**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549








**FORM
      10-QSB**





**x
      QUARTERLY REPORT UNDER
      SECTION 13 OR 15(D) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2006**


or


**o
      TRANSITION REPORT UNDER
      SECTION 13 OR 15(D) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





**Commission
      File Number 000-50888**





**AEROGROW
      INTERNATIONAL, INC.**


(Exact
      name of small business issuer as specified in its charter)








**NEVADA**
            
            **46-0510685**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                Number)











**900
                28th Street, Suite 201, Boulder, Colorado**
            
            **80303**(Address
                of principal executive offices)
            
            (Zip
                code)








**(303)
      444-7755**


(Issuer's
      telephone number)








Check
      whether the Issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the issuer was required to file such reports), and (2) has been subject
      to
      such filing requirements for the past 90 days.


Yes
xNo
o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
oNo
x





**Number
      of shares of issuer's common stock outstanding as of August 11, 2006:
      9,150,726**





Transitional
      Small Business Disclosure Format (check one). Yes oNo x





Documents
      incorporated by reference: None.







**AeroGrow
      International, Inc.**


**TABLE
      OF CONTENTS**


**FORM
      10-QSB REPORT**


**June
      30, 2006**




**PART
                I - FINANCIAL INFORMATION**
            **Page****Item
                1. Interim Financial Statements**Condensed
                Balance Sheets as of June 30, 2006 (Unaudited)
              and March 31, 2006
            1Condensed
                Statements of Operations for the Three
              Months Ended June 30, 2006 and June 30, 2005 (Unaudited)
            2Condensed
                Statement of Stockholders’ Equity for the
                Months Ended June 30, 2006 (Unaudited)
            3Condensed
                Statements of Cash Flows for the Three
                Months Ended June 30, 2006 and June 20, 2005
                  (Unaudited)
            4Notes
                to the Condensed Financial Statements for the Three
              Months Ended June 30, 2006 and June 30, 2005 (Unaudited)
            5**Item
                2. Management's Discussion and Analysis****of
                Financial Condition and Plan of Operation**
            16**Item
                3. Controls and Procedures**
            21**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            21Item
                2. Unregistered Sale of Equity Securities
            22Item
                3. Defaults Upon Senior Securities
            22Item
                4. Submission of Matters to a Vote of Security Holders
            22Item
                5. Other Information
            22Item
                6. ExhibitsSignatures









**PART
      I - FINANCIAL INFORMATION**


**Item
      1. Interim Financial Statements (Unaudited)**





**AEROGROW
      INTERNATIONAL, INC.**


**CONDENSED
      BALANCE SHEETS**


**June
                30,**
            
            **March
                31,****2006**
            
            **2006****ASSETS**
            
            (Unaudited)Current
                assetsCash
            
            $
            6,028,399
            
            $
            8,852,548Restricted
                cash
            
            
            6,370
            
            
            -Accounts
                receivable, net of allowance for doubtful accountsof
                $5,152 and $0 at June 30, 2006 and March 31, 2006,
                respectively
            
            
            520,072
            
            
            43,156Inventory
            
            
            650,391
            
            
            192,946Prepaid
                expenses and other
            
            
            169,676
            
            
            199,590Total
                current assets
            
            
            7,374,908
            
            
            9,288,240Property
                and equipment, net of accumulated depreciation ofof
                $141,219 and $102,043 at June 30, 2006 andMarch
                31, 2006, respectively
            
            
            506,660
            
            
            480,771Other
                assetsDebt
                issuance costs, net of $389,059 and $373,853 accumulatedamortization
                at June 30, 2006 and March 31, 2006, respectively
            
            
            30,412
            
            
            45,618Intangible
                assets, net of $2,238 and $1,071 of accumulatedamortization
                at June 30, 2006 and March 31, 2006, respectively
            
            
            21,114
            
            
            21,696Deposits
            
            
            4,684
            
            
            4,68456,210
            
            
            71,998**Total
                Assets**
            
            $
            7,937,778
            
            $
            9,841,009**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            431,332
            
            $
            487,474Accrued
                expenses
            
            
            341,284
            
            
            334,524Convertible
                debentures, net of discounts ofand
                $131,187 and $196,781 at June 30, 2006 andMarch
                31, 2006, respectively
            
            
            788,360
            
            
            792,539Mandatorily
                redeemable common stock
            
            
            310,000
            
            
            310,000Total
                current liabilities
            
            
            1,870,976
            
            
            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,9,145,726
                and 9,102,622 shares issued and outstandingat
                June 30, 2006 and March 31, 2006, respectively
            
            
            9,146
            
            
            9,103Additional
                paid-in capital
            
            
            27,586,257
            
            
            27,313,081Accumulated
                (deficit)
            
            
            (21,528,601
            )
            
            (19,405,712
            )Total
                Stockholders' Equity
            
            
            6,066,802
            
            
            7,916,472**Total
                Liabilities and Stockholders' Equity**
            
            $
            7,937,778
            
            $
            9,841,009





See
      accompanying notes to the condensed financial statements




1




**AEROGROW
      INTERNATIONAL, INC.**


**CONDENSED
      STATEMENTS OF OPERATIONS**





**Three
                months ended****June
                30,****2006**
            
            **2005**(Unaudited)RevenueProduct
                sales
            
            $
            821,938
            
            $
            -Operating
                expensesCost
                of revenue
            
            
            675,695
            
            
            -Research
                and development
            
            
            434,931
            
            
            308,213Sales
                and marketing
            
            
            960,474
            
            
            94,493General
                and administrative
            
            
            856,040
            
            
            657,954Total
                operating expenses
            
            
            2,927,140
            
            
            1,060,660Loss
                from operations
            
            
            (2,105,202
            )
            
            (1,060,660
            )Other
                (income) expense, netInterest
                (income)
            
            
            (84,113
            )
            
            (6,438
            )Interest
                expense
            
            
            101,800
            
            
            -Total
                other (income) expense, net
            
            
            17,687
            
            
            (6,438
            )Net
                (loss)
            
            $
            (2,122,889
            )
            $
            (1,054,222
            )**Net
                loss per share, basic and diluted**
            
            $
            (0.23
            )
            $
            (0.21
            )**Weighted
                average number of common shares outstanding, basic and
                diluted**
            
            
            9,116,832
            
            
            4,920,860




See
      accompanying notes to the condensed financial statements




2




**AEROGROW
      INTERNATIONAL, INC.**


**CONDENSED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**(Unaudited)**











AdditionalCommon
                Stock
            
            Paid-in
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            (Deficit)
            
            Total**Balances,
                March 31, 2006**
            
            
            9,102,622
            
            
            9,103
            
            
            27,313,081
            
            
            (19,405,712
            )
            
            7,916,472Exercise
                of common stock warrants at $2.50
            
            
            10,000
            
            
            10
            
            
            24,990
            
            
            -
            
            
            25,000Common
                stock issued under equity compensation plans to employees
            
            
            7,500
            
            
            7
            
            
            37,493
            
            
            -
            
            
            37,500Common
                stock issued under equity compensation plans to
                consultants
            
            
            12,000
            
            
            12
            
            
            59,988
            
            
            -
            
            
            60,000Common
                stock issued under equity compensation plans to directors
            
            
            6,000
            
            
            6
            
            
            29,994
            
            
            -
            
            
            30,000Common
                stock issued to landlord as rent
            
            
            7,604
            
            
            8
            
            
            38,012
            
            
            -
            
            
            38,020Stock
                options issued under equity compensation plans
            
            
            -
            
            
            -
            
            
            42,926
            
            
            -
            
            
            42,926Accretion
                of loss on modification of debt
            
            
            -
            
            
            -
            
            
            39,773
            
            
            -
            
            
            39,773Net
                (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,122,889
            )
            
            (2,122,889
            )**Balances,
                June 30, 2006**
            
            
            9,145,726
            
            
            9,146
            
            $
            27,586,257
            
            $
            (21,528,601
            )
            $
            6,066,802




See
      accompanying notes to the condensed financial statements




3




**AEROGROW
      INTERNATIONAL INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**Three
                months ended****June
                30,****2006**
            
            **2005**(Unaudited)**Cash
                flows from operating activities:**Net (loss)
            
            $
            (2,122,889
            )
            $
            (1,054,222
            )Adjustments to reconcile net (loss) to cash provided(used) by operations:Issuance
                of common stock and options underequity
                compensation plans
            
            
            170,426
            
            
            230,733Issuance
                of common stock to landlord for rent
            
            
            38,020
            
            
            -Depreciation
                and amortization expense
            
            
            40,344
            
            
            3,837Allowance
                for bad debt
            
            
            5,152
            
            
            -Amortization
                of debt issuance costs
            
            
            15,206
            
            
            -Accretion
                of convertible debentures
            
            
            27,188
            
            
            -Interest
                expense associated with warrants issued withconvertible
                debentures
            
            
            38,406
            
            
            -Change in assets and liabilities:(Increase)
                in accounts receivable
            
            
            (482,068
            )
            
            -(Increase)
                in inventory
            
            
            (457,445
            )
            
            -Decrease
                (increase) in other current assets
            
            
            29,914
            
            
            (43,770
            )(Decrease)
                increase in accounts payable
            
            
            (56,142
            )
            
            21,305Increase
                in accrued expenses
            
            
            6,760
            
            
            107,417Increase
                in accrued compensation
            
            
            -
            
            
            4,731Net
                cash (used) by operating activities
            
            
            (2,747,128
            )
            
            (729,969
            )**Cash
                flows from investing activities:**Decrease
                (increase) in restricted cash
            
            
            (6,370
            )
            
            -Purchases
                of equipment
            
            
            (65,066
            )
            
            (49,512
            )Patent
                expenses
            
            
            (
                585
            )
            
            -Net
                cash (used) by investing activities
            
            
            (72,021
            )
            
            (49,512
            )**Cash
                flows from financing activities:**Increase
                in due to parent company
            
            
            -
            
            
            28,500Proceeds
                from issuance of common stock, net
            
            
            -
            
            
            91,000Proceeds
                from exercise of warrants
            
            
            25,000
            
            
            -Repayments
                of convertible debentures
            
            
            (30,000
            )
            
            -Proceeds
                from issuance of convertible debentures
            
            
            -
            
            
            250,000Issuance
                costs associated with convertible debentures
            
            
            -
            
            
            (25,453
            )Net
                cash provided (used) by financing activities
            
            
            (5,000
            )
            
            344,047Net
                increase (decrease) in cash
            
            
            (2,824,149
            )
            
            (435,434
            )Cash,
                beginning of period
            
            
            8,852,548
            
            
            1,265,811Cash,
                end of period
            
            $
            6,028,399
            
            $
            830,377**Supplemental
                disclosure of non-cash investing and financing
                activities:**Interest
                paid
            
            $
            21,000
            
            $
            -Income
                taxes paid
            
            $
            -
            
            $
            -Accretion
                of debt modification
            
            $
            39,773
            
            $
            -





See
      accompanying notes to the condensed financial statements




4




**AEROGROW
      INTERNATIONAL INC.**


**NOTES
      TO THE CONDENSED FINANCIAL STATEMENTS**


**THREE
      MONTHS ENDED JUNE 30, 2006 AND JUNE 30, 2005**


**(Unaudited)**





**1.** **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 its formation through March 2006 have 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 its 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 its 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.





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 is 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.





In
      two
      closings, held on February 24, 2006 and March 1, 2006, the Company completed
      the
      sale of shares of its common stock and common stock purchase warrants in a
      private placement (the “2006 Offering”). The Company sold 2,148,000 shares of
      its common stock and warrants to purchase 2,148,000 shares of its common stock.
      Each unit in the offering 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 was $5.00. The Company received net proceeds of
      $8,964,952 from the 2006 Offering after the commission and offering
      expenses.





**2.** **Basis
      of Presentation**





Interim
      Financial Information


The
      unaudited interim financial statements of the Company included herein have
      been
      prepared in accordance with the instructions for Form 10-QSB under the
      Securities Exchange Act of 1934, as amended, and Item 310 of Regulation S-B
      under the Securities Act of 1933, as amended. Certain information and footnote
      disclosures normally included in financial statements prepared in accordance
      with generally accepted accounting principles have been condensed or omitted
      pursuant to such rules and regulations relating to interim financial
      statements.





In
      the
      opinion of management, the accompanying unaudited interim consolidated financial
      statements reflect all adjustments, including normal recurring accruals,
      necessary to present fairly the financial position of the Company at June 30,
      2006, the results of operations for the three months ended June 30, 2006 and
      2005, and the cash flows for the three months ended June 30, 2006 and 2005.
      The
      results of operations for the three months ended June 30, 2006 are not
      necessarily indicative of the expected results of operations for the full year
      or any future period. The balance sheet as of March 31, 2006 is derived from
      the
      Company’s audited financial statements. These financial statements should be
      read in conjunction with the consolidated financial statements and footnotes
      included in the Company’s Annual Report on transitional Form 10-KSB for the
      period ended March 31, 2006 as filed with the Securities and Exchange
      Commission.




5




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.




C oncentration
      of Credit Risk


Financial
      instruments consist of cash and cash equivalents, subscriptions receivable
      and
      accounts payable. The carrying values of all financial instruments approximate
      their fair value. The carrying value of the convertible debentures approximate
      their fair value based on the current interest rate of 5%.





The
      Company has a concentration of credit risk with respect to trade account
      receivables for two customers who accounted for 40% and 17%, respectively,
      of
      the Company’s trade accounts receivable. The Company performs ongoing credit
      evaluations of its customers and normally does not require collateral to support
      accounts receivable .
      For the
      three months ended June 30, 2006, two customers represented 47% and 19% of
      revenues for the period.





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. A majority
      of
      the Company’s products are manufactured overseas and are recorded at
      cost.




6




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 June 30, 2006 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’s sales vary by customer, however,
      generally are net 30 days. Accounts receivable is 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. There
      was no allowance recorded at March 31, 2006. As of June 30, 2006, the Company
      had recorded an allowance for bad debts of $5,152.





Advertising
      and Production Costs


The
      Company expenses the costs of all production costs related to advertising as
      incurred. The Company expenses all costs related to actual advertising such
      as
      print, television, and radio advertisements when the advertisement has been
      broadcast or otherwise distributed.





Research
      and Development


The
      costs
      incurred to develop products to be sold or otherwise marketed are currently
      charged to expense. When a product is ready for general release, its capitalized
      costs will be amortized using the straight-line method of amortization over
      a
      reasonable period. During the three months ended June 30, 2006 and June 30,
      2005
      no research and development costs have been capitalized.





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.





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 three
      months ended June 30, 2006 and June 30, 2005 the Company recognized a valuation
      allowance equal to 100% of the net deferred tax asset balance.




7




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; the customer has no right to return goods
      unless defective and collection of the resulting receivable is reasonably
      assured. 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 price markdowns, promotions, other
      volume-based incentives and expected returns. 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. The Company also records
      estimated reductions to revenue for end user rebate programs, returns and costs
      related to warranty services. At June 30, 2006, the Company had accrued $21,245
      as its estimate for the foregoing deductions and allowances.





Shipping
      and Handling Costs


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





Registration
      Rights Penalties


The
      holders of securities issued in the Company’s February 2006 private placement
      offering and the convertible debt offering in 2005 (Note 3) has 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 common stock
      of
      the Company under certain circumstances and are limited to 1% of the amount
      of
      the outstanding convertible debt 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 the Company’s common stock valued at a rate of
      $2.00 per share. Until such time as there has been a consensus reached on
      Emerging Issues Task Force Issue No. 05-4, "The Effect of a Liquidated Damages
      Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
      ‘Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in, a Company's Own Stock’ ”, the Company has elected to recognize the
      impact of such registration rights penalties as incurred, which commenced after
      July 22, 2006.





Pending
      Issues


The
      Company is in the process of responding to comments from the Securities and
      Exchange Commission (“SEC”) regarding, among other issues, the accounting for
      the convertible debentures issued by the Company in 2005 (Note 3) as well as
      the
      accounting for the Company’s February 2006 private placement offering. The
      outcome of such discussions with the SEC may result in adjustments to certain
      amounts reported in financial statements issued for the quarterly period ended
      June 30, 2005 and all subsequent periods thereafter. These adjustments could
      affect the presentation and classification of amounts and costs relating to
      certain debt and equity based instruments and on the Company’s balance sheet and
      statement of operations, however, the Company currently believes that if such
      adjustments are required to be made, its reported cash flows will be
      unaffected.




8




New
      Accounting Pronouncements


In
      February 2006, the Financial Accounting Standard Board (“FASB”) issued SFAS No.
      155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB
      Statements No. 133 and 140”. This Statement resolves issues addressed in
      Statement 133 Implementation Issue No. D1, “Application of Statement 133 to
      Beneficial Interest in Securitized Financial Assets.” This pronouncement will be
      effective on the fiscal year beginning after September 15, 2006. Currently,
      the
      Company does not have any derivative instruments or participate in any hedging
      activities, and therefore the adoption of SFAS No. 155 is not expected to have
      a
      material impact on the Company’s financial position or results of operations.





In
      March
      2006, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 156,
“Accounting for Servicing of Financial Assets, an amendment of FASB Statement
      No. 140”. This Statement requires recognition of servicing a financial asset by
      entering into a servicing contract in certain situations. This pronouncement
      will be effective on the fiscal year beginning after September 15, 2006.
      Currently, the Company does not have any servicing asset or liability, and
      therefore the adoption of SFAS No. 156 is not expected to have a material impact
      on the Company’s financial position or results of operations.




**3.** **Convertible
      Debentures**





On
      May
      27, 2005, the Company entered into an exclusive Placement Agreement with Keating
      Securities, LLC to solicit 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.
      Each Unit is 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. Interest is payable quarterly beginning
      September 30, 2005. The principal was originally due on June 30, 2006. During
      the fifteen days following the completion of an additional financing, each
      note
      holder has the opportunity to request full payment of the principal amount
      of
      the notes and interest instead of converting their convertible notes into shares
      of common stock and convertible warrants. 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 shall receive an additional five
      year
      warrant to purchase one share of the 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 associated
      with
      this offering. In the event the Company fails to fulfill in registration
      obligations the Company hereby agrees to pay liquidated damages under the
      following circumstances: (a) if the registration statement is not filed by
      the
      Company on or prior to 60 days after the final closing of the offering (such
      an
      event, a “Filing Default”); (b) if the registration statement is not declared
      effective by the SEC on or prior to 150 days after the final Closing in the
      offering (such an event, an “Effectiveness Default”); or (c) if the Company does
      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 shall 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.




9




In
      conjunction with this $3,000,000 private placement, 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 is being 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 this $3,000,000 private placement, 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
      to
      be 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 Offering but contingent upon their successful
      completion, in February 2006, the Company entered into agreements with the
      convertible debt holders whereby 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 (the “Note Conversion”) 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
      which were issued as a result of the change in the conversion price change
      to $3
      per share from the originally issued $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 is deemed
      extinguished and a debt extinguishment loss was recognized. This loss is 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.




10


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, $30,000 was
      due
      on June 30, 2006 and was repaid on that date and $840,000 is due December 31,
      2006.





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 limited and
      payable under the following circumstances: (a) if a registration statement
      is
      not filed by the AeroGrow 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
      AeroGrow 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 the effectiveness of such registration is pending.





The
      balance presented for the Convertible Debentures, net of discounts, as of June
      30, 2006 and March 31, 2006 is as follows:




**June
                30,**
            
            **March
                31,****2006**
            
            **2006**Convertible
              debentures outstanding
            $840,000
            
            $870,000Loss
              on modification of debt, net of $53,031 and $13,258 accretion to
              additional paid in capital as of June 30, 2006 and March 31, 2006,
              respectively
            79,547
            
            119,320Discount
              as a result of beneficial conversion feature, net of amortization of
              $695,625 and $668,437 as of June 30, 2006 and March 31, 2006,
              respectively
            (54,375)
            
            (81,563)Discount
              as a result of fair value of warrants issued, net of amortization of
              $982,668 and $944,262 as of June 30, 2006 and March 31, 2006,
              respectively
            (76,812)
            
            (115,218)Net
              balance
            $
                788,360
            
            $792,539




11




**4.** **Equity
      Compensation Plans**





In
      2003,
      the Company's Board of Directors approved a Stock Option Plan (the Plan)
      pursuant to which nonqualified stock options are reserved for issuance to
      eligible employees, consultants and directors of the Company. The Plan is
      administered by the Board of Directors, which has the authority to select the
      individual’s 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
      nonqualified stock options to purchase shares of common stock to certain
      employees at exercise prices ranging from $0.05 to $5.00 per share. In August
      2005, the Plan was merged into the 2005 Equity Compensation Plan and it no
      longer separately exists. However, options issued and outstanding under this
      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 individual’s 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 $2.50 to $5.00 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).




12




On
      June
      28, 2006, the Company granted to one employee 125,000 options to purchase the
      Company’s common stock at an exercise price of $5.00 per share under the 2005
      Plan which will vest 50% on the twelve month anniversary of the grant and 12.5%
      for each of the next four three month periods thereafter. The Company will
      value
      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. In as much as none of these options were vested at June
      30,
      2006, there was no expense recognized for the three months ended June 30, 2006
      related to these options.





As
      a
      result of recognizing compensation expense for stock options previously granted
      pursuant to the provisions of SFAS No. 123(R), the net loss for the three months
      ended June 30, 2006, was $42,926 greater, than if the Company had continued
      to
      account for stock options under APB No. 25.





Information
      regarding employee stock options outstanding as of June 30, 2006 is as
      follows:








**Options Outstanding**
            
            **Options Exercisable****Weighted-****Weighted-**
            
            **average****average**
            
            **Remaining****Exercise**
            
            
            
            **Exercise**
            
            **Contractual****price range**
            
            **Options**
            
            **Price**
            
            **Life (years)**
            
            **Options**Over
                $0.00 to $0.50
            
            
            30,618
            
            $
            0.08
            
            
            2.67
            
            
            30,618Over
                $0.50 to $2.50
            
            
            137,259
            
            $
            1.57
            
            
            2.47
            
            
            137,259$5.00
            
            
            1,074,392
            
            $
            5.00
            
            
            5.33
            
            
            991,0551,242,269
            
            $
            4.50
            
            
            4.76
            
            
            1,158,932





In
      addition to option grants, during the three months ended June 30, 2006 the
      Company granted under the 2005 Equity Compensation Plan a total of 25,500 shares
      of common stock at a fair value of $5.00 per share, consisting of 5,000 shares
      granted and issued to an employee in conjunction with his hiring, 12,000 shares
      granted to a consultant in conjunction with the signing of a consulting
      agreement at June 30, 2006, 1,500 shares granted to a consultant in conjunction
      with his agreement to provide advisory services regarding sales strategy, 1,000
      shares granted to a consultant for graphic services provided, 1,250 shares
      granted to each of three directors for service on the Audit Committee and 750
      shares granted to each of three directors for service on the Governance
      Committee. All of the foregoing was charged to operating expenses for the three
      months ended June 30, 2006 resulting in a total charge of $127,500.





Information
      regarding the Company’s equity compensation plans at June 30, 2006 is as
      follows:




13


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 issuanceEquity
                compensation plans approved by security holders
            
            
            1,242,269
            
            $
            4.50
            
            
            208,171Equity
                compensation plans not approved by security holders
            
            
            -
            
            $
            -
            
            
            -Total
            
            
            1,242,269
            
            $
            4.50
            
            
            208,171





At
      June
      30, 2006, the Company has 166,663 of options that have been granted and are
      unvested that will result in $686,500 of compensation expense in future periods
      if fully vested.




**5.** **Related
      Party Transactions**





During
      the three months ended June 30, 2006, the Company paid consulting fees totaling
      $23,019 to one director for services related to the development of an
      international channel of distribution for the company’s products.





Also
      during the three months ended June 30, 2006, the Company incurred fees totaling
      $113,175 to MedEd Architects LLC; a video production company owned 33% by Randy
      Seffren, the Company’s Chief Marketing Officer. The Company will incur
      approximately $200,000 in costs in subsequent calendar quarters to MedEd
      Architects LLC, all of the foregoing for production of an infomercial featuring
      the Company’s products and related video-based products.





During
      the three month period ended June 30, 2005, the Company retained one member
      of
      their board as a consultant who was granted stock options, common stock and
      fees
      for financial services provided totaling $50,152. For the three month period
      ended June 30, 2005, a director of the Company, who is a partner in the law
      firm
      of Kranitz and Philipp, was paid legal fees of $6,000.





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





**6.** **Stockholders’
      Equity**





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.





During
      the three months ended June 30, 2006, the Company issued 25,500 shares of common
      stock under its 2005 Equity Compensation Plan.





During
      the three months ended June 30, 2006 and June 30, 2005 the Company issued shares
      of stock to a landlord as additional rent expense.




14




During
      the three month period ended June 30, 2005, 20,000 warrants were exercised
      at
      $2.50 per share. During the same period, the Company issued a total of 45,947
      shares at a $5.00 per share to landlords, consultants and employees for IT,
      marketing, administrative, financial, and research and development services
      provided. These shares were priced based on their current fair market value
      at
      the time services were rendered.





**7.** **Subsequent
      Events**





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 no later than December 1, 2006. Pawnee Properties, LLC, and
      its controlling persons, are not affiliates of the Company. The initial rent
      is
      $15,759 per month, plus the Company 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.





On
      July
      24, 2006, the Company entered into an employment agreement with Randal Lee
      Seffren, its Chief Marketing Officer. 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 shall 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 Company’s
      annual financial statements and pro rated for any portion of such annual period
      covered under this Agreement; but subject to adjustment so that it is no less
      favorable than granted to other senior executives. The agreement also provides
      for medical, vacation and other benefits commensurate with the policies and
      programs as adopted by the Company for its senior executives. Further, the
      agreement confirms the option grant awarded to Mr. Seffren as of March 28,
      2006,
      consisting of 125,000 options to purchase the Company’s common stock under the
      Company’s 2005 Equity Compensation Plan at an exercise price of $5.00 per share;
      were fully vested as of that grant date; and (iii) 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 the Company during employment and for twenty-four
      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 twelfth month following termination; and the pro rata portion
      of his bonus as of the nearest quarter end financial statements of the
      Company.




15


**Item
      2. Management's Discussion and Analysis of Financial Condition and Plan of
      Operation**





The
      discussion contained herein is for the three months ended June 30, 2006 and
      2005. The following discussion should be read in conjunction with the Company’s
      financial statements and the notes to the financial statements included
      elsewhere in this Quarterly Report on Form 10-QSB for the quarterly period
      ended
      June 30, 2006. The following discussion 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, including
      statements that include words such as “anticipates”, “expects”, “intends”,
“plans”, “believes”, “may”, “will” or similar expressions that are intended to
      identify forward-looking statements. In addition, any statements that refer
      to
      expectations, projections or other characterizations of future events or
      circumstances, including any underlying assumptions, are forward-looking
      statements. Such statements include, but are not limited to, statements
      regarding our intent, belief or current expectations regarding our strategies,
      plans and objectives, our product release schedules, our ability to design,
      develop, manufacture and market products, our intentions with respect to
      strategic acquisitions, the ability of our products to achieve or maintain
      commercial acceptance and our ability to obtain financing for our obligations.
      Such statements are not guarantees of future performance and are subject to
      risks, uncertainties and assumptions that are difficult to predict. Therefore,
      the Company’s actual results could differ materially and adversely from those
      expressed in any forward-looking statements as a result of various factors.
      Factors that could cause or contribute to the differences are discussed in
“Risk
      Factors” and elsewhere in the Company’s transitional annual report on Form
      10-KSB filed on July 6, 2006 with the Securities and Exchange Commission. Except
      as required by applicable law or regulation, the Company undertakes no
      obligation to revise or update any forward-looking statements contained in
      this
      Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2006.
      The information contained in this Quarterly Report on Form 10-QSB for the
      quarterly period ended June 30, 2006 is not a complete description of the
      Company’s business or the risks associated with an investment in the Company’s
      common stock. Each reader should carefully review and consider the various
      disclosures made by the Company in this Quarterly Report on Form 10-QSB for
      the
      quarterly period ended June 30, 2006 and in the Company’s other filings with the
      Securities and Exchange Commission.





**Background
      and Corporate History**





We
      were
      incorporated in the State of Nevada on March 25, 2002. We are in the business
      of
      developing, marketing and distributing advanced indoor aeroponic garden systems.
      Since formation and through our development stage which ended in February 2006,
      our principal activities had 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, have contracted with a third-party
      manufacturer who has commenced production activities and we have actively began
      sales activities as of March 2006. Through June 30, 2006, we had manufactured
      and taken delivery of 21,000 units and have orders placed for an additional
      24,000 units to date. We commenced our initial marketing and distribution of
      our
      products during March 2006. Prior to March 2006 when we commenced sales of
      our
      aeroponic garden systems, we were considered a Development Stage Enterprise
      in
      accordance FAS No. 7, Accounting and Reporting by Development Stage Enterprises.





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




16




In
      two
      closings, held on February 24, 2006 and March 1, 2006, we completed the sale
      of
      shares of our common stock and common stock purchase warrants in a private
      placement (the “2006 Offering”). We sold 2,148,000 shares of our common stock
      and warrants to purchase 2,148,000 shares of its common stock. Each unit in
      the
      offering 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 was $5.00. We received net proceeds of $8,964,952 from the 2006
      Offering after the commission and offering expenses.





**Our
      Critical Accounting Policies**


The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the United States. The preparation
      of these financial statements requires that we make estimates and judgments
      that
      affect the reported amounts of assets, liabilities, revenues, expenses and
      related disclosure. On an on-going basis, we re-evaluate our estimates,
      including those relating to revenue recognition, uncollectible accounts
      receivable, intangible assets and contingent expenses and revise reported
      amounts prospectively. We base our estimates on historical experiences, combined
      with anticipated activity and various other assumptions that we believe to
      be
      reasonable under the circumstances. When combined, this body of knowledge forms
      the basis for making judgments about the carrying value of assets and
      liabilities. Actual results may differ from these estimates under different
      assumptions or conditions.





Financial
      Reporting Release No. 60, which was issued by the Securities and Exchange
      Commission, requires all companies to include a discussion of critical
      accounting policies or methods used in preparation of financial statements.
      The
      following is a brief discussion of our most critical accounting policies,
      including those methods affected by our more complex judgments and
      estimates.





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 our financial statements. Prior to January 1, 2006, we 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. 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 will have a material impact on our results of
      operations.




Revenue
      Recognition


We
      recognize our 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. The liability for sales returns is estimated based upon
      historical experience of return levels.




17




We
      record
      estimated reductions to revenue for customer and distributor programs and
      incentive offerings, including price markdowns, promotions, other volume-based
      incentives and expected returns. 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 incentive is offered. Additionally, certain incentive programs require
      us to
      estimate based on industry experience the number of customers who will actually
      redeem the incentive. We also record estimated reductions to revenue for end
      user rebate programs, returns and costs related to warranty services. At June
      30, 2006, we had accrued $21,245 as its estimate for the foregoing deductions
      and allowances.





Registration
      Rights Penalties


The
      holders of securities issued in the Company’s 2006 Offering and the convertible
      debt offering in 2005 have 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 our common stock under certain circumstances and
      are
      limited to 1% per month of the amount of the outstanding of convertible debt
      up
      to a maximum of 24% and 1% per month 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. Until such
      time
      as there has been a consensus reached on Emerging Issues Task Force Issue No.
      05-4, "The Effect of a Liquidated Damages Clause on a Freestanding Financial
      Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company's Own Stock’ ”, we
      have elected to recognize the impact of such registration rights penalties
      as
      incurred, which commenced after July 22, 2006.





Pending
      Issues


We
      are in
      the process of responding to comments from the Securities and Exchange
      Commission (“SEC”) regarding, among other issues, the accounting for the
      convertible debentures issued by us in 2005 as well as the accounting for our
      2006 Offering. The outcome of such discussions with the SEC may result in
      adjustments to certain amounts reported in our financial statements issued
      for
      the quarterly period ended June 30, 2005 and all subsequent periods thereafter.
      These adjustments could affect the presentation and classification of amounts
      and costs relating to certain equity based instruments and on our balance sheet
      and statement of operations, however, we currently believe that if such
      adjustments are made, our report of cash flows will be unaffected.





**Plan
      of Operation**





During
      the next twelve months, we intend to expand our efforts in manufacturing,
      marketing, distributing and selling our kitchen garden systems. Manufacturing
      activities began in January 2006 for pilot production and production capacity
      is
      being expanded, both in terms of capacity at our current contract manufacturer
      as well as finalizing agreements with an additional contract manufacturer.
      Our
      infomercial, a thirty minute video presentation of the product which we will
      air
      on television and solicit direct sales from consumers for our product, has
      been
      filmed and is expected to begin airing in September of 2006. Initial test
      marketing shipments to retail launch partners, including Sur La Table, Frontgate
      and others commenced in March 2006. In July, we were featured in a
      successful airing on QVC, the world’s largest television retailer and have
      received additional orders from QVC for the balance of calendar 2006. In order
      to transition from the development stage to an operating company, we have
      strengthened our management team with the addition of a Vice President of Sales,
      a Vice President of Operations, Vice President of Engineering and Manufacturing,
      a new Chief Financial Officer and other marketing, operations and administrative
      staff. We also are expanding our new product development activities to sustain
      operations beyond our initial product offerings.




18




We
      have
      developed many of our marketing materials, including our website, product
      brochures, retail packaging and other retail collateral materials and public
      relations kits. Additional development is in process for in-store point of
      purchase supplies, infomercial and short-form television show and print media
      items. Most of these items will be completed by September 2006.





Our
      plan
      of operation for the balance of the fiscal years ended March 31, 2007 and 2008
      will depend, in part, on the assumptions used to develop our business plan
      and
      whether they were or have been inaccurate or need to be changed to respond
      to
      different assumptions or different business needs or objectives. Any changes
      could cause the working capital to be insufficient to fund our operations and
      we
      could be required to seek additional financing sooner than we currently
      anticipate.





**Results
      of Operations**





The
      three
      months ended June 30, 2006 represented our first three month period of revenues
      from operations. Initial shipments of our products began in March 2006. For
      the
      three months ended June 30, 2006, net sales totaled $821,938. Of this amount,
      two customers represented 47% and 19% of revenues for the period. In accordance
      with our policy with regard to revenue recognition, we deferred recognition
      of
      $116,075 in sales to the following period for two customers, both television
      retailers, due to return rights granted these customers in the event our
      products did not meet sales expectations, these rights were waived by the
      customers after June 30, 2006.





Cost
      of
      revenue for
      the
      three months ended June 30, 2006 totaled $675,695, representing 82% of revenues.
      Included in cost of revenues for the three months ended June 30, 2006 is
      approximately $170,000 in airfreight costs for the initial shipments of our
      products, a cost of approximately of $140,000 over standard ocean freight
      costs. This shipping practice is not expected to be a recurring method of
      transportation for our products. We also experienced higher than
      anticipated costs in our seed kit manufacturing operations for the inital kits
      sold. As we begin to increase seed kit production volume, costs for seed
      kit production are anticipated to improve significantly in future periods
      as economies of scale are achieved.





During
      the three months ended June 30, 2006 we incurred $434,931 in research and
      development costs as compared to $308,213 for the three months ended June 30,
      2005, an increase of $126,718 or 41%. We continue to allocate additional
      resources to the development, the design and technology of various new prototype
      models as well as expand our greenhouse and laboratory to measure the success
      of
      various seeds, cuttings and nutrients under different conditions as well as
      test
      new plant varieties for additional seed kits.





Sales
      and
      marketing costs for the three months ended June 30, 2006 totaled $960,474 as
      compared to $94,493 for the three months ended June 30, 2005. Sales and
      marketing costs include all costs associated with the marketing and distribution
      of our products and included approximately $283,000 in salaries, $151,000 in
      consulting fees, $132,000 in video production costs, $98,000 in public relations
      costs, $57,000 in sales commissions and $45,000 in trade show costs.





General
      and administrative costs for the three months ended June 30, 2006 totaled
      $856,040 as compared to $657,954 for the three months ended June 30, 2005,
      an
      increase of $198,086 or 30%. The principal increases are in salaries for
      additional administrative and finance personnel as well as increases in legal
      and audit fees.





In
      the
      next twelve months, we intend to continue researching and developing new product
      designs and product extensions including, but not limited to, product line
      extensions targeted at both higher and lower retail price points, nutrient
      delivery systems and additional seed varieties for our seed kits. We also will
      dedicate research and development resources to the improvement, expansion and
      automation of our in-house seed kit manufacturing capabilities.




19


**Liquidity
      and Capital Resources**





Prior
      to
      March 2006, we had been funded primarily the proceeds of private placement
      offerings of both debt and equity securities inclusive of:




·
            $2,591,554
                from our debt offering of convertible notes and redeemable 2005 warrants
                in June, July, August and September 2005, ·
            $962,500
                from the exercise of outstanding $2.50 and $5.00 warrants for 395,000
                shares of common stock during December 2005;
                and ·
            $8,964,952
                in net proceeds from the sale of common stock and warrants in our
                private
                placement offering, consummated February 24, 2006 and March 1,
                2006.  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,


·
            commence
                development of our direct response marketing advertisements including
                one
                30-minute infomercial and 60-second television commercials,
                and


·
            our
                public relations launch during the period from January 2006 through
                June
                2006.





As
      of
      June 30, 2006, we had a cash balance of $6,028,399, a decrease of $2,824,149
      from the cash balance at March 31, 2006. Net cash used in operations totaled
      $2,747,128 consisting primarily of our loss from operations for the three months
      ended June 30, 2006 of $2,122,889, increases in accounts receivable and
      inventory totaling $939,513 related to the commencement of sales of our products
      and reductions in our outstanding accounts payable balances of $56,142 which
      were offset in part by $208,446 of non cash expenses recorded as a result of
      our
      issuances of common stock and options to purchase our common stock in lieu
      of
      cash payments for such expenses.




Net
      cash
      used in investing activities totaled $72,021 included equipment purchases of
      $65,066 primarily related to our increase in staff and updating of office
      furniture and equipment of $41,064, manufacturing equipment related to our
      seed
      kit manufacturing operations of $17,534 and tooling costs of
      $6,468.





Net
      cash
      used in investing activities totaled $5,000 resulting from repayment of $30,000
      in convertible debt which did not elect the modification options we offered
      in
      January 2006 offset by an exercise by a warrant holder of 10,000 warrants at
      an
      exercise price of $2.50 per share, for a total of $25,000





We
      anticipate that existing cash resources will be sufficient for at least the
      next
      twelve months. We anticipate our principal sources of liquidity during the
      fiscal year ended March 31, 2007 will be proceeds from initial sales of our
      products. To date we have shipped products to Sur La Table, a retailer,
      Frontgate, a nationally recognized catalogue, QVC, the world’s leading
      television retailer and other retailer customers as well as generating sales
      from our own web site. We intend to use our working capital principally to
      purchase inventory, fund our initial media advertising, continuing to fund
      our
      public relations campaign and trade show costs as well as our ongoing overheads
      and operations costs.




20




**Principal
      Commitments**





On
      July
      27, 2006, we entered into a lease with Pawnee Properties, LLC. an unrelated
      company, 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, commencing no later than December 1, 2006. 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. It contains other standard
      office lease provisions.





**Off-Balance
      Sheet Arrangements**





At
      June
      30, 2006, we did not have any transactions, obligations or relationships that
      could be considered off-balance sheet arrangements.





**Item
      3. Controls and Procedures** .





(a) Evaluation
      of Disclosure Controls and Procedures





Disclosure
      controls and procedures are designed to ensure that information required to
      be
      disclosed in the reports filed or submitted by the Company under the Securities
      Exchange Act of 1934 is recorded, processed, summarized and reported, within
      the
      time periods specified in the rules and forms of the Securities and Exchange
      Commission. Disclosure controls and procedures include, without limitation,
      controls and procedures designed to ensure that information required to be
      disclosed in the reports filed under the Securities Exchange Act of 1934 is
      accumulated and communicated to the Company’s management, including its
      principal executive and financial officers, as appropriate, to allow timely
      decisions regarding required disclosure.





The
      Company carried out an evaluation, under the supervision and with the
      participation of its management, including its principal executive officer
      and
      principal financial officer, of the effectiveness of the design and operation
      of
      the Company’s disclosure controls and procedures as of the end of the period
      covered by this report. Based upon that evaluation, our Chief Executive Officer
      and our Chief Financial Officer concluded that there may be material weaknesses
      in our internal controls over financial reporting and that such internal
      controls may not be effective as of the end of the period covered by this report
      related to the Company’s accounting for derivative debt and equity instruments.
      We have addressed these issues by retaining a consultant knowledgeable in this
      area of accounting and are currently in discussion with the SEC to resolve
      these
      accounting issues. The foregoing accounting issues may have a material effect
      on
      the financial statements for the periods presented in this annual
      reports.




(b) Changes
      in Internal Controls




There
      were no changes in the Company’s internal controls or in other factors that
      could have significantly affected those controls subsequent to the date of
      the
      Company’s most recent evaluation.




**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings** .





None.





21




**Item
      2** **.
      Unregistered Sale of Equity Securities.**





None




**Item
      3. Defaults Upon Senior Securities.**





None.





**Item
      4. Submission Of Matters To a Vote of Security Holders.**





None.





**Item
      5. Other Information.**





None.




**Item
      6. Exhibits**





None




22




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act the Registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized.




**AeroGrow
              International Inc.**Date: August
              21, 2006
            
            /s/Michael
              BissonnetteBy:
              Michael BissonnetteIts:
              Chief Executive Officer (Principal Executive
              Officer) and Director


Date: August
              21, 2006
            
            /s/Mitchell
              B.
              RubinBy:
              Mitchell B. RubinIts:
              Chief Financial Officer (Principal Financial
              Officer and PrincipalAccounting
              Officer)




23