**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        DC 20549**
  **FORM
        10-KSB**
 (MARK
                    ONE)**x**
                **ANNUAL
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934****For
                    the fiscal year ended March 31, 2007****OR****o**
                **TRANSITION
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934****For
                    the transition period from  ______________ to
                    ______________**
  Commission
          file number **: 000-50888**
 **AEROGROW
        INTERANATIONAL, INC.**
 **(Name
        of small business issuer in its charter)**
  **Nevada**
              **46-0510685**(State
                  or other jurisdictionof
                incorporation
                  or organization)
              (IRS
                  Employer
                Identification
                  No.)
   ****6075
                  Longbow Dr., Suite 200 Boulder,
                  Colorado****
              **80301**(Address
                  of principal executive offices)
              (Zip
                  Code)
  **(303)
          444-7755**
 (Issuer’s
          telephone number)
 
 
 **Securities
        registered pursuant to Section 12(g) of
        the Exchange Act:**
 
 Title
                  of each class
              Name
                  of each exchange on which registered**Common
                  Stock, $0.0001 Par Value**
              **Over
                  the Counter**
  **Securities
          registered under Section 12(b) of the Exchange Act:**
  Common
          Stock, $.01 par value
  Check
          whether the issuer is not required to file reports pursuant to Section
          13 or
          15(d) of the Exchange Act   o
  Check
          whether the Registrant: (1) filed all reports required to be filed by Sections
          13 or 15(d) of the Exchange Act during the past 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 past 90 days.  Yes x         No
o
 
 Check
          if
          there is no disclosure of delinquent filers in response to Item 405 of
          Regulation S-B contained in this form, and no disclosure will 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-KSB or
          any
          amendment to this Form 10-KSB. o
 
 Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule 12b-2 of the Exchange Act). Yes o No ý
  Issuer’s
          revenues for its most recent fiscal year $13,144,037.
  The
          aggregate market value of the common equity stock held by non-affiliates,
          computed by reference to the average bid and asked prices of such stock
          as of
          May 31, 2007, was approximately $66,476,272.
 
 The
          number of shares outstanding of the issuer’s common equity as of May 31, 2007
          was 11,065,609.
 
 Documents
          incorporated by reference: None





Table
            of Contents


**TABLE
        OF CONTENTS**




PAGEPART
                  I.Item
                  1.
              Description
                  of Business
              1Item
                  2.
              Description
                  of Property
              15Item
                  3.
              Legal
                  Proceedings
              15Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              15PART
                  II.Item
                  5.
              Market
                  for Common Equity and Related Stockholder Matters
                  and
                  SmallBusiness
                  Issuer Purchases of Equity Securities
              15Item
                  6.
              Management’s
                    Discussion and Analysis or Plan of
                    Operation
              16Item
                  7.
              Financial
                  Statements
              28Item
                  8.
              Changes
                  In and Disagreements With Accountants on
                  Accounting and Financial Disclosure
              28Item
                  8A.
              Controls
                    and Procedures
              28Item
                  8B.
              Other
                  Information
              28PART
                  III.Item
                  9.
              Directors,
                  Executive Officers, Promoters, Control Persons
                  and Corporate Governance; Compliance with Section 16(a) of the
                  Exchange
                  Act
              29Item
                  10.
              Executive
                  Compensation
              32Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              36Item
                  12.
              Certain
                  Relationships and Related Transactions, and
                  Director Independence
              41Item
                  13.
              Exhibits
                  and Reports
              42Item
                  14.
              Principal
                  Accountant Fees and Services
              42Signatures
              43Financial
                Statements
              F-1Exhibit
                Index
              I-1






*In
      addition to historical information, this Annual Report on Form 10-KSB (“Annual
      Report”) for AeroGrow International Inc. (“AeroGrow” the “Company,” “we,” “our”
or “us”) contains “forward-looking” statements within the meaning of Section 27A
      of the Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”), including statements that
      include the words “may,” “will,” “believes,” “expects,” “anticipates,” or
      similar expressions. These forward looking statements may include, among others,
      statements concerning our expectations regarding our business, growth prospects,
      revenue trends, operating costs, working capital requirements, competition,
      results of operations and other statements of expectations, beliefs, future
      plans and strategies, anticipated events or trends, and similar expressions
      concerning matters that are not historical facts. The forward-looking statements
      in this Annual Report involve known and unknown risks, uncertainties and other
      factors that could cause our actual results, performance or achievements to
      differ materially from those expressed or implied by the forward-looking
      statements contained herein.*





*Each
      forward-looking statement should be read in context with, and with an
      understanding of, the various disclosures concerning our business made elsewhere
      in this Annual Report, as well as other public reports filed by us with the
      United States Securities and Exchange Commission. Investors should not place
      undue reliance on any forward-looking statement as a prediction of actual
      results of developments. Except as required by applicable law or regulation,
      we
      undertake no obligation to update or revise any forward-looking statement
      contained in this Annual Report.*


Table
          of Contents


**PART
      I**


**ITEM
        1.  DESCRIPTION OF
        BUSINESS**




**Corporate
      History**




AeroGrow
      International Inc. (“AeroGrow”) was formed as a Nevada corporation on March 25,
      2002. Wentworth I, Inc., a Delaware corporation (“Wentworth”) organized
      under the laws of the State of Delaware on March 6, 2001, entered into an
      Agreement and Plan of Merger with us (the “Merger Agreement”) on January 12,
      2006, which was consummated on February 24, 2006.  Under the Merger
      Agreement, Wentworth merged with and into AeroGrow, and AeroGrow was the
      surviving corporation (“Merger”).  Our certificate of incorporation
      and by-laws prior to the Merger are now those of the surviving company, and
      the
      surviving company is governed by the corporate law of the State of
      Nevada.





**Our
      Business**





Our
      principal business is developing, marketing, distributing, and selling advanced
      indoor aeroponic garden systems designed and priced to appeal to the gardening,
      cooking and small kitchen appliance, healthy eating, and home and office décor
      markets worldwide. Our principal activities since our formation through March
      2006 consisted of product research and development, market research, business
      planning, and raising the capital necessary to fund these activities. We have
      been issued seven trademarks, one of which has been registered (AeroGarden®),
      and have an additional 28 trademark applications pending (25 in the United
      States and 3 internationally).  We have 19 patent applications pending
      in the United States. To date, we have completed the development of multiple
      proprietary growing systems and 22 proprietary seed kits. These development
      activities have in the past, and continue to include, an iterative process
      of
      experimentation, consumer testing, and adjustment in consultation with
      scientists familiar with the technology. Often, these tests are combined with
      in-home use of our systems by sample consumers picked from our employees and
      investors. User feedback from these tests is frequently incorporated in next
      generation products and development.




During
      2005 we completed development of our initial kitchen garden systems and related
      “bio-grow” seed pods. We contracted with a third-party manufacturer who
      commenced production activities in December 2005 and a second manufacturer
      who
      began production in the first quarter of calendar 2007. In March 2006, we began
      sales activities. As of March 31, 2007, we had manufactured and taken delivery
      of over 140,000 AeroGarden® kitchen garden units from its two manufacturers. We
      commenced initial marketing and distribution of our products during March 2006
      and have expanded these marketing efforts to encompass retail, home shopping,
      catalogue, international, and direct to consumer sales channels.




Our
      principal products are “kitchen garden” indoor growing systems and proprietary
      seed kits that allow consumers, with or without gardening experience, the
      ability to grow cherry tomatoes, cilantro, chives, basil, dill, oregano, mint,
      flowers, chili peppers, salad greens, vegetables and more throughout the year.
      Our kitchen garden systems are designed to be simple, consistently successful,
      and affordable. We believe that our focus on the design and features of our
      kitchen garden systems made them the first of their kind on the consumer market.
      This conclusion was reached on the basis of standard market research, including
      focus groups and potential customer interview techniques, review of potentially
      competitive products offered at all ranges of functionality and price, and
      testing of products that may be considered competitive in function although
      not
      necessarily competitive in market orientation.




We
      believe that our products will allow almost anyone, from consumers who have
      no
      gardening experience, to professional gardeners, to produce year-round harvests
      of a variety of herbs, vegetables, and flowers, which are provided in our seed
      kits, regardless of season, weather, or lack of natural light. We believe that
      our kitchen garden systems’ unique and attractive designs make them appropriate
      for use in almost any location, including kitchens, bathrooms, living areas,
      and
      offices.




Our
      kitchen garden systems currently on the market retail at approximately $149
      to
      $169 with variations based on the channel of distribution in which they are
      sold
      and the accessory components included with the unit.




Until
      March 2006, we were a development stage company
      and we did not generate any revenues. Through March 1, 2006, we funded our
      operations primarily through private sales of equity securities. Since
      commencing sales of our products, we have begun to increase our reliance on
      revenues generated from such sales for funding our operations. Prior to March
      2006, when we commenced sales of our aeroponic garden systems, we were
      considered a Development Stage Enterprise in accordance with Statement of
      Financial Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by
      Development Stage Enterprises.


1
 Table
          of Contents




**Hydroponics
      Industry - Background and Opportunity**




Hydroponics
      is the science of growing plants in water instead of soil. Used commercially
      worldwide, hydroponics is considered an advanced and often preferred crop
      production method. Hydroponics is typically used inside greenhouses to give
      growers the ability to better regulate and control nutrient delivery, light,
      air, water, humidity, pests and temperature. Hydroponic growers benefit by
      producing crops faster and enjoying higher crop yields per acre than traditional
      soil-based growers.





Aeroponic
      technology is derived from hydroponics and occurs when plant roots are suspended
      in an air chamber and bathed at regular intervals with a nutrient solution.
      AeroGrow believes that the aeroponic technology used in our kitchen garden
      systems is a technological advance over hydroponics because plant roots are
      suspended in a near 100% humidity enclosed air chamber and bathed in a
      nutrient-rich solution. We believe aeroponic methods ensure the plants not
      only
      have sufficient water, nutrients and oxygen, but the temperature inside the
      root
      chamber can be easily controlled, ensuring temperature stress of the plant
      does
      not limit growth. For this reason, we believe the use of a well designed and
      maintained aeroponic system can yield increases in growth rate and plant
      survival when compared to hydroponics systems.




From
      August 2002 through July 2005, we conducted research with approximately 500
      individuals who were identified either because they (i) signed-up on our
      website to pre-order the basic AeroGrow product, (ii) agreed to be beta
      testers of the basic product, (iii) came to preview meetings concerning the
      company, or (iv) were friends of employees and consultants of AeroGrow.
      Persons found our website through referrals, web searches, or as a result of
      our
      fund raising and hiring activities. The research consisted of face-to-face
      and
      internet interviews/surveys with potential consumers and standard focus groups.
      From some of the contacts, we obtained a ten-page questionnaire, and in other
      instances we taped the responses for later review. Persons from approximately
      35
      states responded to the surveys and participated in focus groups. A professional
      market research consultant assisted with the design, implementation and analysis
      of the focus groups, individual interviews, and surveys. From this research,
      and
      the initial results of our subsequent product launch, we believe that there
      is a
      potential, sizeable national market for our countertop soil-less kitchen garden
      systems for use indoors in homes and offices. Until the development of our
      kitchen garden systems, significant barriers have prevented hydroponic or
      aeroponic technology from being incorporated into mainstream, mass-marketed
      consumer products, including:




· 
Consumers
      generally lack the specialized knowledge required to select, set up, operate
      and
      maintain the various components for a typical hydroponic or aeroponic system,
      including growing trays, irrigation channels, growing media nutrient reservoirs,
      and nutrient delivery systems consisting of electronic timers, pumps, motors,
      tubing and nozzles;




· 
Consumers
      generally do not possess the specialized knowledge required to select, set
      up,
      operate and maintain the varied indoor lighting systems that are necessary
      to
      grow plants indoors in the absence of adequate natural light;




· 
Consumers
      are
      unable to properly mix and measure complex hydroponic nutrient formulas, which
      change depending on the plant variety and the stage of plant growth. In
      addition, consumers are unable to deal with the problem of nutrient spoilage;
      and




· 
      Federally-mandated water quality reports show that the water in many large
      cities is not suitable for hydroponic or aeroponic growing and requires chemical
      treatments. Consumers generally are unaware of how to adjust the water for
      healthy plant growth.


We
      believe that these complexities have been accepted in existing hydroponic market
      channels because our research has indicated that hydroponic manufacturers have
      generally focused their product development and marketing efforts on satisfying
      the needs of the commercial greenhouse and dedicated hobbyist markets. These
      users are motivated to gain the specialized knowledge, equipment and experience
      currently required to successfully grow plants with these
      products.  Our research has indicated that the hydroponic growing
      equipment currently available in these markets is bulky, expensive and comprised
      of many parts




We
      believe that the complexities of currently available commercial hydroponic
      products fail to address the needs and wants of the mass consumer market,
      leaving that market unserved. We further believe that our trade secrets,
      patent-pending inventions and companion technologies have simplified and
      improved hydroponic and aeroponic technologies have enabled us to create the
      first indoor aeroponic gardening system appropriate for the mass consumer
      market.




2
 Table
          of Contents




**Our
      Proprietary Technology**




We
      have
      spent over four years innovating, simplifying, combining and integrating
      numerous proprietary technologies and inventions into a family of “plug and
      grow” aeroponic kitchen garden systems and related seed kits specifically
      designed and priced for the mass consumer market. We have filed 19 patent
      applications in the United States to protect our
      inventions.  Following is a description of our proprietary
      technologies and inventions that are used in our kitchen garden system and
      seed
      kits. The inventions under the patent applications have not been granted
      patents, and there can be no assurance that patents will be granted. See “Risk
      Factors - Our intellectual property and proprietary rights give us only limited
      protection and can be expensive to defend.”




**Rainforest
      Nutrient Delivery System**. Our “rainforest” nutrient delivery system
      combines our patent-pending technologies with features from several hydroponic
      or aeroponic methodologies into a proprietary system designed to provide
      aeroponic plant growth. These hydroponic or aeroponic methodologies
      include:




· 
*Drip
      Technologies*. Drip systems create nutrient irrigation by pumping nutrient
      solution from a reservoir up to the base of the plant and saturating a soil-less
      growing medium. The growing medium delivers nutrients and moisture to plant
      roots, which is similar to rainwater as it drips through the soil and past
      plant
      roots.




· 
*Ein
      Gedi
      Aeroponic Technologies*. Plant roots in aeroponic systems are suspended in
      an air chamber and bathed at regular intervals with nutrient solution. In the
      Ein Gedi variation of aeroponics, plant roots are allowed to grow directly
      into
      nutrient solution after passing through an air space.




Our
      rainforest technology suspends plant roots into a 2-to-4 inch air chamber above
      an oxygenated nutrient solution. Nutrients are pumped from the nutrient
      reservoir to the base of each plant where a regulated flow of nutrients drips
      down through plant roots.




**Pre-Seeded
      Bio-Grow Seed Pods**. Our proprietary bio-grow seed pods include
      pre-implanted seeds, a bio-sponge growing medium, removable bio-dome covers
      and
      a grow basket to assist with the proper distribution of moisture. We designed
      our seed pods for use in our kitchen garden systems. We believe consumers may
      use seeds purchased from other sources in our kitchen garden system, although
      we
      do not provide any assurances on germination and growth in such
      cases.




We
      selected the seeds to pre-implant in our initial bio-grow seed pods after two
      years of extensive research, which included:




· 
analyzing
      thousands of seed varieties,




· 
growing
      and
      testing several hundred varieties of plants in our greenhouse and grow
      laboratories, and




· 
testing
      the
      taste and appearance of our grown vegetables, herbs and flowers with
      consumers.


We
      implant our selected seeds in a bio-sponge growing medium that, based upon
      our
      research, facilitates rapid germination and enhanced root growth in comparison
      to other mediums tested, as well as supports plant roots from germination
      through maturity and harvest. Our bio-grow domes create a “mini-greenhouse”
environment by covering the grow surface to create a near-100% humidity air
      chamber, which is optimal for most plant germination and initial growth.
      Bio-grow domes help regulate moisture and temperature to levels optimal for
      plant germination.




Our
      proprietary bio-grow seed pods are a vital component of our kitchen garden
      system. Our bio-grow seed pods are packaged along with nutrients in our
      proprietary seed kits for use in our kitchen garden systems. These seed kits
      currently include seeds for cherry tomatoes, salad greens, cilantro, chives,
      basil, dill, oregano, mint, chili peppers and flowers as well as a variety
      of
      international herbs for Italian, Japanese, and French cooking. In addition
      to
      pre-seeded pods, we also allow consumers to purchase unseeded pods in our Master
      Gardner Kit, to give them the opportunity to grow their own seeds in our kitchen
      garden systems. Not all plants, however, are appropriate to grow in the kitchen
      garden system.




3
 Table
          of Contents





**Microprocessor-Based
      Control Panel and Nutrient Cycle Delivery System**. We believe that
      certain common problems face both experienced gardeners and beginning gardeners,
      including:




· 
improperly
      watering plants,




· 
improperly
      feeding plants, and




· 
failing
      to
      provide plants with sufficient light for healthy growth.




To
      assist
      consumers, especially inexperienced gardeners, we have developed two
      patent-pending microprocessor-based technologies that address these common
      problems. These technologies are designed to:




· 
regulate
      the
      lighting system,




· 
automatically
      alert users when it is time to add water and nutrients,




· 
help
      simplify
      and reduce consumers’ time and involvement in caring for plants,




· 
reduce
      the
      variables and errors often made by consumers in plant care, and




· 
enhance
      plant
      growth.




We
      have
      developed multiple kitchen garden systems, which are described below at “Our
      Kitchen Garden Systems,” with different control systems. Variations of our
      microprocessor-based control panel are included as a standard feature on our
      current kitchen garden system. This control panel includes an electronic
      nutrient and water reminder system and microprocessor-controlled lights that
      alert consumers to add water and nutrients when needed and help ensure that
      plants are properly fed and receive the proper lighting. In addition, with
      our
      microprocessor-based nutrient cycle delivery system the consumer selects from
      four plant types (lettuce, herbs, tomatoes or flowers) and the system then
      automatically adjusts and optimizes the nutrient, water and lighting cycles
      based on the plant variety selected.




**Time-Release
      Nutrient Tablets**. Plants require a balanced mixture of nutrients for
      optimal growth. Certain nutrient combinations, including calcium nitrate and
      magnesium sulphate, generally cannot be combined, mixed, or stored in the same
      container due to specific chemical reactions that bind them together and renders
      them useless to plants. Hydroponic growers seek to solve this problem by
      packaging various nutrient concentrations in up to four separate containers,
      which are individually measured and added as needed by the consumer. These
      nutrient complexities require consumers using hydroponic systems
      to:




· 
understand
      the blends of nutrient fertilizer that are best suited for the specific variety
      of plants they are growing,




· 
understand
      the nutrient requirements for the specific plant variety at each of three stages
      of our growth and maturity,




· 
measure
      and
      blend nutrients from up to four different concentrated solutions and add them
      to
      specific measured quantities of water, and




· 
monitor,
      adjust and re-mix nutrient fertilizers over time.




We
      believe that current plant nutrition processes required for successful
      hydroponic growing have created barriers to mass consumer use and acceptance
      because they are cumbersome and complex. To help overcome these barriers, we
      have developed time-release nutrient tablets designed specifically to deliver
      the proper nutrients to the plants, while offering consumers a user-friendly
      nutrient system. The consumer simply adds the plant-specific nutrient tablets
      to
      the kitchen garden systems when instructed (usually once every two weeks) by
      the
      microprocessor-based nutrient cycle delivery system. The nutrient tablets
      eliminate the need for measuring and mixing multi-part nutrient formulas and
      storing various nutrients in separate containers. The nutrient tablets customize
      multiple nutrients and minerals such as calcium, magnesium and iron for specific
      plant varieties at different stages of their growth.




4
 Table
          of Contents




**Automatic
      Water Adjustment**. Tap water supplied by local municipalities often is
      not conducive to aeroponic or hydroponic growth. To address these problems,
      most
      hydroponic growers monitor and chemically adjust the water they use on a daily
      or weekly basis.




We
      believe that the problems associated with the wide range of water chemistry
      found throughout the United States (and possibly internationally), as well
      as
      the complexities involved in monitoring water chemistry, are significant
      barriers to the use of hydroponic gardening by the general public. We have
      developed a patent-pending formula that automatically adjusts and balances
      the
      water to a level capable of sustaining healthy plant growth in an aeroponic
      environment. This formula is pre-mixed into our time-release nutrient tablet
      described above, which eliminates the need for consumers to understand water
      chemistry.




**Integrated
      and Automated Lighting System**. Hydroponic systems typically do not
      incorporate built-in lighting systems. Lighting systems must typically be
      purchased as separate components and assembled by the consumers. Hydroponic
      lighting systems generally consist of a ballast, reflector hood, lights and
      an
      electronic timer. The consumer must suspend the lighting system over the
      hydroponic unit and then continually raise the lights as the plants grow.
      Complete lighting systems often cost hundreds of dollars, which is considerably
      more than the cost of our entire kitchen garden system.




Our
      kitchen garden systems include built-in adjustable grow lights with ballast,
      reflector hood, lights and an electronic timer. Our integrated lighting systems
      include high-output compact fluorescent light bulbs that deliver a spectrum
      and
      intensity of light designed to help optimize plant growth without natural light.
      In addition, our lighting system is fully automated and controlled by our
      microprocessor-based control panel described above. Improvements continue to
      be
      made in our proprietary light bulbs to facilitate better growing characteristics
      at lower manufacturing costs.




**Adaptive
      Growth Software**. Through research and testing in our grow laboratory,
      we have determined that better plant growth can be achieved if nutrients,
      moisture and lighting are adapted and customized to the specific stages of
      the
      plants’ growth: germination, initial growth and advanced growth. We have
      developed a proprietary software technology entitled “adaptive growth
      technology” which automatically analyzes and adjusts the nutrient delivery
      schedules based on plant maturity. We have introduced this technology into
      an
      upgraded kitchen garden system, which was introduced in the second calendar
      quarter of 2007.





**New
      Technologies in Development.** We continue to improve on our initial
      development of a methodology to cultivate and ship “live starter plants” in the
      grow pod mediums that will be able to grow in our kitchen garden systems. We
      have started market testing this process with strawberries during the first
      quarter of calendar 2007. We plan to expand our efforts in this area and are
      developing a portable greenhouse that we believe enables us to scale this
      methodology both geographically as well as increasing the varieties of plants
      offered as “live starter plants.” We have also begun development of a new
      aeroponic based technology that utilizes a new form of proprietary seed pod
      that
      will facilitate transfer of water using materials that transfer moisture to
      the
      seeds without the need of the pump system. This new technology is anticipated
      to
      reduce manufacturing costs with no loss of efficacy. We plan to test market
      a smaller
      version of our kitchen garden system in the fourth calendar quarter of 2007
      using this new technology with a targeted retail price of $99-$129 based on
      the
      channel of distribution in which it is sold and the accessory components
      included with the unit.




5
 Table
          of Contents




**AeroGrow’s
      Kitchen Garden Systems**




**AeroGrow’s
      Kitchen Garden Systems**.  We have begun, and in some cases
      completed, development for multiple kitchen garden systems and have commenced
      marketing two of these models. Both marketed models feature the rainforest
      nutrient delivery system and an integrated lighting system (including the
      microprocessor-based control panel), and a microprocessor-based nutrient cycle
      delivery system. The initial/standard model of our kitchen garden system retails
      at approximately $149 with variations based on the channel of distribution
      in
      which it is sold and the accessory components included with the unit. In April
      2007 we launched the AeroGarden Pro100 which features a stainless steel accented
      finish as well as our adaptive growth technology (described above) and retails
      at approximately $169 with variations based on the channel of distribution
      in
      which it is sold and the accessory components included with the
      unit.




**AeroGrow’s
      Seed Kits**.  We have developed and are producing 22 seed kits
      for use in our kitchen garden systems. These seed kits include pre-seeded
      bio-grow seed pods and a three-to-six-month supply of nutrients, including
      our
      formula for adjusting water quality. Our seed kits retail at prices ranging
      from
      $14.99 to $29.99. Currently developed seed kits include:




· 
cherry
      tomato
      garden,




· 
chili
      pepper
      garden,




· 
gourmet
      herb
      garden,




· 
salad
      greens
      garden,




· 
grandiflora
      petunia garden,




· 
international
      basil garden,




· 
Japanese
      herbs,




· 
French
      Herbs,
      and




· 
Italian
      herbs.




Our
      seed
      kits, time-release nutrient tablets, and replacement light bulbs are also sold
      to consumers for use with our kitchen garden system. Additionally, with our
      Master Gardner Kit, seed pods are available for use by consumers who wish to
      try
      to grow their own seeds, but we do not give assurance that all varieties of
      plants will grow with this kit in our kitchen garden system.




6
 Table
          of Contents




**Other
      Accessories**.  To complement and expand the functionality of
      our kitchen garden systems, we have developed a variety of accessory products.
      We have developed an Herb Appeal Collection, consisting of an internally
      produced video and guidebook on the care and uses of herbs and a set of cutting
      boards. We have also developed two wall bracket systems designed to hold two
      or
      more kitchen garden systems for consumers who wish to grow more than one seed
      kit at a time. We have also developed our own design of a battery operated
      herb
      blender and salad dressing maker called the Herb N Serve. These products will
      be
      sold individually and will be used as premium “gifts with purchases” to enhance
      our direct to consumer and retail offerings.




**Additional
      Future Products**.  In addition to our kitchen garden systems,
      we are developing and plan to market in the future companion products designed
      to provide a successful gardening experience for consumers of all experience
      levels while providing a potentially continuing and profitable revenue stream
      for us. Our development and production
      of the following additional products will depend in large part on the revenues
      generated from future product sales and the availability of additional
      financings.




*Children’s
      Garden*. Our children’s garden is designed for simplicity and ease of use.
      We anticipate introducing this garden system in the toy market.




*Decorator
      Office Garden*. We are developing a garden system designed specifically for
      use in offices and work stations to introduce decorative and fragrant living
      flowers into the workplace.




*Professional
      System*. A larger-scale garden system is planned for gardening enthusiasts
      who want to grow large quantities of vegetables, herbs and flowers.




*Future
      Seed Kits*. We plan to continue development of additional seed kits on an
      ongoing basis including new varieties for international markets.







**Markets**




Based
      on
      our informal market research consisting of individual consumer interviews,
      focus
      groups and Internet survey responses, as well as our “sales to date” experience,
      we believe that our kitchen garden systems will appeal to a broad spectrum
      of
      consumers in the United States and internationally, including Europe and Japan.
      We believe that our products will appeal to at least four major market
      segments:




· 
experienced
      gardeners,




· 
“want-to-be”
      gardeners,




· 
the
      kitchen
      products and small appliances market, and




· 
the
      office
      and home décor markets.




Further,
      based on our discussions with potential distributors, we believe that our
      kitchen garden systems present opportunities in the specialized toy,
      educational, gift and hydroponic hobbyist markets.




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**Gardener
      Market**. The 2002 National Gardening Survey conducted by the National
      Gardening Association states that gardening was America’s number one hobby with
      more than 70 million active gardeners. Based upon this survey, there were
      estimated to be: 27 million vegetable gardeners, with one out of every four
      households having a vegetable garden; over 15 million fresh herb gardeners;
      and
      over 20 million flower gardeners. We believe that our kitchen garden systems
      and
      related products can offer both expert and novice gardeners several major
      benefits not readily available through traditional gardening methods,
      including:




· 
the
      ability
      to grow fresh herbs, lettuces, vegetables, tomatoes and flowers year-round,
      regardless of indoor light levels or seasonal weather conditions,




· 
the
      ability
      to easily start plants indoors during colder months and then transplant them
      outdoors at the onset of the outdoor growing season,




· 
the
      ability
      to use stem cuttings to propagate multiple reproductions of the desired plants
      in our kitchen garden systems,




· 
the
      reasonable assurance that crops can grow successfully by significantly reducing
      potential obstacles such as uncertain weather and garden pests,




· 
the
      ease of
      growing hydroponically in contrast to the toil associated with traditional
      gardening, including preparing the soil, planting, thinning, weeding and
      watering.


**“Want-to-be”
      Gardener Market**. We believe that many people have an interest in
      gardening but lack the knowledge, confidence, available space, equipment, or
      time to garden. We have observed the following barriers to beginning to
      garden:




· 
gardening
      requires an ongoing time commitment,




· 
apartment,
      high-rise and condominium dwellers often lack the land needed for a traditional
      garden,




· 
gardening
      requires physical work which can be a significant barrier to older people or
      people with limited mobility or health issues,




· 
buying
      the
      necessary equipment to garden can be expensive, and




· 
gardening
      requires knowledge and expertise.




We
      believe that our kitchen garden systems overcome many of these barriers and
      provide a simple, convenient way for many current non-gardeners to begin to
      garden.




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**Kitchen
      Products and Small Appliances Market**. We believe that many Americans
      now enjoy cooking as a form of entertainment or hobby and that these people
      repeatedly purchase new kitchen appliances and will be motivated to purchase
      our
      kitchen garden systems and related seed kits. Consumers in this potential market
      include:




· 
people
      interested in cooking who would appreciate the convenience and satisfaction
      of
      having a readily available supply of fresh-cut herbs and basils to flavor soups,
      salads and other dishes,




· 
people
      who
      prefer the distinctive texture and taste of freshly picked, vine-ripened
      tomatoes, basils, lettuces and other vegetables over days-old supermarket
      produce, and




· 
people
      interested in healthy, pesticide-free foods for themselves and their families,
      reflecting both the rapidly growing interest in naturally and organically grown
      foods and the increasing number of people who, for health or weight concerns,
      include salads and fresh vegetables as part of their families’
diets.




We
      believe that our kitchen garden systems will be embraced in this market by
      people who understand the value of having an ongoing supply of fresh herbs
      and
      vine-ripened produce throughout the year.




**Office
      and Home Decor Market**. Flowers are frequently used to brighten homes
      and offices around the world. It is difficult to readily grow flowers indoors
      due to a lack of sufficient light and growing knowledge. As a result, people
      often use cut flowers, which are expensive, short-lived and require ongoing
      maintenance. Our kitchen garden systems enable colorful and fragrant flowers
      to
      be easily grown indoors year-round. Flowers grown with our kitchen garden
      systems will last for months with minimal care and maintenance. Flowers can
      be
      grown in a wide variety of indoor locations, including kitchen and bathroom
      countertops, living rooms, bedrooms, family rooms, offices, work stations,
      waiting rooms and lobbies.




**Specialty
      Markets**. We believe that several specialized markets potentially exist
      for our garden systems in the future, including:




· 
toy
      market
      for a children’s “root-viewing” garden,




· 
classroom
      market for student education relating to plant growth,




· 
gift
      market,




· 
hydroponic
      enthusiast market, and




· 
international
      markets, particularly in large cities with limited outdoor garden
      space.


**Marketing
      and Sales Strategy**




We
      began
      launching our kitchen garden system in the United States during the first
      quarter of 2006 with a nationwide public relations campaign. Initial test
      marketing shipments to retail launch partners, including Sur La Table,
      Frontgate, and others commenced in March 2006. As launch partners, we agreed
      to
      feature Sur La Table and Frontgate in the Company’s public relations efforts. In
      addition, we paid Sur La Table a $30,000 fee for full page advertisement in
      Sur
      La Table’s catalogue distributed to over one million consumers. We granted
      exclusive rights to Frontgate as a catalogue retailer through December 1, 2006,
      in exchange for Frontgate’s agreement to provide full page advertisements within
      their catalogues for the AeroGarden through the end of 2006. We have developed
      many of our marketing materials, including our website, product brochures,
      retail packaging and other retail collateral materials, public relations kits,
      in-store point of purchase supplies, infomercial, and short-form (60 to 120
      seconds) television commercials. Our planned marketing strategy is to follow
      our
      initial launch with sales of our products through direct marketing vehicles
      and
      then expanded distribution through retail channels. We plan to expand our
      marketing and distribution internationally in the third calendar quarter of
      2007. Our direct marketing activities include 30-minute infomercials, 60-second
      and 120-second television spots, home shopping networks, print advertising,
      catalogue mailings and Internet-based advertising. Our plan is designed to
      educate prospective customers while creating widespread awareness of our kitchen
      garden systems and generating direct sales in four key target markets: the
      experienced gardener market, the “want-to-be” gardener market, the kitchen
      products and small appliances markets, and the office and home décor
      market.




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**Competition**




Aeroponic
      and hydroponic technologies have historically been limited to ardent hobbyists
      and commercial growing facilities. We believe that we are the first company
      to
      develop and offer a simple soil-less indoor growing system for the mass consumer
      market.




Typical
      hydroponic manufacturers offer a range of equipment and accessories through
      distributors or small independent “hydro-shops” in a trade-oriented manner
      similar to plumbing or electrical suppliers. Purchasers typically mix and match
      equipment from various suppliers in an “a la carte” fashion to individually
      customize a large system that they then assemble on their premises. We believe
      that these products are substantially more expensive than the selling prices
      of
      our products.




We
      believe that our simplified and complete kitchen garden systems and current
      and
      planned methods of distribution offer significant benefits from these
      traditional hydroponic industry practices.  However, we recognize that
      there are companies that are better funded and have greater experience in
      producing hydroponic products in commercial markets, including, but not limited
      to, companies such as General Hydroponics and American Hydroponics. These
      companies could potentially decide to focus on the consumer market with
      competing products. We could also potentially face competition from gardening
      wholesalers and large and profitable soil-based gardening companies, including,
      but not limited to, the Burpee Seed Company and Gardener’s Supply Company,
      should they decide to produce a competitive product. These companies may have
      better consumer acceptance and may be better funded than us.




**Manufacturing**




We
      manufacture our products using contract manufacturing sources, which are
      supervised by our internal engineering and manufacturing teams. Our bio-grow
      seed pods are currently produced and assembled in our laboratory facilities
      in
      Longmont, Colorado.




We
      signed
      a tri-party manufacturing agreement with Source Plus, Inc. (“Source Plus”), an
      Alabama corporation, and Mingkeda Industries Co., Ltd. (“Mingkeda”), a Chinese
      company, for the manufacture of our kitchen garden systems and accessories.
      Source Plus assisted us in identifying companies in China that had the
      capability to manufacture our kitchen garden systems. Source Plus advanced
      monies to Mingkeda for tooling and molds to build our products. To reimburse
      Source Plus for advances to Mingkeda for tooling, we issued 62,000 shares of
      our
      common stock to Source Plus in October 2005 and recorded a $310,000 asset for
      tooling. Source Plus is also obligated to provide us with quality control
      inspection services at Mingkeda’s factory. Mingkeda has informed us that it can
      currently produce 15,000 kitchen garden systems per month and will eventually
      be
      able to produce approximately 25,000
      kitchen garden systems per month with our existing set of tools. As of March
      31,
      2007, we have received approximately 85,000 units from Mingkeda with over 20,000
      additional units in process. Mingkeda estimates that it can add the additional
      set of tools and presses within 60 to 90 days following our
      notification.





We
      have
      completed two sets of tooling with a second contract manufacturer, Main Power
      Electrical Factory Ltd., which is located in China (“Main Power”). During the
      first calendar quarter of 2007, AeroGrow began receiving delivery of production
      units built by Main Power. Production capacity at Main Power is estimated to
      be
      50,000 units per month for each set of tools.




We
      produce and assemble our bio-grow seed pods in our laboratory facilities in
      Longmont, Colorado. The seed pods and kitchen garden systems are shipped to
      a
      fulfillment center in Chino, California. A third party service provider provides
      warehousing, order fulfillment, and shipping for our products.




**Product
      Returns and Warranties**




We
      have had limited sales to date and thus, have limited experience dealing with
      returns. We currently process returns at a third party distribution center
      and
      at our facilities in Longmont, Colorado. We anticipate that we will send
      unopened returned products back into inventory and repair defective products
      to
      sell as refurbished products. We are also utilizing a “Destroy in Field”
methodology for certain customers as the cost of shipping the return, if used,
      does not justify the value of the recovered unit. In these cases, the customer
      is required to cut the power cord ands send it back to obtain a
      credit.  Our manufacturers will provide us at no charge with
      replacement part assemblies for products which are deemed defective due to
      materials or manufacturing complications. We record warranty liabilities at
      the
      time of sale for the estimated costs that may be incurred under our basic
      warranty program. The specific warranty terms and conditions vary depending
      upon
      the product sold but generally include technical support, repair parts, labor
      for periods up to one year. Factors that affect our warranty liability include
      the number of installed units currently under warranty, historical and
      anticipated rates of warranty claims on those units, and cost per claim to
      satisfy our warranty obligation.




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**Intellectual
      Property**




We
      have
      filed 19 patent applications in the United States to protect our technologies
      and products. These applications are for:




·
            seed
                germination pods that transport, support and germinate seedlings
                in
                aeroponic or hydroponic devices and support the growth of the plant
                to
                maturity, filed in November 2003, application serial number 10/714,786,
                and responding to examiner’s third
                action,





·
            use
                of infrared beams to measure plant roots which creates a basis for
                the
                regulation of nutrients, oxygen and plant growth, filed in December
                2003,
                application serial number 10/748,321, and responded to examiner’s second
                action,





·
            PONDS
                (passive, osmotic nutrient delivery system) technology, which is
                a
                nutrient delivery system using no moving parts, filed in March 2005,
                application serial number 11/079,054, and responding to examiner’s first
                action,





·
            RAIN
                (rain-aerated ionized nutrient) system technology, which hyper-oxygenates
                and ionizes plant roots in AeroGrow’s kitchen garden systems, filed in
                March 2005, application serial number
                10/528,110,





·
            rainforest
                growing dome for maximizing germination, filed in April 2005, application
                serial number 11/098,176, and responded to examiner’s second
                action,





·
            growing
                basket for optimizing liquid and nutrient delivery, filed in April
                2005,
                application serial number 11/111,553, and responding to an office
                communication,




·
              methods
                    for growing plants using seed germination pods, filed in April
                    2005,
                    application serial number 11/112,269, and responding to examiner’s third
                    action,


·
            devices
                and methods for growing plants by measuring liquid or nutrient usage
                rate,
                the adaptive growth learning technologies, filed in December 2005,
                application serial number
                11/321,368,





·
            time-release
                oxygen generating nutrient compositions and methods for growing plants,
                filed in December 2005, application serial number
                11/321,910,





·
            pH
                buffered plant nutrient compositions and methods for growing plants,
                filed
                in December 2005, application serial number
                11/321,023,





·
            apparatus
                and methods for delivering photoradiation to plants, filed in June
                2006,
                application serial number
                60/814,853,





·
            smart
                garden devices and methods for hydroponic gardens, filed in June
                2006,
                application serial number
                11/455,364,





·
            indoor
                gardening appliance, filed in August 2005, application serial number
                29/235,880, and responded to request for
                information





·
            master
                gardener baskets and methods for growing plants, filed in August
                2006,
                application serial number
                60/840,575,





·
            devices
                and methods for growing plants, filed in January 2007, application
                serial
                number 11/653,121,





·
            indoor
                gardening appliance, filed in January 2007, application serial number
                29/271,260,





·
            indoor
                gardening appliance, filed in January 2007, application serial number
                29/271,209





·
            indoor
                gardening appliance, filed in January 2007, application serial number
                29/271,259, and





·
            systems
                and methods for controlling liquid delivery and distribution to plants,
                filed January 2007, application serial number
                11/654,164.




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We
      believe that the technology covered by these patent applications does not
      infringe on issued patents owned by others. We believe that if we fail to
      receive patents for any one of these patent applications, our operations will
      not be materially, adversely affected. We believe that failure to obtain
      patents, however, will make it easier for competitors to bring competitive
      products to market. If such competitive products performed better and/or were
      marketed by companies with greater financial and distribution resources than
      us,
      such competitive products may adversely affect our operations. In addition
      to
      the patents being sought, we maintain some crucial information about our
      products as trade secrets. The inventions under the patent applications have
      not
      been granted patents, and there can be no assurance that patents will be
      granted.





We
      have
      filed 36 trademark applications in the United States (7 of which have been
      allowed) and 3 trademark applications designating 33 countries, which we intend
      to prosecute to protect our products and brand equity. The applications are
      for:





·
            Farmers
                Market Fresh, filed in July 2005, application serial number 78671280,
                and
                allowed,





·
            Kitchen
                Harvest filed in December 2005, application serial number
                78781094,





·
            AeroGarden
                filed in December 2005, application serial number 78781935, and
                allowed,





·
            Farmer’s
                Market in Your Kitchen, filed in March 2006, application serial number
                78836826, and allowed,


·
            Bio-Dome,
                filed in March 2006, application serial number 78836718, and
                allowed,





·
            AeroPod,
                filed in March 2006, application serial number 78836577, and
                allowed,





·
            AeroGarden,
                filed in Mexico in June 2006, application serial number 790722, and
                responded to examiner’s first
                action,





·
            AeroGarden,
                filed in 31 countries under the Madrid Protocol in June 2006, application
                serial number A0005030, and received a general statement of grant
                of
                protection, received notices that protected in Australia and Norway,
                received office action in Korea





·
            AeroGarden,
                filed in Canada in June 2006, application serial number 1,305,822,
                and
                allowed,





·
            International
                Gourmet, filed in May 2006, application serial number 78874379, and
                allowed,





·
            Farmer’s
                Market Fresh, filed in May 2006, application serial number 78882877,
                and
                responded to examiner’s first
                action,





·
            AeroGrow,
                filed in April 2005, application serial number 78614573, responded
                to
                examiners first action and
                suspended,





·
            GrowNow,
                filed in August 2006, application serial number 78955692, and responded
                to
                examiner’s first action,





·
            Green
                Thumb Guarantee, filed in September 2006, application serial number
                77007729, and responding to examiner’s first
                action,





·
            BioTransport,
                filed in September 2006, application serial number 77009465, and
                responding to examiner’s first
                action,





·
            Herb
                Appeal, filed November 2006, application serial number 77045636,
                and
                responding to examiner’s first
                action,




12
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·
            Strawberry
                Patch, filed November 2006, application serial number 77045993, and
                responding to examiner’s first
                action,





·
            Sweet
                Rubies, filed December 2006, application serial number 77058522,
                and
                published





·
            Plug
                & Grow, filed December 2006, application serial number 77058534, and
                responding to examiner’s first
                action,





·
            Even
                Better Than Organic, filed December 2006, application serial number
                77070519, and responding to examiner’s first
                action,





·
            AeroGarden,
                filed December 2006, application serial number 77073259, and responding
                to
                examiner’s first action,





·
            AeroGarden,
                filed December 2006, application serial number 77073339, and responding
                to
                examiner’s first action,





·
            AeroGarden,
                filed December 2006, application serial number 77073345, and responding
                to
                examiner’s first action,





·
            AeroGarden,
                filed December 2006, application serial number
                77073362,




·
              AeroGarden,
                  filed December 2006, application serial number 77073424, and received
                  examiner’s amendment


·
            AeroGarden,
                filed December 2006, application serial number 77073448, and received
                examiner’s amendment





·
            Herb
                ‘n Serve, filed January 2007, application serial number
                77095536





·
            Chef
                in a Box, filed March 2007, application serial number 77127173, and
                received examiner’s amendment





·
            Adaptive
                Growth Intelligence, filed March 2007, application serial number
                77129677,
                and received examiner’s amendment





·
            Wall
                Farm, filed March 2007, application serial number 77129806, and examiner’s
                amendment





·
            Wall
                Garden, filed March 2007, application serial number 77129826, and
                received
                examiner’s amendment





·
            Pet
                Net, filed March 2007, application serial number 77130024, and received
                examiner’s amendment




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·
            Ultimate
                Kitchen Gardener, filed March 2007, application serial number 77132449,
                and received examiner’s amendment





·
            Ultimate
                Kitchen Garden, filed March 2007, application serial number 77132485,
                and
                received examiner’s amendment





·
            Edible
                Pantry, filed March 2007, application serial number
                77142761





·
            Produce
                Pantry, filed March 2007, application serial number
                77144237





·
            Get
                The Garden, filed April 2007, application serial number
                77154135





·
            Veg-e-Garden,
                filed May 2007, application serial number
                77170403





·
            Florist
                in a Box, filed May 2007, application serial number
                77185032




Each
      of
      our employees, independent contractors and consultants has executed assignment
      of application agreements and nondisclosure agreements. The assignment of
      application agreements grant us the right to own inventions and related patents
      which may be granted in the United States. The nondisclosure agreements
      generally provide that these people will not disclose our confidential
      information to any other person without our prior written consent. We have
      also
      obtained, both domestically and internationally, the domain names for
      AeroGrow.com, AeroGarden.com, AeroGarden.net, AeroGarden.tv, AeroGarden.biz,
      and
      Getthegarden.com, among others.




**Governmental
      Regulation and Certification**




We
      believe that we are complying with United States regulations concerning the
      shipping and labeling of seeds and nutrients. Currently, the components for
      the
      kitchen garden system are UL certified. We have filed initial applications
      for
      UL certification and ETL certification for the kitchen garden system as a whole
      and anticipate completion within 60 days. These certifications confirm that
      the
      products have been tested and conform to a recognized level of fire and other
      safety standards for consumers. Such independent third party certification
      is
      required for sales of products through many major retailers.








We
      believe that our costs and effects of compliance with environmental laws will
      not be material.




**Personnel**




As
      of
      March 31, 2007, we employed approximately 71 persons - 59 full-time and 12
      part-time. In addition, we contract for the services of part-time and project
      consultants on an “as needed” basis. We believe that our employee
      relations are good. We also believe that we will hire additional employees
      and/or consultants in the future as our operations grow. We outsource some
      activities, in whole or part, such as manufacturing, telemarketing, public
      relations, infomercial production, fulfillment, and shipping.




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 Table
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**ITEM
      2.  DESCRIPTION OF
      PROPERTY**




On
      July
      27, 2006, we entered into a lease with Pawnee Properties, LLC to consolidate
      our
      operations, other than our seed kit manufacturing operations, into a 21,012
      square foot office space at 6075 Longbow Drive, Boulder, Colorado 80301. The
      initial rent is $15,759 per month, plus our proportionate share of building
      taxes, insurance and operating expenses. The initial term continues until
      January 31, 2012, unless modified under specified circumstances. The agreement
      contains other standard office lease provisions.




We
      also
      rent storage and manufacturing space in Longmont, Colorado, pursuant to a
      month-to-month rental agreement. Effective April 1, 2007, the space rented
      was
      increased from approximately 11,000 square feet to 22,000 square feet and the
      monthly rental was increased from $5,600 to $10,100. AeroGrow uses this space
      to
      manufacture our seed pods.




While
      our
      facilities appear adequate for the foreseeable future, we may add space to
      meet
      future growth as needed. Upon expiration of our current leases, we believe
      that
      we will be able to either renew our existing leases or arrange new leases in
      nearby locations on acceptable terms. We believe that these properties are
      adequately covered by insurance.




**ITEM
        3.  LEGALPROCEEDINGS**


To
      the
      best of our knowledge, there are no legal proceedings pending or threatened
      against us.




**ITEM
        4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
        HOLDERS**




None.


**PART
        II**


**ITEM
        5.   MARKETFOR COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
        SECURITIES**


From
      January 8, 2007 through June 12, 2007, our common stock traded on the
      Over-the-Counter Bulletin Board (“OTC BB”) using the trading symbol is AGWI.OB.
      Beginning June 13, 2007, our common stock began trading on the NASDAQ Capital
      Market using the trading symbol AERO. The closing price of our common stock
      on
      May 31, 2007 was $6.90.





**Holders
      of Record**





As
      of May
      31, 2007, we had approximately 775 holders of record of our common
      stock.





**Dividends**





We
      have
      not declared or paid any cash dividends on our common stock, and we currently
      intend to retain future earnings, if any, to finance the expansion of our
      business, and we do not expect to pay any cash dividends in the foreseeable
      future. The decision whether to pay cash dividends on our common stock will
      be
      made by our Board of Directors, in their discretion, and will depend on our
      financial position, operating results, capital requirements and other factors
      that the Board of Directors considers significant.





**Equity
      Compensation Plan Information**





Refer
      to
      Item 11 below for information with respect to our equity compensation
      plans.


15
 Table
          of Contents


**Lock
      Up Restrictions**





In
      conjunction with the closing of the Merger with Wentworth in February 2006,
      the
      former stockholders of Wentworth holding an aggregate of 396,813 shares of
      common stock, AeroGrow stockholders (including all shares of AeroGrow held
      by
      our current officers and directors) holding an aggregate of 4,792,428 shares
      of
      our common stock, and 1,831,067 shares of common stock underlying our warrants
      and options entered into lock up agreements under which they are prohibited
      from
      selling or otherwise transferring: (i) any of their shares of common stock
      for a
      period of 12 months following the effective date of the registration statement
      (“Initial Lock Up Period”) that registers their shares for resale, and (ii) 50%
      of their shares of common stock after the expiration of Initial Lock Up Period
      until the date which is 18 months after the effective date of the registration
      statement filed by us.  The registration statement went effective on
      December 22, 2006.





There
      are
      544,428 shares of common stock held by investors in our Colorado intrastate
      offering (“Colorado Offering Shares”) and 553,642 shares of other outstanding
      common stock that are not subject to lock up restrictions and are freely
      tradable without restriction depending on how long the holders thereof have
      held
      these shares in accordance with the requirements of Rules 144 and
      701.




**ITEM
        6.  MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN
        OF OPERATION**


The
      following plan of operation provides information which our management believes
      is relevant to an assessment and understanding of our business, operations,
      and
      financial condition. This plan of operation contains forward-looking statements
      that involve risks, uncertainties, and assumptions. Our actual results may
      differ substantially from those anticipated in any forward-looking statements
      included in this discussion as a result of various factors, including those
      set
      forth in “Risk Factors.”




**Overview**




We
      are in
      the business of developing, marketing, and distributing advanced indoor
      aeroponic garden systems. Since formation and through our development stage
      that
      ended March 1, 2006, our principal activities consisted of product research
      and
      development, market research, business planning, and raising the capital
      necessary to fund these activities. We have completed development of our initial
      kitchen garden systems and related “bio-grow” seed pods and have contracted with
      a third-party manufacturers who have commenced production activities. We began
      sales activities as of March 2006. As of March 31, 2007, we had manufactured
      and
      taken delivery of over 140,000 units of our kitchen garden systems and had
      manufactured over 400,000 seed kits. We commenced initial marketing and
      distribution of our products during March 2006, and have expanded these
      marketing efforts to encompass retail, home shopping, catalogue, international,
      and direct to consumer sales channels. Prior to March 2006 when we commenced
      sales of our aeroponic garden systems, we were considered a Development Stage
      Enterprise in accordance with Statement of Financial Accounting Standards
      (“SFAS”) No. 7, Accounting and Reporting by Development Stage
      Enterprises.





**Our
      Critical Accounting Policies**





*Inventory*


Inventories
      are valued at the lower of cost, determined by the first-in, first-out method,
      or market. When we are the manufacturer, we include in inventory costs raw
      materials, labor and manufacturing overhead. We record the raw materials at
      delivered cost. Standard labor and manufacturing overhead costs are applied
      to
      the finished goods based on normal production capacity as prescribed under
      ARB
      No. 43, Chapter 4, “Inventory Pricing.” A majority of our products are
      manufactured overseas and are recorded at cost.





We
      will
      determine an inventory obsolescence reserve based on historical experience
      and
      will establish reserves against inventory according to the age of the product.
      As of March 31, 2007 and March 31, 2006 we had determined that no inventory
      obsolescence reserve was required.





*Revenue
      Recognition*


We
      recognize revenue from product sales, net of estimated returns, when persuasive
      evidence of a sale exists: that is, a product is shipped under an agreement
      with
      a customer; risk of loss and title has passed to the customer; the fees
      are
      fixed or determinable; and collection of the resulting receivable is reasonably
      assured. Accordingly, we did not record $451,898 of revenue as of March 31,
      2007
      related to the unpaid balance due for orders shipped in conjunction with our
      direct sales to consumers because the consumer has thirty-six days to evaluate
      the product paying the shipping and handling costs for such products before
      making the required installment payments after the expiration of the thirty-six
      day trial period. We also, as of March 31, 2007, did not record $135,459 of
      product costs associated with the foregoing revenue because the customer is
      required to return the product in order to cancel further billing, and therefore
      we are able to recover these costs through resale of the goods. The liability
      for sales returns are estimated based upon historical experience of return
      levels.




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We
      record
      estimated reductions to revenue for customer and distributor programs and
      incentive offerings, including promotions and other volume-based incentives.
      Future market conditions and product transitions may require us to take actions
      to increase customer incentive offerings, possibly resulting in an incremental
      reduction of revenue at the time the incentives are offered. Additionally,
      certain incentive programs require us to estimate based on industry experience
      the number of customers who will actually redeem the incentive. At March 31,
      2007 and March 31, 2006, we had accrued $65,385 and $0, respectively, as our
      estimate for the foregoing deductions and allowances.





*Warranty
      and Return Reserves*


We
      record
      warranty liabilities at the time of sale for the estimated costs that may be
      incurred under our basic warranty program. The specific warranty terms and
      conditions vary depending upon the product sold but generally include technical
      support, repair parts and labor for periods up to one year. Factors that affect
      our warranty liability include the number of installed units currently under
      warranty, historical and anticipated rates of warranty claims on those units,
      and cost per claim to satisfy our warranty obligation.  Both
      manufacturers of our products provide replacement parts for any defective
      components free of charge for up to 2% of the total units
      purchased.  Based upon the foregoing, we have recorded a provision for
      potential future warranty costs of $15,393 as of March 31, 2007. There was
      no
      provision required as of March 31, 2006.





We
      reserve for potential returns from customers and associated refunds or credits
      related to such returns based upon historical experience. As of March 31, 2007,
      we have recorded a reserve for customer returns of $238,569. There was no
      provision required as of March 31, 2006.





*Shipping
      and Handling Costs*


Shipping
      and handling costs associated with inbound freight are recorded in cost of
      revenue. Shipping and handling costs associated with freight out to customers
      are also included in cost of revenue. Shipping and handling charges to customers
      are included in sales.





*Stock
      Based Compensation*


In
      December 2004, the Financial Accounting Standards Board issued SFAS No. 123R,
      “Share-Based Payment.” Subsequently, the Securities and Exchange Commission
      (“SEC”) provided for a phase-in implementation process for SFAS No. 123R, which
      required adoption of the new accounting standard no later than January 1,
      2006. SFAS No. 123R requires accounting for stock options using a
      fair-value-based method as described in such statement and recognize the
      resulting compensation expense in the Company’s financial statements. Prior to
      January 1, 2006, the Company accounted for employee stock options using the
      intrinsic value method under Accounting Principles Board (“APB”) No. 25,
“Accounting for Stock Issued to Employees” and related interpretations, which
      generally results in no employee stock option expense. We adopted SFAS No.
      123R
      on January 1, 2006 and do not plan to restate financial statements for prior
      periods. We plan to continue to use the Black-Scholes option valuation model
      in
      estimating the fair value of the stock option awards issued under SFAS No.
      123R.
      The adoption of SFAS No. 123R has increased net loss by $560,859 and $3,315,840
      for the year ended March 31, 2007 and the three month transitional period ended
      March 31, 2006, respectively, as compared to using our prior method under APB
      25.





*Registration
      Rights Penalties*


The holders of securities issued in the our 2006 Offering and 2005 Offering
      (see
      Note 4 to our Financial Statements) had registration rights for the common
      stock
      and for the common stock underlying the convertible debt and the warrants held
      by them. Liquidated damages for failure to register and maintain registration
      for such common stock are payable in shares of our common stock under certain
      circumstances and are equal to 1% of the amount of the outstanding convertible
      debt per 30-day period up to a maximum of 24% and 1% of the amount of the
      investment in the 2006 Offering up to a maximum of 18%. In each case, the amount
      is payable in shares of our common stock valued
      at
      a rate of $2.00 per share. We elected to recognize the impact of such
      registration rights penalties as incurred, which commenced after July 23, 2006.
      We completed the registration of the foregoing securities on December 22, 2006
      and recognized five months of penalty, resulting in the recording of 332,876
      shares of common stock to be issued at a value of $5.00 for a total of
      $1,664,380. On December 21, 2006, the FASB Financial Statement Publication
      (“FSP”) EITF 00-19-2 that addresses the accrual and accounting for registration
      rights penalties became effective immediately. This FSP addresses the proper
      accounting of similarly arranged registration rights agreements entered into
      after the effective date of December 21, 2006.  The Company adopted
      EITF 00-19-2 as of its effective date and does not expect the adoption to be
      significantly different from our current policy.




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**New
      Accounting Pronouncements**





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes,” which is an interpretation of SFAS No. 109 ,
“Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty
      in income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS 109 and prescribes a recognition threshold and measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return. FIN 48 also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. We are currently evaluating the effect that
      the adoption of FIN 48 may have on our financial position or results of
      operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
      157 defines fair value, establishes a framework for measuring fair value and
      expands disclosure of fair value measurements. SFAS 157 applies under other
      accounting pronouncements that require or permit fair value measurements and
      accordingly, does not require any new fair value measurements. SFAS 157 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007. We are currently in the process of assessing the impact
      the
      adoption of SFAS 157 will have on our financial statements.





In
      September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements.” SAB 108 requires that public companies utilize a “dual-approach” to
      assessing the quantitative effects of financial misstatements. This dual
      approach includes both an income statement focused assessment and a balance
      sheet focused assessment. The guidance in SAB 108 must be applied to annual
      financial statements for fiscal years ending after November 15, 2006. We believe
      the adoption of this pronouncement will not have a material impact on our
      financial statements.





In
      February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial
      Assets and Financial Liabilities—including an amendment of FASB Statement 157.”
We will adopt SFAS 159 in the fiscal year beginning April 1, 2008. The adoption
      of this statement is not expected to have a material effect on our financial
      statements.




**Plan
      of Operation**




Having
      launched our products through multiple channels including retail, home shopping,
      catalogue, international and direct to consumer sales, our objective over the
      next 12 months will be to expand our marketing efforts in each of these channels
      for our kitchen garden systems and peripheral products. Our infomercial, a
      30-minute video presentation of the product, has been airing on national cable
      and local broadcast television stations since September 2006 and we anticipate
      continued airings through the balance of calendar year 2007.




We
      are
      also expanding our product development activities to sustain operations beyond
      our initial product offerings. Development has begun and, in some cases has
      been
      completed, for final design and tooling of new models of our AeroGarden kitchen
      appliances, including models that offer additional features and finishes which
      are designed for higher price points than our current system, as well models
      which will have smaller growing capacities and require smaller counter space,
      designed to sell for lower price points. These lower priced products may be
      introduced into specialty channels of distribution such as toy channels for
      a
      children’s garden, coffee shops for a tea garden, office channels for desktop
      garden, etc. We also continue to enhance our offerings of seed kits and
      accessories, with available seed kits growing from the six that were available
      in March 2006 to over 20 by March 2007, including the sale and distribution
      of
      live strawberry plants developed to grow in the AeroGarden system. We have
      also
      expanded our line of accessories to include the wall garden, a shelving unit
      that enables users to mount from one to three AeroGardens
      systems on the wall vertically in less than 16 inches. Consumers can mount
      up to
      three of these wall gardens next to each other using only one electrical outlet
      (collectively know as “The Wall Farm”), allowing consumers to grow a large
      abundance of fresh homegrown produce year round. We have also developed and
      launched our Herb N Serve, a battery operated mixer/blender designed to allow
      the consumer to make salad dressing using herbs from the AeroGarden and serve
      it
      from the same container.




We
      have
      completed development of many of our marketing materials, including infomercials
      and short form (60 and 120 seconds) television commercials, multiple websites,
      product brochures, retail packaging, point of purchase displays and other retail
      collateral materials and public relations kits. We continue to dedicate
      financial and management resources to the improvement of our marketing and
      sales
      materials and processes.




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**Manufacturing**




We
      manufacture our products using contract manufacturing sources that are
      supervised by our internal engineering and manufacturing teams. Our bio-grow
      seed pods are currently manufactured and assembled in our production facilities
      in Longmont, Colorado.




On
      September 30, 2005, we entered into a manufacturing agreement with Source Plus,
      Inc. (“Source Plus”) an Alabama corporation, and Mingkeda Industries Co., Ltd.
      (“Mingkeda”), a Chinese company located in the Guangdong Province of China that
      has primarily manufactured light fixtures in the past. Under the terms of this
      agreement, Source Plus advanced monies to Mingkeda for tooling and molds to
      build our products. To reimburse Source Plus, we issued 62,000 shares of our
      common stock to Source Plus in October 2005 and recorded a $310,000 asset for
      tooling, which we will depreciate over a period of three years to reflect the
      estimated useful life of the tooling. AeroGrow and Source Plus have agreed
      to
      certain selling restrictions on our sale of common stock. Further, in return
      for
      a $0.50 per unit price concession from Mingkeda for products we purchase, we
      issued 10,000 shares of our common stock to Mingkeda in October 2005. These
      shares are subject to the same selling restrictions as the stock issued to
      Source Plus. AeroGrow recorded a $50,000 expense for inventory which we charged
      to cost of sales during the initial year.




This
      agreement provides for payment of the purchase price of products manufactured
      by
      Mingkeda as follows: 30% paid 25 days prior to shipment, 50% paid upon shipment,
      and the remaining 20% paid 20 days after shipment. The purchase price is
      determined based upon a fixed percentage for profit (14% for light bulbs, 29%
      for all other products); overhead and labor are applied to actual component
      costs. We have also agreed to pay to Source Plus a commission of 2% of the
      total
      purchases of the product with such payments to be made using the same
      proportions as our payments to Mingkeda. In addition, Source Plus is entitled
      to
      receive 2% of all our purchases of kitchen gardens, from all sources, for a
      period of 18 months from the date of the initial shipment from Mingkeda.
      Mingkeda will manufacture and ship the products as and when required by us
      and
      will maintain an agreed level of quality. Currently, Mingkeda has the capacity
      to produce 15,000 per month and has agreed to develop sufficient capacity to
      manufacture up to 25,000 kitchen garden systems per month. We will have the
      right to audit Mingkeda’s manufacturing performance periodically and maintain an
      agent in the Mingkeda plant to inspect our production.




The
      manufacturing agreement with Mingkeda and Source Plus provides for protection
      of
      our intellectual property rights. Under the agreement, Source Plus is
      specifically responsible for working as the liaison between us and Mingkeda
      with
      responsibility for oversight of quality control in the manufacturing of the
      products, review of specifications and Mingkeda’s compliance, monitoring of
      order fulfillment, and similar tasks related to quality of the finished goods.
      Source Plus receives a 2% commission for their work. Mingkeda manufactures
      the
      product to our specifications at a predetermined line item component and
      assembly cost that will not change unless there are changes in exchange rate
      or
      cost of raw materials. We must approve changes in cost.




In
      order
      to diversify our risk from having a single manufacturer, as well as provide
      for
      capacity beyond that of Mingkeda, we identified and commenced production with
      an
      additional contract manufacturing source, Main Power Electrical Factory Ltd
      (Main Power). We have completed two sets of tooling with Main Power for a
      production capacity of 100,000 per month of our original kitchen garden units.
      We have also developed, through Main Power, tooling for a new model, the
      AeroGarden Pro100, which features a stainless steel accented finish as well
      as
      our Adaptive Growth technology. During the first calendar quarter of 2007,
      we
      began receiving delivery of production units built by Main Power. Purchasing
      terms with Main Power are 100% payment upon shipment through commercial bills
      of
      exchange. As of March 31, 2007, we have recorded $289,335 in tooling costs
      related to tooling at Main Power for two models of our AeroGarden. We have
      paid
      Main Power $35,736 in deposits toward tooling costs, and we owe $35,736 in
      additional deposits, we have amortized $7,968 of tooling costs to date and
      have
      an additional $210,296 due as of March 31, 2007 to be amortized at the rate
      of
      $0.20 per unit.




In
      addition, we have increased research and development and production capacity
      for
      seed kits for our kitchen garden systems at our facility in Longmont, Colorado.
      We expect to continue to dedicate financial and management resources to the
      improvement of operating efficiencies and production capacity at this
      facility.




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**Retail
      Marketing and Sales**




We
      began
      testing various direct marketing advertisements during the third and fourth
      calendar quarter of 2006 including:




· 
60-second
      television commercials,




· 
30-minute
      infomercials,




· 
home
      shopping
      networks, and




· 
Internet
      advertising.




We
      have
      been airing our infomercial we produced on national cable and broadcast
      television, spending approximately $2.0 million in media through March 31,
      2007.
      We expect that the exposure for our products that will be generated from the
      infomercial and other direct response marketing advertising will broaden the
      AeroGarden brand and product recognition in all channels of
      distribution.




In
      July
      2006, the AeroGarden was featured on QVC, the world’s largest television
      retailer, and had multiple additional airings since that time, including an
      airing in April 2007 which featured the Pro100 model of AeroGarden throughout
      QVC’s broadcast day, a promotion known as “Today’s Special Value” or
“TSV.”




We
      have
      expanded our presence in catalogues from our catalogue launch partner,
      Frontgate, to multiple catalogues including Brookstone, Plow and Hearth,
      Improvements and others, all of which we believe add to the growing consumer
      recognition of their products. We also continue to expand our retail
      distribution with over 1,350 retail stores to date carrying AeroGarden products
      nationwide in multiple channels including housewares, culinary, lawn and garden
      and department stores. Included in the foregoing is Linens ‘n Things with other
      chain wide distribution anticipated for the remainder of calendar 2007 including
      JC Penney’s, Sears and others. The AeroGarden has received recognition from
      retailers such as Amazon.com whose customers voted the AeroGarden the “Most
      Wished For” home and garden product of 2006, the media, including features in
      nationally recognized television shows such as the “Today Show” and the “Ellen
      Degeneres” show and the housewares industry, with the AeroGarden receiving "Best
      in Category" from the International Housewares Association in the "Food
      Preparation" category based upon the AeroGarden’s innovative technology, user
      benefits and market response.




We
      have
      developed a nationwide network of manufacturer sales representative
      organizations with experience in each of these retail categories to manage
      sales
      activities for these channels. These sales representatives are independent
      contractors compensated by commission based on the sales they generate. Although
      our gross profit margins will be lower when selling through retail channels,
      we
      will not incur the relatively higher advertising costs associated with our
      direct response marketing. Our ability to continue to expand and maintain sales
      through retail channels will depend on the success of our public relations
      and
      direct marketing campaigns in generating awareness for our products, the
      retailers’ ability and willingness to merchandise our products, and continued
      consumer acceptance for our kitchen garden systems.




**Distribution**




Through
      December 31, 2006, we had contracted with a third party service provider in
      Reno, Nevada to fulfill, store and ship our products. As of January 1, 2007,
      we
      terminated our relationship with the company in Reno, Nevada and
      relocated our warehousing and
      fulfillment to a new third party facility,Motivational Fulfillment
      and Logistics
      Services (“Motivational”), located in Chino, California. We believe this change
      has reduced inbound and outbound freight costs as well as fulfillment and
      handling charges and reduced time to market as a result of our location near
      the
      major sea ports of Los Angeles and Long Beach, California. Motivational provides
      warehousing, order packing, and shipping for the products sold (through both
      direct response channels and retail channels) on primarily a variable cost
      basis. Costs for warehousing, order packing, and shipping for the products
      sold
      through direct response channels are included in the shipping and handling
      charge paid by the direct response purchaser. For retail distribution, the
      costs
      for warehousing, order packing, and shipping are lower because of the
      efficiencies gained in shipping larger quantities per order. Freight costs
      will
      vary significantly depending upon quantity ordered and destination, but range
      from 3% to 5% of sales net of reimbursement from customers. A different third
      party service provider, Web-Ideals LLC, also provides payment processing,
      database management, and customer support services for direct response sales.
      We
      manage the majority of our consumer and retailer customer support from our
      own
      call center facilities located in our headquarters in Boulder,
      Colorado.




We
      have
      contracted with a telemarketing company, LiveOps, Inc. to provide operators
      who
      will take calls from consumers responding to our direct response marketing.
      This
      contract may be cancelled upon 30 days notice. These orders and the orders
      received on our website are provided to our third party service provider daily
      to be fulfilled. Telemarketing costs per order are approximating 4% of direct
      response sales.




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**International
      Sales**




We
      have
      begun to build our international distributor network and have entered into
      agreements with distributors in Japan, Mexico and Canada. On September 1, 2006,
      we retained the services of a consultant in London to assist in developing
      our
      international distributor network in Europe and Asia. We anticipate finalizing
      distribution agreements in key markets such as Germany and the United Kingdom
      by
      the end of September 2007 and have obtained electrical approvals and seed kit
      customs clearance for our kitchen garden products, enabling distribution to
      commence in Europe and Japan during the early part of the third calendar quarter
      of 2007. The terms of our international agreements generally provide for a
      test
      period commencing from the first shipment of product, usually around 90 to
      120
      days, during which the distributor will air the infomercial and otherwise
      evaluate the product potential in their market. Thereafter, if electing to
      go
      forward, the distributor will be subject to minimum purchase requirements on
      a
      quarterly or semi-annual basis based upon the size of the market and the
      distribution channels granted the distributor in the market.





**Inflation
      and Seasonality**




We
      do not
      expect inflation to have a significant effect on our operations in the
      foreseeable future. Because our kitchen garden systems are designed for an
      indoor gardening experience, it is likely that we may experience slower sales
      in
      the United States during June through September when our consumers may tend
      to
      garden outdoors. In addition, we had increased sales during the holiday season
      in the fourth calendar quarter. We have had only one year of operations, but
      it
      does appear that we have some seasonality.  We intend to sell to our
      international distributors in US Dollars thereby minimizing effects from
      currency fluctuations. Our purchases from China may be affected by changes
      in
      valuation of the US Dollar as compared to the Chinese Yuan.




**Results
      of Operations**





The
      year
      ended March 31, 2007 represented our first full year of revenues from
      operations. Initial shipments of our products began in March
      2006.  The following table sets forth, as a percentage of sales, our
      quarterly financial results for this first 12 months of operations:





**Three
                months ended****31-Mar-07**
            
            
            **31-Dec-06**
            
            
            **30-Sep-06**
            
            
            **30-Jun-06**RevenueProduct
                sales- retail
            
            
            65.1
            %
            
            
            67.2
            %
            
            
            77.6
            %
            
            
            84.4
            %Product
                sales- direct to consumer
            
            
            34.9
            %
            
            
            32.8
            %
            
            
            22.4
            %
            
            
            15.6
            %Total
                sales
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Operating
                expensesCost
                of revenue
            
            
            56.3
            %
            
            
            67.5
            %
            
            
            80.3
            %
            
            
            82.2
            %Research
                and development
            
            
            8.8
            %
            
            
            14.4
            %
            
            
            39.7
            %
            
            
            52.9
            %Sales
                and marketing
            
            
            44.0
            %
            
            
            40.5
            %
            
            
            132.0
            %
            
            
            116.9
            %General
                and administrative
            
            
            21.4
            %
            
            
            21.5
            %
            
            
            75.1
            %
            
            
            104.1
            %Total
                operating expenses
            
            
            130.5
            %
            
            
            143.9
            %
            
            
            327.1
            %
            
            
            356.1
            %Loss
                from operations
            
            
            -30.5
            %
            
            
            -43.9
            %
            
            
            -227.1
            %
            
            
            -256.1
            %





For
      the
      year ended March 31, 2007, net sales totaled $13,144,037.  In the
      prior period, which was a transitional three-month period ended March 31, 2006,
      we recorded our first sales of $35,245. Direct sales are generated as a result
      of airings of our infomercial, our websites and other direct to consumer
      advertisements. Retail sales are generated through sales to “brick and mortar”
retailers, catalogues and home shopping companies who in turn sell to consumers.
      In regard to our direct sales, we offer our direct customers thirty-six days
      to
      evaluate the product (“Trial Sales”) paying only the shipping and handling costs
      for such products before making the required installment payments after the
      expiration of the thirty-six day trial period. Accordingly, we did not record
      $451,898 of revenue as of March 31, 2007 related to the unpaid balance due
      for
      orders shipped in conjunction with these Trial Sales. Also, as of March 31,
      2007, we did not record $135,459 of product costs associated with the foregoing
      Trial Sales because the customer is required to return the product and we are
      therefore able to recover these costs through resale of the goods.





During
      the year ended March 31, 2007, we had two retail customers who accounted for
      15%
      ($1,962,968) and 10% ($1,303,899), respectively, of our net sales.




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Cost
      of revenues for the year ended
      March 31, 2007 totaled $8,404,507 representing 64% of revenues for the year.
      Cost of revenues include product costs for purchased and manufactured products,
      freight costs for inbound freight from manufacturers and outbound freight to
      customers, costs related to warehousing and the shipping of products to
      customers and duties and customs applicable to products imported. Throughout
      the
      initial year of our product launch, we were able to improve both manufacturing
      costs and transportation costs as evidenced by the above table. Included in
      cost
      of revenue for the year ended March 31, 2007 are costs associated with expedited
      shipping of approximately 15,000 of our AeroGarden units from our factory in
      China by air rather than by sea in order to expedite our initial deliveries
      in
      April 2006, and to satisfy customer demands in the November/December 2006
      holiday timeframe at an incremental airfreight cost of $27 per unit, as well
      as
      airfreight costs associated with expediting components parts for our seed kits
      in the January  2007 timeframe for a total of additional freight cost
      of approximately $490,000. We also experienced higher than anticipated costs
      in
      the startup of our seed kit manufacturing operations which improved throughout
      the year ended March 31, 2007 as efficiencies in manufacturing seed kits due
      to
      improvements in both process and volume were realized.With the additional
      factory capacity
      that enables more efficient component purchasing, manufacturing cost reductions
      related to integration of electrical components, relocation of our distribution
      facilities to California improving inbound and outbound freight costs and the
      ability to maintain adequate inventory levels thereby avoiding
      air  freight costs, we anticipate further reductions in costs of
      revenues in the next 12 months.





Gross
      margins vary based upon the factors impacting cost of revenue discussed above
      as
      well as the ratio of direct sales versus retail sales. In a direct to consumer
      sale, we recognize as revenue the full purchase price for the product as opposed
      to retail sales, where we recognize as revenue the wholesale price for the
      product charged to the retailer. Media costs associated with direct sales are
      included in sales and marketing costs. Gross margins for the year ended March
      31, 2007 were $4,739,530 representing 36% of revenues. Affecting gross margins
      for the year ended March 31, 2007, as discussed above, were airfreight costs
      of
      $490,000, reducing gross margins by 4%. With the addition of the new
      manufacturing capability, we expect to have sufficient manufacturing capacity
      to
      avoid such airfreight costs in the future. There are further reductions possible
      from obtaining regulatory approval to produce selected seed kits in China to
      be
      shipped with the AeroGarden which would result in up to 60% cost savings for
      such seed kits as compared to current manufacturing costs in Colorado. At
      present no assurances can be given that such regulatory approval can be
      obtained.


Sales
      and
      marketing costs for the year ended March 31, 2007 totaled $7,117,613. Sales
      and
      marketing costs for the year ended March 31, 2007, the three-month transitional
      period ended March 31, 2006 and the year ended December 31, 2005 include all
      costs associated with the marketing sales and distribution of our products
      and
      consists of the following:





**Year
                ended**
            
            
            **Three
                month transitional**
              **period
                ended**
            
            
            **Year
                ended****March
                31,**
            
            
            **March
                31,**
            
            
            **December
                31,****2007**
            
            
            **2006**
            
            
            **2005**Advertising
            
            $
            2,125,111
            
            
            $
            30,000
            
            
            $
            -Salaries
                and related costs
            
            
            1,672,877
            
            
            
            94,832
            
            
            
            109,370Stock
                based compensation
            
            
            363,227
            
            
            
            1,724,940
            
            
            
            -Infomercial
                production costs
            
            
            767,599
            
            
            
            181,060
            
            
            
            63,635Sales
                commissions
            
            
            556,531
            
            
            
            -
            
            
            
            -Consulting
                fees
            
            
            408,465
            
            
            
            224,500
            
            
            
            -Public
                relations
            
            
            235,608
            
            
            
            124,195
            
            
            
            173,085Telemarketing
            
            
            168,572
            
            
            
            -
            
            
            
            -Other
            
            
            819,623
            
            
            
            169,056
            
            
            
            237,807$
            7,117,613
            
            
            $
            2,548,583
            
            
            $
            583,897





Advertising
      is primarily comprised of media costs for airing of the our infomercial which
      we
      consider a key component of our marketing strategy in that in helps build
      awareness and therefore consumer demand for all channels of distribution as
      well
      as generating revenues from direct to consumer sales. We anticipate continued
      airing of our current infomercial through December 2007. Salaries and related
      costs consist of salaries, payroll taxes, employee benefits and other payroll
      costs for our sales, customer service operations, graphics and marketing
      departments. Stock based compensation represents charges related to the granting
      of stock options and grants to employees and consultants that service the
      foregoing departments.  Infomercial production costs represent costs
      related to the development, production, editing and revision of our thirty
      minute infomercial and short form (0:60 and 1:20 second) television commercials.
      We intend to produce and test market at least two new infomercials for products
      in development for airing in calendar year 2008. Sales commissions represent
      commissions 7% of collections from net sales paid to sales representative
      organizations that assisted us in opening and maintaining our retail customers.
      We have recently renegotiated the agreements with our sales representative
      organizations to sliding scales based upon the size of the customers and, as
      a
      result, anticipate the aggregate percentage rate of these commissions to decline
      in the next 12 months.





General
      and administrative costs for the year ended March 31, 2007 totaled $4,050,312.
      General and administrative costs for the three month transitional period ended
      March 31, 2006 and the year ended December 31, 2005 were $2,010,907 and
      $2,923,792, respectively. Included in general and administrative costs for
      the
      year ended March 31, 2007 were $356,720 in stock based compensation related
      to
      employee stock option and restricted stock grants, $362,830 in legal fees and
      $322,541 of consulting fees. For the three month transitional period ended
      March
      31, 2006, general and administrative costs included $1,332,540 in stock based
      compensation related to employee stock option and restricted stock
      grants.




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**Research
      and Development**





During
      the year ended March 31, 2007 we incurred $2,113,255 in research and development
      costs, inclusive of $336,482 in compensation relating to the granting of
      restricted stock and stock options during the year. During the three-month
      transitional period ended March 31, 2006, we incurred $978,539 in research
      and
      development costs, inclusive of $573,916 in compensation relating to the
      granting of stock options granted March 28, 2006.  During the year
      ended December 31, 2005, we incurred $1,578,833 in research and development
      costs. We initially focused our efforts on determining if an aeroponic product
      could be developed for consumer use in the home at attractive
      prices.  We then focused on developing the design, technology and
      various prototype models.  In addition, we set up a greenhouse and
      laboratory to measure the success of growing herbs, vegetables and flowers
      with
      various seeds, cuttings
      and nutrients under different lighting conditions.  Finally, we filed
      patent applications for certain of the technology used in our kitchen garden
      systems.





In
      the
      next 12 months we intend to continue researching and developing new product
      designs and product extensions including, but not limited to, nutrient delivery
      systems and additional seed varieties for our seed kits.  We have also
      begun development of a methodology to cultivate and ship live “starter” plants
      in the grow pod mediums that will be able to grow in our kitchen garden systems.
      We started market testing this process with strawberries during the first
      quarter of calendar 2007. We have also initiated development of a new aeroponic
      based technology which utilizes a new form of proprietary seed pod that will
      facilitate transfer of water using materials that facilitate the transfer of
      moisture to the seeds without the need of the pump system. This new technology
      is anticipated to reduce manufacturing costs of our kitchen garden systems
      with
      no loss of efficacy. We also plan to introduce a smaller version of our kitchen
      garden system in the fourth calendar quarter of 2007 using this new technology
      with a targeted retail price of $99-$129 based on the channel of distribution
      in
      which it is sold and the accessory components included with the unit. Partially
      offsetting future increases in these costs will be cost savings associated
      with
      research and development resources available to us through our new manufacturer
      provided at minimal costs to us including resources for design, prototyping
      and
      regulatory approvals.





**Liquidity
      and Capital Resources**




On
      March
      12 and March 15, 2007, we completed a private offering of 833,400 units of
      our
      common stock and warrants to purchase common stock and on March 29, 2007, we
      completed a private offering of 333,360 units of our common stock and warrants
      to purchase common stock (“2007 Offerings”). Each unit consisted of one share of
      common stock, par value $0.001, and one five-year warrant to purchase one share
      of common stock at an exercise price of $7.50 per share. The units were sold
      at
      a per unit price of $6.00. We raised an aggregate of $7,000,000 from the 2007
      Offerings, less a placement agent fee in the amount of $700,000 and
      approximately $100,000 in other expenses related to the 2007 Offerings. The
      holders of securities issued in the 2007 Offerings had registration rights
      for
      the common stock and for the common stock underlying the warrants held by them.
      Liquidated damages for failure to register and maintain registration for such
      common stock were payable in cash under certain circumstances and were limited
      to 1% of the amount of the investment per 30-day period made up to a maximum
      of
      10%. We completed the registration of $5.0 million of the 2007 Offerings on
      May
      11, 2007 and we intend to file a registration statement for the remaining $2.0
      million of the 2007 Offerings within the 120 day required time for filing such
      registration statement.





As
      of
      March 31, 2007, we had a cash balance of approximately $5,495,000. We anticipate
      that existing cash resources will be sufficient for the next 12
      months.




We
      anticipates our principal sources of liquidity during the next fiscal year
      ending March 31, 2008 will be proceeds from sales of our products. We intends\
      to use our working capital principally to purchase inventory, fund media
      advertising, fund product promotion and trade show costs as well as support
      ongoing product development, overheads and operational costs. In the event
      retail and/or direct response sales accelerate more rapidly than currently
      anticipated, we would need to support this growth through additional asset-based
      or other debt financing or the raising of additional equity. However, no
      assurance that such financing will be available on attractive terms or at
      all.




As
      of
      March 31, 2007, we had generated net proceeds of $23,730,751 from the sale
      of
      securities.




We
      have
      used the funds raised to date to:




· 
complete
      the
      research and development of our kitchen garden systems,




· 
commence
      manufacturing of one model of our kitchen garden and ten varieties of seed
      kits.




· 
develop
      our
      direct response marketing advertisements including one 30-minute infomercial
      and
      several 60-second television commercials, and




· 
launch
      our
      public relations campaign.


·
      launch our initial
      products through direct response, retail, catalogue and home shopping
      distribution channels.





**Off-Balance
      Sheet Arrangements**





We
      have certain current commitments under operating leases and have not entered
      into any capital leases or contracts for financial derivative instruments such
      as futures, swaps and options.




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**RISK
      FACTORS**





**RISKS
      RELATED TO OPERATIONS**




**Because
      we have a limited operating history, we may not be able to successfully manage
      our business or achieve profitability.**




We
      have a
      limited operating history upon which you can base your evaluation of our
      prospects and the potential value of our common stock. We recently have begun
      to
      produce our garden systems and seed kits. We are confronted with the risks
      inherent in a start-up company, including difficulties and delays in connection
      with the production and sales of our kitchen garden systems, reliance on a
      small
      number of products, operational difficulties and our potential under-estimation
      of production and administrative costs. If we cannot successfully manage our
      business, we may not be able to generate future profits and may not be able
      to
      support our operations. We expect to incur substantial additional expenses
      and
      losses in the further implementation of our business plan. Because we are in
      the
      early stages of implementing our business plan, we cannot predict now if we
      will
      ever be profitable. We may not be able to improve operations and therefore
      may
      not become profitable.




**We
      have incurred substantial losses since inception and may never achieve
      profitability.**




Since
      we
      commenced operations in 2002 and through March 31, 2007, we have incurred
      substantial operating losses. For the year ended March 31, 2007, we had a net
      loss of $10,386,451; for the transition period of the three months ended March
      31, 2006, we had a net loss of $7,543,343; for the 12 months ended December
      31,
      2005, we had a net loss of $7,717,577. Since inception, our losses from
      operations have resulted in an accumulated deficit of $29,792,163 as of March
      31, 2007. We expect that our operating expenses will outpace revenues for the
      near future and result in continued losses. The success of our business will
      depend on its ability to expand sales and distribution of our AeroGardenTM
kitchen garden systems to consumers and develop new product extensions and
      applications.




We
      are
      subject to many of the risks common to developing enterprises, including
      undercapitalization, cash shortages, limitations with respect to financial
      and
      other resources, and lack of revenues to be self-sustaining. There is no
      assurance that we will ever obtain profitability, which may lead to the loss
      of
      your entire investment.




**If
      our kitchen garden systems fail to perform properly, our business could suffer
      with increased costs and reduced income.**




Although
      we have been internally testing our products in our laboratories and with users
      for over three years, our products may fail to meet consumer expectations.
      We
      have only limited experience with returns and have no meaningful history with
      respect to warranty claims for our products. We may be required to replace
      or
      repair products or refund the purchase price to consumers. Failure of our
      products to meet expectations could:








· 
damage
      our
      reputation,




· 
decrease
      sales,




· 
incur
      costs
      related to returns and repairs,




· 
delay
      market
      acceptance of our products,




· 
result
      in
      unpaid accounts receivable, and




· 
divert
      our
      resources to remedy the malfunctions.




The
      occurrence of any of these events would have an adverse impact on our results
      of
      operations.




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**We
      will likely need additional capital to fund our growth.**




We
      anticipate that we have sufficient capital to satisfy our requirements for
      the
      next 12 months. However, we will likely require additional capital to support
      our growth and cover operational expenses as we expand our marketing and product
      development. It is possible that none of our outstanding warrants will be
      exercised and we will therefore not receive any proceeds therefrom. We may
      need
      to issue equity, debt or securities convertible into equity. All of which could
      dilute the current stock ownership in AeroGrow. If we cannot obtain additional
      financing on acceptable terms, we may not have sufficient capital to operate
      our
      business as planned and would have to modify our business plan or curtail some
      or all of our operations.




**Our
      intellectual property and proprietary rights are only filed in the United States
      and give us only limited protection and can be expensive to
      defend.**




Our
      ability to produce and sell kitchen garden systems exclusively depends in part
      on securing patent protection for the components of our systems, maintaining
      various trademarks, and protecting our operational trade secrets. To protect
      our
      proprietary technology, we rely on a combination of patents pending (and if
      granted, patents), trade secrets, and non-disclosure agreements, each of which
      affords only limited protection. We own the rights to 19 United States patent
      applications. However, these patent applications may not result in issued
      patents and even issued patents may be challenged. We are selling our kitchen
      garden systems prior to receiving issued patents relating to our patent
      applications. All of our intellectual property rights may be challenged,
      invalidated or circumvented. Claims for infringement may be asserted or
      prosecuted against us in the future and e may not be able to protect our
      patents, if any are obtained, and intellectual property rights against others.
      Our former employees or consultants may violate their non-disclosure agreements,
      leading to a loss of proprietary intellectual property. We also could incur
      substantial costs to assert our intellectual property or proprietary rights
      against others.








**Our
      current or future manufacturers could fail to fulfill our orders for kitchen
      garden systems, which would disrupt our business, increase our costs, and could
      potentially cause us to lose our market.**




We
      currently depend on two contract manufacturers in China to produce our kitchen
      garden systems. These manufacturers could fail to produce the kitchen garden
      system to our specifications or in a workmanlike manner and may not deliver
      the
      systems on a timely basis. Our manufacturers must also obtain inventories of
      the
      necessary parts and tools for production. We own the tools and dies used by
      our
      manufacturers. Our manufacturers operate in China and may be subject to business
      risks that fall outside our control, including but not limited to, political,
      currency and regulatory risks, each of which may affect the manufacturer’s
      ability to fulfill our orders for kitchen garden systems. Any change in
      manufacturers could disrupt our ability to fulfill orders for kitchen garden
      systems. Any change in manufacturers could disrupt our business due to delays
      in
      finding a new manufacturer, providing specifications and testing initial
      production.




**If
      we are unable to assimilate our new managers and recruit and retain key
      personnel necessary to operate our business, our ability to successfully manage
      our business and develop and market our products may be
      harmed.**




Several
      of our executive officers have recently joined us and therefore have limited
      experience in managing our company. In addition, to expand our business we
      will
      also need to attract, retain and motivate highly skilled design, development,
      management, accounting, sales, merchandising, marketing and customer service
      personnel. We plan to hire additional personnel in all areas of our business.
      Competition for many of these types of personnel is intense. As a result, we
      may
      be unable to successfully attract or retain qualified personnel. Additionally,
      any of our officers or employees can terminate their employment with us at
      any
      time. The loss of any key employee or our inability to attract or retain other
      qualified employees could harm our business and results of
      operations.


**We
      rely on third parties for a significant portion of our manufacturing, warehouse,
      distribution, order processing, and fulfillment operations. If these parties
      are
      unwilling to continue providing services to us, or are unable to adequately
      perform such services for us on a cost effective basis, our business could
      be
      materially harmed.**




We
      engage third parties to perform many critical functions. For example, we have
      outsourced our manufacturing, warehouse, distribution, order processing, and
      fulfillment operations. Any disruption in our relationship with any of our
      vendors could cause significant disruption in our business and we may not be
      able to locate another party that can provide comparable services in a timely
      manner or on acceptable commercial terms. In addition, no assurance can be
      made
      that these relationships will be adequate to support our business as we follow
      our business plan.




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**RISKS
      RELATED TO THE RELEVANT MARKET FOR OUR PRODUCT**




**Our
      future depends on the financial success of our kitchen garden systems. Since
      we
      are introducing entirely new products without comparable sales history, we
      do
      not know if our kitchen garden systems and seed kits will generate wide
      acceptance by consumers.**




We
      have
      introduced our kitchen garden systems and seed kits as new products to consumer
      markets unfamiliar with their use and benefits. In addition, we currently have,
      and only contemplate having, one product line, indoor garden systems. We cannot
      be certain that our products will generate widespread acceptance. If consumers
      do not purchase our products in sufficient numbers, we will not be profitable
      and you may lose all of your investment. Investors must consider our prospects
      in light of the risks, expenses and challenges of attempting to introduce new
      products with unknown consumer acceptance.




**Our
      marketing strategies may not be successful, which would adversely affect our
      future revenues and profitability.**




Our
      revenues and future depend on the successful marketing of our kitchen garden
      systems. We cannot give assurance that consumers will continue to be interested
      in purchasing our products. We plan to use direct marketing to sell our products
      via television commercials, infomercials, magazine and newspaper advertising,
      and the Internet. Our infomercials and commercials may not generate sufficient
      income to continue to air them. If our marketing strategies fail to attract
      customers, our product sales will not produce future revenues sufficient to
      meet
      our operating expenses or fund our future operations. If this occurs, our
      business may fail and investors may lose their entire investment.




**We
      may face significant competition, and if we are unable to compete effectively,
      our sales may be adversely affected.**




We
      believe that our simplified and complete kitchen garden systems and planned
      methods of distribution offer significant benefits as compared to the
      traditional hydroponic industry practices. We recognize, however, that there
      are
      companies that are better funded and have greater experience in producing
      hydroponic products in commercial markets, including, but not limited to,
      companies such as General Hydroponics and American Hydroponics. These companies
      could potentially decide to focus on the consumer market with competing
      products. We could also face competition from gardening wholesalers and large
      and profitable soil-based gardening companies, including, but not limited to,
      the Burpee Seed Company and Gardener’s Supply Company, should they decide to
      produce a competitive product. In addition, other consumer products companies
      could develop products to compete with us. These companies may use hydroponic
      technologies, and may have better consumer acceptance. Such companies may be
      better funded than us. If any such competing products are successful, their
      success may adversely impact us.




**RISKS
      RELATED TO OUR CAPITALIZATION**




**If
      an exemption from registration on that we have relied for any of our past
      offerings of common stock or warrants are later challenged legally, our
      principals may have to spend time defending claims, and we would then risk
      paying expenses for defense, rescission and/or regulatory
      sanctions.**


To
      raise
      working capital, we offered common stock and warrants in private transactions
      that we believed to be exempt from registration under the Securities Act, as
      amended, and state securities laws. In 2004 we also conducted a state registered
      offering in Colorado of common stock and warrants intended to be exempt from
      registration under the Securities Act, as amended, as an intrastate offering.
      However, because we are incorporated in Nevada, the offering did not satisfy
      all
      of the requirements for an intrastate offering. This could result in investors
      or regulators asserting that the Colorado offering and/or the private
      transactions (if the private transactions were integrated with the Colorado
      offering) violated the Securities Act. There can be no assurance that investors
      or regulators will not be successful in asserting a claim that these
      transactions should not be integrated. In the event that one or more investors
      seeks rescission, with resulting return of investment funds and interest at
      a
      market rate, or that state or federal regulators seeks sanctions against us
      or
      our principals, we would spend time and financial resources to pay expenses
      for
      defense, rescission awards or regulatory sanctions. The use of funds would
      reduce the capital available to implement our full plan of operation. No
      assurance can be given regarding the outcome of any such actions.




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**There
      may be substantial sales of our common stock by existing stockholders which
      could cause the price of our stock to fall.**




Future
      sales of substantial amounts of our common stock in the public market, if one
      develops, or the perception that such sales might occur, could cause the market
      price of our common stock to decline and could impair the value of your
      investment in our common stock and our ability to raise equity capital in the
      future. As of March 31, 2007, we had 11,065,609 shares of common stock
      outstanding, of which 4,917,540 shares may be sold without restriction. See
      the
      following risk factor for discussion of additional shares that are subject
      to
      issuance pursuant to outstanding warrants, options and convertible debt. Of
      the
      remaining shares, (i) 580,136 shares issued to stockholders of Wentworth in
      the Merger  have registration rights, but of these shares, 396,813
      shares are subject to lockup restrictions for periods of 12 to 18 months from
      the effective date of our registration statement declared effective on December
      22, 2006 (the "2006 Registration Statement") and the holders of such shares
      have
      waived their right to be included in that registration statement in exchange
      for
      our obligation to register all such shares as soon as commercially reasonable
      after the filing of the next quarterly or annual report or after the declaration
      of effectiveness of the this registration statement, (ii) 332,876 shares
      were issued under registration rights agreements, (iii) 5,578,740 shares issued
      prior to December 31, 2005 that have been held more than one year and may be
      transferred and sold, subject to the restrictions under Rule 144 or Rule 701,
      depending on the status of the holder and the holding period as well as lockup
      agreements, (iv) 148,931 shares granted to employees and directors since
      December 31, 2005 under our 2005 Equity Compensation Plan. Of the shares
      identified in the last two categories above, 4,642,326 shares are subject to
      lockup agreements for periods of 12 to 18 months from the effective date of
      the
      2006 Registration Statement. Also, 333,360 shares and 333,360 shares underlying
      warrants were issued in March 2007 have yet to be registered. The lockup
      restrictions may be released by an agreement between us and Keating Securities,
      LLC (“Keating Securities”). The shares of our common stock underlying the
      convertible notes and the warrants issued or to be issued to the holders of
      convertible notes are required to be registered for resale by us and are not
      subject to lockup restrictions. The sales of our common stock by these
      stockholders having registration rights or even the appearance that such holders
      may make such sales once a registration statement becomes effective may limit
      the market for the common stock or depress any trading market volume and price
      before other investors are able to sell the common stock. Moreover, a number
      of
      shareholders have held their investment for a substantial period of time and
      may
      desire to sell their shares, which could drive down the price of our common
      stock.




**Our
      outstanding warrants, options and convertible notes, and additional future
      obligations to issue our securities to various parties, may dilute the value
      of
      your investment and may adversely affect our ability to raise additional
      capital.**




As
      of March 31, 2007, we are committed to issue up to 7,066,454 additional shares
      of common stock under the terms of outstanding convertible notes, warrants,
      options and other arrangements. There are warrants and options outstanding
      issued prior to June 30, 2005 that can be exercised for 818,858 shares of its
      common stock at exercise prices ranging from $0.005 to $15.00 per share. There
      are 2,143,000 shares of common stock issuable upon exercise of the outstanding
      warrants issued to investors in our February 2006 private placement offering
      (the "2006 Offering") exercisable at $6.25 per share. There are 1,166,760 shares
      of common stock issuable upon exercise of the outstanding warrants issued to
      investors in our March 2007 private placement offering (the "2007 Offering")
      exercisable at $7.50 per share.  There are 600,000 shares of common
      stock issuable upon exercise of outstanding warrants held by the initial holders
      of the convertible notes with an exercise price of $5.00 per share. There are
      594,000 shares of common stock
      issuable upon exercise of warrants, at an exercise price of $6.00 per share,
      that were issued to holders that elected to convert notes in the principal
      amount of $2,970,000. There are 60,000 shares of common stock issuable upon
      exercise of outstanding warrants issued in 2005 to Keating Securities or its
      designees in connection with the convertible notes offering with exercise price
      of $6.00 per share and 214,800 shares of common stock issuable upon exercise
      of
      outstanding warrants issued to designees of Keating Securities in the 2006
      Offering with an exercise price of $6.25 and 116,676 shares of common stock
      issuable upon exercise of outstanding warrants issued to designees of Keating
      Securities in the 2007 Offering with an exercise price of $8.25. As of March
      31,
      2007, we had granted 1,337,360 options to purchase its common stock pursuant
      to
      our 2005 Equity Compensation Plan.




We
      have
      historically issued shares of its common stock or granted stock options to
      employees, consultants and vendors as a means to conserve cash, and we may
      continue to grant additional shares of stock and issue stock options in the
      future. As of March 31, 2007, 33,386 shares of common stock remain available
      for
      issuance under our 2005 Equity Compensation Plan.




For
      the
      length of time these notes, warrants, and options are outstanding, the holders
      will have an opportunity to profit from a rise in the market price of our common
      stock without assuming the risks of ownership. This may adversely affect the
      terms upon which we can obtain additional capital. The holders of such
      derivative securities would likely exercise or convert them at a time when
      we
      would be able to obtain equity capital on terms more favorable than the exercise
      or conversion prices provided by the notes, warrants or options.





**The
      market price of the shares may fluctuate greatly. Investors in AeroGrow bear
      the
      risk that they will not recover their investment.**




Our
      common stock began trading on the NASDAQ on June 13, 2007. From January 8,
      2007
      through June 12, 2007, our common stock traded on the Over-the-Counter Bulletin
      Board (“OTC BB”) using the trading symbol AGWI.OB. Our trading symbol is AERO.
      No assurance can be made that an active market will develop on the
      NASDAQ.  Currently, trading in our common stock on NASDAQ is limited,
      and the per share price is likely to be influenced by the price at which and
      the
      amount of shares the selling stockholders are attempting to sell at any time
      with the possible effect of limiting the trading price or lowering the price
      to
      their offering price. Shares such as ours are also subject to the activities
      of
      persons engaged in short selling securities, which generally has the effect
      of
      driving the price down. Also, the common stock of emerging growth companies
      is
      typically subject to high price and volume volatility. Therefore, the price
      of
      our common stock may fluctuate widely. A full and stable trading market for our
      common stock may never develop in which event any holder of such shares may
      not
      be able to sell at the time he elects or at all.




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 Table
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**ITEM
        7.  FINANCIALSTATEMENTS**
  Our
        financial statements appear in a separate section at the end of this Annual
        Report. Such information is incorporated herein by reference.
 **ITEM
          8.  CHANGESIN AND DISAGREEMENTS WITH
          ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**


On
      February 24, 2006, we dismissed Hein & Associates LLP (“Hein”) as our
      independent certified public accountants, the former accountants for Wentworth,
      the company which merged with and into AeroGrow. The decision was approved
      by
      our Board of Directors. We are the “successor issuer” to Wentworth I, Inc.
      within the meaning of Rule 12(g)-3 under the Securities Exchange Act of 1934,
      as
      amended (“Exchange Act”) and became a Section 12(g) reporting company under the
      Exchange Act.





The
      reports of Hein on Wentworth’s financial statements for the fiscal years ended
      December 31, 2005 did not contain an adverse opinion or disclaimer of opinion
      and were not modified as to uncertainty, audit scope, or accounting principles,
      except the report did contain an explanatory paragraph related to Wentworth’s
      ability to continue as a going concern.  During Wentworth’s fiscal
      year ended December 31, 2005, there were no disagreements with Hein on any
      matter of accounting principles or practices, financial statement disclosure,
      or
      auditing scope or procedure, which disagreements, if not resolved to the
      satisfaction of Hein would have caused Hein to make reference to
      the
      subject matter of the disagreements in connection with its report on the
      financial statements for such years. Wentworth requested that Hein furnish
      it
      with a letter addressed to the Securities and Exchange Commission ("SEC")
      stating whether or not it agrees with Wentworth’s statements in this Item
      4.01(a). A copy of the letter furnished by Hein in response to that request,
      dated February 27, 2006 which was filed as Exhibit 16.1 to the Form 8-K
      reporting the change.





Gordon,
      Hughes & Banks, LLP (“GHB”) have audited our financial statements annually
      since inception through March 31, 2007. At a shareholder’s meeting held on
      February 21, 2006, our shareholder’s ratified the appointment of GHB as auditors
      for fiscal year ending March 31, 2007. During the years ended December 31,
      2005
      and 2004, and the period from January 1, 2006 through March 31, 2007 there
      were
      no disagreements with GHB on any matter of accounting principles or practices,
      financial statement disclosure, or auditing scope or procedure, which
      disagreements, if not resolved to the satisfaction of GHB, would have caused
      GHB
      to make reference to the subject matter of the disagreements in connection
      with
      its reports on the our financial statements. In addition, none of the events
      described in Item 304(a)(1)(iv) of Regulation S-K occurred during such
      periods.




**ITEM
        8A. CONTROLSAND PROCEDURES**
  **(a)
          Evaluation of Disclosure Controls and Procedures**


Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we conducted an
      evaluation of the effectiveness of the design and operations of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as of March 31, 2007. Based on this evaluation,
      our principal executive officer and principal financial officer concluded that
      our disclosure controls and procedures were effective such that the material
      information required to be included in our SEC reports is recorded, processed,
      summarized and reported within the time periods specified in SEC rules and
      forms
      relating to AeroGrow International Inc., and was made known to them by others
      within those entities, particularly during the period when this report was
      being
      prepared.




**(b)
        Changes in Internal Controls**




We
      have
      not made any significant changes to our internal controls subsequent to the
      evaluation date. We have not identified any significant deficiencies or material
      weaknesses or other factors that could significantly affect these controls,
      and
      therefore, no corrective action was taken.




**ITEM
        8B. OTHERINFORMATION**


Not
      applicable.




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**PART
        III**
  **ITEM
          9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL
          PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE
          EXCHANGE
          ACT**




**Directors
      and Officers**




The
      following table shows the names and ages of our directors and executive officers
      and the positions they hold with us. Our bylaws provide that directors are
      generally elected at our annual shareholders meeting and hold office until
      the
      next annual shareholders meeting and until their successors are elected and
      qualified. Our bylaws provide that the board of directors shall consist of
      such
      number of members as the board may determine from time to time, but not less
      than one and not more than fifteen. Our board of directors currently consists
      of
      five individuals. Executive officers are selected by the board of directors
      and
      serve at its discretion.




**Name**
            **Age**
            **Position
                with AeroGrow**
            **Serving
                as a Director Since**W.
                Michael Bissonnette
            58
            Chief
                Executive Officer, President and Director
            2002Richard
                A. Kranitz
            63
            Director
            2002Dennis  Channer
            57
            Director
            2007Jack
                J. Walker
            72
            Director
            2006Kenneth
                Leung
            62
            Director
            2006Mitchell
                B. Rubin
            52
            Chief
                Financial Officer
            n/aRandall
                Lee Seffren
            49
            Chief
                Marketing Officer
            n/a




**W. Michael
      Bissonnette** is our founding shareholder and has served as chief
      executive officer, president and a director of AeroGrow since July 2002.
      Concurrently, he has served as chief executive officer, president, and a
      director of our former parent company, Mentor Capital Consultants, Inc. since
      March 2000. Mentor Capital currently has no active operating business. From
      1994
      through 2000, Mr. Bissonnette was a private investor. From 1989 to 1994, he
      was the founder, chief executive officer, president, and a director of Voice
      Powered Technology International, Inc., an international consumer electronics
      company. From 1977 to 1989, Mr. Bissonnette was the founder, chief
      executive officer and president of Knight Protective Industries, Inc., an
      international consumer security products company. Prior to 1977, he was founder,
      chief executive officer and president of Shagrila Carpets, Inc., a multi-store
      retailer of commercial and home carpeting. Both Voice Powered Technology
      International, Inc. and Knight Protective Industries, Inc. specialized in the
      funding, development, and marketing of technology-based consumer
      products.




**Richard A.
      Kranitz** has been a director of AeroGrow since July 2002. He has also
      served as a director of Mentor Capital since March 2000. Mr. Kranitz has
      been an attorney in private practice since 1970, emphasizing securities, banking
      and business law. From 1990 to the present he has been an attorney in
      Kranitz & Philipp in Grafton, Wisconsin. Previously, following the
      death of a partner in 1976, he formed the Law Offices of Richard A.
      Kranitz. From 1982 to 1983 he also was a member of Fretty & Kranitz and
      from 1977 to 1978 he was also a member of Habush, Gillick, Habush, Davis,
      Murphy, Kraemer & Kranitz. He was a member of McKay, Martin &
Kranitz from 1973 to 1976, and was employed by Reinhart, Boerner, Van Deuren,
      Norris & Reiselbach, s.c. from 1970 to 1973. Mr. Kranitz served as
      Law Clerk to the Honorable Myron L. Gordon in the U.S. District Court (E.D.
      Wisconsin) from 1969 to 1970. Mr. Kranitz has served as a director of the
      Grafton State Bank from 1990 to present. He served as a venture capital
      consultant to, and director of, various companies, and he has served at various
      times as a director of various professional, civic, or charitable
      organizations.





**Dennis
      Channer, CPA, CFP**, has been a director of AeroGrow since April 16,
      2007. Since 2001 to the present, Mr. Channer has been a member of Channer
      Darmour Yanari, LLC, an investment advisory firm in Boulder, Colorado. From
      1999
      to 2000 he served as a Senior Consultant and Vice President of Portfolio
      Management Consultants, Inc., a provider of wealth management services, with
      over $30 billion in assets under management. From 1996 to 1999 Mr. Channer
      was a
      co-founder, Managing Director, and Chairman of the Board of Directors of
      Investors Independent Trust Company in Boulder, Colorado. From 1992 to 1996
      he
      was the Managing Principal of Channer & Company, an independent investment
      advisory and financial planning firm. From 1986 to 1992 he worked as the
      Director of Financial Planning for Acacia Group in Denver, Colorado. From 1981
      to 1986 Mr. Channer was a Partner in Thal Channer & Company, CPAs. Before
      that, he served as an Accounting Manager (Western Interstate Commission For
      Higher Education, 1979 to 1980); a Controller (Boulder County Department of
      Human Resources, 1975 to 1978); and an Assistant Controller (Denver Manpower
      Administration, 1974 to 1975). Mr. Channer was awarded his B.S. in accounting
      by
      Metropolitan State College of Denver in 1973.





**Jack J.
      Walker** has been a director since the February 23, 2006, annual
      meeting of shareholders. He has served as president of English &
Continental Properties, Inc., a real estate investment and development company,
      from 1980 to present. From 1976 to 1985, Mr. Walker was president of March
      Trade & Finance, Inc., a private investment company. From 1974 to 1976,
      Mr. Walker acquired control of Charles Spreckly Industries, Town &
Commercial Properties and Associated Development Holdings. In 1961 he started
      English & Continental Property Company, and became joint Managing
      Director of this commercial development company until 1976. Mr. Walker
      began his career in 1957 as a lawyer in London, England specializing in real
      estate, financing, international tax, and corporate affairs. Mr. Walker has
      served as a director of Megafoods Stores Inc. from 1984 to 1993. In addition,
      since 1975 through the present, he has served as a venture capital consultant
      to
      companies on financial and pre-IPO strategies. In addition, he created
      the Walker Foundation for Charitable Activities and he has served at various
      times as a director of various professional, civic, and charitable
      organizations.


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**Kenneth
      Leung** has been a director since the February 23, 2006, annual
      meeting of shareholders. From 1995 to the present he has been Managing Director
      of Investment Banking-Environmental and the Chief Investment Officer of the
      Environmental Opportunities Fund at Sanders Morris Harris. Previously
      Mr. Leung served as Managing Director Research-Environmental at Smith
      Barney from 1978 to 1994. He was Vice President Research-Environmental with
      F. Eberstadt & Co. from 1974 to 1978. From 1968-1974 he was an
      Assistant Treasurer with Chemical Bank. Mr. Leung served on the boards of
      American Ecology since February 2005, Caprius, Inc. since December, 2006, and
      SystemOne Technologies since June 2000, all of which are public companies.
      He
      has served at various times as a director of various civic and charitable
      organizations.




**Description
      of Other Executive Officers of the Corporation**




All
      of
      the officers of the corporation are appointed by the board of directors to
      serve
      until their termination or resignation or appointment of a successor. The
      current officers, in addition to Mr. Bissonette, are:




**Mitchell
      Rubin** was elected chief financial officer and treasurer of AeroGrow on
      February 23, 2006. Prior to joining AeroGrow, from January 2003 through February
      2006, Mr. Rubin was an independent financial consultant. From July 1999 to
      December 2002, Mr. Rubin was the Chief Financial Officer of Web-Ideals LLC,
      a
      privately owned application service provider that offered a web-based
      application for managing direct to consumer commerce. From January 1994 to
      June
      1999, Mr. Rubin held various positions including Chief Financial Officer, Chief
      Executive Officer, and director with Voice Powered Technology International
      Inc., a publicly held developer and manufacturer of consumer electronic
      products. From July 1991 to December 1993, Mr. Rubin served as Executive Vice
      President and Chief Operating Officer of Regal Group, Inc., a television
      direct-response company. Mr. Rubin began his career as a certified public
      accountant.




**Randall
      Seffren** has been chief marketing officer of AeroGrow since April 2004
      on a consulting basis through Prometheus Communications Group, a company of
      which he is the principal owner, and through which he has billed AeroGrow,
      and
      as an employee since July 2006. From 1999 to 2004, Mr. Seffren headed the
      marketing efforts for healthcare communications companies, including Orbis
      Broadcast Group and MedEd Architects. From 1993 to 1999, he was executive vice
      president with Reebok Home Fitness/DP Fitness/Body By Jake Fitness/Kent &
Spiegel Direct. From 1989 to 1993, Mr. Seffren led the marketing, communications
      and product development efforts as director of marketing communications with
      Life Fitness, a fitness equipment company.





**Board
      Committees and Meetings**




We
      have
      established two standing committees so that some matters can be addressed in
      more depth than may be possible in a full board meeting: an audit committee
      and
      a governance, compensation and nominating committee. These two committees each
      operate under a written charter. The board has affirmatively determined that
      Mr. Channer, who was elected by the board and appointed Chairman of these
      two committees on April 16, 2007, is independent as defined by applicable
      securities law and NASDAQ corporate governance guidelines. Following is a
      description of both of these committees.





**Audit
      Committee.** The current members of our audit committee are Mr. Channer
      (chairman), Mr. Jack Walker and Mr. Kenneth Leung. Mr. Channer is considered
      a
      financial expert and Messrs Walker and Leung are considered financially literate
      under the rules of the SEC for audit committee members. The board has
      affirmatively determined that each of these persons is an independent director
      as defined by applicable securities law and NASDAQ corporate governance
      guidelines. As we add additional independent members to our board of directors
      as required by applicable securities laws or exchange listing guidelines, such
      independent directors may be appointed to our audit committee or the membership
      of the committee may be changed. This committee’s charter provides that the
      committee shall:




·
            oversee
                  the accounting and financial reporting processes and audits of
                  the
                  financial statements,




·
            assist
                the board with oversight of the integrity of our financial statements,
                the
                Company’s compliance with legal and regulatory requirements, its
                independent auditors’ qualifications and independence and the performance
                of the independent auditors, and




·
            provide
                the board with the results of its
                monitoring.




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**Governance,
      Compensation and Nominating Committee.** The current members of the
      governance, compensation and nominating committee are Mr. Channer
      (chairman) and Mr. Jack Walker and Mr. Kenneth Leung. Each of these persons
      is
      an independent director. This committee’s charter provides that the committee
      shall:




·
            recommend
                to the board the corporate governance guidelines to be
                followed,




·
            review
                and recommend the nomination of board
                members,




·
            set
                the compensation for the chief executive officer and other officers,
                and




·
            administer
                the equity performance plans of
                AeroGrow.




**Meetings.**
      During fiscal year ended March 31, 2007 the board of directors met eight times.
      Each director attended all of the meetings held by the board during the period
      that he served as a director of AeroGrow.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
        16(a) of the Securities Exchange Act of 1934, as amended, requires the
        Company's executive
        officers and directors, and persons who own more than 10% of our the Company’s
        common stock, to file reports of ownership on Form 3 and changes in ownership
        on
        Form 4 or 5 with the SEC.  Such executive officers, directors and 10%
        stockholders are also required by SEC rules to furnish the Company with copies
        of all Section 16(a) forms they file.
  To
        our
        knowledge, based solely on our review of the copies of such forms received
        by
        us, or written representations from the reporting persons,  Section 16(a)
        forms for our officers and directors were not timely filed for the fiscal
        year
        ended March 31, 2007 as follows:
  **Name**
              **Number
                  of**
                **Late
                  Reports**
              **Number
                  of Transactions**
                **Not
                  Reported****on
                  a Timely Basis**
              **Failure
                  to File**
                **Requested
                  Form**
              **Reason**Jeffrey
                  Brainard
              1
              1
              0
              Administrative
                    errorDennis
                    A. Channer
              1
              2
              0
              Time
                  to obtain SIC code and compile initial filingWayne
                    E. Harding
              2
              3
              0
              Administrative
                  errorRichard
                  A. Kranitz
              1
              2
              0
              Administrative
                  errorKenneth
                    C. Leung
              2
              3
              0
              Administrative
                  errorMitchell
                    B. Rubin
              1
              1
              0
              Administrative
                  errorJack
                    J. Walker
              2
              2
              11
              Administrative
                  error




(1)
              Mr.
                  Walker filed an amended Form 3 on June 28, 2007 originally filed
                  on March
                  6, 2006 due to an error in the number of common stock shares reported
                  on the initial filing.  Further, Mr. Walker filed a Form 4 on June
                  28, 2007 to report additional common stock and warrants purchased
                  by Mr.
                  Walker in conjuction with the Company's 2006
                  Offering.


**Code
        of Ethics.** We have adopted a Code of Ethics that applies to each of our
        employees, executive officers and directors. A copy is available free of
        charge
        in the “Investor” section of our website at www.aerogrow.com. Any amendment to
        or waiver of the Code of Ethics will be disclosed promptly following the
        date of
        such amendment or waiver in a Current Report on Form 8-K filing with the
        SEC.




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**ITEM
        10. EXECUTIVECOMPENSATION**




**Executive
      Compensation**




*Executives
      and Employment Arrangements*


The
      following discussion and table relates to compensation arrangements on behalf
      of, and compensation paid by us to Mr. Bissonnette, our chief executive
      officer, Mr. Rubin, our Chief Financial Officer, Mr. Brainard, our Vice
      President of Sales, Mr. Seffren, our Chief Marketing Officer, Mr. Wolfe,
      our Vice President of Operations and Mr. Robertson, our Vice President of
      Engineering and Manufacturing for the fiscal year ended March 31,
      2007.





*Employment
      Contracts*




We
      have
      entered into employment agreements with W. Michael Bissonnette, Mitchell B.
      Rubin, Randall (Randy) L. Seffren, Jeffrey Brainard, W. Terry Robertson Jr.
      and
      J. Michael Wolfe.




*W. Michael
      Bissonnette*




The
      employment agreement of Mr. Bissonnette, dated as of March 1, 2006,
      provides that he will be employed as the chief executive officer of AeroGrow
      for
      an initial term of 24 months, renewable automatically for successive one year
      terms. He will be paid a base salary of $225,000. Mr. Bissonnette will also
      be able to participate in equity compensation plans as determined by the
      compensation committee. Mr. Bissonnette will be reimbursed car and home
      office expenses at the rate of $2,500 per month and participate in regular
      employee benefit plans as provided by us. If Mr. Bissonnette is terminated
      without cause by us or Mr. Bissonnette terminates under certain
      circumstances constituting a breach of the agreement by us, he will be paid
      his
      base salary, medical benefits, and pro rata portion of the bonus for one year.
      If he terminates his employment without cause, he will be paid his salary to
      the
      end of the month of such notice. Mr. Bissonnette has agreed to regular
      confidentiality provisions and agreed not to compete with us in the area of
      aeroponics products and business for two years after the termination of
      employment. Any inventions, including modifications, are assigned to us by
      the
      terms of the agreement.




*Mitchell
      B. Rubin*




The
      employment agreement of Mr. Rubin, dated as of March 1, 2006, provides that
      he will be employed as the chief financial officer of the Company. He will
      devote his entire business time to the affairs of the Company, provided that
      for
      the first four months of his employment he was permitted to devote a limited
      amount of time to non-competitive business activities during the work day in
      transition from his prior consulting business. The initial term is two years
      and
      renewable for successive one year terms. Mr. Rubin shall receive base
      compensation of $200,000 per year and a bonus per fiscal year of not less than
      1.5% of EBITDA. If Mr. Rubin is terminated without cause by us or
      Mr. Rubin terminates under certain circumstances constituting a breach of
      the agreement by us, Mr. Rubin shall be entitled to receive severance
      compensation equivalent to six-months base salary and the pro rata bonus. In
      addition, if Mr. Rubin is terminated in the event of a change in control of
      AeroGrow, including a change in chief executive officer, Mr. Rubin shall be
      entitled to receive severance equal to his base salary for one year. The
      agreement also provides for medical, vacation and other benefits commensurate
      with the policies and programs as adopted by us for our senior executives.
      Further, the agreement provides for Mr. Rubin to receive a grant of options
      to purchase 125,000 shares of our common stock under our 2005 Plan at an
      exercise price of not greater than $5.00, which was granted on March 28, 2006.
      These options: (i) were fully vested on the grant date; (ii) shall not
      expire in less than five years from the date of grant; (iii) are subject to
      other standard terms and conditions under the 2005 Plan; and (iv) have
      other terms and conditions no less favorable than those granted to other senior
      executives of the Company. Mr. Rubin has agreed to regular confidentiality
      and inventions assignment provisions and agreed not to compete with AeroGrow
      for
      two years after the termination of employment.




*Randall
      (Randy) L. Seffren*




The
      employment agreement of Mr. Seffren provides that he will be employed as Chief
      Marketing Officer of the Company. He will devote all of his business time to
      the
      affairs of the Company working half time from an office in Chicago, Illinois
      and
      the balance of his time traveling on Company business. The initial term is
      two
      years ending July 31, 2008, and renewable for successive one-year terms.
      Mr. Seffren will receive base compensation of $200,000 per year and a bonus
      per fiscal year in an amount not less than 1.5% of the EBITDA of the Company,
      as
      determined by the our annual financial statements and pro rated for any portion
      of such annual period covered under this agreement. The bonus is subject to
      adjustment so that it is no less favorable than that granted to other senior
      executives. The agreement also provides for medical, vacation, and other
      benefits commensurate with the policies and programs as adopted by us for our
      senior executives. Further, the agreement confirms the option grant awarded
      to
      Mr. Seffren as of March 28, 2006,
      consisting of an option to purchase 125,000 shares of our common stock under
      our
      2005 Equity Compensation Plan at an exercise price of $5.00 per share, which
      were fully vested as of that grant date and are subject to other standard terms
      and conditions under the 2005 Equity Compensation Plan. Mr. Seffren has agreed
      to regular confidentiality and inventions assignment provisions and agreed
      not
      to compete with us during employment and for 24 months thereafter. If his
      employment is terminated, he will be entitled to receive severance pay equal
      to
      six months of his base salary as in effect immediately before his termination,
      and the payment by the Company of medical benefits until the 12th month
      following termination, and the pro rata portion of his bonus as of the nearest
      quarter end financial statements of the Company.




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*Jeffrey
      Brainard*




The
      employment agreement of Mr. Brainard, dated as of March 31, 2006,
      provides that he will be employed as the vice president, sales of the Company.
      He will devote his entire business time to the affairs of the Company, working
      from his home office in Lexington, Massachusetts. The initial term is two years
      and renewable for successive one year terms. Mr. Brainard shall receive base
      compensation of $150,000 per year and a bonus per fiscal year in an amount
      not
      less than the greater of: (i) $50,000; (ii) 0.5 per cent of retail net
      sales, net of all customer deductions including but not limited to returns,
      allowances, bad debts and other deductions; or (iii) 1.5% of the EBITDA of
      the Company as determined by the our annual financial statements and pro rated
      for any portion of such annual period covered under this agreement. Such bonus
      shall be payable for the initial year in two installments, $25,000 to be paid
      six months following the initial date of the agreement, an additional $25,000
      12
      months following the date of the agreement, and the balance not later than
      120
      days after the end of the each of the Company’s fiscal years covered under the
      agreement. The agreement also provides for medical, vacation, and other benefits
      commensurate with the policies and programs adopted by us for our senior
      executives. Further, the agreement provides for Mr. Brainard to receive a
      grant of 125,000 options to purchase our common stock under our 2005 Plan at
      an
      exercise price of not greater than $5.00. The options shall: (i) vest
      pursuant to a schedule that provides for vesting of at least of 33% of the
      amount of the grant at the date granted and 33% per each 12-month period from
      the date of grant; (ii) not expire in less than five years from the date of
      grant; and (iii) be subject to other standard terms and conditions under
      the 2005 Plan. The agreement also required that Mr. Brainard be granted shares
      of our common stock equal in value to $25,000 semi-annually until such time
      as
      the salary is at a rate of $200,000 annually. The first 5,000 shares (valued
      at
      a price of $5.00 per share) were granted immediately upon Mr. Brainard’s joining
      AeroGrow, with 5,000 additional shares six months thereafter. Effective March
      31, 2007, his salary was increased to $200,000 annually. Mr. Brainard has
      agreed to regular confidentiality and inventions assignment provisions and
      agreed not to compete with AeroGrow for a period equal to the term employed
      after the termination of employment. If Mr. Brainard is terminated without
      cause by us or Mr. Brainard terminates under certain circumstances
      constituting a breach of the agreement by us, Mr. Brainard shall be
      entitled to receive severance compensation equivalent to six months base salary
      and the pro rata bonus. In addition, if Mr. Brainard is terminated in the event
      of a change in control of AeroGrow, including a change in chief executive
      officer, Mr. Brainard shall be entitled to receive severance equal to his
      base salary for one year.




*W.
      Terry Robertson, Jr.*




The
      employment agreement of Mr. Robertson, dated as of April 15, 2006, provides
      that he will be employed as the Vice President of Engineering, Manufacturing
      and
      Quality of the Company. He will devote his entire business time to the affairs
      of the Company. The initial term is two years and renewable for successive
      one
      year terms. Mr. Robertson shall receive base compensation of $150,000 per
      year, a bonus of 5,000 shares of the our common stock upon Employee’s relocation
      to the Boulder, Colorado area, and a bonus per fiscal year of not less than
      1.5%
      of EBITDA. If Mr. Robertson is terminated without cause by us or
      Mr. Robertson terminates under certain circumstances constituting a breach
      of the agreement by us, Mr. Robertson shall be entitled to receive
      severance compensation equivalent to six months base salary and the pro rata
      bonus. The agreement also provides for medical, vacation and other benefits
      commensurate with the policies and programs adopted by us for our senior
      executives. Further, the agreement provides for Mr. Robertson to receive a
      grant of 125,000 options to purchase our common stock under our 2005 Plan at
      an
      exercise price of not greater than $5.00. The options, which were granted on
      March 28, 2006, shall: (i) vest 50% 12 months from the anniversary date
      hereof and an additional 12.5% per each three-month period thereafter until
      fully vested; (ii) not expire in less than five years from the date of
      grant; and (iii) be subject to other standard terms and conditions under
      the 2005 Plan. Mr. Robertson has agreed to regular confidentiality and
      inventions assignment provisions and agreed not to compete with AeroGrow for
      a
      period equal to the term employed after the termination of employment. In
      addition, if Mr. Robertson is terminated in the event of a change in control
      of AeroGrow,
      including a change in chief executive officer, Mr. Robertson shall be
      entitled to receive severance equal to his base salary for one year. On November
      15, 2006, Mr. Robertson’s annual salary was increased to $165,000 per year and
      he received a retroactive salary adjustment of $10,000.




*J.
      Michael Wolfe*




The
      employment agreement of Mr. Wolfe, dated as of March 15, 2006, provides
      that he will be employed as the Vice President of Operations of the Company.
      He
      will devote his entire business time to the affairs of the Company. The initial
      term is two years and renewable for successive one year terms. Mr. Wolfe
      initially received base compensation of $135,000 per year and a bonus per fiscal
      year of not less than 0.5% of EBITDA. If Mr. Wolfe is terminated without
      cause by the us or Mr. Wolfe terminates under certain circumstances
      constituting a breach of the agreement by the us, Mr. Wolfe shall be
      entitled to receive severance compensation equivalent to six months base salary
      and the pro rata bonus. The agreement also provides for medical, vacation and
      other benefits commensurate with the policies and programs adopted by us for
      our
      senior executives. Further, the agreement provides for Mr. Wolfe to receive
      a grant of options to purchase 125,000 shares of our common stock under our
      2005
      Plan at an exercise price of not greater than $5.00, which was granted on March
      28, 2006. These options: (i) were fully vested on the grant date;
      (ii) shall not expire in less than five years from the date of grant; and
      (iii) are subject to other standard terms and conditions under the 2005
      Plan. Mr. Wolfe has agreed to regular confidentiality and inventions
      assignment provisions and agreed not to compete with AeroGrow for a period
      equal
      to the term employed after the termination of employment. In addition, if Mr.
      Wolfe is terminated in the event of a change in control of AeroGrow, including
      a
      change in chief executive officer, Mr. Wolfe shall be entitled to receive
      severance equal to his base salary for one year. Effective April 7, 2007, Mr.
      Wolfe’s annual salary was increased to $175,000 per year and the bonus to 1.5%
      of EBITDA.




Except
      as
      set forth above, our other employees are employed on an “at will” basis subject
      to varying lengths of severance agreements and, to the extent specific
      agreements exist; such agreements are not deemed material.




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*Summary
      Compensation Table*




The
      following table sets forth information regarding all forms of compensation
      received by the named executive officers during the fiscal year ended March
      31,
      2007:




**Name
                and Principal Position**
            ****
            **Year**
            ****
            **Salary**
            ****
            ****
            **Bonus**
            ****
            ****
            **Stock
                Awards**
            ****
            ****
            **Option
                Awards**
            ****
            ****
            **All
                Other Compensation**
            ****
            ****
            **Total**W.
                Michael Bissonnette,
              CEO,
                President and Director(1)
            
            2007
            
            $
            225,000
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            23,063
            (1)
            
            $
            248,063Mitchell
                B. Rubin,
              Chief
                Financial Officer
            
            2007
            
            $
            200,000
            
            
            $
            5,000
            
            
            $
            25,000
            (2)
            
            $
            --
            
            
            $
            --
            
            
            $
            230,000Randy
                Seffren,
              Chief
                Marketing Officer
            
            2007
            
            $
            150,000
            
            
            $
            --
            
            
            $
            $
                --
            
            
            $
            --
            
            
            $
            53,828
            (3)
            
            $
            203,828Jeffrey
                Brainard,
              Vice
                President Sales
            
            2007
            
            $
            150,000
            
            
            $
            63,462
            
            
            $
            25,000
            (4)
            
            $
            9,604
            (4)
            
            $
            --
            
            
            $
            248,066W.
                Terry Robertson Jr.
              Vice
                President of Engineering, Manufacturing and Quality
            
            2007
            
            $
            159,375
            
            
            $
            --
            
            
            $
            25,000
            (5)
            
            $
            515,000
            (5)
            
            $
            --
            
            
            $
            699,375J.
                Michael Wolfe
              Vice
                President, Operations
            
            2007
            
            $
            157,500
            
            
            $
            --
            
            
            $
            $
                --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            157,500




(1)
            In
                accordance with the employment agreement entered into as of March
                1, 2006,
                Mr. Bissonette has a non-accountable expense allowance of $2,500
                per month
                as reimbursement for his auto expenses, home office expenses and
                other
                expenses.




(2)
            Represents
                5,000 shares of our common stock granted to Mr. Rubin in December
                2006
                valued by us at $5.00 per share.




(3)
            Represents
                consulting fees paid to Prometheus Communications Group, LLC (“PCG”) of
                which Mr. Seffren is the 100% owner and managing member prior to
                the
                effective date of Mr. Seffren’s employment
                agreement.




(4)
            In
                accordance with Mr. Brainard’s employment agreement, we issued 5,000
                shares of our common stock on January 3, 2007 valued by the us at
                $5.00
                per share. In addition, in December 2006, Mr. Brainard was granted
                five
                year options to purchase our common stock at an exercise price of
                $5.00
                per share, which will vest monthly pro-rata over a two year period.
 
                We valued the foregoing options using the Black Scholes option pricing
                model using the following assumptions: no dividend yield; expected
                volatility rate of 129.67%; risk free interest rate of 5% and an
                average
                life of 4 years, resulting in a value of $4.12 per option
                granted.




(5)
            We
                issued 5,000 shares of our common stock to Mr. Robertson on January
                3,
                2007 valued by us at $5.00 per share. In accordance with Mr. Robertson’s
                employment agreement, we granted in June 2006 125,000 options to
                purchase
                our common stock at an exercise price of $5.00 per share, which will
                vest
                50% during the initial 12 months from the date of the grant and 12.5%
                for
                each of the next four three month periods thereafter. We valued these
                options using the Black Scholes option pricing model using the following
                assumptions: no dividend yield; expected volatility rate of 129.67%;
                risk
                free interest rate of 5% and an average life of 4 years, resulting
                in a
                value of $4.12 per option granted.




The
      following table provides information with respect to the named executive
      officers concerning unexercised stock options held by them at March 31, 2007.
      All options granted to date are unexercised and, based upon the closing price
      of
      the stock as of April 30, 2007 of $6.35 per share, are considered to be “in the
      money.”




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*Outstanding
      Equity Awards at Fiscal Year End*





**Name**
            ****
            **Number
                of Securities Underlying**
              **Unexercised
                Options**
              **(Exercisable)
                (1)**
            ****
            ****
            **Number
                of Securities Underlying**
              **Unexercised
                Options**
              **(Unexercisable)**
            ****
            ****
            **Exercise
                Price per Share**
            ****
            **Expiration
                Date**Randy
                Seffren
            
            
            125,000
            
            
            
            -
            
            
            $
            5.00
            
            27-Mar-2011Mitchell
                Rubin
            
            
            3,768
            
            
            
            -
            
            
            $
            0.50
            
            31-Dec-2010Mitchell
                Rubin
            
            
            125,000
            
            
            
            -
            
            
            $
            5.00
            
            27-Mar-2011W.Terry
                Robertson
            
            
            46,875
            
            
            
            78,125
            (2)
            
            $
            5.00
            
            27-Jun-2011Jeffrey
                Brainard
            
            
            83,329
            
            
            
            41,671
            (3)
            
            $
            5.00
            
            27-Mar-2011Jeffrey
                Brainard
            
            
            1,166
            
            
            
            1,166
            (4)
            
            $
            5.00
            
            14-Dec-2011




**(1)**
            Though
                vested and exercisable, and shares common stock received from such
                exercise are subject to lock-up agreements prohibiting the sale of
                such
                shares through December 22, 2007, and 50% of aggregate share holdings
                through June 22, 2008.




**(2)**
            Will
                vest 50% during the initial 12 months from the date of the grant,
                June 28,
                2006, and 12.5% for each of the next four three month periods
                thereafter.




**(3)**
            Will
                vest monthly pro-rata over a two year period from the date of grant,
                March
                28, 2006.




**(4)**
            Will
                vest monthly pro-rata over a two year period from the date of grant,
                December 14, 2006.




**Director
      Compensation**




*Current
      and Historical Compensation Program*




In
      2004
      and 2005 each director received 2,000 shares of common stock for his service
      as
      director. Mr. Bissonnette has agreed to forgo any future stock-based
      compensation for serving as a director of AeroGrow. We compensate outside
      directors $500 for attending meetings and reimburses them for their
      out-of-pocket expenses for attending meetings. On March 28, 2006, we
      granted to each of our four outside directors 2,500 shares of the our common
      stock at a value of $5.00 per share for a total of $12,500 for each director,
      or
      an aggregate total of $50,000, and 10,000 fully vested five-year options to
      purchase our common stock at an exercise price of $5.00 per share for services
      for the fiscal year ending March 31, 2007. In addition, Messrs. Walker, Harding
      and Leung received grants of 1,250
      shares for service on the Audit Committee and 750 shares for service on the
      Governance Committee. On March 22, 2007, we granted to three of our four
      outside directors, Messrs. Leung, Walker and Kranitz, 2,500 shares of the our
      common stock at a market value of $5.90 per share for a total of $14,750 for
      each director, or an aggregate total of $59,000, and 10,000 fully vested
      five-year options to purchase our common stock at an exercise price of $5.90
      per
      share, the price per share equal to the fair market value of the common stock
      on
      the date of the option grant, for services on the board for the calendar year
      ending December 31, 2007. In addition, on March 22, 2007, Messrs. Walker and
      Leung received grants of 1,250 shares for service on the Audit Committee and
      750
      shares for service on the Governance Committee. Also, Mr. Harding, the previous
      Chairman of the audit and governance committees, received a grant on March
      22,
      2007 for services rendered of 3,500 shares of our common stock at a market
      value
      of $5.90 per share for a total of $20,650 and 5,000 fully vested five-year
      options to purchase our common stock at an exercise price of $5.90 per share,
      the price per share equal to the fair market value of the common stock on the
      date of the option grant. Mr. Harding resigned from the board effective April
      16, 2007.




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*Director
      Compensation Table*




The
      following table sets forth information regarding all forms of compensation
      received by directors of the Company during the fiscal year ended March 31,
      2007:





**Name**
            
            **Directors
                Fees**
              **Earned
                or**
              **Paid
                in Cash**
            
            
            **Stock
                Awards**
            
            
            **Option
                Awards**
            
            
            **All
                Other Compensation**
            
            
            **Total**Michael
                Bissonnette (Chairman)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            
            
            
            $
            -Wayne
                E. Harding, III, Director
            
            $
            2,000
            
            
            $
            30,650
            
            
            $
            25,850
            (1)
            
            $
            69,650
            (2)
            
            $
            128,150Richard
                A. Kranitz, Director
            
            $
            2,000
            
            
            $
            14,750
            
            
            $
            51,700
            (1)
            
            $
            24,000
            (3)
            
            $
            92,450Kenneth
                Leung, Director
            
            $
            2,000
            
            
            $
            36,550
            
            
            $
            51,700
            (1)
            
            $
            -
            
            
            $
            90,250Jack
                J. Walker, Director
            
            $
            2,000
            
            
            $
            36,550
            
            
            $
            51,700
            (1)
            
            $
            -
            
            
            $
            90,250




(1)
            Valued
                using the Black Scholes option pricing model using the following
                assumptions: no dividend yield; expected volatility rate of 132%;
                risk
                free interest rate of 5% and an average life of 5 years resulting
                in a
                value of $5.17 per option granted.




(2)
            Represents
                consulting fees paid to Wayne Harding & Co. for various projects
                including oversight of a pilot kiosk sales program, investigation
                of
                international sales prospects and other new business
                opportunities.




(3)
            Represents
                fees for legal services paid to Kranitz and Philip, a law firm of
                which
                Mr. Kranitz is a partner.


**ITEM
        11.   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL
        OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
        MATTERS**




The
      following table sets forth certain information regarding our common stock
      beneficially owned on March 31, 2007 by:




·each
      shareholder we
      know to be the beneficial owner of 5% or more of our outstanding common
      stock,





·each
      of our
      executive officers for whom disclosure is provided in Item 10, “Executive
      Compensation,” and each of our directors, and




·all
      executive
      officers and directors as a group.




In
      general, a person is deemed to be a “beneficial owner” of a security if that
      person has or shares the power to vote or direct the voting of such security,
      or
      the power to dispose or to direct the disposition of such security. A person
      is
      also deemed to be a beneficial owner of any securities of which the person
      has
      the right to acquire beneficial ownership
      within 60 days. To the best of our knowledge, subject to community and marital
      property laws, all persons named have sole voting and investment power with
      respect to such shares except as otherwise noted. The table assumes a total
      of
      11,065,609 shares of common stock outstanding.


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**Name
                of Beneficial Owner (1)**
            **Amount
                of**
              **Beneficial
                Ownership**
            **Percent**
              **Beneficial
                Ownership**W.
                Michael Bissonnette
              c/o 6075 Longbow Dr. Suite 200
              Boulder,
                CO 80301
            956,297
            8.60%Mitchell
                Rubin
              c/o 6075 Longbow Dr. Suite 200
              Boulder,
                CO 80301 (2)
            143,331
            1.30%Jeffrey
                Brainard
              c/o
                6075 Longbow Dr. Suite 200
              Boulder,
                CO 80301 (3)
            160,173
            1.40%Richard
                A. Kranitz
              1238 Twelfth Avenue
              Grafton,
                WI 53024 (4)
            80,079
            0.70%Randy
                Seffren
              c/o 6075 Longbow Dr. Suite 200
              Boulder,
                CO 80301 (3)
            209,320
            1.90%Wayne
                Harding
              5206 South Hanover Way
              Englewood,
                CO 80111 (5)
            133,768
            1.20%Jack
                J. Walker
              c/o
                6075 Longbow Dr. Suite 200
              Boulder,
                CO 80301 (6)
            244,408
            2.20%Kenneth
                Leung
              c/o
                6075 Longbow Dr. Suite 200
              Boulder,
                CO 80301 (7)
            29,000
            0.30%W.
                Terry Robertson
              c/o 6075 Longbow Dr. Suite 200
              Boulder,
                CO 80301 (8)
            130,000
            1.20%J.
                .Michael Wolfe
              c/o
                6075 Longbow Dr. Suite 200
              Boulder,
                CO 80301 (9)
            125,000
            1.10%All
                AeroGrow Executive Officers and Directors as a Group (10 Persons)
                (10)
            2,211,376
            19.90%






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1)
            Beneficial
                ownership is determined in accordance with the rules of the SEC,
                which
                include holding voting and investment power with respect to the
                securities. Shares of common stock subject to options or warrants
                currently exercisable, or exercisable within 60 days, are deemed
                outstanding for computing the percentage of the total number of shares
                beneficially owned by the designated person, but are not deemed
                outstanding for computing the percentage for any other
                person.




(2)
            Includes
                options to purchase 3,768 shares of our common stock at an exercise
                price
                of $0.50 per share and options granted on March 28, 2006 to purchase
                125,000 shares of our common stock at an exercise price of $5.00
                per
                share.




(3)
            Includes
                options granted on March 28, 2006 to purchase 125,000 shares of our
                common
                stock at an exercise price of $5.00 per share and options granted
                on
                December 14, 2006 to purchase 2,331 shares of our common stock at
                an
                exercise price of $5.00 per share.




(4)
            Includes
                46,546 shares owned by Cedar Creek Ventures, LLC, of which Mr. Kranitz
                is
                a 50% owner and managing member. Also includes 10,000 fully vested
                five-year options to purchase our common stock at an exercise price
                of
                $5.00 per share and 2,500 shares of common stock valued at $5.00
                per share
                granted as of March 28, 2006 and 10,000 fully vested five-year options
                to
                purchase our common stock at an exercise price of $5.90 per share
                and
                2,500 shares of common stock valued at $5.90 per share granted as
                of March
                22, 2007.




(5)
            Includes
                options to purchase 3,910 shares of our common stock at an exercise
                price
                of $2.50 per share, and warrants to purchase 5,000 shares of our
                common
                stock at an exercise price of $2.50 per share. Also includes 10,000
                fully
                vested five-year options to purchase our common stock at an exercise
                price
                of $5.00 per share and 2,500 shares of common stock valued at $5.00
                per
                share granted as of March 28, 2006, for services as a director and
                2,000
                shares of common stock valued at $5.00 per share granted for services
                on
                the audit and compensation committees. Also includes 5,000 fully
                vested
                five-year options to purchase our common stock at an exercise price
                of
                $5.90 per share and 3,500 shares of common stock valued at $5.90
                per share
                granted as of March 22, 2007.




(6)
            Includes
                96,122 shares held of record by March Trade & Finance, Inc. of which
                Mr. Walker is a controlling person and 34,286 shares issuable under
                a
                convertible note in principal amount of $120,000 that was converted
                by
                March 31, 2007 and 24,000 shares underlying immediately exercisable
                warrants at $5.00 per share and 24,000 shares underlying warrants
                issuable
                and exercisable upon conversion of the note at $6.00 per share. March
                Trade & Finance, Inc. holds 42,000 of these shares on behalf of an
                unrelated third party. Also includes 12,000 shares underlying immediately
                exercisable warrants at $6.25 per share, 10,000 fully vested five-year
                options to purchase our common stock at an exercise price of $5.00
                per
                share and 2,500 shares of common stock valued at $5.00 per share
                granted
                as of March 28, 2006 and 2,000 shares of common stock valued at $5.00
                per
                share granted for services on the audit and compensation committees.
                Also
                includes 10,000 fully vested five-year options to purchase our common
                stock at an exercise price of $5.90 per share and 4,500 shares of
                common
                stock valued at $5.90 per share granted as of March 22,
                2007.




(7)
            Includes
                10,000 fully vested five-year options to purchase our common stock
                at an
                exercise price of $5.00 per share and 2,500 shares of common stock
                valued
                at $5.00 per share granted as of March 28, 2006, and 2,000 shares
                of
                common stock valued at $5.00 per share granted for services on the
                audit
                and compensation committees. Also includes 10,000 fully vested five-year
                options to purchase our common stock at an exercise price of $5.90
                per
                share and 4,500 shares of common stock valued at $5.90 per share
                granted
                as of March 22, 2007.




(8)
            Includes
                options granted in June, 2006 to purchase 125,000 shares of our common
                stock at an exercise price of $5.00 per share that will vest 50%
                12 months
                from the anniversary date hereof and an additional 12.5% per each
                three-month period thereafter until fully
                vested.




(9)
            Includes
                options granted on March 28, 2006 to purchase 125,000 shares of our
                common
                stock at an exercise price of $5.00 per share.(10)
            Includes
                options and warrants to acquire 780,059 shares of common
                stock.






38
 Table
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**Securities
      Authorized for Issuance Under Equity Compensation Plans**




**Amended
      2003 Stock Option Plan.** On January 3, 2003, our board of directors
      adopted a stock option plan for key employees (including key employees who
      are
      directors), non-employee directors, consultants and investors which provided
      that an aggregate of 400,000 shares of our common stock may be granted under
      the
      plan (the “2003 Plan”).  As of December 31, 2005, there were
      options for 204,869 shares outstanding at exercise prices ranging from $0.01
      to
      $5.00. The remaining 195,131 options were merged into the 2005 Equity
      Compensation Plan and the 2003 Plan no longer separately exists. Vesting
      schedules are determined individually for each grant and were all fully vested
      as of December 2005.




*Administration*.
      The plan is administered by our Governance, Compensation and Nominating
      Committee, and in the past was administered by the board. The plan provides
      that
      it may be administered by either the committee or board, and in its
      administration it may:




· 
select
                participants,




· 
                determine the date of grant, exercise price and other terms of
                options,




· 
                establish rules and regulations to administer the
                plan,


· 
amend,
                suspend, or discontinue the plan subject to applicable shareholder
                approval,




· 
                interpret the rules relating to the plan,
                and




· 
                otherwise administer the plan.





*Stock
      Options.* The plan provides that the committee may grant both incentive
      stock options, which can result in potentially favorable tax treatment to the
      participant, and non-qualified stock options. The committee determines the
      terms
      and vesting provisions, including the exercise price. The maximum term of each
      option and the times at which each option will be exercisable generally are
      fixed by the committee, except that no option may have a term exceeding ten
      years. Shares subject to options that expire or otherwise terminate remain
      available for awards under the plan. Shares issued under the plan may be either
      newly issued shares or shares which we have reacquired.




**2005
      Equity Compensation Plan.** In August 2005 we adopted the 2005 Equity
      Compensation Plan (“2005 Plan”) to promote our interests and the interests of
      our shareholders by attracting, retaining, and motivating our key officers,
      employees, directors, and consultants. The Plan was approved by our stockholders
      at the annual meeting of stockholders held February 23, 2006. Our 2003 stock
      option plan was merged into this plan in August 2005, which modification was
      approved by the stockholders in February 23, 2006; the 2003 Plan no longer
      separately exists. The options for the 204,869 shares issued under the 2003
      Plan
      continue to be governed by their grant agreements but are administered under
      the
      2005 Plan. A total of 1,505,000 shares of our common stock were originally
      available for grant under the 2005 Plan pursuant to stock options or awards
      of
      shares of restricted stock. As of March 31, 2007, we have issued 1,343,554
      options to purchase common stock at exercise prices ranging from $5.00 to $5.90
      and 339,123 shares of common stock at valued at prices ranging from $5.00 to
      $5.90 and there remain 33,386 unallocated shares that may be the subject of
      awards in the future.




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 Table
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*Shares
      Available for Awards*. Shares subject to an award that is cancelled, expired
      unexercised, forfeited, settled in cash or otherwise terminated remain available
      for awards under the plan. Shares issued under the 2005 Plan may be either
      newly
      issued shares or shares which we have reacquired. The plan imposes individual
      limitations on the amount of certain awards in order to comply with
      Section 162(m) of the Internal Revenue Code of 1986. Under these
      limitations no single participant may generally receive awards in any calendar
      year that relate to more than $1 million. Awards may generally be adjusted
      to
      prevent dilution or enlargement of benefits when certain events occur such
      as a
      stock dividend, reorganization, recapitalization, stock split, combination,
      merger, or consolidation.




*Eligibility.*
      Our employees, directors and consultants may be granted awards under the
      plan.  As of March 31, 2007, approximately 65 individuals were
      eligible to participate.




*Administration*.
      The plan is administered by the Governance, Compensation and Nominating
      Committee. Awards to directors serving on the committee are determined and
      administered by the full board of directors. The committee may:




·
            select
                participants,




·
            determine
                the type and number of awards to be
                granted,




·
            determine
                the exercise or purchase price, vesting periods and any performance
                goals,




·
            determine
                and later amend the terms and conditions of any
                award,




·
              interpret
                    the rules relating to the plan,
                    and


·
              otherwise
                    administer the plan.


*Stock
      Options*. The committee may grant both incentive stock options, which can
      result in potentially favorable tax treatment to the participant, and
      non-qualified stock options. The committee determines the terms and individual
      vesting schedules for each grant including the exercise price, which may not
      be
      less than the fair market value of a share of common stock on the date of the
      grant.




*Restricted
      Shares.* The committee may grant restricted shares of common stock.
      Restricted shares are shares of common stock with transfer restrictions. These
      restrictions lapse on the basis of performance and/or continued employment
      as
      determined in advance by the committee. They may be forfeited by participants
      as
      specified by the committee in the award agreement. A participant who has
      received a grant of restricted shares will be eligible to receive dividends
      and
      have the right to vote those shares. Restricted shares may not be transferred,
      encumbered or disposed of during the restricted period or until after the
      restrictive conditions are met.




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 Table
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*Other
      Terms.* All outstanding awards vest, become immediately exercisable or
      payable, and have all restrictions lifted immediately when we experience a
      change in control. The Board may amend or terminate the plan subject to
      applicable stockholder approval. The committee may not amend the terms of
      previously granted options to reduce the exercise price or cancel options and
      grant substitute options with a lower exercise price than the cancelled options.
      The committee also may not adversely affect the rights of any award holder
      without the award holder’s consent.




In
      addition to option grants, during the year ended March 31, 2007, we granted
      under the 2005 Plan a total of 98,194 shares of common stock at a value of
      $5.00
      to $5.90 per share consisting of 5,000 shares issued to our Chief Financial
      Officer, 5,000 shares issued to our Vice President of Engineering and
      Manufacturing, 18,044 shares issued to other employees, 49,150 shares granted
      to
      consultants for services, 21,000 shares granted to directors for service on
      the
      Board of Directors, Audit Committee and on the Governance Committee. All of
      the
      foregoing are included in operating expenses for the year ended March 31, 2007
      resulting in a total charge of $516,170.




Information
      regarding our equity compensation plans at March 31, 2007 is as
      follows:





**Plan****category**
            ****
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            ****
            ****
            **Weighted
                average exercise price of outstanding options, warrants and
                rights**
            ****
            ****
            **Number
                of securities remaining available for future
                issuance**Equity
                compensation plans approved by security holders
            
            
            1,337,360
            
            
            $
            4.58
            
            
            
            33,386Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            $
            -
            
            
            
            -Total
            
            
            1,337,360
            
            
            $
            4.58
            
            
            
            33,386





At
      March
      31, 2007 we had granted options for 131,462 shares of the our common stock
      that
      are unvested that will result in $643,881 of compensation expense in future
      periods if fully vested.





**ITEM
      12.  CERTAINRELATIONSHIPS AND RELATED
      TRANSACTIONS, AND DIRECTOR INDEPENDENCE**




The
      following transactions were entered into with our executive officers, directors
      and 5% or greater shareholders. These transactions may or will continue in
      effect and may result in conflicts of interest between us and these individuals.
      Although our executive officers and directors have fiduciary duties to us and
      our shareholders, we cannot assure that these conflicts of interest will always
      be resolved in our favor or in the favor of our shareholders.




Richard
      Kranitz, one of our directors, is a member of the law firm of Kranitz and
      Philipp, which provides legal services to us. During the years ended December
      31, 2005, we paid legal fees to Kranitz and Philipp in the amount of $37,438
      and
      issued shares of common stock for services provided valued at $10,000. During
      the year ended March 31, 2007 and the three-month transition period ended March
      31, 2006, we paid $24,000 and $44,472, respectively, to this same firm for
      legal
      services.


During
      the year ended March 31, 2007, we incurred fees totaling $640,186 for various
      video and web projects, including production of our infomercial to promote
      our
      products, to MedEd Architects LLC a video production company owned 33% by Mr.
      Seffren. We may incur additional costs in subsequent calendar quarters to MedEd
      Architects LLC, for editing and production of additional infomercials featuring
      our products and related video-based products. During the three month transition
      period ended March 31, 2006, we incurred $131,894 in expenses to MedEd
      Architects, LLC for video production, printing, duplication, and web
      design.





During
      the three-month transition period ended March 31, 2006, we paid to Mr. Walker,
      a
      director, $12,500 in consulting fees in connection with a corporate presentation
      used for our private placement in February 2006.





During
      the year ended March 31, 2007, we paid consulting fees totaling $81,238 to
      Mr.
      Harding, a director, for services related to the development of an international
      channel of distribution for our products and other consulting services. Mr.
      Harding resigned as a director on April 16, 2007.




**Director
      Independence**




Our
      Board of Directors comprises W.
      Michael Bissonnette, Richard A. Kranitz, Dennis Channer, Jack J. Walker, and
      Kenneth Leung.  Our Board of Directors has determined that
      Mr. Channer, Mr. Walker, and Mr. Leung are “independent” as that term is
      defined by NASDAQ.  Under the NASDAQ definition, an independent
      director is a person who is not an executive officer or employee of the Company
      and who does not have a relationship with the Company that, in the opinion
      of
      our Board of Directors, would interfere with the exercise of independent
      judgment in carrying out the responsibilities of a director.




41
 Table
          of Contents




**ITEM
      13. EXHIBITS**





The
      information required by this Item is set forth in the section of this Annual
      Report entitled “EXHIBIT INDEX” and is incorporated herein by
      reference.




**ITEM
      14. PRINCIPALACCOUNTANT FEES AND
      SERVICES**





Aggregate
      fees billed by Gordon, Hughes & Banks, LLP (“GHB”), our current independent
      registered public accounting firm, for the year ended March 31, 2007, the three
      months ended March 31, 2006 and for the year ended December 31, 2005, are as
      follows:





**Year
                Ended March 31,**
            
            
            **Three
                Months Ended March 31,**
            
            
            **Year
                Ended December 31,****2007**
            
            
            **2006**
            
            
            **2005**Audit
                Fees
            
            $
            26,000
            
            
            $
            18,000
            
            
            $
            10,500All
                Other Fees
            
            $
            15,564
            
            
            $
            11,300
            
            
            $
            2,150





Other
      fees paid to GHB were for review of SEC filings including 8-Ks and Form
      SB-2s filed during the periods.





**Tax
      Fees**





Tax
      fees
      consist of fees for tax compliance, including the preparation of tax returns,
      tax advice, and tax planning services. Tax advice and tax planning services
      relate to advice regarding mergers and acquisitions and assistance with tax
      audits and appeals. We use a firm other than GHB for these services. We paid
      $3,375 for tax related services for the three months ended March 31, 2006 and
      $9,244 for the year ended December 31, 2005, respectively.





**Policy
      on Accounting Matters; Pre-Approval of Audit and Non-Audit Services of
      Independent Registered Public Accounting Firm**


The
      primary purpose of the Audit Committee is to assist the Board in monitoring
      (i)
      the integrity of our financial statements and disclosures, including oversight
      of the accounting and financial reporting processes and the audits of our
      financial statements, (ii) the compliance by us with our legal, ethical and
      regulatory requirements and (iii) the independence and performance of our
      independent registered public accounting firm.





The
      Audit
      Committee’s policy is to pre-approve all audit and non-audit services, other
      than de minimis non-audit services, provided by the independent registered
      public accounting firm. These services may include, among others, audit
      services, audit-related services, tax services and other services. Pre-approval
      is generally provided for up to one year and any pre-approval is detailed as
      to
      particular service or category of services and is generally subject to a
      specific budget. The independent registered public accounting firm and
      management are required to periodically report to the full Board regarding
      the
      extent of services provided by the independent registered public accounting
      firm
      in accordance with this pre-approval, and the fees for the services performed
      to
      date.





The
      Audit
      Committee has considered the provision of non-audit services provided by our
      independent registered public accounting firm to be compatible with maintaining
      their independence. The Audit Committee will continue to approve all audit
      and
      permissible non-audit services provided by our independent registered public
      accounting firm. These services may include audit services and related services,
      tax services, and other services.


42
 Table
          of Contents


**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.




**AEROGROW
                INTERNATIONAL, INC.,**
              **A
                NEVADA CORPORATION**By:
            /s/ W.
              Michael
              BissonnetteW.
              Michael Bissonnette*President
              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 indicated
      on
      the 29th day of June 2007.





Signature
              Title
              Date/s/
                  W. MICHAEL BISSONNETTE
              President
                  and Chairman
              June
                  29, 2007W.
                  Michael Bissonnette
              of
                  the Board (Principal Executive Officer)/s/
                  MITCHELL RUBIN
              Treasurer
                  (Principal
              June
                  29, 2007Mitchell
                  Rubin
              Financial
                  Officer andPrincipal
                Accounting Officer/s/
                  RICHARD A. KRANITZ
              Director
              June
                  29, 2007Richard
                  A. Kranitz/s/
                  DENNIS CHANNER
              Director
              June
                  29, 2007Dennis
                  Channer/s/
                  JACK J. WALKER
              Director
              June
                  29, 2007Jack
                  J. Walker/s/
                  KENNETH LEUNG
              Director
              June
                  29, 2007Kenneth
                  Leung









43
 Table
          of Contents




**AEROGROW
        INTERNATIONAL, INC.**
 **INDEX
        TO FINANCIAL STATEMENTS**
 **Page**Report
                    of Independent Registered Public Accounting
                    Firm
                F-1Balance
                    Sheets as
                    of March 31, 2007 and March 31, 2006
                F-2Statements
                      of Operations for
                      the year ended March 31, 2007, the three monthtransitional
                      period ended March 31, 2006 and the year ended December 31,
                      2005
                F-3Statements
                      of Changes in Stockholders' Equity for
                      the year ended March 31, 2007, the threemonth
                      transitional period ended March 31, 2006 and the year ended
                      December 31,
                      2005
                F-4Statements
                      of Changes in Cash Flows for
                      the year ended March 31, 2007, the three monthtransitional
                      period ended March 31, 2006 and the year ended December 31,
                      2005
                F-5Notes
                      to Financial Statements
                F-7
   Table
            of Contents




**REPORT
          OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING
          FIRM**
 
 
 The
          Board
          of Directors
 AeroGrow
          International, Inc.
 Boulder,
          CO
 
 We
          have
          audited the accompanying balance sheets of AeroGrow International, Inc.
          (the
“Company”) as of March 31, 2007 and 2006, and the related statements of
          operations, changes in stockholders’ equity (deficit) and cash flows for the
          year ended March 31, 2007, the three months ended March 31, 2006 and the
          year
          ended December 31, 2005.  These financial statements are the
          responsibility of the Company’s management.  Our responsibility is to
          express an opinion on these financial statements based on our
          audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States).  Those standards require
          that we plan and perform the audits to obtain reasonable assurance about
          whether
          the financial statements are free of material misstatement.  The
          Company has determined that it is not required to have, nor were we engaged
          to perform, an audit of its internal control over financial
          reporting.  Our audits included  consideration
          of internal  control  over  financial  reporting  as
          a basis  for  designing  audit procedures
          that are appropriate in the circumstances, but not for the purpose
          of expressing an opinion on the  effectiveness  of the
          Company's  internal  control over  financial  reporting.  Accordingly,
          we express no such opinion. An audit includes examining, on a test basis,
          evidence supporting the amounts and disclosures in the financial
          statements.  An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation.  We believe
          that our audits provide a reasonable basis for our opinion.
 
 In
          our opinion, the financial
          statements referred to above present fairly, in all material respects,
          the
          financial position ofAeroGrow International,
          Inc.as ofMarch
          31, 2007and 2006, and the
          results of its
          operations and its cash flows for the year ended March 31, 2007, the three
          months ended March 31, 2006 and the year ended December 31, 2005, in conformity
          with accounting principles generally accepted in the United States of
          America.
 
 
 ***Gordon,
          Hughes & Banks, LLP***
 
 Greenwood
          Village, Colorado
 June
          8,
          2007


F-1
 Table
          of Contents




**AEROGROW
        INTERNATIONAL, INC.**
 **BALANCE
        SHEETS**




**March
                31,**
            
            
            **March
                31,****2007**
            
            
            **2006****ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            5,495,501
            
            
            $
            8,852,548Restricted
                cash
            
            
            84,363
            
            
            
            -Accounts
                receivable, net of allowance for doubtful accounts of
                $80,695  and $0 at March 31, 2007 and March 31, 2006,
                respectively
            
            
            1,884,743
            
            
            
            43,156Other
                receivable
            
            
            182,221
            
            
            
            -Inventory
            
            
            3,940,614
            
            
            
            192,946Prepaid
                expenses and other
            
            
            480,990
            
            
            
            199,590Total
                current assets
            
            
            12,068,432
            
            
            
            9,288,240Property
                and equipment, net of accumulated depreciation of $322,405 and $102,431
                at
                March 31, 2007 and March 31, 2006, respectively
            
            
            909,496
            
            
            
            480,771Other
                assetsDebt
                issuance costs, net of accumulated amortization $419,471 and $373,853
                at
                March 31, 2007 and March 31, 2006, respectively
            
            
            -
            
            
            
            45,618Intangible
                assets, net of accumulated amortization $6,659 and $1,071 of at March
                31,
                2007 and March 31, 2006, respectively
            
            
            28,723
            
            
            
            21,696Deposits
            
            
            35,155
            
            
            
            4,68463,878
            
            
            
            71,998Total
                Assets
            
            $
            13,041,806
            
            
            $
            9,841,009**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilitiesDue
                to factor
            
            $
            645,151
            
            
            $
            -Accounts
                payable
            
            
            3,192,734
            
            
            
            487,474Accrued
                expenses
            
            
            1,166,485
            
            
            
            334,524Deferred
                rent
            
            
            53,531
            
            
            
            -Convertible
                debentures, net of discounts of $0 and $196,781 at March 31, 2007
                and
                March 31, 2006, respectively
            
            
            -
            
            
            
            792,539Mandatorily
                redeemable common stock
            
            
            -
            
            
            
            310,000Total
                current liabilities
            
            
            5,057,901
            
            
            
            1,924,537Stockholders'
                equityPreferred
                stock, $.001 par value, 20,000,000 shares authorized, none issued
                or
                outstanding
            
            
            -
            
            
            
            -Common
                stock, $.001 par value, 75,000,000 shares authorized, 11,065,609
                and
                9,102,622 shares issued and outstanding at March 31, 2007 and March
                31,
                2006, respectively
            
            
            11,065
            
            
            
            9,103Additional
                paid-in capital
            
            
            37,765,003
            
            
            
            27,313,081Accumulated
                (deficit)
            
            
            (29,792,163
            )
            
            
            (19,405,712
            )Total
                Stockholders' Equity
            
            
            7,983,905
            
            
            
            7,916,472Total
                Liabilities and Stockholders' Equity
            
            $
            13,041,806
            
            
            $
            9,841,009




See
      accompanying notes to the financial statements.


F-2
 Table
          of Contents


**AEROGROW
      INTERNATIONAL, INC.**


**STATEMENTS
      OF OPERATIONS**







**Year
                ended**
            
            
            **Three
                month transitional period ended**
            
            
            **Year
                ended****March
                31,**
            
            
            **March
                31,**
            
            
            **December
                31,****2007**
            
            
            **2006**
            
            
            **2005**RevenueProduct
                sales, net
            
            $
            13,144,037
            
            
            $
            35,245
            
            
            $
            -Operating
                expensesCost
                of revenue
            
            
            8,404,507
            
            
            
            134,622
            
            
            
            -Research
                and development
            
            
            2,113,255
            
            
            
            978,539
            
            
            
            1,578,833Sales
                and marketing
            
            
            7,117,613
            
            
            
            2,548,583
            
            
            
            583,897General
                and administrative
            
            
            4,050,312
            
            
            
            2,010,907
            
            
            
            2,923,792Total
                operating expenses
            
            
            21,685,687
            
            
            
            5,672,651
            
            
            
            5,086,522Loss
                from operations
            
            
            (8,541,650
            )
            
            
            (5,637,406
            )
            
            
            (5,086,522
            )Other
                (income) expense, netInterest
                (income)
            
            
            (176,173
            )
            
            
            (39,919
            )
            
            
            (41,106
            )Interest
                expense
            
            
            356,594
            
            
            
            1,813,278
            
            
            
            1,225,961Warrant
                modification expense
            
            
            -
            
            
            
            -
            
            
            
            1,446,200Loss
                on modification of debt
            
            
            -
            
            
            
            132,578
            
            
            
            -Registration
                rights penalty
            
            
            1,664,380
            
            
            
            -
            
            
            
            -Total
                other (income) expense, net
            
            
            1,844,801
            
            
            
            1,905,937
            
            
            
            2,631,055Net
                loss
            
            $
            (10,386,451
            )
            
            $
            (7,543,343
            )
            
            $
            (7,717,577
            )Net
                loss per share, basic and diluted
            
            $
            (1.09
            )
            
            $
            (0.84
            )
            
            $
            (1.55
            )Weighted
                average number of commonshares
                outstanding, basic and diluted
            
            
            9,505,926
            
            
            
            8,956,353
            
            
            
            4,971,857




See
      accompanying notes to the financial statements









F-3
 Table
          of Contents


**AEROGROW
      INTERNATIONAL, INC.**


**STATEMENT
      OF CHANGES IN STOCKHOLDERS' EQUITY**




**Common
                Stock**
            
            
            **Additional
                Paid-in**
            
            
            **Accumulated****Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **(Deficit)**
            
            
            **Total****Balances,
                January 1, 2005**
            
            ****
            **4,882,908**
            
            
            **$**
            **4,883**
            
            
            **$**
            **6,051,832**
            
            
            **$**
            **(4,144,792**
            **)**
            
            **$**
            **1,911,923**Exercise
                of common stock warrants
            
            
            435,000
            
            
            
            435
            
            
            
            1,047,065
            
            
            
            -
            
            
            
            1,047,500Issuance
                of common stock for cash in August at $5.00 per share
            
            
            1,600
            
            
            
            2
            
            
            
            7,998
            
            
            
            -
            
            
            
            8,000Issuance
                of common stock for services provided, rent and equipment
                purchases
            
            
            261,232
            
            
            
            261
            
            
            
            1,305,875
            
            
            
            -
            
            
            
            1,306,136Issuance
                of stock options to non-employees for services
            
            
            -
            
            
            
            -
            
            
            
            72,936
            
            
            
            -
            
            
            
            72,936Issuance
                of warrants to debt holders of convertible debentures
            
            
            -
            
            
            
            -
            
            
            
            1,059,480
            
            
            
            -
            
            
            
            1,059,480Intrinsic
                value of convertible debentures, beneficial conversion
                feature
            
            
            -
            
            
            
            -
            
            
            
            750,000
            
            
            
            -
            
            
            
            750,000Effects
                of variable accounting on the modification of terms
            
            
            -
            
            
            
            -
            
            
            
            1,446,200
            
            
            
            -
            
            
            
            1,446,200Net
                (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,717,577
            )
            
            
            (7,717,577
            )**Balances,
                December 31, 2005**
            
            ****
            **5,580,740**
            
            
            ****
            **5,581**
            
            
            ****
            **11,741,386**
            
            
            ****
            **(11,862,369**
            **)**
            
            ****
            **(115,402**
            **)**Common
                stock issued in private placement
            
            
            2,148,000
            
            
            
            2,148
            
            
            
            8,807,787
            
            
            
            -
            
            
            
            8,809,935Common
                stock issued for conversion of convertible debentures
            
            
            710,009
            
            
            
            710
            
            
            
            2,129,290
            
            
            
            -
            
            
            
            2,130,000Common
                stock issued in exchange for stock of Wentorth 1
            
            
            580,136
            
            
            
            580
            
            
            
            (580
            )
            
            
            -
            
            
            
            -Common
                stock issued under equity compensation plans
            
            
            83,737
            
            
            
            84
            
            
            
            418,600
            
            
            
            -
            
            
            
            418,684Stock
                options issued under equity compensation plans
            
            
            -
            
            
            
            -
            
            
            
            3,315,840
            
            
            
            -
            
            
            
            3,315,840Beneficial
                conversion value due to modification of the convertible
                debentures
            
            
            -
            
            
            
            -
            
            
            
            900,758
            
            
            
            -
            
            
            
            900,758Net
                (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,543,343
            )
            
            
            (7,543,343
            )**Balances,
                March 31, 2006**
            
            ****
            **9,102,622**
            
            
            ****
            **9,103**
            
            
            ****
            **27,313,081**
            
            
            ****
            **(19,405,712**
            **)**
            
            ****
            **7,916,472**Common
                stock issued in private placements
            
            
            1,166,760
            
            
            
            1,167
            
            
            
            6,199,147
            
            
            
            -
            
            
            
            6,200,314Exercise
                of common stock warrants at $2.50
            
            
            34,000
            
            
            
            34
            
            
            
            84,966
            
            
            
            -
            
            
            
            85,000Exercise
                of common stock warrants at $6.25
            
            
            5,000
            
            
            
            5
            
            
            
            31,245
            
            
            
            -
            
            
            
            31,250Common
                stock issued upon conversion of convertible debt
            
            
            240,006
            
            
            
            240
            
            
            
            839,760
            
            
            
            -
            
            
            
            840,000Common
                stock issued under equity compensation plans
            
            
            98,194
            
            
            
            98
            
            
            
            516,072
            
            
            
            -
            
            
            
            516,170Common
                stock issued to landlord as rent
            
            
            8,872
            
            
            
            9
            
            
            
            44,351
            
            
            
            -
            
            
            
            44,360Common
                stock issued to public relations firm for services
            
            
            11,354
            
            
            
            11
            
            
            
            56,759
            
            
            
            -
            
            
            
            56,770Common
                stock issued in settlement of claim
            
            
            6,858
            
            
            
            7
            
            
            
            40,455
            
            
            
            -
            
            
            
            40,462Repurchase
                of common stock
            
            
            (3,000
            )
            
            
            (3
            )
            
            
            (14,997
            )
            
            
            -
            
            
            
            (15,000
            )Adjustment
                for error in warrant exercise
            
            
            67
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Stock
                options issued under equity compensation plans
            
            
            -
            
            
            
            -
            
            
            
            560,859
            
            
            
            -
            
            
            
            560,859Accretion
                of loss on modification of debt
            
            
            -
            
            
            
            -
            
            
            
            119,319
            
            
            
            -
            
            
            
            119,319Common
                stock issued for registration rights penalty
            
            
            332,876
            
            
            
            332
            
            
            
            1,664,048
            
            
            
            -
            
            
            
            1,664,380Mandatory
                redeemable common stock converted
            
            
            62,000
            
            
            
            62
            
            
            
            309,938
            
            
            
            -
            
            
            
            310,000Net
                (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (10,386,451
            )
            
            
            (10,386,451
            )**Balances,
                March 31, 2007**
            
            ****
            **11,065,609**
            
            
            **$**
            **11,065**
            
            
            **$**
            **37,765,003**
            
            
            **$**
            **(29,792,163**
            **)**
            
            **$**
            **7,983,905**





See
      accompanying notes to the financial statements.


F-4
 Table
          of Contents


**AEROGROW
      INTERNATIONAL, INC.**


**STATEMENTS
      OF CASH FLOWS**




**Year
                ended**
            
            
            **Three
                month transitional period ended**
            
            
            **Year
                ended****March
                31,**
            
            
            **March
                31,**
            
            
            **December
                31,****2007**
            
            
            **2006**
            
            
            **2005**Cash
                flows from operating activities:Net
                (loss)
            
            $
            (10,386,451
            )
            
            $
            (7,543,343
            )
            
            $
            (7,717,577
            )Adjustments
                to reconcile net (loss) to cash provided(used)
                by operations:Common
                Stock issued for registration rights penalty
            
            
            1,664,380
            
            
            
            -
            
            
            
            -Issuance
                of common stock and options under equity compensation
                plans
            
            
            1,077,029
            
            
            
            3,734,525
            
            
            
            1,349,072Issuance
                of common stock not under equity compensation plan
            
            
            141,592
            
            
            
            -
            
            
            
            -Depreciation
                and amortization expense
            
            
            225,949
            
            
            
            41,514
            
            
            
            53,759Bad
                debt expense
            
            
            80,695
            
            
            
            -
            
            
            
            -Amortization
                of debt issuance costs
            
            
            242,399
            
            
            
            164,119
            
            
            
            209,737Amortization
                of convertible debentures, beneficial conversion feature
            
            
            -
            
            
            
            1,180,937
            
            
            
            375,000Interest
                expense from warrants issued with convertible debentures
            
            
            -
            
            
            
            414,522
            
            
            
            529,740Effects
                of variable accounting for modification of warrant terms
            
            
            -
            
            
            
            132,578
            
            
            
            1,446,200Change
                in assets and liabilities:Decrease
                in subscriptions receivable
            
            
            -
            
            
            
            840,000
            
            
            
            -(Increase)
                in accounts receivable
            
            
            (1,922,282
            )
            
            
            (43,156
            )
            
            
            -(Increase)
                in other receivable
            
            
            (182,221
            )
            
            
            -
            
            
            
            -(Increase)
                in inventory
            
            
            (3,747,668
            )
            
            
            (173,466
            )
            
            
            (19,480
            )Increase
                in other current assets
            
            
            (281,400
            )
            
            
            (119,870
            )
            
            
            (873,297
            )(Increase)
                decrease in deposits
            
            
            (30,471
            )
            
            
            -
            
            
            
            (200
            )(Decrease)
                increase in accounts payable
            
            
            2,705,260
            
            
            
            290,634
            
            
            
            149,871Increase
                in accrued expenses
            
            
            831,961
            
            
            
            277,624
            
            
            
            327,322Increase
                in deferred rent
            
            
            53,531
            
            
            
            -
            
            
            
            -Net
                cash (used) by operating activities
            
            
            (9,527,697
            )
            
            
            (803,382
            )
            
            
            (4,169,853
            )Cash
                flows from investing activities:Decrease
                (increase) in restricted cash
            
            
            (84,363
            )
            
            
            -
            
            
            
            -Purchases
                of equipment
            
            
            (649,087
            )
            
            
            (100,771
            )
            
            
            (413,482
            )Patent
                expenses
            
            
            (12,615
            )
            
            
            (2,360
            )
            
            
            (20,407
            )Net
                cash (used) by investing activities
            
            
            (746,065
            )
            
            
            (103,131
            )
            
            
            (433,889
            )Cash
                flows from financing activities:Increase
                in amounts due to factor
            
            
            645,151
            
            
            
            -
            
            
            
            -Stock
                repurchase
            
            
            (15,000
            )
            
            
            -
            
            
            
            -Proceeds
                from issuance of common stock, net
            
            
            6,200,314
            
            
            
            8,809,935
            
            
            
            1,055,500Proceeds
                from exercise of warrants
            
            
            116,250
            
            
            
            -
            
            
            
            -Repayments
                of convertible debentures
            
            
            (30,000
            )
            
            
            -
            
            
            
            -Proceeds
                from issuance of convertible debentures
            
            
            -
            
            
            
            -
            
            
            
            3,000,000Issuance
                costs associated with debentures
            
            
            -
            
            
            
            -
            
            
            
            (419,474
            )Net
                cash provided (used) by financing activities
            
            
            6,916,715
            
            
            
            8,809,935
            
            
            
            3,636,026Net
                increase (decrease) in cash
            
            
            (3,357,047
            )
            
            
            7,903,422
            
            
            
            (967,716
            )Cash,
                beginning of period
            
            
            8,852,548
            
            
            
            949,126
            
            
            
            1,916,842Cash,
                end of period
            
            $
            5,495,501
            
            
            $
            8,852,548
            
            
            $
            949,126





See
      supplemental disclosures on the following page and the accompanying notes to
      the
      financial statements.





F-5
 Table
          of Contents





**Supplemental
                disclosure of non cash investing****and
                financing activities:**Interest
                paid
            
            $
            83,158
            
            
            $
            32,700
            
            
            $
            111,487-Income
                taxes paid
            
            $
            -
            
            
            $
            -
            
            
            $
            -Accretion
                of debt modification
            
            $
            119,319
            
            
            $
            13,249
            
            
            $
            -Issuance
                of common stock for equipment purchases
            
            $
            -
            
            
            $
            -
            
            
            $
            30,000Convertible
                debentures converted to common stock
            
            $
            840,000
            
            
            $
            2,130,000
            
            
            $
            -Conversion
                of manditorily redeemable common stock
            
            $
            310,000
            
            
            $
            -
            
            
            $
            -





See
      accompanying notes to the financial statements.





F-6
 Table
          of Contents


**Note
      1 – Descriptionof the Business and Summary of Significant
      Accounting Policies**




**Description
      of the Business**





AeroGrow
      International, Inc. ("the Company") was incorporated in the State of Nevada
      on
      March 25, 2002.  The Company’s principal business is developing and
      marketing advanced indoor aeroponic garden systems designed and priced to appeal
      to the gardening, cooking and small kitchen appliance markets worldwide. The
      Company’s principal activities since our formation through March 2006 had
      consisted of the development of the Company’s products business planning and
      raising the capital necessary to fund these activities. In December 2005, the
      Company commenced pilot production of our AeroGardenTM system and, in March 2006,
      began shipping these systems to retail and catalogue customers. Prior to March
      2006 when the Company commenced sales of our aeroponic garden systems, the
      Company was considered a Development Stage Enterprise in accordance FAS No.
      7,
      Accounting and Reporting by Development Stage Enterprises. Effective March
      2006,
      the Company ceased being considered a development stage enterprise. The Company
      is headquartered in Boulder, Colorado.





On
      January 12, 2006, the Company and Wentworth I, Inc., a Delaware corporation
      (“Wentworth”), entered into an Agreement and Plan of Merger (the “Merger
      Agreement”) which was consummated on February 24, 2006.  Under the
      Merger Agreement, Wentworth merged with and into the Company, and the Company
      was the surviving corporation (“Merger”). The Merger, for accounting and
      financial reporting purposes, has been accounted as an acquisition of Wentworth
      by the Company.  As such, the Company was the accounting acquirer in
      the Merger, and the historical financial statements of the Company will be
      the
      financial statements for the Company following the Merger.





**Significant
      Accounting Policies**





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 reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period.  Actual results could differ from those
      estimates.





Net
      Income (Loss) per Share of Common Stock


The
      Company computes net income (loss) per share of common stock in accordance
      with
      SFAS No. 128, “Earnings per Share,” and Securities and Exchange Commission Staff
      Accounting Bulletin No. 98 (“SAB 98”).  SFAS No. 128 requires
      companies with complex capital structures to present basic and diluted
      EPS.  Basic EPS is measured as the income or loss available to common
      stock shareholders divided by the weighted average shares of common stock
      outstanding for the period. Diluted EPS is similar to basic EPS but presents
      the
      dilutive effect on a per share basis of potential common stock (e.g.,
      convertible securities, options and warrants) as if they had been converted
      at
      the beginning of the periods presented. Potential shares of common stock that
      have an anti-dilutive effect (i.e., those that increase income per share or
      decrease loss per share) are excluded from the calculation of diluted
      EPS.




Reclassifications


Certain
      prior year amounts have been reclassified to conform to current year
      presentation.





Cash
      and cash equivalents


The
      Company considers all highly liquid investments with an original maturity of
      three months or less when purchased to be cash equivalents.





Restricted
      Cash


The
      Company has secured activity related to its corporate credit card purchase
      account with a restricted money market account. The balance in this account
      as
      of March 31, 2007 was $84,363.


F-7
 Table
            of Contents




Concentration
        of Credit Risk and Financial Instruments
 Statement
        of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of Information
        About Financial Instruments with Off-Balance Sheet Risk and Financial
        Instruments with Concentrations of Credit Risk," requires disclosure of
        significant concentrations of credit risk regardless of the degree of such
        risk.  Financial instruments with
        significant credit risk include cash.  The amount on deposit with a
        financial institution exceeded the $100,000 federally insured limit as of
        March
        31, 2007, March 31, 2006 and December 31, 2005.  However, management
        believes that the financial institution is financially sound and the risk
        of
        loss is minimal.





Financial
      instruments consist of cash and cash equivalents, accounts receivable and
      accounts payable. The carrying values of all financial instruments approximate
      their fair value.





*Customers:*


For
      the
      year ended March 31, 2007, the Company had two customers who represented 15%
      and
      10% of the Company’s net product sales, respectively.  At March 31,
      2007, the foregoing customers accounted for 13% and 2% of the total outstanding
      accounts receivable, respectively.  In addition, at March 31, 2007,
      the Company had three additional customers accounting for 15%, 11% and 11%,
      respectively, of total accounts receivable outstanding.





For
      the
      three months ended March 31, 2006, one customer represented 93% of the Company’s
      net product sales.  At March 31, 2006, this customer represented 76%
      of the total accounts outstanding receivable.





*Suppliers:*


As
      of
      March 31, 2007, the Company had two suppliers each of which accounted for in
      excess of 10% of total accounts payable consisting of $942,758 and $383,976,
      or
      29.4% and 12.0% respectively, of total outstanding accounts payable. At March
      31, 2006, one supplier represented $66,151 or 13.57% of total accounts
      payable.  In addition, one service provider represented $53,739 or
      11.02% of total accounts payable.  For the year ended March 31, 2007,
      the Company purchased inventories and other inventory related items from these
      suppliers totaling $2,307,826 and $4,686,403, respectively.  During
      the three months ended March 31, 2006, the Company purchased inventory and
      other
      inventory related items from one supplier totaling $160,523.





Property
      and Equipment


Property
      and equipment are stated at cost.  Depreciation for financial
      accounting purposes is computed using the straight-line method over the
      estimated lives of the respective assets.  Office equipment and
      computer hardware are depreciated over five years.  Tooling is
      depreciated over three years. Leasehold improvements are being amortized over
      the life of the lease which is five years.





Property
                and equipment consist of the following as of:**March
                31**
            
            
            **March
                31****2007**
            
            
            **2006**Manufacturing
                equipment and tooling
            
            $
            823,675
            
            
            $
            425,482Computer
                hardware
            
            
            131,625
            
            
            
            88,681Leasehold
                Improvements
            
            
            104,994
            
            
            
            -Office
                equipment
            
            
            171,607
            
            
            
            68,6511,231,901
            
            
            
            582,814Less:  accumulated
                depreciation
            
            
            (322,405
            )
            
            
            (102,043
            )Property
                and equipment, net
            
            $
            909,496
            
            
            $
            480,771





Depreciation
      expense for the year ended March 31, 2007, for the three months ended March
      31,
      2006, and for the year ended December 31, 2005 was $220,362, $40,444 and
      $53,760, respectively.




F-8
 Table
          of Contents


Intangible
      assets and goodwill


Intangible
      assets, to date, have consisted of the direct costs incurred for application
      fees and legal expenses associated with patents and trademarks on the Company's
      products.  The Company periodically reviews the recoverability from future
      operations using undiscounted cash flows.  To the extent carrying values
      exceed fair values, an impairment loss will be evaluated for possible
      recording.  The Company amortizes its patent and trademarks costs on a
      straight line basis over their estimated useful life of 5 years.





Intangible
      assets consist of the following:





**March
                31**
            
            
            **March
                31****2007**
            
            
            **2006**Patents
            
            $
            22,858
            
            
            $
            15,913Trademarks
            
            
            12,524
            
            
            
            6,85435,382
            
            
            
            22,767Less:  accumulated
                amortization
            
            
            (6,659
            )
            
            
            (1,071
            )Intangible
                assets, net
            
            $
            28,723
            
            
            $
            21,696





Amortization
      expense for the year ended March 31, 2007, for the three months ended March
      31,
      2006, and for the year ended December 31, 2005 was $5,588, $1,071 and $0,
      respectively.





Inventory


Inventories
      are valued at the lower of cost, determined by the first-in, first-out method,
      or market. Included in inventory costs where the Company is the manufacturer
      are
      raw materials, labor and manufacturing overhead. The Company records the raw
      materials at delivered cost. Standard labor and manufacturing overhead costs
      are
      applied to the finished goods based on normal production capacity as prescribed
      under ARB No. 43, Chapter 4, “Inventory Pricing.”  A majority of the
      Company’s products are manufactured overseas and are recorded at
      cost.





**March
                31**
            
            
            **March
                31****2007**
            
            
            **2006**Finished
                goods
            
            $
            3,626,671
            
            
            $
            132,806Raw
                materials
            
            
            313,943
            
            
            
            60,140$
            3,940,614
            
            
            $
            192,946





The
      Company will determine inventory obsolescence reserve based on management’s
      historical experience and establishes reserves against inventory according
      to
      the age of the product. As of March 31, 2007 and March 31, 2006, the Company
      had
      determined that no inventory obsolescence reserve was required.




Accounts
      Receivable and Allowance for Doubtful Accounts


The
      Company sells its products to retailers and consumers. Consumer transactions
      are
      paid primarily by credit card. Retailer sales terms vary by customer, however,
      and generally are net 30 days. Accounts receivable are reported at net
      realizable value and net of allowance for doubtful accounts. The Company uses
      the allowance method to account for uncollectible accounts receivable. The
      Company's estimate is based on a review of the current status of trade accounts
      receivable which totaled $80,695 and $14,627 at March 31, 2007 and March 31,
      2006, respectively.





Other
      receivable


In
      conjunction with the Company’s processing of credit card transactions and for
      its direct to consumer sales activities and as security with respect to the
      Company’s performance for required credit card refunds and chargebacks, the
      Company is required to maintain a cash reserve with Litle and Company, the
      Company’s credit card processor. This reserve is equal to 5% of the credit card
      sales processed over the previous six months of activity. As of March 31, 2007,
      the balance in this reserve account was $182,221.




F-9
 Table
          of Contents




Advertising
      and Production Costs


The
      Company expenses all production costs related to advertising as incurred. These
      costs include actual advertising such as print, television, and radio
      advertisements which are expensed when the advertisement has been broadcast
      or
      otherwise distributed.  Advertising expense for the year ended March
      31, 2007, for the three months ended March 31, 2006, and for the year ended
      December 31, 2005 was $2,125,112, $30,000, and $0, respectively.





Research
      and Development


Research,
      development, and engineering costs are expensed as incurred, in accordance
      with
      SFAS No. 2, “Accounting for Research and Development
      Costs.”  Research, development, and engineering expenses primarily
      include payroll and headcount related costs, contractor fees, infrastructure
      costs, and administrative expenses directly related to research and development
      support.








Stock
      Based Compensation


In
      December 2004, the Financial Accounting Standards Board issued SFAS No. 123R,
      “Share-Based Payment.” Subsequently, the Securities and Exchange Commission
      (“SEC”) provided for a phase-in implementation process for SFAS No. 123R, which
      required adoption of the new accounting standard no later than January 1, 2006.
      SFAS No. 123R requires accounting for stock options using a fair-value-based
      method as described in such statement and recognize the resulting compensation
      expense in the Company’s financial statements. Prior to January 1, 2006, the
      Company accounted for employee stock options using the intrinsic value method
      under APB No. 25, “Accounting for Stock Issued to Employees” and related
      Interpretations, which generally results in no employee stock option expense.
      The Company adopted SFAS No. 123R on January 1, 2006 and does not plan to
      restate financial statements for prior periods. The Company plans to continue
      to
      use the Black-Scholes option valuation model in estimating the fair value of
      the
      stock option awards issued under SFAS No. 123R. The adoption of SFAS No. 123R
      will have a material impact on our results of operations. For the year ended
      March 31, 2007 and the three month transition period ended March 31, 2006,
      equity compensation in the form of stock options and grants of restricted stock
      totaled $1,077,029 and $3,734,525, respectively, and is included in the
      accompanying Statements of Operations in the following categories:





**Year
                ended**
              **March
                31, 2007**
            
            
            **Three
                month transition period ended March 31, 2006**General
                and administrative
            
            $
            356,720
            
            
            $
            1,332,540Research
                and development
            
            
            336,482
            
            
            
            651,417Sales
                and  marketing
            
            
            383,827
            
            
            
            1,724,940Cost
                of Sales
            
            
            -
            
            
            
            25,628$
            1,077,029
            
            
            $
            3,734,525




Income
      taxes


The
      Company accounts for deferred income taxes in accordance with the liability
      method as required by Statement of Financial Accounting Standards No. 109
      "Accounting for Income Taxes" ("SFAS 109").  Deferred income taxes are
      recognized for the tax consequences in future years for differences between
      the
      tax basis of assets and liabilities and their financial reporting amounts at
      the
      end of each period, based on enacted laws and statutory rates applicable to
      the
      periods in which the differences are expected to affect taxable
      income.  Any liability for actual taxes to taxing authorities is
      recorded as income tax liability.The effect on deferred
      tax
      assets and liabilities of a change in tax rates is recognized in income in
      the
      period that includes the enactment date. A valuation allowance is established
      against such assets where management is unable to conclude more likely than
      not
      that such asset will be realized. For the year ended March 31, 2007 and the
      three month transition period ended March 31, 2006, and for the year ended
      December 31, 2005 the Company recognized a valuation allowance equal to 100%
      of
      the net deferred tax asset balance.





Revenue
      Recognition


The
      Company recognizes revenue from product sales, net of estimated returns, when
      persuasive evidence of a sale exists: that is, a product is shipped under an
      agreement with a customer; risk of loss and title has passed to the customer;
      the fee is fixed or determinable; and collection of the resulting receivable
      is
      reasonably assured. Accordingly, the Company did not record $451,898 of revenue
      as of March 31, 2007 related to the unpaid balance due for orders shipped in
      conjunction with the Company’s direct sales to consumers because the consumer
      has thirty-six days to evaluate the product, paying only the shipping and
      handling costs for such products before making the required installment payments
      after the expiration of the thirty-six day trial period. The Company also,
      as of
      March 31, 2007, did not record $135,459 of product costs associated with the
      foregoing revenue in as much as the customer is required to return the product
      and the Company is therefore able to recover these costs through resale of
      the
      goods. The liability for sales returns is estimated based upon historical
      experience of return levels.





The
      Company records estimated reductions to revenue for customer and distributor
      programs and incentive offerings, including promotions and other volume-based
      incentives. Future market conditions and product transitions may require the
      Company to take actions to increase customer incentive offerings, possibly
      resulting in an incremental reduction of revenue at the time the incentive
      is
      offered. Additionally, certain incentive programs require the Company to
      estimate based on industry experience the number of customers who will actually
      redeem the incentive. At March 31, 2007 and March 31, 2006, the Company had
      accrued $65,385 and $0, respectively, as its estimate for the foregoing
      deductions and allowances.





F-10
 Table
          of Contents




Warranty
      and Return Reserves


The
      Company records warranty liabilities at the time of sale for the estimated
      costs
      that may be incurred under its basic warranty program. The specific warranty
      terms and conditions vary depending upon the product sold but generally include
      technical support, repair parts and labor for periods up to one year. Factors
      that affect the Company’s warranty liability include the number of installed
      units currently under warranty, historical and anticipated rates of warranty
      claims on those units, and cost per claim to satisfy the Company’s warranty
      obligation.   Both manufacturers of the Company’s products
      provide replacement parts for any defective components free of charge up to
      2%
      of the total units purchased.  Based upon the foregoing, the Company
      has recorded as of March 31, 2007 a provision for potential future warranty
      costs of $15,393. There was no provision required as of March 31,
      2006.





The
      Company reserves for potential returns from customers and associated refunds
      or
      credits related to such returns based upon historical experience. As of March
      31, 2007, the Company has recorded a reserve for customer returns of $238,569.
      There was no provision required as of March 31, 2006.





Shipping
      and Handling Costs


Shipping
      and handling costs associated with inbound freight are recorded in cost of
      revenue. Shipping and handling costs associated with freight out to customers
      are also included in cost of revenue. Shipping and handling charges to customers
      are included in sales.





Deferred
      Rent


In
      July
      2006, the Company entered into a facility lease with a term through January
      2012, for its corporate offices in Boulder, Colorado.  At March 31,
      2007, the Company had recorded deferred rent related to this agreement in the
      amount of $53,531, based on the difference between rent expense recorded and
      the
      rent payment obligation.




Registration
      Rights Penalties


The
      holders of securities issued in the Company’s 2006 Offering and 2005 Offering
      (see Note 4) had registration rights for the common stock and for the common
      stock underlying the convertible debt and the warrants held by them. Liquidated
      damages for failure to register and maintain registration for such common stock
      were payable in common stock of the Company under certain circumstances and
      were
      limited to 1% of the amount of the outstanding convertible debt per 30-day
      period up to a maximum of 24% and 1% of the amount of the investment in the
      2006
      Offering up to a maximum of 18%. In each case, the amount was payable in shares
      of the Company’s common stock valued at a rate of $2.00 per
      share.  The Company elected to recognize the impact of such
      registration rights penalties as incurred, which commenced after July 23, 2006
      (see Note 4 and Note 6). The Company completed the registration of the foregoing
      securities on December 22, 2006 and recognized five months of penalty, resulting
      in the recording of 332,876 shares of common stock to be issued at a value
      of
      $5.00 for a total of $1,664,380.  On December 21, 2006, the FASB
      Financial Statement Publication (“FSP”) EITF 00-19-2 that addresses the accrual
      and accounting for registration rights penalties and became effective for all
      fiscal years beginning after December 15, 2006 and immediately for all new
      arrangements entered into after this date.  The Company adopted this
      FSP immediately for fiscal 2007.  The Company does not expect the
      adoption to have a significant impact on its current policy.





On
      March
      12 and March 15, 2007, the Company completed a private offering of 833,400
      units
      of its common stock and warrants to purchase common stock and on March 29,
      2007,
      the Company completed a private offering of 333,360 units of its common stock
      and warrants to purchase common stock (“2007 Offerings”). Each unit consisted of
      one share of common stock, par value $0.001, and one five-year warrant to
      purchase one share of common stock at an exercise price of $7.50 per share.
      The
      units were sold at a per unit price of $6.00. The Company raised an aggregate
      of
      $7,000,000 from the 2007 Offerings, less a placement agent fee in the amount
      of
      $700,000 and approximately $100,000 in other expenses related to the 2007
      Offerings. The holders of securities issued in the Company’s 2007 Offerings had
      registration rights for the common stock and for the common stock underlying
      the
      warrants held by them. Liquidated damages for failure to register and maintain
      registration for such common stock were payable in cash under certain
      circumstances and were limited to 1% of the amount of the investment per 30-day
      period made up to a maximum of 10%. The Company completed the registration
      of
      $5.0 million of the 2007 Offerings on May 11, 2007 and intends to file a
      registration statement for the remaining $2.0 million of the 2007 Offerings
      within the required time for filing such registration
      statement.


Segments
      of an Enterprise and Related Information


Statement
      of Financial Accounting Standards No. 131, "Disclosures about Segments of an
      Enterprise and Related Information" ("SFAS 131") replaces the industry segment
      approach under previously issued pronouncements with the management
      approach.  The management approach designates the internal
      organization that is used by management for allocating resources and assessing
      performance as the source of the Company's reportable segments.  SFAS
      131 also requires disclosures about products and services, geographic areas
      and
      major customers.  At present, the Company only operates in one
      segment.





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Debt
      Issuance Costs


Debt
      issuance costs consist of consideration paid to third parties with respect
      to a
      $3.0 million debt financing in July 2005, including cash payments for legal
      fees
      and placement agent fees. Such costs are being deferred and were to be amortized
      over the term of the related debt, which was one year.  On February
      24, 2006, $2,130,000 of the debt associated with these costs converted to
      710,009 shares of the common stock (See Note 4, Convertible
      Debentures).  The pro rata costs associated with the $2,130,000 which
      converted to common stock was expensed as interest as of the date converted.
      The
      amortization of the remaining debt issuance costs will be amortized over the
      remaining life of the debt.





Beneficial
      Conversion Feature of Debentures


In
      accordance with Emerging Issues Task Force No. 98-5, “Accounting for Convertible
      Securities with Beneficial Conversion Features or Contingently Adjustable
      Conversion Ratios,” and Emerging Issues Task Force No. 00-27, “Application of
      Issue No. 98-5 to Certain Convertible Instruments,” the Company recognized the
      advantageous value of conversion rights attached to convertible debt. Such
      rights gives the debt holder the ability to convert debt into shares of common
      stock at a price per share that is less than the fair market value of the common
      stock on the day the loan is made to the Company. The beneficial value was
      calculated as the intrinsic value (the fair market value of the stock at the
      commitment date in excess of the conversion rate) of the beneficial conversion
      feature of the debentures and the related accrued interest and was recorded
      as a
      discount to the related debt and an addition to additional paid in capital.
      The
      discount was subsequently amortized to interest expense over the remaining
      outstanding period of the related debt using the interest method.




New
      Accounting Pronouncements


In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes,” which is an interpretation of SFAS No. 109 (“SFAS
      109”), “Accounting for Income Taxes.” FIN 48 clarifies the accounting for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with SFAS 109 and prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. FIN 48 also
      provides guidance on de-recognition, classification, interest and penalties,
      accounting in interim periods, disclosure, and transition. FIN 48 is effective
      for fiscal years beginning after December 15, 2006. We are currently evaluating
      the effect that the adoption of FIN 48 may have on our financial position or
      results of operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.”  SFAS 157 defines fair value, establishes a framework
      for measuring fair value and expands disclosure of fair value measurements.
      SFAS
      157 applies under other accounting pronouncements that require or permit fair
      value measurements and accordingly, does not require any new fair value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007. The Company is currently in the process
      of assessing the impact the adoption of SFAS 157 will have on its financial
      statements.





In
      September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements.”  SAB 108 requires that public companies utilize a
“dual-approach” to assessing the quantitative effects of financial
      misstatements. This dual approach includes both an income statement focused
      assessment and a balance sheet focused assessment. The guidance in SAB 108
      must
      be applied to annual financial statements for fiscal years ending after November
      15, 2006. Management believes the adoption of this pronouncement will not have
      a
      material impact on the Company’s financial statements.





In
      February 2007, the FASB issued SFAS No.159,” The Fair Value Option for Financial
      Assets and Financial Liabilities—including an amendment of FASB Statement 157.”
We will adopt SFAS 159 in the fiscal year beginning April 1, 2008. The adoption
      of this Statement is not expected to have a material effect on our consolidated
      financial statements.






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**Note
      2 – Merger and 2006 Private Placement**




The
      Company entered into a Letter of Intent on January 4, 2006, and a Merger
      Agreement on January 12, 2006, with Wentworth I, Inc., a Delaware corporation.
      Wentworth was a non-operating entity without significant assets. On January
      12,
      2006, Wentworth’s Board of Directors and its shareholders approved the Merger
      Agreement and the Company’s Board of Directors approved the Merger Agreement.
      Under the Merger Agreement, Wentworth merged with and into the Company, and
      the
      Company was the surviving corporation (“Merger”). The Merger, for accounting and
      financial reporting purposes, has been accounted as an acquisition of Wentworth
      by the Company.





As
      a
      condition of the closing of the Merger Agreement, the Company was required
      to
      complete a private placement offering of its common stock shares and common
      stock warrants with gross proceeds of not less that $5 million (the “Offering”).
      Under the terms of the Merger Agreement, the Company paid a financial advisory
      fee of $350,000 to Keating Securities, Wentworth’s financial advisor in the
      transaction.





The
      closing of the Merger Agreement occurred on February 24, 2006 and closings
      of
      the Offering occurred on February 24, 2006 and March 1, 2006. The Company
      received gross proceeds of $10,740,000 in the Offering. Pursuant to Subscription
      Agreements entered into with these Investors, the Company sold 2,148,000 units
      (“Unit(s)”) in the Offering; each Unit consisted of one share of common stock
      and a five-year warrant to purchase one share of common stock at an exercise
      price of $6.25 per share. The price per Unit in the Offering was $5.00. After
      commissions, expenses and the reverse merger fee payable to Keating Securities,
      the Company received net proceeds of $8,964,952 in the Offering. This offering
      required registration of the common stock issued and the shares of common stock
      underlying the warrants. Liquidated damages are payable to investors under
      the
      following circumstances: (a) if a registration statement is not filed by the
      Company on or prior to 45 days after the closing date (such an event, a “Filing
      Default”); (b) if the registration statement is not declared effective by the
      SEC on or prior to the 150th day after the Closing Date (such an event, an
      “Effectiveness Default”); and/or (c) if the Registration Statement (after its
      effectiveness date) ceases to be effective and available to investors for any
      continuous period that exceeds 30 days or for one or more periods that exceeds
      in the aggregate 60 days in any 12-month period (such an event, a “Suspension
      Default” and together with a Filing Default and an Effectiveness Default, a
“Registration Default”). In the event of a Registration Default, the Company
      shall pay as Liquidated Damages, for each 30-day period of a Registration
      Default, an amount equal to 1% of the aggregate purchase price paid by the
      investors  up to a maximum of 18% of the aggregate purchase price
      paid, provided that liquidation damages in respect of a Suspension Default
      shall
      not be payable in relation to any securities not owned by the investors at
      the
      time of the Suspension Default and, provided further, that no liquidated damages
      are due in respect of the warrants. In the event of a Filing Default or an
      Effectiveness Default, the Liquidated Damages shall be paid by the issuance
      of
      additional common stock at the rate of the amount of the liquidated damages
      due
      divided by $2.00. In the event of a Suspension Default, the liquidated damages
      shall be paid in cash. The Company filed the required Registration Statement
      within the 45 days pursuant to (a) above and completed the registration of
      the
      foregoing securities on December 22, 2006. Accordingly, the Company recognized
      five months of penalty, resulting in the recording of 332,876 shares of common
      stock to be issued at a value of $5.00 for a total of $1,664,380, inclusive
      of
      74,250 penalty shares issued to investors in the Company’s Convertible Debt
      Offering (See Note 4).





In
      the
      Merger each of the Wentworth’s 3,750,000 shares of outstanding common stock was
      converted into the right to receive 0.154703 shares of the Company common stock
      resulting in the issuance of 580,136 shares of the Company’s common stock to the
      Wentworth stockholders representing 6.4% of the issued and outstanding common
      stock of the Company immediately after the Merger, the Offering and the Note
      Conversion. Immediately after the closing of the Offering, the investors owned
      2,148,000 shares of the Company’s common stock representing 23.7% of the issued
      and outstanding common stock immediately after the Merger, the Offering and
      the
      Note Conversion.





**Note
      3 – Due to Factor**





On
      February 9, 2007, the Company entered into an agreement with Benefactor Group
      Inc. (“Benefactor”) whereby Benefactor agreed to factor the company’s retail
      accounts receivable invoices. The term of the agreement is for one year but
      can
      be terminated by the Company with 60 days written notice. In accordance with
      the
      terms of the agreement, Benefactor will purchase the invoices that it approves
      for an initial payment of 85% of the amount of the invoice with the remaining
      15% paid upon collection less any deductions from the customer. Benefactor
      charges a commission of 1 1⁄4% of the gross amount of the invoice and a
      maintenance fee equal to an annual rate of prime plus 3%,
      prime
      being determined by Benefactor based upon either the prime rate published by
      Benefactor’s bank or the Wall Street Journal, (11.25% at March 31, 2007) charged
      on a daily basis for the unpaid invoice amounts outstanding. The Company has
      agreed, beginning May 2007, to factor with Benefactor a minimum of $800,000
      of
      invoices monthly. The Company is responsible for any invoices which are unpaid
      after 91 days or are subject to other defaults by the customer and this
      obligation is secured by the Company with a security interest granted to
      Benefactor on all assets. As of March 31, 2007, Benefactor had advanced the
      Company $645,151 against invoices totaling $764,338. Fees paid to Benefactor
      for
      interest, discounts and other services for the year ended March 31, 2007 totaled
      $39,556.  The receivables are considered recourse and are shown gross
      in the balance sheet.





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**Note
      4 – Convertible Debentures**




On
      May
      27, 2005, the Company entered into an exclusive Placement Agreement with Keating
      Securities, LLC to raise up to $3,000,000, through a private placement offering
      consisting of up to 300 units at an offering price of $10,000 per unit (the
      “2005 Offering”). Each unit was comprised of a convertible debenture evidenced
      by a 10% unsecured convertible promissory note in the principal amount of
      $10,000 (a total of $3,000,000), and 2,000 five-year warrants (a total of
      600,000 warrants), each warrant providing for the purchase of one share of
      the
      Company's common stock at the exercise price of $5.01 per share. The Unsecured
      Convertible Promissory Notes bear interest at the rate of 10% per annum which
      was payable quarterly beginning September 30, 2005. The principal was originally
      due on September 30, 2006. The Company received proceeds of $3,000,000 from
      this
      private placement less $419,471 in directly incurred debt issuance costs. In
      addition to the foregoing, for each share of common stock issuable upon
      conversion, each note holder received an additional five year warrant to
      purchase one share of common stock at an exercise price of $6.00 per share.
      The
      Company had agreed to registration rights related to both the shares underlying
      the convertible debt and the related warrants.  In the event the
      Company failed to fulfill its registration obligations the Company agreed to
      pay
      liquidated damages under the following circumstances: (a) if the registration
      statement was not filed by the Company on or prior to 60 days after the final
      closing of the 2005 Offering (such an event, a “Filing Default”); (b) if the
      registration statement was not declared effective by the SEC on or prior to
      150
      days after the final Closing of the offering (such an event, an “Effectiveness
      Default”); or (c) if the Company did not file its required periodic reports
      under the Exchange Act when due (such an event, a “Reporting Default” and
      together with a Filing Default and an Effectiveness Default, a “SEC Default”).
      In the event of an SEC Default, the Company shall as liquidated damages pay,
      for
      each 30-day period of an SEC Default, an amount equal to 1% of the principal
      amount of the notes up to a maximum aggregate of 24 months of SEC Defaults.
      The
      Company was obligated to pay the Liquidated Damages in shares of common stock,
      priced at $2.00 per share as follows: (i) in connection with a Filing Default,
      on the 61st day after the initial closing, and each 30th day thereafter until
      the registration statement is filed with the SEC; (ii) in connection with an
      Effectiveness Default, on the 151st day after the initial closing, and each
      30th
      day thereafter until the Registration Statement is declared effective by the
      SEC; or (iii) in connection with a Reporting Default, on the 31st consecutive
      day of after a Reporting Default has occurred, provided that if the Reporting
      Default has been cured, then such days during which a Reporting Default were
      accruing will be added to any future Reporting Default period for the purposes
      of calculating the payment of the liquidated damages provided for in this
      provision. The Company has recorded penalties for an Effectiveness Default
      with
      regard to the 2005 Offering through December 22, 2006, the effective date of
      the
      registration of the underlying shares, of 74,250 shares of common stock valued
      at $371,250.




In
      conjunction with the 2005 Offering, the Company recognized at the time of
      issuance $750,000 of beneficial conversion costs, representing the value of
      the
      beneficial conversion rights of the convertible debentures, determined by
      calculating the difference of the fair market value of the stock at the
      commitment date, or $5.00 per share, less the conversion exercise price of
      $4.00
      times the number of shares to be issued upon conversion or 750,000 shares.
      This
      value is recorded as a discount to the convertible debentures and an addition
      to
      additional paid- in capital. This discount was completely amortized as interest
      expense over the term of the convertible debentures which were originally due,
      if not converted, by June 30, 2006.




Also
      in
      conjunction with the 2005 Offering, the Company recognized at the time of
      issuance $1,059,480 representing the fair value of the five year warrants issued
      with the convertible debentures. The value of these warrants was determined
      in
      accordance with the Black-Scholes pricing model utilizing a historic volatility
      factor of 129.67%, a risk free interest rate of 5.0% and an expected life for
      the warrants of five years, resulting in a value of $2.73 per warrant. This
      value was recorded as an additional discount to the convertible debentures
      and
      an addition to additional
      paid-in capital. This discount was completely amortized to interest expense
      over
      the term of the convertible debentures which were originally due if not
      converted by June 30, 2006.




Prior
      to
      the closings of the Merger and the 2006 Offering but contingent upon their
      successful completion, in February 2006, the Company entered into agreements
      with the convertible debt holders of the 2005 Offering whereby certain debt
      holders converted $2,130,000 of their outstanding debt obligations into common
      stock of the Company at a conversion price of $3.00 per share and certain other
      debt holders agreed to extend the maturity dates of $840,000 of debt obligations
      from June 30, 2006 to December 31, 2006. The $2,130,000 of debt that converted
      immediately resulted in additional beneficial conversion expense of $887,500
      to
      account for the additional fair value attributed to the additional shares of
      common stock were issued as a result of the change in the conversion price
      to $3
      per share from the original conversion price of $4 per share. The fair value
      of
      the foregoing additional shares was based upon a price of $5.00 per share.
      The
      converting note holders also were issued, pursuant to the terms of the original
      note offering, five-year warrants to purchase 426,000 shares of the Company’s
      common stock at an exercise price of $6.00 per share. With respect to the
      $840,000 of convertible debentures that were modified by extension of the due
      date from June 30, 2006 to December 31, 2006 and modification of the embedded
      conversion feature from a conversion price of $4.00 per share to a conversion
      price of $3.50 per share, based on the significant change in the terms of these
      $840,000 in debentures, the original debt was deemed extinguished and a debt
      extinguishment loss was recognized. This loss was based on the fair value of
      the
      new debt instrument in accordance with EITF 96-19, “Debtor’s Accounting for a
      Modification or Exchange of Debt Instruments and EITF 05-07, Accounting for
      Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues.”  The Company recognized a loss on extinguishment of debt of
      $132,578. This loss was determined by calculating the change in net present
      value of the cash flows from the convertible debt, inclusive of the change
      in
      the embedded conversion feature determined by comparing the fair value of the
      conversion option immediately following such modification with its fair value
      immediately prior to the modification. This loss was recorded as of February
      2006 with a corresponding increase in fair value of the modified convertible
      debenture balance and is being amortized over the remaining term of these
      debentures to additional paid in capital. As of December 31, 2006, the Company
      has accreted $132,578 of the recognized loss on extinguishment of debt to
      additional paid in capital.  Of the original amount of $3,000,000 in
      convertible debentures disclosed as outstanding as of December 31, 2005,
      $2,130,000 converted to common stock in February 2006, $30,000 was repaid in
      June 2006 and $840,000 converted to common stock in March 2007.




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The
      holders of securities issued in the private placement offering and the
      convertible debt offering have registration rights under the common stock and
      for the common stock underlying the warrants held by them. Liquidated damages
      for failure to register and maintain registration for the common stock and
      for
      the common stock underlying the warrants held by investors are payable under
      the
      following circumstances: (a) if a registration statement is not filed by the
      Company on or prior to 45 days after the closing date (such an event, a “Filing
      Default”); (b) if the registration statement is not declared effective by the
      SEC on or prior to the 150th day after the Closing Date (such an event, an
      “Effectiveness Default”); and/or (c) if the Registration Statement (after its
      effectiveness date) ceases to be effective and available to Investor for any
      continuous period that exceeds 30 days or for one or more period that exceeds
      in
      the aggregate 60 days in any 12-month period (such an event, a “Suspension
      Default” and together with a Filing Default and an Effectiveness Default, a
“Registration Default”). In the event of a Registration Default, the Company
      shall pay to Investor as Liquidated Damages, for each 30-day period of a
      Registration Default, an amount equal to 1% of the aggregate purchase price
      paid
      by Investor pursuant to this Agreement up to a maximum of 18% of the aggregate
      purchase price paid by the investor, provided that liquidation damages in
      respect of a Suspension Default shall not be payable in relation to any
      securities not owned by the investor at the time of the Suspension Default
      and,
      provided further, that no liquidated damages are due in respect of the warrants.
      In the event of a Filing Default or an Effectiveness Default, the Liquidated
      Damages shall be paid by the issuance of additional common stock at the rate
      of
      the amount of the liquidated damages due divided by $2.00. In the event of
      a
      Suspension Default, the liquidated damages shall be paid in cash. In summary,
      the liquidated damages are either settled with common stock in the case of
      a
      delay in filing having declared effective a registration statement, or in cash
      but only related to actual stock issued (excluding common stock underlying
      warrants) for failure to maintain effectiveness of a registration. The Company
      filed the required Registration Statement within the 45 days pursuant to (a)
      above and completed the registration on December 22, 2006. Accordingly, the
      Company recognized five months of penalty and issued 74,250 penalty shares
      of
      common stock in January 2007 to investors in the Company’s Convertible Debt
      Offering aggregating a total charge to expense of $371,250.




The
      balance presented for the Convertible Debentures, net of discounts, as of March
      31, 2007 and March 31, 2006 is as follows:







**March
                31, 2007**
            
            
            **March
                31, 2006**Convertible
                debentures outstanding
            
            $
            -
            
            
            $
            870,000Loss
                on modification of debt, net of $13,258 accretion to additional paid
                in
                capital as of March 31, 2006
            
            
            -
            
            
            
            119,320Discount
                as a result of beneficial conversion feature, net of amortization
                of  $668,437 as of March 31, 2006
            
            
            -
            
            
            
            (81,563
            )Discount
                as a result of fair value of warrants issued, net of amortization
                of
                $944,262 as of March 31, 2006
            
            
            -
            
            
            
            (115,218
            )Net
                balance
            
            $
            -
            
            
            $
            792,539







**Note
      5 – Equity Compensation Plans**




In
      2003,
      the Company's Board of Directors approved a Stock Option Plan (the 2003 Plan)
      pursuant to which nonqualified stock options are reserved for issuance to
      eligible employees, consultants and directors of the Company.  The
      2003 Plan was administered by the Board of Directors, which had the authority
      to
      select the individuals to whom awards were to be granted, the number of shares
      of common stock to be covered by each award, the vesting schedule of stock
      options, and all other terms and conditions of each award.  The
      Company has granted nonqualified stock options to purchase shares of common
      stock to certain employees at exercise prices ranging from $0.01 to $5.90 per
      share.  In August 2005, the 2003 Plan was merged into the 2005 Equity
      Compensation Plan and it no longer separately exists. However, options issued
      and outstanding under the 2003 Plan continue to be governed by their grant
      agreements but are administered under the 2005 Equity Compensation
      Plan.





In
      August
      2005, the Company’s Board of Directors approved the 2005 Equity Compensation
      Plan (the 2005 Plan) pursuant to which both qualified and nonqualified stock
      options as well as restricted shares of common stock are reserved for issuance
      to eligible employees, consultants and directors of the Company.  A
      total of 1,505,000 shares of our common stock may be granted under the 2005
      Plan.





The
      2005
      Plan is administered by the Company’s compensation committee which has the
      authority to select the individuals to whom awards are to be granted, the number
      of shares of common stock to be covered by each award, the vesting schedule
      of
      stock options, and all other terms and conditions of each award.  The
      Company has granted qualified stock options to purchase shares of common stock
      to certain employees at exercise prices ranging from $0.01 to $5.90 per
      share.





Prior
      to
      January 1, 2006, the Company accounted for employee stock-based compensation
      under the recognition and measurement principles of Accounting Principles Board
      Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related
      Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based
      Compensation.”  Under the recognition principles of APB No. 25,
      compensation expense related to restricted stock and performance units was
      recognized in the financial statements. However, APB No. 25 generally did not
      require the recognition of compensation expense for stock options because the
      exercise price of these instruments was generally equal to the fair value of
      the
      underlying common stock on the date of grant, and the related number of shares
      granted were fixed at that point in time.


Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123(R), “Share-Based Payment.”  In addition to recognizing
      compensation expense related to restricted stock and performance units, SFAS
      No.
      123(R) also requires recognition of compensation expense related to the
      estimated fair value of stock options. The Company adopted SFAS No. 123(R)
      using
      the modified-prospective-transition method. Under that transition method,
      compensation expense recognized subsequent to adoption includes: (a)
      compensation cost for all share-based payments granted prior to, but not yet
      vested as of January 1, 2006, based on the values estimated in accordance with
      the original provisions of SFAS No. 123, and (b) compensation cost for all
      share-based payments granted subsequent to January 1, 2006, based on the
      grant-date fair values estimated in accordance with the provisions of SFAS
      No.
      123(R). Consistent with the modified-prospective-transition method, the
      Company’s results of operations for prior periods have not been adjusted to
      reflect the adoption of FAS 123(R).




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For
      the
      year and three months ended March 31, 2007 and March 31, 2006, respectively,
      the
      Company granted 222,131 and 888,153 options to purchase the Company’s common
      stock at an exercise prices ranging from $5.00 to $5.90 per share under the
      2005
      Plan as follows:





**Year**
              **ended**
              **March
                31, 2007**
            
            
            **Three
                month transition period ended March 31, 2006**Employees
            
            
            170,131
            
            
            
            810,700Consultants
            
            
            17,000
            
            
            
            40,000Directors
            
            
            35,000
            
            
            
            37,453222,131
            
            
            
            888,153





For
      the
      option grants issued during the three month transition period ended March 31,
      2006 and through December 31, 2006, the Company used the following weighted
      average assumptions: no dividend yield; expected volatility rate of 129.67%;
      risk free interest rate of 5%; and average lives of 4 years resulting in a
      value
      of $4.12 per option granted. In March 2007, in as much as the Company’s stock
      had begun trading in the public market but trading history was limited the
      Company reviewed the assumptions utilized for the volatility rate, researching
      companies within the consumer products category with comparable market
      capitalizations, comparable per share prices and with a minimum of five years
      of
      trading history, the length of time the options are exercisable. Accordingly,
      for the options granted for the three months ended March 31, 2007, the Company
      used the following weighted average assumptions: no dividend yield; expected
      volatility rate of 50.3%; risk free interest rate of 5%; and average lives
      of 3
      years resulting in a value of $2.28 per option granted based upon a market
      value
      of $5.90 per share on the date of grant. As a result of recognizing compensation
      expense for stock options pursuant to the provisions of SFAS No. 123(R), the
      net
      loss for the year ended March 31, 2007 and the three month transition period
      ended March 31, 2006, was $560,859 and $3,315,840 greater, respectively, than
      if
      the Company had continued to account for stock options under APB No. 25. In
      addition, both basic and diluted loss per share for the year ended March 31,
      2007 and for the three month transition period ended March 31, 2006 was $0.06
      and $0.37 greater, respectively, than if the Company had continued to account
      for stock options under APB No. 25.





The
      following table illustrates the effect on net income and EPS for the year ended
      December 31, 2005 if the Company had applied the fair value recognition
      provisions of SFAS No. 123R:





**Year
                ended**
            ********
            ****
            **December
                31, 2005,**Net
                loss, as reported
            
            $
            (7,717,577
            )Net
              income (loss) per share, basic and diluted, as reported
            
            $
            (1.55
            )Deduct:  Stock-based
                compensation expense, as determined under fair-value based method
                for all
                employee awards
            
            
            (225,127
            )Pro
                forma net loss
            
            $
            (7,942,704
            )Pro
                forma net income (loss) per share, basic and diluted
            
            $
            (1.60
            )


For
        purposes of calculating fair value under SFAS 123, the fair value of each
        option
        grant for the year ended December 31, 2005 was estimated on the date of grant
        using the Black-Scholes option-pricing model with the following weighted
        average assumptions: no dividend yield, expected volatility rate of 129.67%;
        risk free interest rate of 5%; and average lives of 5 years.




F-16
 Table
          of Contents




A
      summary
      of option activity in the 2005 Plan is as follows:





**Exercise price****Weighted-****Options**
            
            
            **Low**
            
            
            **High**
            
            
            **average**Balance
                unexercised at January 1, 2005
            
            
            184,429
            
            
            $
            0.01
            
            
            $
            5.00
            
            
            $
            1.47Granted
            
            
            67,070
            
            
            $
            0.50
            
            
            $
            5.00
            
            
            $
            4.22Exercised
            
            
            -
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Forfeited
            
            
            (18,229
            )
            
            $
            0.05
            
            
            $
            1.25
            
            
            $
            0.62Balance
                unexercised at December 31, 2005
            
            
            233,270
            
            
            $
            0.01
            
            
            $
            5.00
            
            
            $
            2.34Granted
            
            
            888,153
            
            
            $
            5.00
            
            
            $
            5.00
            
            
            $
            5.00Exercised
            
            
            -
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Forfeited
            
            
            (4,154
            )
            
            $
            5.00
            
            
            $
            5.00
            
            
            $
            5.00Balance
                unexercised at March 31, 2006
            
            
            1,117,269
            
            
            $
            0.01
            
            
            $
            5.00
            
            
            $
            4.44Granted
            
            
            222,131
            
            
            $
            5.00
            
            
            $
            5.90
            
            
            $
            5.24Exercised
            
            
            -
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Forfeited
            
            
            (2,040
            )
            
            $
            5.00
            
            
            $
            5.00
            
            
            $
            5.00Balance
                unexercised at March 31, 2007
            
            
            1,337,360
            
            
            $
            0.01
            
            
            $
            5.90
            
            
            $
            4.58





Information
      regarding all stock options outstanding under the 2005 Plan as of March 31,
      2007
      is as follows:





**Options
                Outstanding**
            
            **Options
                Exercisable****Weighted-**
            
            
            
            
            
            
            
            
            
            **Weighted-****average**
            
            
            **Weighted-**
            
            
            
            
            
            
            **average**
            
            
            **Weighted-****Remaining**
            
            
            **average**
            
            **Aggregate**
            
            
            
            
            **Remaining**
            
            
            **average**
            
            **Aggregate****Exercise**
            
            
            
            
            
            **Contractual**
            
            
            **Exercise**
            
            **Intrinsic**
            
            
            
            
            **Contractual**
            
            
            **Exercise**
            
            **Intrinsic****price range**
            
            
            **Options**
            
            
            **Life (years)**
            
            
            **Price**
            
            **Value**
            
            **Options**
            
            
            **Life (years)**
            
            
            **Price**
            
            **Value**Over
                $0.00to
                $0.50
            
            
            
            24,141
            
            
            
            1.56
            
            
            $
            0.06
            
            
            
            
            24,141
            
            
            
            3.33
            
            
            $
            0.06Over
                $0.50 to$2.50
            
            
            
            136,259
            
            
            
            1.73
            
            
            $
            1.57
            
            
            
            
            136,259
            
            
            
            3.33
            
            
            $
            1.57$5.00
            
            
            
            1,116,660
            
            
            
            3.99
            
            
            $
            5.00
            
            
            
            
            985,198
            
            
            
            3.97
            
            
            $
            5.00$5.90
            
            
            
            60,300
            
            
            
            4.97
            
            
            $
            5.90
            
            
            
            
            40,521
            
            
            
            5.00
            
            
            $
            5.901,337,360
            
            
            
            3.76
            
            
            $
            4.34
            
            $1,870,297
            
            
            1,186,119
            
            
            
            3.63
            
            
            $
            4.34
            
            $1,736,857





The
      aggregate intrinsic value in the preceding table represents the difference
      between the Company’s closing stock price and the exercise price of each
      in-the-money option on the last trading day (March 30, 2007) of the period
      presented.




In
      addition to option grants, during the year ended March 31, 2007, the three
      month
      transition period ended March 31, 2006 and the year ended December 31, 2005
      the
      Company granted and issued under the 2005 Equity Compensation Plan a total
      of
      98,194, 83,737 and 157,192 shares, respectively, of common stock at $5.00 to
      $5.90 per share to employees, consultants and directors for services
      provided.  Other than grants in March 2007, which were valued at
      market on the date of grant, the fair value of these shares was determined
      based
      upon sales of other stock transactions in the private market just prior to
      the
      services being provided as follows:





**Year
                ended**
              **March
                31, 2007**
            
            
            **Three
                Months ended**
              **March
                31, 2006**
            
            
            **Year
                ended**
              **December
                31, 2005**Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            AmountEmployees
            
            
            28,044
            
            
            $
            140,220
            
            
            
            34,000
            
            
            $
            170,000
            
            
            
            30,431
            
            
            $
            152,155Consultants
            
            
            49,150
            
            
            
            257,450
            
            
            
            39,737
            
            
            
            198,685
            
            
            
            126,761
            
            
            
            633,805Directors
            
            
            21,000
            
            
            
            118,500
            
            
            
            10,000
            
            
            
            50,000
            
            
            
            -
            
            
            
            -98,194
            
            
            $
            516,170
            
            
            
            83,737
            
            
            $
            418,685
            
            
            
            157,192
            
            
            $
            785,960




Accordingly,
      a total of 33,386 shares are available for future grants under the 2005
      Plan.  At March 31, 2007 the Company has granted options for 151,241
      shares of the Company’s common stock that are unvested that will result in
      $586,719 of compensation expense in future periods if fully vested.




F-17
 Table
          of Contents




**Note
      6 – Income Taxes**




The
        Company did not record any provision for federal and state income taxes for
        the
        year ended March 31, 2007, the three months ended March 31, 2006 and for
        the
        year ended December 31, 2005.  Variations from the federal statutory
        rate are as follows:
 
 **Year
                  Ended**
              
              
              **Three
                  Months Ended**
              
              
              **Year
                  Ended****March
                  31,**
              
              
              **March
                  31,**
              
              
              **December
                  31,****2007**
              
              
              **2006**
              
              
              **2005**Expected
                  income tax benefit at the statutory rate of 34%
              
              $
              4,083,171
              
              
              $
              2,179,733
              
              
              $
              1,559,071Less
                  valuation allowance
              
              
              (4,083,171
              )
              
              
              (2,179,733
              )
              
              
              (1,559,071
              )Net
                  tax expense
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
  Deferred
        income tax assets result from cumulative federal and state operating loss
        carryforwards in the amounts of $10,402,418 and $7,751,561 at March 31, 2006
        and
        December 31, 2005, respectively. For the year ended March 31, 2007, the Company
        incurred additional federal and state operating loss carryforwards of
        $8,895,243. The loss carry forwards will begin to expire in 2022.  At
        March 31, 2007, March 31, 2006, and December 31, 2005, the Company has research
        and development tax credit carryforwards of $362,672, $118,285 and $118,285,
        respectively, which begin to expire in 2022.
  Net
        deferred tax assets consist of the following as of:
 
 **March
                  31,**
              
              
              **March
                  31,**
              
              
              **December
                  31,****2007**
              
              
              **2006**
              
              
              **2005**Tax
                  effect of net operating loss carryforwards
              
              $
              7,454,687
              
              
              $
              4,021,104
              
              
              $
              2,997,078Tax
                  effect of employee equity compensation
              
              
              1,374,298
              
              
              
              1,157,638
              
              
              
              -Tax
                  effect of other temporary differences
              
              
              166,194
              
              
              
              (22,348
              )
              
              
              (20,417
              )Research
                  and development tax credit
              
              
              362,672
              
              
              
              118,285
              
              
              
              118,285Less
                  valuation allowance
              
              
              (9,357,850
              )
              
              
              (5,274,679
              )
              
              
              (3,094,946
              )Net
                  deferred tax assets
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 In
        assessing the realizability of deferred tax assets, the Company considers
        whether it is more likely than not that some or the entire deferred tax asset
        will not be realized.  The Company believes that sufficient
        uncertainty exists regarding the realizability of the deferred tax assets
        such
        that valuation allowances equal to the entire balance of the deferred tax
        assets
        are necessary.  In accordance with Sections 382 and 383 of the
        Internal Revenue Code, a change in ownership of greater than 50% of a
        corporation within a three-year period will place an annual limitation on
        our
        ability to utilize our existing tax loss and tax credit carry
        forwards.  The Company did incur such a change in ownership effective
        in the fourth quarter of 2004.  The result of the section 382
        limitation was that the NOL carryover from 2004 and previous years was limited
        to $1,042,501 per year.  At this time the Company does not anticipate
        a section 383 limitation as a result of this ownership change.


F-18
 Table
          of Contents




**Note
      7 – Related Party Transactions**





During
        the year ended December 31, 2005, the Company retained one member of their
        board
        as a consultant who was granted shares of common stock and fees for services
        provided totaling $286,167.  During the year ended December 31, 2005,
        the Company paid legal fees to a director in the amount of $37,438 and issued
        shares of common stock for services provided valued at
        $10,000.  During the year ended March 31, 2007 and the three month
        transition period ended March 31, 2006, the Company paid $44,472 and $24,000,
        respectively, to this same director for legal services. The Company also
        issued
        shares of common stock to its Board of Directors for services provided valued
        at
        $30,000 for the year ended December 31, 2005.  On March 28, 2006, the
        Company granted to each of its four outside directors 2,500 shares of the
        Company’s common stock at a value of $5.00 per share for a total of $12,500 for
        each director, or an aggregate total of $50,000, and 10,000 fully vested
        five-year options to purchase the Company’s common stock at an exercise price of
        $5.00 per share for services for the fiscal year ending March 31, 2007. In
        addition, three outside directors received grants of 1,250 shares for service
        on
        the Audit Committee and 750 shares for service on the Governance Committee.
        On
        March 22, 2007, the Company granted to three of its four outside directors,
        2,500 shares of the Company’s common stock at a market value of $5.90 per share
        for a total of $14,750 for each director, or an aggregate total of $44,250,
        and
        10,000 fully vested five-year options to purchase the Company’s common stock at
        an exercise price of $5.90 per share, the price per share equal to the fair
        market value of the common stock on the date of the option grant, for services
        on the board for the calendar year ending December 31, 2007.  In
        addition, on March 22, 2007, two outside directors received grants of 1,250
        shares for service on the Audit Committee and 750 shares for service on the
        Governance Committee at an exercise price of $5.90 per share for an aggregate
        total of $23,600. Also, the previous Chairman of the audit and governance
        committees, received a grant on March 22, 2007 for services rendered of 3,500
        shares of the Company’s common stock at a market value of $5.90 per share for a
        total of $20,650 and 5,000 fully vested five-year options to purchase the
        Company’s common stock at an exercise price of $5.90 per share, the price per
        share equal to the fair market value of the common stock on the date of the
        option grant.


The
      Company leased its office space during the year ended December 31, 2005 from
      a
      landlord who is a minority shareholder.  The Company paid rent to the
      shareholder in the amount of $30,408 and issued shares of common stock for
      rent
      valued at $76,036.  Through July 2005, the Company leased certain
      laboratory space from an employee.  Rent expense paid to the employee
      totaled $7,574 for the year ended December 31, 2005.





The
      Company was renting office furniture, office equipment, and computers from
      its
      former parent, Mentor Capital Consultants, Inc., at the rate of $2,500 per
      month. For the first five months of 2005, the Company continued to rent
      equipment from Mentor Capital for a total of $12,500.  On May 31,
      2005, the Company acquired these fixed assets for their net book value of
      $33,901.





During
      the three-month transition period ended March 31, 2006, the Company paid to
      a
      director, $12,500 in consulting fees in connection with a corporate presentation
      given in conjunction with our private placement in February 2006.





During
      the year ended March 31, 2007, the Company paid consulting fees totaling $81,238
      to one of its directors who resigned on April 16, 2007, for services related
      to
      the development of an international channel of distribution for the Company’s
      products and other consulting services.





Also,
      during the year ended March 31, 2007, the Company incurred fees totaling
      $640,186 for various video and web projects, including production of the
      Company’s infomercial to promote its products, to MedEd Architects LLC a video
      production company owned 33% by the Company’s Chief Marketing Officer. The
      Company may incur additional costs in subsequent calendar quarters to MedEd
      Architects LLC, for editing and production of additional infomercials featuring
      the Company’s products and related video-based products.During the three month
      transition period ended March 31, 2006, we incurred $131,894 in expenses to
      MedEd Architects, LLC for video production, printing, duplication, and web
      design.


F-19
 Table
          of Contents


**Note
      8 – Commitments and Contingencies**




On
      July
      27, 2006 the Company entered into a lease with Pawnee Properties, LLC to
      consolidate its operations, other than its seed kit manufacturing operations,
      into a 21,012 square foot office space at 6075 Longbow Drive, Boulder, Colorado
      80301, commencing December 1, 2006.  The initial rent is $15,759 per
      month, plus the Company’s proportionate share of building taxes, insurance and
      operating expenses. The initial term continues until January 31, 2012, unless
      modified under specified circumstances. The agreement contains other standard
      office lease provisions.





Future
      cash payments under such operating lease for the upcoming five years are as
      follows:




**Year
                  Ended**
              
              **Rent**March
                  31, 2008
              
              $
              296,546March
                  31, 2009
              
              
              328,400March
                  31, 2010
              
              
              341,970March
                  31, 2011
              
              
              344,684March
                  31, 2012
              
              
              268,691$
              1,580,291





Rent
      expense for the year ended March 31, 2007, for the three months ended March
      31,
      2006, and for the year ended December 31, 2005 was $348,454, $33,458 and
      $106,444, respectively.





**Note
      9 – Stockholders’ Equity**





On
      January 31, 2005, the State of Nevada approved the Board of Director's amendment
      to the articles of incorporation  were amended to increase the
      authorized shares of the Company's common stock from 40,000,000 shares to
      75,000,000 shares.  On May 31, 2005, the Company's Board of Directors
      approved a one-for-five reverse stock split of all outstanding
      shares.  The historical share and per share amounts included in the
      accompanying financial statements have been retroactively adjusted to reflect
      the split.




On
      September 2, 2005, the Board approved the modification of 504,098 warrants
      whereby the expiration dates of the aforementioned warrants was extended from
      various dates throughout 2005, through and including December 31,
      2005.  The Company recorded the effects of the modification of these
      terms of the warrants in accordance with variable accounting.  This
      modification resulted in additional expense of $1,446,200 being recorded in
      the
      year ending December 31, 2005. The Company accounted for this modification
      in
      warrant terms in accordance with variable accounting in that the extension
      of
      the expiration dates of the outstanding warrants results in a new measurement
      of
      compensation cost as if the award were newly granted.  Therefore, in
      applying variable accounting, the Company revalued the warrants as if they
      were
      granted on September 2, 2005 and recognized as compensation expense the
      difference between the fair value determined on September 2, 2005 and the fair
      value of the warrants determined when originally issued in 2002 and
      2003.  The warrants, when originally issued, were determined to have a
      fair value of $198,844.  The warrants, when re-valued on September 2,
      2005, were determined to have a fair value of $1,645,044, or a difference of
      $1,446,200.  This modification resulted in additional expense of
      $1,446,200 being recorded in the year ending December 31, 2005. The
      Black-Scholes valuation model was utilized to value the warrants in accordance
      with fair value as of both the original warrant issuance date and September
      2,
      2005.




During
      the year ended December 31, 2005, 1,600 shares of common stock were sold at
      $5.00 per share to an employee per an employment agreement.  In
      addition, 38,000 warrants were exercised at $1.25 per share and 64,000 warrants
      were exercised at $2.50 per share.  As of December 31, 2005, the
      Company recorded subscriptions receivable of $840,000 representing the exercises
      of 326,000 warrants at $2.50 per share and 5,000 warrants at $5.00 per
      share.  This amount was collected in cash in January
      2006.




Also
      during 2005, the Company issued a total of 104,040 shares of common stock at
      a
      $5.00 per share value to vendors (17,100 shares), landlords (15,208 shares),
      consultants (62,705 shares) and employees (9,027 shares) for various services
      provided.  The fair value of these shares was determined based upon
      sales of other stock transactions in the private market just prior to the
      services being provided.




During
      the three-month transition period ended March 31, 2006, the Company issued
      2,148,000 shares of common stock valued at $5.00 per unit (each unit included
      one share and one warrant to purchase a share of common stock at an exercise
      price of $7.50 per share ) in a private placement (Note 2 – Merger and Private
      Placement).


F-20
 Table
          of Contents


During
      the three month transition period ended March 31, 2006, the Company issued
      710,009 shares of common stock valued at $5.00 per share and five year warrants
      issuable upon conversion with an exercise price of $6.00 per share in exchange
      for conversion of convertible debentures (Note 4 – Convertible
      Debentures).




During
      the three month transition period ended March 31, 2006, the Company issued
      580,136 shares of common stock in conjunction with a merger with Wentworth
      I
      (Note 2 – Merger and 2006 Private Placement).




In
      June
      2006, a warrant holder with warrants expiring June 30, 2006 exercised warrants
      to purchase 10,000 shares of the company’s common stock at $2.50 per
      share.




In
      July
      2006, a warrant holder with warrants from the Company’s 2006 Offering exercised
      warrants to purchase 5,000 shares of the Company’s common stock at $6.25 per
      share.




The
      Company purchased 3,000 shares of its own common stock at a price of $5.00
      per
      share in July 2006 that had been previously issued as compensation to a
      consultant based upon an agreement to allow such consultant to convert such
      stock to cash if the consultant so elected prior to June 30, 2006.




In
      December 2006 a warrant holder with warrants expiring December 31, 2006
      exercised warrants to purchase 24,000 shares of the company’s common stock at
      $2.50 per share.




During
      the year ended March 31, 2007, the Company issued 98,194 shares of common stock
      under its 2005 Plan including 5,000 shares to the Company’s Chief Financial
      Officer as additional compensation, 21,000 shares to its directors, 23,044
      shares to other employees, and 49,150 shares to consultants.




During
      the year ended March 31, 2007, the Company issued 8,872 shares of stock to
      a
      landlord and recorded $44,360 as additional rent expense. During the nine months
      ended December 31, 2005, the Company issued 11,403 shares of stock to a landlord
      and recorded $57,015 as additional rent expense.




During
      the year ended March 31, 2007, the Company issued 11,354 shares of stock to
      its
      public relations firm and recorded $56,770 as additional marketing
      expense.




During
      the year ended March 31, 2007, the Company issued 6,858 shares of stock to
      an
      unrelated third party in settlement of a claim from its previous parent company
      and recorded $40,462 as additional general and administrative
      expense.




On
      March
      16, 2007, the Company completed a private offering in which the Company sold
      an
      aggregate of 833,400 shares of common stock and warrants to purchase 833,400
      shares of common stock (the "2007 Investor Warrants") in the form of units
      consisting of one share of common stock and one warrant per unit (the "2007
      Offering"). The units were sold at a price of $6.00 per unit. In addition,
      warrants to purchase 83,340 shares of common stock were issued to the placement
      agent of the 2007 Offering (the "2007 Agent Warrants," and together with the
      2007 Investor Warrants, the "2007 Warrants").




Each
      2007
      Investor Warrant is exercisable for one share of common stock at an exercise
      price of $7.50 per share, and each 2007 Agent Warrant is exercisable for one
      share of common stock at an exercise price of $8.25 per share. Each 2007 Warrant
      will be exercisable for five years from the closing of the 2007 Offering. The
      exercise price and number of shares of common stock underlying the 2007 Warrants
      is subject to adjustment on certain events, including reverse stock splits,
      stock dividends and recapitalizations, combinations, and mergers where the
      Company is not the surviving company. The Company will at all times reserve
      and
      keep available, solely for issuance and delivery upon the exercise of the 2007
      Warrants, such shares of common stock underlying the 2007 Warrants, as from
      time
      to time shall be issuable upon the exercise of the 2007 Warrants.




The
      Company has the right to require the holders of 2007 Investor Warrants to
      exercise the 2007 Investor Warrant if our common stock is quoted on the NASDAQ
      Capital Market and, for a period of 20 consecutive trading days, the closing
      bid
      price of the common stock has been above $10.00 per share and the daily trading
      volume has been at least 50,000 shares, in each case on each of the 20
      consecutive trading days.


On
        March
        28, 2007, the Company completed an additional private offering in which the
        Company sold an aggregate of 333,360 shares of common stock and warrants
        to
        purchase 333,360 shares of common stock in the form of units




F-21
 Table
          of Contents




The
      Company's Articles of Incorporation authorize the issuance of 20,000,000 shares
      of preferred stock with $.001 par value.    As of March 31,
      2007, March 31, 2006 and December 31, 2005, no shares of preferred stock have
      been issued.




A
      summary
      of the Company’s warrant activity for the period from January 1, 2005 through
      March 31, 2007 is presented below:




**Weighted**
            
            **Aggregate****Warrants**
            
            
            **Average**
            
            **Intrinsic****Outstanding**
            
            
            **Exercise
                Price**
            
            **Value****Outstanding,
                January 1, 2005**
            
            ****
            **1,350,858**
            
            
            **$**
            **8.31**Granted
            
            
            660,000
            
            
            $
            5.10Exercised
            
            
            (433,000
            )
            
            $
            1.25Expired
            
            
            (25,000
            )
            
            $
            5.00**Outstanding,
                December 31, 2005**
            
            ****
            **1,552,858**
            
            
            **$**
            **8.64**Granted
            
            
            2,962,800
            
            
            $
            6.20Exercised
            
            
            -
            
            
            $
            -Expired
            
            
            -
            
            
            $
            -**Outstanding,
                March 31, 2006**
            
            ****
            **4,515,658**
            
            
            **$**
            **7.04**Granted
            
            
            1,283,436
            
            
            $
            7.57Exercised
            
            
            (39,000
            )
            
            $
            2.98Expired
            
            
            (36,000
            )
            
            $
            3.08**Outstanding,
                March 31, 2007**
            
            ****
            **5,724,094**
            
            
            **$**
            **7.21**
            
            **$   721,343**







As
      of
      March 31, 2007, the Company had the following outstanding warrants to purchase
      its common stock:




**Weighted**
            
            
            **Weighted****Warrants**
            
            
            **Average**
            
            
            **Average****Outstanding**
            
            
            **Exercise
                Price**
            
            
            **Remaining
                Life**32,098
            
            
            $
            2.50
            
            
            
            0.9015,000
            
            
            $
            5.00
            
            
            
            0.90600,000
            
            
            $
            5.00
            
            
            
            3.45654,000
            
            
            $
            6.00
            
            
            
            4.122,357,800
            
            
            $
            6.25
            
            
            
            3.901,283,436
            
            
            $
            7.57
            
            
            
            4.99391,280
            
            
            $
            10.00
            
            
            
            2.63391,280
            
            
            $
            15.00
            
            
            
            2.635,724,094
            
            
            $
            7.21
            
            
            
            3.93





**Note
      10 – Mandatorily Redeemable Common Stock**




On
      September 30, 2005, the Company entered into a manufacturing agreement with
      Source Plus, Inc. (“Source Plus”) and Mingkeda Industries Co. Ltd.
      (“Mingkeda”).  Source Plus advanced monies to Mingkeda for tooling and
      molds to build the Company’s products.  To reimburse Source Plus for
      its advances to Mingkeda, the Company issued
      62,000 shares of common stock to Source Plus in October 2005 with an estimated
      market value of $5.00 per share.  The Company recorded a $310,000
      asset for tooling which is being depreciated over a period of three years to
      reflect the estimated useful life of the tooling.  If an offering or
      other transaction to enable Source Plus the ability to register their issued
      shares was not completed on or before June 1, 2006, Source Plus could have
      required the Company to repay $310,000 in exchange for its return of the shares
      of common stock.  In accordance with SFAS No. 150, the Company had
      recorded the shares issued as a liability until such time as the registration
      contingency could be removed. The Company completed registration of the shares
      issued in its 2006 Private Placement on December 22, 2006 and the forgoing
      shares were reclassified as equity.





**Note
      11 – Subsequent Events**




On
      June
      14, 2007, the Company received gross proceeds of $312,500 from the exercise
      of
      50,000 stock purchase warrants having an exercise price of $6.25 per
      share.


F-22
 Table
          of Contents


**INDEX
      TO EXHIBITS**







3.1
            Articles
                of Incorporation of the Registrant (incorporated by reference to
                Exhibit
                3.1 of our Current Report on Form 8-K/A-2, filed November 16,
                2006)




3.2
            Certificate
                of Amendment to Articles of Incorporation, dated November 3, 2002
                (incorporated by reference to Exhibit 3.2 of our Current Report on
                Form
                8-K/A-2, filed November 16, 2006)




3.3
            Certificate
                of Amendment to Articles of Incorporation, dated January 31, 2005
                (incorporated by reference to Exhibit 3.3 of our Current Report on
                Form
                8-K/A-2, filed November 16, 2006)




3.4
            Certificate
                of Change to Articles of Incorporation, dated July 27, 2005 (incorporated
                by reference to Exhibit 3.4 of our Current Report on Form 8-K/A-2,
                filed
                November 16, 2006)




3.5
            Certificate
                of Amendment to Articles of Incorporation, dated February 24, 2006
                (incorporated by reference to Exhibit 3.5 of our Current Report on
                Form
                8-K/A-2, filed November 16, 2006)




3.6
            Amended
                Bylaws of the Registrant (incorporated by reference to Exhibit 3.6
                of our
                Current Report on Form 8-K/A-2, filed November 16,
                2006)




4.1
            Form
                of Certificate of Common Stock of Registrant (incorporated by reference
                to
                Exhibit 4.1 of our Current Report on Form 8-K, filed March 7,
                2006)




4.2
            Form
                of 2005 Warrant (incorporated by reference to Exhibit 4.2 of our
                Current
                Report on Form 8-K, filed March 7,
                2006)




4.3
            Form
                of 2006 Warrant (incorporated by reference to Exhibit 4.3 of our
                Current
                Report on Form 8-K, filed March 7,
                2006)




4.4
            Form
                of 10% Convertible Note (incorporated by reference to Exhibit 4.4
                of our
                Current Report on Form 8-K, filed March 7,
                2006)




4.5
            Form
                of $10.00 Redeemable Warrant (incorporated by reference to Exhibit
                4.5 of
                our Current Report on Form 8-K, filed March 7,
                2006)




4.6
            Form
                of $15.00 Redeemable Warrant (incorporated by reference to Exhibit
                4.6 of
                our Current Report on Form 8-K, filed March 7,
                2006)




4.7
            Form
                of Conversion Warrant (incorporated by reference to Exhibit 4.7 of
                our
                Current Report on Form 8-K, filed March 7,
                2006)




4.8
            Form
                of 2005 Placement Agent Warrant (incorporated by reference to Exhibit
                4.8
                of our Current Report on Form 8-K, filed March 7,
                2006)




4.9
            Form
                of 2006 Placement Agent Warrant (incorporated by reference to Exhibit
                4.9
                of our Current Report on Form 8-K, filed March 7,
                2006)




4.10
            Form
                of $2.50 Warrant (incorporated by reference to Exhibit 4.10 of our
                Current
                Report on Form 8-K, filed March 7,
                2006)




4.11
            Form
                of $5.00 Warrant (incorporated by reference to Exhibit 4.11 of our
                Current
                Report on Form 8-K, filed March 7,
                2006)




4.12
            Form
                of Convertible Note Modification Agreement (incorporated by reference
                to
                Exhibit 10.27 of our Current Report on Form 8-K/A-2, filed November
                16,
                200)




4.13
            Form
                of 2007 Investor Warrant (incorporated by reference to Exhibit 4.1
                of our
                Current Report on Form 8-K, filed March 16,
                2007)




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 Table
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4.14
            Form
                of 2007 Agent Warrant (incorporated by reference to Exhibit 4.2 of
                our
                Current Report on Form 8-K, filed March 16,
                2007)




4.15
            Form
                of 2007 Second Tranche Investor
                Warrant*




4.16
            Form
                of 2007 Second Tranche Agent
                Warrant*




10.1
            Lease
                Agreement between AeroGrow and United Professional Management, Inc.
                dated
                October 1, 2003, as amended by a Lease Amendment dated October 7,
                2003, and a Lease Amendment dated April 71 2005 (incorporated by
                reference
                to Exhibit 10.1 of our Current Report on Form 8-K, filed March 7,
                2006)




10.2
            Amended
                2003 Stock Option Plan (incorporated by reference to Exhibit 10.2
                of our
                Current Report on Form 8-K, filed March 7,
                2006)




10.3
            Form
                of Stock Option Agreement relating to the 2003 Stock Option Plan
                (incorporated by reference to Exhibit 10.3 of our Current Report
                on Form
                8-K, filed March 7, 2006)




10.4
            2005
                Equity Compensation Plan (incorporated by reference to Exhibit 10.4
                of our
                Current Report on Form 8-K, filed March 7,
                2006)




10.5
            Form
                of Stock Option Agreement relating to the 2005 Equity Compensation
                Plan
                (incorporated by reference to Exhibit 10.5 of our Current Report
                on Form
                8-K, filed March 7, 2006)




10.6
            Form
                of Restricted Stock Grant Agreement relating to the 2005 Equity
                Compensation Plan (incorporated by reference to Exhibit 10.6 of our
                Current Report on Form 8-K, filed March 7,
                2006)




10.7
            Form
                of Lock-up Agreement for certain investors (incorporated by reference
                to
                Exhibit 10.7 of our Current Report on Form 8-K, filed March 7,
                2006)




10.8
            Placement
                Agent Agreement between Keating Securities, LLC and AeroGrow dated
                May 27,
                2005 with respect to the Convertible Note offering (incorporated
                by
                reference to Exhibit 10.8 of our Current Report on Form 8-K, filed
                March
                7, 2006)




10.9
            Placement
                Agent Agreement between Keating Securities, LLC and AeroGrow dated
                February 6, 2006 with respect to the 2006 Offering (incorporated
                by
                reference to Exhibit 10.9 of our Current Report on Form 8-K, filed
                March
                7, 2006)




10.10
            Business
                Lease dated December 8, 2004, between AeroGrow and Investors Independent
                Trust Company (incorporated by reference to Exhibit 10.10 of our
                Current
                Report on Form 8-K, filed March 7,
                2006)




10.11
            Consulting
                Arrangement between Randy Seffren and AeroGrow dated October 13,
                2004
                (incorporated by reference to Exhibit 10.11 of our Current Report
                on Form
                8-K, filed March 7, 2006)




10.12
            Contract
                between AeroGrow and Innotrac Corporation dated October 7, 2005
                (incorporated by reference to Exhibit 10.12 of our Current Report
                on Form
                8-K, filed March 7, 2006)




10.13
            Letter
                of Agreement dated September 30, 2005, between AeroGrow and Kenneth
                Dubach
                (incorporated by reference to Exhibit 10.13 of our Current Report
                on Form
                8-K, filed March 7, 2006)




10.14
            Consulting
                Agreement between AeroGrow and Jerry Gutterman dated May 16, 2005
                (incorporated by reference to Exhibit 10.14 of our Current Report
                on Form
                8-K, filed March 7, 2006)




10.15
            Manufacturing
                Agreement among Mingkeda Industries Co., LTD., Source Plus, Inc.
                and
                AeroGrow dated September 30, 2005 (incorporated by reference to Exhibit
                10.15 of our Current Report on Form 8-K, filed March 7,
                2006)




10.16
            Form
                of Subscription Agreement relating to the issuance of our convertible
                notes and redeemable 2005 warrants (incorporated by reference to
                Exhibit
                10.16 of our Current Report on Form 8-K, filed March 7,
                2006)




10.17
            Form
                of Assignment of Application Agreement between AeroGrow and our
                executives, employees and consultants (incorporated by reference
                to
                Exhibit 10.17 of our Current Report on Form 8-K, filed March 7,
                2006)




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 Table
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10.18
            Form
                of Non-disclosure Agreement between AeroGrow and our executives,
                employees
                and consultants (incorporated by reference to Exhibit 10.18 of our
                Current
                Report on Form 8-K, filed March 7,
                2006)




10.19
            Form
                of Statement of Confidentiality, Non-Disclosure and Non-Compete Agreement
                between AeroGrow and our employees, consultants and other third-party
                contractors (incorporated by reference to Exhibit 10.19 of our Current
                Report on Form 8-K, filed March 7,
                2006)




10.20
            Letter
                agreement dated July 15, 2005 between AeroGrow and Patrice Tanaka
&
                Company (incorporated by reference to Exhibit 10.20 of our Current
                Report
                on Form 8-K, filed March 7, 2006)




10.21
            Production
                Agreement dated October 3, 2005, between AeroGrow and Respond2, Inc.
                (incorporated by reference to Exhibit 10.21 of our Current Report
                on Form
                8-K, filed March 7, 2006)




10.22
            Form
                of Subscription Agreement relating to offering consummated February
                24,
                2006 for the sale of common stock and warrants* (incorporated by
                reference
                to Exhibit 10.22 of our Current Report on Form 8-K, filed March 7,
                2006)




10.23
            Employment
                Agreement between AeroGrow and W. Michael Bissonnette (incorporated
                by
                reference to Exhibit 10.23 of our Current Report on Form 8-K, filed
                March
                7, 2006)




10.24
            Employment
                Agreement between AeroGrow and Mitchell Rubin (incorporated by reference
                to Exhibit 10.24 of our Current Report on Form 8-K, filed March 7,
                2006)




10.25
            Employment
                Agreement between AeroGrow and Jeff Brainard (incorporated by reference
                to
                Exhibit 10.25 of our Current Report on Form 8-K/A, filed May 16,
                2006)




10.26
            Employment
                Agreement between AeroGrow and Randal Seffren, dated July 24, 2006
                (incorporated by reference to Exhibit 10.26 of our Current Report
                on Form
                8-K, filed July 27,
                2006)**.**




10.27
            Waiver
                and Amendment No. 1 to Agreement and Plan of Merger (incorporated
                by
                reference to Exhibit 10.26 our Current Report on Form 8-K/A-2, filed
                November 16, 2006)




10.28
            Lease
                Agreement with Pawnee Properties, LLC (incorporated by reference
                to
                Exhibit 10.27 of our Current Report on Form 8-K, filed August 2,
                2006)




10.29
            Registration
                Rights Agreement dated as of March 12, 2007, by and between AeroGrow
                International, Inc. and the other parties thereto (incorporated by
                reference to Exhibit 10.1 of our Current Report on Form 8-K, filed
                March
                16, 2007)




10.30
            Product
                Supply Agreement between AeroGrow and Global Information Services,
                Inc.,
                dated May 30, 2007 (incorporated by reference to Exhibit 10.1 of
                our
                Current Report on Form 8-K, filed June 4,
                2007)




10.31
            Registration
                Rights Agreement dated as of March 30, 2007, by and between AeroGrow
                International, Inc. and the other parties
                thereto*


23.1
              Consent
                    of Independent Registered Public Accounting
                    Firm*


31.1
            Chief
                Executive Officer Certification pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002*




31.2
            Chief
                Financial Officer Certification pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002*




32.1
            Chief
                Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002*




32.2
            Chief
                Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002*






***
                Filed herewith**






I-3