**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 DECEMBER 31, 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)




**6075
                Longbow Drive, Suite 200 - Boulder, Colorado**
            
            **80301**(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 x No 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 x





**Number
      of shares of issuer's common stock outstanding as of January 31, 2007:
      9,607,631**





Transitional
      Small Business Disclosure Format (check one). Yes o No x





Documents
      incorporated by reference: None.










**AeroGrow
      International, Inc.**


**TABLE
      OF CONTENTS**


**FORM
      10-QSB REPORT**


**December
      31, 2006**




**PART
                I - FINANCIAL INFORMATION**
            
            **Page****Item
                1. Interim Financial Statements (Unaudited)**Condensed
                Balance Sheets as of December 31, 2006 (Unaudited)
              and
                March 31, 2006
            
            3Condensed
                Statements of Operations for the Three and Nine Months Ended December
                31,
                2006
              and
                December 31, 2005 (Unaudited)
            
            4Condensed
                Statement of Stockholders’ Equity for the Nine Months Ended December 31,
                2006 (Unaudited)
            
            5Condensed
                Statements of Cash Flows for the Nine Months Ended December 31,
                2006
              and
                December 31, 2005 (Unaudited)
            
            6Notes
                to the Condensed Financial Statements
            
            7**Item
                2. Management's Discussion and Analysis****of
                Financial Condition and Plan of Operation**
            
            17**Item
                3. Controls and Procedures**
            
            24**PART
                II - OTHER INFORMATION****Item
                1. Legal Proceedings**
            
            25**Item
                2. Unregistered Sale of Equity Securities**
            
            25**Item
                3. Defaults Upon Senior Securities**
            
            25**Item
                4. Submission of Matters to a Vote of Security
                Holders**
            
            25**Item
                5. Other Information**
            
            25**Item
                6. Exhibits**
            
            25**Signatures**
            
            26


-2-




**PART
      I - FINANCIAL INFORMATION**


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





**AEROGROW
      INTERNATIONAL, INC.**


**CONDENSED
      BALANCE SHEETS**




**December
                31,**
            
            **March
                31,****2006**
            
            **2006****ASSETS**
            
            (Unaudited)Current
                assetsCash
            
            $
            1,740,327
            
            $
            8,852,548Restricted
                cash
            
            
            161,609
            
            
            -Accounts
                receivable, net of allowance for doubtful accountsof
                $14,627 and $0 at December 31, 2006 and March 31, 2006,
                respectively
            
            
            1,636,722
            
            
            43,156Inventory
            
            
            1,334,126
            
            
            192,946Prepaid
                expenses and other
            
            
            343,898
            
            
            199,590Total
                current assets
            
            
            5,216,682
            
            
            9,288,240Property
                and equipment, net of accumulated depreciation ofof
                $235,197 and $102,043 at December 31, 2006 and March 31, 2006,
                respectively
            
            
            873,344
            
            
            480,771Other
                assetsDebt
                issuance costs, net of $419,471 and $373,853 accumulatedamortization
                at December 31, 2006 and March 31, 2006, respectively
            
            
            -
            
            
            45,618Intangible
                assets, net of $4,851 and $1,071 of accumulatedamortization
                at December 31, 2006 and March 31, 2006, respectively
            
            
            22,565
            
            
            21,696Deposits
            
            
            36,569
            
            
            4,684Total
                other assets, net
            
            
            59,134
            
            
            71,998**Total
                Assets**
            
            $
            6,149,160
            
            $
            9,841,009**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            1,534,410
            
            $
            487,474Accrued
                expenses
            
            
            1,255,888
            
            
            334,524Deferred
                rent
            
            
            22,039
            
            
            -Convertible
                debentures, net of discounts of$0
                and $196,781 at December 31, 2006 and March 31, 2006,
                respectively
            
            
            840,000
            
            
            792,539Mandatorily
                redeemable common stock
            
            
            -
            
            
            310,000Total
                current liabilities
            
            
            3,652,337
            
            
            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,9,607,631
                and 9,102,622 shares issued and outstandingat
                December 31, 2006 and March 31, 2006, respectively
            
            
            9,607
            
            
            9,103Additional
                paid-in capital
            
            
            30,282,821
            
            
            27,313,081Accumulated
                deficit
            
            
            (27,795,605
            )
            
            (19,405,712
            )Total
                Stockholders' Equity
            
            
            2,496,823
            
            
            7,916,472**Total
                Liabilities and Stockholders' Equity**
            
            $
            6,149,160
            
            $
            9,841,009





See
      accompanying notes to the condensed financial statements




-3-




**AEROGROW
      INTERNATIONAL, INC.**


**CONDENSED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**





Three
                months ended
              December
                31,
            
            Nine
                months ended
              December
                31,2006
            
            2005
            
            2006
            
            2005RevenueProduct
                sales, net
            
            $
            4,857,604
            
            $
            -
            
            $
            6,709,858
            
            $
            -Operating
                expensesCost
                of revenue
            
            
            3,282,291
            
            
            -
            
            
            4,785,151
            
            
            -Research
                and development
            
            
            700,111
            
            
            584,074
            
            
            1,544,495
            
            
            1,272,639Sales
                and marketing
            
            
            1,965,578
            
            
            203,822
            
            
            4,285,849
            
            
            555,622General
                and administrative
            
            
            1,042,537
            
            
            976,234
            
            
            2,671,939
            
            
            2,408,819Total
                operating expenses
            
            
            6,990,517
            
            
            1,764,130
            
            
            13,287,434
            
            
            4,237,080Loss
                from operations
            
            
            (2,132,913
            )
            
            (1,764,130
            )
            
            (6,577,576
            )
            
            (4,237,080
            )Other
                (income) expense, netInterest
                (income)
            
            
            (12,646
            )
            
            (13,542
            )
            
            (157,508
            )
            
            (33,171
            )Interest
                expense
            
            
            101,841
            
            
            675,891
            
            
            305,445
            
            
            1,225,961Loss
                on modification of debt
            
            
            -
            
            
            110,769
            
            
            -
            
            
            1,446,200Registration
                rights penalty
            
            
            636,130
            
            
            -
            
            
            1,664,380
            
            
            -Total
                other (income) expense, net
            
            
            725,325
            
            
            773,118
            
            
            1,812,317
            
            
            2,638,990Net
                loss
            
            $
            (2,858,238
            )
            $
            (2,537,248
            )
            $
            (8,389,893
            )
            $
            (6,876,070
            )Net
                loss per share, basic and diluted
            
            $
            (0.30
            )
            $
            (0.48
            )
            $
            (0.90
            )
            $
            (1.39
            )Weighted
                average number of common shares outstanding, basic and
                diluted
            
            
            9,501,095
            
            
            5,257,042
            
            
            9,304,380
            
            
            4,958,842




See
      accompanying notes to the condensed financial statements





-4-




**AEROGROW
      INTERNATIONAL, INC.**


**CONDENSED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**(Unaudited)**





AdditionalCommon
                Stock
            
            Paid-in
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            (Deficit)
            
            Total**Balances,
                April 1, 2006**
            
            
            9,102,622
            
            $
            9,103
            
            $
            27,313,081
            
            $
            (19,405,712
            )
            $
            7,916,472Exercise
                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 under equity compensation plans to employees
            
            
            24,544
            
            
            24
            
            
            120,196
            
            
            -
            
            
            120,220Common
                stock issued under equity compensation plans to
                consultants
            
            
            34,650
            
            
            35
            
            
            175,715
            
            
            -
            
            
            175,750Common
                stock issued under equity compensation plans to directors
            
            
            6,000
            
            
            6
            
            
            29,994
            
            
            -
            
            
            30,000Common
                stock issued to landlord as rent
            
            
            8,872
            
            
            9
            
            
            44,351
            
            
            -
            
            
            44,360Repurchase
                of common stock
            
            
            (3,000
            )
            
            (3
            )
            
            (14,997
            )
            
            -
            
            
            (15,000
            )Stock
                options issued under equity compensation plans
            
            
            -
            
            
            -
            
            
            404,965
            
            
            -
            
            
            404,965Accretion
                of loss on modification of debt
            
            
            -
            
            
            -
            
            
            119,319
            
            
            -
            
            
            119,319Common
                stock to be issued for registration rights penalty
            
            
            332,876
            
            
            332
            
            
            1,664,048
            
            
            -
            
            
            1,664,380Mandatory
                redeemable common stock converted
            
            
            62,000
            
            
            62
            
            
            309,938
            
            
            -
            
            
            310,000Adjustment
                for error in prior period warrant exercise
            
            
            67
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            (8,389,893
            )
            
            (8,389,893
            )**Balances,
                December 31, 2006**
            
            
            9,607,631
            
            $
            9,607
            
            $
            30,282,821
            
            $
            (27,795,605
            )
            $
            2,496,823




See
      accompanying notes to the condensed financial statements


-5-





**AEROGROW
      INTERNATIONAL, INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**


**Nine
                months ended****December
                31,****2006**
            
            **2005****Cash
                flows from operating activities:**Net loss
            
            $
            (8,389,893
            )
            $
            (6,876,070
            )Adjustments to reconcile net loss to cash provided(used) by operations:Registration
                rights penalty
            
            
            1,664,380
            
            
            -Issuance
                of common stock and options underequity
                compensation plans
            
            
            730,935
            
            
            1,130,267Issuance
                of common stock to landlord for rent
            
            
            44,360
            
            
            -Depreciation
                and amortization expense
            
            
            136,935
            
            
            51,861Allowance
                for bad debt
            
            
            14,627
            
            
            -Amortization
                of debt issuance costs
            
            
            45,618
            
            
            209,737Accretion
                of convertible debentures
            
            
            81,563
            
            
            375,000Interest
                expense associated with warrants issued with convertible
                debentures
            
            
            115,218
            
            
            529,740Effects
                of variable accounting for modification of warrant terms
            
            
            -
            
            
            1,446,200Change in assets and liabilities:Increase
                in accounts receivable
            
            
            (1,608,193
            )
            
            -Increase
                in inventory
            
            
            (1,141,180
            )
            
            (19,480
            )Increase
                in other current assets
            
            
            (144,308
            )
            
            (911,163
            )Increase
                in deposits
            
            
            (31,885
            )
            
            -Increase
                in accounts payable
            
            
            1,046,936
            
            
            152,671Increase
                in deferred rent
            
            
            22,039
            
            
            -Increase
                in accrued expenses
            
            
            921,364
            
            
            360,812Net
                cash used by operating activities
            
            
            (6,491,484
            )
            
            (3,550,425
            )**Cash
                flows from investing activities:**Increase
                in restricted cash
            
            
            (161,609
            )
            
            -Purchases
                of equipment
            
            
            (525,729
            )
            
            (410,379
            )Patent
                expenses
            
            
            (4,649
            )
            
            (20,407
            )Net
                cash used by investing activities
            
            
            (691,987
            )
            
            (430,786
            )**Cash
                flows from financing activities:**Stock
                repurchase
            
            
            (15,000
            )
            
            -Increase
                in due to parent company
            
            
            -
            
            
            28,500Proceeds
                from issuance of common stock, net
            
            
            -
            
            
            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 convertible debentures
            
            
            -
            
            
            (419,474
            )Net
                cash provided by financing activities
            
            
            71,250
            
            
            3,664,526Net
                decrease in cash
            
            
            (7,112,221
            )
            
            (316,685
            )Cash,
                beginning of period
            
            
            8,852,548
            
            
            1,265,811Cash,
                end of period
            
            $
            1,740,327
            
            $
            949,126**Supplemental
                disclosure of non-cash investing and financing
                activities:**Interest
                paid
            
            $
            63,500
            
            $
            111,487Income
                taxes paid
            
            $
            -
            
            $
            -Accretion
                of debt modification
            
            $
            119,319
            
            $
            -Issuance
                of common stock for equipment purchases
            
            $
            -
            
            $
            30,000Conversion
                of manditorily redeemable common stock
            
            $
            310,000
            
            $
            -




See
      accompanying notes to the condensed financial statements


-6-


**AEROGROW
      INTERNATIONAL INC.**


**NOTES
      TO THE CONDENSED FINANCIAL STATEMENTS**


**(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 March 2006, the Company commenced
      initial marketing and distribution of its products and has expanded these
      marketing efforts to encompass retail, home shopping, catalogue, international,
      and direct to consumer sales channels. Prior to March 2006, 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 before the merger will continue
      to 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 warrant
      to purchase one share of common stock expiring February 2011 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 financial statements
      reflect all adjustments, including normal recurring accruals, necessary to
      present fairly the financial position of the Company at December 31, 2006,
      the
      results of operations for the three and nine months ended December 31, 2006
      and
      2005, and the cash flows for the nine months ended December 31, 2006 and 2005.
      The results of operations for the three and nine months ended December 31,
      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 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 (“SEC”).





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,” (“EPS”) and Securities and Exchange
      Commission SEC Staff Accounting Bulletin (“SAB”) 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.






-7-
 
  **AEROGROW
          INTERNATIONAL INC.**
 **NOTES
          TO THE CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**


Reclassifications


Certain
      prior period amounts have been reclassified to conform to current period’s
      presentation.




Concentration
      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 10%.





Restricted
      Cash


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 December 31,
      2006, the balance in this reserve account was $78,161. In addition, 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 December
      31, 2006 was $83,448.





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 delivered
      cost.





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




Accounts
      Receivable and Allowance for Doubtful Accounts


The
      Company sells its products to retailers and consumers. Consumer transactions
      are
      paid primarily by credit card and are recognized as revenue once our applicable
      trial period has expired (See “Revenue Recognition”). Sales to retailers vary by
      customer, however, generally are on net 30 day terms. 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. There was no allowance recorded at March 31, 2006.
      As
      of December 31, 2006, the Company had recorded an allowance for bad debts of
      $14,627.





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.




-8-




**AEROGROW
        INTERNATIONAL INC.**
 **NOTES
        TO THE CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**


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 (“FASB”) issued SFAS No.
      123R, “Share-Based Payment.” Subsequently, the SEC provided for a phase-in
      implementation process for SFAS No. 123(R), which required adoption of the
      new
      accounting standard no later than January 1, 2006. SFAS No. 123(R) requires
      accounting for stock options using a fair-value-based method as described in
      such statement and recognition of 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. The Company adopted SFAS No. 123(R) 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. 123(R).





Income
      Taxes


The
      Company accounts for deferred income taxes in accordance with the liability
      method as required by SFAS No. 109 "Accounting for Income Taxes". 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 nine months ended December 31, 2006 and 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 $354,050 of revenue
      as of December 31, 2006 related to the unpaid balance due for orders shipped
      in
      conjunction with the Company’s direct sales to consumers which allow the
      consumer thirty 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 day trial period. The Company also, as of
      December 31, 2006, did not record $102,480 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 December 31, 2006 and March 31, 2006, the Company
      had
      accrued $212,268 and $0, respectively, as its estimate for the foregoing
      deductions and allowances.





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 December
      31,
      2006 a provision for potential future warranty costs of $5,850.






-9-




**AEROGROW
        INTERNATIONAL INC.**
 **NOTES
        TO THE CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**


The
      Company reserves for potential returns from customers and associated refunds
      or
      credits related to such returns based upon historical experience. As of December
      31, 2006, the Company has recorded a reserve for customer returns of
      $173,030.





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 product 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 December 31, 2006,
      the
      Company had recorded deferred rent related to this agreement in the amount
      of
      $22,039, 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 3) 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 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. The Company has elected to
      recognize the impact of such registration rights penalties as incurred, which
      commenced after July 23, 2006 (see Note 3 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 becomes
      effective for the year beginning December 15, 2006. The Company is assessing
      this FSP and will adopt it for fiscal 2007. The Company does not expect the
      adoption to have a significant difference in its current policy.




3. 
**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 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. The Unsecured Convertible
      Promissory Notes bear interest at the rate of 10% per annum which is payable
      quarterly beginning September 30, 2005. The principal was originally due on
      September 30, 2006. During the fifteen days following the completion of an
      additional financing, each note holder had 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
      received 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 2005 Offering. 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 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. 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 74,250 shares of common stock valued at $371,250.





-10-




**AEROGROW
        INTERNATIONAL INC.**
 **NOTES
        TO THE CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**




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 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 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
      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 which 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 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. 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, as of December 31, 2006 $2,130,000 converted to
      common stock, $30,000 was due on June 30, 2006 and was repaid on that date
      and
      $840,000 was due on March 31, 2007 after the Company granted and the investors
      accepted an additional three month extension of the previously modified maturity
      date.


-11-




**AEROGROW
        INTERNATIONAL INC.**
 **NOTES
        TO THE CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**
  The
        balance presented for the convertible debentures, net of discounts, as of
        December 31, 2006 and March 31, 2006 is as follows:




**December
                31,**
            
            **March
                31,****2006**
            
            **2006**Convertible
                debentures outstanding
            
            $
            840,000
            
            $
            870,000Loss
                on modification of debt, net of $132,578 and $13,258 accretion to
                additional paid in capital as of December 31, 2006 and March 31,
                2006,
                respectively
            
            
            -
            
            
            119,320Discount
                as a result of beneficial conversion feature, net of amortization
                of
                $750,000 and $668,437 as of December 31, 2006 and March 31, 2006,
                respectively
            
            
            -
            
            
            (81,563
            )Discount
                as a result of fair value of warrants issued, net of amortization
                of
                $1,059,480 and $944,262 as of December 31, 2006 and March 31, 2006,
                respectively
            
            
            -
            
            
            (115,218
            )Net
                balance
            
            $
            840,000
            
            $
            792,539




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 was
      administered by the Board of Directors, which had 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
      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 (the “2005
      Plan”) and it no longer separately exists. However, options issued and
      outstanding under the Plan continue to be governed by their grant agreements
      but
      are administered under the 2005 Plan.





In
      August
      2005, the Company’s Board of Directors approved 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 $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 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-




**AEROGROW
        INTERNATIONAL INC.**
 **NOTES
        TO THE CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**


On
      June
      28, 2006, the Company granted to one employee options to purchase 125,000 shares
      of the Company’s common stock at an exercise price of $5.00 per share under the
      2005 Plan which will vest 50% on the 12 month anniversary of the grant and
      12.5%
      for each of the next four three-month periods. On September 25, 2006, the
      Company granted to one employee options to purchase 10,000 shares of the
      Company’s common stock at an exercise price of $5.00 per share under the 2005
      Plan which will vest pro rata over a two year period. In December 2006, the
      Company granted to two employees options under the 2005 Plan to purchase 4,000
      shares of the Company’s common stock at an exercise price of $5.00 per share
      which will vest pro rata over a two year period and 3,500 shares of the
      Company’s common stock at an exercise price of $5.00 per share which were vested
      upon issuance. The Company 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.





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 nine months
      ended December 31, 2006 was $404,965 greater than if the Company had continued
      to account for stock options under APB No. 25.





Information
      regarding employee stock options outstanding as of December 31, 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
            
            
            2.42
            
            
            30,618Over
                $0.50 to $2.50
            
            
            137,259
            
            $
            1.57
            
            
            2.22
            
            
            137,259$5.00
            
            
            1,083,614
            
            $
            5.00
            
            
            4.47
            
            
            952,1521,251,491
            
            $
            4.51
            
            
            4.00
            
            
            1,120,029





In
      addition to option grants, during the nine months ended December 31, 2006 the
      Company granted under the 2005 Plan a total of 65,194 shares of common stock
      at
      a fair value of $5.00 per share, consisting of 24,544 shares granted and issued
      to employees, 34,650 shares granted to consultants for services, 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 were charged to operating expenses for the
      nine
      months ended December 31, 2006 resulting in a total charge of
      $325,970.





Information
      regarding the Company’s equity compensation plans at December 31, 2006 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 issuanceEquity
                compensation plans approved by security holders
            
            
            1,251,491
            
            $
            4.51
            
            
            129,646Equity
                compensation plans not approved by security holders
            
            
            -
            
            $
            -
            
            
            -Total
            
            
            1,251,491
            
            $
            4.51
            
            
            129,646







-13-




**AEROGROW
        INTERNATIONAL INC.**
 **NOTES
        TO THE CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**




At
      December 31, 2006, the Company has granted options for 131,462 of the Company’s
      common stock that are unvested that will result in $584,530 of compensation
      expense in future periods if fully vested.





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





Nine
                months endedDecember
                31, 2005,(Unaudited)Net
                loss, as reported
            
            $
            (6,876,070
            )Net
                income (loss) per share, basic and diluted, as reported
            
            $
            (1.39
            )Deduct:
                Stock-based compensation expense, as determined under fair-value
                based
                method for all employee awards
            
            $
            (177,127
            )Pro
                forma net loss
            
            $
            (7,053,197
            )Pro
                forma net income (loss) per share, basic and diluted
            
            $
            (1.42
            )




5. 
**Related
      Party Transactions**


During
      the nine months ended December 31, 2006, the Company paid consulting fees
      totaling $62,922 to one of its director for services related to the development
      of an international channel of distribution for the Company’s products and other
      consulting services.





Also
      during the nine months ended December 31, 2006, the Company incurred fees
      totaling $600,094 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 Randy Seffren, 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.





For
      the
      nine months ended December 31, 2006 and December 31, 2005, a director of the
      Company, who is a partner in a law firm, was paid legal fees of $17,593 and
      $18,000, respectively (for each period).





During
      the nine month period ended December 31, 2005, the Company retained one member
      of its board as a consultant who was granted stock options, common stock and
      fees for financial services provided totaling $264,291.





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





Each
      of
      the Company’s four directors not employed by the Company received $1,500
      representing compensation for attendance at three Board of Director meetings
      at
      the rate of $500 each meeting.




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.




-14-


**AEROGROW
        INTERNATIONAL INC.**
 **NOTES
        TO THE CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**




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 nine months ended December 31, 2006, the Company issued 65,194 shares of
      common stock under its 2005 Plan including 5,000 shares to the Company’s Chief
      Financial Officer as additional compensation, 18,044 shares to other employees
      and 36,150 shares to consultants.





During
      the nine months ended December 31, 2006, 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.





The
      holders of securities issued in the private placement offering, as well the
      convertible debt offering as described in Note 3, 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 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
      of the 2006 Offering (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 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 the 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 such holder pursuant to this Agreement up to a maximum
      of
      18% of the aggregate purchase price paid by such holder, provided that
      liquidation damages in respect of a Suspension Default shall not be payable
      in
      relation to any securities not owned by such holder 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 such registration was declared effective
      on
      December 22, 2006. The Company recorded penalties for (b) above with regard
      to the 2006 Offering through December 22, 2006, the date the registration was
      declared effective, of 258,626 shares of common stock valued at $1,293,130
      which, when added to the similar penalties incurred for the convertible debt
      offering as described in Note 3 total. 332,876 shares of common stock with
      a
      total value of $1,664,380.




7. 
**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 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’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.





-15-




**AEROGROW
        INTERNATIONAL INC.**
 **NOTES
        TO THE CONDENSED FINANCIAL STATEMENTS**
 **(Unaudited)**


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





**Year
                Ended**
            
            **Rent**March
                31, 2007
            
            $
            48,877March
                31, 2008
            
            $
            296,848March
                31, 2009
            
            $
            316,253March
                31, 2010
            
            $
            325,152March
                31, 2011
            
            $
            327,047







8. 
**Segment
      Information and Concentrations**




The
      Company’s only operating segment consists of sales of its aeroponic garden
      systems and peripheral products.





During
      the nine months ended December 31, 2006, the Company utilized one manufacturer
      for 100% of its manufacturing of its aeroponic garden systems which accounted
      for $2,573,464 or 54% of cost of sales. Goods produced by this manufacturer
      in
      inventory at December 31, 2006 totaled $721,878 or 54% of inventory. As of
      December 31, 2006, the Company had paid cash deposits to this manufacturer
      for
      goods not yet shipped totaling $214,196 which are included in prepaid expenses,
      and had outstanding accounts payable to this manufacturer as of December 31,
      2006 of $280,882 or 18% of the accounts payable balance.





During
      the nine months ended December 31, 2006, the Company had two customers which
      accounted for 19% ($1,303,949) and 15% ($1,019,629), respectively, of its
      product sales. During the three months ended December 31, 2006, the same two
      customers accounted for 19% ($929,544) and 12% ($562,733), respectively, of
      its
      product sales. These same two customers accounted for 15% ($248,466) and 19%
      ($314,643) of the Company’s outstanding accounts receivable at December 31,
      2006.




9. 
**Subsequent
      Event**


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 rate plus 3% (11.25% at
      February 9, 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.


-16-




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





The
      discussion contained herein is for the three and nine months ended December
      31,
      2006 and 2005. The following discussion should be read in conjunction with
      the
      financial statements of AeroGrow International, Inc. (the “Company”) and the
      notes to the financial statements included elsewhere in this Quarterly Report
      on
      Form 10-QSB for the quarterly period ended December 31, 2006. The following
      discussion contains forward-looking statements within the meaning of Section
      27A
      of the Securities Act of 1933 (the “Securities Act”), as amended, and Section
      21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
      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 (the
      “SEC”) and the Form SB-2/A filed with the SEC December 22, 2006. 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 December 31, 2006. The
      information contained in this Quarterly Report on Form 10-QSB for the quarterly
      period ended December 31, 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 December 31, 2006 and in the Company’s other filings with the
      SEC.





**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
      including plants and accessories for use with such systems. Since formation
      and
      through our development stage which ended in March 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 two third-party manufacturers who
      have commenced production activities and we have actively began sales activities
      as of March 2006. To date, we have manufactured and taken delivery of over
      100,000 units. We commenced our 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 Statement
      of Financial Accounting Standards (“SFAS”) SFAS 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 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.





-17-




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 warrant to purchase one
      share of common stock expiring February 2011 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.





Inventory


Inventories
      are valued at the lower of cost, determined by the first-in, first-out method,
      or market. Included in inventory costs where we are the manufacturer are 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. A majority of our
      products are manufactured overseas and are recorded at delivered
      cost.





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




Stock
      Based Compensation


In
      December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R),
      “Share-Based Payment.” Subsequently, the SEC provided for a phase-in
      implementation process for SFAS No. 123(R), which required adoption of the
      new
      accounting standard no later than January 1, 2006. SFAS No. 123(R) requires
      accounting for stock options using a fair-value-based method as described in
      such statement and recognition of 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 Accounting Principles Board
      (“APB”) 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. 123(R) 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. 123(R). The adoption of SFAS No. 123(R) has increased
      net
      loss by $404,965 for the nine months ended December 31, 2006 as compared to
      using our prior method under APB 25.





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. Accordingly, we deferred $354,050 of revenue as of December
      31, 2006 related to the unpaid balance due for orders shipped in conjunction
      with our direct sales which allow the customer thirty 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
      day
      trial period. We also deferred, as of December 31, 2006, recognition of $102,480
      of product costs associated with such revenue in as much as the customer is
      required to return the product to us and we are 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.





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   At December 31, 2006, and at March 31, 2006, we had
      accrued $212,268 and $0, respectively.






-18-





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 $2.00 per share. On December 21, 2006, the FASB
      FSP EITF 00-19-2 that addresses the accrual and accounting for registration
      rights penalties becomes effective for the year beginning December 15, 2006.
      The
      Company is assessing this FSP and will adopt it for fiscal 2007. The Company
      does not expect the adoption to have a significant difference in its current
      method.





**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 twelve months will be to expand our marketing efforts in each of these
      channels for our kitchen garden systems and peripheral products. Our
      infomercial, a thirty minute video presentation of the product, has been
      completed and commenced test airings on national cable and local broadcast
      television stations in September 2006. We have completed initial test airings
      of
      the infomercial and we plan to continue to broadcast our infomercial throughout
      2007. It is our expectation that the exposure for our products and services
      that
      will be generated through the infomercial and other direct response marketing
      advertising will broaden our brand and product recognition in our other channels
      of distribution. In July 2006, we were featured on QVC, the world’s largest
      television retailer and have had four additional airings since that time, with
      further times scheduled through April 2007, including a scheduled airing which
      will feature a new model of our kitchen garden system 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 our products. We also to continue to expand our retail
      distribution with over 650 retail stores to date carrying our products
      nationwide in multiple channels including housewares, culinary, lawn and garden
      and department stores. Included in the foregoing is an initiative launched
      in
      September 2006 which focused on generating a high level of awareness and product
      visibility in the New York metropolitan market. This initiative included
      securing high profile merchandising for our products from leading retailers
      in
      the New York area such as Macy’s, Bed, Bath and Beyond, Linens ‘n Things and
      others for the fourth quarter 2006 holiday season. This initiative was promoted
      in New York using our infomercial and other television media to promote sales
      at
      the participating retail locations and has resulted in several of these major
      retailers electing to continue merchandising our products after the holiday
      season, as well as increasing the number of storefronts carrying the AeroGarden
      product line. 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
      begun to build our international distributor network and have entered into
      agreements to date with distributors in Mexico and Canada. On September 1,
      2006,
      we retained the services of a consultant in London to assist us in developing
      our international distributor network in Europe and Asia. We anticipate
      finalizing distribution agreements in key markets such as Japan, Germany and
      the
      United Kingdom by the end of March 2007 and having models of our kitchen garden
      products compatible with European and Asian regulatory and electrical
      requirements completed and available for distribution during the early part
      of
      the second calendar quarter of 2007.





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, a 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. We have
      begun development and, in some cases have completed final design and tooling,
      of
      new models of our AeroGarden kitchen appliance, including models that include
      additional features and finishes which are designed to retail for higher price
      points than our current system as well models which will have smaller growing
      capacities and require smaller counter space designed to retail for lower retail
      price points. These lower priced products are intended to be introduced into
      specialty channels of distribution such as children’s products (the magic
      garden) office products (office garden) pet market (the Cat Café for cat grass
      and catnip) and home beauty and décor market (the scented, wild flower and baby
      rose gardens). We also continue to enhance our offerings of seed kits and
      accessories, with available seed kits growing from six that were available
      in
      March 2006 to over twelve by March 2007, including the sale and distribution
      of
      live strawberry plants developed to grow in the AeroGarden system. We also
      have
      expanded our accessories to include the wall garden allowing shelving units
      that
      enable users to mount multiple from one to three AeroGardens systems on the
      wallvertically in less than a 16 inches. Consumers can mount up to 3 of these
      wall gardens (9 units) 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.






-19-




In
      addition to expanding our sales and distribution, we are also expanding our
      manufacturing activities, which began in January 2006 for pilot production,
      both
      in terms of capacity at our current contract manufacturer as well as with
      additional contract manufacturer. We have commenced production at this new
      facility beginning January 2007 and, in February 2007, authorized the building
      of a second set of tooling which will enable capacity at this manufacturer
      to
      reach 100,000 units per month. In addition, we are increasing research
      and development and our production capacity for our 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.





We
      have
      completed development of many of our marketing materials, including our website,
      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.





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 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
      nine
      months ended December 31, 2006 represented our first nine months of revenues
      from operations. Initial shipments of our products began in March 2006. During
      our first holiday selling season, we experienced higher than anticipated demand
      for our products and accordingly were unable to fully meet customer demands
      both
      from retailers (“Retail Sales”) as well as direct sales to consumer (“Direct
      Sales”). As a result, we had orders from retailers totaling $305,000 and direct
      orders from consumers totaling $205,000 that we were unable to ship by December
      31, 2006. Further, during the months of November and December 2006, we elected
      to expedite shipping of 9,615 units of our AeroGarden units from our factory
      in
      China by air rather than by sea in order to satisfy customer demands at an
      incremental airfreight cost of $27 per unit, a total additional freight cost
      of
      $259,600 which was included in Cost of Revenue for the three and nine months
      ended December 31, 2006.





For
      the
      three and nine months ended December 31, 2006, net sales totaled $4,857,604
      and
      $6,709,858, respectively. There were no sales in the prior year. 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 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 day trial period. Accordingly, we have not recorded
      $354,050 of revenue as of December 31, 2006 related to the unpaid balance due
      for such orders shipped prior to December 31, 2006. We also deferred recognition
      of $102,480 of product costs associated with the foregoing revenue in as much
      as
      the customer is required to return the product to us and we are able to recover
      these costs through resale of the goods. An analysis of our sales is as
      follows:





Three
                months
            
            Nine
                monthsended
            
            endedDecember
                31, 2006Direct
                Sales, net
            
            $
            1,314,174
            
            $
            1,673,483Retail
                Sales, net
            
            
            3,543,430
            
            
            5,036,375$
            4,857,604
            
            $
            6,709,858





During
      the nine months ended December 31, 2006, we had two retail customers who
      accounted for 19% ($1,303,949) and 15% ($1,019,629), respectively, of our net
      sales. During the three months ended December 31, 2006, the same two retail
      customers accounted for 19% ($929,544) and 12% ($562,733), respectively, of
      our
      net sales.






-20-





Cost
      of
      revenues for the three and nine months ended December 31, 2006 totaled
      $3,282,291 and $4,785,151, representing 68% and 71% of revenues, respectively.
      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. Included
      in
      cost of revenues for the three months ended December 31, 2006, is approximately
      $140,000 in incremental airfreight costs for the initial shipments of our
      products and approximately $259,600 in incremental airfreight costs related
      to
      expediting deliveries resulting from higher than expected demand for our
      products during the holiday season. This shipping practice is not expected
      to be
      a recurring method of transportation for our products. During the nine months
      ended December 31, 2006, product costs were also impacted by the worldwide
      increasing costs of plastics and copper. We have seen improvement in the costs
      of plastics in recent months and as a result have realized a 4% reduction in
      our
      product cost subsequent to December 31, 2006. Further, in as much as inbound
      freight from our manufacturers as well as outbound freight to our customers
      both
      are included in our cost of sales, we have determined that our third party
      warehouse and fulfillment facility based in Reno, Nevada was not efficient
      in
      minimizing such freight costs. Effective January 1, 2007, we terminated our
      agreement with the facility in Reno and entered into a new agreement with a
      warehouse facility near Los Angeles, California. We anticipate this change
      will
      result in savings of 10% to 15% in our freight and distribution costs. We also
      experienced higher than anticipated costs in the startup of our seed kit
      manufacturing operations which we anticipate will decline in future periods
      as
      efficiencies in manufacturing seed kits due to improvements in both process
      and
      volume are realized.





Gross
      margins will vary based upon the ratio of Direct Sales, where 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 three and nine months ended December
      31,
      2006 were $1,575,313 and $1,924,707 representing 32% and 29% of revenues,
      respectively. Affecting gross margins for the three and nine months ended
      December 31, 2006, as discussed above, were airfreight costs of $259,600 and
      $399,600 respectively, reducing gross margins by 5% and 6% respectively. With
      the addition of the new manufacturing capability, we expect to have sufficient
      manufacturing capacity to avoid such airfreight costs in the future. Also
      effecting gross margins were increases in the manufactured costs due to costs
      associated with plastics of our AeroGarden as discussed above which have
      improved by 4% of current product cost manufactured in China from that which
      was
      incurred during the three and nine months ended December 31, 2006. Further
      reductions in manufacturing cost are anticipated for the next twelve months
      based upon new integrated microprocessors which would reduce the cost of current
      electronic components. 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 60% cost savings for such seed kits as
      compared to current manufacturing costs in Colorado.





During
      the three and nine months ended December 31, 2006 we incurred $700,111 and
      $1,544,495 in research and development costs as compared to $584,074 and
      $1,272,639 for the three and nine months ended December 31, 2005, an increase
      of
      $116,037 and $271,856, or 20% and 21%, respectively. We continue to allocate
      additional resources to the development, design and technology of various new
      prototype models as well as expansion of our greenhouse and laboratory to
      measure the success of various seeds, cuttings and nutrients under different
      conditions and testing new plant varieties for additional seed kits. A
      significant component of the increase for the nine months ended December 31,
      2006 over the nine months ended December 31, 2005 is $329,595 in non-cash
      compensation expense recognized as a result of stock options granted and common
      stock issued during the period to personnel engaged in our research and
      development activities. Partially offsetting this increase is the cost savings
      associated with research and development resources available to us through
      our
      new manufacturer including resources for design, prototyping and regulatory
      approvals.





Sales
      and
      marketing costs for the three and nine months ended December 31, 2006 totaled
      $1,965,578 and $4,285,849 as compared to $203,822 and $555,622 for the three
      and
      nine months ended December 31, 2005, an increase of $1,761,756 and $3,730,227,
      or 864% and 671%, respectively. Sales and marketing costs for the nine months
      ended December 31, 2006 include all costs associated with the media cost for
      airings of our infomercial and other direct response advertisements which
      totaled $630,714, $687,241 in costs associated with the production of our
      infomercial, $176,981 in advertising and other promotional allowances granted
      to
      our retail customers, $161,699 in public relations costs, $311,592 in
      commissions to sales representatives for sales to our retail customers and
      $167,897 in other advertising and promotional costs. Further, a significant
      component of the increase on sales and marketing for the nine months ended
      December 31, 2006 over the nine months ended December 31, 2005 is $237,488
      in
      non-cash compensation expense recognized as a result of stock options granted
      and common stock issued during the period to personnel engaged in our sales
      and
      marketing activities.





General
      and administrative costs for the three months ended December 31, 2006 totaled
      $1,042,537 as compared to $976,234 for the three months ended December 31,
      2005,
      an increase of $66,303 or 7%. For the nine months ended December 31, 2006,
      general and administrative costs totaled $2,671,939 as compared to $2,408,819
      for the nine months ended December 31, 2005, an increase of $263,120 or 11%.
      Contributing to the increases for the three and nine months ended December
      31,
      2006 are approximately $176,000 in legal and consulting costs associated with
      our efforts to complete the registration of the 6,700,900 shares of common
      stock
      and the shares of common stock underlying warrants and convertible debt
      associated with our 2005 convertible debt offering and our 2006 private
      placement offering. Also impacting general and administrative costs during
      the
      three months ended December 31, 2006 were approximately $50,000 in moving and
      related costs as a result of our relocation to our new 21,012 square foot
      corporate headquarters.






-21-




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.





-22-


**Liquidity
      and Capital Resources**





Prior
      to
      March 2006, we had been funded primarily from 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, 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,


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


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




As
      of
      December 31, 2006, we had a cash balance of $1,740,327, a decrease of $7,112,221
      from the cash balance at March 31, 2006. Net cash used in operations totaled
      $6,491,484, consisting primarily of our net loss for the nine months ended
      December 31, 2006 of $8,389,893 less non cash charges to net loss including
      registration rights penalties totaling $1,664,380, non cash compensation in
      the
      form of common stock and stock options under our 2005 Equity Compensation Plan
      totaling $730,935, increases in accounts receivable of $1,608,193 and increases
      in inventory totaling $1,141,180.





Net
      cash
      used by investing activities of $691,987 included equipment purchases of
      $525,729 primarily related to our increase in staff, updating of computers,
      office furniture and equipment, leasehold improvements to our new corporate
      headquarters occupied in November 2006, manufacturing equipment related to
      our
      seed kit manufacturing operations and tooling costs. A summary of the increase
      to property and equipment is as follows:





December
                31, 2006
            
            March
                31, 2006
            
            IncreaseComputers
            
            $
            117,188
            
            $
            88,681
            
            $
            28,507Machinery
                & Equipment
            
            
            110,289
            
            
            77,743
            
            
            32,546Office
                Furniture & Equipment
            
            
            170,437
            
            
            68,651
            
            
            101,786Tooling
                & Molds
            
            
            607,943
            
            
            347,739
            
            
            260,204Leasehold
                improvements
            
            
            102,686
            
            
            -
            
            
            102,686$
            1,108,543
            
            $
            582,814
            
            $
            525,729





Restricted
      cash increased by $161,609 due to the Company’s increased credit sales related
      to its direct response activities and other restricted cash held in a money
      market account as security for the Company’s corporate credit card purchase
      account.





Net
      cash
      provided by financing activities totaled $71,250 resulting from exercises by
      two
      warrant holders of 34,000 warrants at an exercise price of $2.50 per share,
      for
      a total of $85,000 and an exercise of 5,000 warrants at an exercise price of
      $6.25 per share, for a total of $31,250 offset by repayment of $30,000 in
      convertible debt which did not elect the modification options we offered in
      January 2006 and a repurchase of 3,000 shares of stock for $15,000 from an
      individual who had received such stock as compensation for a web address
      purchased by the Company.





On
      February 9, 2007, we entered into an agreement with Benefactor Group Inc.
      (“Benefactor”) whereby Benefactor agreed to factor our retail accounts
      receivable invoices. The term of the agreement is for one year but can be
      terminated by us with 60 days written notice. In accordance with the terms
      of
      the agreement, Benefactor will purchase our 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 rate plus3% (11.25% at February 9, 2007)
      charged on a daily basis for the unpaid invoice amounts outstanding. We have
      agreed, beginning May 2007, to factor with Benefactor a minimum of $800,000
      of
      invoices monthly. We are 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 a security interest granted to Benefactor on all of our
      assets.





With
      the
      factoring arrangement discussed, we anticipate that existing cash resources
      will
      be sufficient for the next 12 months. However, as of December 31, 2006 we
      had $840,000 in convertible debentures that become due as of March 31, 2007.
      To
      date $120,000 of this debt has elected to convert to common stock. We do not
      know at this time whether the holders of the remaining $720,000 of debentures
      intend to convert to common stock at a price of $3.50 per share or seek
      repayment of their debentures. In the event the majority of the holders of
      these
      debentures request repayment, we may need to seek additional debt or equity
      financing to fund our current business objectives. Although no assurance can
      be
      given, we believe we could obtain such financing if required.





-23-




On
        February 20, 2007, we announced that we are proposing to privately offer,
        subject to market and other conditions, approximately $4 million of common
        stock
        and warrants to purchase common stock (the “Units”) through an offering within
        the United States in reliance on the exemption provided by Section 4(2) of
        the
        Securities Act and Rule 506 and Regulation D promulgated thereunder. Each
        Unit
        consists of one share of common stock and a five-year warrant to purchase
        one
        share of common stock at an exercise price of $7.50 per share. We currently
        anticipate that it will offer each Unit at a per Unit price of
        $6.00.
 
 We
        intend
        to use the net proceeds of the private offering to increase working capital
        for
        new product introductions into new specialty channels, and to extend its
        product
        distribution into the lawn and garden and hydroponics channels. We also intend
        to utilize the net proceeds of the private offering to increase inventory
        levels
        to support the foregoing additional product distribution and for general
        corporate purposes. We also require an increase in shareholder’s equity to
        assist us in satisfying the capital requirements of the NASDAQ Capital Market.
        We are not currently listed on the NASDAQ Capital Market and do not currently
        satisfy its listing criteria.


We
      anticipate our principal sources of liquidity during the current fiscal quarter
      ended March 31, 2007 and fiscal year ended March 31, 2008 will be proceeds
      from
      sales of our products. We intend to use our working capital principally to
      purchase inventory, fund our media advertising, fund product promotion and
      trade
      show costs as well as support our ongoing product development, overheads and
      operational costs. In the event our retail and/or direct response sales
      accelerate more rapidly that currently anticipated, we would support this growth
      through additional asset-based financing or the raising of additional
      equity.




**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.





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





**Year
                Ended**
            
            **Rent**March
                31, 2007
            
            $
            48,877March
                31, 2008
            
            $
            296,848March
                31, 2009
            
            $
            316,253March
                31, 2010
            
            $
            325,152March
                31, 2011
            
            $
            327,047




**Off-Balance
      Sheet Arrangements**





At
      December 31, 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 Exchange
      Act is recorded, processed, summarized and reported, within the time periods
      specified in the rules and forms of the SEC. 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 Exchange
      Act
      is accumulated and communicated to the Company’s management, including its
      principal executive and financial officer, 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 and as of the date of that evaluation, the
      Company’s principal executive officer and financial officers concluded that the
      Company’s disclosure controls and procedures are effective to ensure that
      information required to be disclosed in the reports the Company files and
      submits under the Exchange Act of 1934 is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission's rules and forms.





-24-




(b)
        Changes in Internal Controls




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




**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings** .





None.




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





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.





**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**





Exhibit
      31.1   Certification of the Chief Executive Officer Under Section 302 of
      the Sarbanes Oxley Act**


Exhibit
      31.2   Certification of the Chief Financial Officer Under Section 302 of
      the Sarbanes Oxley Act


Exhibit
      32.1   Certification of the Chief Executive Officer Under Section 906 of
      the Sarbanes Oxley Act


Exhibit
      32.2 Certification of the Chief Financial Officer Under Section 906 of the Sarbanes
      Oxley Act





**
            Filed
                Herewith





-25-


**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: February
                20, 2007
            
            /s/Michael
                BissonnetteBy:
                Michael BissonnetteIts:
                Chief Executive Officer (Principal Executive Officer) and DirectorDate: February
                20, 2007
            
            /s/Mitchell
                B. RubinBy:
                Mitchell B. RubinIts:
                Chief Financial Officer (Principal Financial Officer and Principal
                Accounting Officer)





-26-