, the Company recorded
$75.7 million of restructuring and other charges, primarily associated with
reductions in headcount and the closure or relocation of certain manufacturing
and administrative facilities. The $75.7 million in charges is segregated in the
Consolidated Statements of Operations in two components: (i) $7.3 million
included in cost of sales for the write-off of inventory that was rendered
unusable as a result of the restructuring activities and (ii) $68.4 million
included in selling, general and administrative costs. Included in the $68.4
million charge in selling, general and administrative costs is $20.4 million to
write-down to fair value certain property and equipment and other assets; $5.8
million of facility exit costs; $27.0 million of severance costs; and $15.2
million in other restructuring and other costs. The severance costs related to
the reduction in force initiatives, facility closures and consolidations in
North America and Europe covered approximately 340 administrative, production,
selling and other employees. Most severance costs were paid in fiscal 2002 with
the balance substantially completed in 2003. All other fiscal 2001 restructuring
related activities and costs were completed by the end of fiscal 2002.

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63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a rollforward of the cash portion of the restructuring and
other charges accrued in fiscal 2003, 2002 and 2001. The balance of the accrued
charges at September 30, 2003 are included in accrued liabilities on the
Consolidated Balance Sheets.

NOTE 5. ACQUISITIONS AND DIVESTITURES

During fiscal 2003, the Company's Scotts LawnService(R) segment acquired 22
individual lawn service entities for a total cost of $30.6 million. Of the total
purchase price, $17.2 million was paid in cash, with notes being issued for the
remaining $13.4 million. Goodwill attributable to the fiscal 2003 acquisitions
was $22.3 million, of which $20.4 million was deductible for tax purposes. Other
intangible assets, primarily customer accounts and non-compete agreements, of
$6.2 million, and working capital and property, plant and equipment of $2.1
million were also recorded.

The Company's North American Consumer segment acquired two entities to
enter the pottery business in fiscal 2003. The aggregate purchase price for
these two entities was $3.2 million, all of which was paid in cash. Goodwill of
$0.8 million pertaining to these acquisitions is tax deductible. Other
intangible assets, primarily customer accounts of $1.0 million, and inventory of
$1.4 million were also recorded.

During fiscal 2002, the Company's Scotts LawnService(R) segment acquired 17
individual lawn service entities for a total cost of $54.8 million. Of this
total, $33.9 million was paid in cash, with notes being issued for the remaining
$20.9 million. Three of the entities acquired were responsible for approximately
$44 million of the total acquisition costs. Goodwill related to these
acquisitions of $42.7 million was recorded in fiscal 2002, all tax deductible.
Other intangible assets of $8.7 million and working capital and property, plant
and equipment of $3.4 million were also recorded.

On January 1, 2001, the Company acquired the Substral(R) brand and consumer
plant care business from Henkel KGaA. Substral(R) is a leading consumer
fertilizer brand in many European countries including Germany, Austria, Belgium,
France and the Nordics. Under the terms of the asset purchase agreement, the
Company acquired specified working capital and intangible assets associated with
the Substral(R) business. The final purchase price, determined based on the
value of the assets acquired and the performance of the business for the period
from June 15, 2000 to December 31, 2000, was $34.0 million.

The Substral(R) acquisition was made in exchange for cash and notes payable
to seller and was accounted for under the purchase method of accounting.
Accordingly, Substral's results have been included from the date of its
acquisition and the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Intangible assets associated with the purchase were $34.0 million.

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64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma results of operations give effect to the
fiscal 2002 and fiscal 2001 Scotts LawnService(R) acquisitions and Substral(R)
brand acquisition as if they had occurred on October 1, 2000. The fiscal 2003
acquisitions were deemed immaterial to include in the table below.

NOTE 6. GOODWILL AND INTANGIBLE ASSETS, NET

Effective October 1, 2001, Scotts adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". In accordance with
this standard, goodwill and certain other intangible assets, primarily
tradenames, have been classified as indefinite-lived assets no longer subject to
amortization. Indefinite-lived assets are subject to impairment testing upon
adoption of SFAS No. 142 and at least annually thereafter. The initial
impairment analysis was completed in the second quarter of fiscal 2002, taking
into account additional guidance provided by EITF 02-07, "Unit of Measure for
Testing Impairment of Indefinite-Lived Intangible Assets". The value of all
indefinite-lived tradenames as of October 1, 2001 was determined using a
"royalty savings" methodology that was employed when the businesses associated
with these tradenames were acquired but using updated estimates of sales and
profitability. As a result, a pre-tax impairment loss of $29.8 million was
recorded for the writedown of the value of the tradenames in our International
Consumer businesses in Germany, France and the United Kingdom. This transitional
impairment charge was recorded as a cumulative effect of accounting change, net
of tax, as of October 1, 2001. After completing this initial valuation and
impairment of tradenames, an initial assessment for goodwill impairment was
performed. It was determined that a goodwill impairment charge was not required.

Intangible assets include patents, tradenames and other intangible assets
which are valued at acquisition through independent appraisals where material,
or through other valuation techniques. Patents, trademarks and other intangible
assets are being amortized on a straight-line basis over periods varying from 7
to 40 years. The useful lives of intangible assets still subject to amortization
were not revised as a result of the adoption of SFAS No. 142.

Management assesses the recoverability of goodwill, tradenames and other
intangible assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable from its discounted future
cash flows. Goodwill and unamortizable intangible assets are reviewed for
impairment at least annually. If it is determined that an impairment of
intangile assets has occurred, an impairment loss is recognized for the amount
by which the carrying value of the asset exceeds its estimated fair value.

In the first quarter of fiscal 2003, the Company completed its annual
impairment analysis and determined that a charge for annual impairment was not
required.

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65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents goodwill and intangible assets as of the end
of each period presented. The September 30, 2002 balances reflect the impairment
charge recorded as of October 1, 2001.

The changes to the net carrying value of goodwill by segment for the fiscal
year ended September 30, 2003 are as follows (in millions):

The following table represents a reconciliation of recorded net income to
adjusted net income and related earnings per share data as if the provision of
SFAS No. 142 relating to non-amortization of indefinite-lived intangible assets
had been adopted as of the beginning of the earliest period presented. This
presentation does not take into account the impairment charge, if any, that may
have been recorded

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66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

if SFAS 142 had been adopted in the earlier periods presented. Basic and diluted
earnings per share would have been $3.44 and $3.19, respectively in fiscal 2002
excluding the impairment charge.

The total amortization expense for the years ended September 30, 2003, 2002
and 2001 was $8.6 million, $5.7 million and $27.7 million, respectively.

Estimated amortization expense for the existing amortizable intangible
assets for the years ended September 30, is as follows:

NOTE 7. RETIREMENT PLANS

The Company offers a defined contribution profit sharing and 401(k) plan
for substantially all U.S. employees. The majority of full and part-time
employees may participate in the plan on the first day of the month after being
hired, with a portion of the workforce being required to wait 60 days and until
the first of the next month. The plan allows participants to contribute up to
75% of their compensation in the form of pre-tax contributions, not to exceed
the annual Internal Revenue Service (IRS) maximum deferral amount. The Company
provides a matching contribution equivalent to 100% of participants' initial

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67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3% contribution and 50% of the participants' remaining contribution up to 5%.
Participants are immediately vested in employee contributions, the Company's
matching contributions and the investment return on those monies. The Company
also provides a base contribution to employees' accounts regardless of whether
employees are active in the plan. The base contribution is 2% of compensation up
to 50% of the Social Security taxable wage base plus 4% of compensation in
excess of 50% of the Social Security taxable wage base. Domestic employees of
the Company are eligible to receive base contributions on the first day of the
month following the date of hire with a portion of the workforce eligible to
receive base contributions on the first day of the month after completing one
year of service. Participants become fully vested in the Company's base
contribution after three years of service. The Company recorded charges of $9.6
million, $7.3 million and $10.3 million under the plan in fiscal 2003, 2002 and
2001, respectively.

In conjunction with the decision to offer the expanded defined contribution
profit sharing and 401(k) plan to domestic Company associates, management
decided to freeze benefits under certain defined benefit pension plans as of
December 31, 1997. These pension plans covered substantially all full-time U.S.
associates who had 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 or stated amounts. The Company's funding
policy, consistent with statutory requirements and tax considerations, is based
on actuarial computations using the Projected Unit Credit method. The Company
also curtailed its non-qualified supplemental pension plan which provides for
incremental pension payments from the Company 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.

The Company also sponsors the following pension plans associated with the
international businesses it has acquired: Scotts International BV, ASEF BV
(Netherlands), The Scotts Company (United Kingdom) Ltd., Miracle Garden Care,
Scotts France SAS, Scotts Celaflor GmbH (Germany) and Scotts Celaflor HG
(Austria). These plans generally cover all associates of the respective
businesses and retirement benefits are generally based on years of service and
compensation levels. The pension plans for Scotts International BV, ASEF BV
(Netherlands), The Scotts Company (United Kingdom) Ltd., and Miracle Garden Care
are funded plans. The remaining international pension plans are not funded by
separately held plan assets.

In connection with reduction in force initiatives implemented in fiscal
2001, curtailment (gains) or losses of ($0.2) million and $2.7 million were
recorded as components of restructuring expense for the international and
domestic defined benefit pension plans, respectively. In connection with the
closure of a manufacturing plant in Bramford, England, completed in May 2003,
special termination benefits of $1.5 million were recorded as a component of
restructuring expense in September 2002.

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68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present information about benefit obligations, plan
assets, annual expense and other assumptions about the Company's defined benefit
pension plans (in millions):

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69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. ASSOCIATE BENEFITS

The Company provides comprehensive major medical benefits to certain of its
retired associates and their dependents. Substantially all of the Company's
domestic associates who were hired before January 1, 1998 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.

In connection with the reduction in force in fiscal 2001, the plan incurred
a curtailment expense of $3.7 million which was included in restructuring
expense.

The following table sets forth the information about the retiree medical
plan:

The discount rates used in determining the accumulated postretirement
benefit obligation were 6.00% and 6.75% in fiscal 2003 and 2002, respectively.
For measurement purposes, annual rate of increase in per capita cost of covered
retiree medical benefits assumed for fiscal 2003 was 8.5% for participants under
65 years of age and 9.5% for those over 65, and 9.5% for all participants in
fiscal 2002. The rate was assumed to decrease gradually to 5.5% by the year 2011
and remain at that level thereafter. A 1% increase in health cost trend rate
assumptions would increase the accumulated postretirement benefit obligation
(APBO) as of September 30, 2003 and 2002 by $2.5 million and $1.6 million,
respectively. A 1% decrease in health cost trend rate assumptions would decrease
the APBO as of September 30, 2003 and 2002 by $2.2 million and $1.4 million,
respectively. A 1% increase or decrease in the same rate would not have a
material effect on service or interest costs.

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70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is self-insured for certain health benefits up to $0.2 million
per occurrence per individual. The cost of such benefits is recognized as
expense in the period the claim is incurred. This cost was $15.4 million, $15.8
million, and $14.7 million in fiscal 2003, 2002 and 2001, respectively.

NOTE 9. DEBT

Maturities of short- and long-term debt, including capital leases for the
next five fiscal years and thereafter are as follows:

The revolving credit facility under the Credit Agreement ("Credit
Agreement") provides for borrowings of up to $575 million, which are available
on a revolving basis over a term of 6 1/2 years ending June 30, 2005. A portion
of the revolving credit facility not to exceed $100 million is available for the
issuance of letters of credit. A portion of the facility not to exceed $360
million is available for borrowings in optional currencies, provided that the
outstanding revolving loans in other currencies do not exceed $200 million
except for British Pounds Sterling, which cannot exceed $360 million. The
outstanding principal amount of all revolving credit loans may not exceed $150
million for at least 30 consecutive days during any calendar year.

Spreads on rates and commitment fees under the Credit Agreement vary
according to the Company's leverage ratios, and interest rates also vary within
tranches. The weighted-average interest rate on the Company's borrowings under
the Credit Agreement for the years ended September 30, 2003 and 2002 was 4.88%
and 6.26%, respectively. Administrative fees paid in fiscal 2003 for the Credit
Agreement totaled $0.4 million.

Financial covenants include interest coverage and net leverage ratios.
Other covenants include limitations on indebtedness, liens, mergers,
consolidations, liquidations and dissolutions, sale of assets,
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71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

leases, dividends, capital expenditures, and investments. The Scotts Company and
all of its domestic subsidiaries pledged substantially all of their personal,
real and intellectual property assets as collateral for the borrowings under the
Credit Agreement. The Scotts Company and its subsidiaries also pledged the stock
in foreign subsidiaries that borrow under the Credit Agreement.

The term loan facilities under the Credit Agreement consist of two
tranches. The Tranche A Term Loan Facility consists of three sub-tranches of
Euros and British Pounds Sterling in the aggregate principal amount of $265
million, which are to be repaid quarterly over a 6 1/2 year period ending June
30, 2005. The Tranche B Loan Facility has an aggregate principal amount of $260
million and is to be repaid quarterly over a 6 1/2 year period ending December
31, 2007. At September 30, 2003, the outstanding balances of the Tranche A and
Tranche B Term loan Facilities are $86.0 million and $240.5 million,
respectively. Minimum required repayments by fiscal years are as follows:

These future payments are presented at foreign exchange rates in effect at
September 30, 2003.

The term loan facilities have a variable interest rate which was 3.98% at
September 30, 2003.

Approximately $17.3 million of financing costs associated with the Credit
Agreement have been deferred as of September 30, 2003 and are being amortized
over a period which ends June 30, 2005. The unamortized balance September 30,
2003 was $5.8 million.

In January 2002, The Scotts Company completed an offering of $70 million of
8 5/8% Senior Subordinated Notes due 2009. The net proceeds from the offering
were used to pay down borrowings on our revolving credit facility. The notes
were issued at a premium of $1.8 million. The effective interest rate for the
notes is 8 3/8%. The issuance costs associated with the offering totaled $1.6
million. Both the premium and the issuance costs are being amortized over the
life of the notes.

In January 1999, The Scotts Company completed an offering of $330 million
of 8 5/8% Senior Subordinated Notes due 2009. The Scotts Company entered into
two interest rate locks in fiscal 1998 to hedge its anticipated interest rate
exposure on the 8 5/8% Notes offering. The total amount paid under the interest
rate locks of $12.9 million has been recorded as a reduction of the 8 5/8%
Notes' carrying value and is being amortized over the life of the 8 5/8% Notes
as interest expense. Approximately $11.8 million of issuance costs associated
with the 8 5/8% Notes were deferred and are being amortized over the term of the
Notes. The effective interest rate for the notes including the cost of the
interest rate locks is 9.24%.

In October 2003, The Scotts Company completed a refinancing of its Credit
Agreement and its $400 million 8 5/8% Senior Subordinated Notes in a series of
transactions. See Note 23 to the Consolidated Financial Statements.

In conjunction with previous acquisitions, notes were issued for certain
portions of the total purchase price that are to be paid in future periods. The
present value of the remaining note payments is $21.6 million, of which $15.5
million pertains to lawnservice business acquisitions. The Company is imputing
interest on the notes using the stated interest rate or an interest rate
prevalent for similar instruments at the time of acquisition on the non-interest
bearing notes.

Foreign notes of $6.0 million issued on December 12, 1997, have an 8-year
term and bear interest at 1% below LIBOR. The present value of these loans at
September 30, 2003 and 2002 was $0.6 million and $2.6 million, respectively. The
loans are denominated in British Pounds Sterling and can be redeemed, on demand,
by the note holder. The foreign bank borrowings of $5.7 million at September 30,
2003 and $4.4 million at September 30, 2002 represent lines of credit for
foreign operations and are primarily denominated in Euros.

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72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. SHAREHOLDERS' EQUITY

Class A Convertible Preferred Stock ("Preferred Shares") with a liquidation
preference of $195.0 million was issued in conjunction with the 1995 Miracle-Gro
merger transactions. These Preferred Shares had a 5% dividend yield and were
convertible upon shareholder demand into common shares at any time and at The
Scotts Company's option after May 2000 at $19.00 per common share. The
conversion feature associated with the Preferred Shares issued in connection
with the Miracle-Gro merger transactions was negotiated as an integral part of
the overall transaction. The conversion price exceeded the fair market value of
The Scotts Company's common shares on the date the two companies reached
agreement and, therefore, the Preferred Shares did not provide for a beneficial
conversion feature. Additionally, warrants to purchase 3.0 million common shares
of The Scotts Company were issued as part of the purchase price. As of September
30, 2003, all warrants have been exercised by the issuance of 1,527,551 common
shares in a series of non-cash transactions. The fair value of the warrants at
issuance has been included in capital in excess of par value in the Company's
Consolidated Balance Sheets.

In fiscal 1999, certain of the Preferred Shares were converted into 0.2
million common shares at the holder's option. In October 1999, all of the then
outstanding Preferred Shares were converted into 10.0 million common shares. In
exchange for the early conversion, The Scotts Company paid the holders of the
Preferred Shares $6.4 million. That amount represents the dividends on the
Preferred Shares that otherwise would have been payable from the conversion date
through May 2000, the month during which the Preferred Shares could first be
redeemed by The Scotts Company. In addition, The Scotts Company agreed to
accelerate the termination of many of the standstill provisions in the
Miracle-Gro merger agreement that would otherwise have terminated in May 2000.
These standstill provisions include the provisions related to the Board of
Directors and voting restrictions, as well as restrictions on transfer.
Therefore, the former shareholders of Stern's Miracle-Gro Products, Inc.,
including Hagedorn Partnership, L.P., may vote their common shares freely in the
election of directors and generally on all matters brought before The Scotts
Company's shareholders. Following the conversion and the termination of the
standstill provisions described above, the former shareholders of Miracle-Gro
owned approximately 34% as of September 30, 2003 of The Scotts Company's
outstanding common shares and, thus, have the ability to significantly influence
the election of directors and approval of other actions requiring the approval
of The Scotts Company's shareholders.

In January 2001, the Amended Articles of Incorporation of The Scotts
Company were amended to change the authorized preferred stock from 195,000
shares of Class A Convertible Preferred Stock to 195,000 preferred shares, each
without par value.

The limitations on the ability of the former shareholders of Miracle-Gro to
acquire additional voting securities of The Scotts Company contained in the
merger agreement terminated as of October 1, 1999, except for the restriction
under which the former shareholders of Miracle-Gro may not acquire, directly or
indirectly, beneficial ownership of Voting Stock (as that term is defined in the
Miracle-Gro merger agreement) representing more than 49% of the total voting
power of the outstanding Voting Stock, except pursuant to a tender offer for
100% of that total voting power, which tender offer is made at a price per share
which is not less than the market price per share on the last trading day before
the announcement of the tender offer and is conditioned upon the receipt of at
least 50% of the Voting Stock beneficially owned by shareholders of The Scotts
Company other than the former shareholders of Miracle-Gro and their affiliates
and associates.

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73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Under The Scotts Company 1992 Long Term Incentive Plan (the "1992 Plan"),
stock options and performance share awards were granted to officers and other
key employees of the Company. The 1992 Plan also provided for the grant of stock
options to non-employee directors of Scotts. The maximum number of common shares
that may be issued under the 1992 Plan is 1.7 million, plus the number of common
shares surrendered to exercise options (other than non-employee director
options) granted under the 1992 Plan, up to a maximum of 1.0 million surrendered
common shares. Vesting periods under the 1992 Plan vary and were determined by
the Compensation and Organization Committee of the Board of Directors.

Under The Scotts Company 1996 Stock Option Plan (the "1996 Plan"), stock
awards may be granted to officers and other key employees of the Company and
non-employee directors of The Scotts Company. The maximum number of common
shares that may be issued under the 1996 Plan is 5.5 million. Vesting periods
under the 1996 Plan vary. Generally, a 3-year cliff vesting schedule is used
unless decided otherwise by the Compensation and Organization Committee of the
Board of Directors. The Company also has a phantom option plan for certain
management employees which is payable in cash based on the increase in the
Company's share price over a three-year vesting period.

Under The Scotts Company 2003 Stock Option and Incentive Equity Plan (the
"2003 Plan"), which was approved by the Board Directors at the annual meeting in
January 2003, stock awards may be granted to officers and other key employees of
the Company and non-employee directors of The Scotts Company. The maximum number
of common shares that may be issued under the 2003 Plan is 3.5 million. Vesting
periods under the 2003 Plan vary. Generally a three-year cliff vesting schedule
is used unless decided otherwise by the Compensation and Organization Committee
of the Board of Directors.

Aggregate stock award activity consists of the following (shares in
millions):

The following summarizes certain information pertaining to stock awards
outstanding and exercisable at September 30, 2003 (shares in millions):

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74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, had originally adopted SFAS No. 123 for disclosure purposes only.
However, effective October 1, 2002, the Company began expensing options granted
after that date in accordance with the SFAS No. 123 recognition and measurement
provisions as amended by SFAS No. 148.

The fair value of each award granted has been estimated on the grant date
using the Black-Scholes option-pricing model based on the following weighted
average assumptions for those granted in fiscal 2003, 2002 and 2001: (1)
expected market-price volatility of 30.1%, 29.7% and 29.5%, respectively; (2)
risk-free interest rates of 3.5%, 3.35% and 4.4%, respectively; and (3) expected
life of options of 7 years for fiscal 2003 and fiscal 2002 and 6 years for
fiscal 2001. Awards are generally granted with a ten-year term. The estimated
weighted-average fair value per share of options granted during fiscal 2003,
2002 and 2001 was $19.35, $15.83 and $11.74, respectively.

NOTE 11. EARNINGS PER COMMON SHARE

The following table presents information necessary to calculate basic and
diluted earnings per common share. Basic earnings per common share are computed
by dividing net income by the weighted average number of common shares
outstanding. Options to purchase 0.1 million, 0.1 million and 0.2 million shares
of common stock for the years ended September 30, 2003, 2002 and 2001,
respectively, were not included in the computation of diluted earnings per
common share. These options were excluded from the calculation because the
exercise price of these options was greater than the

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75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

average market price of the common shares in the respective periods, and
therefore, they were anti-dilutive.

NOTE 12. INCOME TAXES

The provision for income taxes consists of the following:

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76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The domestic and foreign components of income before taxes are as follows:

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

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

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77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Net operating loss carryforwards in foreign jurisdictions were $0.6 million
at September 30, 2002. The use of these acquired carryforwards is subject to
limitations imposed by the tax laws of each applicable country.

State net operating loss carryforwards were $4.4 million and $0.5 million
at September 30, 2003 and 2002, respectively. Any losses not previously utilized
will begin to expire starting in fiscal 2011.

State tax credits were $2.8 million at September 30, 2003. Any credits not
previously utilized will begin to expire starting in fiscal 2005.

A valuation allowance of $1.0 million at September 30, 2003 was established
to offset the potential tax benefits of capital losses for which the benefits
are not expected to be realized.

Deferred taxes have not been provided on unremitted earnings of certain
foreign subsidiaries and foreign corporate joint ventures that arose in fiscal
years ending on or before September 30, 2003 in accordance with APB 23 since
such earnings have been permanently reinvested.

NOTE 13. FINANCIAL INSTRUMENTS

A description of the Company's financial instruments and the methods and
assumptions used to estimate their fair values is as follows:

LONG-TERM DEBT

At September 30, 2003 and 2002, Scotts had $400 million outstanding, of
8 5/8% Senior Subordinated Notes due 2009. The fair value of these notes was
estimated based on recent trading information. Variable rate debt outstanding at
September 30, 2003 and 2002 consisted of term loans under the Company's credit
agreement and local bank borrowings for certain of the Company's foreign
operations. The carrying amounts of these borrowings are considered to
approximate their fair values.

INTEREST RATE SWAP AGREEMENTS

At September 30, 2003 and 2002, Scotts had five and six interest rate swaps
outstanding, respectively, with major financial institutions that effectively
convert variable-rate debt to a fixed rate. The swaps have notional amounts
between $10 million and $25 million ($75 million and $95 million in total,

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78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

respectively) with three, four or five-year terms commencing in January 1999.
Under the terms of these swaps, the Company pays swap rates ranging from 3.75%
to 5.18% plus a spread based on the pricing grid contained in the credit
agreement and receives three-month LIBOR in return.

Scotts enters into interest rate swap agreements as a means to hedge its
interest rate exposure on debt instruments. Since the interest rate swaps have
been designated as hedging instruments, their fair values are reflected in the
Company's Consolidated Balance Sheets. Net amounts to be received or paid under
the swap agreements are reflected as adjustments to interest expense. Unrealized
gains or losses resulting from valuing these swaps at fair value are recorded in
other comprehensive income. The fair value of the swap agreements was determined
based on the present value of the estimated future net cash flows using implied
rates in the applicable yield curve as of the valuation date.

INTEREST RATE LOCKS

Scotts entered into the interest rate locks to hedge its interest rate
exposure on the offering of the 8 5/8% Senior Subordinated Notes due 2009. The
net amount paid under the interest rate locks is reflected as an adjustment to
the carrying amount of the 8 5/8% Senior Subordinated Notes.

The estimated fair values of the Company's financial instruments are as
follows for the fiscal years ended September 30:

Excluded from the fair value table above are the following items that are
included in the Company's total debt balances at September 30, 2003 and 2002:

The fair value of the non-interest bearing notes is not considered
determinable since there is no established market for notes with similar
characteristics and since they represent notes that were negotiated between the
Company and the seller as part of transactions to acquire businesses.

NOTE 14. OPERATING LEASES

The Company leases buildings, land and equipment under various
noncancellable lease agreements for periods of two to fourteen years. The lease
agreements generally provide that the Company pay taxes,

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79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

insurance and maintenance expenses related to the leased assets. Certain lease
agreements contain purchase options. At September 30, 2003, future minimum lease
payments were as follows:

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 $40.8 million, $33.6 million and $22.0 million for fiscal 2003, 2002
and 2001, respectively.

NOTE 15. COMMITMENTS

The Company has entered into the following purchase commitments:

SEED: The Company is obligated to make future purchases based on estimated
yields and other market purchase commitments. At September 30, 2003, estimated
annual seed purchase commitments were as follows:

The Company made purchases of $53.9 million, $51.6 million and $53.9
million under this obligation in fiscal 2003, 2002 and 2001, respectively.

MEDIA ADVERTISING. As of September 30, 2003, the Company has committed to
purchase $25.3 million of airtime for both national and regional television
advertising in fiscal 2004.

NOTE 16. CONTINGENCIES

Management continually evaluates the Company's contingencies, including
various lawsuits and claims which arise in the normal course of business,
product and general liabilities, worker's compensation, property losses and
other fiduciary liabilities for which the Company is self-insured or retains a
high exposure limit. Insurance reserves are established within an actuarially
determined range. In the opinion of management, its assessment of contingencies
is reasonable and related reserves, in the aggregate, are adequate; however,
there can be no assurance that future quarterly or annual operating results will
not be materially affected by final resolution of these matters. The following
matters are the more significant of the Company's identified contingencies.

ENVIRONMENTAL MATTERS

In June 1997, the Ohio EPA initiated an enforcement action against us with
respect to alleged surface water violations and inadequate treatment
capabilities at our Marysville facility and seeking corrective action under the
federal Resource Conservation and Recovery Act. The action relates to several
discontinued on-site disposal areas which date back to the early operations of
the Marysville facility that we had already been assessing and, in some cases,
remediating, on a voluntary basis. On December 3,

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80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2001, an agreed judicial Consent Order was submitted to the Union County Common
Pleas Court and was entered by the court on January 25, 2002.

Now that the Consent Order has been entered, we have paid a $275,000 fine
and must satisfactorily remediate the Marysville site. We have continued our
remediation activities with the knowledge and oversight of the Ohio EPA. We
completed an updated evaluation of our expected liability related to this matter
based on the fine paid and remediation actions that we have taken and expect to
take in the future. As a result, we accrued an additional $3.0 million in the
third quarter of fiscal 2002 to increase our reserve based on the latest
estimates.

In addition to the dispute with the Ohio EPA, we are negotiating with the
Philadelphia District of the U.S. Army Corps of Engineers regarding the terms of
site remediation and the resolution of the Corps' civil penalty demand in
connection with our prior peat harvesting operations at our Lafayette, New
Jersey facility. We are also addressing remediation concerns raised by the
Environment Agency of the United Kingdom with respect to emissions to air and
groundwater at our Bramford (Suffolk), United Kingdom facility. We have reserved
for our estimates of probable losses to be incurred in connection with each of
these matters.

At September 30, 2003, $6.8 million was accrued for the environmental and
regulatory matters described herein. The most significant component of this
accrual are estimated costs for site remediation of $4.5 million. Most of the
costs accrued as of September 30, 2003, are expected to be paid in fiscal 2004
and 2005; however, payments could be made for a period thereafter.

We believe that the amounts accrued as of September 30, 2003 are adequate
to cover our known environmental exposures based on current facts and estimates
of likely outcome. However, the adequacy of these accruals is based on several
significant assumptions:

- that we have identified all of the significant sites that must be
remediated;

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

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

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

During fiscal 2003, we made approximately $1.5 million in environmental
expenditures, compared with approximately $0.3 million in environmental capital
expenditures and $5.4 million in environmental expenditures for fiscal 2002.
Included in the $5.4 million is the $3.0 million increase in the accrual for
future costs related to site remediation as described above.

AGREVO ENVIRONMENTAL HEALTH, INC.

On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") (which
subsequently changed its name to Aventis Environmental Health Science USA LP)
filed a complaint in the U.S. District Court for the Southern District of New
York (the "New York Action"), against Scotts, a subsidiary of Scotts and
Monsanto seeking damages and injunctive relief for alleged antitrust violations
and breach of contract by Scotts and its subsidiary and antitrust violations and
tortious interference with contract by Monsanto. Scotts purchased a consumer
herbicide business from AgrEvo in May 1998. AgrEvo claims in the suit that
Scotts' subsequent agreement to become Monsanto's exclusive sales and marketing
agent for Monsanto's consumer Roundup(R) business violated the federal antitrust
laws. AgrEvo contends that Monsanto attempted to or did monopolize the market
for non-selective herbicides and conspired with Scotts to eliminate the
herbicide Scotts previously purchased from AgrEvo, which competed with
Monsanto's Roundup(R). AgrEvo also contends that Scotts' execution of various
agreements with Monsanto, including the Roundup(R) marketing agreement, as well
as Scotts' subsequent actions, violated agreements between AgrEvo and Scotts.

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81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AgrEvo is requesting unspecified damages as well as affirmative injunctive
relief, and seeking to have the court invalidate the Roundup(R) marketing
agreement as violative of the federal antitrust laws. Under the indemnification
provisions of the Roundup(R) marketing agreement, Monsanto and Scotts each have
requested that the other indemnify against any losses arising from this lawsuit.

On June 29, 1999, AgrEvo also filed a complaint in the Superior Court of
the State of Delaware against two of Scotts' subsidiaries seeking damages for
alleged breach of contract. AgrEvo alleges that, under the contracts by which a
subsidiary of Scotts purchased a herbicide business from AgrEvo in May 1998, two
of Scotts' subsidiaries have failed to pay AgrEvo approximately $0.6 million.
AgrEvo is requesting damages in this amount, as well as pre- and post-judgment
interest and attorneys' fees and costs. Scotts' subsidiaries have moved to
dismiss or stay this action. On January 31, 2000, the Delaware court stayed
AgrEvo's action pending the resolution of a motion to amend the New York Action,
and the resolution of the New York Action.

On May 15, 2002, AgrEvo filed an additional, duplicative complaint that
makes the same claims that are made in the amended complaint in the New York
Action, described above. On June 6, 2002, Scotts moved to dismiss this
duplicative complaint as procedurally improper. There has been no ruling by the
court on Scotts' motion.

On January 10, 2003, Scotts filed a supplemental counterclaim against
AgrEvo for breach of contract. Scotts alleges that AgrEvo owes Scotts for
amounts that Scotts overpaid to AgrEvo. Scotts' counterclaim is now part of the
underlying litigation.

Scotts believes that AgrEvo's claims in these matters are without merit and
intends to vigorously defend against them. If the above actions are determined
adversely to Scotts, the result could have a material adverse effect on Scotts'
results of operations, financial position and cash flows. Any potential exposure
that Scotts may face cannot be reasonably estimated. Therefore, no accrual has
been established related to these matters.

CENTRAL GARDEN & PET COMPANY

SCOTTS V. CENTRAL GARDEN, SOUTHERN DISTRICT OF OHIO

On June 30, 2000, Scotts filed suit against Central Garden & Pet Company
("Central Garden") in the U.S. District Court for the Southern District of Ohio
(the "Ohio Action") to recover approximately $24 million in accounts receivable
and additional damages for other breaches of duty.

Central Garden filed counterclaims including allegations that Scotts and
Central Garden had entered into an oral agreement in April 1998 whereby Scotts
would allegedly share with Central Garden the benefits and liabilities of any
future business integration between Scotts and Monsanto. The court has dismissed
a number of Central Garden's counterclaims as well as Scotts' claims that
Central Garden breached other duties owed to Scotts. On April 22, 2002, a jury
returned a verdict in favor of Scotts of $22.5 million and for Central Garden on
its remaining counterclaims in an amount of approximately $12.1 million. Various
post-trial motions were filed. As a result of those motions, the trial court has
reduced Central Garden's verdict by $750,000, denied Central Garden's motion for
a new trial on two of its counterclaims and granted the parties pre-judgment
interest on their respective verdicts. On September 22, 2003, the court entered
a final judgment, which provided for a net award to Scotts of approximately $14
million, together with interest at 2.31% through the date of payment. Central
Garden has appealed and Scotts has cross-appealed from that final judgment.

Two counterclaims that the court permitted Central Garden to add on the eve
of trial were subsequently settled.

CENTRAL GARDEN V. SCOTTS & PHARMACIA, NORTHERN DISTRICT OF CALIFORNIA

On July 7, 2000, Central Garden filed suit against Scotts and Pharmacia in
the U.S. District Court for the Northern District of California (San Francisco
Division) alleging various claims, including breach of contract and violations
of federal antitrust laws, and seeking an unspecified amount of damages and
injunctive relief. On April 15, 2002, Scotts and Central Garden each filed
summary judgment motions in this action. On June 26, 2002, the court granted
summary judgment in favor of Scotts and dismissed all of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Central Garden's then remaining claims. The case is now pending on appeal in the
United States Court of Appeals.

CENTRAL GARDEN V. SCOTTS & PHARMACIA, CONTRA COSTA SUPERIOR COURT

On October 31, 2000, Central Garden filed a complaint against Scotts and
Pharmacia in the California Superior Court for Contra Costa County. That
complaint seeks to assert breach of contract claims and claims under Section
17200 of the California Business and Professions Code. On December 4, 2000,
Scotts and Pharmacia jointly filed a motion to stay this action based on the
pendency of prior lawsuits that involve the same subject matter. By order dated
February 23, 2001, the Superior Court stayed the action pending before it. The
Court recently granted Scotts' motion to lift the stay and is considering a
motion to dismiss filed by Scotts. Central Garden and Pharmacia have settled
their claims relating to this action.

Although Scotts has prevailed consistently and extensively in the
litigation with Central Garden, the decisions in Scotts' favor are subject to
appeal. If, upon appeal or otherwise, the above actions are determined adversely
to Scotts, the result could have a material adverse affect on Scotts' results of
operations, financial position and cash flows. Scotts believes that it will
continue to prevail in the Central Garden matters and that any potential
exposure that Scotts may face cannot be reasonably estimated. Therefore, no
accrual has been established related to the claims brought against Scotts by
Central Garden, except for amounts ordered paid to Central Garden in the Ohio
Action. Scotts believes it has adequate reserves recorded for the amounts it may
ultimately be required to pay.

NOTE 17. 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 commercial nurseries, greenhouses, landscape
services, and growers of specialty agriculture crops.

At September 30, 2003, 68% of the Company's accounts receivable was due in
North America, with 7% related to on-going litigation documented in Note 16 to
the Consolidated Financial Statements. Approximately 75% of the North American
receivables were generated from the Company's North American Consumer segment.
The most significant concentration of receivables within this segment was from
our top 3 customers, which accounted for 79% of the total.

The remaining 25% of North American accounts receivable was generated from
customers of the Scotts LawnService(R) and Global Professional segments located
in North America. Nearly all of the Global Professional segment's North American
accounts receivable at September 30, 2003 was due from distributors.

The 32% of accounts receivable generated outside of North America was due
from retailers, distributors, nurseries and growers. No concentrations of
customers or individual customers within this group account for more than 10% of
the Company's accounts receivable balance at September 30, 2003.

At September 30, 2003, the Company's concentrations of credit risk were
similar to those existing at September 30, 2002.

The Company's two largest customers accounted for the following percentage
of net sales in each respective period:

Sales to the Company's two largest customers are reported within Scotts'
North American Consumer segment. No other customers accounted for more than 10%
of fiscal 2003, 2002 or 2001 net sales.

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83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18. OTHER EXPENSE (INCOME)

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

NOTE 19. NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities--an interpretation of ARB No. 51"
(FIN 46), in January 2003. This Interpretation explains how to identify variable
interest entities and how an enterprise assesses its interests in a variable
interest entity to decide whether to consolidate that entity. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risks will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. The Company will be required to adopt this
interpretation in the first quarter of fiscal 2004. The Company is still
evaluating the provisions of FIN 46 and its related FASB Staff Positions for
applicability to the Company's Scotts LawnService(R) franchises are currently
being reviewed for application of this Interpretation. The Company has no other
special purpose entities that would be applicable under this Interpretation.

NOTE 20. SUPPLEMENTAL CASH FLOW INFORMATION

NOTE 21. SEGMENT INFORMATION

For fiscal 2003, the Company was divided into four reportable
segments--North American Consumer, Scotts LawnService(R), Global Professional
and International Consumer. The North American Consumer segment consists of the
Lawns, Gardening Products, Ortho(R) and Canadian business groups.

The North American Consumer 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 growing media products and pesticides products. Products are marketed to
mass merchandisers, home improvement centers, national hardware chains,
independent hardware stores, nurseries, gardens centers, and food and drug
stores.

The Scotts LawnService(R) segment provides lawn fertilization, insect
control and other related services such as core aeration primarily to
residential consumers through company-operated branches and

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84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

franchises. In most Company markets, Scotts LawnService(R) also offers tree and
shrub fertilization, disease and insect control treatments and, in our larger
branches, we offer an exterior barrier pest control service.

The Global Professional segment is focused on a full line of horticulture
products including controlled-release and water-soluble fertilizers and plant
protection products, grass seed, spreaders, customer application services and
growing media. Products are sold to commercial nurseries and greenhouses and
specialty crop growers. Our Branded Plants business and biotechnology operations
are also part of the Global Professional segment.

The International Consumer segment provides products similar to those
described above for the North American Consumer segment to consumers in
countries other than the United States and Canada.

The following table presents segment financial information in accordance
with Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Pursuant to SFAS No. 131,
the presentation of the segment financial information is consistent with the
basis used by management (i.e., certain costs not allocated to business segments
for internal management reporting purposes are not allocated for purposes of
this presentation).

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

Income (loss) from operations reported for Scotts' four operating segments
represents earnings before amortization of intangible assets, interest and
taxes, since this is the measure of profitability used by management.
Accordingly, the Corporate loss from operations for the fiscal years ended
September 30,
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85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2003, 2002 and 2001 includes amortization of certain intangible assets,
unallocated corporate general and administrative expenses, certain other
income/expense not allocated to the business segments and North America
restructuring charges. International restructuring charges of approximately $9.1
million, $4.5 million and $10.4 million are included in International Consumer's
income (loss) from operations in fiscal 2003, 2002 and 2001, respectively.
Global Professional income from operations in fiscal 2001 is net of
restructuring charges of $2.9 million.

Long-lived assets reported for Scotts' operating segments include goodwill
and intangible assets as well as property, plant and equipment within each
segment.

Total assets reported for Scotts' operating segments include the intangible
assets for the acquired businesses within those segments. Corporate assets
primarily include deferred financing and debt issuance costs, corporate
intangible assets as well as deferred tax assets.

NOTE 22. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations
for fiscal 2003 and 2002.

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86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Common stock equivalents, such as stock awards and warrants, are excluded
from the diluted loss per share calculation in periods where there is a net loss
because their effect is anti-dilutive.

Scotts' business is highly seasonal with over 70% of sales occurring in the
second and third fiscal quarters combined.

NOTE 23. SUBSEQUENT EVENT

In October 2003, the Company substantially completed a refinancing of the
former Credit Agreement and its $400 million 8 5/8% Senior Subordinated Notes
("8 5/8% Notes") in a series of transactions. The refinancing began on October
8, 2003 with the issuance by The Scotts Company of $200 million 6 5/8% Senior
Subordinated Notes due November 15, 2013 ("6 5/8% Notes"). Next, substantially
all of the outstanding 8 5/8% Notes were tendered on October 21, 2003 within the
terms of the original agreement. Finally, the Former Credit Agreement was
replaced with a Second Amended and Restated Credit Agreement ("New Credit
Agreement") on October 22, 2003 which contains less restrictive terms and
conditions than the Former Agreement.

The 6 5/8% Notes were issued in accordance with Rule 144A and Regulation S
under the Securities Act of 1933. The 6 5/8% Notes were sold at par, pay
interest semi-annually on May 15 and November 15, have a ten-year maturity with
a five-year no-call provision, and are guaranteed by the current and future
domestic restricted subsidiaries of The Scotts Company. Such guarantees are
unsecured senior subordinated obligations of the Company. The covenants
contained in the 6 5/8% Notes indenture are less restrictive than those
contained in the 8 5/8% Notes indenture.

The Scotts Company called the 8 5/8% Notes at 106.05% per $1,000 Note
resulting in a principal tendered amount of approximately $386.8 million on
October 21, 2003. On November 21, 2003, the

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87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company delivered notice to the trustee to redeem the outstanding $13.2 million
8 5/8% Notes effective on the first call date of January 15, 2004 at 104.313%
per $1,000 Note plus accrued interest. The expected loss on the extinguishment
of the former Credit Agreement is $44.3 million, of which $19.4 million is
related to the write-off of deferred fees, $24.0 million of premiums paid and
$0.9 million in transaction fees.

The New Credit Agreement was entered into with a syndicate of commercial
banks and institutional lenders on October 22, 2003. The New Credit Agreement
consists of a $700 million multi-currency revolving credit commitment and a $500
million term loan B facility. Financial covenants consist of a minimum interest
coverage ratio and a maximum leverage ratio along with other negative covenants
similar to the previous Credit Agreement.

The revolving credit facilities under the New Credit Agreement provide for
a five-year $700 million commitment expiring on October 22, 2008 and allow for
borrowings in U.S. Dollars and optional currencies including, but not limited
to, Euros, British Pounds Sterling, Canadian Dollars and Australian Dollars. A
portion of the revolving credit facilities of an amount not exceeding $65
million may be used for letters of credit. Interest rate spreads under the New
Credit Agreement will be determined by a pricing grid corresponding to a
quarterly calculation of the Company's leverage ratio comprised of averaged
components for the most recent four quarters.

The $500 million term loan B facility expires on September 30, 2010.
Repayment of the term loan B commences on March 31, 2004 with minimum quarterly
principal payments through June 30, 2010 followed by a balloon maturity on
September 30, 2010.

Collateral for the borrowings under the New Credit Agreement consists of
pledges by the Company and all of its domestic subsidiaries of substantially all
of their personal, real and intellectual property assets. The Company and its
subsidiaries also pledged a majority of the stock in foreign subsidiaries that
borrow under the New Credit Agreement.

On November 28, 2003, The Scotts Company entered into five new interest
swaps with major financial institutions that effectively convert variable-rate
debt related to the New Credit Agreement dated October 22, 2003 to a fixed rate.
The swaps have notional amounts between $10 million and $50 million ($125
million in total) with three, four and five-year terms. Under the terms of these
swaps, the Company pays swap rates ranging from 2.76% to 3.56%, plus a spread
based on the pricing grid contained in the credit agreement and receives
three-month LIBOR in return.

NOTE 24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS

In January 1999, The Scotts Company issued $330 million of 8 5/8% Senior
Subordinated Notes due 2009 to qualified institutional buyers under the
provisions of Rule 144A of the Securities Act of 1933. These Notes were
subsequently registered in December 2000. In January 2002, the Company issued an
additional $70 million of 8 5/8% Senior Subordinated Notes due 2009 and were
subsequently exchanged for Registered 8 5/8% Notes in October 2002.

The Notes are general obligations of The Scotts Company and are guaranteed
by all of the existing wholly-owned, domestic subsidiaries and all future
wholly-owned, significant (as defined in Regulation S-X of the SEC) domestic
subsidiaries of The Scotts Company. These subsidiary guarantors jointly and
severally guarantee The Scotts Company's obligations under the Notes. The
guarantees represent full and unconditional general obligations of each
subsidiary that are subordinated in right of payment to all existing and future
senior debt of that subsidiary but are senior in right of payment to any future
junior subordinated debt of that subsidiary.

The following information presents consolidating Statements of Operations
and Statements of Cash Flows for the three years ended September 30, 2003 and
consolidated Balance Sheets as of September 30, 2003 and 2002. Separate audited
financial statements of the individual guarantor subsidiaries have not been
provided because management does not believe they would be meaningful to
investors.

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88

THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
(IN MILLIONS)

----
89

THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
(IN MILLIONS)

----
90

THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 2003
(IN MILLIONS)

----
91

THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
(IN MILLIONS)

----
92

THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
(IN MILLIONS)

----
93

THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(IN MILLIONS)

----
94

THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)

----
95

THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)

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96

REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders of The Scotts Company

Our audits of the consolidated financial statements referred to in our
report dated December 5, 2003 appearing in Item 15(a)(1) of this Annual Report
on Form 10-K, also included an audit of the financial statement schedule listed
in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.

/s/ PRICEWATERHOUSECOOPERS LLP

Columbus, Ohio
December 5, 2003

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97

THE SCOTTS COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
(IN MILLIONS)

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
(IN MILLIONS)

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)

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98

THE SCOTTS COMPANY

INDEX TO EXHIBITS

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* Filed herewith.

** Certain portions of this Exhibit have been omitted based upon an Order
Granting Confidential Treatment from the Securities and Exchange Commission
("SEC"), dated August 23, 2002, extending through September 30, 2005.

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107