**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





(Mark
      One)




**x**
            **Annual
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934**




For
      the
      fiscal year ended December 31, 2006




or




** ̈**
            **Transition
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934**





COMMISSION
      FILE NUMBER 000-27915





**GENIUS
      PRODUCTS, INC.**


**(Exact
      name of registrant as specified in its charter)**




**DELAWARE**
            
            **33-0852923****(State
                or Other Jurisdiction of**
              **Incorporation
                or Organization)**
            
            **(I.R.S.
                Employer**
              **Identification
                No.)****2230
                BROADWAY, SANTA MONICA, CALIFORNIA**
            
            **90404****(Address
                of principal executive offices)**
            
            **(Zip
                Code)**





**(310)
      453-1222**


**(Registrant’s
      telephone number, including area code)**





Securities
      registered pursuant to Section 12(b) of the Act :





None





Securities
      registered pursuant to Section 12(g) of the Act:





**COMMON
      STOCK, PAR VALUE $0.0001**


**(Title
      of Class)**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes  ̈ No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes  ̈ No x





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the registrant
      was required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days. Yes  ̈ No x





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. Yes  ̈ No x





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes  ̈ No x





The
      aggregate market value of voting stock held by non-affiliates of the registrant
      was $68,655,618 as of June 30, 2006 (computed by reference to the average of
      the
      bid and asked price of a share of the registrant’s common stock on that date as
      reported by the Over the Counter Bulletin Board). For purposes of this
      computation, it has been assumed that the shares beneficially held by directors
      and officers of registrant were “held by affiliates”; this assumption is not to
      be deemed to be an admission by such persons that they are affiliates of
      registrant.





There
      were 65,421,762 shares of the registrant’s common stock outstanding as of
      March 31, 2007.









**TABLE
      OF CONTENTS**





**Page****PART
                I**ITEM 1.
            DESCRIPTION
                OF BUSINESS
            1ITEM 1A.
            RISK
                FACTORS
            7ITEM 1B.
            UNRESOLVED
                STAFF COMMENTS
            11ITEM 2.
            DESCRIPTION
                OF PROPERTY
            11ITEM 3.
            LEGAL
                PROCEEDINGS
            12ITEM 4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            13**PART
                II**ITEM 5.
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            15ITEM 6.
            SELECTED
                FINANCIAL DATA
            19ITEM 7.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            20ITEM 7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            31ITEM 8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA
            31ITEM 9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            31ITEM 9A.
            CONTROLS
                AND PROCEDURES
            31ITEM 9B.
            OTHER
                INFORMATION
            34**PART
                III**ITEM 10.
            DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            35ITEM 11.
            EXECUTIVE
                COMPENSATION
            39ITEM 12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS
            51ITEM 13.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE
            53ITEM 14.
            PRINCIPAL
                ACCOUNTING FEES AND SERVICES
            55**PART
                I**ITEM 15.
            EXHIBITS,
                FINANCIAL STATEMENT SCHEDULES
            57EXHIBIT
                INDEX
            57








**NOTICE
      ABOUT FORWARD-LOOKING STATEMENTS**




This
      Annual Report on Form 10-K includes “forward-looking statements”. To the extent
      that the information presented in this Annual Report discusses financial
      projections, information or expectations about our business plans, results
      of
      operations, products or markets, or otherwise makes statements about future
      events, such statements are forward-looking. Such forward-looking statements
      can
      be identified by the use of words such as “intends”, “anticipates”, “believes”,
“estimates”, “projects”, “forecasts”, “expects”, “plans” and “proposes”.





Although
      we believe that the expectations reflected in these forward-looking statements
      are based on reasonable assumptions, there are a number of risks and
      uncertainties that could cause actual results to differ materially from such
      forward-looking statements. These include, among others, the cautionary
      statements in the “Risk Factors” and “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” sections of this Annual Report.
      These cautionary statements identify important factors that could cause actual
      results to differ materially from those described in the forward-looking
      statements.





When
      considering forward-looking statements in this Annual Report, you should keep
      in
      mind the cautionary statements in the “Risk Factors” and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”
sections, and other sections of this Annual Report. Except as required by law,
      we do not intend to update our forward-looking statements, whether written
      or
      oral, to reflect events or circumstances after the date of this Annual Report.








**PART
      I**





**ITEM 1.****DESCRIPTION
      OF BUSINESS**




**TRANSACTION
      WITH THE WEINSTEIN COMPANY**





On
      July
      21, 2006, Genius Products, Inc. (“we”, “us”, “our” or the “Company”) completed a
      strategic transaction (the “TWC Transaction”) with The Weinstein Company LLC
      (“TWC”) and its parent company, The Weinstein Company Holdings LLC, and formed a
      venture named Genius Products, LLC (the “Distributor”) to exploit the U.S. home
      video distribution rights to feature film, television programming, documentary
      and direct-to-video releases owned or controlled by TWC and other content
      partners. At the closing of the TWC Transaction on July 21, 2006 (the
“Closing”), we contributed to the Distributor all of our operating businesses,
      including substantially all of our assets, except for approximately $1.0 million
      in cash, the right to proceeds from the exercise of options and warrants issued
      prior to the Closing and certain liabilities. At the Closing, the Company
      received a 30% equity interest in the Distributor and became the managing member
      of the Distributor.





For
      the
      period from July 22, 2006 through December 31, 2006, we accounted for our
      investment in the Distributor using the equity method of accounting. Under
      the
      equity method of accounting, only our investment in and amounts due to and
      from
      the Distributor are included in our consolidated balance sheet. As a result,
      we
      recorded an asset on our balance sheet related to our investment interest in
      the
      Distributor. In our statement of operations, we recorded our 30% share of the
      Distributor’s loss as equity in net losses from the Distributor. We recorded a
      gain upon consummation of the TWC Transaction based on the difference between
      the fair market value of assets contributed and their net book value, reduced
      for the portion of the gain associated with our retained economic interest
      in
      the Distributor. After the Closing, substantially all of our revenues and
      expenses, including revenues from sales of TWC products, are reflected in the
      financial statements of the Distributor.





The
      information in this Annual Report pertaining to our business operations reflects
      the operations of the Company prior to the Closing and the operations of the
      Distributor after the Closing. In addition, we are including standalone
      financial statements of the Distributor, which are located immediately following
      the financial statements for the Company.





**BUSINESS**





**Overview**





We,
      through the Distributor, are a leading entertainment products distribution
      company that distributes, licenses, acquires and produces an expanding library
      of feature films, television programming, family, lifestyle and trend
      entertainment on digital versatile discs (“DVD”) and other emerging platforms
      such as the new high-definition DVD formats and digital distribution
      technologies. The Distributor produces and sells on DVD its own proprietary
      content, licenses content from third parties for distribution on DVD, and
      distributes content on DVD from third parties for a fee. To a limited extent,
      the Distributor also distributes a line of musical compact discs (“CDs”) under
      recognizable brand names in three categories: Classical, Instrumental, and
      Vocal.





The
      Distributor focuses primarily on the following four core, branded content areas,
      frequently referred to as “Content Verticals”:





·
            Theatrical/Independent
                Films(includes Independent Film Channel (IFC)®,
                RHI
                EntertainmentTM
                (Hallmark
                library), Tartan, The Weinstein Company®
                and
                WellspringTM)




·
            Sports(includes ESPN® and World Wrestling
                Entertainment®)




·
            Lifestyle(includes Animal Planet, The Learning Channel (TLCTM)
                and
                WellspringTM)




·
            Family/Faith(includes Classic Media, Discovery KidsTM,
                Entertainment Rights and Sesame Workshop®)




1


The
      following table summarizes the Distributor’s primary brands and content
      suppliers:




**Owned
                or Licensed Brands and Trademarks**
            **Distributed
                Content**Animal
                Planet
            Amity
                EntertainmentBerliner
                Film Company
            Bauer
                Martinez EntertainmentGenius
                Entertainment
            Brandissimo!Grodfilms
            BKN
                EntertainmentHollywood
                ClassicsTM
            Classic
                MediaJillian
                Michaels
            Discovery
                KidsTMJ
                Horror Library (through Horizon
            Entertainment
                RightsEntertainment
                and Pony Canyon)
            ESPN
                ®Laugh
                Factory
            ImaginAsian
                EntertainmentPeace
                Arch Entertainment
            Independent
                Film Channel (IFC) ®Porchlight
                Entertainment
            Legend
                Film LibrarySpectrum
                Connections
            Liberation
                Entertainment LibraryTaffy
                Entertainment
            Pacific
                EntertainmentThe
                Flockhearts
            RHI
                EntertainmentTM (Hallmark Library)The
                Learning Channel (TLCTM)
            Sesame
                Workshop®Wellspring
                LibraryTM
            Seven
                ArtsWorkout
                of Champions
            Tartan
                Video USATelevisaThe
                Weinstein Company®World
                Wrestling Entertainment®




The
      Distributor’s agreements with TWC, ESPN®, Classic Media, Sesame Workshop®, World
      Wrestling Entertainment, Inc. ® and Discovery Communications, in combination
      with our acquisition of the Wellspring library in 2005, gives the Distributor
      a
      substantial library of high quality content comprising approximately 3,500
      feature films and documentaries and 4,000 **** hours
      of
      television programming. We believe that the Distributor’s catalog of titles is
      integral to a well-balanced content portfolio that can generate substantial
      revenues with a diverse group of retailers and wholesalers.





The
      Distributor’s business strategy is to leverage its increasing market share and
      retail sales volumes from its relationships with TWC and other key content
      providers to add additional content partners, engage in profitable production
      and licensing of new content, and expand into complementary businesses such
      as
      interactive software (video games), mobile devices and licensing of our
      proprietary brands and content. The Distributor intends to continue to acquire
      rights to film and television libraries and enter into distribution agreements
      with new branded content suppliers.





**Content
      Agreements**





The
      Distributor is a party to a number of agreements under which it has the right
      to
      distribute and/or co-produce content with a variety of providers, including
      the
      following:





*The
      Weinstein Company*





The
      Distributor currently has the exclusive U.S. home video distribution rights
      to
      feature film and direct-to-video releases owned or controlled by TWC, a new
      film
      company created by Bob and Harvey Weinstein. Through April 10, 2007, the
      Distributor has released over 50 TWC titles on DVD, including the following
      titles:





·
            *Derailed*,
                starring Jennifer Aniston and Clive Owen, on March 21, 2006;


·
            *Wolf
                Creek*,
                an Australian horror film, on April 11, 2006;


·
            *Mrs.
                Henderson Presents*,
                starring Judi Dench and Bob Hoskins, on April 18, 2006;


·
            *Hoodwinked*,
                an updated retelling of the classic story of Red Riding Hood with
                the
                voices of Anne Hathaway, Glenn Close and Jim Belushi, on May 2, 2006;


·
            *Doogal*,
                with the voices of Whoopi Goldberg, Jimmy Fallon, William H. Macy
                and Jon
                Stewart, on May 16, 2006;


·
            *Transamerica*,
                starring Felicity Huffman, winner of the Golden Globe Award for best
                actress, on May 23, 2006;


·
            *The
                Libertine*,
                starring Johnny Depp, on July 4, 2006;


·
            *The
                Matador*,
                starring Pierce Brosnan, on July 4, 2006;


·
            *Scary
                Movie 4*,
                directed by David Zucker, on August 15, 2006;


·
            *Lucky
                Number Slevin*,
                starring Bruce Willis, on September 12, 2006;


·
            *Feast*,
                produced by Wes Craven, Ben Affleck and Matt Damon, on October 17,
                2006;


·
            *Clerks
                II*,
                directed by Kevin Smith, on November 28, 2006;


·
            *School
                for Scoundrels*,
                starring Billy Bob Thornton, on February 13, 2007;


·
            *Black
                Christmas*,
                starring Michelle Trachtenberg and Lacey Chabert, on April 3, 2007;
                and


·
            *Bobby*,
                directed by Emilio Estevez, on April 10, 2007.




2


Upcoming
      scheduled releases include *Arthur
      and the Invisibles* ,
      directed by Luc Besson, on May 15, 2007; *Hannibal
      Rising* ,
      based
      on the novel by Thomas Harris, on May 29, 2007; and *Miss
      Potter* ,
      starring Renee Zellweger and Ewan McGregor, on June 16, 2007.





The
      Distributor maintains in perpetuity distribution rights for TWC content released
      during the term of the Distributor’s distribution agreement with TWC (the “TWC
      Distribution Agreement”).





Under
      the
      TWC Distribution Agreement, TWC granted a license to the Distributor to
      manufacture, promote and sell in the U.S. and its territories and possessions,
      through December 31, 2010 (or December 31, 2013 if TWC extends the term), DVDs,
      videocassettes and other forms of pre-recorded home video of feature films
      and
      direct-to-video releases which TWC has the right to distribute on home video.
      These releases include films produced by TWC as well as films which TWC acquires
      or obtains the right to distribute on home video. The TWC Distribution Agreement
      provides that the Distributor will earn a fee of between 3% and 6% on net sales
      of these home video products, depending on the level of these sales compared
      to
      theatrical box office revenues for the same films. The Distributor collects
      the
      proceeds from sales of home video products and remits these proceeds to TWC,
      minus the Distributor’s distribution fee of 3% to 6%, cost of goods sold
      (including manufacturing expenses) and certain marketing expenses.





The
      TWC
      Distribution Agreement contains complex provisions relating to payments,
      permitted expenses and other adjustments, and the foregoing discussion is
      intended only as a summary. For further information, the full text of the TWC
      Distribution Agreement is included as an exhibit to this Annual
      Report.





*Classic/Entertainment
      Rights*




In
      December 2006, the Distributor entered into multi-year agreements with Gold
      Key
      Home Video, Inc. (“Classic”) and Entertainment Rights Distribution Limited
      (“ER”), for the distribution, co-production and co-financing of multiple home
      video and videogame productions for the family, children and teen markets.
      Pursuant to these agreements, the Distributor will be the exclusive North
      American distributor of home video and certain digital media distribution rights
      for Classic’s and ER’s catalogs of children’s and faith-based animated films as
      well as other titles and series totaling, in the aggregate, more than 4,000
      programs. These titles include Lassie, Fat Albert, Postman Pat, Rupert Bear,
      the
      best-selling holiday specials Rudolph the Red-Nosed Reindeer, Frosty the Snowman
      and Santa Claus is Comin’ to Town, and VeggieTales®, the world’s most
      popular faith-based kids’ brand with more than 50 million videos
      sold. **** The
      Distributor will also have North American home video and certain digital
      distribution rights in new productions, including The Lone Ranger, Gumby and
      She
      Ra, and for a slate of up to 12 new videogames to be produced and financed
      by
      the Distributor based on titles in the ER and Filmation catalogs. ER, Classic
      and TWC will be co-producing and co-financing new animated children's
      productions including Turok, Gumby, Kung Fu Magoo, Lone Ranger, Rupert Bear,
      Postman Pat and She-Ra. North American home video and digital distribution
      of
      co-productions will be handled by the Distributor and ER will distribute
      internationally. The productions will be managed by the Production and
      Development Group of TWC.




3




*Sesame
      Workshop®*




In
      February 2007, the Distributor entered into a multi-year agreement with Sesame
      Workshop *®* of New
      York to be the exclusive North American home entertainment distributor of Sesame
      Workshop *®* ’s
      library of more
      than
      100 titles. Included are Sesame Street, Sesame Beginnings, and Elmo's World.
      The
      agreement also includes the option to distribute Pinky Dinky Doo, which
      premiered in April 2006. The Distributor will maintain home video and certain
      digital distribution rights for the term of the agreement. The transaction
      will
      automatically increase the Distributor’s library by over 100 titles and further
      solidifies its emerging role as a leader in the growing family
      market.




*ESPN* ®




In
      July 2006, the Company entered into an Output Distribution Agreement (the
“ESPN Distribution Agreement”) with ESPN Enterprises, Inc. (“ESPN”) pursuant to
      which ESPN granted to the Company, among other things, the right to be the
      exclusive videogram distributor of all audiovisual productions released by
      ESPN
      during the term of the ESPN Distribution Agreement in the United States and
      Canada. All of the Company’s rights and obligations were assigned to the
      Distributor effective as of July 21, 2006. The initial term of the ESPN
      Distribution Agreement commenced on July 6, 2006 and continues, subject to
      the terms of the ESPN Distribution Agreement, through December 31, 2011
      (the “Term”). Commencing immediately at the end of the Term, the Distributor
      will have an additional six month period as a non-exclusive sell-off period
      for
      videograms, during which time the Distributor will have the right to continue
      to
      market, distribute and account for all videograms remaining in the Distributor’s
      inventory at the end of the Term. Pursuant to the terms of the ESPN Distribution
      Agreement, the Distributor will pay ESPN a minimum guarantee of $4.5 million
      in
      each of five “Sales Periods” (as defined in the ESPN Distribution Agreement)
      during the Term. The Distributor will receive a distribution fee which shall
      be
      computed in accordance with the terms of the ESPN Distribution Agreement.




*WWE®*




In
      October 2006, the Distributor entered into a multi-year agreement with World
      Wrestling Entertainment, Inc. (WWE). Under the terms of the multi-year
      agreement, the Distributor will be the exclusive U.S. distributor for all WWE
      television and home video content, including the content in its 90,000-hour
      video library, the largest of its kind in the world, featuring content from
      RAW®,
      SmackDown!® and ECW® (Extreme Championship WrestlingTM), pay-per-view
      events, including WrestleMania®, and past and present Superstar profiles, among
      others. The first title was released on November 14, 2006, and features one
      of
      WWE’s greatest legends, *Born
      to Controversy: The Roddy Piper Story* .
      This
      was followed by the release of *The
      Spectacular Legacy of the AWA* on
      November 21, 2006 ** and
      the
      RAW brand’s pay-per-view event, *WWE
      Cyber Sunday*TM on
      December 5, 2006. We  expect
      to
      release a minimum of 25 new titles in 2007, and have additional plans to exploit
      WWE's DVD catalog of more than 100 titles. In 2006, ten of WWE’s DVD releases
      achieved the No. 1 position on the Sports DVD charts, according to Nielsen
      VideoScan.





*ImaginAsian*





In
      October 2006, the Distributor entered into a five-year agreement with
      ImaginAsian Entertainment, Inc. to be the exclusive North American home
      entertainment distributor for ImaginAsian's expanding portfolio of Asian-genre
      motion pictures and television programs. ImaginAsian Entertainment, Inc., a
      multimedia company, through its multiple platforms, seeks to reach the major
      sub-segments of the Asian American community with entertainment, news and
      information. This community is one of the fastest growing, most economically
      influential ethnic populations in the U.S.





*Discovery
      KidsTM*





In
      October 2006, the Distributor entered into an agreement with Discovery
      Communications, Inc. (DCI) to be the exclusive U.S. home entertainment
      distributor (outside Discovery direct-to-consumer channels) of Discovery
      KidsTM
      television programming,  including
      content from the Ready Set Learn!TM block on TLCTM channels.  The Distributor
      plans to release a minimum of 16 titles per year pursuant to this agreement.
      Properties for release on DVD include *Kenny
      the Shark*TM , *Tutenstein*TM and *Flight
      29 Down* ,
      as seen
      on the Discovery KidsTM channel and *Paz*TM and *Save-Ums*TM from
      Ready Set Learn!TM, the preschool block that airs on TLCTM channel. Home video
      release dates for the Discovery KidsTM titles will be announced on an ongoing
      basis.




4


*TWC/Blockbuster*





In
      November 2006, the Distributor announced that it will act as the exclusive
      distributor for TWC in servicing TWC’s unique four-year strategic agreement with
      Blockbuster, Inc. (NYSE: BBI, BBI.B), under which TWC provides its theatrical
      and direct-to-video movies on DVD for rental exclusively through Blockbuster.
      The Distributor will provide distribution services to TWC in connection with
      the
      deal.





**Distribution/Supply
      Chain**





The
      Distributor utilizes third-party distribution facilities located throughout
      the
      United States. The Distributor sells its products directly to retailers,
      rentailers and through key select wholesale distribution companies, including
      companies such as Alliance Entertainment Corp., Ingram, VPD and Baker &
Taylor. The Distributor has excellent relationships with retailers nationwide
      and is a direct supplier to nearly every major retailer or major wholesaler
      that
      carries video and/or music products.





The
      Distributor has distribution in approximately 25,000 retail locations, and
      its
      products can be found at retail outlets nationwide, such as mass retail stores
      including Target, Wal-Mart, Kmart, Meijers, ShopKo, Costco and Sam’s Club;
      children’s toy stores including Toys R Us; electronics stores including Best
      Buy, Fry’s and Circuit City; bookstores including Borders and Barnes &
Noble; music retailers including Trans World Entertainment and Virgin; internet
      retailers including Amazon.com, Netflix and iTunes; rental outlets including
      Blockbuster, Movie Gallery and Hollywood Video; direct marketing companies
      including QVC, Castalian Music and Columbia House; and other non-traditional
      outlets.





The
      Distributor works with a number of key retail outlets utilizing its Vendor
      Managed Inventory (“VMI”) system and contract merchandisers to allocate and
      manage a retailer’s inventory of the Distributor’s products on a store, display
      and shelf basis. The Distributor’s VMI system drives store level placement,
      replenishment and in-store displays which highlight and promote its distributed
      products and brands. The Distributor customizes store level application of
      products and replenishment strategies based upon the retailer’s inventory plan,
      store traits, seasonal trends and forecasted store traffic, as well as buying
      patterns, habits and demographics of the consumers to whom the products are
      targeted. The Distributor’s retail groups also work with retailers to develop
      promotional plans, re-price tactics and volume forecasts for catalog as well
      as
      recently released titles.





In
      November 2006, TWC announced an exclusive rental program with Blockbuster,
      pursuant to which TWC granted to Blockbuster the exclusive right to rent TWC
      content. The Distributor services TWC’s agreement with Blockbuster pursuant to
      the TWC Distribution Agreement.





For
      the
      202 days ended July 21, 2006, Wal-Mart accounted for 29% of the Company’s net
      revenues. For the year ended December 31, 2005, Wal-Mart accounted for 40%
      of
      the Company’s net revenues, Target Corporation accounted for 27% of the
      Company’s net revenues and Dollar Tree Stores accounted for 26% of the Company’s
      net revenues.





**Marketing
      and Sales**





The
      Distributor’s marketing and sales strategies are designed to support the sale of
      products for the retail and licensing components of the Distributor’s business.
      For its proprietary content, the Distributor uses relatively low-cost marketing
      techniques, including public relations, promotional programs, in-store
      advertising and merchandising programs and cross-marketing with its branded
      content partners which are useful for marketing purposes but do not generate
      revenues directly. The Distributor continues to exhibit its products at select
      industry trade shows. For TWC content, the Distributor uses marketing programs
      and strategies consistent with major film studios, including advertising on
      television and radio, in magazines and newspapers and special promotions with
      retailers and consumer packaged goods companies.




5


**Third-Party
      Content Licenses**





A
      substantial portion of the Distributor’s business is dependent upon licenses
      that it obtains from third parties relating primarily to entertainment content,
      such as film, video and music. In addition, the Wellspring film library that
      we
      acquired in 2005, and which was contributed to the Distributor as part of the
      TWC Transaction, includes a large number of third-party licenses to films and
      documentaries.





As
      the
      Distributor adds more content to its library, the Distributor intends to
      distribute, license, acquire or produce products with credible value and brand
      them for relevance to the consumer. The Distributor attempts to limit financial
      exposure through (i) a detailed return on investment analysis of potential
      acquisitions of new content, and (ii) its newly implemented VMI system that
      provides the Distributor with a scalable infrastructure and cost-effective
      technology to manage the supply chain process.





**Suppliers
      and Compliance with Environmental Laws**





The
      Distributor is able to obtain its physical DVDs and CDs from a variety of
      suppliers. These items are readily available, and we would not expect the
      Distributor’s production to be seriously affected by the failure of any one
      supplier. We are not aware of any environmental laws that materially affect
      our
      business or the business of the Distributor.





**Internet
      Business**





Consumers
      who visit our website at www.geniusproducts.com can learn about us and the
      Distributor’s products. We are also creating a business-to-business section that
      will allow smaller independent retailers to order the Distributor’s products for
      resale in their stores and to gain access to promotional and marketing
      materials. We believe that a continued internet presence is desirable because
      it
      aids in consumer sales, business-to-business sales, brand exposure and retail
      sales.





**Musical
      CDs**





The
      Distributor distributes a line of musical CDs under recognizable brand names
      in
      three categories: Classical, Instrumental and Vocal. This line of business
      is no
      longer a material part of the Distributor’s business.





**Competition**





The
      retail and internet markets for entertainment products, including DVDs and
      CDs,
      are highly competitive. We face significant competition with respect to the
      number of products currently available, pricing and in securing distribution
      at
      retail outlets. The costs of entry into the retail and internet markets for
      competitive products are low, and there are no significant barriers to entry.
      There are many companies who could introduce directly competitive products
      in
      the short term that have established brand names, are better funded, have
      established distribution channels and have greater resources than we
      do.





Established
      companies who compete with the Distributor include major studios such as Buena
      Vista (Disney), Fox, Paramount, Sony, Warner Bros. and Universal Studios, as
      well as certain independent studios and suppliers such as Lionsgate, First
      Look
      and Image Entertainment. The Distributor’s portfolio of owned and distributed
      content from The Weinstein Company®, ESPN®, World Wrestling Entertainment®,
      Sesame Workshop®, Classic Media and others provides the Distributor with a high
      volume of major studio quality, theatrically released feature films and
      direct-to-video releases, which we believe provides the Distributor with a
      strong competitive position in the marketplace.





**Corporate
      Information**





We
      were
      organized under the laws of the State of Nevada on January 8, 1996 under a
      different name. In October 1999, we changed our name to Genius Products, Inc.
      On
      March 2, 2005, we changed our state of incorporation to Delaware. Our
      corporate headquarters are located at 2230
      Broadway, Santa Monica, CA 90404,
      and our telephone number is (310) 453-1222. Our corporate website address is
      www.geniusproducts.com.




6


**EMPLOYEES**





As
      of
      March 31, 2007, the Distributor had 149 full-time employees and one
      part-time employee. Although Genius Products, Inc. has no employees, certain
      employees of the Distributor act as officers of Genius Products, Inc.





None
      of
      the Distributor’s employees are represented by an organized labor union. We
      believe that the Distributor’s relationship with its employees is good, and
      neither Genius Products, Inc. nor the Distributor has experienced an
      employee-related work stoppage.





**INTERNET
      ACCESS TO OUR SEC REPORTS**




Our
      Internet address is www.geniusproducts.com. Through our website, we make
      available, free of charge, the following reports as soon as reasonably
      practicable after electronically filing them with, or furnishing them to, the
      Securities and Exchange Commission (the “SEC”): our Annual Reports on
      Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on
      Form 8-K; and amendments to those reports. Our Proxy Statements for our
      Stockholder Meetings are also available through our website. Our website and
      the
      information contained therein or connected thereto are not intended to be
      incorporated into this Annual Report on Form 10-K.




**ITEM 1A.** **RISK
      FACTORS**





***We
      have a history of significant losses, and we may never achieve or sustain
      profitability.***





We
      have
      incurred operating losses in every quarter since we commenced operations. As
      of
      December 31, 2006, we had an accumulated deficit of $29.9 million. Our net
      loss before extraordinary gain for the twelve months ended December 31,
      2006 was $45.4 million. Our net loss for the year ended December 31, 2005
      was $17.2 million and our net loss for the year ended December 31, 2004 was
      $6.0 million. We cannot provide assurances that we, or the Distributor, will
      achieve profitability in the future, even as a result of the TWC Transaction.
      Our continued operating losses may have a material adverse effect upon the
      value
      of our common stock and may jeopardize our ability to continue our
      operations.




***Our
      business, results of operations and financial condition depend principally
      on
      the success of our relationships with The Weinstein Company LLC and our other
      key content suppliers.***





A
      majority of our revenues are derived from the distribution rights accorded
      to
      the Distributor under its distribution agreements with TWC and other key content
      suppliers. Our business, results of operations, and financial condition
      therefore depend principally on the success of the relationships between TWC’s,
      and other key content suppliers’, personnel and those of the Distributor. Any
      deterioration in or termination of these relationships would have a material
      adverse effect on our business, results of operations and financial condition.
      There can be no assurance that the Distributor will be successful in maintaining
      and developing its relationships with TWC and/or other key content
      suppliers.





***Failure
      to achieve and maintain effective disclosure controls or internal controls
      could
      have a material adverse effect on our ability to report our financial results
      timely and accurately.***





In
      connection with our internal
      reviews and audit of our financial results for the year ended December 31,
      2006,
      we discovered material weaknesses. The material weaknesses we identified related
      to the following items: (i)
      timely and routine processes for reconciling certain accounts to the general
      ledger; (ii) detailed documentation and analysis to support certain reserve
      estimates; (iii) proper presentation of marketing related expenses associated
      with revenue generated from “Revenue Share” parties; (iv) proper application of
      stock compensation expense and incomplete record keeping related to stock option
      grants; (v) proper application of the provisions of SOP 00-2 *Accounting
      by Producers or Distributors of Films* for the
      recognition of revenues and expenses associated with the distribution agreement
      between TWC and the Distributor; (vi) timely assessment of accounts for
      realizability or impairment; (vii) accurate valuation and supporting
      documentation for certain assets as of the closing date of the TWC Transaction;
      and (viii) formal processes governing changes, access and controls and
      procedures related to our information technology systems.  In light of the
      material weaknesses related to our internal controls and processes over
      financial reporting, we and our independent registered public accounting firm
      concluded that our disclosure controls and procedures and our internal controls
      and processes over financial reporting were ineffective at December 31, 2006.




7


We
      are
      remediating these material weaknesses and have taken several actions to address
      these items.   Management together with the Audit Committee of the
      Company’s Board of Directors have dedicated significant resources and have hired
      an internal control manager and external consultants to support management
      in
      its efforts to improve our control environment and to review, remediate and
      implement controls and
      procedures to satisfy the Company’s requirement to be compliant with the
      requirements of Sarbanes Oxley by December 31, 2007.  We intend to further
      expand our internal accounting personnel, information technology systems and
      personnel and compliance capabilities by attracting additional talent, enhancing
      training and implementing system and process improvements in our accounting
      and
      record keeping. These ongoing efforts are focused on implementing process
      changes to strengthen our internal control and monitoring activities. However,
      these measures may not ensure that we will implement and maintain adequate
      controls over our financial reporting in the future. We have failed to meet
      the
      reporting deadline for this Report on Form 10-K. Any failure to implement
      required new or improved controls, or difficulties encountered in their
      implementations, could cause us to fail to meet our future reporting
      obligations. In addition, we may in the future identify further material
      weaknesses or significant deficiencies in our internal controls over financial
      reporting. Any of the foregoing could materially and adversely affect our
      business, our financial condition and the market value of our securities.





***TWC’s
      success depends largely on Robert and Harvey
      Weinstein.***





TWC
      is
      substantially dependent upon the services of Robert and Harvey Weinstein, and,
      therefore, TWC’s business, results of operations and financial condition could
      be adversely affected if TWC should lose the services of either of these
      individuals. TWC has entered into employment agreements with the Weinsteins.
      However, these agreements cannot assure TWC of the continued services of the
      Weinsteins. The loss of the services of either of the Weinsteins could have
      a
      material adverse effect on TWC’s ability to produce and distribute motion
      pictures, which could have a material adverse effect on the business, operating
      results and financial condition of the Distributor and its ability to profit
      from the sale of home video products. This, in turn, would have a material
      adverse effect on our business, results of operations and financial
      condition.





***If
      the Distributor does not achieve target home video distribution rates for TWC’s
      films or meet other performance criteria, TWC may terminate its distribution
      agreement with the Distributor, which would have a material adverse effect
      on
      our business, results of operations and financial
      condition.***





TWC
      has
      the right to terminate the TWC Distribution Agreement if the Distributor does
      not achieve target home video distribution rates for TWC’s films or meet other
      performance criteria specified in the TWC Distribution Agreement. We cannot
      assure you that the Distributor will have the financial and other resources
      necessary to perform adequately. Accordingly, we are subject to the risk that
      TWC may terminate the TWC Distribution Agreement, which would have a material
      adverse effect on our business, results of operations and financial
      condition.




***If
      we cannot ramp up our operations quickly to accommodate the new business from
      TWC and other key content suppliers, our business may
      suffer.***





The
      integration of the new titles that the Distributor will be distributing under
      its distribution agreements with TWC and other key content suppliers will
      continue to require significant management attention and expansion of our
      operations and employee base (which have been and will continue to be operated
      by the Distributor since the closing of the TWC Transaction). The Distributor
      must maintain adequate operational, financial and management information
      systems, and motivate and effectively manage an increasing number of employees
      and base of operations. Our future success will also depend in part on the
      Distributor’s ability to retain or hire qualified employees to operate its
      expanded businesses efficiently.




8


***The
      loss of any of our major customers could harm us.***





For
      the
      202 days ended July 21, 2006, Wal-Mart accounted for 29% **** of
      the
      Company’s net revenues. This customer is expected to continue to be the major
      customer of the Distributor as a result of the TWC Transaction. The loss of
      any
      significant customers could have a material adverse effect upon the business
      of
      the Distributor and our business, results of operations and financial
      condition.





***Our
      products are subject to returns.***





Customers
      to which the Distributor sells have in the past returned significant amounts
      of
      products if it has not sold in accordance with their expectations or if newer
      versions of the product were available. We expect that they will continue to
      do
      so in the future and anticipate a certain level of returns, accounting for
      such
      when recognizing revenue based upon our historic return rates and estimates
      of
      returns based upon new product introduction. If product returns experienced
      by
      the Distributor are significantly greater than anticipated, it will negatively
      impact the business of the Distributor and our business, results of operations
      and financial condition.





***Many
      of the Distributor’s operating expenses relating to the sales, marketing,
      production and distribution of content are recoupable and if the Distributor
      does not account for them appropriately to enable recoupment this could impact
      our profitability.***





Many
      of
      the Distributor’s agreements with content licensors provide for the Distributor
      to collect receipts from customers, deduct a reserve for returns, deduct a
      distribution fee, deduct operating expenses relating to the sales, marketing,
      production and distribution of the content and remit the balance to the
      licensor. To the extent that the Distributor fails to account for all expenses
      related to a licensor in a particular accounting period, it may overstate the
      amount owed to the licensor and could potentially pay the licensor more than
      is
      actually due to the licensor for that accounting period.


***There
        is a risk that the Distributor will not be able to recoup advances paid to
        its
        content providers.***
 
 In
        the
        normal course of its business, the Distributor pays to its content providers
        advances that are recoupable from the net sales of such content providers’
products. We anticipate that the Distributor will continue to pay such advances
        to new content providers. To the extent that the Distributor’s sales of these
        products fall below the Distributor’s projections, this could have a material
        adverse effect on the Distributor’s ability to recoup such advances and, in
        turn, the Distributor’s and our business, results of operations and financial
        condition.
 
 ***There
        is a risk that the Distributor’s cash flow will not be sufficient to meet its
        operational needs.***
 
 At
        December 31, 2006, the Distributor had cash balances of $8.3 million. The
        Distributor may consider additional issuance of debt financing to fund future
        growth opportunities. Although we believe that the Distributor’s expanded
        product line offers the opportunity for significantly improved operating
        results
        in future quarters, no assurance can be given that we or the Distributor
        will
        operate on a profitable basis in 2007, or ever, as such performance is subject
        to numerous variables and uncertainties, many of which are out of our control.





***There
      is a risk that the rate at which the Distributor’s inventory becomes obsolete
      will exceed its estimated allowances.***





The
      Distributor’s estimated allowances for obsolete or unmarketable inventory are
      based upon management’s understanding of market conditions and forecasts of
      future product demand, which are subject to change. If the actual amount of
      obsolete or unmarketable inventory significantly exceeds estimated allowances,
      it could have a material adverse effect upon the business of the Distributor
      and
      our business, results of operations and financial condition. As discussed in
      Item 7 below under “Management’s Discussion
      and Analysis of Financial Condition and Results of Operations”, we recently
      restated our quarterly financial statements for 2006 due to non-cash adjustments
      necessary to properly reflect the amount of inventory that the Distributor
      believes it will be able to sell.





***Rapid
      technological change could render the Distributor’s current products
      obsolete.***





The
      market for cassettes, CDs and DVD technology is subject to change. There can
      be
      no assurance that over time these technologies will not be affected by
      competition from another form of information storage and retrieval technology,
      such as on-line information services. A further strong advance in the technology
      surrounding cable and satellite that would give consumers access to information
      and entertainment may limit the expansion of the market for applications based
      on cassettes, CDs, and DVDs. The replacement of the Distributor’s technology by
      another information storage and retrieval technology, or the replacement of
      existing technology by a new technology at a pace too rapid for production
      adjustments, may also have a material adverse effect on the business of the
      Distributor and our business, financial condition and results of
      operations.





***There
      is a risk that our business may be adversely affected because we and the
      Distributor are required to present content acquisition opportunities to TWC
      before pursuing those opportunities.***





Subject
      to limited exceptions, if we or the Distributor are presented with a content
      acquisition opportunity that is above a certain dollar amount, then we or the
      Distributor, as applicable, must present the content acquisition opportunity
      to
      TWC, and the TWC parties will have the right to engage in the content
      acquisition opportunity. This requirement restricts our future business
      opportunities and may have a material adverse effect on the business of the
      Distributor and our business, results of operations and financial
      condition.




9


***If
      we cease to serve as the managing member of the Distributor, we could become
      subject to the Investment Company Act of 1940, which could have a material
      adverse effect on our business.***





The
      Amended and Restated Limited Liability Company Agreement of the Distributor
      (the
“Distributor LLC Agreement”) contemplates that The Weinstein Company Holdings
      LLC (“TWC Holdings”) or its designee will become the managing member of the
      Distributor, instead of the Company, if we become insolvent or bankrupt, if
      we
      violate the membership interest transfer restrictions in the Distributor LLC
      Agreement or if a lender forecloses on a security interest granted with respect
      to our Class G Units in the Distributor. If we cease to serve as the managing
      member of the Distributor, then we could become subject to the Investment
      Company Act of 1940 (the “1940 Act”), which could have a material adverse effect
      on our business.





Under
      the
      1940 Act, a company may be deemed to be an investment company if it owns
      investment securities with a value exceeding 40% of its total assets, subject
      to
      certain exclusions. If we ceased to serve as the managing member of the
      Distributor and were deemed an investment company, we would become subject
      to
      the requirements of the 1940 Act. As a consequence, among other things, we
      would
      likely incur significant expenses and could be prohibited from engaging in
      our
      business or issuing our securities as we have in the past.





***The
      motion picture industry is rapidly evolving, and recent trends have shown that
      audience response to both traditional and emerging distribution channels is
      volatile and difficult to predict. Neither we nor TWC can accurately predict
      the
      effect that changing audience demands, technological change or the availability
      of alternative forms of entertainment may have on the business of the
      Distributor, our business or the motion picture
      industry.***





The
      entertainment industry in general, and the motion picture industry in
      particular, continues to undergo significant changes, due both to shifting
      consumer tastes and to technological developments. New technologies, such as
      video-on-demand and Internet distribution of films, have provided motion picture
      companies with new channels through which to distribute their films. However,
      accurately forecasting both the changing expectations of movie audiences and
      market demand within these new channels has proven challenging.





We
      cannot
      accurately predict the overall effect that shifting audience tastes,
      technological change or the availability of alternative forms of entertainment
      may have on the Distributor’s and, in turn, our business. In addition to
      uncertainty regarding the growth of the DVD market, we similarly cannot be
      certain that other developing distribution channels and formats, including
      video-on-demand, Internet distribution of films and high-definition, will attain
      expected levels of public acceptance or, if such channels or formats are
      accepted by the public, that the Distributor will be successful in exploiting
      the business opportunities they provide. Moreover, to the extent that these
      emerging distribution channels and formats gain popular acceptance, it is
      possible that demand for delivery through DVDs will decrease. Under the TWC
      Distribution Agreement, the Distributor may not have the right to distribute
      films from TWC through these other distribution channels.





***As
      part of the TWC Transaction, the Distributor assumed the financial risk of
      customers’ nonpayment or delay in payment under the TWC Distribution Agreement,
      which could have a material adverse effect on our business, results of
      operations and financial condition.***





The
      TWC
      Distribution Agreement provides that the Distributor will bear (and will not
      be
      entitled to recoup as distribution expenses) all bad debt expense and collection
      costs arising from its distribution of TWC titles. If the bad debt expense
      and
      collection costs are significant, then they could have a material adverse effect
      on the Distributor’s business, results of operations and financial condition,
      which, in turn, would have a material adverse effect on our business, results
      of
      operations and financial condition.





***Our
      common stock is traded on the OTCBB, which may be detrimental to
      investors.***





Our
      shares of common stock are currently traded on the Over the Counter Bulletin
      Board, or the OTCBB. Stocks traded on the OTCBB generally have limited trading
      volume and exhibit a wide spread between the bid/ask quotation, which could
      reduce investor liquidity and the value realized upon share sales.




10


***Our
      common stock is subject to penny stock rules which may be detrimental to
      investors.***





Our
      common stock is subject to Rules 15g-1 through 15g-9 under the Securities
      Exchange Act of 1934, as amended, which impose certain sales practice
      requirements on broker-dealers which sell our common stock to persons other
      than
      established customers and “accredited investors” (generally, individuals with a
      net worth in excess of $1,000,000 or an annual income exceeding $200,000
      individually or $300,000 together with their spouses). For transactions covered
      by these rules, a broker-dealer must make a special suitability determination
      for the purchaser and have received the purchaser’s written consent to the
      transaction prior to the sale. This rule adversely affects the ability of
      broker-dealers to sell our common stock and purchasers of our common stock
      to
      sell their shares of such common stock. Additionally, our common stock is
      subject to the SEC regulations for “penny stock”. Penny stock includes any
      non-NASDAQ equity security that has a market price of less than $5.00 per share,
      subject to certain exceptions. The regulations require that prior to any
      non-exempt buy/sell transaction in a penny stock, a disclosure schedule set
      forth by the SEC relating to the penny stock market must be delivered to the
      purchaser of such penny stock. This disclosure must include the amount of
      commissions payable to both the broker-dealer and the registered representative
      and current price quotations for the common stock. The regulations also require
      that monthly statements be sent to holders of penny stock that disclose recent
      price information for the penny stock and information about the limited market
      for penny stocks. These requirements adversely affect the market liquidity
      of
      our common stock.





**ITEM 1B.****UNRESOLVED
      STAFF COMMENTS**





None.




**ITEM 2.****PROPERTIES**





On
      January 17, 2007, the Distributor entered into a lease agreement with Del Mar
      Investors, L.P., under which the Distributor rents approximately 493 square
      feet
      of office space located in Del Mar, California, for a monthly rent of $1,800
      per
      month. The Distributor has leased this office space on a month-to-month basis.
      This office space is used by certain of the Distributor’s executive officers and
      employees.





On
      January 23, 2007, the Distributor entered into a lease agreement with Maguire
      Properties, L.P., under which the Distributor rents approximately 5,050 square
      feet of office space located in Santa Monica, California, for a monthly rent
      of
      $31,300 per month. The Distributor has the right to terminate this lease at
      any
      time upon five (5) business days’ prior written notice. The Distributor’s
      accounting and finance departments are currently housed on a temporary basis
      in
      this office space.





On
      March
      8, 2006, we entered into a lease agreement for a 17,400 square foot facility
      located in Santa Monica, California. This lease was assigned to the Distributor
      as part of the TWC Transaction. This facility has been used as our, and the
      Distributor’s, principal executive offices. This lease is for a five-year term
      which commenced in March 2006. Monthly rent for this space is as
      follows:




**MONTH
                OF TERM**
            
            **AMOUNT**1-12
            
            $
            54,80013-24
            
            $
            56,50025-36
            
            $
            58,10037-48
            
            $
            59,90049-60
            
            $
            61,700





On
      March
      22, 2005, as part of the acquisition of American Vantage Media Corporation
      and
      Wellspring Media, Inc., we assumed office space in New York and Santa Monica
      on
      a month-to-month basis. Effective as of April 30, 2006, we terminated our lease
      for the Santa Monica space. Effective as of the closing of the TWC Transaction,
      the Distributor assumed all of our rights and obligations under the New York
      lease, and continues to occupy the New York space for monthly rent of
      $17,800.





On
      January 5, 2007, the Distributor entered into a sublease agreement with The
      Advantage Network, LLC, under which the Distributor subleased to The Advantage
      Network, LLC its leasehold interest in a 5,603 square foot facility located
      in
      Solana Beach, California. This sublease is for a term commencing February 1,
      2007 and ending December 31, 2008, and provides for monthly rent of $10,600
      from
      February 1, 2007 through December 31, 2007, and $11,000 from January 1, 2008
      through December 31, 2008. Until March 2006, we used this facility as our
      principal executive offices pursuant to a sublease agreement entered into in
      November 2003. The November 2003 sublease is for a five-year term which
      commenced in January 2004, and was assigned to the Distributor as part of the
      TWC Transaction. Monthly rent for this space is as follows:




11




**MONTH
                OF TERM**
            
            **AMOUNT**1-12
            
            $
            11,20013-24
            
            $
            11,60025-36
            
            $
            12,00037-48
            
            $
            12,40049-60
            
            $
            12,900





In
      addition to the monthly rent, the Distributor is required to pay for increases
      in common area expenses over the base year of 2004. The Distributor also has
      the
      option to extend the lease for an additional five-year period, although we
      do
      not anticipate that the Distributor will exercise this option upon expiration
      of
      the term. Under the Distributor’s sublease agreement with The Advantage Network,
      LLC, the Distributor remains obligated to pay any rent and common area expenses
      under the November 2003 sublease in excess of the monthly rent paid by The
      Advantage Network, LLC.





On
      October 15, 2004, we entered into a sublease agreement for a 1,670 square foot
      facility located in Bentonville, Arkansas. This sublease has a term of 5 years
      and expires in October 2009. The monthly rent for this facility is $1,900 with
      an annual increase of 3 percent. This sublease was assigned to the Distributor
      as part of the TWC Transaction.





**ITEM 3.****LEGAL
      PROCEEDINGS**





Except
      as
      described below, neither we nor the Distributor are a party to any legal or
      administrative proceedings, other than routine litigation incidental to our
      business and that of the Distributor that we do not believe, individually or
      in
      the aggregate, would be likely to have a material adverse effect on our, or
      the
      Distributor’s, financial condition or results of operations.





**NEBG**





On
      December 11, 2006, NEBG, LLC, a national organization whose members are
      independent video retailers, Nolan Anaya, dba Captain Video, and Todd Zaganiacz,
      dba Video Zone (collectively, “Plaintiffs”), filed a complaint (the “Complaint”)
      in the Superior Court of Massachusetts naming TWC Holdings, Genius Products,
      Inc. and Genius Products, LLC, as defendants (collectively, “Defendants”). The
      Complaint alleged that Defendants, in connection with an exclusive revenue
      sharing agreement between TWC Holdings and Blockbuster for the rental of DVDs
      of
      TWC product (“TWC DVDs”), planned to include a message on such TWC DVDs urging
      consumers to call a toll-free number if they rented the TWC DVDs from
      Plaintiffs. The Complaint alleged that such a message would suggest that
      Plaintiffs were engaged in wrongdoing by renting such TWC DVDs to their
      customers, which would amount to false advertising and violate the First Sale
      Doctrine of the Copyright Act. The Complaint alleged Massachusetts state law
      counts of unfair competition, unfair or deceptive acts or practices, and untrue
      and misleading advertising, as well as counts of negligent misrepresentation
      and
      tortuous interference with advantageous business relationships, and requested
      that the court enjoin Defendants from distributing any TWC DVDs with the
      toll-free number message.





On
      January 4, 2007, Defendants removed the case to the U.S. District Court of
      Massachusetts. The court denied Plaintiffs’ motion for a temporary restraining
      order on January 5, 2007, and denied Plaintiffs’ motion for a preliminary
      injunction on January 18, 2007. Defendants filed a motion to dismiss the
      Complaint on February 2, 2007, and the court heard oral arguments on the motion
      on March 9, 2007. In the hearing, Plaintiffs conceded that there is nothing
      improper or misleading with respect to the message currently contained on TWC
      DVDs, “This DVD is intended for sale only”. The court focused on the issue of
      ripeness and questioned whether the Complaint states a cause of action given
      that the Defendants have not (and are not alleged to have) included a toll-free
      number message on any of the TWC DVDs. The court is considering the parties’
arguments, and Defendants are awaiting a ruling on the motion to
      dismiss.




12




**Wellspring**





On
      March 21, 2005, we completed our acquisition of American Vantage Media
      Corporation and its subsidiary, Wellspring Media, Inc. (“Wellspring”). On or
      about March 14, 2005, a complaint was filed in U.S. Bankruptcy Court for
      the District of Delaware against Wellspring requesting a judgment in excess
      of
      $3,000,000. The complaint was filed by the Chapter 7 Trustee of the Winstar
      Communications, Inc. Estate (“Winstar”). The details of this matter are
      discussed below.





In
      September 2001 (prior to the acquisition of Wellspring by American Vantage
      Media
      Corporation), Winstar (or its predecessor) sold a subsidiary, Winstar
      TV & Video (“TV & Video”), to Wellspring in exchange for
      $2,000,000 in cash and a promissory note in the amount of $3,000,000. The merger
      agreement provided that in the event the working capital of TV & Video
      was determined to be less than $3,000,000 at the closing of the merger, the
      sole
      remedy of Wellspring was a reduction in the principal amount of the promissory
      note by the difference between $3,000,000 and the actual amount of the working
      capital. The accountants for Wellspring determined that at the time of the
      closing of the merger, TV & Video had a working capital deficit. Based
      upon this determination and the provisions of the merger agreement, Wellspring
      determined that the amount due under the promissory note should be reduced
      to
      zero, and as a result no payment was made. On November 30, 2001, Wellspring
      informed Winstar of its determination regarding the working capital deficit,
      and
      Winstar subsequently advised Wellspring that it disputed the determination.
      Since 2001, Wellspring and Winstar have engaged in discussions in an effort
      to
      settle the dispute over the working capital calculation, but no settlement
      has
      been reached.





We
      believe that, if an adverse judgment against Wellspring occurs or an adverse
      settlement is reached, our direct and indirect subsidiaries, the Distributor,
      American Vantage Media Corporation and Wellspring, will be entitled to full
      indemnification against any such losses by the initial owners of Wellspring
      (prior to American Vantage Media Corporation), and we will be entitled to
      indemnification by American Vantage Companies, the former owners of American
      Vantage Media Corporation.





**Falcon
      Picture Group**





On
      October 3, 2005, Falcon Picture Group, LLC (“Falcon”) commenced litigation
      against the Company in the Circuit Court of Cook County, Illinois, Case
      No. 05H16850 (the “Illinois Proceeding”), based upon allegations, among
      other things, that the Company breached the terms of a license agreement between
      Falcon and the Company by refusing to pay certain royalties to which Falcon
      supposedly was entitled. Falcon seeks damages of approximately $83,332, as
      well
      as an accounting of royalties supposedly due to Falcon.





The
      Company’s primary defense is that Falcon breached the license agreement by
      delivering defective content to the Company, double billing for content and
      failing to honor a provision in the license agreement requiring Falcon to
      indemnify the Company in the event of claims by third parties that the Company
      did not possess the legal right to sell Falcon content. The Company believes
      the
      evidence will demonstrate that there was no monetary default on its part under
      the license agreement insofar as, at the time of the alleged default, Falcon
      was
      indebted to the Company for an amount substantially in excess of the sum Falcon
      claims was past due. Accordingly, the Company has commenced litigation against
      Falcon and its owner, Carl Amari, in the form of a counter claim seeking damages
      of $975,000 arising out of, among other claims for relief, Falcon’s breach of
      the license agreement. Discovery is in its early stages and the action has
      not
      been scheduled for trial.





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





Our
      2006
      Annual Meeting of Stockholders was held on December 12, 2006. Of the 61,534,357
      shares eligible to vote, 44,894,525 appeared by proxy and established a quorum
      for the meeting. The singular matter considered at the annual meeting was the
      election of directors, with the holders of our common stock entitled to appoint
      two directors and the holders of our Series W Preferred Stock entitled to
      appoint four directors. The items listed in the table below were approved by,
      respectively, a majority of the common stockholders appearing at the meeting
      and
      a majority of the Series W Preferred stockholders appearing at the
      meeting.




13




**VOTES**
              **FOR**
            
            **VOTES**
              **AGAINST**
            
            **VOTES**
              **WITHHELD**
            
            **NOT**
              **VOTED**1.
            
            Election
                of Directors by Common StockholdersStephen
                K. Bannon
            
            38,106,421
            
            1,751,000
            
            5,037,104
            
            0Trevor
                Drinkwater
            
            38,115,396
            
            1,742,025
            
            5,037,104
            
            0







**VOTES**
              **FOR**
            
            **VOTES**
              **AGAINST**
            
            **VOTES**
              **WITHHELD**
            
            **NOT**
              **VOTED**2.
            
            Election
                of Directors by Series W Preferred StockholdersJames
                G. Ellis
            
            100
            
            0
            
            0
            
            0Herbert
                Hardt
            
            100
            
            0
            
            0
            
            0Larry
                Madden
            
            100
            
            0
            
            0
            
            0Irwin
                Reiter
            
            100
            
            0
            
            0
            
            0





Also
      on
      December 12, 2006, the holders of our Series W Preferred Stock, pursuant to
      their rights under our Amended and Restated Certificate of Incorporation to
      elect up to five of our directors, appointed Bradley A. Ball as a director
      by
      unanimous written consent.




14




**PART
      II**





**ITEM 5.****MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





Our
      stock
      trades on the over-the-counter bulletin board (“OTCBB”) under the symbol “GNPI”.
      The market represented by the OTCBB is extremely limited and the price for
      our
      common stock quoted on the OTCBB is not necessarily a reliable indication of
      the
      value of our common stock. The following table sets forth the high and low
      bid
      prices for shares of our common stock for the periods noted, as reported on
      the
      OTCBB. Quotations reflect inter-dealer prices, without retail mark-up, mark-down
      or commission and may not represent actual transactions.




**YEAR**
            **PERIOD**
            **HIGH**
            **LOW**Calendar
                Year 2005
            First
                Quarter
            $
                2.48
            $
                1.35Second
                Quarter
            2.55
            1.65Third
                Quarter
            2.10
            1.41Fourth
                Quarter
            2.61
            1.37Calendar
                Year 2006
            First
                Quarter
            $
                2.35
            $
                1.62Second
                Quarter
            2.08
            1.55Third
                Quarter
            2.12
            1.63Fourth
                Quarter
            2.72
            1.78





Our
      common stock is subject to Rules 15g-1 through 15g-9 under the Securities
      Exchange Act of 1934, as amended, which impose certain sales practice
      requirements on broker-dealers who sell our common stock to persons other than
      established customers and “accredited investors” (generally, individuals with a
      net worth in excess of $1,000,000 or an annual income exceeding $200,000
      individually or $300,000 together with their spouses). For transactions covered
      by this rule, a broker-dealer must make a special suitability determination
      for
      the purchaser and have received the purchaser’s written consent to the
      transaction prior to the sale.





**Stock
      Performance Graph**





The
      following graph compares the performance of our common stock over the five
      preceding fiscal years to the weighted average performance over the same period
      of the stock of companies included in the NASDAQ Composite Index and the S&P
      Movies and Entertainment Index. The graph assumes $100 was invested at the
      close
      of trading on December 31, 2001 in our common stock and in each of the indices
      and that all dividends were reinvested. The stockholder return shown on the
      graph below should not be considered indicative of future stockholder returns,
      and we will not make or endorse any predictions of future stockholder
      returns.




15









**Stockholders**





As
      of
      March 31, 2007, we had approximately 65,421,762 shares of common stock issued
      and outstanding which were held by approximately 221 stockholders of record,
      including the holders that have their shares held in a depository trust in
      “street” name. The transfer agent for our common stock is Interwest Transfer
      Company, 1981 East 4800 South, Suite 100, Salt Lake City, Utah
      84117.




16


**Equity
      Compensation Plans**





The
      following table provides information concerning our equity compensation plans
      as
      of December 31, 2006.




**(Securities
        in thousands)**


**Number of securities
                to be issued**
              **Upon
                exercise of outstanding**
              **options,
                warrants and rights**
              **(a)**
            
            **Weighted-average**
              **exercise
                price of**
              **outstanding**
              **options,
                warrants**
              **and
                rights**
              **(b)**
            
            **Number of securities**
              **remaining available for
                future**
              **issuance
                under Equity**
              **Compensation
                Plans**
              **(excluding
                securities reflected**
              **in
                column (a))**
              **(c)**Equity
                compensation plans approved by security holders
            32,771
            
            $
            1.99
            
            7,928Equity
                compensation plans not approved by security holders
            —
            
            
            —
            
            0Total
            32,771
            
            $
            1.99
            
            7,928





**Dividend
      Policy**





Our
      Board
      of Directors determines any payment of dividends. We have never declared or
      paid
      cash dividends on our common or preferred stock. We do not expect to authorize
      the payment of cash dividends on our shares of common or preferred stock in
      the
      foreseeable future. Any future decision with respect to dividends will depend
      on
      future earnings, operations, capital requirements and availability, restrictions
      in future financing agreements and other business and financial
      considerations.





**Sales
      of Unregistered Securities**





On
      March 2, 2005, we engaged in a private placement of 6,518,987 shares of our
      common stock and five-year warrants to purchase 1,303,797 shares of common
      stock, half at an exercise price of $2.56 per share and half at an exercise
      price of $2.78 per share. The transaction closed on March 3, 2005 and we
      realized gross proceeds of $10.3 million from the financing, before deducting
      commissions and other expenses. We agreed to register for resale the shares
      of
      common stock issued in the private placement and shares issuable upon exercise
      of warrants. Such registration statement became effective on May 11,
      2005.





On
      March
      22, 2005, in connection with the Company’s acquisition of American Vantage
      Corporation from American Vantage Companies (“AVC”), the Company issued to AVC
      (i) 7,000,000 shares of the Company’s common stock valued at $2.27 per share and
      (ii) warrants to purchase 1,400,000 shares of the Company’s common stock, half
      at an exercise price of $2.56 per share and half at an exercise price of $2.78
      per share.





In
      May
      2005, we engaged in a private placement of 3,000,000 shares of our common stock
      and five-year warrants to purchase 270,000 shares of our common stock at an
      exercise price of $2.56 per share. The transaction closed on May 20, 2005,
      and we realized gross proceeds of $5.25 million from the financing before
      deducting commissions and other expenses.





On
      December 5, 2005, we engaged in a private placement of 16,000,000 shares of
      our common stock and five-year warrants to purchase 4,800,000 shares of common
      stock with an exercise price of $2.40 per share. The transaction closed on
      December 6, 2005 and we realized gross proceeds of $32 million from the
      financing, before deducting commissions and other expenses.





On
      October 4, 2005, we entered into a Note and Warrant Purchase Agreement with
      a
      group of investors (collectively, the “Investors”). Under the Note and Warrant
      Purchase Agreement, the Investors loaned a total of $4.0 million to the Company
      in exchange for (i) promissory notes in favor of the Investors with a total
      principal balance of $4.0 million and (ii) five-year warrants to purchase a
      total of 280,000 shares of our common stock at an exercise price of $1.88 per
      share.




17


From
      time
      to time, the Company has awarded stock options to certain individuals outside
      of
      the Company’s stock option plans.





The
      aforementioned sales of securities were not registered under the Securities
      Act
      of 1933, as amended (the “Act”), or any state securities laws, and were sold in
      private transactions exempt from registration pursuant to Section 4(2) of
      the Act and Regulation D promulgated thereunder.




18


**ITEM 6.** **SELECTED
      FINANCIAL DATA**





You
      should read the financial data set forth below in conjunction with “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”
(included in Item 7) and our consolidated financial statements and the related
      notes included in this Annual Report.




**(In
                  thousands, except per share information)**
              
              Years
                  Ended December 31,2006*
              
              2005
              
              2004
              
              2003
              
              2002**Statement
                  of Operations data:**Revenues,
                  net of sales returns, discounts and allowances
              
              $
              119,011
              
              $
              22,328
              
              $
              16,630
              
              $
              3,069
              
              $
              2,144Cost
                  of revenues
              
              
              130,870
              
              
              22,883
              
              
              13,893
              
              
              2,150
              
              
              1,592Gross
                  profit (loss)
              
              
              (11,859
              )
              
              (555
              )
              
              2,737
              
              
              919
              
              
              552Operating
                  expenses (income):General
                  and administrative
              
              
              19,867
              
              
              14,747
              
              
              8,231
              
              
              3,531
              
              
              3,304Restructuring
              
              
              -
              
              
              2,745
              
              
              -
              
              
              -
              
              
              -Gain
                  on sale, related party
              
              
              (63
              )
              
              (1,352
              )
              
              -
              
              
              -
              
              
              -Equity
                  in net loss from Distributor
              
              
              7,989
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  operating expenses
              
              
              27,793
              
              
              16,140
              
              
              8,231
              
              
              3,531
              
              
              3,304Loss
                  from operations
              
              
              (39,652
              )
              
              (16,695
              )
              
              (5,494
              )
              
              (2,612
              )
              
              (2,752
              )Interest
                  expense and other, net
              
              
              86
              
              
              (465
              )
              
              (551
              )
              
              (130
              )
              
              (35
              )Loss
                  before provision for income taxes
              
              
              (39,566
              )
              
              (17,160
              )
              
              (6,045
              )
              
              (2,742
              )
              
              (2,787
              )Provision
                  for income taxes
              
              
              5,797
              
              
              1
              
              
              1
              
              
              1
              
              
              1Extraordinary
                  gain, net of taxes
              
              
              54,203
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              8,840
              
              $
              (17,161
              )
              $
              (6,046
              )
              $
              (2,743
              )
              $
              (2,788
              )**Basic
                  and diluted EPS**Loss
                  before extraordinary item
              
              $
              (0.74
              )
              $
              (0.42
              )
              $
              (0.25
              )
              $
              (0.16
              )
              $
              (0.20
              )Extraordinary
                  item
              
              
              0.89
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              0.15
              
              $
              (0.42
              )
              $
              (0.25
              )
              $
              (0.16
              )
              $
              (0.20
              )Basic
                  and diluted weighted average shares
              
              
              60,949
              
              
              40,400
              
              
              23,827
              
              
              17,574
              
              
              13,839**Balance
                  Sheet data:**Cash
                  and cash equivalents
              
              $
              3,745
              
              $
              30,597
              
              $
              1,224
              
              $
              941
              
              $
              746Working
                  capital
              
              
              3,707
              
              
              21,441
              
              
              60
              
              
              1,150
              
              
              590Investment
                  in Distributor
              
              
              84,796
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  assets
              
              
              89,428
              
              
              76,365
              
              
              12,996
              
              
              5,575
              
              
              2,283Redeemable
                  common stock
              
              
              -
              
              
              414
              
              
              395
              
              
              491
              
              
              466Deferred
                  gain, related party
              
              
              -
              
              
              1,212
              
              
              -
              
              
              -
              
              
              -Total
                  stockholders' equity
              
              
              75,483
              
              
              55,188
              
              
              4,432
              
              
              2,723
              
              
              1,053




*
        For
        2006, the financial data reflects results from the Company's new venture
        with
        The Weinstein Company, and will not be comparable to prior years. Results
        reflect operations of Genius Products, Inc. from January 1 through July 21,
        2006
        and the Company's equity in net loss from Distributor from July 22 through
        December 31, 2006.




19




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





**UNAUDITED
      RESTATEMENTS OF 2006 QUARTERLY FINANCIAL STATEMENTS**





On
      April
      12, 2007, the Audit Committee of the Board of Directors of the Company
      determined that it was necessary to restate the Company’s unaudited consolidated
      financial statements and other financial information at and for the fiscal
      quarters ended March 31, June 30 and September 30, 2006. The majority of the
      restatement adjustments relate to non-cash items. The restatements are reflected
      in the financial statements included in this Report on Form 10-K, and the
      Company intends to file shortly amendments to its Form 10-Qs for the quarterly
      periods in 2006. The restatements relate to the correction of the following
      errors in the Company’s financial statements at and for these dates (See also
      Note 9 to the consolidated financial statements of the Company included
      elsewhere):





1. The
      Company revised the computation of its stock option non-cash compensation
      expense under the provisions of FAS 123(R) Accounting for Stock Based
      Compensation and EITF 96-18 Accounting for Equity Instruments That Are Issued
      to
      Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services (“Stock Option Compensation Expense”), for the fiscal quarters ended
      March 31, June 30 and September 30, 2006. The revised computation changed Stock
      Option Compensation Expense in each of the three above-mentioned fiscal
      quarters.




Additionally,
      the Company revised its computation of Stock Option Compensation Expense in
      the
      fiscal quarter ended September 30, 2006 to properly reflect the accelerated
      vesting of employee and non-employee awards of stock options which occurred
      upon
      the closing of the TWC Transaction as of July 21, 2006. This non-cash adjustment
      was necessary as the Stock Option Compensation Expense related to the
      accelerated vesting was recorded in the records of the Distributor. For the
      three months ended March 31, 2006, the Company decreased its Stock Option
      Compensation Expense by $0.1 million. For the three months ended June 30 and
      September 30, 2006, the Company increased Stock Option Compensation Expense
      by
      $0.4 million and $4.1 million, respectively.





2. The
      Company revised its reported net revenue amounts for the fiscal quarters ended
      March 31, June 30 and September 30, 2006 to properly reflect net revenue in
      the
      appropriate periods. The need for these corrections resulted from cut-offs
      due
      to the closing of the TWC Transaction on July 21, 2006 (as opposed to a
      month-end cut-off date), cut-offs at June 30 and errors in the timing of
      recognition of invoices and expenses. For the three months ended June 30 and
      September 30, 2006, the Company increased its revenue in the amount of $2.3
      million and decreased its revenue in the amount of $2.0 million, respectively.
      In addition, the Company identified errors in the treatment of revenue from
      revenue-sharing agreements and revised its reported net revenue to comply with
      the provisions of EITF 01-09 Accounting for Consideration Given by a Vendor
      to a
      Customer. The total non-cash adjustments required to decrease revenue for the
      three months ended March 31, June 30 and September 30, 2006, were $0.7 million,
      $1.2 million and $0.3 million, respectively.





3. The
      Company revised its advertising and marketing expense to properly expense
      advertising and marketing related items as incurred and revised participations
      expense to comply with the provisions of SOP 00-2, Accounting
      by Producers or Distributors of Films .
      The
      Company increased advertising and marketing expense by $2.6 million for the
      three months ended March 31, 2006, and decreased advertising and marketing
      expenses by $1.6 million for the three months ended June 30, 2006. For the
      three
      months ended March 31 and June 30, 2006, the Company reduced participation
      expense by $1.5 million and increased participation expense by $0.4 million,
      respectively.





4. The
      Company reduced an accrued liability on its balance sheet by approximately
      $0.4
      million for the fiscal quarter ended March 31, 2006, to reflect that the Company
      does not have any obligation associated with redeemable common stock that had
      been accrued for and disclosed in prior fiscal periods. The redeemable common
      stock was reclassified to additional paid-in capital.





5. The
      Company revised its operating results for the fiscal quarter ended June 30,
      2006
      to account for the impairment of its film library, advances made to participants
      and physical inventory based upon the Company’s shift in its business from
      value-priced product to branded content. These non-cash adjustments were
      necessary to properly reflect the realizability of such assets as of June 30,
      2006. The total non-cash adjustments required to decrease film library, advances
      made to participants and physical inventory as of June 30, 2006 were $11.6
      million, $2.2 million and $4.6 million, respectively.




20




6. The
      Company increased by $10.0 million the amount it recorded as an extraordinary
      gain associated with the TWC Transaction as of July 21, 2006, primarily as
      a
      result of the restatement item in paragraph 5 above. This non-cash adjustment
      was necessary since adjustments that the Company recorded in the fiscal quarters
      ended March 31 and June 30, 2006 changed the carrying amount of certain assets
      and liabilities that were contributed to the Distributor.





7. The
      Company decreased by $1.4 million the amount it recorded for expenses for the
      fiscal quarter ended September 30, 2006 to properly allocate certain sales
      and
      general and administrative costs between the Company and the Distributor in
      the
      period that they were incurred. In addition, the Company revised the amount
      it
      recorded for its equity in earnings of the Distributor for the fiscal quarter
      ended September 30, 2006, to properly reflect its earnings as a result of
      adjustments made to the operating results of the Distributor. The total non-cash
      adjustment required to adjust the Company’s equity in net loss of the
      Distributor for the fiscal quarter ended September 30, 2006 was a decrease
      of
      $1.8 million.





8. The
      Company revised its tax provision amounts for the fiscal quarters ended March
      31, June 30 and September 30, 2006 to properly reflect  its
      tax
      provision for these periods.  The need for these corrections resulted from
      the liability recognized in purchase accounting in connection with the
      Wellspring acquisition and the TWC Transaction.
      For the three months ended March 31 and three months ended June 30, the
      Company decreased its tax provision by $46,000 and $1.3 million, respectively,
      and for the three months ended September 30, the Company increased its tax
      provision by $13.1 million, including amounts attributable to the extraordinary
      gain .





9. The
      company revised the presentation of its advertising and marketing expenses
      and
      bad debt expense for the fiscal quarters ended March 31, June 30 and September
      30, 2006 to reclassify these amounts from operating expenses to cost of
      revenues.





The
      effects of the restatements on net revenues, cost of revenues, gross profit
      (loss), general and administrative costs, net income (loss), basic and diluted
      loss and income per common share, accounts receivable, film library, accrued
      expenses, and stockholders’ equity as of and for the quarters ended March 31,
      June 30 and September 30, 2006 are set forth in Note 9 in the Company’s
      financial statements attached to this Annual Report.





**TRANSACTION
      WITH THE WEINSTEIN COMPANY**





On
      July
      21, 2006, Genius Products, Inc. (“we”, “us”, “our” or the “Company”) completed a
      strategic transaction (the “TWC Transaction”) with The Weinstein Company LLC
      (“TWC”) and its parent company, The Weinstein Company Holdings LLC (“TWC
      Holdings”), and formed a venture named Genius Products, LLC (the “Distributor”)
      to exploit the U.S. home video distribution rights to feature film, television
      programming, documentary and direct-to-video releases owned or controlled by
      TWC
      and other content partners. At the closing of the TWC Transaction on July 21,
      2006 (the “Closing”), we contributed to the Distributor all of our operating
      business, including substantially all of our assets, except for approximately
      $1.0 million in cash, the right to proceeds from the exercise of options and
      warrants issued prior to the Closing and certain liabilities. At the Closing,
      the Company received a 30% equity interest in the Distributor and became the
      managing member of the Distributor.





For
      the
      period from July 22, 2006 through December 31, 2006 (after the Closing), we
      accounted for our investment in the Distributor using the equity method of
      accounting. Under the equity method of accounting, only our investment in and
      amounts due to and from the Distributor are included in our consolidated balance
      sheet. As a result, we recorded an asset on our balance sheet related to our
      investment interest in the Distributor. In our statement of operations, we
      recorded our 30% share of the Distributor’s loss as equity in net losses from
      the Distributor. We recorded a gain upon consummation of the TWC Transaction
      based on the difference between the fair market value of assets contributed
      and
      their net book value, reduced for the portion of the gain associated with our
      retained economic interest in the Distributor. We entered into a master
      contribution agreement related to the TWC Transaction effective December 5,
      2005
      and operated under an interim distribution agreement with TWC through July
      21,
      2006. During that period, we recorded the results from releasing TWC titles
      in
      our financial statements. After the Closing, substantially all of the operating
      activities that we previously conducted, including releasing TWC products,
      are
      reflected in the financial statements of the Distributor.




21


The
      information in this Annual Report pertaining to our business operations reflects
      the operations of the Company prior to the Closing and the operations of the
      Distributor after the Closing. In addition, we are including standalone
      financial statements and footnotes of the Distributor, which are located
      immediately following the footnotes for the Company.





We
      recognized an extraordinary gain on sale of $54.2 million after taxes,
      representing the excess of total consideration less net assets transferred
      to
      the Distributor in the TWC Transaction net of the Company’s retained ownership
      interest in the Distributor.





**CRITICAL
      ACCOUNTING POLICIES**





**NOTE** **:
      THE FOLLOWING CRITICAL ACCOUNTING POLICIES ARE CONSISTENTLY APPLIED BY BOTH
      GENIUS PRODUCTS, INC. AND GENIUS PRODUCTS, LLC.**





ALLOWANCE
      FOR SALES RETURNS AND DOUBTFUL ACCOUNTS. The allowance for doubtful accounts
      and
      provision for sales returns includes management's estimate of the amount
      expected to be uncollectible or returned on specific accounts and losses or
      returns on other accounts as yet to be identified included in accounts
      receivable. We
      provide for future returns of home video product at the time the products are
      sold. We calculate an estimate of future returns of product by analyzing a
      combination of historical returns, current economic trends, projections of
      consumer demand for our product and point-of-sale data available from certain
      retailers. Based on this information, a percentage of each sale is reserved.
      We
      also analyze other factors, including our historical experience with similar
      types of sales, information we receive from retailers and our assessment of
      the
      product's appeal based on domestic box office success and other research. Actual
      returns are charged against the reserve. The
      amounts we will ultimately realize could differ materially in the near term
      from
      the amounts estimated in arriving at the allowance for doubtful accounts and
      provision for sales returns in the accompanying financial
      statements.




INVENTORIES.
      Inventories consist of raw materials and finished goods and are valued at the
      lower of cost or market. Cost is determined on an average cost basis, which
      approximates the first-in-first-out method of valuation. The Distributor
      regularly monitors inventory for excess or obsolete items and makes any
      valuation corrections when such adjustments are needed.




LONG-LIVED
      ASSETS. **





*Film
      Library:* We
      capitalize the costs of production and acquisition of film libraries. Costs
      of
      production include costs of film and tape conversion to DLT master format,
      menu
      design, authoring and compression. These costs are amortized to cost of sales
      in
      accordance with Statement of Position (“SOP”) 00-2, “Accounting by Producers or
      Distributors of Films”, using the individual film forecast method over a period
      of ten years. Costs are stated at the lower of unamortized film costs or
      estimated fair value. For acquired film libraries, ultimate revenue includes
      estimates over a period not to exceed ten years. Management regularly reviews
      and revises when necessary its ultimate revenue and cost estimates, which may
      result in a change in the rate of amortization of film costs and/or a write-down
      of all or a portion of the unamortized film or library costs to its estimated
      fair value. No assurances can be given that unfavorable changes to revenue
      and
      cost estimates will not occur, which may result in significant write-downs
      affecting our results of operations and financial condition.




*Goodwill
      and Other Intangible Assets* :
      We
      evaluate the carrying value of goodwill as of December 31 of each year and
      between annual evaluations if events occur or circumstances change that would
      more likely than not reduce the fair value of the reporting unit below its
      net
      book value. Such circumstances could include, but are not limited to: (1) a
      significant adverse change in legal factors or in business climate,
      (2) unanticipated competition, or (3) an adverse action or assessment
      by a regulator. When performing the impairment review, we determine the carrying
      amount of each reporting unit by assigning assets and liabilities, including
      the
      existing goodwill, to those reporting units. A reporting unit is defined as
      an
      operating segment or one level below an operating segment (referred to as a
      component). A component of an operating segment is deemed a reporting unit
      if
      the component constitutes a business for which discrete financial information
      is
      available, and segment management regularly reviews the operating results of
      that component.




22




To
      evaluate whether goodwill is impaired, we compare the fair value of the
      reporting unit to which the goodwill is assigned to the reporting unit's net
      book value, including goodwill. We determine the fair value of each reporting
      unit using the present value of expected future cash flows for that reporting
      unit. If the net book value of a reporting unit exceeds its fair value, the
      amount of the impairment loss must be measured. The impairment loss would be
      calculated by comparing the implied fair value of reporting unit goodwill to
      its
      carrying amount. In calculating the implied fair value of the reporting unit
      goodwill, the fair value of the reporting unit is allocated to all of the other
      assets and liabilities of that unit based on their fair values. The excess
      of
      the fair value of a reporting unit over the amount assigned to its other assets
      and liabilities is the implied fair value of goodwill. An impairment loss would
      be recognized when the carrying amount of goodwill exceeds its implied fair
      value. We also evaluate other intangible assets to determine whether such assets
      have been impaired.




Long-lived
      assets are reviewed annually for impairment and whenever events or changes
      in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. An impairment loss is recognized when the undiscounted cash flows
      estimated to be generated by the asset are less than the carrying amount of
      the
      asset.




REVENUE
      RECOGNITION. Revenue from the sale or licensing of films is recognized upon
      meeting all recognition requirements of SOP 00-2 and Staff Accounting Bulletin
      (“SAB”) No. 104 Revenue Recognition. Revenues are recorded upon the receipt of
      goods by the customer for titles that do not have a “street date” (when it is
      available for sale by the customer). If a title has a street date, we recognize
      the initial shipment as revenue on that date and all subsequent shipments after
      street date are recognized as revenue upon the receipt of goods by the customer.
      Under revenue sharing arrangements, rental revenue is recognized on or after
      the
      street date and when we are entitled to receipts and such receipts are
      determinable. Costs of sales and an allowance for returns are recorded at the
      time of revenue recognition. Revenues from royalties are recognized when
      received. Revenues from licensing are recognized when the title is available
      to
      the licensee. Cash payments received are recorded as deferred revenue until
      all
      the conditions of revenue recognition have been met. Long-term, non-interest
      bearing receivables are discounted to present value.




**NOTE** **:
      THE FOLLOWING CRITICAL ACCOUNTING POLICIES ARE APPLIED ONLY BY GENIUS PRODUCTS,
      INC.**





INVESTMENT
      IN DISTRIBUTOR. The amount initially recorded for our investment in the
      Distributor was partially based on our fair value as determined by reference
      to
      the quoted market price of the Company’s common stock at the close of the market
      on the closing date of the TWC Transaction and partially based on the historical
      basis of the net assets surrendered in the TWC Transaction. The carrying amount
      of the Company’s investment in the Distributor is adjusted to recognize our
      share of the earnings or losses of the Distributor after the TWC Transaction.
      Pursuant to Accounting Principles Bulletin No. 18, we will be required to
      periodically assess whether a decrease in value of the investment has occurred
      which is other than temporary and which should be recognized immediately,
      resulting in an impairment loss.





INCOME
      TAXES . As
      of
      December 31, 2006, we had total net operating loss carry-forwards for
      federal and state income tax purposes of $50.3 million and $41 million,
      respectively which start expiring in 2011 through 2026. Included in our total
      net operating loss carryover, is approximately $17.6 million of net operating
      losses we inherited as a result of the AVMC acquisition pertaining mainly to
      the
      Wellspring division. The utilization of net operating loss carry-forwards may
      be
      limited due to the ownership change under the provisions of Internal Revenue
      Code Section 382 and similar state provisions.




The
      net
      increase in our valuation allowance was $4.7 million in 2006, $12.3 million
      in
      2005 and $2.6 million in 2004. All of our deferred income tax assets have been
      offset by a valuation allowance as management does not believe the
      recoverability of the deferred income tax assets is more likely than not to
      occur. The Company has recorded a net deferred tax liability relating to its
      investment in Genius Products, LLC. The deferred tax liability related to Genius
      Products, LLC is not offset against the deferred tax assets as the reversal
      period for this amount is not considered to be determinable on a more likely
      than not basis.





23





**GENIUS
      PRODUCTS, INC.**





The
      following discussion and analysis of the financial condition and results of
      operations of Genius Products, Inc. should be read in conjunction with the
      financial statements and notes thereto of the Company contained in this report.
      The discussion contains forward-looking statements that relate to future events
      or the Company’s future financial performance that involve known and unknown
      risks, uncertainties and other factors that may cause the Company’s actual
      results, levels of activity, performance or achievements to be materially
      different from those expressed or implied by the forward-looking statements.
      For
      additional information concerning these factors, see the information under
      the
      caption “Risk Factors” in Item 1A above.





The
      discussion in this section reflects the Company’s operations for the 202 day
      period ending July 21, 2006, the period prior to the closing of the TWC
      Transaction. For the 163 day period from July 22 through December 31, 2006
      (post-closing), we accounted for the Company’s investment in the Distributor on
      the Company’s financial statements using the equity method of accounting. Under
      the equity method of accounting, only the Company’s investment in and amounts
      due to and from the Distributor are included in the Company’s consolidated
      balance sheet. On the Company’s statement of operations, we recorded the
      Company’s 30% share of the Distributor's profit or loss as equity in net
      earnings (losses) from the Distributor, as adjusted for certain basis
      differences. After the closing of the TWC Transaction, substantially all of
      the
      operating activities previously conducted by the Company as well as the results
      from releasing TWC product are reflected in the financial statements of the
      Distributor. We did not compare the results of operations for the 202 day period
      ending July 21, 2006 with the year ended December 31, 2005 due to the fact
      that
      the time periods involved are not comparable, and the prior year operations
      focused solely on non-TWC product.





The
      Company does not report its different product lines as segments because we
      do
      not allocate our resources among product lines nor do we measure performance
      by
      product line. We do not maintain discrete financial information regarding
      product lines. Our sales, marketing and product development efforts among our
      different product lines are supported by one integrated group of individuals.
      Additionally, our warehousing costs also reflect support of all product lines
      and as such cannot be segmented.




**Results
        of Operations of Genius Products, Inc. for 202 days from January 1 to July
        21,
        2006**


*Revenues*





Revenues
      for the 202 days ended July 21, 2006 were $119.0 million, net of sales returns,
      discounts and allowances of $40.9 million. Net revenues for the 202 days ending
      July 21, 2006 were primarily composed of sales of TWC titles, *Derailed, Wolf Creek, Mrs. Henderson Presents, Hoodwinked, Transamerica, The
      Matador* and *The
      Libertine,* sales of
      branded and proprietary products including branded classic movies and television
      shows on DVD as well as non-branded classic movies and television shows on
      DVD,
      and Wellspring titles from AVMC.





Consistent
      with other retail product distributors, the Company has
      experienced some degree of sales seasonality; however, subsequent to the July
      21, 2006 completion of the TWC Transaction described below, sales seasonality
      will be reflected in the revenues and operations of the Distributor directly,
      and in the Company’s results of operations indirectly, through its equity
      interest in the Distributor.





Excluding
      the impact of acquisitions and new content agreements, the third quarter (period
      ending September 30) is typically the lowest sales period and the fourth
      quarter the highest. We have also historically experienced higher returns during
      the first two quarters than during the last two quarters. However, historic
      changes in revenues may not be indicative of future trends and may not track
      industry seasonality norms. In addition, the Distributor is currently placing
      a
      higher focus on branded and proprietary business and less of a focus on
      non-branded, value-priced products compared to our practice in prior years.
      This
      change in focus may also affect the fluctuation in our quarterly
      results.





*Costs
      and expenses*




*Cost
      of Revenues*




Cost
      of
      revenues consists primarily of the raw material and manufacturing costs of
      products sold to customers, packaging and shipping costs, advertising and
      marketing, amortization of our film library, and participations and royalties.
      Participation expenses related to TWC’s distribution agreement are accrued in
      the proportion that current year’s revenues for a title bear to management’s
      estimates of the ultimate revenue expected to be recognized for that
      title.




24


Manufacturing
      and distribution expenses were $26.5 million for the 202 days ending July 21,
      2006. Manufacturing and distribution expenses are primarily due to the video
      release of TWC’s titles during such period.





Advertising
      and marketing expenses were $18.0 million during the 202 days ending July 21,
      2006. Advertising and marketing is primarily attributable to the advertising
      campaigns for the video release of TWC’s *Derailed* , *Wolf
      Creek* , *Hoodwinked* , *Doogal* , *The
      Matador* ,
      and *The
      Libertine* .
      Advertising and marketing expenses are recorded in the period in which these
      expenses are incurred.





Amortization
      and participation expenses were $86.4 million for the 202 days ending July
      21,
      2006. Amortization and participation expenses include amortization of film
      library and participation expenses related to TWC and other
      licensors.





*Operating
      Expenses*





General
      and administrative expenses were $19.9 million for the year ended December
      31,
      2006 and 17% of net revenues.




During
      the 163-day period from July 22 through December 31, 2006, the Company’s 30%
      equity in the net loss of the Distributor was $8.0 million.





*Other
      Income and Expense*




The
        Company had interest income of $0.1 million and $11,000 of interest expense
        during the 202 days ending July 21, 2006. Interest
        income relates to interest earned on outstanding cash balances, and interest
        expense was associated with notes payable that were partially repaid in the
        first quarter.
 The
          Company had income tax expense of $5.8 million for the year ended December
          31,
          2006.
 
 As
          result
          of the foregoing, the net loss before extraordinary gain was $45.4 million
          for
          the year ended December 31, 2006.
 As
            a
            result of the closing of the TWC Transaction, the Company recorded an
            extraordinary gain of $54.2 million after taxes. The extraordinary gain
            represents the fair value of the 70% interest in Genius Products, Inc.
            relinquished in the TWC Transaction, determined by reference to the Company’s
            equity market capitalization on July 21, 2006, less the carrying amount
            of net
            assets.





Net
      income was $8.8 million for the year ended December 31, 2006.




**Results
      of Operations of Genius Products, Inc. for 2005 Compared to
      2004**





*Revenues*





Video
      and
      DVD revenues for the year ended December 31, 2005 were composed of sales of
      branded and proprietary products including branded classic movies and television
      shows on DVD as well as non-branded classic movies and television shows on
      DVD
      and Wellspring titles from the completion of the acquisition of AVMC on March
      22, 2005. Video gross revenues increased $8.8 million or 55.3% during the year
      ended December 31, 2005 to $24.8 million compared to $16.0 million for the
      same
      period ended December 31, 2004. These increases were due to the acquisition
      of
      AVMC on March 22, 2005 and increased revenues from our branded products during
      2005. The increase in revenue was offset by a decline in value priced products
      as a result of our decision to discontinue this product line. Value product
      net
      revenue declined from $11.1 million in 2004 to $3.7 million in 2005, or 67%.
      Excluding value product revenue, gross revenue increased $13.1 million from
      $5.5
      million in 2004 compared to $18.6 million in 2005 or 238%.





25




Theatrical
      revenues were composed of sales generated from film rental by our theatrical
      subsidiary, Wellspring Media Inc., that we acquired from AVMC on March 22,
      2005.
      Theatrical revenues were $0.8 million for the year ended December 31, 2005,
      as
      compared to zero for the comparable prior year. On February 20, 2006 we
      announced a corporate realignment of this subsidiary.





Audio
      revenues for the year ended December 31, 2005 were composed of Baby Genius,
      Kid
      Genius, licensed music CDs, interactive music programs, and non-branded, value
      music products sold at an entry level price point at retail. Audio revenues
      increased $3.1 million, or 103.4%, during the year ended December 31, 2005
      to
      $6.0 million, as compared to $2.9 million during the comparable prior year.
      The
      increase was attributable to higher sales of the Baby Genius and licensed music
      product and continued sales of the non-branded, value music products and
      Lifestyles Music Program that we introduced in the fourth quarter of 2004.





Royalties,
      licensing and other revenues were composed of royalties from licensing fees
      from
      Wellspring Media, Inc, and the license of our Baby Genius brand name. Royalties,
      licensing and other revenues increased $0.3 million, or 77.3%, for the year
      ended December 31, 2005 to $0.7 million, as compared to $0.4 million during
      the
      comparable prior year. The changes resulted from a decrease in royalties related
      to the licensing of our Baby Genius brand name, offset by an increase in
      licensing revenues from our acquisition of AVMC on March 22, 2005.





As
      a
      result of the foregoing, total gross revenues increased $13.0 million, or 67.0%,
      during the year ended December 31, 2005, to $32.3 million as compared to $19.3
      million during the comparable prior year, due primarily to increased sales
      of
      video and audio products as discussed above.





Sales
      returns, discounts and allowances increased $7.3 million, or 268.5%, during
      the
      year ended December 31, 2005 to $10.0 million, as compared to $2.7 million
      during the year ended December 31, 2004. Overall, there has been an industry
      trend towards an increasing percentage of returns for the sale of DVDs. The
      increase resulted primarily from additional markdowns, higher returns from
      increased sales year over year, and higher than expected returns during the
      quarter ended December 31, 2005 due to lower than expected performance by a
      retail promotion with one of our major retailers. The provision for sales
      returns and allowances is calculated in accordance with historical averages
      and
      industry changes, but may vary in the future based on customer and product
      mix.





Net
      revenues increased $5.7 million, or 34.3%, for the year ended December 31,
      2005
      to $22.3 million as compared to $16.6 million for the comparable prior year,
      due
      to the increase in sales of DVDs and the acquisition of AVMC, offset in part
      by
      an increase in sales returns and allowances as described above.





*Costs
      and Expenses*





*Cost
      of Revenues*





Cost
      of
      sales consists primarily of the cost of products sold to customers, packaging
      and shipping costs, amortization of production masters and library, and
      participations and royalties paid on sales of licensed products. For analytical
      purposes we review amortization of production masters and library as a
      stand-alone cost element and discuss the aggregate cost of producing, packaging,
      and shipping of the audio, DVD, and royalty, licensing and other products.
      Generally, cost of sales increased as a result of increased sales.





Video
      and
      DVD cost of sales increased $2.3 million, or 19.4%, during the year ended
      December 31, 2005 to $13.7 million as compared to $11.4 million during the
      comparable prior year. The increase resulted from an increase in Video and
      DVD
      sales, partially due to the addition of AVMC into our Video and DVD product
      mix
      for 2005 and a reserve recorded for obsolete products determined by management
      to be of limited or no value. Video and DVD cost of sales in 2005 were 55.1%
      of
      DVD and VHS revenues, as compared to 71.7% for 2004. The decrease in Video
      and
      DVD costs for the year ended December 31, 2005, as compared to the year ended
      December 31, 2004, was the result of an increase of higher margin products
      in
      our sales mix during 2005. The improvement in the cost of sales and the reserve
      for obsolescence are due in part to our decision to decrease our sales of value
      priced, lower margin content and increase the sale of our proprietary content.




26




Theatrical
      cost of sales, composed primarily of releasing costs associated with film prints
      and advertising related to the exhibition and promotion of films in theaters
      by
      our subsidiary, Wellspring Media Inc., were $2.1 million for the year ended
      December 31, 2005 as compared to zero during 2004. During 2005, theatrical
      releasing costs included significant expenditures on the theatrical release
      of
      titles including *Palindromes,
      Kings & Queens, Wild*  *Side,* and *The
      Beat My Heart Skipped.* Theatrical releasing expenditures can vary from period to period, often in
      advance of a theatrical release and the associated film rental revenues that
      are
      generated from exhibiting the film.





Audio
      cost of sales increased $2.6 million, or 221.9%, during the year ended December
      31, 2005 to $3.8 million, as compared to $1.2 million for the year ended
      December 31, 2004. The increase in cost of sales was due to higher audio sales
      for 2005 compared to 2004. Audio cost of sales in 2005 was 63.7% of audio
      revenues, as compared to 40.2% in 2004. This increase was due ---primarily
      to
      the reserve of inventory during the second and fourth quarters of 2005.





Warehouse
      expenses and other decreased by $0.3 million, or 48.3%, to $0.3 million in
      2005
      as compared to $0.6 million in 2004 due to the classification of royalties,
      licensing and other expense of $0.3 million in 2004. Excluding the royalties,
      licensing and other expense of $0.3 million in 2004, warehouse expense increased
      slightly to $0.3 million in 2005 as increased sales and inventory levels
      resulted in higher freight-in and warehouse operations. However, warehouse
      expenses as a percentage of gross sales decreased from 3.0% in 2004 to 0.9%
      in
      2005.





Amortization
      of production masters and film library increased $2.3 million, or 336.3%, for
      the year ended December 31, 2005 to $3.0 million, as compared to $0.7 million
      during the comparable prior year. The increase in amortization of production
      masters and film library is primarily the result of an increase in sales for
      2005 as compared to 2004 and the acquisition of AVMC.





*Gross
      Profit*





Gross
      profit decreased $3.3 million to a gross loss of $0.6 million in 2005 as
      compared to a gross profit of $2.7 million in 2004 due primarily to a reserve
      recorded for obsolete products determined by management to be of limited or
      no
      value and higher amortization of production master and film
      library.





*Operating
      Expenses*





General
      and administrative expenses increased by $6.5 million, or 79% during the year
      ended December 31, 2005 to $14.7 million, as compared to $8.2 million during
      2004. These increases were primarily due to increased payroll, rent, and
      utilities as a result of the acquisition of AVMC, increased payroll and overhead
      to support the increased sales volume anticipated as part of the new
      relationship with The Weinstein Company from which revenue will not be generated
      until 2006, increased transaction costs including investment banking, audit
      and
      legal fees related to the transaction announced with The Weinstein Company,
      severance costs associated with employees and outside consultants and warrants
      and options expense associated with compensation to certain employees and
      outside consultants. Additional expenses include increased insurance, accounting
      and legal costs associated with the larger combined entity. General and
      administrative expense as a percentage of net revenues increased from 49% in
      2004 to 66% in 2005. Excluding expenses of $2.4 million associated with TWC
      transaction fees and TWC-related overhead and other charges, general and
      administrative expenses would have been $12.3 million in 2005, or 55% of net
      revenue, as compared to $8.2 million, or 49% in 2004.





We
      reorganized our executive management team and terminated an exclusive agreement
      with our financial advisor during the third quarter ended September 30, 2005.
      As
      a result, severance related charges of approximately $2.7 million were
      recognized, of which $1.4 million was related to non-cash compensation expense
      resulting from the grant of additional vested stock options and the acceleration
      of certain unvested stock options. As of December 31, 2005, the remaining
      severance obligation was $0.3 million.





*Other
      Income and Expense*





On
      December 31, 2005, we sold to Klaus Moeller, our founder and former Chief
      Executive Officer, all of our right, title and interest in and to our “Baby
      Genius”, “Kid Genius”, “Little Tikes” and “Wee Worship” lines of business for a
      total purchase price of $3 million.




27


The
      purchase price was payable as follows:





·
            $0.25
                million in cash on signing;


·
            $0.75
                million by means of secured promissory note due and payable in full,
                together with all accrued interest, on January 30, 2006, bearing
                interest
                at the rate of 4.5% per annum; and


·
            $2
                million by means of a secured promissory note due and payable in
                full,
                together with all accrued interest, on the fifth anniversary of the
                closing date, bearing interest at a rate of 4.5% per
                annum.





In
      conjunction with this transaction we recorded a gain on sale in the amount
      of
      $1.4 million and recorded a note receivable in the amount of $1.7 million
      representing the present value of a $2 million secured promissory note that
      we
      received in this transaction. We have subsequently received payment in full
      of
      the secured promissory note, due on January 30, 2006, in the amount of $0.75
      million, plus interest.





Interest
      expense and other, net decreased by $0.1 million, or 15.6% for the year ended
      December 31, 2005 to $0.5 million, as compared to $0.6 million for the
      comparable prior year. The decrease resulted from the repayment of notes payable
      in the fourth quarter of 2004 and an increase in interest income in 2005 as
      a
      result of an increase in cash, partially offset by an increase in interest
      expense related to the $4.0 million notes payable assumed as part of the AVMC
      transaction and the $4.0 million notes payable issued in October 2005.





As
      result
      of the foregoing, the net loss increased by $11.1 million for the year ended
      December 31, 2005, to $17.1 million, as compared to $6.0 million for
      2004.





**Liquidity
      and Capital Resources**




Net
      cash
      used in operations during the twelve months ended December 31, 2006 was $3.9
      million, primarily due to increases in net accounts receivable, inventories,
      a
      decrease in accounts payable and additions to our film library offset by
      increases in accrued expenses, remittance due to licensor, and net income of
      $8.8 million. These changes are primarily related to the release of TWC titles
      during the 202-day period prior to the closing of the TWC Transaction on July
      21, 2006. The increase in accounts receivable relates primarily to sales
      of *Derailed, Mrs. Henderson Presents, Transamerica, Wolf Creek,
      Hoodwinked* , *Doogal, The Matador* and *The
      Libertine* .
      The
      increase in inventories primarily relate to the production of inventory for *Scary
      Movie 4* and *Lucky
      Number Slevin* .
      The
      increase in remittance due to licensor primarily represents the amount owed
      to
      TWC after deducting the related cost of revenues, marketing costs and
      distribution fee from net sales of TWC titles. Allowance for doubtful accounts
      and provision for returns increased primarily as a result of reserves for
      returns related to the release of ** TWC
      titles. On July 21, 2006, we contributed substantially all of our assets and
      liabilities to the Distributor. These assets and liabilities are reflected
      on
      the balance sheet of the Distributor at December 31, 2006.




Net
      cash
      used in investing activities was $21.1 million, primarily attributed to the
      investment in the Distributor.




Cash
      used
      in financing activities for twelve months ended December 31, 2006 was $1.9
      million, resulting from the repayment of $5.2 million in notes payable offset
      by
      proceeds from the exercise of stock options and warrants.




At
      December 31, 2006, the Company had cash balances of $3.7 million. We may
      consider additional issuance of equity and debt financing to fund future growth
      opportunities. Although we believe that the Distributor’s expanded product line
      offers us the opportunity for significantly improved operating results in future
      quarters, no assurance can be given that we will operate on a profitable basis
      in 2007, or ever, as such performance is subject to numerous variables and
      uncertainties, many of which are out of our control. Although we own 30% of
      the
      Distributor, we only have access to the cash on the Distributor’s balance sheet
      to the extent that we agree with our partner, TWC, to make a distribution to
      us.





**GENIUS
      PRODUCTS, LLC**




The
      following discussion and analysis of the financial condition and results of
      operations of Genius Products, LLC should be read in conjunction with the
      financial statements of the Distributor and notes thereto attached to this
      report. The discussion contains forward-looking statements that relate to future
      events or the Distributor’s future financial performance that involve known and
      unknown risks, uncertainties and other factors that may cause the Distributor’s
      actual results, levels of activity, performance or achievements to be materially
      different from those expressed or implied by the forward-looking statements.
      For
      additional information concerning these factors, see the information under
      the
      caption “Risk Factors” in Item 1A above.




28


**Results
      of Operations of Genius Products, LLC for the Period from July 22 to December
      31, 2006**





The
      discussion in this section reflects the results of operations of the Distributor
      for the 163 day period from July 22 through December 31, 2006. The transaction
      with TWC closed on July 21, 2006. After the closing of the TWC Transaction,
      substantially all of the operating activities previously conducted by the
      Company, as well as the results from releasing TWC products, are reflected
      in
      the financial statements of the Distributor. We did not compare the results
      with
      the prior year results due to the fact that the Distributor did not have
      reported results for the prior year.




The
      Distributor does not report its different product lines as segments because
      it
      does not allocate its resources among product lines nor does it measure
      performance by product line. The Distributor does not maintain discrete
      financial information regarding product lines. The Distributor’s sales,
      marketing and product development efforts among its different product lines
      are
      supported by one integrated group of individuals. Additionally, the
      Distributor’s warehousing costs also reflect support of all product lines and as
      such cannot be segmented.





*Revenues*





Revenues
      for the 163 days ended December 31, 2006 were $155.6 million, net of sales
      returns, discounts and allowances of $72.0 million. Revenues for the 163 days
      ended December 31, 2006 were primarily composed of sales of TWC
      titles, *Scary Movie 4, Lucky Number Slevin, Pulse, Feast* and *Clerks
      2,* and
      sales of branded and proprietary ESPN® and WWE® titles on DVD.





Consistent
      with other retail product distributors, the Distributor may experience some
      degree of sales seasonality. Excluding the impact of acquisitions and new
      content agreements, the third quarter is typically the lowest sales period
      and
      the fourth quarter the highest. Historically returns are higher during the
      first
      two quarters than during the last two quarters. However, historical changes
      in
      revenues may not be indicative of the Distributor’s future trends and may not
      track industry seasonality norms. In addition, the Distributor is currently
      placing a higher focus on its branded and proprietary business and less of
      a
      focus on non-branded, value priced products compared to the Company’s focus in
      prior years. This change in focus may also cause the Distributor’s quarterly
      results to differ from historical patterns.




*Costs
      and expenses*




*Cost
      of Revenues*




Cost
      of
      revenues consists primarily of the raw material and manufacturing costs of
      products sold to customers, packaging and shipping costs, advertising and
      marketing, amortization of film library, participations, and royalties.
      Participation expenses related to the TWC Distribution Agreement are accrued
      in
      the proportion that current year’s revenues for a title bear to management’s
      estimates of the ultimate revenue expected to be recognized for that
      title.





Manufacturing
      and distribution expenses were $54.2 million for the 163 days ending December
      31, 2006. Manufacturing and distribution expenses were incurred primarily in
      connection with the video release of TWC’s titles during such period.





Amortization
      and participation expenses were $89.2 million for the 163 days ending December
      31, 2006. Amortization and participation expenses include amortization of film
      library, intangibles and participation expenses related to TWC and other
      licensors.





Advertising
      and marketing expenses were $24.6 million during the 163 days ending December
      31, 2006. Advertising and marketing is primarily attributable to the advertising
      campaigns for the video release of TWC’s *Scary
      Movie 4* , *Lucky
      Number Slevin* , *Pulse* , *Feast* ,
      and *Clerks
      2* .
      Advertising and marketing expenses are recorded in the period in which these
      expenses are incurred.




29




*Operating
      Expenses*




General
      and administrative expenses were $7.6 million during the 163 days ending
      December 31, 2006. General and administrative expenses primarily relate to
      payroll, rent, audit and legal fees and warrants and options expense. General
      and administrative expenses were 5% of net revenues for the 163 days ending
      December 31, 2006.





*Other
      Income and Expense*





The
      Distributor had interest income of $0.5 million and interest expense of $0.2
      million during the 163 days ending December 31, 2006. Interest income related
      to
      interest earned on outstanding cash balances, and interest expense was primarily
      associated with notes payable that were contributed to the Distributor upon
      the
      closing of the TWC Transaction.





As
      result
      of the foregoing, the Distributor incurred a net loss of $19.7 million during
      the 163 days ending December 31, 2006.





**Liquidity
      and Capital Resources of Genius Products, LLC**




Net
      cash
      used in operations during the 163 day period from July 22 through December
      31,
      2006 was $6.2 million, primarily due to increases in net accounts receivable,
      royalty advances, and net loss of $19.7 million offset by increases in
      remittance due to licensors and accounts payable. These items are primarily
      related to the release of TWC titles. Accounts receivable relates primarily
      to
      sales of *Scary Movie 4,*  *Lucky
      Number Slevin, Pulse, Feast* and *Clerks 2* and the
      release of ESPN and WWE titles during the 163 days ending December 31, 2006.
      Accrued expenses primarily relate to invoices received but not paid for the
      production of inventory and sales and marketing expenses related to *Scary
      Movie 4,*  *Lucky
      Number Slevin, Pulse, Feast* and *Clerks 2* .
      The
      remittance to licensors primarily represents the amount owed to TWC after
      deducting the related cost of revenues, marketing costs, and the Distributor’s
      distribution fee from net sales of TWC titles during the 163 days ending
      December 31, 2006. Under the terms of the TWC Distribution Agreement, the
      Distributor is required to pay TWC after collection of receipts, the amount
      of
      which is determined by net revenue, which as of December 31, 2006 had not been
      collected. However, the Distributor bears the risk of accounts receivable
      collections. Allowance for doubtful accounts and provision for returns increased
      primarily as a result of reserves for returns related to TWC titles.




Net
      cash
      used in investing activities for the 163 days ending December 31, 2006, was
      $4.6
      million, primarily attributed to the payment of transaction costs related
      to the TWC transaction.




Cash
      used
      in financing activities for the 163 days ending December 31, 2006 was $1.3
      million, resulting from operating costs incurred by the Distributor to provide
      certain services to Genius Products, Inc.





At
      December 31, 2006, the Distributor had cash balances of $8.3 million. The
      Distributor may consider additional issuance of debt financing to fund future
      growth opportunities. Although we believe that the Distributor’s expanded
      product line offers the opportunity for significantly improved operating results
      in future quarters, no assurance can be given that we or the Distributor will
      operate on a profitable basis in 2006, or ever, as such performance is subject
      to numerous variables and uncertainties, many of which are out of our or the
      Distributor’s control.





The
      table
      below summarizes information as of December 31, 2006 regarding certain future
      minimum contractual obligations and commitments for the next five
      years.


(In
                  thousands)
              
              2007
              
              2008
              
              2009
              
              2010
              
              2011
              
              TotalLease
                  obligations
              
              $
              863
              
              $
              873
              
              $
              740
              
              $
              762
              
              $
              207
              
              $
              3,445Employment
                  agreements
              
              
              1,938
              
              
              1,783
              
              
              1,783
              
              
              1,194
              
              
              432
              
              
              7,130Consulting
                  agreements
              
              
              537
              
              
              138
              
              
              -
              
              
              -
              
              
              -
              
              
              675Royalty
                  advances
              
              
              29,137
              
              
              20,050
              
              
              8,200
              
              
              -
              
              
              -
              
              
              57,387Total
              
              $
              32,475
              
              $
              22,844
              
              $
              10,723
              
              $
              1,956
              
              $
              639
              
              $
              68,637




30




**ITEM 7A.****QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





As
      of
      December 31, 2006, the Distributor’s cash and cash equivalents were
      invested with financial institutions with investment grade credit ratings.
      Due
      to the short duration of the Distributor’s investment portfolio and the high
      quality of the Distributor’s investments, an immediate 10% change in interest
      rates would not have a material effect on the fair market value of the
      Distributor’s portfolio. Therefore, we would not expect the Distributor’s
      operating results or cash flows to be affected to any significant degree by
      the
      effect of a sudden change in market interest rates on the Distributor’s
      investment portfolio.





Neither
      we nor the distributor enter into hedging or derivative instrument
      arrangements.





**ITEM 8.****FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





The
      Consolidated Financial Statements of Genius Products, Inc., together with the
      reports thereon of Ernst & Young LLP and Singer Lewak Greenbaum &
Goldstein LLP, begin at page F-1 of this Report and are incorporated herein
      by
      reference and contain the following:




Report
                of Ernst & Young LLP
            F-1Report
                of Singer Lewak Greenbaum & Goldstein LLP
            F-2Consolidated
                Genius Products, Inc. Balance Sheets as of December 31, 2006 and
                2005.
            F-3Consolidated
                Genius Products, Inc. Statements of Operations for the Years Ended
                December 31, 2006, 2005 and 2004.
            F-4Consolidated
                Genius Products, Inc. Statements of Stockholders’ Equity for the Years
                Ended December 31, 2006, 2005 and 2004.
            F-5Consolidated
                Genius Products, Inc. Statements of Cash Flows for the Years Ended
                December 31, 2006, 2005 and 2004.
            F-6Notes
                to Genius Products, Inc. Consolidated Financial
                Statements.
            F-7Schedule
                II Valuation and Qualifying Accounts
            F-34Report
                of Ernst & Young LLP
            F-37Consolidated
                Genius Products, LLC Balance Sheet as of December 31,
                2006.
            F-38Consolidated
                Genius Products, LLC Statement of Operations for the Period from
                July 21
                through December 31, 2006.
            F-39Consolidated
                Genius Products, LLC Statement of Members’ Equity for the Period from July
                21 through December 31, 2006.
            F-40Consolidated
                Genius Products, LLC Statement of Cash Flows for the Period from
                July 21
                through December 31, 2006
            F-41Notes
                to Genius Products, LLC Consolidated Financial Statements.
            F-42




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





None.





**ITEM 9A.****CONTROLS
      AND PROCEDURES**





**Disclosure
      Controls and Procedures**





Disclosure
      controls and procedures (as defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other
      procedures that are designed to provide reasonable assurance that the
      information that we are required to disclose in the reports that we file or
      submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the SEC’s rules and forms, and that such
      information is accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate to allow
      timely decisions regarding required disclosure.




31




In
      connection with the preparation of this Annual Report, our management, with
      the
      participation of our Chief Executive Officer and our Chief Financial Officer,
      carried out an evaluation of the effectiveness of the design and operation
      of
      our disclosure controls and procedures as of December 31, 2006. In making
      this evaluation, our management considered the matters relating to the
      restatement of our financial statements for the quarters ended March 31,
      June 30 and September 30, 2006, and the material weaknesses discussed
      below. Based on this evaluation, our Chief Executive Officer and Chief Financial
      Officer concluded that our disclosure controls and procedures were not effective
      at the reasonable assurance level as of December 31, 2006.





In
      light
      of the material weaknesses described below, we performed additional analyses
      and
      other procedures to ensure that our consolidated financial statements included
      in this Annual Report were prepared in accordance with generally accepted
      accounting principles (“GAAP”). These measures included, among other things,
      expansion of our year-end closing procedures, including the expanded review
      and
      analysis of the accounting between the Company and the Distributor, dedication
      of significant internal resources and external consultants to scrutinize account
      analyses, reserve estimates, asset valuations, proper accounting treatment
      for
      revenues and expenses and account reconciliations at a detailed level. As a
      result of these and other expanded procedures, we concluded that the
      consolidated financial statements included in this Annual Report present fairly,
      in all material respects, our financial position, results of operations and
      cash
      flows for the periods presented in conformity with GAAP.





Our
      management, under the supervision of our Chief Executive Officer and Chief
      Financial Officer, is responsible for establishing and maintaining adequate
      internal control over financial reporting. Internal control over financial
      reporting is a process designed to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external purposes in accordance with GAAP. Internal control over financial
      reporting includes policies and procedures that (i) pertain to the maintenance
      of records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of the assets of the Company, (ii) provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with GAAP, and that receipts
      and expenditures of the Company are being made only in accordance with
      authorizations of management and directors of the Company, and (iii) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use, or disposition of the Company’s assets that could have a
      material effect on the financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with existing policies or procedures may deteriorate. Further, because of
      changes in conditions, effectiveness of internal controls over financial
      reporting may vary over time.





A
      material weakness is a control deficiency, or combination of control
      deficiencies (within the meaning of PCAOB Auditing Standard No. 2), that results
      in there being more than a remote likelihood that a material misstatement of
      the
      annual or interim financial statements will not be prevented or detected on
      a
      timely basis by employees in the normal course of their assigned functions.
      Management has identified the following material weaknesses in our internal
      control over financial reporting as of December 31, 2006:





As
      of
      December 31, 2006, we did not maintain effective controls over the
      following items: (i) timely and routine process for reconciling certain accounts
      to the general ledger; (ii) detailed documentation and analysis to support
      certain reserve estimates; (iii) proper presentation of marketing related
      expenses associated with revenue generated from “Revenue Share” parties; (iv)
      proper application of stock compensation expense and incomplete record keeping
      related to stock option grants; (v) proper application of the provision of
      SOP
      00-2 Accounting by Producers or Distributors of Films for the recognition of
      revenues and expenses associated with the Distributor’s distribution agreement
      with TWC; (vi) timely assessment of accounts for realizability or impairment;
      (vii) accurate valuation and supporting documentation for certain assets as
      of
      the closing date of the TWC Transaction; and (viii) formal process over changes,
      access and controls and procedures related to our information technology
      systems.




32




Such
      control deficiencies related primarily to the Company’s new relationship with
      TWC which was announced in December 2005 and the TWC Transaction, which closed
      on July 21, 2006. For the interim period from December 2005 through July 21,
      2006, the Company operated under an interim distribution agreement with TWC.
      As
      of December 31, 2006, our internal accounting personnel did not have
      sufficient depth, skills and experience to recognize errors and deficiencies
      in
      accounting policies and procedures required to properly account for the closing
      of the TWC Transaction. We also had insufficient formalized processes to ensure
      that accounting policies and procedures implemented after the closing of the
      TWC
      Transaction were properly scrutinized or revised for the new corporate
      organizational structure in order to provide reasonable
      reliability.





As
      a
      result of the material weaknesses described above, our management concluded
      that
      as of December 31, 2006, we did not maintain effective internal control
      over financial reporting.





The
      foregoing control deficiencies caused certain errors in our financial statement
      accounts during 2006 and required adjustments of our financial statements.
      These
      errors were discovered by senior management and Ernst & Young LLP in
      connection with work on the audit for fiscal 2006. We intend to file amendments
      to our Quarterly Reports on Form 10-Q for the periods ending March 31,
      June 30 and September 30, 2006 reflecting these adjustments. These
      adjustments are further discussed under Note 9 to our Consolidated Financial
      Statements included in this Annual Report.





In
      response to the identified material weaknesses, we have remedied the specific
      accounting policies and procedures which led to the errors requiring
      restatement. We have established additional policies and enhanced the procedures
      that we will follow and have addressed these items as follows: (i) the Company
      has added additional accounting and financial personnel with industry
      experience, is implementing a formal closing process, has employed an experience
      financial executive to oversee internal controls and procedures implementation,
      and engaged experienced outside consultants to assist the Company in complying
      with the requirements of Sarbanes Oxley by December 31, 2007; (ii) the Company
      established formal processes and procedures including a review conducted by
      the
      Company’s senior executives to ensure appropriate documentation and analyses for
      all reserve estimates; (iii) the Company has changed its invoicing process
      and
      procedures to ensure the proper presentation of marketing related expenses
      associated with revenue generated from “Revenue Share” parties; (iv) the Company
      has engaged the services of an independent stock administration firm to assist
      with transactions, recordkeeping and the computation of compensation expense
      related to its stock options, allocated two individuals within the organization
      to oversee the administration of stock options and performed a review of stock
      option grants to ensure accuracy of the information; (v) the Company has changed
      its accounting policy to related to the proper application of SOP 00-2 to ensure
      proper timing of the recognition of revenue and expenses related to the TWC
      Distribution Agreement; (vi) the Company has implemented a periodic review
      process to assess the recoverability of amounts invested in specific projects;
      (vii) the Company has retained a third party valuation firm to value specific
      assets including intangible assets and allocated personnel to ensure that
      certain asset and liability accounts are properly reviewed and documented;
      and
      (viii) the Company has hired an information technology professional and is
      currently in the process of hiring an additional professional to ensure formal
      processes are implemented with respect to changes, controls, access and
      standardized procedures. Additionally, the Company has engaged a major
      information technology infrastructure provider, that is SAS 70 compliant, to
      assist with hosting the Company’s financial systems. As a result of these
      changes, we do not expect that the type of adjustments discussed in Note 9
      to
      the consolidated financial statements of the Company will recur.





In
      addition, our management, with oversight from our Audit Committee, has dedicated
      significant resources and have hired an internal control manager and external
      consultants to support management in its efforts to improve our control
      environment and to review, remediate and implement controls and procedures
      to
      satisfy the Company’s requirement to be compliant with the requirements of
      Sarbanes Oxley by December 31, 2007. We intend to further expand our internal
      accounting personnel, information technology systems and personnel and
      compliance capabilities by attracting additional talent, enhancing training
      and
      implementing system and process improvements in our accounting and record
      keeping. These ongoing efforts are focused on implementing process changes
      to
      strengthen our internal control and monitoring activities.





**Changes
      in Internal Control over Financial Reporting**





Other
      than as described above, there were no changes in our internal control over
      financial reporting during the quarter ended December 31, 2006, that
      materially affected, or are reasonably likely to affect, our internal control
      over financial reporting.





33





**ITEM 9B.****OTHER
      INFORMATION**





None.




34




**PART
      III**





**ITEM 10.****DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**





**Management**





The
      following table sets forth certain information with respect to each of our
      directors and executive officers, and each of the executive officers of the
      Distributor, as of March 31, 2007.





**NAME**
            **AGE**
            **POSITION**Stephen
                K. Bannon (3)
            53
            Director,
                ChairmanTrevor
                Drinkwater
            41
            President
                and Chief Executive Officer of the Company and the Distributor,
                DirectorBradley
                A. Ball (1) (2) (3)
            57
            DirectorJames
                G. Ellis (1) (2) (3)
            59
            DirectorHerbert
                Hardt (1) (2) (3)
            63
            DirectorLarry
                Madden
            42
            DirectorIrwin
                Reiter
            48
            DirectorJohn
                Mueller
            44
            Executive
                Vice President and Chief Financial Officer of the Company and the
                DistributorMichel
                Urich
            41
            Executive
                Vice President, General Counsel and Secretary of the Company and
                the
                DistributorMitch
                Budin
            41
            Executive
                Vice President of Sales of the DistributorEd
                Byrnes
            62
            Executive
                Vice President, Finance, Systems and Information Technology of the
                DistributorChristine
                Martinez
            40
            Executive
                Vice President and General Manager of the DistributorMichael
                Radiloff
            43
            Executive
                Vice President of Marketing of the DistributorRodney
                Satterwhite
            42
            Executive
                Vice President and Chief Operating Officer of the
                Distributor





(1) Member
        of
        audit committee.





(2) Member
      of
      compensation committee.





(3) Member
      of
      nominating committee.





*Stephen
      K. Bannon* was
      appointed as a Director and Chairman of the Board of the Company in March 2005
      in connection with our acquisition of American Vantage Media Corporation
      (“AVMC”). Mr. Bannon has also served as an outside consultant to the Company
      since July 20, 2006. Mr. Bannon served as the Chief Executive Officer of AVMC
      from May 2004 until our acquisition of AVMC in March 2005. From January 2004
      to
      April 2004, Mr. Bannon provided executive and management services to AVMC as
      a
      consultant. From April 2002 to December 2003, Mr. Bannon served as Head,
      Strategic Advisory Services for The Firm, a leading talent management company
      in
      the entertainment and media industries. Prior to that, from April 1990 to July
      1998, he served as Chief Executive Officer of Bannon & Company, Inc., an
      investment banking firm specializing in the entertainment, media and
      communications industries. In July 1998 Bannon & Company was sold to Societe
      Generale and Mr. Bannon became head of The Media and Entertainment Group as
      part
      of this transaction. Mr. Bannon began his investment banking career in 1984
      with
      Goldman Sachs, Inc., where he worked as a Mergers and Acquisitions Investment
      Banker until 1990. Mr. Bannon was appointed Chairman of the Board of Points
      International in February 2007. Mr. Bannon has a Masters of Arts from Georgetown
      University and an MBA from Harvard Business School where he graduated with
      honors. Mr. Bannon was a Naval Officer for seven years from 1976-1983 including
      four years of sea-duty aboard the USS Paul F. Foster “DD964”. Mr. Bannon was
      awarded the Navy Expedition Medal in 1981 for service in the Persian Gulf during
      the Iranian Hostage Crisis.




*Trevor
      Drinkwater* has
      served as a director of the Company since July 21, 2005 and has served as the
      Company’s President and Chief Executive Officer since February 2005. Mr.
Drinkwater has also served as the President and Chief Executive Officer of
      the
      Distributor since the closing of the TWC Transaction on July 21, 2006. From
      July
      2004 to February 2005, Mr. Drinkwater served as the Company’s Executive Vice
      President of DVD Sales. Prior to that, he served as Chief Operating Officer
      of
      Take-Two Interactive Software, Inc. from 2003-2004, Senior Vice President of
      Sales & Sales Operations at Warner Home Video, Inc. from 1999-2003 and
      worked for The Perrier Group of America, now known as Nestle Waters, from
      1989-1999, where he started in field sales and progressed to General Manager.





35





*Bradley
      A. Ball* has
      served as a director since December 12, 2006. Mr. Ball most recently served
      as
      President of Warner Bros.’ Domestic Theatrical Marketing division. While at
      Warner Bros., he directed all areas of film marketing for Warner Bros.’ North
      American operations and the release of over 90 films, including “You’ve Got
      Mail,” “The Matrix” and “Harry Potter and the Sorcerer’s Stone.” He also served
      as Chairman of the Time Warner Marketing Council, integrating all divisions
      of
      Warner Bros. in cross-divisional marketing efforts to maximize efforts resulting
      from the AOL-Time Warner merger. Further, Mr. Ball was a key player in Warner
      Bros.’ first entry into “original” IMAX content, spearheading production and
      corporate sponsorship for the film “NASCAR 3D, the IMAX Experience.” Before
      joining Warner Bros., Mr. Ball worked as Senior Vice President and Chief
      Marketing Officer for McDonald’s Corporation’s domestic business. During his
      tenure at McDonald’s, he directed U.S. marketing plans for over 10,000
      restaurants, 2,800 franchises and their multiple agency system. His
      contributions included being co-architect of the Disney and McDonald’s global
      alliance, the Atlanta Olympics campaign, numerous Super Bowl advertisements
      and
      the launch of McDonald’s “Did Somebody Say McDonald’s?” branding campaign. Mr.
      Ball began his career at Davis, Johnson, Mogul and Colombatto, a Los Angeles
      based advertising agency where he worked his way to partner.





*James
      G. Ellis* has
      served as a director since February 2005. Mr. Ellis is the Dean of The Marshall
      School of Business at the University of Southern California, having been
      appointed in April 2007. Prior to that, he was USC’s Vice Provost for
      Globalization, responsible for building the school’s brand on a worldwide basis.
      He has served as the Vice Dean of External Relations at The Marshall School
      of
      Business, and as the Associate Dean of the Undergraduate Business Program.
      In
      addition, he is Professor of Marketing, a position he has held since 1997.
      Prior
      to joining academia, Mr. Ellis held various senior executive positions in
      established companies as well as in entrepreneurial ventures. He is a founding
      director of Professional Business Bank in Pasadena, California, and currently
      serves on a number of corporate and non-profit boards, including, among others,
      the board of the Fixed Income Funds of The Capital Group. He is also a member
      of
      the Chief Executives Organization and World Presidents Organization, and is
      a
      graduate of the University of New Mexico and The Harvard University Graduate
      School of Business Administration.





*Herbert
      Hardt* has
      served as a director since October 2005. Mr. Hardt has been a principal of
      Monness, Crespi, Hardt & Co., Inc. since 1980. From 1976 to 1979, he served
      as Vice President of Fidelity Management and Research (Bermuda). Mr. Hardt
      worked at Fidelity Management and Research in Boston, first as an analyst and
      then as fund manager of Essex Fund and Trend Fund from 1971-1976. Mr. Hardt
      received his Bachelor of Arts with a Concentration in Engineering and Applied
      Physics from Harvard College in 1965 and his Master of Business Administration
      from Harvard University in 1971. He also attended graduate school in applied
      mathematics at the University of Bern in Bern, Switzerland. From 1966-1969,
      Mr.
      Hardt served in the military with the 82 nd Airborne
      Division. Mr. Hardt also serves on the board of directors of E-Room
      Systems.





*Larry
      Madden* has
      served as a director since July 21, 2006. Since July 2005, Mr. Madden has served
      as Executive Vice President and Chief Financial Officer of The Weinstein
      Company. From March 2005 to June 2005, Mr. Madden served as President, Digital
      Media Solutions for Loudeye Corp., a supplier of white label music platforms
      and
      business-to-business digital media distribution services. During his tenure
      at
      Loudeye, he also served as Executive Vice President and Chief Financial Officer
      from March 2004 to March 2005. Prior to this, Mr. Madden served as Executive
      Vice President, Chief Financial Officer and Chief Administrative Officer for
      EMAK Worldwide, Inc., a Los Angeles based provider of integrated marketing
      services, from November 2000 to January 2004. He also served as Executive Vice
      President and Chief Financial Officer for Atomic Pop, an online music
      distribution and marketing venture, and as Senior Vice President and Chief
      Financial Officer for the recorded music and publishing investments of
      Wasserstein Co., Inc., an investment bank. Earlier in his career, Mr. Madden
      held executive financial roles at Def Jam Recordings and PolyGram International.
      He began his career with Ernst & Young.




36


*Irwin
      Reiter* has
      served as a director since July 21, 2006. Since the launch of The Weinstein
      Company in October 2005, Mr. Reiter has served as The Weinstein Company’s
      Executive Vice President of Accounting and Financial Reporting. Prior to joining
      The Weinstein Company, Mr. Reiter held various positions at Miramax Films from
      1989-2005, including Controller, Chief Financial Officer and Executive Vice
      President of Accounting and Financial Reporting. During his tenure at Miramax,
      Mr. Reiter was responsible for all aspects of general ledger and financial
      reporting as well as overseeing the participation reporting department. He
      worked on all financial aspects of the company including key vendor
      relationships, key licensing relationships as well as overseeing the financial
      reporting and accounting department. Prior to working for Miramax, Mr. Reiter
      held the position of Manager of Financial Reporting at Tri-Star Pictures from
      1985-1989. Mr. Reiter is a CPA with an MBA in Finance from Hofstra
      University.




*John
      Mueller* has
      served as the Company’s Executive Vice President and Chief Financial Officer
      since February 1, 2006. Mr. Mueller has also served as the Chief Financial
      Officer of the Distributor since the closing of the TWC Transaction on July
      21,
      2006. Mr. Mueller joined the Company from Jefferies & Company, Inc., where
      he served as Senior Vice President of Media and Entertainment Investment Banking
      in New York. Prior to Jefferies, Mr. Mueller worked for Credit Suisse First
      Boston in New York and SG Cowen in Los Angeles advising entertainment and media
      companies from a broad range of sectors including filmed entertainment, video
      games and internet media. Mr. Mueller began his career in corporate finance
      at
      Kimberly-Clark Corporation, a Fortune 500 consumer packaged goods
      company.





*Michel
      Urich* became
      our Executive Vice President and General Counsel in November 2005, after serving
      as General Counsel since July 25, 2005. Mr. Urich has also served as Secretary
      of the Company since December 12, 2005, and as Executive Vice President, General
      Counsel and Secretary of the Distributor since the closing of the TWC
      Transaction on July 21, 2006. Prior to joining the Company, from August 2001
      to
      June 2005 Mr. Urich served as Senior Vice President and Director of Legal
      Affairs at Nara Bancorp, Inc., as well as Nara Bank. Mr. Urich has a law degree
      from the University of London, an LLM from The London School of Ecomonics and
      an MBA from the University of San Francisco.




*Mitch
      Budin* has
      served as the Distributor’s Executive Vice President of Sales since the closing
      of the TWC Transaction on July 21, 2006. Prior to that, Mr. Budin had served
      as
      the Company’s Executive Vice President of Sales since January 6, 2006. Mr. Budin
      joined us from Dreamworks SKG, where he served as Head of Sales North America,
      Home Entertainment division, for over five years. At Dreamworks, Mr. Budin
      was
      instrumental in developing sales and marketing strategies and launching some
      of
      the industry’s biggest selling DVDs, including Madagascar, Gladiator, Shrek,
      Shrek 2 and Shark Tale, among others. He joined Dreamworks from Warner Home
      Video, where he held a number of sales and sales management positions during
      his
      nine-year tenure. Budin received his BS from Towson University.





*Ed
      Byrnes* was
      appointed as the Distributor’s Executive Vice President, Finance, Systems and
      Information Technology, on March 5, 2007. Mr. Byrnes joined the Distributor
      from
      Warner Bros., where during a 30-year tenure with Warner Bros. he served in
      a
      number of senior positions in both the music and filmed entertainment groups,
      most recently serving as Executive Vice President, Worldwide Finance, Systems
      and IT, a position he had held since 2000. In 1980, Mr. Byrnes was instrumental
      in the creation of Warner Bros.’ International Home Entertainment group,
      initially setting up the UK company, thereafter managing the EMEA region
      (Europe, Middle East and Africa) and, from 1985 through 2000, serving as
      International Executive Vice President and General Manager.





*Christine
      Martinez* has
      served as the Distributor’s Executive Vice President and General Manager since
      the closing of the TWC Transaction on July 21, 2006. Prior to that, Ms. Martinez
      had served as the Company’s Executive Vice President and General Manager since
      September 2005. Prior to joining us, Ms. Martinez was a Sales and Marketing
      Executive at Warner Home Video from April 1996 to May 2005. Her last executive
      appointment with Warner Home Video was as Vice President, Marketing - Non
      Theatrical, from November 2003 until her departure from the company. Ms.
      Martinez also had a three-year tenure in sales, from March 1993 to April 1996,
      with WEA Corp., a former Time Warner division. Ms. Martinez holds a BBA from
      the
      University of Texas at Austin.




37




*Michael
      Radiloff* has
      served as the Distributor’s Executive Vice President of Marketing since the
      closing of the TWC Transaction on July 21, 2006. Prior to that, Mr. Radiloff
      had
      served as the Company’s Executive Vice President of Marketing since October
      2005. Mr. Radiloff is a senior marketing executive with 16 years of
      entertainment and packaged goods marketing experience with industry-leading
      companies. He was most recently at Warner Home Video as Vice President of
      Theatrical Catalog Marketing from May 2001 to September 2005 and as Director
      of
      DVD Marketing from March 2000 to April 2001. As the person responsible for
      releasing Warner’s vast film library onto DVD, Mr. Radiloff launched over 100
      new DVD releases annually. Prior to that, he worked as a Brand Marketing Manager
      at Disney Interactive and Activision. Mr. Radiloff holds an MBA from Stanford
      Graduate School of Business.





*Rodney
      Satterwhite* has
      served as the Distributor’s Executive Vice President and Chief Operating Officer
      since the closing of the TWC Transaction on July 21, 2006. Prior to that, Mr.
      Satterwhite had served as the Company’s Executive Vice President and Chief
      Operating Officer since November 2005, after serving as our Executive Vice
      President of Operations from April 2005 to November 2005 and our Vice President,
      Sales Services from July 2004 to April 2005. Mr. Satterwhite has over 22 years
      of management experience in entertainment and retail operations, merchandising
      and strategy. While at Giant Foods Inc. from October 1986 to May 1998 he gained
      management experience in the areas of manufacturing, sourcing, distribution,
      cost accounting, finance, merchandising and category management. He spent more
      than five years as an executive at Warner Bros., from May 1998 to February
      2004,
      where he was responsible for developing category management processes as well
      as
      revamping non-traditional video markets and rental strategies. >From February
      2004 to July 2004, before joining us, he was responsible for revamping trade
      marketing, sales planning and analysis, inventory/supply and customer service
      as
      Take-Two Interactive Software, Inc.’s Vice President of North American Sales
      Services.




**Board
      Composition and Committees**





Our
      Board
      of Directors is currently comprised of seven directors and currently has three
      committees: an audit committee, a compensation committee and a nominating
      committee.





The
      audit
      committee currently consists of Messrs. Hardt, Ellis and Ball. Our Board of
      Directors has determined that Mr. Hardt is an audit committee financial expert
      as defined under applicable rules of the SEC, and that Messrs. Hardt, Ellis
      and
      Ball are independent under the rules applicable to NASDAQ listed companies.
      The audit committee, among other things, reviews the scope and results of the
      annual audit and other services provided by our independent auditors and reviews
      and evaluates our accounting policies and systems of internal controls. Our
      Board of Directors has adopted a written charter for the audit committee, which
      establishes operating guidelines for the audit committee.





The
      compensation committee currently consists of Messrs. Ellis, Hardt and Ball.
      The
      compensation committee, among other things, reviews and approves the salaries,
      bonuses and other compensation payable to our, and the Distributor’s, directors,
      executive officers and employees and administers and makes recommendations
      concerning our employee benefit plans.





The
      nominating committee currently consists of Messrs. Ball, Ellis, Hardt and
      Bannon. The nominating committee is responsible for administering our corporate
      governance systems, recommending proposed new members of our Board of Directors,
      evaluating the independence of our current and prospective directors, and
      reviewing the suitability of each member of our Board of Directors for continued
      service. The nominating committee does not have a charter.





It
      is the
      nominating committee’s policy to consider candidates recommended by
      stockholders. If a stockholder wishes to submit a candidate for nomination
      to
      our Board of Directors, the stockholder should send a written notice to our
      Secretary, at 2230 Broadway, Santa Monica, California 90404, Attn: Corporate
      Secretary. It is the nominating committee’s policy to evaluate candidates
      proposed by stockholders using the same criteria as for other candidates. The
      following are among the qualifications that our nominating committee considers
      when evaluating and selecting candidates for nomination to our Board of
      Directors: (i) experience in business, finance or administration; (ii)
      familiarity with our industry; (iii) prominence and reputation; and (iv) whether
      the individual has sufficient time available to devote to the work of the Board
      of Directors and one or more of its committees.





In
      addition, our Board of Directors expects nominees to possess certain core
      competencies, some of which may include broad experience in business, finance
      or
      administration, familiarity with national and international business matters,
      and familiarity with our industry. In addition to having one or more of these
      core competencies, board member nominees are identified and considered on the
      basis of knowledge, experience, integrity, diversity, leadership, reputation
      and
      ability to understand our business.




38


**Code
      of Ethics**





Our
      Board
      of Directors has adopted an Amended and Restated Code of Ethics that applies
      to
      all of our directors, principal executive officer, principal financial officer,
      principal accounting officer and controller, as well as all other persons
      performing similar functions. A copy of such Amended and Restated Code of Ethics
      has been posted on the Company’s website at www.geniusproducts.com .





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





A
      late
      filing of Form 3 was made by Bradley A. Ball, whose Form 3 was due on December
      22, 2006. To the Company’s knowledge, no other person who, at any time during
      the year ended December 31, 2006, was a director, officer or beneficial owner
      of
      more than ten percent of any class of our equity securities registered pursuant
      to Section 12 of the Exchange Act failed to file on a timely basis, as disclosed
      in Form 3 and 4 filings, reports required by Section 16(a) of the Exchange
      Act
      during the year ended December 31, 2006. The foregoing is based solely upon
      a
      review of Form 3 and 4 filings furnished to us during the year ended December
      31, 2006, and certain representations from officers and directors of the
      Company.





**Compensation
      Committee Interlocks and Insider Participation**





No
      member
      of our compensation committee serves as a member of the Board of Directors
      or
      compensation committee of any entity that has one or more executive officers
      serving as a member of our Board of Directors or compensation
      committee.





**ITEM 11.** **EXECUTIVE
      COMPENSATION**





**COMPENSATION
      DISCUSSION AND ANALYSIS**





**Compensation
      program objectives and philosophy**





We
      maintain a group of executive compensation programs for our named executive
      officers (“Named Executive Officers” or “NEOs”) and other senior level
      executives. Our executive compensation program, taken as a whole, has the
      following objectives. The primary objective of our executive compensation
      program is to attract, retain, motivate and develop the types of people which
      we
      need to effectively manage our business during this period of unprecedented
      growth; we seek to employ the best executive talent in our line of business.
      We
      want to reward our executives for business achievements and satisfaction of
      corporate objectives. Additionally, the overall executive compensation program,
      taken as a whole, should align the interests of the executives with the
      stockholders’ interests.





In
      developing our overall executive compensation program and in establishing the
      pay packages for the NEOs, we strive to meet the following goals:





·
            To
                pay salaries that are competitive in our industry and our geographical
                market.


·
            To
                use, assuming that it makes sense for the Company and the Distributor,
                executive pay practices that are commonly found in companies engaged
                in
                the entertainment distribution
                industry.


·
            To
                maintain a ‘pay for performance’ outlook, particularly in our incentive
                programs


·
            To
                pay salaries, and award merit increases, on the basis of the individual
                executive’s performance and contributions to our
                organization.





We
      view
      our competitors for executive talent (for compensation purposes) as the
      entertainment distribution industry.





To
      attain
      these goals, we have created an executive compensation program which consists
      of
      base pay, a short term cash bonus program and a stock option program. NEOs
      also
      participate in the benefit programs that we offer to all full-time employees,
      and certain NEOs receive additional fringe benefits. The Distributor also
      maintains employment contracts with each of the NEOs, as well as with other
      senior executives at the Distributor.




39


Our
      executive compensation program rewards executives for Company and individual
      performance. Company and individual performance are strongly considered when
      we
      grant base pay increases and equity awards. The pool of funds to be used for
      our
      short term bonus program is decided by our principal preferred stockholder,
      TWC
      Holdings; the Compensation Committee of our Board of Directors (the
“Compensation Committee”) approves an allocation of the bonus award among the
      NEOs and other corporate executives with job titles of manager and
      above.





**The
      role of the Compensation Committee**





Our
      Compensation Committee operates under a formal charter. The charter provides
      that the Compensation Committee shall perform the following functions regarding
      compensation for the NEOs:





·
            Review
                and approve the Company’s and the Distributor’s goals relating to
                Principal Executive Officer (“PEO”)
                compensation.


·
            Evaluate
                the PEO’s performance in light of the
                goals.


·
            Make
                recommendations to the board regarding compensation to be paid to
                the
                other NEOs.


·
            Annually
                review, for all NEOs, annual base salary, short term bonus, long
                term
                incentives, employment-related agreements and special benefits.





Our
      Compensation Committee is active; the Committee retained an independent
      compensation consultant and is involved in all phases of our executive
      compensation program’s design and operation.





**The
      components of our executive compensation program**





Our
      executive compensation program consists of three elements: base pay; short
      term
      cash bonus and grants of fair market value options in our stock. We use this
      mix
      of programs for a variety of reasons:





·
            As
                a package, these types of programs are typically offered by the types
                of
                companies from which we would seek executive
                talent.


·
            As
                a package, these particular programs provide both a current and a
                long
                term incentive for the executive officers, thereby aligning the
                executives’ interests with
                shareholders.


·
            These
                programs, as a package, provide the executives with short and long
                term
                rewards; this serves as a retention, as well as a motivational, device
                for
                the executives.





The
      Distributor also provides NEOs with a package of fringe benefits on the same
      basis that is provided to all full-time benefits eligible employees. These
      benefits include such items as health insurance and group term life insurance.
      We provide certain executives with an additional benefit of an automobile
      allowance, which is provided for in their employment contracts.





We
      believe that the package of executive compensation programs that we offer fits
      our needs well. Our program is competitive; we are able to attract and retain
      the executive talent that we need to successfully run our business. We do not
      maintain any type of non-qualified deferred compensation program (either a
      defined benefit or a defined contribution program) for executives; we do not
      provide our NEOs life insurance benefits beyond what are available to our other
      full time employees. We currently believe that the long term incentive component
      of our executive compensation program, which uses fair market value stock
      options, provides executives with an incentive as well as putting a portion
      of
      their compensation at risk if our share price declines; we do not currently
      feel
      the need to provide additional long term incentives to our executives.





We
      believe that our NEOs should have formalized employment contracts with the
      Distributor. The existence of a contract gives the Company, the Distributor
      and
      the NEO structure as to the other’s expectations from the employment
      relationship. We also believe that the level of security that an employment
      contract provides to the executive is an important retention tool; we feel
      that
      many of the companies with whom we compete for executive talent offer such
      agreements, and that we would be at a competitive disadvantage if we did not
      have them. The salient terms of the employment agreements for the NEOs are
      as
      follows:




40


Trevor
      Drinkwater, Principal Executive Officer :
      Mr.
      Drinkwater signed his employment agreement on July 26, 2005, and it has been
      amended on December 5, 2005 and July 20, 2006. The initial agreement provided
      for a base pay of $275,000. The original agreement, which had a two year term,
      also contained a grant of fair market value options to acquire 1,200,000 shares
      of our stock; one half of the options were immediately exercisable and one
      quarter of the options vested on the second and third anniversary of the grant
      of date, and that vesting could accelerate if certain performance goals were
      met. Mr. Drinkwater also receives all of the benefits that are made available
      to
      all of our full time employees, as well as an $800 monthly automobile allowance.
      The agreement also provides for severance pay in certain circumstances, which
      will be discussed below in the “Post-employment Payments” section.




The
      December 5, 2005 amendment extended the term of the agreement to three years
      from that date, and gave the Company the ability to extend the term an
      additional two years. The amendment also granted Mr. Drinkwater an additional
      1,000,000 fair market value options to purchase Company stock, which were to
      vest in equal installments over five years. The July 20, 2006 amendment fixed
      Mr. Drinkwater’s base salary at $425,000 annually, subject to annual review by
      the Compensation Committee.




John
      Mueller, Chief Financial Officer :
      Mr.
      Mueller signed his employment agreement on March 10, 2006. The agreement, which
      has a five year term, provides annual base pay beginning at $250,000 and
      increasing by $25,000 annually. Additionally, Mr. Mueller is guaranteed an
      annual bonus of $150,000, and the Company has the discretion to pay him an
      additional bonus if it is warranted. The agreement also contains a grant of
      fair
      market value options to acquire 750,000 shares of our stock; two-thirds of
      the
      options were immediately exercisable and one sixth of the options will vest
      on
      January 1, 2007 and 2008, respectively. Mr. Mueller also receives all of the
      benefits that are made available to all of our full time employees, as well
      as
      an $800 monthly automobile allowance. The agreement also provides for severance
      pay in certain circumstances, which will be discussed below in the
“Post-employment Payments” section.




Rodney
      Satterwhite, Executive Vice President and Chief Operating
      Officer :
      Mr.
      Satterwhite signed his employment agreement on December 2, 2005 and it was
      amended on December 5, 2005. The agreement, as amended, provides for a two
      year
      term with annual base pay at a rate of $200,000. The Company has the discretion
      to provide a year-end performance bonus. The agreement also contains a grant
      of
      fair market value options to acquire 75,000 shares of our stock, with the shares
      vesting in equal installments over five years. Mr. Satterwhite also receives
      all
      of the benefits that are made available to all of our full time employees,
      as
      well as an $800 monthly automobile allowance. The agreement also provides for
      severance pay in certain circumstances, which will be discussed below in the
      “Post-employment Payments” section. Mr. Satterwhite received an increase in base
      pay to an annual level of $250,000 during 2006.




Christine
      Martinez, General Manager and Executive Vice President of the Genius
      Division :
      Ms
      Martinez signed her employment agreement on September 26, 2005. The agreement
      provides for annual base pay at a rate of $200,000. The Company has the
      discretion to provide a year-end performance bonus. The agreement also contains
      a grant of fair market value options to acquire 225,000 shares of our stock,
      with the shares vesting in equal installments over three years. Ms. Martinez
      also receives all of the benefits that are made available to all of our full
      time employees. The agreement also provides for severance pay in certain
      circumstances, which will be discussed below in the “Post-employment Payments”
section. Ms. Martinez received a retroactive increase in base pay to an annual
      level of $250,000 during 2006.




Mitch
      Budin, Executive Vice President of Sales :
      Mr.
      Budin signed his employment agreement on December 5, 2005. The agreement, which
      has a two year term, provides annual base pay of $210,000 and a guaranteed
      bonus
      of $52,500. The Company has the discretion to pay him an additional performance
      bonus, if warranted, which is limited to no more than 50% of base salary. The
      agreement also contains a grant of fair market value options to acquire 75,000
      shares of our stock, with the shares vesting in equal installments over five
      years. Mr. Budin also receives all of the benefits that are made available
      to
      all of our full time employees, reimbursement of certain expenses related to
      the
      maintenance of his home office as well as an $800 monthly automobile allowance.
      The agreement also provides for severance pay in certain circumstances, which
      will be discussed below in the “Post-employment Payments” section.





Taken
      as
      a whole, we believe that our executive compensation program is a cost-effective
      method of providing competitive pay to our NEOs.




41


**Our
      process for setting executive pay**





The
      Compensation Committee’s focus is to determine the compensation of the Principal
      Executive Officer and to review the proposals of the Principal Executive Officer
      regarding the compensation for his direct reports, which include the NEOs.
      In
      2006, the Compensation Committee made the final decision on all aspects of
      NEO
      pay. In 2007, the Compensation Committee will present recommendations to the
      entire Board of Directors for their approval.





Our
      executive compensation process begins with our human resources department
      providing various types of pay information to the Principal Executive Officer
      for his evaluation and eventual submission of each executive’s total pay package
      to the Compensation Committee for its determination. We maintain a pay structure
      with ranges for each type of compensation (base pay, short term incentive,
      equity grant) for the NEOs, as well as for other executives. We have developed
      this structure using various compensation surveys, compensation consultants
      and
      our knowledge of our industry. When we are recruiting to fill an executive
      position, we also seek the advice of the recruiting firms that we retain when
      setting pay profiles and making employment offers.





During
      2006, the Company retained various compensation consulting firms to look at
      different aspects of executive pay. The Chairman of the Board and the
      Compensation Committee retained an independent compensation consulting firm
      to
      perform a compensation assessment for selected positions, including the NEOs.
      In
      preparing the report, the consultant used a group of peer companies, which
      included Advanced Marketing Services, Image Entertainment, Lions Gate
      Entertainment and Marvel Entertainment.





Our
      process for determining the value of each component of executive pay functioned
      in the following manner for 2006:




Base
      pay: Base
      compensation for all of our NEOs is provided for in their respective employment
      agreements, and the Company has the ability to make annual increases to the
      base
      pay level. Looking at information compiled by outside consultants and our human
      resources department, the Principal Executive Officer makes a recommendation
      for
      executive base pay increases to the Compensation Committee. The Compensation
      Committee reviews the information provided by the Principal Executive Officer
      and its supporting data, and makes a determination of annual base pay
      increases.





The
      Compensation Committee awarded the following base pay increases to the NEOs;
      the
      increases were effective on January 1, 2007.





**NEO**
            
            **Annualized
                2006**
              **Base**
            
            **Annual**
              **Increase**
            
            **Annualized
                2007**
              **Base**
            
            **Percentage**
              **Increase**John
                Mueller, Principal Financial Officer
            
            $250,000
            
            $25,000
            
            $275,000
            
            10%Rodney
                Satterwhite, Executive Vice President and Chief Operating Officer
                of the
                Distributor
            
            $250,000
            
            $25,000
            
            $275,000
            
            10%Christine
                Martinez, Executive Vice President and General Manager of the
                Distributor
            
            $250,000
            
            $25,000
            
            $275,000
            
            10%Mitch
                Budin, Executive Vice President of Sales of the
                Distributor
            
            $210,000
            
            $65,000
            
            $275,000
            
            31%





The
      Executive Vice President of Sales received a larger raise than the other NEOs
      because further analysis by the Compensation Committee indicated that the
      position was underpaid and the Compensation Committee wanted to establish an
      equitable level of base bay amounts for this group of senior
      executives.




42


The
      Principal Executive Officer may receive a merit base pay increase which would,
      if granted, take effect in July, 2007. The amount, if any, of that increase
      has
      not been determined by the Compensation Committee as of this time.





Annual
      bonus: Our
      annual bonus program for executives for 2006 was administered in the following
      manner. Our principal preferred shareholder, TWC Holdings, authorized funding
      a
      bonus pool of a specific dollar amount to be awarded to a group of executive
      employees; this amount was determined, in part, on 2006 operating results.
      This
      group includes the NEOs as well as managers, senior managers, directors,
      executive officers, vice presidents and certain members of the sales department.
      Once TWC Holdings provided the Company with the overall amount of the bonus
      pool, the PEO made a proposal to the Compensation Committee regarding the amount
      of bonus awards to the executive employees including the NEOs, but excluding
      himself. In making the proposals regarding NEO compensation, the PEO considered
      various factors, including the particular NEO’s base salary, the ranges for
      bonuses maintained by the Company for the particular NEO’s position, competitive
      compensation information, the NEO’s role in the Company, and his or her
      contribution to the Company’s success during 2006.





The
      Compensation Committee considered the PEO’s recommendations, and made a
      determination of each NEO’s bonus, as well as the bonus for the Principal
      Executive Officer. The Compensation Committee reviewed various factors when
      determining the amount of the Principal Executive Officer’s bonus, including the
      Company’s performance, relative shareholder return, the value of similar
      incentive awards to chief executive officers at comparable companies and the
      dramatic increase in revenue of our Company in 2006.





The
      bonuses for 2006 performance, which were paid in 2007, were made on a completely
      discretionary basis. The Principal Financial Officer and the Executive Vice
      President of Sales have guaranteed bonuses in their employment contracts; their
      contracts also give the Company the right to make a discretionary additional
      bonus to them. The Compensation Committee did not make an additional bonus
      award
      to the Principal Financial Officer as a result of 2006 operations.





As
      the
      bonus awards are not determined based on any particular Company metric or
      metrics related to financial performance, the Company does not have a policy
      that would require that recipients return the bonus to the Company in the event
      that a restatement of the Company’s financial statements results in a detriment
      to the Company.





The
      annual bonus related to 2006 operations for each NEO stated as a percentage
      of
      base pay is as follows:





**NEO**
            
            **Annualized
                2006**
              **Base**
            
            **Bonus**
              **Awarded**
            
            **Percentage
                of**
              **Annualized
                Base**Trevor
                Drinkwater, Principal Executive Officer
            
            $425,000
            
            $200,000
            
            47%Rodney
                Satterwhite, Executive Vice President and Chief Operating Officer
                of the
                Distributor
            
            $250,000
            
            $70,000
            
            28%Christine
                Martinez, Executive Vice President and General Manager of the
                Distributor
            
            $250,000
            
            $50,000
            
            20%Mitch
                Budin, Executive Vice President of Sales of the
                Distributor
            
            $210,000
            
            $40,000
            
            19%





Equity
      grants: The only
      equity grants that were made to NEOs during 2006 were in connection with
      employment contracts executed by our Principal Financial Officer and the
      Executive Vice President of Sales. The equity grants during 2006 to our
      Executive Vice President of Sales were in the form of Incentive Stock Options
      (ISOs), which are designed to qualify under Internal Revenue Code Section 422,
      and to the extent that those grants exceed the ISO limitations, non-qualified
      stock options. The equity grant during 2006 to our Principal Financial Officer
      was in the form of non-qualified stock options. All of the options granted
      in
      2006 were valued at fair market value as of the date of grant (as further
      explained below). Two thirds of the grant to our Principal Financial Officer
      vested upon the execution of his employment contract; one sixth of the grant
      vested on January 1, 2007; and the remaining one-sixth of the grant will vest
      on
      January 1, 2008. One-third of the grant to our Executive Vice President of
      Sales
      vested upon the date of grant of the options; one third will vest on the first
      anniversary of the date of grant; and the remaining one third will vest on
      the
      second anniversary of the date of grant.




43




In
      connection with the award of equity grants, the Principal Executive Officer
      provides the Compensation Committee with a proposal for equity grants as part
      of
      the employment contract process. The amount of the grant is based on various
      factors, including the equity grant ranges for the position which the Company
      maintains, information from our human resources department and outside
      consultants. The Compensation Committee reviewed the Principal Executive
      Officer’s proposal and the underlying information, and makes its determination
      as to the grant.





We
      establish the exercise price for our options in the following
      manner:





For
      a new
      hire, the Compensation Committee approves the grant and establishes the price
      based on the Company’s closing price on the day of Compensation committee
      approval; however, if the executive has not yet started employment as of the
      date of Compensation Committee approval, the price is set as the Company’s
      closing price on the executive’s first day of work.




For
      a new
      contract for a current executive, the Compensation Committee approves the grant
      and establishes the price based on the Company’s closing price on the day of
      Compensation Committee approval.





Amounts
      realized in a prior year from annual bonuses or equity awards are not a factor
      in determining current year equity grants.





We
      believe that the grant of fair market value stock options, even though there
      is
      now a financial statement impact before the options are exercised, continues
      to
      provide substantial benefits to the Company and the executive. We benefit
      because:





·
            The
                options align the executive’s financial interest with the shareholders’
                interest.


·
            As
                we do not maintain any other long term incentive plans or non-qualified
                deferred compensation programs, the options help us hold onto the
                executives.





The
      executives benefit because:





·
            They
                can realize additional income if our shares increase in
                value.


·
            They
                have no personal income tax impact until they exercise the
                options.





We
      do not
      maintain any equity ownership guidelines for our NEOs. We have adopted a
      corporate policy which expressly prohibits any NEO from trading in derivative
      securities of our Company, short selling our securities, or purchasing our
      securities on margin at any time. We do not time the granting of our options
      with any favorable or unfavorable news relating to our Company. Proximity of
      any
      awards to an earnings announcement, market event or other event related to
      us is
      purely coincidental.




Because
      we feel that each of our NEOs provides unique services to us, we do not use
      a
      fixed relationship between base pay, short term bonus and equity awards. When
      the Compensation Committee makes the final decisions about a NEO’s total
      compensation package for a year, the three elements (base pay, short term bonus
      and equity award) are considered both individually and as a complete package.
      We
      do not take into account amounts that a NEO may have realized in a year as
      a
      result of short term bonus awards or stock option exercises when we establish
      pay levels and goals for the current year. Overall, we believe that our total
      compensation program for executives is reasonable while being competitive with
      market peers.




44


**Summary
      Compensation Table for 2006**





The
      following table shows the compensation for each of the Named Executive Officers
      for 2006.





**Name
                and**
              **Principal**
              **Position**
              **(a)**
            **Year**
              **(b)**
            **Salary**
              **($)**
              **(c)**
            **Bonus**
              **($)(1)**
              **(d)**
            **Stock
                Awards**
              **($)**
              **(e)**
            **Option
                Awards**
              **($)**
              **(f)**
            **Non-Equity**
              **Plan
                Incentive Compensation**
              **($)**
              **(g)**
            **Non-Qualified
                Deferred Compensation Plan Earnings**
              **($)
                (h)**
            **All
                Other Compensation**
              **($)**
              **(i)**
            **Total**
              **($)**
              **(j)**Trevor
                Drinkwater, Principal Executive Officer (2)
            2006
            $333,134
            $200,000
            —
            $1,836,198
            —
            —
            $26,761
            $2,396,093John
                Mueller, Principal Financial Officer (3)
            2006
            $224,584
            $150,000
            —
            $620,462
            —
            —
            $9,600
            $1,004,646Rodney
                Satterwhite, Executive Vice President and Chief Operating Officer
                (4)
            2006
            $225,213
            $70,000
            —
            $381,426
            —
            —
            $9,600
            $686,239Christine
                Martinez, Executive Vice President and General Manager
            2006
            $241,669
            $50,000
            —
            $339,345
            —
            —
            $0
            $631,014Mitch
                Budin, Executive Vice President of Sales (5)
            2006
            $197,046
            $92,500
            —
            $109,245
            —
            —
            $13,100
            $411,891




(1)
            Discretionary
                bonuses for 2006 were paid in April 2007, aside from Trevor Drinkwater’s,
                which was paid in January, 2007.





(2)
            All
                other compensation consists of an $800 per month automobile allowance
                and
                $17,161 in relocation expenses.





(3)
            Bonus
                amounts were provided in Mr. Mueller’s employment agreement. All other
                compensation consists of an $800 per month automobile
                allowance.





(4)
            All
                other compensation consists of an $800 per month automobile
                allowance.





(5)
            Bonus
                consists of a $40,000 discretionary bonus and $52,500 of bonuses
                provided
                for in Mr. Budin’s employment agreement. All other compensation consists
                of an $800 per month automobile allowance and a $3,500 bonus relation
                to
                the award of premium options.





45





**Grants
      of Plan-Based Awards for 2006**





The
      following table provides information about awards granted in 2006 to each of
      the
      Named Executive Officers.





**Estimated
                Future Payouts Under Equity Incentive Plan Awards**
            **All
                Other Option Awards**





**Name
                and**
              **Principal**
              **Position**
              **(a)**
            **Grant
                Date**
              **(b)**
            **Threshold**
              **(#)**
              **(f)**
            **Target**
              **(#)**
              **(g)**
            **Maximum**
              **(#)**
              **(e)**
            **Number
                of**
              **Securities**
              **Underlying**
              **Options**
              **(#)
                (j)**
            **Exercise
                or**
              **Base
                Price of**
              **Option
                Awards**
              **($/sh)**
              **(k)**
            **Grant
                Date**
              **Fair
                Value of**
              **Stock
                and**
              **Option
                Awards**
              **(l)**Trevor
                Drinkwater, Principal Executive Officer
            None
            —
            —
            —
            —
            —
            —John
                Mueller, Principal Financial Officer
            03/10/06
            —
            —
            —
            750,000
            $1.89
            $830,850Rodney
                Satterwhite, Executive Vice President and Chief Operating
                Officer
            None
            —
            —
            —
            —
            —
            —Christine
                Martinez, Executive Vice President and General Manager
            None
            —
            —
            —
            —
            —
            —Mitch
                Budin, Executive Vice President of Sales
            01/03/06
              01/03/06
            —
            —
            —
            225,000
              75,000
            $2.00
              $2.31
            $263,745
              $89,033





**Grants
      of Plan Based Awards**





During
      2006, the only equity grants that were made to NEOs resulted from the execution
      of employment contracts by our Principal Financial Officer and the Executive
      Vice President of Sales. The 2006 equity grants to our Executive Vice President
      of Sales were in the form of Incentive Stock Options (ISOs), which are
      designed to qualify under Internal Revenue Code Section 422, and to the extent
      that those grants exceed the ISO limitations, non-qualified stock options.
      The
      equity grant during 2006 to our Principal Financial Officer was in the form
      of
      non-qualified stock options. It is our intent to grant all of our options with
      an exercise price equal to the fair market value of our company stock as of
      the
      date of grant (as further explained below). Two thirds of the grant to our
      Principal Financial Officer vested upon the execution of his employment
      contract; one sixth of the grant vested on January 1, 2007; and the remaining
      one-sixth of the grant will vest on January 1, 2008. One-third of the grant
      to
      our Executive Vice President of Sales vested upon the date of grant of the
      options; one third will vest on the first anniversary of the date of grant;
      and
      the remaining one third will vest on the second anniversary of the date of
      grant.





As
      discussed in the notes to our financial statements for the year ending December
      31, 2006, we estimate the fair value of our stock option plans using the
      Black-Scholes option pricing model (the “Option Model”). The Option Model
      requires the use of subjective and complex assumptions, including the option's
      expected term and the estimated future price volatility of the underlying stock,
      which estimates the fair value of the share-based awards.  Our estimate of
      expected term in 2006 was determined based on the weighted average period of
      time that options granted are expected to be outstanding considering current
      vesting schedules. Beginning in 2006, the expected volatility assumption used
      in
      the Option Model changed from being based on historical volatility to implied
      volatility based on traded options on our stock in accordance with guidance
      provided in SFAS 123R and SAB 107. The risk-free interest rate used in the
      Option Model is based on the yield of U.S. Treasuries with a maturity closest
      to
      the expected term of our stock options.




46




We
      estimated share-based compensation expense for fiscal year 2006 using the
      Black-Scholes model with the following weighted average assumptions: risk free
      interest rate—4.0%; expected dividend yield—0%; expected volatility--145.9%;
      expected life in years—5.3.





We
      establish the exercise price for our options in the following
      manner:





For
      a new
      hire, the Compensation Committee approves the grant and establishes the price
      based on the Company’s closing price on the day of Compensation committee
      approval; however, if the executive has not yet started employment as of the
      date of Compensation Committee approval, the price is set as the Company’s
      closing price on the executive’s first day of work.





For
      a new
      contract for a current executive, the Compensation Committee approves the grant
      and establishes the price based on the Company’s closing price on the day of
      Compensation Committee approval.





**Outstanding
      Equity Awards at Year End**





The
      following table shows the number of shares covered by exercisable and
      unexercisable options held by the Named Executive Officers on December 31,
      2006.





**Name
                and Principal Position**
              **(a)**
            **Number
                of Securities Underlying Unexercised Options (#) Exercisable**
              **(b)**
            **Number
                of**
              **Securities**
              **Underlying
                Unexercised**
              **Options
                (#) Unexercisable**
              **(c)**
            **Equity**
              **Incentive
                Plan**
              **Awards:**
              **Number
                of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Unearned**
              **Options**
              **(d)**
            **Option**
              **Exercise**
              **Price**
              **($)**
              **(e)**
            **Option**
              **Expiration**
              **Date**
              **(f)**Trevor
                Drinkwater, Principal Executive Officer (1)
            1,200,000
              200,000
              150,000
              
              175,000
              87,500
              87,500
            800,000
              
              400,000
            —
              —
              —
              —
              —
              —
              —
            $1.65
              $1.88
              $2.00
              $2.31
              $2.00
              $3.00
              $4.00
            7/26/2015
              11/7/2015
              7/16/2014
              11/28/2015
              9/30/2014
              9/30/2014
              9/30/2014John
                Mueller, Principal Financial Officer (2)
            500,000
            250,000
            —
            $1.89
            3/10/2016Rodney
                Satterwhite, Executive Vice President and
              Chief
                Operating Officer (3)
            30,000
              75,000
              30,000
              120,000
            150,000
            —
              —
              —
              —
            $1.63
              $1.88
              $2.00
              $2.10
            10/19/2015
              11/7/2015
              7/16/2014
              6/14/201515,000
            60,000
            —
            $2.31
            11/28/2015Christine
                Martinez, Executive Vice President and
              General
                Manager (4)
            225,000
              15,000
            0
              60,000
            —
              —
            $1.63
              $2.31
            10/19/2015
              11/28/2015Mitch
                Budin, Executive Vice President of Sales (5)
            75,000
              15,000
            150,000
              60,000
            —
              —
            $2.00
              $2.31
            11/7/2015
              11/7/2015




47




(1)
            Mr.
                Drinkwater’s unvested options vest as follows: (a) the options which
                expire on 11/7/2015 will vest in equal installments over the next
                five
                years; (b) the options which expire on 11/28/2015 will only vest
                upon the
                satisfaction of certain performance
                targets.





(2)
            Mr.
                Mueller’s unvested options will vest as follows: (a) 125,000 shares on
                January 1, 2007; and (b) 125,000 shares on January 1,
                2008.





(3)
            Mr.
                Satterwhite’s unvested options will vest as follows: (a) the options which
                expire on 11/7/2015 will vest over three years starting from the
                date of
                grant; (b) the options which expire on 11/28/2015 will vest over
                five
                years with the vesting period beginning six months after the date
                of
                grant.





(4)
            Ms.
                Martinez’s unvested options will vest in equal installments over the next
                four years.





(5)
            Mr.
                Budin’s unvested options will vest as follows: (a) the options which
                expire on 11/7/2015 will vest in equal installments over the next
                three
                years; and (b) the options which expire on 11/28/2015 will vest in
                equal
                installments over the next five
                years.





As
      we do
      not maintain any programs for our NEOs that would require inclusion in the
      “Pension Benefits” or the “Non-Qualified Deferred Compensation” tables, those
      tables are not included in this report.





**Post-
      employment compensation**





The
      Distributor maintains employment arrangements with each of our Named Executive
      Officers that provide for payments upon their termination of employment in
      certain circumstances. All of the employment contracts have the following common
      provisions:





A
      termination for ‘cause’ occurs if the NEO has:





·
            been
                repeatedly negligent in his or her
                duties;


·
            acted
                with ‘gross negligence’ or willful
                misconduct;


·
            been
                dishonest or committed an act of theft, embezzlement, fraud, material
                breach of confidentiality, unauthorized disclosure or use of inside
                information, customer lists, or trade
                secrets;


·
            been
                convicted or plead guilty to a felony or misdemeanor which would
                harm our
                reputation;


·
            materially
                breached the employment agreement;


·
            materially
                violated our company policies;


·
            engaged
                in unfair competition or taken other actions which would harm the
                Company
                or the Distributor;


·
            caused
                a vendor or customer to terminate any contract with us;
                or


·
            failed
                to attend Company meetings or frequently visit our offices after
                receiving
                written warnings from us.




A
      Change
      in Control, which impacts the vesting of options, occurs if:





·
            There
                is a merger or consolidation in which we are not the surviving
                entity


·
            We
                sell or dispose of all or substantially all of our
                assets


·
            We
                dissolve or liquidate


·
            We
                enter into a reverse merger where 40% of our voting power is
                transferred


·
            There
                is a change in the membership of a majority of the Board of Directors
                in a
                36 month period where the new directors were not nominated by the
                then
                current board members.




48
 
  The
        ability to exercise options for the NEOs is governed by the following
        rules:





·
            Upon
                a termination for cause, all vested and unvested options are
                cancelled.


·
            Upon
                death or disability, vested options can be exercised for six months
                (certain options of Drinkwater and Satterwhite, all of Martinez)
                or until
                the options’ expiration date (certain options of Drinkwater and
                Satterwhite, all of Mueller and Budin); all unvested options are
                forfeited.


·
            Upon
                termination for good reason, vested options can be exercised for
                three
                months after termination; all unvested options are
                forfeited.





As
      discussed below, certain NEOs receive additional vesting in certain
      circumstances.





For
      purposes of the table information regarding post employment payments, we assume
      the following:





·
            The
                NEO does not have any severance benefit reduced as a result of obtaining
                employment with a new employer.


·
            For
                change in control purposes, a change in control occurred on December
                31,
                2006.


·
            The
                fair market value of Company shares is $2.72, which is the ending
                share
                value of December 29, 2006.


·
            Termination
                of employment occurs on December 31, 2006, and the termination of
                employment for change of control purposes is not for
                cause.


·
            The
                NEO exercises all outstanding options that can be exercised immediately
                upon termination and the net profit from the exercise is paid to
                the NEO
                in cash.


·
            The
                Principal Financial Officer’s cash severance payment as a result of
                termination not for cause and change in control is limited to his
                base
                salary.





The
      particular terms regarding post-employment compensation for each NEO are as
      follows:





Trevor
      Drinkwater, Principal Executive Officer :
      If Mr.
      Drinkwater is terminated without cause, he receives a severance payment not
      to
      exceed thirty six months of base pay; this payment is limited to the remaining
      term of his employment agreement. He also receives health insurance for the
      remaining term of his employment agreement, with a limit of thirty six months.
      He also receives an additional twelve months of vesting on his stock options.
      In
      the event of a Change in Control, all unvested stock options fully vest.





John
      Mueller, Principal Financial Officer :
      If Mr.
      Mueller is terminated without cause, he receives a severance payment not to
      exceed eighteen months of base pay and any applicable annual bonus that has
      been
      awarded but not paid, based upon the amounts specified in his employment
      agreement; this payment is limited to the remaining term of his employment
      agreement. He also receives an additional eighteen months of vesting on his
      stock options. In the event of a Change in Control, all unvested stock options
      fully vest.





Rodney
      Satterwhite, Executive Vice President and Chief Operating Officer of the
      Distributor :
      If Mr.
      Satterwhite is terminated without cause, he receives a severance payment not
      to
      exceed twelve months of base pay, based upon amounts specified in his employment
      agreement; this payment is limited to the remaining term of his employment
      agreement. He also receives an additional twelve months of vesting on his stock
      options.





Christine
      Martinez, Executive Vice President and General Manager of the
      Distributor :
      If Ms.
      Martinez is terminated without cause, she receives a severance payment equal
      to
      six months of base pay.





Mitch
      Budin, Executive Vice President of Sales of the Distributor :
      If Mr.
      Budin is terminated without cause, he receives a severance payment not to exceed
      twelve months of base pay, based upon the amounts specified in his employment
      agreement; this payment is limited to the remaining term of his employment
      agreement. He also receives an additional twelve months of vesting on his stock
      options.




49


**Post-Employment
      Payments Table**





**Name
                and Principal Position**
            **Severance**
              **for****Cause**
            **Severance**
              **Not
                for**
              **Cause**
            **Death,**
              **Disability
                or**
              **Retirement**
            **Change
                in**
              **Control**Trevor
                Drinkwater, Principal Executive Officer
            $0
            $2,947,134
            $1,695,000
            $3,454,134John
                Mueller, Principal Financial Officer
            $0
            $793,750
            $415,000
            $897,500Rodney
                Satterwhite, Executive Vice President and Chief Operating
                Officer
            $0
            $610,102
            $290,952
            $610,102Christine
                Martinez, Executive Vice President and General Manager
            $0
            $401,000
            $269,850
            $401,000Mitch
                Budin, Executive Vice President of Sales
            $0
            $330,000
            $60,150
            $330,000





**Board
      of Director Compensation**





The
      following table sets forth the compensation paid to our non-employee directors
      in 2006.


**Name**
              **(a)**
            **Fees**
              **Earned
                or**
              **Paid
                in**
              **Cash**
              **($)**
              **(b)**
            **Stock**
              **Awards**
              **($)**
              **(c)**
            **Option
                Awards**
              **($)**
              **(d)**
            **Non-Equity**
              **Incentive
                Plan Compensation**
              **($)**
              **(e)**
            **Nonqualified**
              **Deferred
                Compensation Earnings**
              **($)**
              **(f)**
            **All
                Other Compensation**
              **($)**
              **(g)**
            **Total**
              **($)**
              **(h)**Stephen
                K. Bannon, Chairman
            $0
            $0
            $867,172
            $0
            $0
            $0
            $867,172Bradley
                A. Ball
            $0
            $0
            $0
            $0
            $0
            $0
            $0James
                G. Ellis
            $0
            $0
            $399,101
            $0
            $0
            $0
            $399,101Herbert
                Hardt
            $0
            $0
            $257,692
            $0
            $0
            $0
            $257,692Larry
                Madden
            $0
            $0
            $0
            $0
            $0
            $0
            $0Irwin
                Reiter
            $0
            $0
            $0
            $0
            $0
            $0
            $0





The
      Company did not pay outside directors any cash payments for service on our
      Board
      of Directors during 2006. We do not reimburse directors for their actual
      expenses incurred in attending Board meetings. Compensation amounts shown on
      the
      table reflect the FAS 123R value of options that became vested during 2006.





We
      granted fair market value stock options to director Herbert Hardt in June of
      2006. The options were granted in two separate groups: the first grant,
      consisting of 286,347 shares vests in monthly increments over two years
      beginning in November, 2006, and had a per-option grant value (as reported
      on
      our financial statements in accordance with FAS 123R) of $1.70 per share; the
      second grant, consisting of 100,000 shares, vests in equal monthly increments
      over three years beginning in July, 2006 and had a per-option grant value (as
      reported on our financial statements in accordance with FAS 123R) of $1.70
      per
      share.





Grants
      to
      the other directors vest on a monthly basis over a three year
      period.




50


Our
      Principal Executive Officer is also a member of the Board of Directors. He
      receives no additional compensation related to his service on the Board of
      Directors.





**Compensation
      Committee Report**





The
      Compensation Committee has reviewed the Compensation Discussion and Analysis
      included above, and has reviewed this document with members of our management
      team. Based upon the review and discussions that the Compensation Committee
      had
      with management regarding the Compensation Discussion and Analysis, the
      Compensation Committee recommended to the Board of Directors that the
      Compensation Discussion and Analysis be included in our annual
      report.





Members
      of the Compensation Committee:





James
      G.
      Ellis, Chairman


Herbert
      Hardt


Bradley
      A. Ball





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





The
      following table sets forth certain information known to us with respect to
      the
      beneficial ownership of our common stock and our Series W Preferred
      Stock by (i) each person who is known by us to own beneficially more
      than 5% of our common stock or Series W Preferred Stock, as of the most recent
      date for which information is available, (ii) each of our directors
      and Named Executive Officers and the executive officers of the Distributor
      as of
      March 31, 2007 and (iii) all of our executive officers, directors and all
      of the executive officers of the Distributor **** as
      a
      group as of March 31, 2007. Except as otherwise listed below, the address of
      each person is c/o Genius Products, Inc., 2230 Broadway, Santa Monica,
      California 90404. As of March 31, 2007, there were outstanding 65,421,762 shares
      of our common stock and 100 shares of our Series W Preferred Stock.




**Shares Beneficially Owned
                (1)****Name
                of Owner of Common Stock**
            
            **Number**
            
            
            **Percent**Bradley
                A. Ball
            
            0
            
            
            0
            %Stephen
                K. Bannon
            
            829,520
            (2)
            
            *Mitch
                Budin
            
            165,000
            (3)
            
            *Trevor
                Drinkwater
            
            2,100,000
            (4)
            
            3
            %James
                G. Ellis
            
            429,520
            (5)
            
            *Herbert
                Hardt
            
            437,295
            (6)
            
            *Larry
                Madden
            
            0
            
            
            0
            %Christine
                Martinez
            
            255,000
            (7)
            
            *John
                Mueller
            
            625,000
            (8)
            
            *Michael
                Radiloff
            
            255,000
            (9)
            
            *Irwin
                Reiter
            
            0
            
            
            0
            %Rodney
                Satterwhite
            
            285,001
            (10)
            
            *Michel
                Urich
            
            200,000
            (11)
            
            *All
                directors and officers as a group (13 persons)
            
            5,581,336
            (12)
            
            8.53
            %Bonanza
                Master Fund, Ltd.
            
            5,199,429
            (13)
            
            7.95
            %Janus
                Capital Management
            
            7,239,130
            (14)
            
            11.07
            %Stephens
                Investment Management, LLC
            
            3,641,787
            (15)
            
            5.57
            %Wellington
                Management Company LLP
            
            8,486,730
            (16)
            
            12.97
            %**Name
                of Owner of Series W Preferred Stock**
            
            **Number**
            
            
            **Percent**W-G
                Holding Corp.
            
            1.42857
            (17)
            
            1.43
            %The
                Weinstein Company Holdings LLC
            
            98.57143
            (17)
            
            98.57
            %





51





*  Represents
      less than 1% of our common stock.





(1)
            Beneficial
                ownership is determined in accordance with the rules of the SEC and
                generally includes voting or investment power with respect to securities.
                Shares of common stock subject to options and warrants currently
                exercisable or convertible, or exercisable or convertible within
                60 days
                of March 31, 2007, are deemed outstanding for computing the percentage
                of
                the person holding such option or warrant but are not deemed outstanding
                for computing the percentage of any other person. Except as pursuant
                to
                applicable community property laws, the persons named in the table
                have
                sole voting and investment power with respect to all shares of common
                stock beneficially owned. The information reflected in the this Item
                12 is
                based on the Company’s review of the most recent SEC filings by the
                individuals and entities listed above and the Company’s internal records
                which is as of March 31, 2007 or the most recent date for which
                information is available.





(2)
            Includes
                outstanding options to purchase 829,520 shares exercisable within
                60 days
                of March 31, 2007. Excludes outstanding options to purchase 1,000,000
                shares exercisable after that
                period.





(3)
            Includes
                outstanding options to purchase 165,000 shares exercisable within
                60 days
                of March 31, 2007. Excludes outstanding options to purchase 135,000
                shares
                exercisable after that period.





(4)
            Includes
                outstanding options to purchase 2,100,000 shares exercisable within
                60
                days of March 31, 2007. Excludes outstanding options to purchase
                1,000,000
                shares exercisable after that
                period.





(5)
            Includes
                outstanding options to purchase 429,520 shares exercisable within
                60 days
                of March 31, 2007.





(6)
            Includes
                180,050 shares held directly by Mr. Hardt. Also includes outstanding
                options to purchase 437,295 shares exercisable within 60 days of
                March 31,
                2007. Excludes outstanding options to purchase 92,225 shares exercisable
                after that period.





(7)
            Includes
                outstanding options to purchase 255,000 shares exercisable within
                60 days
                of March 31, 2007. Excludes outstanding options to purchase 45,000
                shares
                exercisable after that period.





(8)
            Includes
                outstanding options to purchase 625,000 shares exercisable within
                60 days
                of March 31, 2007. Excludes outstanding options to purchase 125,000
                shares
                exercisable after that period.





(9)
            Includes
                outstanding options to purchase 255,000 shares exercisable within
                60 days
                of March 31, 2007. Excludes outstanding options to purchase 45,000
                shares
                exercisable after that period.





(10)
            Includes
                outstanding options to purchase 285,001 shares exercisable within
                60 days
                of March 31, 2007. Excludes outstanding options to purchase 194,999
                shares
                exercisable after that period.





(11)
            Includes
                outstanding options to purchase 200,000 shares exercisable within
                60 days
                of March 31, 2007.





(12)
            Includes
                outstanding options to purchase 5,401,286 shares exercisable within
                60
                days of March 31, 2007. Excludes outstanding options to purchase
                2,637,224
                shares exercisable after that period.





(13)
            Bonanza
                Master Fund, Ltd. is managed by Bonanza Capital, Ltd., which is managed
                by
                Bonanza Fund Management, Inc. The number of shares indicated includes
                warrants to purchase 783,830 shares of common stock exercisable within
                60
                days of March 31, 2007. The mailing address for Bonanza Master Fund,
                Ltd.
                is 300 Crescent Court, Suite 1740, Dallas, Texas
                75201.





(14)
            The
                securities reported herein are held by Janus Investment Fund, on
                behalf of
                its Series Janus Venture Fund, which is managed by Janus Capital
                Management. The number of shares includes (i) 5,814,130 shares held
                directly by Janus Capital and (ii) a warrant to purchase 1,425,000
                shares
                of common stock. However, the warrant provides that the number of
                shares
                that may be acquired upon exercise of the warrant is limited to the
                extent
                necessary to ensure that the total number of shares of common stock
                then
                beneficially owned by the warrant holder and its affiliates and any
                other
                persons whose beneficial ownership of common stock would be aggregated
                with the warrant holder’s for purposes of Section 13(d) of the Securities
                Exchange Act of 1934, as amended, does not exceed 9.999% of the total
                number of issued and outstanding shares of common stock (including
                for
                such purpose the shares of common stock issuable upon exercise).
                The
                mailing address for Janus Investment Fund is c/o Janus Capital Management,
                151 Detroit Street, Denver, Colorado
                80206.





(15)
            Stephens
                Investment Management, LLC, in its capacity as investment adviser,
                may be
                deemed to beneficially own 3,641,787 shares which are held of record
                by
                clients of Stephens Investment Management, LLC. The principal business
                address of Stephens Investment Management, LLC is One Sansome Street,
                Suite 2900, San Francisco, California
                94104.





(16)
            Wellington
                Management LLP, in its capacity as investment adviser, may be deemed
                to
                beneficially own 8,486,730 shares which are held of record by clients
                of
                Wellington Management LLP. The principal business address of Wellington
                Management LLP is 75 State Street, Boston, Massachusetts
                02109.





(17)
            The
                principal business address for each of W-G Holding Corp. and The
                Weinstein
                Company Holdings LLC is 345 Hudson Street, 13thFloor, New York, New York 10014.




52


**Changes
      in Control**





Pursuant
      to the Amended and Restated Limited Liability Company Agreement of the
      Distributor, The Weinstein Company Holdings LLC has the right to redeem all
      or a
      portion of its interest in the Distributor in exchange for common stock of
      the
      Company. The exercise of this right by The Weinstein Company Holdings LLC could
      result in a change of control of the Company.




**ITEM 13.** **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





**TWC
      Distribution Agreement**





On
      July
      17, 2006, the Distributor entered into a distribution agreement with TWC (the
      “TWC Distribution Agreement”), an affiliate of TWC Holdings and W-G Holding
      Corp., holders of our Series W Preferred Stock. Pursuant to the TWC Distribution
      Agreement, TWC granted to the Distributor the right to distribute, advertise,
      publicize, promote and market DVDs of motion pictures owned or released by
      TWC
      for an initial term of approximately five years, subject to early termination
      provisions described in the TWC Distribution Agreement. Under the TWC
      Distribution Agreement, after deducting permitted amounts from gross receipts
      for return reserves, the Distributor’s distribution fee and the Distributor’s
      reimbursable expenses, the Distributor is required to pay to TWC a portion
      of
      the net receipts from the sale of any such DVDs. As of March 31, 2007, the
      Distributor has paid to TWC an aggregate of $82.8 million **** in
      respect of such net receipts.





**Bannon
      Consulting Agreement**





Stephen
      K. Bannon is the chairman of the Company’s Board of Directors. Mr. Bannon is
      also a principal with Bannon Strategic Advisors, Inc. (“Bannon Strategic
      Advisors”). On July 20, 2006, the Company and Bannon Strategic Advisors entered
      into a consulting agreement (the “Consulting Agreement”), pursuant to which
      Bannon Strategic Advisors has provided the Company with consulting and advisory
      services. Pursuant to the Consulting Agreement, the Company agreed to pay to
      Bannon Strategic Advisors a monthly consulting fee of $20,833 for a term of
      two
      years (i.e., an aggregate of $500,000) and reimburse Mr. Bannon for expenses
      incurred in connection with services provided to the Company. The Consulting
      Agreement was approved by the Board of Directors, with Mr. Bannon abstaining
      from the vote. On July 21, 2006, the rights and obligations of the Company
      pursuant to the Consulting Agreement were assigned to the Distributor. On
      January 2, 2007, the Distributor paid to Bannon Strategic Advisors a bonus
      of
      $200,000 for services rendered in 2006, and an additional bonus of $25,000
      on
      March 13, 2007. These bonuses were approved by the compensation committee of
      the
      Company’s Board of Directors. Through March 31, 2007, the Company and the
      Distributor in aggregate have paid Bannon Strategic Advisors $454,679 in respect
      of consulting fees and reimbursement of expenses incurred pursuant to the
      Consulting Agreement.





53




**Sale
      of Baby Genius**





On
      December 31, 2005, the Company entered into an Asset Purchase Agreement
      (the “Asset Purchase Agreement”) with Klaus Moeller who was our founder and
      formerly our CEO and a Director. Under the Asset Purchase Agreement, we agreed
      to sell to Mr. Moeller all of our right, title and interest in and to the
      following assets (the “Assets”), subject to the terms, conditions and
      limitations set forth in the Asset Purchase Agreement:




•
            
            The
                audio and audiovisual works entitled “Baby Genius”;




•
            
            The
                audio and audiovisual works entitled “Kid Genius”;




•
            
            The
                audio and audiovisual works entitled “Little Tikes”;




•
            
            The
                audio works entitled “Wee Worship”; and




•
            
            Related
                intellectual property, agreements, documents and instruments.




Subject
      to limited exceptions, Mr. Moeller agreed to assume any and all obligations
      for royalties, advances, reporting requirements, and all other obligations
      of
      any kind arising out of or in connection with all talent agreements, producer
      agreements, and any and all other agreements relating to the Assets and due
      after the signing of the Asset Purchase Agreement. As part of the agreement,
      the
      Company agreed to continue to distribute Baby Genius, Little Tikes and Wee
      Worship DVDs and music CDs and all new products under these brands and, in
      connection therewith, entered into a distribution agreement with Pacific
      Entertainment, the current owners of the Baby Genius business. Under the
      distribution agreement, we will receive a distribution fee and recoup all of
      our
      expenses.




The
      purchase price for the Assets was $3 million, payable as follows:




•
            
            $250,000
                in cash on signing;




•
            
            $750,000
                by means of a secured promissory note due and payable in full, together
                with all accrued interest, on January 30, 2006, bearing interest at
                the rate of 4.5% per annum; and




•
            
            $2
                million by means of a secured promissory note due and payable in
                full,
                together with all accrued interest, on the fifth anniversary of the
                closing date, bearing interest at the rate of 4.5% per annum.




The
      $3
      million purchase price was determined by negotiations between the parties and
      our assessment of the reasonable value of the Assets and the distribution
      arrangement described above.




**Brandissimo!
      Agreement**





On
      November 1, 2005, the Company entered into an agreement with Brandissimo!
      Inc. (“Brandissimo”), a company which was formerly co-owned by
      Trevor Drinkwater, our President and a director, and is currently co-owned
      by David Snyder, a former officer of the Company. Under this agreement, we
      were
      granted an exclusive “first look” at all Brandissimo owned or controlled
      children’s projects to be produced for videogram distribution. Pursuant to the
      agreement, we are the exclusive videogram distributor for all Brandissimo-owned
      or controlled children’s projects produced or otherwise presented to us during
      the term of the agreement. Brandissimo will render production services for
      any
      and all children’s projects which we finance and produce during the term of the
      agreement. Over the course of the term, we will pay to Brandissimo a $100,000
      non-refundable, non-recoupable overhead fee. Under the agreement, we are
      entitled to receive a distribution fee equal to 12% to 20% of gross receipts,
      depending on the products being distributed. All of our rights and obligations
      under this agreement were assigned to the Distributor in connection with the
      TWC
      Transaction.




**Falcon
      Picture Group, LLC**




On
      September 8, 2003, the Company executed a license agreement with Falcon
      Picture Group, LLC (“Falcon”) for the exclusive rights to distribute a majority
      of its audio and video products worldwide, with AMC and TV Guide branded DVD
      movie and television collections and Twilight Zone branded audio collections
      in
      the U.S. and Canada. Carl Amari, a former member of our Board of Directors,
      is
      the CEO of Falcon. This agreement expired on July 1, 2006, with an
      automatic renewal for an additional three years if both parties are fulfilling
      their obligations under the agreement and calls for a royalty to be paid on
      the
      sales of the video and audio products. We have committed to pay a minimum annual
      royalty of $240,000 for brands including AMC and Twilight Zone, and a royalty
      of
      $325,000 for TV Guide over a three and one-half year term that commenced on
      December 22, 2003. In addition, the agreement calls for a minimum content
      purchase of $300,000 annually.




54




The
      agreement also provides a three-year option to acquire Falcon’s assets for
      $3,600,000 (payable in cash or stock or a combination of cash and stock). As
      consideration for the right to purchase Falcon, we issued 70,922 shares of
      common stock with a market value of approximately $100,000. The stock value
      of
      $1.40 is based on the average of the closing market price of the common shares
      as of September 8, 2003, the date of issuance of such shares and the
      execution of the agreement, and July 1, 2003, the effective date of the
      agreement. The specific assets and liabilities of Falcon that would be acquired
      under this right will be negotiated by the parties at the time the acquisition
      is considered. Our option expired unexercised and we have written off all
      amounts associated with this agreement




**Facility
      Lease**




From
      December 31, 2003 through April 21, 2006, the Company leased warehouse space
      in
      Atlantic, Iowa from the Meader Family Trust, which is affiliated with Michael
      Meader, formerly our President. Our lease with the Meader Family Trust provided
      for monthly rent of $2,900 and a term that expires in December 2007. On April
      21, 2006, we entered into a sublease agreement with World Trading Center, Inc.,
      under which we subleased to World Trading Center, Inc. our leasehold interest
      in
      the warehouse facility. This sublease is for a term commencing April 21, 2006
      and continuing until June 30, 2007, and provides for monthly rent of $2,900
      for
      the duration of the term. Our rights and obligations under our lease with the
      Meader Family Trust and our sublease with World Trading Center, Inc. were
      assigned to the Distributor as part of the TWC Transaction. Lease payments
      under
      our lease with the Meader Family Trust for the 202-day period ended July 21,
      2006 were $20,300. Lease payments were $34,800 and $34,800 in 2005 and 2004,
      respectively. We have been informed by the Meader Family Trust that it intends
      to terminate its sublease agreement with Distributor effective as of July 1,
      2007.





**Director
      Independence**





Our
      Board
      of Directors is comprised of seven individuals, three of whom (Bradley A. Ball,
      James G. Ellis and Herbert Hardt) the Company has determined are independent
      under the rules applicable to NASDAQ listed companies.





**ITEM 14.** **PRINCIPAL
      ACCOUNTING FEES AND SERVICES**




The
      following table shows the fees paid or accrued by the Company for the audit
      and
      other services provided by Ernst & Young LLP (“E&Y”), Singer Lewak
      Greenbaum & Goldstein LLP (“SLGG”) and Cacciamatta Accounting
      Corporation (“CAC”) for the years ended December 31 shown:


(In
                  thousands)
              
              2006
              
              2005E&Y
              
              SLGG
              
              CAC
              
              SLGG
              
              CACAudit
                  Fees
              
              $
              1,950
              
              $
              235
              
              $
              -
              
              $
              421
              
              $
              -Audit
                  - Related Fees
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Tax
                  Fees
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -All
                  Other Fees
              
              
              -
              
              
              483
              
              
              120
              
              
              258
              
              
              82Total
              
              $
              1,950
              
              $
              718
              
              $
              120
              
              $
              679
              
              $
              82




All
      Other
      Fees incurred during the year ended December 31, 2006 include fees
      associated with consents and the TWC Transaction.




55


**Tax
      Fees**





Our
      principal accountants did not bill us any fees for tax compliance, tax advice
      and tax planning for our fiscal years ended December 31, 2006 or
      2005.




**All
      Other Fees**





Our
      principal accountants did not bill us for any services or products other than
      as
      reported above in this Item 14 during our fiscal years ended
      December 31, 2006 or 2005.




**Audit
      Committee Approvals**





Effective
      May 6, 2003, the SEC adopted rules that require that before our auditor is
      engaged by us to render any auditing or permitted non-audit related services,
      the engagement must be approved by our audit committee or entered into pursuant
      to pre-approved policies and procedures established by the audit committee,
      provided the policies and procedures are detailed as to the particular service,
      the audit committee is informed of each service, and such policies and
      procedures do not include delegation of the audit committee’s responsibilities
      to management.





Our
      audit
      committee requires advance approval of all audit, audit-related, tax and other
      services performed by the independent auditor. Unless the specific service
      has
      been previously pre-approved with respect to that year, the audit committee
      must
      approve the permitted service before the independent auditor is engaged to
      perform it.





**Engagement
      of Ernst & Young LLP**





Effective
      December 12, 2006, we dismissed SLGG, who had previously served as our
      independent accountants, and engaged Ernst & Young LLP as our new
      independent accountants. Our Audit Committee recommended that we change audit
      firms, directed the process of review of candidate firms to replace SLGG and
      made the final decision to engage E&Y.





The
      reports of SLGG on our financial statements for the fiscal year ended December
      31, 2005 contained no adverse opinions or disclaimer of opinion and were not
      qualified or modified as to uncertainty, audit scope or accounting principle.
      In
      connection with its audits of the Company for the fiscal year ended December
      31,
      2005, and through the date of this report, there were no disagreements with
      SLGG
      on any matter of accounting principles or practices, financial statement
      disclosure, or auditing scope or procedure, which disagreements, if not resolved
      to the satisfaction of SLGG, would have caused SLGG to make reference thereto
      in
      their report on the financial statements for such year.




56


**PART
      IV**





**ITEM 15.****EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES**





The
      financial statements and Schedule II are filed as part of this report under
      Item
      8 - Financial Statements and Supplementary Data.





References
      to “the Company” in this Exhibit index means Genius Products, Inc.




**Exhibit**
                  **No.**
                **Description**3.1
                Amended
                    and Restated Certificate of Incorporation (incorporated by reference
                    from
                    Exhibit 3.1 to the Company’s Form 10-Q filed on November 20,
                    2006).3.2
                Bylaws
                    as amended (incorporated by reference from Exhibit 3.2 to the
                    Company’s
                    Form 10-KSB filed on March 31, 2005).4.1
                Specimen
                    Certificate for Common Stock (incorporated by reference from
                    Exhibit 4.8
                    included with the Company’s Form 10-KSB filed on April 14,
                    2000).4.2
                Certificate
                    of Change in Stock (incorporated by reference from Exhibit 3.2.2
                    included
                    with the Company’s Form 10-KSB filed on April 16, 2002).10.1
                Employment
                    Agreement with Klaus Moeller dated January 3, 2002 (incorporated
                    by
                    reference from Exhibit 10.51 included with the Company’s Form 10-KSB,
                    Amendment #1, filed on April 30, 2002).10.2
                Amendment
                    to Employment Agreement with Klaus Moeller dated October 31,
                    2003
                    (incorporated by reference from Exhibit 10.40 included with the
                    Company’s
                    Form 10-KSB, Amendment #1, filed on April 29, 2004).10.3
                Employment
                    Agreement with Michael Meader dated January 3, 2002 (incorporated
                    by
                    reference from Exhibit 10.52 included with the Company’s Form 10-KSB,
                    Amendment #1, filed on April 30, 2002).10.4
                Employment
                    Agreement with Howard Balaban dated January 3, 2002 (incorporated
                    by
                    reference from Exhibit 10.54 included with the Company’s Form 10-KSB,
                    Amendment #1, filed on April 30, 2002).10.5
                Amendment
                    to Employment Agreement with Howard Balaban dated October 31,
                    2003
                    (incorporated by reference from Exhibit 10.42 included with the
                    Company’s
                    Form 10-KSB, Amendment #1, filed on April 29, 2004).10.6
                Employment
                    Agreement with Larry Balaban dated January 3, 2002 (incorporated
                    by
                    reference from Exhibit 10.53 included with the Company’s Form 10-KSB,
                    Amendment #1, filed on April 30, 2002).10.7
                Amendment
                    to Employment Agreement with Larry Balaban dated October 31,
                    2003
                    (incorporated by reference from Exhibit 10.43 included with the
                    Company’s
                    Form 10-KSB, Amendment #1, filed on April 29, 2004).10.8
                Employment
                    Agreement with Julie Ekelund dated April 1, 2002 (incorporated
                    by
                    reference from Exhibit 10.56 included with the Company’s Form 10-KSB,
                    Amendment #1, filed on April 30, 2002).10.9
                Amendment
                    to Employment Agreement with Julie Ekelund dated October 31,
                    2003
                    (incorporated by reference from Exhibit 10.44 included with the
                    Company’s
                    Form 10-KSB, Amendment #1, filed on April 29, 2004).10.10
                Amendment
                    to Employment Agreement with Michael Meader dated October 31,
                    2003
                    (incorporated by reference from Exhibit 10.41 included with the
                    Company’s
                    Form 10-KSB, Amendment #1, filed on April 29, 2004).10.11
                Employment
                    Agreement with Mark Miller dated February 2, 2004 (incorporated
                    by
                    reference from Exhibit 10.34 included with the Company’s Form 10-KSB filed
                    on March 30, 2004).10.12
                Employment
                    Agreement with Trevor Drinkwater dated July 16, 2004 (incorporated
                    by
                    reference from Exhibit 10.1 included with the Company’s Form 10-QSB filed
                    on August 16, 2004).10.13
                Employment
                    Agreement with Andrew C. Schmidt dated August 23, 2004 (incorporated
                    by
                    reference from Exhibit 99.4 included with the Company’s Form 8-K filed on
                    November 12, 2004).10.14
                Employment
                    Agreement with Shawn Howie dated June 23, 2005 (incorporated
                    by reference
                    from Exhibit 99.1 to the Company’s Form 8-K filed on June 29,
                    2005).
  57
  10.15
                Employment
                    Agreement with Michel Urich dated June 23, 2005 (incorporated
                    by reference
                    from Exhibit 99.2 to the Company’s Form 8-K filed on June 29,
                    2005).10.16
                Employment
                    Agreement with Trevor Drinkwater dated July 26, 2005 (incorporated
                    by
                    reference from Exhibit 99.1 to the Company’s Form 8-K filed on July 29,
                    2005).10.17
                Confidential
                    Settlement Agreement and Mutual Release of Claims between the
                    Company and
                    Mike Meader dated July 29, 2005 (incorporated by reference from
                    Exhibit
                    99.2 to the Company’s Form 8-K filed on July 29, 2005).10.18
                Separation
                    and Retention Agreement with Mike Meader dated July 28, 2005
                    (incorporated
                    by reference from Exhibit 99.3 to the Company’s Form 8-K filed on July 29,
                    2005).10.19
                Confidential
                    Settlement Agreement and Mutual Release of Claims between the
                    Company and
                    Klaus Moeller dated July 28, 2005 (incorporated by reference
                    from Exhibit
                    99.4 to the Company’s Form 8-K filed on July 29, 2005).10.20
                Separation
                    and Consulting Agreement with Klaus Moeller dated July 28, 2005
                    (incorporated by reference from Exhibit 99.5 to the Company’s Form 8-K
                    filed on July 29, 2005).
 10.21
                Employment
                    Agreement with Christine Martinez, effective October 27, 2005
                    (incorporated by reference from Exhibit 99.1 to the Company’s Form 8-K
                    filed on November 1, 2005).10.22
                Employment
                    Agreement with Michael Radiloff, effective October 27, 2005 (incorporated
                    by reference from Exhibit 99.2 to the Company’s Form 8-K filed on November
                    1, 2005).10.23
                Amendment
                    to Employment Agreement between Genius Products, Inc. and Trevor
                    Drinkwater dated December 5, 2005 (incorporated by reference
                    from Exhibit
                    99.1 to the Company’s Form 8-K filed on December 9, 2005).10.24
                Amendment
                    to Employment Agreement between Genius Products, Inc. and Michael
                    Radiloff
                    dated December 5, 2005 (incorporated by reference from Exhibit
                    99.2 to the
                    Company’s Form 8-K filed on December 9, 2005).10.25
                Employment
                    Agreement between Genius Products, Inc. and Rodney Satterwhite
                    dated
                    December 2, 2005 (incorporated by reference from Exhibit 99.3
                    to the
                    Company’s Form 8-K filed on December 9, 2005).10.26
                Amendment
                    to Employment Agreement between Genius Products, Inc. and Rodney
                    Satterwhite dated December 5, 2005 (incorporated by reference
                    from Exhibit
                    99.4 to the Company’s Form 8-K filed on December 9, 2005).10.27
                Employment
                    Agreement between Genius Products, Inc. and Mitch Budin dated
                    December 5,
                    2005 (incorporated by reference from Exhibit 99.5 to the Company’s Form
                    8-K filed on December 9, 2005).10.28
                Amendment
                    to Employment Agreement between Genius Products, Inc. and Mitch
                    Budin
                    dated December 5, 2005 (incorporated by reference from Exhibit
                    99.6 to the
                    Company’s Form 8-K filed on December 9, 2005).10.29
                Amendment
                    to Employment Agreement between Genius Products, Inc. and Michel
                    Urich
                    dated December 2, 2005 (incorporated by reference from Exhibit
                    99.7 to the
                    Company’s Form 8-K filed on December 9, 2005).10.30
                Form
                    of Executive Stock Payment Agreement dated as of June 2, 2003,
                    with Klaus
                    Moeller, Michael Meader, Larry Balaban. Howard Balaban and Julie
                    Ekelund
                    for stock and warrants paid in lieu of $20,000 each of 2003 salary
                    (incorporated by reference from Exhibit 10.1 included with the
                    Company’s
                    Form 10-QSB filed on August 14, 2003).10.31
                Amended
                    and Restated 1997 Non-Qualified Stock Option Plan (incorporated
                    by
                    reference from Exhibit 10.61 included with the Company’s Form 10-KSB,
                    Amendment #1, filed on April 30, 2002).10.32
                Form
                    of Non-Qualified Stock Option Agreement under the Amended and
                    Restated
                    1997 Stock Option Plan (incorporated by reference from Exhibit
                    10.16 to
                    the Company’s Form 10-KSB filed on March 31, 2005).10.33
                Second
                    Amended and Restated 2000 Non-Qualified Stock Option Plan (incorporated
                    by
                    reference from Exhibit 10.62 included with the Company’s Form 10-KSB,
                    Amendment #1, filed on April 30, 2002)10.34
                Form
                    of Non-Qualified Stock Option Agreement under the Second Amended
                    and
                    Restated 2000 Non-Qualified Stock Option Plan (incorporated by
                    reference
                    from Exhibit 10.18 to the Company’s Form 10-KSB filed on March 31,
                    2005).10.35
                2003
                    Stock Option Plan (incorporated by reference from Exhibit A included
                    with
                    the Company’s Proxy Statement filed on April 30, 2003).10.36
                Form
                    of Incentive Stock Option Agreement under the 2003 Stock Option
                    Plan
                    (incorporated by reference from Exhibit 10.30 included with the
                    Company’s
                    Registration Statement (No. 333-108966) on Form SB-2 filed on
                    September
                    19, 2003).
  58
  10.37
                Form
                    of Non-Qualified Stock Option Agreement under the 2003 Stock
                    Option Plan
                    (incorporated by reference from Exhibit 10.31 included with the
                    Company’s
                    Registration Statement (No. 333-108966) on Form SB-2 filed on
                    September
                    19, 2003).10.38
                2004
                    Stock Incentive Plan (incorporated by reference from Appendix
                    B included
                    with the Company’s Proxy Statement filed on October 4, 2004).10.39
                Form
                    of Notice of Stock Option Award under the 2004 Stock Incentive
                    Plan
                    (incorporated by reference from Exhibit 10.23 to the Company’s Form 10-KSB
                    filed on March 31, 2005).10.40
                Form
                    of Stock Option Agreement under the 2004 Stock Incentive Plan
                    (incorporated by reference from Exhibit 10.24 to the Company’s Form 10-KSB
                    filed on March 31, 2005).10.41
                Sublease
                    with Citibank (West), FSB for office space in Solana Beach, California
                    (incorporated by reference from Exhibit 10.30 included with the
                    Company’s
                    Form 10-KSB filed on March 30, 2004).10.42
                Sublease
                    with the Meader Family Limited Trust dated December 31, 2003
                    for warehouse
                    facility in Iowa (incorporated by reference from Exhibit 10.31
                    included
                    with the Company’s Form 10-KSB filed on March 30, 2004).10.43
                Lease
                    Agreement with ProCon, Inc. dated as of August 25, 2004 for office
                    space
                    in Bentonville, Arkansas (incorporated by reference from Exhibit
                    99.1
                    included with the Company’s Form 8-K filed on November 12,
                    2004).10.44**
                License
                    Agreement with Falcon Picture Group, LLC dated September 8, 2003
                    (incorporated by reference from Exhibit 10.3 included with the
                    Company’s
                    Form 10-QSB filed on May 17, 2004).10.45**
                First
                    Amendment to License Agreement with Falcon Picture Group, LLC
                    dated
                    December 22, 2003 (incorporated by reference from Exhibit 10.4
                    included with the Company’s Amended Form 10-QSB filed on July 13,
                    2004).10.46**
                Restated
                    Termination, Release and Royalty Agreement with Warner Home Video
                    dated
                    March 5, 2004 (incorporated by reference from Exhibit 10.5 included
                    with
                    the Company’s Amended Form 10-QSB filed on July 13, 2004).10.47
                Form
                    of $1 and $3 Warrants issued in conjunction with 2003 Secured
                    Promissory
                    Notes (incorporated by reference from Exhibit 10.38 included
                    with the
                    Company’s Form 10-KSB filed on March 30, 2004).10.48
                Registration
                    Rights Agreement, dated March 15, 2004, by and among the Company,
                    various
                    purchasers, and Sands Brothers International Limited. (incorporated
                    by
                    reference from Exhibit 10.36 to the Company’s Form 10-KSB filed on March
                    31, 2005).10.49
                Form
                    of Warrant for purchasers in March 2004 private placement. (incorporated
                    by reference from Exhibit 10.37 to the Company’s Form 10-KSB filed on
                    March 31, 2005).10.50
                Form
                    of Warrant issued to Sands Brothers International Limited dated
                    March 12,
                    2004. (incorporated by reference from Exhibit 10.38 to the Company’s Form
                    10-KSB filed on March 31, 2005).10.51
                Registration
                    Rights Agreement dated March 2, 2005 (incorporated by reference
                    from
                    Exhibit 99.3 to the Company’s Form 8-K filed on March 9,
                    2005).10.52
                Form
                    of Warrant dated March 2, 2005 (incorporated by reference from
                    Exhibit
                    99.3 to the Company’s Form 8-K filed on March 9, 2005).10.53
                Agreement
                    and Plan of Merger, dated as of March 21, 2005, by and among
                    the Company,
                    Genius Acquisition Corp., American Vantage Companies (“AVC”), and American
                    Vantage Media Corporation (incorporated by reference from Exhibit
                    2.1 to
                    the Company’s Form 8-K filed on March 25, 2005).10.54
                Registration
                    Rights Agreement, dated as of March 21, 2005, by and between
                    Genius
                    Products and AVC (incorporated by reference from Exhibit 2.3
                    to the
                    Company’s Form 8-K filed on March 25, 2005).10.55
                Form
                    of Common Stock Purchase Warrant issued to AVC (incorporated
                    by reference
                    from Exhibit 2.7 to the Company’s Form 8-K filed on March 25,
                    2005).10.56
                Form
                    of Securities Purchase Agreement dated May 20, 2005, by and among
                    the
                    Company and various purchasers (incorporated by reference from
                    Exhibit
                    99.1 to the Company’s Form 8-K filed on May 26, 2005).10.57
                Registration
                    Rights Agreement dated May 20, 2005 by and among the Company
                    and various
                    purchasers (incorporated by reference from Exhibit 99.2 to the
                    Company’s
                    Form 8-K filed on May 26, 2005).
  59
  10.58
                Form
                    of Common Stock Purchase Warrant issued to various purchasers
                    (incorporated by reference from Exhibit 99.3 to the Company’s Form 8-K
                    filed on May 26, 2005).10.59
                Letter
                    Agreement between the Company and Cappello Capital Corp dated
                    July 21,
                    2005, amending certain portions of the original engagement agreement
                    dated
                    March 24, 2004 (incorporated by reference from Exhibit 99.1 to
                    the
                    Company’s Form 8-K filed on July 26, 2005).10.60
                Form
                    of Resale Agreement dated July 20, 2005 between the Company and
                    Cappello
                    Capital Corp entered into in connection with the Letter Agreement
                    dated
                    July 21, 2005 (incorporated by reference from Exhibit 99.2 to
                    the
                    Company’s Form 8-K filed on July 26, 2005).10.61
                Form
                    of Note and Warrant Purchase Agreement dated October 4, 2005
                    between the
                    Company and various investors (incorporated by reference from
                    Exhibit 99.1
                    to the Company’s Form 8-K filed on October 11, 2005).10.62
                Form
                    of Promissory Note issued by the Company to various investors
                    in
                    connection with the Note and Warrant Purchase Agreement dated
                    October 4,
                    2005 (incorporated by reference from Exhibit 99.2 to the Company’s Form
                    8-K filed on October 11, 2005).10.63
                Form
                    of Common Stock Purchase Warrant issued to various investors
                    in connection
                    with the Note and Warrant Purchase Agreement dated October 4, 2005
                    (incorporated by reference from Exhibit 99.3 to the Company’s Form 8-K
                    filed on October 11, 2005).10.64
                Form
                    of Registration Rights Agreement issued to various investors
                    in connection
                    with the Note and Warrant Purchase Agreement dated October 4,
                    2005
                    (incorporated by reference from Exhibit 99.4 to the Company’s Form 8-K
                    filed on October 11, 2005).10.65
                Form
                    of Securities Purchase Agreement dated December 5, 2005 by and
                    among the
                    Company and various purchasers (incorporated by reference from
                    Exhibit
                    99.1 to the Company’s Form 8-K filed on December 8, 2005).10.66
                Form
                    of Registration Rights Agreement dated December 5, 2005 by and
                    among the
                    Company and various purchasers (incorporated by reference from
                    Exhibit
                    99.2 to the Company’s Form 8-K filed on December 8, 2005).10.67
                Form
                    of Warrant issued to various purchasers (incorporated by reference
                    from
                    Exhibit 99.3 to the Company’s Form 8-K filed on December 8,
                    2005).10.68
                Master
                    Contribution Agreement by and among Genius Products, Inc., The
                    Weinstein
                    Company LLC and The Weinstein Company Holdings LLC dated as of
                    December 5,
                    2005 (incorporated by reference from Exhibit 2.1 to the Company’s Form 8-K
                    filed on December 9, 2005).*[Exhibits
                    are omitted but will be furnished to the Commission supplementally
                    upon
                    request]*10.69
                Asset
                    Purchase Agreement by and between Genius Products, Inc. and Klaus
                    Moeller
                    dated as of December 31, 2005 (incorporated by reference from Exhibit
                    2.1 to the Company’s Form 8-K filed on January 6, 2006).*[The
                    schedules and other attachments to this exhibit were omitted.
                    The Company
                    agrees to furnish supplementally a copy of any omitted schedules
                    or
                    attachments to the Securities and Exchange Commission upon
                    request]*10.70
                Form
                    of Stock Option Award Agreement with Alexander L. Cappello (incorporated
                    by reference from Exhibit 99.1 o the Company’s Form S-8 filed on December
                    20, 2005).10.71
                Form
                    of Stock Option Award Agreement with Michael J. Koss (incorporated
                    by
                    reference from Exhibit 99.2 o the Company’s Form S-8 filed on December 20,
                    2005).10.72
                Form
                    of Stock Option Award Agreement with Charles H. Rivkin (incorporated
                    by
                    reference from Exhibit 99.3 o the Company’s Form S-8 filed on December 20,
                    2005).10.73
                Form
                    of Stock Option Award Agreement with Peter J. Schlessel (incorporated
                    by
                    reference from Exhibit 99.4 o the Company’s Form S-8 filed on December 20,
                    2005).10.74
                Form
                    of Stock Option Award Agreement with Trevor Drinkwater (incorporated
                    by
                    reference from Exhibit 99.5 o the Company’s Form S-8 filed on December 20,
                    2005).10.75
                Form
                    of Stock Option Award Agreement with Trevor Drinkwater (incorporated
                    by
                    reference from Exhibit 99.6 to the Company’s Form S-8 filed on December
                    20, 2005).
  60
  10.76
                Form
                    of Stock Option Award Agreement with Shawn Howie (incorporated
                    by
                    reference from Exhibit 99.7 to the Company’s Form S-8 filed on December
                    20, 2005).10.77
                Form
                    of Stock Option Award Agreement with Stephen K. Bannon (incorporated
                    by
                    reference from Exhibit 99.8 to the Company’s Form S-8 filed on December
                    20, 2005).10.78
                Form
                    of Stock Option Award Agreement with Stephen K. Bannon (incorporated
                    by
                    reference from Exhibit 99.9 to the Company’s Form S-8 filed on December
                    20, 2005).10.79
                Form
                    of Stock Option Award Agreement with Bruce L. Pompan (incorporated
                    by
                    reference from Exhibit 99.10 to the Company’s Form S-8 filed on December
                    20, 2005).10.80
                Form
                    of Stock Option Award Agreement with James G. Ellis (incorporated
                    by
                    reference from Exhibit 99.11 to the Company’s Form S-8 filed on December
                    20, 2005).10.81
                Form
                    of Stock Option Award Agreement with Robert V. Graziano (incorporated
                    by
                    reference from Exhibit 99.12 to the Company’s Form S-8 filed on December
                    20, 2005).10.82
                Form
                    of Stock Option Award Agreement with Herbert Hardt (incorporated
                    by
                    reference from Exhibit 99.13 to the Company’s Form S-8 filed on
                    December 20, 2005).10.83
                Form
                    of Stock Option Award Agreement with Mitch Budin (incorporated
                    by
                    reference from Exhibit 99.14 to the Company’s Form S-8 filed on December
                    20, 2005).10.84
                Form
                    of Stock Option Award Agreement with Mitch Budin (incorporated
                    by
                    reference from Exhibit 99.15 to the Company’s Form S-8 filed on December
                    20, 2005).10.86
                First
                    Amendment to Master Contribution Agreement by and among Genius
                    Products,
                    Inc., The Weinstein Company LLC and The Weinstein Company Holdings
                    LLC,
                    dated as of March 15, 2006 (incorporated by reference from Exhibit
                    2.2 to
                    the Company’s Form 8-K filed on March 16, 2006).10.87
                Amendment
                    to Asset Purchase Agreement by and among Genius Products, Inc.,
                    Klaus
                    Moeller and Pacific Entertainment Corporation dated as of January
                    5, 2006
                    (incorporated by reference from Exhibit 2.2 to the Company’s Form 8-K
                    filed on January 6, 2006).*[The
                    schedules and other attachments to this exhibit were omitted.
                    The Company
                    agrees to furnish supplementally a copy of any omitted schedules
                    or
                    attachments to the Securities and Exchange Commission upon
                    request]*10.88
                Employment
                    Agreement by and between Genius Products, Inc. and John Mueller
                    dated
                    March 10, 2006 (incorporated by reference from Exhibit 99.1 to
                    the
                    Company’s Form 8-K filed on March 16, 2006).10.89
                Settlement
                    Agreement and Release of Claims entered into by Genius Products,
                    Inc. with
                    Shawn Howie dated February 7, 2006 (incorporated by reference
                    from Exhibit
                    99.1 to the Company’s Form 8-K filed on February 13, 2006).10.90
                Secured
                    Negotiable Note, dated February 3, 2004, in the principal amount
                    of
                    $1,076,704 issued to Al Cattabiani (incorporated by reference
                    from Exhibit
                    10.2 to the Company’s Form 8-K filed on February 18, 2004).10.91
                Secured
                    Negotiable Note, dated February 3, 2004, in the principal amount
                    of
                    $65,472 issued to Carl Seldin Koerner (incorporated by reference
                    from
                    Exhibit 10.3 to the Company’s Form 8-K filed on February 18,
                    2004).10.92
                Secured
                    Negotiable Note, dated February 3, 2004, in the principal amount
                    of
                    $965,712 issued to Clara Spalter Miller (incorporated by reference
                    from
                    Exhibit 10.4 to the Company’s Form 8-K filed on February 18,
                    2004).10.93
                Secured
                    Negotiable Note, dated February 3, 2004, in the principal amount
                    of
                    $965,712 issued to Lee Miller (incorporated by reference from
                    Exhibit 10.5
                    to the Company’s Form 8-K filed on February 18, 2004).10.94
                Secured
                    Non-Negotiable Note, dated February 3, 2004, in the principal
                    amount of
                    $200,000 issued to Al Cattabiani (incorporated by reference from
                    Exhibit
                    10.6 to the Company’s Form 8-K/A filed on March 15, 2004).10.95
                Guaranty,
                    dated February 3, 2004, by Wellspring Media, Inc. (incorporated
                    by
                    reference from Exhibit 10.7 to the Company’s Form 8-K filed on February
                    18, 2004).10.96
                Security
                    Agreement, dated February 3, 2004, by Wellspring Media, Inc.
                    in favor of
                    Lee Miller as security agent (incorporated by reference from
                    Exhibit 10.8
                    to the Company’s Form 8-K filed on February 18, 2004).
  61
  10.97
                Stock
                    Pledge Agreement, dated February 3, 2004, from American Vantage
                    Media
                    Corporation to Lee Miller as pledge agent (incorporated by reference
                    from
                    Exhibit 10.9 to the Company’s Form 8-K filed on February 18,
                    2004).10.98
                Lease
                    Agreement with PTL Realty dated as of March 8, 2006, by and between
                    the
                    Company and Ed Silver, Co-Trustee of the Silver Trust and Tess
                    Weinstein,
                    Co-Trustee of the Weinstein Trust, d/b/a PTL Realty (incorporated
                    by
                    reference from Exhibit 10.1 to the Company’s Form 10-Q filed on May 15,
                    2006).10.99
                Second
                    Amendment to Master Contribution Agreement by and between the
                    Company, The
                    Weinstein Company LLC, The Weinstein Company Holdings LLC and
                    The
                    Weinstein Company Funding LLC entered into on April 26, 2006
                    (incorporated
                    by reference from Exhibit 2.3 to the Company’s Form 8-K filed on May 2,
                    2006).10.100
                Third
                    Amendment to Master Contribution Agreement by and between the
                    Company, The
                    Weinstein Company LLC, The Weinstein Company Holdings LLC and
                    The
                    Weinstein Company Funding LLC entered into on May 30, 2006 (incorporated
                    by reference from Exhibit 2.4 to the Company’s Form 8-K filed on June 2,
                    2006).10.101
                Fourth
                    Amendment to Master Contribution Agreement by and between the
                    Company, The
                    Weinstein Company LLC, The Weinstein Company Holdings LLC and
                    The
                    Weinstein Company Funding LLC entered into on June 28, 2006 (incorporated
                    by reference from Exhibit 2.5 to the Company’s Form 8-K filed on June 29,
                    2006).10.102
                Form
                    of Limited Liability Company Agreement of Genius Products, LLC,
                    dated July
                    21, 2006 (incorporated by reference from Appendix C to the Company’s
                    Definitive Proxy Statement filed on June 29, 2006).10.103
                Form
                    of Distribution Agreement, dated July 17, 2006, by and between
                    Genius
                    Products, LLC and The Weinstein Company LLC (incorporated by
                    reference
                    from Appendix D to the Company’s Definitive Proxy Statement filed on June
                    29, 2006).10.104
                Amended
                    and Restated 2004 Stock Incentive Plan (incorporated by reference
                    from
                    Appendix F to the Company’s Definitive Proxy Statement filed on June 29,
                    2006).10.105
                Output
                    Distribution Agreement, dated July 7, 2006, by and between the
                    Company and
                    ESPN Enterprises, Inc. (incorporated by reference from Exhibit
                    10.1 to the
                    Company’s Form 8-K/A filed on September 29, 2006).10.106
                Consulting
                    Agreement, dated July 20, 2006, by and between the Company and
                    Bannon
                    Strategic Advisors, Inc. (incorporated by reference from Exhibit
                    10.1 to
                    the Company’s Form 8-K filed on July 26, 2006).10.107
                Amendment
                    No. 2 to Employment Agreement, dated July 20, 2006, by and between
                    the
                    Company and Trevor Drinkwater (incorporated by reference from
                    Exhibit 10.2
                    to the Company’s Form 8-K filed on July 26, 2006).10.108
                Registration
                    Rights Agreement, dated July 21, 2006, by and between the Company
                    and The
                    Weinstein Company LLC (incorporated by reference from Exhibit
                    10.7 to the
                    Company’s Report on Form 10-Q filed on November 20, 2006).14.1
                Code
                    of Ethics adopted February 27, 2004 (incorporated by reference
                    from
                    Exhibit 10.39 included with the Company’s Form 10-KSB filed on March 30,
                    2004).23.1*
                Consent
                    of Ernst & Young LLP.23.2*
                Consent
                    of Singer Lewak Greenbaum & Goldstein LLP.31.1*
                Certification
                    of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act.31.2*
                Certification
                    of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act.32.1*
                Certification
                    of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                    Act.32.2*
                Certification
                    of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                    Act.
 * Filed
        herewith.
  ** Confidential
        treatment has been requested with respect to certain portions of this exhibit.
        Omitted portions have been filed separately with the Securities and Exchange
        Commission pursuant to an application for confidential
        treatment.




62


**SIGNATURES**
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, as amended, the registrant has duly caused this report to be signed
        on its
        behalf by the undersigned, thereunto duly authorized.
  Date:
                  May 3, 2007
              
              
              
              GENIUS
                  PRODUCTS, INC.,a
                  Delaware corporationBy
              :
              /s/
                  Trevor DrinkwaterTrevor
                  Drinkwater,Chief
                  Executive Officer
 
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, as amended, this
        report has been signed below by the following persons on behalf of the
        registrant and in the capacities and on the dates indicated.
  **SIGNATURE**
              
              **TITLE**
              
              **DATE**/s/
                  Trevor Drinkwater
              
              Chief
                  Executive Officer and Director
                (Principal
                  Executive Officer)
              
              May
                  3, 2007Trevor
                  Drinkwater/s/
                  John P. Mueller
              
              Chief
                  Financial Officer
                (Principal
                  Financial and Accounting Officer)
              
              May
                  3, 2007John
                  P. Mueller/s/
                  Stephen K. Bannon
              
              Chairman
                  of the Board of Directors
              
              May
                  3, 2007Stephen
                  K. Bannon/s/
                  Bradley A. Ball
              
              Director
              
              May
                  3, 2007Bradley
                  A. Ball/s/
                  James G. Ellis
              
              Director
              
              May
                  3, 2007James
                  G. Ellis/s/
                  Herbert Hardt
              
              Director
              
              May
                  3, 2007Herbert
                  Hardt/s/
                  Larry Madden
              
              Director
              
              May
                  3, 2007Larry
                  Madden/s/
                  Irwin Reiter
              
              Director
              
              May
                  3, 2007Irwin
                  Reiter
  63
  Report
          of
          Independent Registered Public Accounting Firm
  
 To
          the
          Board of Directors and Stockholders
 Genius
          Products, Inc.
 
 We
          have
          audited the accompanying consolidated balance sheet of Genius Products,
          Inc. and
          subsidiaries as of December 31, 2006, and the related consolidated statements
          of
          income, retained earnings, and cash flows for the year then ended. Our
          audit
          also included the financial statement schedule listed in the Index at Item
          8.
          These financial statements and schedule are the responsibility of the Company's
          management. Our responsibility is to express an opinion on these financial
          statements and schedule based on our audit. The financial statements of
          Genius
          Products, Inc and subsidiaries as of December 31, 2005 and for each of
          the two
          years in the period ended December 31, 2005, were audited by other auditors
          whose report dated April 13, 2006, expressed an unqualified opinion on
          those
          statements.
 
 We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. We were not engaged to perform
          an
          audit of the Company's internal control over financial reporting. Our audit
          included consideration of internal control over financial reporting as
          a basis
          for designing audit procedures that are appropriate in the circumstances,
          but
          not for the purpose of expressing an opinion on the effectiveness of the
          Company's internal control over financial reporting. Accordingly, we express
          no
          such opinion. An audit also includes examining, on a test basis, evidence
          supporting the amounts and disclosures in the financial statements, assessing
          the accounting principles used and significant estimates made by management,
          and
          evaluating the overall financial statement presentation. We believe that
          our
          audit provides a reasonable basis for our opinion.
 
 In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects, the consolidated financial position of Genius Products,
          Inc.
          and subsidiaries at December 31, 2006, and the consolidated results of
          their
          operations and their cash flows for the year then ended, in conformity
          with U.S.
          generally accepted accounting principles. Also, in our opinion, the related
          financial statement schedule, when considered in relation to the basic
          financial
          statements taken as a whole, presents fairly in all material respects the
          information set forth therein.
  /s/ Ernst & Young
                  LLP
  Los
          Angeles, California
 May
          1,
          2007
  F-1
 REPORT
          OF
          INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   To
          the
          Board of Directors
 Genius
          Products, Inc.
 Solana
          Beach, California
 
 We
          have
          audited the consolidated balance sheets of Genius Products, Inc. and
          subsidiaries (collectively, the “Company”) as of December 31, 2005 and
          December 31, 2004, and the related consolidated statements of operations,
          stockholders’ equity and cash flows for each of the two years in the period
          ended December 31, 2005. Our audits also included the financial statement
          schedules of the Company, listed in Item 15(a). These financial statements
          and
          financial statement schedules are the responsibility of the Company’s
          management. Our responsibility is to express an opinion on these financial
          statements based on our audit.
 
 We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provided a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of the Company as of December
          31, 2005 and 2004, and the results of their operations and their cash flows
          for
          each of the two years in the period ended December 31, 2005, in conformity
          with
          U.S. generally accepted accounting principles. Also, in our opinion, the
          related
          financial statement schedules, when considered in relation to the basic
          consolidated financial statements, taken as a whole, present fairly in
          all
          material respects the information set forth therein.
  /s/
                    SINGER LEWAK GREENBAUM & GOLDSTEIN LLPLos
                    Angeles, CaliforniaApril
                    13, 2006
  F-2
 
 **GENIUS
          PRODUCTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
            BALANCE SHEETS**
 **(IN
              THOUSANDS, EXCEPT SHARE AND PAR VALUE
              INFORMATION)**
   December
                    31, 2006
                
                December
                    31, 2005**ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                3,745
                
                $
                30,597Accounts
                    receivable, net of allowance for doubtful accounts and sales
                    returns of
                    $6,909 in 2005
                
                
                -
                
                
                2,407Inventories,
                    net
                
                
                -
                
                
                5,568Prepaid
                    expenses and other current assets
                
                
                110
                
                
                704Amounts
                    receivable from affiliate, net
                
                
                777
                
                
                -Notes
                    receivable, related party, net
                
                
                -
                
                
                750Total
                    current assets
                
                
                4,632
                
                
                40,026Property
                    and equipment, net
                
                
                -
                
                
                396Film
                    library, net
                
                
                -
                
                
                19,727Amount
                    receivable from affiliate, net
                
                
                -
                
                
                1,712Investment
                    in Distributor
                
                
                84,796
                
                
                -Goodwill
                
                
                -
                
                
                14,488Deposits
                    and other
                
                
                -
                
                
                16Total
                    assets
                
                $
                89,428
                
                $
                76,365**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Current
                    liabilities:Accounts
                    payable
                
                
                59
                
                
                9,243Notes
                    payable
                
                
                -
                
                
                5,379Accrued
                    expenses
                
                
                865
                
                
                3,309Customer
                    deposits
                
                
                -
                
                
                189Debentures
                    payable
                
                
                -
                
                
                51Redeemable
                    common stock
                
                
                -
                
                
                414Total
                    current liabilities
                
                
                924
                
                
                18,585Deferred
                    gain, related party
                
                
                -
                
                
                1,212Deferred
                    tax liability
                
                
                13,021
                
                
                1,380Total
                    liabilities
                
                
                13,945
                
                
                21,177Commitments
                    and contingenciesStockholders’
                    equity:Preferred
                      stock, $.0001 par value; 10,000,000 shares authorized; no sharesoutstanding
                
                
                -
                
                
                -Series
                    W preferred stock, $.0001 par value; 100 shares authorized and
                    outstanding
                    in 2006
                
                
                -
                
                
                -Common
                    stock, $.0001 par value; 300,000,000 shares authorized;63,305,195
                    and 60,438,154 shares outstanding in 2006 and 2005,
                    respectively
                
                
                6
                
                
                6Additional
                    paid-in capital
                
                
                105,375
                
                
                93,920Accumulated
                    deficit
                
                
                (29,898
                )
                
                (38,738
                )Total
                    stockholders’ equity
                
                
                75,483
                
                
                55,188Total
                    liabilities and stockholders' equity
                
                $
                89,428
                
                $
                76,365
  See
            accompanying notes.
  F-3
  **GENIUS
          PRODUCTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
            STATEMENTS OF OPERATIONS**
 **(IN
              THOUSANDS, EXCEPT PER SHARE INFORMATION)**
  
 Year
                    Ended December 31,2006
                
                2005
                
                2004Revenues,
                    net of sales returns, discounts andallowances
                    of $40,882, $9,965, $2,704
                
                $
                119,011
                
                $
                22,328
                
                $
                16,630in
                    2006, 2005 and 2004, respectivelyCost
                    of revenues:Manufacturing
                    and distribution
                
                
                26,509
                
                
                19,910
                
                
                13,212Advertising
                    and marketing
                
                
                17,971
                
                
                -
                
                
                -Amortization
                    and participation
                
                
                86,390
                
                
                2,973
                
                
                681Total
                    cost of revenues
                
                
                130,870
                
                
                22,883
                
                
                13,893Gross
                    profit (loss)
                
                
                (11,859
                )
                
                (555
                )
                
                2,737Operating
                    expenses (income):Selling,
                    general and administrative
                
                
                19,867
                
                
                14,747
                
                
                8,231Restructuring
                
                
                -
                
                
                2,745
                
                
                -Gain
                    on sale, related party
                
                
                (63
                )
                
                (1,352
                )
                
                -Equity
                    in net loss from Distributor
                
                
                7,989
                
                
                -
                
                
                -Total
                    operating expenses
                
                
                27,793
                
                
                16,140
                
                
                8,231Loss
                    from operations
                
                
                (39,652
                )
                
                (16,695
                )
                
                (5,494
                )Interest
                    expense
                
                
                (11
                )
                
                (465
                )
                
                (551
                )Interest
                    income and other
                
                
                97
                
                
                -
                
                
                -Loss
                    before provision for income taxes
                
                
                (39,566
                )
                
                (17,160
                )
                
                (6,045
                )Provision
                    for income taxes
                
                
                5,797
                
                
                1
                
                
                1Loss
                    before extraordinary item
                
                
                (45,363
                )
                
                (17,161
                )
                
                (6,046
                )Extraordinary
                    gain, net of taxes of $5,843
                
                
                54,203
                
                
                -
                
                
                -Net
                    income (loss)
                
                $
                8,840
                
                $
                (17,161
                )
                $
                (6,046
                )**Basic
                    and diluted EPS**Loss
                    before extraordinary item
                
                $
                (0.74
                )
                $
                (0.42
                )
                $
                (0.25
                )Extraordinary
                    item
                
                
                0.89
                
                
                -
                
                
                -Net
                    income (loss)
                
                $
                0.15
                
                $
                (0.42
                )
                $
                (0.25
                )Basic
                    and diluted weighted average shares
                
                
                60,949,469
                
                
                40,400,112
                
                
                23,826,584
 See
            accompanying notes.
  F-4
  **GENIUS
          PRODUCTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
            STATEMENTS OF STOCKHOLDERS’ EQUITY**
 FOR
            THE YEARS ENDED DECEMBER 31, 2004, 2005
            AND 2006
 **(IN
              THOUSANDS, EXCEPT SHARE AMOUNTS)**
  
 Series
                    W Preferred Stock
                
                Common
                    StockShares
                
                Amount
                
                Shares
                
                Amount
                
                Additional
                  Paid-in
                    Capital
                
                Stock
                  Subscription
                    Receivable
                
                Accumulated
                  Deficit
                
                Total
                  Stockholders’
                    EquityBalance,
                    December 31, 2003
                
                
                0
                
                
                0
                
                
                20,658,425
                
                $
                2
                
                $
                21,048
                
                $
                (2,796
                )
                $
                (15,531
                )
                $
                2,723Shares
                    issued in private placement, net of offering costs
                
                
                0
                
                
                0
                
                
                5,000,000
                
                
                1
                
                
                6,419
                
                
                0
                
                
                0
                
                
                6,420Exercise
                    of warrants for cash
                
                
                0
                
                
                0
                
                
                217,500
                
                
                0
                
                
                137
                
                
                0
                
                
                0
                
                
                137Cashless
                    exercise of warrants
                
                
                0
                
                
                0
                
                
                478,716
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0Issue
                    of warrants for services rendered or to be rendered
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                1,339
                
                
                0
                
                
                0
                
                
                1,339Shares
                    issued for services rendered
                
                
                0
                
                
                0
                
                
                57,994
                
                
                0
                
                
                63
                
                
                0
                
                
                0
                
                
                63Exercise
                    of options
                
                
                0
                
                
                0
                
                
                169,400
                
                
                0
                
                
                172
                
                
                0
                
                
                0
                
                
                172Cancel
                    shares issued for payment of DVD remastering costs
                
                
                0
                
                
                0
                
                
                (350,000
                )
                
                0
                
                
                (350
                )
                
                0
                
                
                0
                
                
                (350
                )Shares
                    canceled/rescinded
                
                
                0
                
                
                0
                
                
                (12,226
                )
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0Other
                    adjustment
                
                
                0
                
                
                0
                
                
                (1,943
                )
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0Payoff
                    subscriptions receivable
                
                
                0
                
                
                0
                
                
                (1,009,354
                )
                
                0
                
                
                (2,822
                )
                
                2,796
                
                
                0
                
                
                (26
                )Net
                    loss
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                (6,046
                )
                
                (6,046
                )Balance,
                    December 31, 2004
                
                
                0
                
                
                0
                
                
                25,208,512
                
                
                3
                
                
                26,006
                
                
                0
                
                
                (21,577
                )
                
                4,432Shares
                    issued in private placement, net of offering costs
                
                
                0
                
                
                0
                
                
                25,681,024
                
                
                2
                
                
                44,454
                
                
                0
                
                
                0
                
                
                44,456Shares
                    and warrants issued for the acquisition of AVM
                
                
                0
                
                
                0
                
                
                7,550,301
                
                
                1
                
                
                18,807
                
                
                0
                
                
                0
                
                
                18,808Exercise
                    of warrants for cash
                
                
                0
                
                
                0
                
                
                1,255,315
                
                
                0
                
                
                1,277
                
                
                0
                
                
                0
                
                
                1,277Exercise
                    of options for cash
                
                
                0
                
                
                0
                
                
                157,600
                
                
                0
                
                
                192
                
                
                0
                
                
                0
                
                
                192Issuance
                    of options/warrants for services rendered or to be
                    rendered
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                440
                
                
                0
                
                
                0
                
                
                440Shares
                    issued for services rendered
                
                
                0
                
                
                0
                
                
                585,402
                
                
                0
                
                
                988
                
                
                0
                
                
                0
                
                
                988Severance
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                1,419
                
                
                0
                
                
                0
                
                
                1,419Warrants
                    issued as debt discount
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                322
                
                
                0
                
                
                0
                
                
                322Other
                    adjustment
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                15
                
                
                0
                
                
                0
                
                
                15Net
                    loss
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                (17,161
                )
                
                (17,161
                )Balance,
                    December 31, 2005
                
                
                0
                
                
                0
                
                
                60,438,154
                
                
                6
                
                
                93,920
                
                
                0
                
                
                (38,738
                )
                
                55,188Exercise
                    of warrants for cash
                
                
                0
                
                
                0
                
                
                649,288
                
                
                0
                
                
                840
                
                
                0
                
                
                0
                
                
                840Cashless
                    exercise of warrants
                
                
                0
                
                
                0
                
                
                325,029
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0Exercise
                    of options for cash
                
                
                0
                
                
                0
                
                
                1,892,724
                
                
                0
                
                
                2,522
                
                
                0
                
                
                0
                
                
                2,522Issuance
                    of Series W Preferred Stock
                
                
                100
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0Share-based
                    compensation
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                7,679
                
                
                0
                
                
                0
                
                
                7,679Reclassification
                    of redeemable stock
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                414
                
                
                0
                
                
                0
                
                
                414Net
                    income
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                0
                
                
                8,840
                
                
                8,840Balance,
                    December 31, 2006
                
                
                100
                
                
                0
                
                
                63,305,195
                
                $
                6
                
                $
                105,375
                
                $
                0
                
                
                ($29,898
                )
                $
                75,483
   See
          accompanying notes.
  F-5
  **GENIUS
          PRODUCTS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
            STATEMENTS OF CASH FLOWS**
 **(IN
              THOUSANDS)**
 Year
                      Ended December 31,2006
                  
                  2005
                  
                  2004Cash
                      flows from operating activities:Net
                      income/(loss)
                  
                  $
                  8,840
                  
                  $
                  (17,161
                  )
                  $
                  (6,046
                  )Adjustments
                      to reconcile net income/(loss) to net cash used in operating
                      activitiesDepreciation
                      and amortization
                  
                  
                  116
                  
                  
                  3,155
                  
                  
                  762Equity
                      in net loss from Distributor
                  
                  
                  7,331
                  
                  
                  -
                  
                  
                  -Amortization
                      and impairment of film library
                  
                  
                  12,508
                  
                  
                  -
                  
                  
                  -Change
                      in allowance for doubtful accounts and provision for
                      returns
                  
                  
                  17,423
                  
                  
                  5,545
                  
                  
                  1,360Operating
                      expenses paid by Distributor
                  
                  
                  378
                  
                  
                  -
                  
                  
                  -Change
                      in provision for obsolete inventory
                  
                  
                  3,922
                  
                  
                  1,827
                  
                  
                  474Common
                      stock issued for services
                  
                  
                  -
                  
                  
                  988
                  
                  
                  63Extraordinary
                      gain
                  
                  
                  (60,046
                  )
                  
                  -
                  
                  
                  -Amortization
                      of warrants issued for services
                  
                  
                  -
                  
                  
                  440
                  
                  
                  1,339Stock
                      compensation expense
                  
                  
                  7,400
                  
                  
                  1,418
                  
                  
                  -Gain
                      on sale of assets to Pacific Entertainment
                  
                  
                  -
                  
                  
                  (1,352
                  )
                  
                  -Interest
                      expense on redeemable common stock
                  
                  
                  -
                  
                  
                  19
                  
                  
                  22Amortization
                      of discount on notes payable
                  
                  
                  -
                  
                  
                  217
                  
                  
                  420Deferred
                      tax liability
                  
                  
                  11,641
                  
                  
                  -
                  
                  
                  -*Changes
                      in assets and liabilities:*Increase
                      in accounts receivable
                  
                  
                  (65,331
                  )
                  
                  (1,493
                  )
                  
                  (3,653
                  )Increase
                      in inventories
                  
                  
                  (12,470
                  )
                  
                  (3,525
                  )
                  
                  (3,117
                  )(Increase)
                      decrease in prepaid expenses, notes receivable and
                      deposits
                  
                  
                  389
                  
                  
                  (81
                  )
                  
                  195Increase
                      in royalty advances
                  
                  
                  (2,416
                  )
                  
                  -
                  
                  
                  -Increase
                      in film library
                  
                  
                  (1,456
                  )
                  
                  (3,454
                  )
                  
                  (2,987
                  )Increase
                      (decrease) in accounts payable
                  
                  
                  (3,767
                  )
                  
                  (4,218
                  )
                  
                  5,898Increase
                      in accrued expenses and other
                  
                  
                  18,149
                  
                  
                  1,453
                  
                  
                  290Decrease
                      in customer deposits
                  
                  
                  -
                  
                  
                  (41
                  )
                  
                  -Increase
                      in deferred revenue
                  
                  
                  2,494
                  
                  
                  -
                  
                  
                  -Increase
                      in remittance to licensors
                  
                  
                  50,992
                  
                  
                  -
                  
                  
                  -Net
                      cash used in operating activities
                  
                  
                  (3,903
                  )
                  
                  (16,263
                  )
                  
                  (4,980
                  )Cash
                      flows from investing activities:AVM
                      cash, net of expenses paid in cash
                  
                  
                  -
                  
                  
                  599
                  
                  
                  -Proceeds
                      from sale of assets to Pacific Entertainment
                  
                  
                  -
                  
                  
                  250
                  
                  
                  -Investment
                      in Distributor
                  
                  
                  (20,329
                  )
                  
                  -Restricted
                      cash
                  
                  
                  (303
                  )
                  
                  -
                  
                  
                  -Patents
                      and trademarks
                  
                  
                  -
                  
                  
                  (10
                  )
                  
                  (4
                  )Purchase
                      of property and equipment
                  
                  
                  (448
                  )
                  
                  (272
                  )
                  
                  (195
                  )Net
                      cash provided by (used in) investing activities
                  
                  
                  (21,080
                  )
                  
                  567
                  
                  
                  (199
                  )Cash
                      flows from financing activities:Proceeds
                      from notes payable
                  
                  
                  -
                  
                  
                  4,000
                  
                  
                  -Net
                      borrowings (payments) on notes payable and debentures
                  
                  
                  (5,230
                  )
                  
                  (4,856
                  )
                  
                  (1,150
                  )Payments
                      of offering costs
                  
                  
                  -
                  
                  
                  (3,444
                  )
                  
                  -Purchase
                      of redeemable common stock
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (117
                  )Proceeds
                      from exercise of options
                  
                  
                  2,522
                  
                  
                  192
                  
                  
                  -Proceeds
                      from exercise of warrants
                  
                  
                  839
                  
                  
                  1,277
                  
                  
                  309Proceeds
                      from issuance of common stock
                  
                  
                  -
                  
                  
                  47,900
                  
                  
                  6,420Net
                      cash provided by (used in) financing activities
                  
                  
                  (1,869
                  )
                  
                  45,069
                  
                  
                  5,462Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  (26,852
                  )
                  
                  29,373
                  
                  
                  283Cash
                      and cash equivalents at beginning of year
                  
                  
                  30,597
                  
                  
                  1,224
                  
                  
                  941Cash
                      and cash equivalents at end of year
                  
                  $
                  3,745
                  
                  $
                  30,597
                  
                  $
                  1,224Supplemental
                      disclosure of cash flow informationWarrants
                      issued for offering costs
                  
                  $
                  -
                  
                  $
                  1,015
                  
                  $
                  -Issuance
                      of common stock for offering costs
                  
                  
                  -
                  
                  
                  350.00
                  
                  
                  -Interest
                      paid
                  
                  
                  11
                  
                  
                  1
                  
                  
                  -Taxes
                      paid
                  
                  
                  -
                  
                  
                  1
                  
                  
                  -Noncash
                      transactionsContribution
                      of assets, liabilities and businesses to Distributor
                  
                  $
                  11,851
                  
                  $
                  -
                  
                  $
                  -Reclassification
                      of of redeemable common stock
                  
                  
                  414
                  
                  
                  -
                  
                  
                  -Equity
                      consideration for acquisition of AVMC
                  
                  
                  -
                  
                  
                  18,808
                  
                  
                  -Repayment
                      of officer loans by return of common stock
                  
                  
                  -
                  
                  
                  -
                  
                  
                  26Repayment
                      of notes receivable by return of common stock
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,797
  See
            accompanying notes.
  F-6
  **GENIUS
          PRODUCTS, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**
  **NOTE
          1.NATURE OF
          BUSINESS**
 Genius
              Products, Inc. (OTC BB:GNPI) ("we" "our" or the "Company"), along with The
              Weinstein Company Holdings LLC and its first-tier subsidiary, W-G Holding Corp.,
              own Genius Products, LLC (the "Distributor"), a leading entertainment products
              distribution company that produces, licenses, and distributes an expanding
              library of feature films, television programming, family, lifestyle and
              trend
              entertainment on DVD and other emerging platforms such as digital distribution
              and the new high-definition DVD formats. The Distributor primarily focuses
              on four core branded content areas: major theatrical/independent film, sports,
              lifestyle and family/faith based content. The Distributor handles the distribution,
              marketing and sales for such brands as The Weinstein Company®, Dimension
              FilmsTM,
              IFC®,
              WellspringTM,
              RHI EntertainmentTM,
              Asia ExtremeTM,
              Imaginasian,
              Dragon DynastyTM,
              Peace Arch,
              Laugh Factory, ESPN®,
              World Wrestling
              Entertainment, Inc.®,
              Animal Planet,
              Classic Media, Entertainment
              Rights, Sesame Workshop®,
              Plaza
              Sesamo®,
              Discovery KidsTM and
              Impact Entertainment. Genius Products, Inc. is the managing member
              of Genius Products,
              LLC, in which it holds a 30% equity interest.
  THE
          WEINSTEIN COMPANY TRANSACTION. On July 21, 2006, we completed a transaction
          (the
“TWC Transaction”) with The Weinstein Company LLC (“TWC”) and its affiliates
          pursuant to which we launched Genius Products, LLC to exploit the exclusive
          U.S.
          home video distribution rights to feature film and direct-to-video releases
          owned or controlled by TWC. The TWC Transaction closed following a special
          meeting of our stockholders to approve the transaction and related matters
          (the
“Closing”). Under the terms of the TWC Transaction, the Company contributed
          substantially all of its assets, employees and existing businesses to the
          Distributor, which holds the exclusive U.S. home video distribution rights
          for
          filmed entertainment and direct-to-video product of TWC. The Distributor
          also
          operates the former businesses of the Company, including the production
          of
          proprietary content and the marketing, sales and distribution for other
          major
          branded entertainment content, such as Classic Media, Entertainment Rights,
          ESPN, NBC News, Sesame Street, Sundance Home Entertainment, World Wrestling
          Entertainment, Inc., Discovery Communications, Inc., Imaginasian, Asia
          Extreme,
          Dragon Dynasty and IFC.
 
 The
          Distributor is owned 70% by TWC’s parent company, The Weinstein Company Holdings
          LLC (“TWC Holdings”), and its first-tier
          subsidiary, W-G Holding Corp., and
          30%
          by the Company. As a
          condition to the closing of the TWC Transaction, we issued an aggregate
          of 100
          shares of Series W Preferred Stock to TWC
          Holdings and W-G
          Holding Corp. The Series W Preferred Stock provides the holders thereof
          with
          significant rights, preferences and powers including those described in
          Note 14. In
          addition, as part of the TWC Transaction, the Company added to its Board
          of
          Directors two TWC executives; Larry Madden, Executive Vice President and
          Chief
          Financial Officer of TWC, and Irwin Reiter, Executive Vice President of
          Accounting and Financial Reporting of TWC.
 
 Our
          interest in the Distributor consists of Class G Units representing a 30%
          membership interest in the Distributor, and the interest of TWC Holdings
          and W-G
          Holding Corp., consists
          of Class W Units representing a 70% membership interest in the Distributor.
          The
          70% interest in the Distributor held by TWC Holdings and W-G
          Holding Corp. is
          redeemable, at their option at any time from one year after the Closing,
          for up
          to 70% of our outstanding common stock, or with their approval, cash. From
          December 5, 2005, the date we entered into a Master Contribution Agreement
          relating to the TWC Transaction, through the Closing, we operated under
          an
          interim distribution agreement with TWC and recorded the results from titles
          we
          first released for TWC in March 2006 in our financial statements. Refer
          to Note
          11 for additional discussion regarding this transaction.
  **NOTE
          2.BASIS OF
          PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
          POLICIES**
  PRINCIPLES
          OF CONSOLIDATION. The consolidated financial statements include the accounts
          of
          (i) Genius Products, Inc., (ii) our wholly owned subsidiary American Vantage
          Media, LLC (“AVM”) and (iii) Wellspring Media, LLC (“Wellspring Media”), a
          wholly owned subsidiary of AVM. Each of the aforementioned direct or indirect
          subsidiaries of the Company was acquired on March 21, 2005, in addition to
          Sanuk Corporation, American Vantage/Hypnotic, Inc. and Wellspring Productions,
          LLC (which are all inactive). All significant inter-company transactions
          and
          accounts have been eliminated in consolidation.
  USE
          OF
          ESTIMATES. The preparation of consolidated financial statements in conformity
          with generally accepted accounting principles 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.
  F-7
  CASH
          AND
          CASH EQUIVALENTS. Cash equivalents include investments in time deposits,
          certificates of deposit and money market accounts with original maturities
          of
          three months or less.
  ALLOWANCE
          FOR SALES RETURNS AND DOUBTFUL ACCOUNTS. The allowance for doubtful accounts
          and
          provision for sales returns includes management's estimate of the amount
          expected to be uncollectible or returned on specific accounts and losses
          or
          returns on other accounts as yet to be identified included in accounts
          receivable. We
          provide for future returns of home video product at the time the products
          are
          sold. We calculate an estimate of future returns of product by analyzing
          a
          combination of historical returns, current economic trends, projections
          of
          consumer demand for our product and point-of-sale data available from certain
          retailers. Based on this information, a percentage of each sale is reserved.
          We
          also analyze other factors, including our historical experience with similar
          types of sales, information we receive from retailers and our assessment
          of the
          product's appeal based on domestic box office success and other research.
          Actual
          returns are charged against the reserve. The
          amounts we will ultimately realize could differ materially in the near
          term from
          the amounts estimated in arriving at the allowance for doubtful accounts
          and
          provision for sales returns in the accompanying financial
          statements.
 
 CONCENTRATIONS
          OF CREDIT RISK. For
          the
          202-day period ended July 21, 2006, Wal-Mart accounted for 29% of net revenue.
          At the Closing we transferred all of our accounts receivable assets to
          the
          Distributor and there were no accounts receivable balances at December
          31, 2006
          for the Company (the accounts receivable balances are recorded on the
          Distributor’s balance sheet at December 31, 2006).
  At
          December 31, 2005 this customer comprised 12.5% of the accounts receivable
          before allowances. In 2004, two customers accounted for 27% and 26% of
          net
          revenue, respectively.
  Financial
          instruments that potentially subject us to concentration of credit risk
          consist
          primarily of temporary cash investments and trade receivables. The Company
          restricts investment of temporary cash investments to financial institutions
          with investment grade credit ratings. We provide credit in the normal course
          of
          business to customers located throughout the United States. We perform
          ongoing
          credit evaluations of our customers, generally do not require collateral
          and
          maintain allowances for potential credit losses which, when realized, have
          been
          within the range of management’s expectations.
  We
          maintain cash and cash equivalents at several financial institutions. From
          time
          to time the balances for these accounts exceed the Federal Deposit Insurance
          Corporation’s (“FDICs”) insured amount.
  INVENTORIES.
          Inventories consist of raw materials and finished goods and are valued
          at the
          lower of cost or market. Cost is determined on an average cost basis which
          approximates the first-in-first-out method of valuation. Shipping and handling
          costs are recorded as expenses in the period in which they are incurred.
          The
          Company regularly monitors inventory for excess or obsolete items and makes
          any
          valuation corrections when such adjustments are needed.
  ROYALTY
          AND DISTRIBUTION FEE ADVANCES. Royalty and distribution fee advances represent
          fixed minimum payments made to program suppliers for exclusive content
          distribution rights. A program supplier’s share of exclusive program
          distribution revenues is retained by us until the share equals the
          advance(s) paid to the program. Thereafter, any excess is paid to the
          program supplier. We record as a cost of sales an amount equal to the program
          supplier’s share of the net distribution revenues. Revenue and cost forecasts
          are continually reviewed by management and revised when warranted by changing
          conditions. When estimates of total revenues and costs indicate that an
          individual title or group of cross-collateralized titles which we exploit
          via
          home entertainment formats (such as home video, CD or broadcast) will result
          in
          an ultimate loss, an impairment charge is recognized to the extent that
          capitalized advance royalties and distribution fees and recoupable production
          costs exceed estimated fair value, based on projected cash flows, in the
          period
          when estimated.
  LONG-LIVED
          ASSETS.
  *Property
          and Equipment:* Property
          and equipment purchases are recorded at cost and are depreciated and amortized
          over the estimated useful lives of the assets (three to seven years generally)
          using the straight-line method.
  *Film
          Library:* We
          capitalize the costs of production and acquisition of film libraries. Costs
          of
          production include costs of film and tape conversion to DLT master format,
          menu
          design, authoring and compression. These costs are amortized to cost of
          revenues
          in accordance with Statement of Position (“SOP”) 00-2, “Accounting by Producers
          or Distributors of Films”, using the individual film forecast method over a
          period of ten years. Costs are stated at the lower of unamortized film
          costs or
          estimated fair value. For acquired film libraries, ultimate revenue includes
          estimates over a period not to exceed ten years. Management regularly reviews
          and revises when necessary its ultimate revenue and cost estimates, which
          may
          result in a change in the rate of amortization of film costs and/or a write-down
          of all or a portion of unamortized film costs or library to estimated fair
          value.
  F-8
  *Goodwill* :
          As of
          July 21, 2006, goodwill was $14.5 million representing the excess of the
          fair
          value of Genius Products, Inc. over its net book value. On the closing
          of the
          TWC Transaction all Genius Products, Inc. goodwill was transferred to the
          Distributor.
  FAIR
          VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and cash
          equivalents, accounts receivable, prepaid expenses, accounts payable and
          accrued
          expenses approximate fair value.
  STOCK-BASED
          COMPENSATION. In December 2004, the Financial Accounting Standards Board
          (“FASB”) revised Statement of Financial Accounting Standards (“SFAS”)
          No. 123 (“SFAS No. 123R”), “Share-Based Payment,” which establishes
          accounting for share-based awards exchanged for employee services and requires
          companies to expense the estimated fair value of these awards over the
          requisite
          employee service period. The accounting provisions of SFAS No. 123R became
          effective for the Company beginning on January 1, 2006. There was no impact
          from adopting SFAS No. 123R.
  Under
          SFAS No. 123R, share-based compensation cost is measured at the grant date,
          based on the estimated fair value of the award, and is recognized as expense
          over the employee's requisite service period. The Company adopted the provisions
          of SFAS No. 123R using a modified prospective application. The valuation
          provisions of SFAS No. 123R apply to new awards and to awards that are
          outstanding on the effective date and subsequently modified or cancelled.
          Share-based compensation expense recognized under SFAS No. 123R includes
          share-based awards granted subsequent to January 1, 2006, based on the
          grant
          date fair value estimated in accordance with the provisions of SFAS No.
          123R as
          well as share-based awards granted prior to, but not yet vested as of January
          1,
          2006, based on the grant date fair value estimated in accordance with the
          provisions of SFAS No. 123R. In accordance with the modified prospective
          method,
          the consolidated financial statements for prior periods have not been restated
          to reflect, and do not include, the share-based compensation impact of
          SFAS No.
          123R.
 
 INCOME
          TAXES. The
          Company accounts for income taxes under SFAS No. 109, “Accounting for
          Income Taxes” (“SFAS No. 109”). This statement requires the recognition of
          deferred tax assets and liabilities for the future consequences of events
          that
          have been recognized in the Company’s consolidated financial statements or tax
          returns. The measurement of the deferred items is based on enacted tax
          laws. In
          the event the future consequences of differences between financial reporting
          bases and the tax bases of the Company’s assets and liabilities result in a
          deferred tax asset, SFAS No. 109 requires an evaluation of the probability
          of being able to realize the future benefits indicated by such asset. A
          valuation allowance related to a deferred tax asset is recorded when it
          is more
          likely than not that some portion or all of the deferred tax asset will
          not be
          realized. The Company currently has a full valuation allowance on its deferred
          tax assets and has recorded a net deferred tax liability relating to its
          investment in Genius Products, LLC. Based on the Company’s assessment of all
          available evidence, the Company concluded that it is not more likely than
          not
          that its deferred tax assets will not be realized. This conclusion is based
          primarily on our history of net operating losses, annual net operating
          loss
          limitations under Section 382 of the Code, and the need to generate
          significant amounts of taxable income in future periods on a consistent
          and
          prolonged basis in order to utilize the deferred tax assets. The deferred
          tax
          liability related to Genius Products, LLC is not offset against the deferred
          tax
          assets as the reversal period for this amount is not considered to be
          determinable on a more likely than not basis.
  REVENUE
          RECOGNITION. Revenue from the sale or licensing of films is recognized
          upon
          meeting all recognition requirements of SOP 00-2 and Staff Accounting Bulletin
          (“SAB”) No. 104, “Revenue Recognition.” Revenues are recorded upon the
          receipt of goods by the customer for titles that do not have a “street date”
(when it is available for sale by the customer). If a title has a street
          date,
          we recognize the initial shipment as revenue on that street date and all
          subsequent shipments after street date are recognized as revenue upon the
          receipt of goods by the customer. Under revenue sharing arrangements, rental
          revenue is recognized on or after the street date and when we are entitled
          to
          receipts and such receipts are determinable. Costs of sales and an allowance
          for
          returns are recorded at the time of revenue recognition. Revenues from
          royalties
          are recognized when received. Revenues from licensing are recognized when
          the
          title is available to the licensee. Cash payments received are recorded
          as
          deferred revenue until all the conditions of revenue recognition have been
          met.
          Long-term, non-interest bearing receivables are discounted to present value.
  RECLASSIFICATIONS.
          Certain prior period amounts have been reclassified to conform to the current
          period presentation.
  ADVERTISING
          COSTS. Our advertising expense comprises expenditures related to placement
          of
          our products with retailers, advertising in trade and consumer publications,
          product brochures and catalogs, booklets for sales promotion, radio and
          television advertising and other promotional costs. In accordance with
          SOP 93-7,
“Reporting on Advertising Costs”, we expense advertising costs in the period in
          which the advertisement first takes place.
  F-9
  For
          the
          202-day period ended July 21, 2006, advertising and marketing expense was
          $18.0
          million. For the years ended December 31, 2005 and 2004, advertising and
          promotion expense, which was included in selling, general and administrative
          expenses, was $2.6 million and $2.2 million, respectively. The advertising
          and
          promotion expense in 2005 and 2004 was composed primarily of brochures
          and
          tradeshows, which were general marketing activities not specifically related
          to
          product distribution. In 2006, advertising and marketing expense is
          composed primarily of co-op advertising and third party TV and radio
          advertising. Such amounts are included in cost of revenues since these
          activities are specifically related to the marketing and promotion of specific
          titles.
  SHIPPING
          EXPENSES. In accordance with Emerging Issues Task Force (“ETIF”) Issue 00-10,
“Accounting for Shipping and Handling Fees and Costs”, we classify amounts
          related to shipping as cost of sales in the accompanying statements of
          operations.
  BASIC
          AND
          DILUTED INCOME (LOSS) PER COMMON SHARE. Basic EPS is calculated using income
          available to common stockholders divided by the weighted average of common
          shares outstanding during the year. Diluted EPS is similar to Basic EPS
          except
          that the weighted average of common shares outstanding is increased to
          include
          the number of additional common shares that would have been outstanding
          if the
          potential dilutive common shares, such as options and warrants, had been
          issued.
          The treasury stock method is used to calculate dilutive shares and reduces
          the
          gross number of dilutive shares by the number of shares purchasable from
          the
          proceeds of the options assumed to be exercised.
  The
          effects of the potentially dilutive securities (options and warrants that
          are outstanding) were not included in the computation of diluted loss per
          share
          for 2006, 2005 and 2004, since to do so would have been
          anti-dilutive.
  INVESTMENT
          IN DISTRIBUTOR
 
 At
          the
          Closing of the TWC Transaction, we contributed to the Distributor all of
          our
          operating businesses, including substantially all of our assets, except
          for $1
          million in cash and certain liabilities, and received a 30% equity interest
          in
          the Distributor. The Distributor is treated as a partnership for U.S. federal
          income tax purposes. The accompanying consolidated financial statements
          account
          for our investment in the Distributor using the equity method of
          accounting.
 
 Under
          the
          equity method of accounting, only our investment in and amounts due to
          and from
          the Distributor have been included in our consolidated balance sheet. As
          a
          result, we recorded an asset on our balance sheet related to our investment
          interest in the Distributor. The TWC Transaction represents a non-monetary
          exchange of a business controlled by the Company for a non-controlling
          interest
          in the Distributor. Accordingly, the amount to be initially recorded for
          the
          Company’s investment in the Distributor is partially based on the Company’s fair
          value as determined by reference to the quoted market prices of the Company’s
          shares at the close of the market on the date of Closing and partially
          based on
          the historical basis of the net assets surrendered in the TWC Transaction.
          On
          the date of the Closing, we recorded a gain based on the difference between
          the
          fair market value of assets contributed and their net book value, reduced
          for
          the portion of the gain associated with the retained economic interest
          in the
          Distributor.
 
 On
          our
          consolidated statement of operations subsequent to the Closing, we have
          recorded
          our 30% share of the Distributor’s profit or loss as equity in net earnings
          (loss) from Distributor. The carrying amount of our investment in the
          Distributor is adjusted to recognize our share of the earnings or losses
          of the
          Distributor, adjusted for basis differences and costs incurred by the
          Distributor on behalf of Genius Products, Inc. Pursuant to Accounting Principles
          Bulletin No. 18, “The Equity Method of Accounting for Investments in Common
          Stock”, we will be required to periodically assess whether a decrease in value
          of the investment has occurred which is other than temporary and which
          should be
          recognized immediately resulting in an impairment loss.
  F-10
  From
          December 5, 2005 through the Closing, we operated under an interim distribution
          agreement with TWC and recorded the results from titles we released for
          TWC on
          our financial statements. After Closing, substantially all of the operating
          activities we previously conducted, as well as the results from releasing
          TWC
          product, are reflected in the financial statements of the Distributor.
          A summary
          of the financial results of the Distributor is in Note 12 to our consolidated
          financial statements.
 
 RECENTLY
          ISSUED ACCOUNTING PRONOUNCEMENTS.
 
 In
          May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
          Corrections” (“SFAS No. 154”), an amendment to Accounting Principles
          Bulletin Opinion No. 20, “Accounting Changes” (“APB No. 20”), and SFAS
          No. 3, “Reporting Accounting Changes in Interim Financial Statements”
(“SFAS No. 3”). Though SFAS No. 154 carries forward the guidance in APB
          No. 20 and SFAS No. 3 with respect to accounting for changes in
          estimates, changes in reporting entity, and the correction of errors, SFAS
          No. 154 establishes new standards on accounting for changes in accounting
          principles, whereby all such changes must be accounted for by retrospective
          application to the financial statements of prior periods unless it is
          impracticable to do so. SFAS No. 154 is effective for accounting changes
          and error corrections made in fiscal years beginning after December 15,
          2005, with early adoption permitted for changes and corrections made in
          years
          beginning after May 2005. We implemented SFAS No. 154 in our fiscal
          year beginning January 1, 2006. The adoption of SFAS No. 154 did not have a
          material impact on our financial position of results of operations for
          the year
          ended December 31, 2006. After we completed our 2005 Form 10-K, we determined
          that it was necessary to restate our unaudited consolidated financial statements
          and other financial information as of and for the quarters ended June 30,
          2005
          and September 30, 2005 as well as the quarters ended March 31, 2006,
          June 30, 2006 and September 30, 2006. Please refer to Notes 9 and 10
          for further discussion regarding the 2005 and 2006 quarterly restatements.
 
 In
          November 2005, the FASB issued FSP FAS 115-1, “The Meaning of
          Other-Than-Temporary Impairment and Its Application to Certain Investments”
(“FSP FAS 115-1”). FSP FAS 115-1 addresses the determination as to when an
          investment is considered impaired, whether that impairment is other than
          temporary, and the measurement of an impairment loss. The FSP also includes
          accounting considerations subsequent to the recognition of an
          other-than-temporary impairment and requires certain disclosures about
          unrealized losses that have not been recognized as other-than-temporary
          impairments. The guidance in FSP FAS 115-1 is effective for reporting periods
          beginning after December 15, 2005. We adopted FSP FAS 115-1 on January 1,
          2006.  The adoption of FSP FAS 115-1 did not impact the Company's
          consolidated financial statements.
 
 In
          February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
          Financial Instruments” (“SFAS No. 155”), which amends SFAS No. 133,
“Accounting for Derivatives Instruments and Hedging Activities” (“SFAS No. 133”)
          and SFAS No. 140, “Accounting for Transfers and Servicing of Financial
          Assets and Extinguishment of Liabilities” (“SFAS No. 140”). SFAS No. 155
          amends SFAS No. 133 to narrow the scope exception for interest-only and
          principal-only strips on debt instruments to include only such strips
          representing rights to receive a specified portion of the contractual interest
          or principal cash flows. SFAS No. 155 also amends SFAS No. 140 to
          allow qualifying special-purpose entities to hold a passive derivative
          financial
          instrument pertaining to beneficial interests that itself is a derivative
          instrument. We are currently evaluating the impact of this new standard
          but
          believe that it will not have a material impact on our financial position,
          results of operations, or cash flows. This statement is effective for all
          financial instruments acquired or issued after the beginning of an entity's
          first fiscal year that begins after September 15, 2006.
 
 In
          March
          2006, the EITF issued Issue 06-3, “How Sales Taxes Collected From Customers and
          Remitted to Governmental Authorities Should Be Presented in the Income
          Statement
          (That Is, Gross versus Net Presentation).” (“EITF 06-3”). A consensus was
          reached that entities may adopt a policy of presenting sales taxes in the
          income
          statement on either a gross or net basis. If taxes are significant, an
          entity
          should disclose its policy of presenting taxes and the amount of taxes.
          The
          guidance is effective for periods beginning after December 15, 2006. The
          Company
          presents sales net of sales taxes. The Company does not believe that the
          adoption of EITF 06-3 will impact the method for recording these sales
          taxes in
          the Company's consolidated financial statements.
 
 In
          March
          2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
          Assets” (“SFAS No. 156”), which provides an approach to simplify efforts to
          obtain hedge-like (offset) accounting.  This Statement amends SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
          of Liabilities”, with respect to the accounting for separately recognized
          servicing assets and servicing liabilities.  The Statement (1) requires an
          entity to recognize a servicing asset or servicing liability each time
          it
          undertakes an obligation to service a financial asset by entering into
          a
          servicing contract in certain situations; (2) requires that a separately
          recognized servicing asset or servicing liability be initially measured
          at fair
          value, if practicable;  (3) permits an entity to choose either the
          amortization method or the fair value method for subsequent measurement
          for each
          class of separately recognized servicing assets or servicing liabilities;
          (4)
          permits at initial adoption a one-time reclassification of available-for-sale
          securities to trading securities by an entity with recognized servicing
          rights,
          provided the securities reclassified offset the entity’s exposure to changes in
          the fair value of the servicing assets or liabilities; and (5) requires
          separate
          presentation of servicing assets and servicing liabilities subsequently
          measured
          at fair value in the balance sheet and additional disclosures for all separately
          recognized servicing assets and servicing liabilities.  SFAS No. 156 is
          effective for all separately recognized servicing assets and liabilities
          as of
          the beginning of an entity’s fiscal year that begins after September 15, 2006,
          with earlier adoption permitted in certain circumstances.  The Statement
          also describes the manner in which it should be initially applied.  The
          Company does not believe that SFAS No. 156 will have a material impact
          on its
          financial position, results of operations or cash flows.
  F-11
  In
          June
          2006, the FASB issued Interpretation No. 48, ** “Accounting
          for Uncertainty in Income Taxes -- An Interpretation of FASB Statement
          No. 109”, (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in
          income taxes recognized in an enterprise's financial statements in accordance
          with FASB Statement No. 109, ** “Accounting
          for Income Taxes *.* ” FIN 48 also prescribes a recognition threshold and measurement attribute
          for the financial statement recognition and measurement of a tax position
          taken
          or expected to be taken in a tax return that results in a tax benefit.
          Additionally, FIN 48 provides guidance on de-recognition, income statement
          classification of interest and penalties, accounting in interim periods,
          disclosure, and transition. This interpretation is effective for fiscal
          years
          beginning after December 15, 2006. The Company is currently evaluating the
          effect that the application of FIN 48 will have on its results of
          operations and financial condition.
  In
          September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
          No. 157”), which defines fair value, establishes a framework for measuring fair
          value and expands disclosures about fair value measurements.  This
          statement is effective for financial statements issued for fiscal years
          beginning after November 15, 2007, and interim periods within those fiscal
          years.  Early adoption is encouraged, provided that the registrant has not
          yet issued financial statements for that fiscal year, including any financial
          statements for an interim period within that fiscal year. The
          Company is currently evaluating the effect that the application of SFAS
          No. 157
          will have on its results of operations and financial condition.
  In
          September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
          Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), which improves
          financial reporting by requiring an employer to recognize the over or under
          funded status of a defined benefit postretirement plan as an asset or liability
          in its statement of financial position and to recognize changes in that
          funded
          status in the year in which the changes occur through comprehensive income
          of a
          business entity or changes in unrestricted net assets of a not-for-profit
          organization.  This statement also improves financial reporting by
          requiring an employer to measure the funded status of a plan as of the
          date of
          its year end statement of financial position, with limited exceptions. 
This Statement amends SFAS No. 87, SFAS No. 88, “Employers’ Accounting for
          Settlements and Curtailments of Defined Benefit Pension Plans and for
          Termination Benefits”, SFAS No. 106, “Employers’ Accounting for Postretirement
          Benefits Other Than Pensions”, and SFAS No. 132 (revised 2003), “Employers’
Disclosures about Pensions and Other Postretirement Benefits”.  Upon the
          initial application of this statement and subsequently, an employer should
          continue to apply the provisions in SFAS Nos. 87, 88, and 106 in measuring
          plan
          assets and benefit obligations as of the date of its statement of financial
          position and in determining the amount of net periodic benefit cost.  An
          employer with publicly traded equity securities is required to initially
          recognize the funded status of a defined benefit postretirement plan and
          to
          provide the required disclosures as of the end of the fiscal year ending
          after
          December 31, 2006.  An employer without publicly traded equity securities
          is required to recognize the funded status of a defined benefit postretirement
          plan and to provide the required disclosures as of the end of the fiscal
          year
          ending after June 15, 2007.  Early application of the recognition or
          measurement date provisions is encouraged; however, early application must
          be
          for all of an employer’s benefit plans.  Retrospective application of the
          Statement is not permitted.  We do not believe that SFAS No. 158 will have
          a material impact on our financial position, results of operations or cash
          flows.
  In
          September 2006, the United States Securities and Exchange Commission (“SEC”)
          issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when
          Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”).
          SAB No. 108 provides guidance on the consideration of the effects of prior
          year
          misstatements in quantifying current year misstatements for the purpose
          of a
          materiality assessment. SAB No. 108 establishes an approach that requires
          quantification of financial statement errors based on the effects on each
          of the
          Company’s balance sheet and statement of operations financial statements and the
          related financial statement disclosures. The SAB permits existing public
          companies to record the cumulative effect of initially applying this approach
          in
          the first year ending after November 15, 2006 by recording the necessary
          correcting adjustments to the carrying values of assets and liabilities
          as of
          the beginning of that year with the offsetting adjustment recorded to the
          opening balance of retained earnings. Additionally, the use of the cumulative
          effect transition method requires detailed disclosure of the nature and
          amount
          of each individual error being corrected through the cumulative adjustment
          and
          how and when it arose. We are currently evaluating the impact SAB No. 108
          may
          have to our consolidated balance sheet, results of operations and cash
          flows.
  F-12
  **NOTE
          3.INVENTORY**
 
 Inventories
          consist of raw materials and finished goods and are valued at the lower
          of cost
          or market.
 (In
                      thousands)
                  
                  December
                      31, 2006
                  
                  December
                      31, 2005Raw
                      materials
                  
                  $
                  -
                  
                  $
                  71Finished
                      goods
                  
                  
                  -
                  
                  
                  7,798-
                  
                  
                  7,869Less
                      allowance for obsolescence
                  
                  
                  -
                  
                  
                  (2,301
                  )Inventories,
                      net
                  
                  $
                  -
                  
                  $
                  5,568
  We
          revised our inventory carrying amounts as of June 30, 2006 to reflect the
          amount
          that we estimated could be sold over the next 12 months based upon an evaluation
          of our most recent sales history at that date. Please refer to Note 9 for
          further discussion regarding the 2006 quarterly restatement.
 
 At
          the
          Closing we transferred all of our inventory to the Distributor and there
          were no
          inventory asset balances at December 31, 2006 for the Company.
  **NOTE
          4.PROPERTY AND
          EQUIPMENT**
  (In
                      thousands)
                  
                  December
                      31, 2006
                  
                  December
                      31, 2005
                  
                  Useful
                      livesComputers
                      and equipment
                  
                  $
                  -
                  
                  $
                  712
                  
                  3-5
                      yearsFurniture
                      and fixtures
                  
                  
                  -
                  
                  
                  35
                  
                  3-7
                      yearsLeasehold
                      improvements
                  
                  
                  -
                  
                  
                  22
                  
                  Lesser
                      of lease term or useful life769Less
                      accumulated depreciation and amortization
                  
                  
                  -
                  
                  
                  (373
                  )Property
                      and equipment, net
                  
                  $
                  -
                  
                  $
                  396
 
 Depreciation
          expense for the 202 day-period ended July 21, 2006 was $0.1
          million. Depreciation expense for the years ended December 31, 2005, and
          2004
          was $0.2 million, and $0.1 million, respectively. At
          the
          Closing we transferred all of our fixed assets to the Distributor and there
          were
          no fixed asset balances at December 31, 2006 for the Company.
  F-13
  **NOTE
          5.FILM LIBRARY**
 (In
                      thousands)
                  
                  December
                      31, 2006
                  
                  December
                      31, 2005Library
                      and Advances, net of accumulated amortization of $4,027 in
                      2005
                  
                  $
                  -
                  
                  $
                  19,124Titles
                      acquired and not released
                  
                  
                  -
                  
                  
                  603Total
                      library, net of accumulated depreciation
                  
                  $
                  -
                  
                  $
                  19,727
  The
          library includes titles acquired as part of the acquisition of AVM and
          Wellspring Media on March 22, 2005 (Wellspring Library). The Wellspring
          Library is amortized over its expected revenue stream for a period of ten
          years
          from the acquisition date.
 
 We
          revised the film library and advances amounts on our balance sheet as of
          June
          30, 2006, to reflect their fair value based primarily upon a recent third
          party
          valuation performed as of that date. Please refer to Note 9 for further
          discussion regarding the 2006 quarterly restatements.
 
 At
          the
          Closing we transferred our film library to the Distributor and there were
          no
          film library asset balances at December 31, 2006 for the Company.
  **NOTE
          6.ACQUISITION OF
          AVM**
  On
          March 21, 2005, we completed our acquisition of American Vantage Media
          Corporation (“AVMC”), a subsidiary of American Vantage Companies (“AVC”). AVMC
          was subsequently converted into a limited liability company in July, 2006
          under
          the name American Vantage Media, LLC (“AVM”). The acquisition was completed
          through an Agreement and Plan of Merger (“Merger Agreement”) which provided for
          the issuance to AVC of (i) 7,000,000 shares of our common stock valued at
          $2.27 per share and (ii) warrants to purchase 1,400,000 shares of our
          common stock, half at an exercise price of $2.56 per share and half at
          an
          exercise price of $2.78 per share, plus our assumption of approximately
          $15.2
          million in debt of AVMC. The fair value of these warrants was estimated
          as $1.6
          million using the Black-Scholes model with the following weighted average
          assumptions: expected volatility of 60%, risk free interest rate of 4.2%,
          an
          expected life of five years and no expected dividends. The purchase price
          is
          approximated by using the average closing market price of our common stock
          over
          the two-day period before and after the sale was announced. $1.6 million
          in
          direct costs incurred for the acquisition include $0.2 million for legal
          and
          professional services related to the valuation of the Wellspring Library,
          AVM’s
          principal asset, as well as a transaction fee of $1.2 million paid in the
          form
          of 550,301 shares issued at a value of $2.27 per share, and 63,000 warrants,
          half at an exercise price of $2.56 and half at an exercise price of $2.78,
          valued at $71,842. The value of the warrants was estimated using the
          Black-Scholes model with the following weighted average assumptions: expected
          volatility of 60%, risk free interest rate of 4.2%, an expected life of
          five
          years and no dividends. The fair value of the warrants was classified as
          equity
          in 2005 in accordance with EITF Issue 00-19, “Accounting for Derivative
          Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
          Stock” (“EITF 00-19”).
  The
          total
          purchase price of the AVM acquisition was allocated to the estimated fair
          values
          of assets acquired and liabilities assumed as set forth in the following
          table:
  (In
                    thousands)Current
                    assets
                
                $
                4,074Property
                    and equipment
                
                
                31Wellspring
                    Library
                
                
                15,379Other
                    assets
                
                
                238Liabilities
                    assumed
                
                
                (13,784
                )Deferred
                    tax liability
                
                
                (1,380
                )Goodwill
                
                
                14,488Total
                    Consideration
                
                $
                19,046
  F-14
  The
          following unaudited pro forma information represents our consolidated results
          of
          operations as if the acquisition of AVM had occurred on January 1, 2004.
          Such pro forma information does not purport to be indicative of the results
          that
          would have been obtained had these events actually occurred at the beginning
          of
          the periods presented, nor does it intend to be a projection of future
          results.
  **Year
                    Ended December 31,**(In
                    thousands except per share amounts)
                
                **2005**
                
                **2004**Pro
                    forma net revenue
                
                $
                24,038
                
                $
                34,855Pro
                    forma net loss
                
                $
                (18,643
                )
                $
                (7,845
                )Pro
                    forma net loss per shareBasic
                    and diluted
                
                $
                (0.46
                )
                $
                (0.33
                )
  **NOTE
          7.ACCRUED EXPENSES**
  The
          components of accrued expenses at December 31, 2006 and 2005
          were :
 (In
                      thousands)
                  
                  December
                      31,
                    2006
                  
                  December
                      31,
                    2005Accrued
                      payroll and related items
                  
                  $
                  -
                  
                  $
                  484Accrued
                      commissions
                  
                  
                  -
                  
                  
                  374Unearned
                      revenue
                  
                  
                  -
                  
                  
                  263Accrued
                      severance
                  
                  
                  -
                  
                  
                  309Tax
                      payable
                  
                  
                  -
                  
                  
                  75Accrued
                      purchases for inventory
                  
                  
                  -
                  
                  
                  1,137Other
                      accrued expense
                  
                  
                  -
                  
                  
                  667Total
                      accrued expenses
                  
                  $
                  -
                  
                  $
                  3,309
  At
          the
          Closing we transferred all of our accrued expenses to the Distributor and
          there
          were no accrued expense balances at December 31, 2006 for the Company.
  **NOTE
          8.NOTES PAYABLE AND
          CONVERTIBLE DEBENTURES**
  On
          March 21, 2005 (see Note 6), the Company assumed notes payable to certain
          individuals and entities with a total principal balance of $4.0 million,
          bearing
          interest at 7%, payable quarterly, and a maturity date of February 3, 2006.
          The Company repaid $3.8 million of these notes on February 7, 2006 and
          withheld payment on the balance as part of our contractual right to reserve
          for
          certain potential liabilities associated with the acquisition.
  On
          October 4, 2005, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with a group of investors (collectively, the “Investors”).
          Under the Purchase Agreement, the Investors loaned a total of $4.0 million
          to us
          in exchange for (i) promissory notes in favor of the Investors (the
“Notes”) with a total principal balance of $4.0 million and (ii) five-year
          warrants to purchase a total of 280,000 shares of our common stock, par
          value
          $0.0001 per share, with an exercise price per share equal to $1.88 (the
          last
          reported sales price of our common stock, as reported by the Over the Counter
          Bulletin Board, on the closing date of October 5, 2005). The discount
          allocated to the warrants was $0.3 million, calculated using the Black-Scholes
          model, with the following weighted average assumptions: expected volatility
          60%;
          risk free interest rate of 4.2%; expected life of five years and no dividends
          payable. The fair value of the warrants was classified as equity in 2005
          in
          accordance with EITF 00-19. The discount is amortized over the life of
          the
          Notes. As of December 31, 2005 the amortized discount was $0.2 million. On
          December 5, 2005, we repaid $2.5 million of the October 4, 2005 Notes
          with proceeds from our December 2005 private equity financing, and on
          March 6, 2006 we repaid the remaining $1.5 million.
  In
          the
          fourth quarter of 2003, we issued notes payable totaling $1.2 million to
          private
          lenders. The notes bore interest at 10.5% and were due December 31, 2004.
          Interest was payable quarterly, beginning March 31, 2004. For the year
          ended December 31, 2004, interest expense on the notes was $97,278. Each
          lender was also granted one warrant at $1.00 per share and one warrant
          at $3.00
          per share for our common stock for each dollar loaned. The discount allocated
          to
          the warrants was $0.5 million, calculated using the Black-Scholes model,
          with
          the following weighted average assumptions: expected volatility 50%, risk
          free
          interest rate of 4.4%, expected life of two years and no dividends paid.
          The
          discount was amortized over the lives of the notes. The notes were paid
          in full
          as of December 31, 2004.
  F-15
  In
          2001,
          we issued a convertible debenture for $50,750 to a shareholder in place
          of
          redeemable common stock. The debenture bore interest at 8%, was due
          March 31, 2002, and was convertible into common shares at $.50 per share;
          however, the conversion feature of this debenture has expired. Interest
          on the
          debenture was accrued through December 31, 2005. There was no beneficial
          conversion interest related to this debenture. We repaid the balance of
          the
          debenture in February 2006.
  **NOTE
          9.UNAUDITED
          RESTATEMENT OF**  **QUARTERS
          ENDED MARCH 31, JUNE 30 AND SEPTEMBER 30, 2006**
 
 On
          April
          12, 2007, we determined that it was necessary to restate our unaudited
          consolidated financial statements and other financial information as of
          and for
          the quarters ended, March 31, June 30 and September 30, 2006. The
          restatements that we made at that time related to the following corrections
          of
          errors:
 
 1. The
          Company revised the computation of its stock option non-cash compensation
          expense under the provisions of SFAS No. 123R and EITF 96-18, “Accounting for
          Equity Instruments That Are Issued to Other Than Employees for Acquiring,
          or in
          Conjunction with Selling, Goods or Services” (“Stock Option Compensation
          Expense”), for the fiscal quarters ended March 31, June 30 and September 30,
          2006. The revised computation changed Stock Option Compensation Expense
          in each
          of the three above-mentioned fiscal quarters.
  Additionally,
          the Company revised its computation of Stock Option Compensation Expense
          in the
          fiscal quarter ended September 30, 2006 to properly reflect the accelerated
          vesting of employee and non-employee awards of stock options which occurred
          upon
          the closing of the TWC Transaction as of July 21, 2006. This non-cash adjustment
          was necessary as the Stock Option Compensation Expense related to the
          accelerated vesting was initially recorded in the records of the Distributor.
          For the three months ended March 31, the Company decreased its stock
          compensation by $0.1 million. For the three months ended June 30 and September
          30, the Company increased stock compensation expense by $0.4 million and
          $4.1
          million, respectively.
 
 2. The
          Company revised its reported net revenue amounts for the fiscal quarters
          ended
          March 31, June 30 and September 30, 2006 to properly reflect net revenue
          in the
          appropriate periods. The need for these corrections resulted from cut-offs
          due
          to the closing of the TWC Transaction on July 21, 2006 (as opposed to a
          month-end cut-off date), cut-offs at June 30 and errors in the timing
          of recognition of invoices and expenses. For the three months ended June
          30, and
          September 30, the Company increased its revenue in the amount of $2.3 million
          and decreased its revenue in the amount of $2.0 million, respectively.
          In
          addition, the Company identified errors in the treatment of revenue from
          revenue-sharing agreements and revised its reported net revenue to comply
          with
          the provisions of EITF 01-09, “Accounting for Consideration Given by a Vendor to
          a Customer.” The total non-cash adjustments required to decrease revenue for the
          three months ended March 31, June 30 and September 30 were $0.7 million,
          $1.2
          million and $0.3 million, respectively.
 
 3. The
          Company revised its advertising and marketing expense to properly expense
          advertising and marketing related items as incurred and revised participations
          expense to comply with the provisions of SOP 00-2. The Company increased
          advertising and marketing expense by $2.6 million for the three months
          ended
          March 31 and decreased advertising and marketing expenses by $1.6 million
          for
          the three months ended June 30. For the three months ended March 31 and
          June 30,
          the Company reduced participation expense by $1.5 million and increased
          participation expense by $0.4 million, respectively.
 
 4. The
          Company reduced an accrued liability on its balance sheet by approximately
          $0.4
          million for the fiscal quarter ended March 31, 2006, to reflect that the
          Company
          does not have any obligation associated with redeemable common stock that
          had
          been accrued for and disclosed in prior fiscal periods. The redeemable
          common
          stock was reclassified to additional paid-in capital.
  F-16
  5. The
          Company revised its operating results for the fiscal quarter ended June
          30, 2006
          to account for the impairment of its film library, advances made to participants
          and physical inventory based upon the Company’s shift in its business from
          value-priced product to branded content. These non-cash adjustments were
          necessary to properly reflect the realizability of such assets as of June
          30,
          2006. The total non-cash adjustments required to decrease film library,
          advances
          made to participants and physical inventory as of June 30, 2006 were $11.6
          million, $2.2 million and $4.6 million, respectively.
  6. The
          Company increased by $10.0 million the amount it recorded as an extraordinary
          gain associated with the TWC Transaction as of July 21, 2006, primarily
          as a
          result of the restatement item in paragraph five above. This non-cash adjustment
          is necessary since adjustments that the Company recorded in the fiscal
          quarters
          ended March 31 and June 30, 2006 changed the carrying amount of certain
          assets
          and liabilities that were contributed to the Distributor.
 
 7. The
          Company decreased by $1.4 million the amount it recorded for expenses for
          the
          fiscal quarter ended September 30, 2006 to properly allocate certain sales
          and
          general and administrative costs between the Company and the Distributor
          in the
          period that they were incurred. In addition, the Company revised the amount
          it
          recorded for its equity in earnings of the Distributor for the fiscal quarter
          ended September 30, 2006, to properly reflect its
          earnings as a result of adjustments made to the operating results of the
          Distributor. The total non-cash adjustment required to adjust the Company’s
          equity in net loss of the Distributor for the fiscal quarter ended September
          30,
          2006 was a decrease of $1.8 million.
 
 8. The
          Company revised its tax provision amounts for the fiscal quarters ended
          March
          31, June 30 and September 30, 2006 to properly reflect  its
          tax
          provision for these periods.  The need for these corrections resulted from
          the liability recognized in purchase accounting in connection with the
          Wellspring acquisition and the TWC Transaction. For the three months ended
          March
          31 and three month s ended
          June 30,  the Company decreased its tax provision by
          $46,000 and $1.3 million, respectively, and for the three months ended
          September 30, the Company increased its tax provision by $13.1 million,
          including amounts attributable to the extraordinary gain.
 
 9. The
          Company revised the presentation of its advertising and marketing expenses
          and
          bad debt expense for the fiscal quarters ended March 31, June 30 and September
          30, 2006 to reclassify these amounts from operating expenses to cost of
          revenues.
 
 The
          effects of the restatement on net revenues, cost of revenues, gross profit,
          provision for taxes, net loss, basic and diluted loss per common share,
          accounts
          receivable, production masters, film library, accrued expenses, and
          stockholders’ equity as of and for the quarters ended March 31, June 30 and
          September 30, 2006 and six and nine months ended June 30 and September
          30, 2006
          are as follows:
 (In
                      thousands, except per share amounts)
                  
                  Three
                      months ended March 31, 2006As
                      Originally Reported
                  
                  Restatement
                      Adjustments
                  
                  As
                      RestatedNet
                      revenues
                  
                  $
                  28,583
                  
                  $
                  (671
                  )
                  $
                  27,912Cost
                      of revenues
                  
                  
                  23,181
                  
                  
                  5,616
                  
                  
                  28,797Gross
                      profit (loss)
                  
                  
                  5,402
                  
                  
                  (6,287
                  )
                  
                  (885
                  )Provision
                      for income taxes
                  
                  
                  -
                  
                  
                  (46
                  )
                  
                  (46
                  )Net
                      loss
                  
                  
                  (5,674
                  )
                  
                  (1,046
                  )
                  
                  (6,720
                  )Loss
                      per common share:Basic
                      and diluted
                  
                  
                  (0.09
                  )
                  
                  (0.02
                  )
                  
                  (0.11
                  )Accounts
                      receivable
                  
                  
                  42,038
                  
                  
                  -
                  
                  
                  42,038Total
                      current assets
                  
                  
                  70,448
                  
                  
                  -
                  
                  
                  70,448Production
                      masters
                  
                  
                  5,195
                  
                  
                  (5,195
                  )
                  
                  -Film
                      library
                  
                  
                  15,093
                  
                  
                  5,195
                  
                  
                  20,288Total
                      assets
                  
                  
                  108,053
                  
                  
                  (165
                  )
                  
                  107,888Accrued
                      expenses
                  
                  
                  6,410
                  
                  
                  2,392
                  
                  
                  8,802Total
                      current liabilities
                  
                  
                  54,754
                  
                  
                  500
                  
                  
                  55,254Stockholders'
                      equity
                  
                  
                  50,746
                  
                  
                  (739
                  )
                  
                  50,007
  F-17
  (In
                      thousands, except per share amounts)
                  
                  Three
                      months ended June 30, 2006
                  
                  Six
                      months ended June 30, 2006As
                      Originally Reported
                  
                  Restatement
                      Adjustments
                  
                  As
                      Restated
                  
                  As
                      Originally Reported
                  
                  Restatement
                      Adjustments
                  
                  As
                      RestatedNet
                      revenues
                  
                  $
                  75,013
                  
                  $
                  1,071
                  
                  $
                  76,084
                  
                  $
                  103,596
                  
                  $
                  401
                  
                  $
                  103,997Cost
                      of revenues
                  
                  
                  60,207
                  
                  
                  26,549
                  
                  
                  86,756
                  
                  
                  83,388
                  
                  
                  32,165
                  
                  
                  115,553Gross
                      profit
                  
                  
                  14,805
                  
                  
                  (25,477
                  )
                  
                  (10,672
                  )
                  
                  20,208
                  
                  
                  (31,764
                  )
                  
                  (11,556
                  )Provision
                      for income taxes
                  
                  
                  107
                  
                  
                  (1,334
                  )
                  
                  (1,227
                  )
                  
                  107
                  
                  
                  (1,380
                  )
                  
                  (1,273
                  )Net
                      loss
                  
                  
                  (3,980
                  )
                  
                  (13,941
                  )
                  
                  (17,921
                  )
                  
                  (9,653
                  )
                  
                  (14,989
                  )
                  
                  (24,642
                  )Loss
                      per common share:Basic
                      and diluted
                  
                  
                  
                  
                  
                  
                  
                  
                  (0.29
                  )Accounts
                      receivable
                  
                  
                  48,457
                  
                  
                  2,263
                  
                  
                  50,720
                  
                  
                  48,457
                  
                  
                  2,263
                  
                  
                  50,720Total
                      current assets
                  
                  
                  110,958
                  
                  
                  (2,638
                  )
                  
                  108,320
                  
                  
                  110,958
                  
                  
                  (2,638
                  )
                  
                  108,320Production
                      masters
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Film
                      library
                  
                  
                  22,926
                  
                  
                  (14,946
                  )
                  
                  7,980
                  
                  
                  22,926
                  
                  
                  (14,946
                  )
                  
                  7,980Total
                      assets
                  
                  
                  151,331
                  
                  
                  (16,608
                  )
                  
                  134,723
                  
                  
                  151,331
                  
                  
                  (16,608
                  )
                  
                  134,723Accrued
                      expenses
                  
                  
                  20,347
                  
                  
                  514
                  
                  
                  20,861
                  
                  
                  20,347
                  
                  
                  514
                  
                  
                  20,861Total
                      current liabilities
                  
                  
                  100,976
                  
                  
                  (1,016
                  )
                  
                  99,960
                  
                  
                  100,976
                  
                  
                  (1,016
                  )
                  
                  99,960Stockholders'
                      equity
                  
                  
                  47,826
                  
                  
                  (14,314
                  )
                  
                  33,512
                  
                  
                  47,826
                  
                  
                  (14,314
                  )
                  
                  33,512
   (In
                      thousands, except per share amounts)
                  
                  Three
                      months ended September 30, 2006
                  
                  Nine
                      months ended September 30, 2006As
                      Originally Reported
                  
                  Restatement
                      Adjustments
                  
                  As
                      Restated
                  
                  As
                      Originally Reported
                  
                  Restatement
                      Adjustments
                  
                  As
                      RestatedNet
                      revenues
                  
                  $
                  17,341
                  
                  $
                  (2,326
                  )
                  $
                  15,015
                  
                  $
                  120,937
                  
                  $
                  (1,926
                  )
                  $
                  119,011Cost
                      of revenues
                  
                  
                  10,400
                  
                  
                  4,918
                  
                  
                  15,318
                  
                  
                  93,787
                  
                  
                  37,084
                  
                  
                  130,871Gross
                      profit
                  
                  
                  6,941
                  
                  
                  (7,244
                  )
                  
                  (303
                  )
                  
                  27,149
                  
                  
                  (39,009
                  )
                  
                  (11,860
                  )Provision
                      for income taxes
                  
                  
                  (107
                  )
                  
                  8,160
                  
                  
                  8,053
                  
                  
                  -
                  
                  
                  6,780
                  
                  
                  6,780Net
                      income
                  
                  
                  46,965
                  
                  
                  (5,711
                  )
                  
                  41,254
                  
                  
                  37,311
                  
                  
                  (20,698
                  )
                  
                  16,613Loss
                      per common share:Basic
                      and diluted
                  
                  
                  
                  
                  
                  
                  
                  
                  0.67Accounts
                      receivable
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Total
                      current assets
                  
                  
                  1,071
                  
                  
                  887
                  
                  
                  1,958
                  
                  
                  1,071
                  
                  
                  887
                  
                  
                  1,958Production
                      masters
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Film
                      library
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Total
                      assets
                  
                  
                  98,568
                  
                  
                  (4,487
                  )
                  
                  94,081
                  
                  
                  98,568
                  
                  
                  (4,487
                  )
                  
                  94,081Accrued
                      expenses
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Total
                      current liabilities
                  
                  
                  426
                  
                  
                  (241
                  )
                  
                  185
                  
                  
                  426
                  
                  
                  (241
                  )
                  
                  185Stockholders'
                      equity
                  
                  
                  98,142
                  
                  
                  (18,691
                  )
                  
                  79,451
                  
                  
                  98,142
                  
                  
                  (18,691
                  )
                  
                  79,451
 **NOTE
          10:RESTATEMENT OF
          QUARTERS ENDED JUNE 30 AND SEPTEMBER 30, 2005**
 
 When
          we
          completed our Form 10-K for the year ended 2005, we determined that it
          was
          necessary to restate our unaudited consolidated financial statements and
          other
          financial information at and for the quarters ended, June 30 and September
          30, 2005. The restatement that we made at that time related to the following
          correction of errors:
 
 1. We
          revised
          our theatrical revenue to decrease the amount recognized during the three
          months
          ended September 30, 2005. The total adjustment required to decrease theatrical
          revenue to its proper amount was $251,603 for the three months ended September
          30, 2005. This adjustment was necessary because we had previously accrued
          this
          amount of revenue for the three months ended June 30, 2005 as film rental
          earned but not billed during that period and, therefore, overstated theatrical
          revenue by this amount in the three months ended September 30, 2005. The
          correct
          accounting treatment is to reverse this accrual during the three months
          ended
          September 30, 2005 to properly state theatrical revenue.
 
 2. We
          revised
          our royalty expense to increase the amount recognized during the three
          month
          period ended September 30, 2005. The total adjustment required to increase
          royalty expense to its proper amount was $74,311 for the three month period
          ended September 30, 2005. This adjustment was necessary because we had
          recorded
          this amount as an asset as of September 30, 2005. The correct accounting
          treatment is to record this amount as royalties expense during the three
          month
          period ended September 30, 2005.
  F-18
  3. We
          revised
          production cost amortization expense to increase the amount recognized
          during
          the three month period ended September 30, 2005. The total adjustment required
          to increase production costs amortization expense to its proper amount
          was
          $41,474 for the three month period ended September 30, 2005. This adjustment
          was
          necessary because we had recorded this amount as an asset as of September
          30,
          2005 when the amount should have been expensed under SOP 00-2. The correct
          accounting treatment is to record this amount as expense during the three
          month
          period ended September 30, 2005.
 
 The
          effects of the restatement on net revenues, cost of revenues, gross profit,
          net
          loss, basic and diluted loss per common share, accounts receivable, production
          masters, film library, accrued expenses, and stockholders’ equity as of and for
          the quarters ended June 30 and September 30, 2006 and six and nine months
          ended
          June 30 and September 30, 2005 are as follows:
 (In
                      thousands, except per share amounts)
                  
                  Three
                      months ended June 30, 2005
                  
                  Six
                      months ended June 30, 2005As
                      Originally Reported
                  
                  Restatement
                      Adjustments
                  
                  As
                      Restated
                  
                  As
                      Originally Reported
                  
                  Restatement
                      Adjustments
                  
                  As
                      RestatedNet
                      revenues
                  
                  $
                  3,822
                  
                  $
                  90
                  
                  $
                  3,912
                  
                  $
                  6,378
                  
                  $
                  90
                  
                  $
                  6,468Cost
                      of revenues
                  
                  
                  5,163
                  
                  
                  480
                  
                  
                  5,643
                  
                  
                  7,830
                  
                  
                  480
                  
                  
                  8,310Gross
                      profit
                  
                  
                  (1,341
                  )
                  
                  (390
                  )
                  
                  (1,731
                  )
                  
                  (1,452
                  )
                  
                  (390
                  )
                  
                  (1,842
                  )Net
                      loss
                  
                  
                  (4,906
                  )
                  
                  (390
                  )
                  
                  (5,296
                  )
                  
                  (7,139
                  )
                  
                  (390
                  )
                  
                  (7,529
                  )Loss
                      per common share:Basic
                      and diluted
                  
                  
                  (0.12
                  )
                  
                  (0.01
                  )
                  
                  (0.13
                  )
                  
                  (0.17
                  )
                  
                  (0.01
                  )
                  
                  (0.18
                  )Production
                      masters
                  
                  
                  3,456
                  
                  
                  (63
                  )
                  
                  3,393
                  
                  
                  3,456
                  
                  
                  (63
                  )
                  
                  3,393Film
                      library
                  
                  
                  16,096
                  
                  
                  (416
                  )
                  
                  15,680
                  
                  
                  16,096
                  
                  
                  (416
                  )
                  
                  15,680Total
                      assets
                  
                  
                  46,981
                  
                  
                  (480
                  )
                  
                  46,501
                  
                  
                  46,981
                  
                  
                  (480
                  )
                  
                  46,501Accrued
                      expenses
                  
                  
                  1,596
                  
                  
                  (90
                  )
                  
                  1,506
                  
                  
                  1,596
                  
                  
                  (90
                  )
                  
                  1,506Total
                      current liabilities
                  
                  
                  15,255
                  
                  
                  (90
                  )
                  
                  15,165
                  
                  
                  15,255
                  
                  
                  (90
                  )
                  
                  15,165Stockholders'
                      equity
                  
                  
                  31,726
                  
                  
                  (390
                  )
                  
                  31,336
                  
                  
                  31,726
                  
                  
                  (390
                  )
                  
                  31,336
  (In
                      thousands, except per share amounts)
                  
                  Three
                      months ended September 30, 2005
                  
                  Nine
                      months ended September 30, 2005As
                      Originally Reported
                  
                  Restatement
                      Adjustments
                  
                  As
                      Restated
                  
                  As
                      Originally Reported
                  
                  Restatement
                      Adjustments
                  
                  As
                      RestatedNet
                      revenues
                  
                  $
                  8,406
                  
                  $
                  (252
                  )
                  $
                  8,154
                  
                  $
                  14,784
                  
                  $
                  (162
                  )
                  $
                  14,622Cost
                      of revenues
                  
                  
                  5,670
                  
                  
                  116
                  
                  
                  5,786
                  
                  
                  13,501
                  
                  
                  595
                  
                  
                  14,096Gross
                      profit
                  
                  
                  2,735
                  
                  
                  (367
                  )
                  
                  2,368
                  
                  
                  1,283
                  
                  
                  (757
                  )
                  
                  526Net
                      loss
                  
                  
                  (3,487
                  )
                  
                  (367
                  )
                  
                  (3,855
                  )
                  
                  (10,626
                  )
                  
                  (757
                  )
                  
                  (11,383
                  )Loss
                      per common share:Basic
                      and diluted
                  
                  
                  (0.08
                  )
                  
                  (0.01
                  )
                  
                  (0.09
                  )
                  
                  (0.24
                  )
                  
                  (0.02
                  )
                  
                  (0.26
                  )Accounts
                      receivable
                  
                  
                  5,649
                  
                  
                  (252
                  )
                  
                  5,398
                  
                  
                  5,649
                  
                  
                  (252
                  )
                  
                  5,398Total
                      current assets
                  
                  
                  13,552
                  
                  
                  (252
                  )
                  
                  13,301
                  
                  
                  13,552
                  
                  
                  (252
                  )
                  
                  13,301Production
                      masters
                  
                  
                  3,616
                  
                  
                  (105
                  )
                  
                  3,511
                  
                  
                  3,616
                  
                  
                  (105
                  )
                  
                  3,511Film
                      library
                  
                  
                  16,270
                  
                  
                  (490
                  )
                  
                  15,780
                  
                  
                  16,270
                  
                  
                  (490
                  )
                  
                  15,780Total
                      assets
                  
                  
                  46,675
                  
                  
                  (847
                  )
                  
                  45,828
                  
                  
                  46,675
                  
                  
                  (847
                  )
                  
                  45,828Accrued
                      expenses
                  
                  
                  3,236
                  
                  
                  (90
                  )
                  
                  3,146
                  
                  
                  3,236
                  
                  
                  (90
                  )
                  
                  3,146Total
                      current liabilities
                  
                  
                  16,465
                  
                  
                  (90
                  )
                  
                  16,375
                  
                  
                  16,465
                  
                  
                  (90
                  )
                  
                  16,375Stockholders'
                      equity
                  
                  
                  30,210
                  
                  
                  (757
                  )
                  
                  29,453
                  
                  
                  30,210
                  
                  
                  (757
                  )
                  
                  29,453
  **NOTE
          11.COMPLETION OF
          THE WEINSTEIN COMPANY TRANSACTION**
 
 On
          July
          21, 2006, we completed the TWC Transaction with TWC and its affiliates
          pursuant
          to which we launched Genius Products, LLC to exploit the exclusive U.S.
          home
          video distribution rights to feature film and direct-to-video releases
          owned or
          controlled by TWC. The transaction closed following a Special Meeting of
          Stockholders of the Company to approve the transaction and related matters.
          Under the terms of the TWC Transaction, the Company contributed substantially
          all of its assets, employees and existing businesses to the Distributor,
          which
          holds the exclusive U.S. home video distribution rights for filmed entertainment
          and direct-to-video product of TWC. The Distributor is owned 70% by TWC’s parent
          company and its first-tier
          subsidiary, W-G Holding Corp., and 30%
          by Genius Products, Inc. In addition, as part of the TWC Transaction, the
          Company added to its Board of Directors two TWC executives; Larry Madden,
          Executive Vice President and Chief Financial Officer of TWC, and Irwin
          Reiter,
          Executive Vice President of Accounting and Financial Reporting of
          TWC.
  F-19
 At
          the
          Closing, the Distributor adopted an Amended and Restated Limited Liability
          Company Agreement (the “LLC Agreement”) in the form agreed to by the parties.
          The Distributor, which was renamed Genius Products, LLC, now operates the
          new
          distribution business as well as our businesses that we conducted prior
          to the
          Closing.
 
 At
          the
          Closing, we issued to The Weinstein Company Holdings LLC (“TWC Holdings”) and W-G
          Holding Corp. an aggregate of 100
          shares of Series W Preferred Stock. The Series W Preferred Stock provides
          them
          and their permitted transferees with (a) the right to elect five of the
          seven directors on our Board of Directors, (b) majority voting power over
          other actions requiring approval of our stockholders, and (c) the right to
          approve certain specified actions. The Series W Preferred Stock has no
          rights to
          receive dividends and minimal liquidation value. On the Closing, we amended
          and
          restated our Certificate of Incorporation to, among other things, provide
          for
          the designation of the Series W Preferred Stock.
 
 At
          the
          Closing, we entered into a Registration Rights Agreement with TWC pursuant
          to
          which we agreed to register for resale the shares of our common stock issuable
          upon redemption of Class W Units in the Distributor currently held by TWC
          Holdings and W-G
          Holding Corp .
          In
          addition, we entered into the following agreements at the Closing: (i)
          Amended
          and Restated Limited Liability Company Agreement, (ii) Video Distribution
          Agreement, (iii) Services Agreement, and (iv) Assignment and Assumption
          Agreement.
 
 The
          TWC
          Transaction represents a non-monetary exchange of a business controlled
          by the
          Company for a non-controlling interest in the Distributor. Accordingly,
          the
          amount recorded for our investment in the Distributor was partially based
          on our
          fair value as determined by reference to the quoted market prices of our
          shares
          at the close of the market on the date of Closing and partially based on
          the
          historical basis of the net assets surrendered in the TWC Transaction.
 
 We
          recorded a gain based on the difference between the fair market value of
          assets
          contributed and their net book value, reduced for the portion of the gain
          associated with the retained economic interest in the Distributor as shown
          below:
  Total
                    Genius Products Inc. shares outstanding as of July 21,
                    2006
                
                
                61,005,126Closing
                    share price on July 21, 2006
                
                $
                1.95Equity
                    market capitalization
                
                
                118,960Less
                    cash retained at Genus Products, Inc.
                
                
                (1,000
                )Total
                    consideration
                
                $
                117,960Ownership
                    interest retained
                
                
                30
                %Genius
                    Products, Inc. net book value at July 21, 2006
                
                $
                33,180Less
                    cash retained at Genius Products, Inc.
                
                
                (1,000
                )Adjusted
                    net book value
                
                
                32,180Consideration
                    in excess of book value
                
                $
                85,780Ownership
                    interest surrendered
                
                
                70
                %Genius
                    Products, Inc's partial gain
                
                
                60,046Less
                    tax provison
                
                
                (5,843
                )Extraordinary
                    gain, net of taxes
                
                $
                54,203
  F-20
  **NOTE
          12.INVESTMENT IN
          DISTRIBUTOR (GENIUS PRODUCTS, LLC)**
 
 Summaries
          of the statement of operations for the Distributor and a computation of
          equity
          in net loss of the Distributor for the period from July 22, 2006 through
          December 31, 2006 are shown below.
  GENIUS
            PRODUCTS LLC
 SUPPLEMENTAL
              CONDENSED STATEMENT OF OPERATIONS
 FOR
                THE
                PERIOD JULY 22, 2006 THROUGH DECEMBER 31, 2006
 (IN
                  THOUSANDS)
  Revenues,
                      net of sales, returns, discounts and allowances of $71,983
                  
                  $
                  155,591Total
                      cost of revenues
                  
                  
                  168,044Gross
                      profit
                  
                  
                  (12,453
                  )Total
                      operating expenses
                  
                  
                  7,566Loss
                      from operations
                  
                  
                  (20,019
                  )Interest
                      and other income
                  
                  
                  309Net
                      loss
                  
                  $
                  (19,710
                  )
  Our equity
          in net loss of the Distributor is adjusted each period for basis
          differences between the investment and the underlying equity in the Distributor
          and for the impact of certain costs incurred by the Distributor on behalf
          of the
          Company.
  Genius
                      Products, Inc. 30% share of net loss from the Distributor
                  
                  $
                  5,913Adjustments
                      for basis differences
                  
                  
                  1,420Charge
                      for stock compensation for Distributor employees
                  
                  
                  656Equity
                      in net loss from Distributor
                  
                  $
                  7,989
  **NOTE
          13.COMMITMENTS AND
          CONTINGENCIES**
 
 OPERATING
          LEASES. The Company leases certain facilities and computer equipment under
          non-cancelable operating leases. Rental expense for the 202-day period
          ended
          July 21, 2006 was $0.6 million. Rental expense for the years ended December
          31,
          2005, and 2004 was $0.5 million, and $0.2 million, respectively.
 
 As
          of
          December 31, 2006, we did not have any future minimum annual rental
          commitments under existing non-cancelable operating leases since at
          the
          Closing we transferred all of our lease obligations to the Distributor.
 
 We
          may be
          subject to penalties of up to $1 million per month associated with the
          late
          filing of our Form 10-K which has prevented us from maintaining current
          registration statements related to several equity issuances.
  F-21
  Except
          as
          described below, we are not a party to any legal or administrative proceedings,
          other than routine litigation incidental to our business that we do not
          believe,
          individually or in the aggregate, would be likely to have a material adverse
          effect on our financial condition or results of operations.
 
 NEBG
          V.
          GENIUS ****
 
 On
          December 11, 2006, NEBG, LLC, a national organization whose members are
          independent video retailers, Nolan Anaya, dba Captain Video, and Todd Zaganiacz,
          dba Video Zone (collectively, “Plaintiffs”), filed a complaint (the “Complaint”)
          in the Superior Court of Massachusetts naming TWC Holdings, the Company
          and the
          Distributor as defendants (collectively, “Defendants”). The Complaint alleged
          that Defendants, in connection with an exclusive revenue sharing agreement
          between TWC Holdings and Blockbuster for the rental of DVDs of TWC product
          (“TWC
          DVDs”), planned to include a message on such TWC DVDs urging consumers to call
          a
          toll-free number if they rented the TWC DVDs from Plaintiffs. The Complaint
          alleged that such a message would suggest that Plaintiffs were engaged
          in
          wrongdoing by renting such TWC DVDs to their customers, which would amount
          to
          false advertising and violate the First Sale Doctrine of the Copyright
          Act. The
          Complaint alleged Massachusetts state law counts of unfair competition,
          unfair
          or deceptive acts or practices, and untrue and misleading advertising,
          as well
          as counts of negligent misrepresentation and tortuous interference with
          advantageous business relationships, and requested that the court enjoin
          Defendants from distributing any TWC DVDs with the toll-free number
          message.
 
 On
          January 4, 2007, Defendants removed the case to the U.S. District Court
          of
          Massachusetts. The court denied Plaintiffs’ motion for a temporary restraining
          order on January 5, 2007, and denied Plaintiffs’ motion for a preliminary
          injunction on January 18, 2007. Defendants filed a motion to dismiss the
          Complaint on February 2, 2007, and the court heard oral arguments on the
          motion
          on March 9, 2007. In the hearing, Plaintiffs conceded that there is nothing
          improper or misleading with respect to the message currently contained
          on TWC
          DVDs, “This DVD is intended for sale only”. The court focused on the issue of
          ripeness and questioned whether the Complaint states a cause of action
          given
          that the Defendants have not (and are not alleged to have) included a toll-free
          number message on any of the TWC DVDs. The court is considering the parties’
arguments, and Defendants are awaiting a ruling on the motion to
          dismiss.
 
 WELLSPRING/WINSTAR
          MATTER
 
 On
          March 21, 2005, we completed our acquisition of American Vantage Media
          Corporation (“AVMC”) and its subsidiary, Wellspring Media, Inc. (“Wellspring”).
          On or about March 14, 2005, a complaint was filed in U.S. Bankruptcy Court
          for the District of Delaware against Wellspring requesting a judgment in
          excess
          of $3.0 million. The complaint was filed by the Chapter 7 Trustee of the
          Winstar
          Communications, Inc. Estate (“Winstar”). The details of this matter are
          discussed below.
 
 In
          September 2001 (prior to the acquisition of Wellspring by AVMC), Winstar
          (or its
          predecessor) sold a subsidiary, Winstar TV & Video (“TV &
Video”), to Wellspring in exchange for $2.0 million in cash and a promissory
          note in the amount of $3.0 million. The merger agreement provided that
          in the
          event the working capital of TV & Video was determined to be less than
          $3.0 million at the closing of the merger, the sole remedy of Wellspring
          was a
          reduction in the principal amount of the promissory note by the difference
          between $3.0 million and the actual amount of the working capital. The
          accountants for Wellspring determined that at the time of the closing of
          the
          merger, TV & Video had a working capital deficit. Based upon this
          determination and the provisions of the merger agreement, Wellspring determined
          that the amount due under the promissory note should be reduced to zero,
          and as
          a result no payment was made. On November 30, 2001, Wellspring informed
          Winstar of its determination regarding the working capital deficit, and
          Winstar
          subsequently advised Wellspring that it disputed the determination. Since
          2001,
          Wellspring and Winstar have engaged in discussions in an effort to settle
          the
          dispute over the working capital calculation, but no settlement has been
          reached.
 
 We
          believe that, if an adverse judgment against Wellspring occurs or an adverse
          settlement is reached, our direct and indirect subsidiaries, the Distributor,
          AVMC and Wellspring, will be entitled to full indemnification against any
          such
          losses by the initial owners of Wellspring (prior to AVMC), and we will
          be
          entitled to indemnification by American Vantage Companies, the former owners
          of
          AVMC.
  F-22
  FALCON
          PICTURE GROUP MATTER
  On
          October 3, 2005, Falcon Picture Group, LLC (“Falcon”) commenced litigation
          against the Company in the Circuit Court of Cook County, Illinois, Case
          No. 05H16850 (the “Illinois Proceeding”), based upon allegations, among
          other things, that the Company breached the terms of a license agreement
          between
          Falcon and the Company by refusing to pay certain royalties to which Falcon
          supposedly was entitled. Falcon seeks damages of approximately $83,332,
          as well
          as an accounting of royalties supposedly due to Falcon.
 
 The
          Company’s primary defense is that Falcon breached the license agreement by
          delivering defective content to the Company, double billing for content
          and
          failing to honor a provision in the license agreement requiring Falcon
          to
          indemnify the Company in the event of claims by third parties that the
          Company
          did not possess the legal right to sell Falcon content. The Company believes
          the
          evidence will demonstrate that there was no monetary default on its part
          under
          the license agreement insofar as, at the time of the alleged default, Falcon
          was
          indebted to the Company for an amount substantially in excess of the sum
          Falcon
          claims was past due. Accordingly, the Company has commenced litigation
          against
          Falcon and its owner, Carl Amari, in the form of a counter claim seeking
          damages
          of $1.0 million arising out of, among other claims for relief, Falcon’s breach
          of the license agreement. Discovery is in its early stages and the action
          has
          not been scheduled for trial.
 
 **NOTE
          14.STOCKHOLDERS'
          EQUITY**
  COMMON
          STOCK
  On
          March 19, 2004, we completed a private placement offering of 100 units
          aggregating $7 million pursuant to an exemption from registration under
          Rule 506
          of Regulation D of the Securities Act. Proceeds net of cash commissions
          totaled
          approximately $6.4 million. The private placement was priced at $70,000
          per
          unit. Each unit consists of 50,000 shares of common stock and warrants
          to
          purchase 10,000 shares of common stock. The warrants have an exercise price
          of
          $3.00 per share and a five-year term. The fair value of the warrants at
          the time
          of issuance was $0.4 million using the Black-Scholes valuation method with
          weighted average assumptions of expected volatility of 20%, risk free interest
          rate of 2.65%, expected life of five years and no expected dividends. In
          connection with the sales of the units we issued 5,000,000 new unregistered
          shares of common stock and warrants to purchase up to 1,650,000 shares
          of common
          stock (including warrants issued as compensation to the selected dealer).
          In
          accordance with the terms of the Registration Rights Agreement we entered
          into
          with the investors and the selected dealer in connection with this financing,
          we
          have filed a resale registration statement for the resale of the common
          stock
          and the common stock underlying the warrants. The fair value of the warrants
          was
          classified as equity in 2005 in accordance with EITF 00-19. The Company
          used the
          proceeds from this offering for working capital and other general corporate
          purposes.
 
 On
          March 2, 2005, we changed our state of incorporation from the state of
          Nevada to the state of Delaware and changed the par value of our common
          stock
          from $0.001 per share to $0.0001 per share. All transactions have been
          restated
          to reflect this change.
  On
          March 2, 2005, we entered into a securities purchase agreement with certain
          institutional investors related to the private placement of 6,518,987 shares
          of
          our common stock, par value $0.0001 per share, and five-year warrants to
          purchase 1,303,797 shares of Common Stock, half at an exercise price of
          $2.56
          per share and half at an exercise price of $2.78 per share. The transaction
          closed on March 3, 2005 and we realized gross proceeds of $10.3 million
          from the financing, before deducting commissions and other expenses. We
          agreed
          to register for resale the shares of Common Stock issued in the private
          placement and shares issuable upon exercise of warrants. Such registration
          statement became effective on May 11, 2005. The Company used the proceeds
          from this offering for working capital and other general corporate purposes.
          The
          fair value of the warrants was classified as equity in 2005 in accordance
          with
          EITF 00-19.
  In
          May
          2005, we entered into a securities purchase agreement with certain institutional
          investors related to the private placement of 3,000,000 shares of our common
          stock and five-year warrants to purchase 270,000 shares of our common stock
          at
          an exercise price of $2.56 per share. The transaction closed on May 20,
          2005, and we realized gross proceeds of $5.25 million from the financing
          before
          deducting commissions and other expenses. The Company used the proceeds
          from
          this offering for working capital and other general corporate purposes.
          The fair
          value of the warrants was classified as equity in 2005 in accordance with
          EITF
          00-19.
  On
          December 5, 2005, we entered into a securities purchase agreement with
          certain institutional investors related to the private placement of 16,000,000
          shares of our common stock, par value $0.0001 per share, and five-year
          warrants
          to purchase 4,800,000 shares of common stock with an exercise price of
          $2.40 per
          share. The transaction closed on December 6, 2005 and we realized gross
          proceeds of $32 million from the financing, before deducting commissions
          and
          other expenses. The proceeds from the offering will provide working capital
          to
          fund new ventures as well as content acquisitions. The fair value of the
          warrants was classified as equity in 2005 in accordance with EITF
          00-19.
  F-23
  OTHER
          STOCK ISSUANCES. During 2004, we issued 57,994 shares of common stock to
          third-party consultants and service providers for a total of $102,800.
          During
          2005, we issued 585,402 shares of common stock to third-party consultants
          and
          service providers for a total of $905,750.
 
 SERIES
          W
          PREFERRED STOCK
 
 As
          a
          condition to the closing of the TWC Transaction, we issued 100 shares of
          Series
          W Preferred Stock to TWC
          Holdings and its
          first-tier subsidiary, W-G Holding Corp (collectively, the “TWC Holders”). The
          Series W Preferred Stock provides the holders with significant rights,
          preferences and powers:
  A. Voting .
 1. General .
          Except
          as required by our certificate of incorporation or applicable law, the
          holders
          of Series W Preferred Stock are entitled to vote on all matters submitted
          to a
          vote of our stockholders, voting together with the common stockholders
          as one
          class.
 
 2. Voting
          Power When Threshold Amount Held .
          Subject
          to certain limitations set forth in our Charter, the holders of Series
          W
          Preferred Stock, in the aggregate, have voting rights equal to the greater
          of
          (i) 100 votes; (ii) the number of votes attributable to the number of shares
          of
          common stock that TWC Holders beneficially own or have the right to acquire,
          less the number of votes attributable to the shares of common stock which
          they
          may vote directly; and (iii) the number of votes that, together with all
          other
          votes entitled to be directly cast by the holders of shares of Series W
          Preferred Stock, entitle the holders of Series W Preferred Stock to exercise
          one
          vote more than one-half of all votes entitled to be cast by all holders
          of our
          capital stock.
  3. Board
          of Directors .
          The
          holders of Series W Preferred Stock (voting separately as a single class)
          are
          entitled to elect five (5) directors to our Board (the “Series W Directors”),
          and to replace or remove any such Series W Directors. So long as the TWC
          Holders
          own or have the right to own at least 20% of our outstanding common stock
          (the
“Threshold Amount”), the holders of our common stock (voting separately as a
          single class) are entitled to elect two (2) directors (the “At-Large
          Directors”), and to replace or remove any such At-Large Director.
 
 4. Protective
          Provisions .
          The
          holders of Series W Preferred Stock have special protective provisions
          under our
          Charter. These protective provisions provide that the Company may not,
          without
          the approval of the holders of at least a majority of the Series W Preferred
          Stock, take certain important actions specified in our Charter and relating
          to
          the Company’s and the Distributor’s business.
 
 5. Vote
          Below Threshold Amount .
          At such
          time as the TWC Holders and their permitted transferees no longer beneficially
          own or have the right to acquire the Threshold Amount, the voting rights
          of the
          holders of the Series W Preferred Stock described above immediately terminate
          and each share of Series W Preferred Stock will entitle the holder thereof
          to
          the number of votes represented by the number of shares of common stock
          into
          which all Class W Units held by TWC Holders and their permitted transferees
          would be converted, exchanged or redeemed pursuant to the LLC Agreement,
          divided
          by the number of shares of Series W Preferred Stock outstanding at the
          record
          date for such vote.
 
 B. Dividend
          Provisions .
          The
          Series W Preferred Stockholders are entitled to receive dividends as may
          be
          declared from time to time by our Board of Directors.
  C. Liquidation .
          In the
          event of the liquidation, dissolution, winding up or sale or other disposition
          of all or substantially all of the assets of the Company, whether voluntary
          or
          involuntary (“Liquidation”), the Series W Preferred Stockholders are entitled to
          receive, after payment of the debts and other liabilities of Genius Products,
          Inc., an amount (or assets having a fair market value) equal to $0.01 plus
          all
          accrued but unpaid dividends up to and including the date of Liquidation.
 
 D. Conversion .
          The
          Series W Preferred Stock will not be convertible into any other class of
          stock
          of the Company.
  F-24
 
 NON-EMPLOYEE
          WARRANTS.
  In
          2004,
          we granted warrants to purchase a total of 4,667,432 shares of our common
          stock
          at exercise prices from $1.20 to $3.00 per share to individuals for services
          to
          be rendered and in relation to a private placement, resulting in the recognition
          of $1.3 million of expense. During 2004, warrants for 217,500 shares were
          exercised for cash and 478,716 shares of stock were issued in exchange
          for
          1,436,148 warrants in a cashless exercise. In accordance with EITF Issue
          96-18,
“Accounting for Equity Instruments That are Issued to Other Than Employees
          for
          Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF Issue
          00-18, “Accounting Recognition for Certain Transactions Involving Equity
          Instruments Granted to Other Than Employees,” the stock based compensation
          expense recorded in our statement of operations for the year ended
          December 31, 2004, in the amount of $1.3 million, reflected the proportion
          of the aggregate value corresponding to the number of warrants that had
          vested
          by that date.
 
 In
          2005,
          we granted warrants to purchase a total of 8,905,750 shares of our common
          stock
          at exercise prices from $1.58 to $2.78 per share to individuals for services
          to
          be rendered and in relation to a private placement, resulting in the recognition
          of $0.4 million of expense. During 2005, warrants for 1,255,315 shares
          were
          exercised for cash.
 
 In
          2006,
          warrants for 649,288 shares were exercised for cash. Additionally, warrants
          for
          826,796 shares were exchanged in cashless exercises for 325,029
          shares.
 
 A
          summary
          of warrant activity follows:
  Warrants
                  Outstanding
                
                Weighted
                  Average
                  Exercise
                  Price
                
                Aggregate
                  Intrinsic
                  ValueDecember
                    31, 2003
                
                
                7,415,255
                
                $
                1.35Granted
                    in private placement
                
                
                4,017,432
                
                
                2.52Granted
                    for services rendered
                
                
                650,000
                
                
                3.00Exercised
                
                
                (696,216
                )
                
                0.80Canceled
                
                
                (311,216
                )
                
                1.05December
                    31, 2004
                
                
                11,075,255
                
                
                1.82Granted
                    in private placement
                
                
                7,773,797
                
                
                2.47Granted
                    for services rendered
                
                
                1,131,953
                
                
                1.82Exercised
                
                
                (1,255,315
                )
                
                1.02Canceled
                
                
                (2,496,773
                )
                
                2.06December
                    31, 2005
                
                
                16,228,917
                
                
                2.15Exercised
                
                
                (1,476,084
                )
                
                1.47
                
                $
                889,392December
                    31, 2006
                
                
                14,752,833
                
                $
                2.21
                
                $
                8,040,263Warrants
                    exercisable, December 31, 2006
                
                
                14,752,833
                
                $
                2.21
                
                $
                8,040,263
  The
          following information applies to warrants outstanding at December 31,
          2006:
  Warrants
                  outstanding
                
                Average
                  remaining
                    life
                
                Weighted
                  average
                  exercise price of
                  warrants
                  outstanding
                
                Warrants
                  exercisable
                
                Weighted
                  average
                  exercise price of
                  warrants
                  exercisableUnder
                    $1.50
                3,268,152
                
                1.03
                
                $1.16
                
                3,268,152
                
                $1.16$1.50
                    - $1.99
                167,500
                
                3.73
                
                1.88
                
                167,500
                
                1.88$2.00
                    - $2.99
                9,670,181
                
                3.36
                
                2.44
                
                9,670,181
                
                2.44$3.00
                    - $3.99
                1,647,000
                
                2.25
                
                3.00
                
                1,647,000
                
                3.0014,752,833
                
                2.72
                
                $2.21
                
                14,752,833
                
                $2.21
 
 F-25
 
 **NOTE
          15.STOCK-BASED
          COMPENSATION**
 
 We
          have
          adopted several stock option plans, all of which have been approved by
          our
          stockholders, that authorize the granting of options to purchase our common
          shares subject to certain conditions. At December 31, 2006, we had reserved
          19.1 million of our common shares for issuance of share-based compensation
          awards under our stock option plans. At December 31, 2006, we have granted
          7,394,213 share-based compensation awards outside of our stock option plans.
          Options are granted at the fair value of the shares underlying the options
          at
          the date of the grant and generally become exercisable over periods ranging
          from
          three to five years and expire in ten years.
  The
          2004
          Stock Option Plan provides a total of 13,500,000 shares to be granted as
          either
          incentive stock options or nonqualified stock options to our employees,
          directors and consultants. The term of the awards may not be for more than
          ten
          years (or five years in the case of incentive stock options granted to
          any
          participant who owns stock representing more than 10% of the combined voting
          power of us or any parent or subsidiary of ours).
  During
          2004, we granted options to our employees and directors to purchase a total
          of
          5,775,080 shares of our common stock at exercise prices of $1.40 to $4.00
          per
          share, which equaled or exceeded fair market value at the time the options
          were
          granted.
  During
          2005, we granted to our employess and directors options to purchase a total
          of
          6,561,253 shares of our common stock under the 2004 Stock Option Plan and
          options to purchase a total of 3,270,000 shares of our common stock outside
          any
          plan, at exercise prices ranging from $1.45 to $2.31 and $1.55 to $2.31,
          respectively.
  During
          2006, we granted to our employees and directors options to purchase a total
          of
          1,992,000 shares of our common stock under the 2004 Stock Option Plan and
          options to purchase 1,577,929 shares of our common stock options outside
          any
          plan, at exercise prices ranging from $1.75 to $2.45 and $1.70 to $2.31,
          respectively.
 
 During
          2006, we estimated the fair value of our stock options using the Black-Scholes
          option pricing model (the “Option Model”). The Option Model requires the use of
          subjective and complex assumptions, including the option's expected term
          and the
          estimated future price volatility of the underlying stock. As described
          in SEC
          SAB No. 107, the Company estimates its expected term using the "simplified"
          method of calculation. Beginning in 2006, the expected volatility assumption
          used in the Option Model changed from being based on historical volatility
          to
          implied volatility based on traded options on our stock in accordance with
          guidance provided in SFAS No. 123R and SAB 107 “Share-Based Payment”. The
          risk-free interest rate used in the Option Model is based on the yield
          of U.S.
          Treasuries with a maturity closest to the expected term of our stock
          options.
 
 Total
          share-based compensation expense recognized for the year ended December
          31, 2006
          was $7.7 million. For the year ended December 31, 2006, no income tax benefit
          was recognized in the statement of operations for share-based compensation
          arrangements.
  As
          of December 31, 2006 there was approximately $7.2
          million of total unrecognized stock-based compensation cost related to
          share-based payments granted under the Company's stock-based compensation
          plans
          that will be recognized over a period of four years. Future grants will add
          to this total, whereas quarterly amortization and vesting of the existing
          grants
          will reduce this total.
 
 A
          total
          of $0.9 million of share-based compensation expense was recorded as compensation
          expense in the statement of operations for the Distributor for the 163
          days
          ending December 31, 2006. Options are issued by Genius Products, Inc. to
          the
          employees of the Distributor. Therefore, the Distributor records stock
          compensation expense pursuant to EITF 00-12. For Genius Products, Inc.
          management assessed the likelihood that deferred tax assets relating to
          future
          tax deductions from share-based compensation will be recovered from future
          taxable income and determined that a 100% valuation allowance was required
          due
          to uncertainty regarding the recoverability of these items.
  During
          the years ended December 31, 2006, 2005 and 2004, we received proceeds
          of $2.6
          million, $0.2 million and $0.2 million, respectively, related to the exercise
          of
          options.
  F-26
  We
          estimated share-based compensation expense for fiscal year 2006 using the
          Black-Scholes model with the following weighted average
          assumptions:
 
 Year
                    EndedDecember
                    31, 2006Risk
                    free interest rate
                4.0%Expected
                    dividend yield
                -Expected
                    volatility
                145.9%Expected
                    life (in years)
                5.3
 
 A
          summary
          of option activity follows:
  Options
                  Outstanding
                
                Weighted
                    Average Price
                
                Aggregate
                  Intrinsic
                  ValueDecember
                    31, 2003
                
                
                7,555,910
                
                $
                1.35Grants
                
                
                5,775,080
                
                
                2.52Exercised
                
                
                (169,400
                )
                
                0.80Canceled
                
                
                (1,185,097
                )
                
                1.05December
                    31, 2004
                
                
                11,976,493
                
                
                1.84Grants
                
                
                9,831,253
                
                
                1.80Exercised
                
                
                (157,600
                )
                
                1.14Canceled
                
                
                (3,261,013
                )
                
                2.06December
                    31, 2005
                
                
                18,389,133
                
                
                1.78Grants
                
                
                3,569,929
                
                
                1.91Exercised
                
                
                (1,833,068
                )
                
                1.36
                
                $
                1,738,178Canceled
                
                
                (1,053,500
                )
                
                2.04December
                    31, 2006
                
                
                19,072,494
                
                $
                1.82
                
                $
                18,407,885Options
                    exercisable, December 31, 2006
                
                
                13,905,675
                
                $
                1.77
                
                $
                14,530,330
 
 The
          following information applies to options outstanding at December 31, 2006:
 
 Options
                  outstanding
                Average
                  remaining
                  life
                Weighted
                  average
                  exercise price of
                  options
                  outstanding
                
                Options
                  exercisable
                Weighted
                  average
                  exercise price of
                  options
                  exercisableUnder
                    $1.50
                3,742,281
                5.61
                $1.00
                
                3,742,281
                $1.00$1.50
                    - $1.99
                9,838,213
                8.05
                1.75
                
                5,978,061
                1.68$2.00
                    - $2.99
                4,293,500
                7.95
                2.16
                
                2,986,833
                2.10$3.00
                    - $3.99
                793,750
                7.08
                3.00
                
                793,750
                3.00$4.00
                    + over
                404,750
                2.65
                5.42
                
                404,750
                5.4219,072,494
                7.39
                $1.82
                
                13,905,675
                $1.77
 
 *Pro
          Forma Information Under SFAS 123 for Periods Prior to Fiscal
          2006*
  Prior
          to
          January 1, 2006, we accounted for stock options under the recognition and
          measurement principles of APB Opinion No. 25, “Accounting for Stock Issued
          to Employees,” and related interpretations. Prior to the implementation of SFAS
          No. 123R, stock-based employee compensation expense was not generally reflected
          in net income, as all options granted under our plans had an exercise price
          equal to the market value of the underlying common stock on the date of
          grant.
          The following table illustrates the effect on net income and earnings per
          share
          if we had applied the fair value recognition provisions of SFAS No. 123R to
          stock-based employee compensation for the years ended December 31, 2005
          and
          2004:
  F-27
  (In
                    thousands, except per share amounts)
                
                **Years
                    Ended December 31,****2005**
                
                **2004**Net
                    loss as reported
                
                $
                (17,161
                )
                $
                (6,046
                )Compensation
                    cost at fair value
                
                
                (1,007
                )
                
                (1,808
                )Pro
                    forma net loss
                
                $
                (18,168
                )
                $
                (7,854
                )Basic
                    and diluted net loss per shareAs
                    reported
                
                $
                (0.42
                )
                $
                (0.25
                )Pro
                    forma
                
                $
                (0.45
                )
                $
                (0.33
                )
 
 The
          pro
          forma compensation cost recognized for the grant date fair value of the
          stock
          options granted during the years ended December 31, 2005 and 2004 was estimated
          using the Black-Scholes model with the following weighted-average
          assumptions:
  **Years Ended December 31,****2005**
                
                **2004**Risk
                    free interest rate
                
                
                3.6
                %
                
                2.7
                %Expected
                    dividend yield
                
                
                —
                
                
                —Expected
                    volatility
                
                
                50
                %
                
                20
                %Expected
                    life (in years)
                
                
                3.5
                
                
                4.2
  **NOTE
          16.SEVERANCE**
  We
          reorganized our executive management team and terminated an exclusive agreement
          with our financial advisor during fiscal year 2005. As a result, severance
          related charges of approximately $2.7 million were recognized, of which,
          $1.4
          million was related to non-cash compensation expense resulting from the
          grant of
          additional vested stock options and the acceleration of certain unvested
          stock
          options.
  In
          February 2006, we reorganized our theatrical releasing business as part
          of a
          decision to discontinue the use of theatrical releasing as a marketing
          strategy
          to improve video sales. As a result, severance related charges of approximately
          $0.9 million were recognized during the 202-day period ended July 21, 2006.
          As
          of December 31, 2006, we did not have any remaining severance obligations.
 
 **NOTE
          17.INCOME
          TAXES**
  The
          following table presents the current and deferred income tax provision
          for federal and state income taxes for the years ended December 31, 2006,
          2005 and 2004:
 
 F-28
 
 (In
                        thousands)2006
                    
                    2005
                    
                    2004**Current**Federal
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -State
                    
                    
                    -
                    
                    
                    1
                    
                    
                    1**Deferred**Federal
                    
                    
                    4,948
                    
                    
                    -
                    
                    
                    -State
                    
                    
                    849
                    
                    
                    -
                    
                    
                    -Total
                    
                    $
                    5,797
                    
                    $
                    1
                    
                    $
                    1
 
 At
            December 31, 2006 and 2005, components of net deferred tax assets (liabilities)
            in the accompanying balance sheet include the following amounts of deferred
            tax
            liabilities:




(In
      thousands)


December
                  31,Deferred
                  tax asset (liability)
              
              2006
              
              2005NOL
                  carry-forwards
              
              $
              20,742
              
              $
              13,886State
                  deferreds
              
              
              -
              
              
              (401
              )Allowance
                  accounts
              
              
              -
              
              
              404Accrued
                  vacation
              
              
              -
              
              
              60Other
                  reserves
              
              
              1,171
              
              
              4,559Deferred
                  compensation cost
              
              
              -
              
              
              1,067Wellspring
                  deferred tax liability
              
              
              -
              
              
              (1,380
              )Depreciation
              
              
              -
              
              
              25Stock
                  options
              
              
              2,384
              
              
              -Investment
                  in Distributor
              
              
              (13,021
              )
              
              -11,276
              
              
              18,220Less
                  valuation allowance
              
              
              (24,297
              )
              
              (19,600
              )Net
                  deferred tax asset (liability)
              
              $
              (13,021
              )
              $
              (1,380
              )


Income
        tax expense differs from the amounts computed by applying the United States
        federal income tax rate of 34% to income taxes as a result of the following
        for
        the years ended December 31, 2006 and 2005 and 2004:
 2006
                
                2005
                
                2004Federal
                    tax on pretax income at statutory rates
                
                
                34%
                
                
                34%
                
                
                34%State
                    tax, net of federal benefit
                
                
                6
                
                
                6
                
                
                6Other
                
                
                3
                
                
                (1)
                
                
                (1)Valuation
                    allowance
                
                
                (58)
                
                
                (39)
                
                
                (39)Total
                
                
                (15%)
                
                
                0%
                
                
                0%






F-29




As
      of
      December 31, 2006, we had total net operating loss carry-forwards for
      federal and state income tax purposes of $50.3 million and $41.0 million,
      respectively which start expiring in 2011 through 2026. Included in our total
      net operating loss carryover, is approximately $17.6 million of net operating
      losses we inherited as a result of the AVMC acquisition pertaining mainly to
      the
      Wellspring division. The utilization of net operating loss carry-forwards may
      be
      limited due to the ownership change under the provisions of Internal Revenue
      Code Section 382 and similar state provisions.




The
      net
      increase in our valuation allowance was $4.7 million in 2006, $12.3 million
      in
      2005 and $2.6 million in 2004. All of our deferred income tax assets have been
      offset by a valuation allowance as management does not believe the
      recoverability of the deferred income tax assets is more likely than not to
      occur. The Company has recorded a net deferred tax liability relating to its
      investment in Genius Products, LLC. The deferred tax liability related to Genius
      Products, LLC is not offset against the deferred tax assets as the reversal
      period for this amount is not considered to be determinable on a more likely
      than not basis.




**NOTE
      18.EMPLOYEE BENEFIT
      PLAN**





We
      sponsor a defined contribution plan (the “Plan”) under Section 401(k) of the
      Internal Revenue Code, covering employees of the Company. Under the Plan, we
      may
      match contributions at the discretion of management. For the 202-day period
      ended July 21, 2006 and the years ended December 31, 2005 and 2004 we did not
      make any contributions to the Plan. At
      the
      Closing, we transferred the Plan to the Distributor and as such, there was
      no
      employee benefit plan at December 31, 2006 for the Company.




**NOTE
      19.RELATED-PARTY
      TRANSACTIONS**





TWC
      DISTRIBUTION AGREEMENT





On
      July
      17, 2006, the Distributor entered into a Distribution Agreement with TWC (the
      “TWC Distribution Agreement”), an affiliate of TWC Holdings and W-G Holding
      Corp., holders of the Company’s Series W Preferred Stock. Pursuant to the TWC
      Distribution Agreement, TWC granted to the Distributor the right to distribute,
      advertise, publicize, promote and market DVDs of motion pictures owned or
      released by TWC for an initial term of approximately five years, subject to
      early termination provisions described in the TWC Distribution Agreement. Under
      the TWC Distribution Agreement, after deducting permitted amounts from gross
      receipts for return reserves, the Distributor’s distribution fee and the
      Distributor’s reimbursable expenses, the Distributor is required to pay to TWC a
      portion of the net receipts from the sale of any such DVDs. As of March 31,
      2007, the Distributor has paid to TWC an aggregate of $82.8 million in respect
      of such net receipts.





BANNON
      CONSULTING AGREEMENT




Stephen
      K. Bannon is the chairman of the Company’s Board of Directors. Mr. Bannon is
      also a principal with Bannon Strategic Advisors, Inc. (“Bannon Strategic
      Advisors”). On July 20, 2006, the Company and Bannon Strategic Advisors entered
      into a consulting agreement (the “Consulting Agreement”), pursuant to which
      Bannon Strategic Advisors has provided the Company with consulting and advisory
      services. Pursuant to the Consulting Agreement, the Company agreed to pay to
      Bannon Strategic Advisors a monthly consulting fee of $20,833 for a term of
      two
      years (i.e., an aggregate of $500,000) and reimburse Mr. Bannon for expenses
      incurred in connection with services provided to the Company. The Consulting
      Agreement was approved by the Board of Directors, with Mr. Bannon abstaining
      from the vote. On July 21, 2006, the rights and obligations of the Company
      pursuant to the Consulting Agreement were assigned to the Distributor. On
      January 2, 2007, the Distributor paid to Bannon Strategic Advisors a bonus
      of
      $200,000 for services rendered in 2006, and an additional bonus of $25,000
      on
      March 13, 2007. These bonuses were approved by the compensation committee of
      the
      Company’s Board of Directors. Through March 31, 2007, the Company and the
      Distributor in aggregate have paid Bannon Strategic Advisors $454,679 in respect
      of consulting fees and reimbursement of expenses incurred pursuant to the
      Consulting Agreement.





SALE
      OF
      BABY GENIUS




On
      December 31, 2005, the Company entered into an Asset Purchase Agreement
      (the “Asset Purchase Agreement”) with Klaus Moeller who was its founder, former
      CEO and a Director. Under the Asset Purchase Agreement, the Company agreed
      to
      sell to Mr. Moeller all of its right, title and interest in and to the
      following assets (the “Assets”), subject to the terms, conditions and
      limitations set forth in the Asset Purchase Agreement:




•
            
            The
                audio and audiovisual works entitled “Baby Genius”;




•
            
            The
                audio and audiovisual works entitled “Kid Genius”;




F-30




•
            
            The
                audio and audiovisual works entitled “Little Tikes”;




•
            
            The
                audio works entitled “Wee Worship”; and




•
            
            Related
                intellectual property, agreements, documents and instruments.




Subject
      to limited exceptions, Mr. Moeller agreed to assume any and all obligations
      for royalties, advances, reporting requirements, and all other obligations
      of
      any kind arising out of or in connection with all talent agreements, producer
      agreements, and any and all other agreements relating to the Assets and due
      after the signing of the Asset Purchase Agreement. As part of the agreement,
      the
      Company agreed to continue to distribute Baby Genius, Kid Genius, Little Tikes
      and Wee Worship DVDs and music CDs and all new products under these brands.
      Under the distribution agreement, the Company will receive a distribution fee
      and recoup all of its expenses.




The
      purchase price for the Assets was $3 million, payable as follows:




•
            
            $0.25
                million in cash on signing;




•
            
            $0.75
                million by means of a secured promissory note due and payable in
                full,
                together with all accrued interest, on January 30, 2006, bearing
                interest at the rate of 4.5% per annum; and




•
            
            $2
                million by means of a secured promissory note due and payable in
                full,
                together with all accrued interest, on the fifth anniversary of the
                closing date, bearing interest at the rate of 4.5% per annum.




The
      $3
      million purchase price was determined by negotiations between the parties and
      the Company’s assessment of the reasonable value of the Assets and the
      distribution arrangement described above. At June 30, the Company determined
      that the remaining value of the note was impaired and recorded an impairment
      charge of $1.2 million by offsetting the deferred gain against the $2 million
      note.




BRANDISSIMO!
      AGREEMENT





On
      November 1, 2005, the Company entered into an agreement with Brandissimo!
      Inc. (“Brandissimo”), a company which was formerly co-owned by
      Trevor Drinkwater, the Company’s President and a Director, and is currently
      co-owned by David Snyder, a former officer of the Company. Under this agreement,
      the Company was granted an exclusive “first look” at all Brandissimo-owned or
      controlled children’s projects to be produced for videogram distribution.
      Pursuant to the agreement, the Company is the exclusive videogram distributor
      for all Brandissimo-owned or controlled children’s projects produced or
      otherwise presented to us **.** Brandissimo
      will render production services for any and all children’s projects which the
      Company finances and produce during the term of the agreement. Over the course
      of the term, the Company will pay to Brandissimo a $0.1 million non-refundable,
      non-recoupable overhead fee. Under the agreement, the Company is entitled to
      receive a distribution fee ranging from 12% to 20% of gross receipts, depending
      on the products being distributed. All of the Company’s rights and obligations
      under this agreement were assigned to the Distributor in connection with the
      TWC
      Transaction.




FALCON
      PICTURE GROUP, LLC




On
      September 8, 2003, the Company executed a license agreement with Falcon
      Picture Group, LLC (“Falcon”) for the exclusive rights to distribute a majority
      of its audio and video products worldwide, including AMC and TV Guide branded
      DVD movie and television collections and Twilight Zone branded audio collections
      in the U.S. and Canada. Carl Amari, a former member of the Company’s Board of
      Directors, is the CEO of Falcon. This agreement expired on July 1, 2006,
      with an automatic renewal for an additional three years if both parties were
      fulfilling their obligations under the agreement and calls for a royalty to
      be
      paid to Falcon on the sales of the video and audio products. The Company
      committed to pay a minimum annual royalty of $0.2 million for brands including
      AMC and Twilight Zone, and a royalty of $0.3 million for TV Guide over a three
      and one-half year term that commenced on December 22, 2003. In addition,
      the agreement calls for a minimum content purchase of $0.3 million annually.




The
      agreement also provided a three-year option to acquire Falcon’s assets for $3.6
      million (payable in cash or stock or a combination of cash and stock). As
      consideration for the right to purchase Falcon, the Company issued 70,922 shares
      of common stock with a market value of approximately $0.1 million. The stock
      value of $1.40 per share was based on the average of the closing market price
      of
      the common shares as of September 8, 2003, the date of issuance of such
      shares and the execution of the agreement, and July 1, 2003, the effective
      date of the agreement. The specific assets and liabilities of Falcon that would
      be acquired under this right will be negotiated by the parties at the time
      the
      acquisition is considered. The purchase option expired unexercised in 2006,
      whereupon the Company wrote off the entire amount.




F-31




FACILITY
      LEASES




From
      December 31, 2003 through April 21, 2006, the Company leased warehouse space
      in
      Atlantic, Iowa from the Meader Family Trust, which is affiliated with Michael
      Meader, formerly the Company’s President. The Company’s lease with the Meader
      Family Trust provided for monthly rent of $2,900 and a term that expires in
      December 2007. On April 21, 2006, the Company entered into a sublease agreement
      with World Trading Center, Inc., under which the Company subleased to World
      Trading Center, Inc. its leasehold interest in the warehouse facility. This
      sublease is for a term commencing April 21, 2006 and continuing until June
      30,
      2007, and provides for monthly rent of $2,900 for the duration of the term.
      The
      Company’s rights and obligations under its lease with the Meader Family Trust
      and its sublease with World Trading Center, Inc. were assigned to the
      Distributor as part of the TWC Transaction. Lease payments under the Company’s
      lease with the Meader Family Trust for the 202-day period ended July 21, 2006
      were $20,300. Lease payments were $34,800 and $34,800 in 2005 and 2004,
      respectively. The Distributor has been informed by the Meader Family Trust
      that
      it intends to terminate its sublease agreement with the Distributor effective
      as
      of July 1, 2007.




The
      Company also leased sales offices in Minnesota from Ekelund Properties, which
      is
      affiliated with Julie Ekelund, a former Executive Vice President of the Company.
      Lease payments made during fiscal year 2004 were $14,400 under this agreement.
      This lease expired in January 2005.




INVESTMENT
      BANKING AND FINANCIAL ADVISORY SERVICES




Alexander
      L. Cappello is Chairman, CEO and sole shareholder of Cappello Capital Corp.
      (“Cappello”), investment bankers. Bruce Pompan is Managing Director of Cappello.
      Both were Directors of the Company. The Company retained Cappello to perform
      corporate finance advisory services for a two-year period commencing in March
      2004. After the first 12 month term, the agreement can be terminated with 30
      days’ advance notice. As consideration for the finance advisory services,
      Cappello was granted 2,000,000 warrants with an exercise price of $2.50 and
      a
      term of ten years. On July 21, 2005, the Company and Cappello entered into
      (i) a letter agreement (the “First Amendment”) amending certain portions of
      its original engagement agreement, dated March 24, 2004 (the “Engagement
      Agreement”), under which the Company retained Cappello as exclusive financial
      advisor; and (ii) a Resale Agreement (the “Resale Agreement”) providing
      restrictions on open market sales of certain shares of common stock issued
      to
      Cappello.




Under
      the
      First Amendment, the Company and Cappello agreed to the following:




•
            
            The
                Engagement Agreement and the exclusive engagement of Cappello as
                the
                Company’s financial advisor are terminated effective as of June 3,
                2005;




•
            
            The
                term “Covered Party” for purposes of the tail period under the Engagement
                Agreement was limited to two parties identified in the First Amendment
                and
                any party providing financing to complete a proposed transaction
                identified in the First Amendment. The fees payable by us for potential
                transactions with these two parties were modified from the amounts
                otherwise payable under the Engagement Agreement;




•
            
            Bruce
                L. Pompan would submit his resignation as the Company’s director,
                effective immediately;




•
            
            The
                Company would issue to Cappello 175,000 shares of common stock and
                reduce
                the exercise price on 2,000,000 warrants to purchase common stock
                currently held by Cappello from $2.50 per share to $2.20 per share;




•
            
            The
                Company would increase the monthly retainer payable to Cappello from
                $10,000 per month to $25,000 per month for services commencing as
                of
                June 3, 2005 until the occurrence of certain events specified in the
                Amendment; and




•
            
            The
                Company would pay to Cappello a fee for the private placement transaction
                which closed on May 20, 2005 in the amount of $105,000 (2% of the
                transaction) and 171,675 warrants to purchase the Company’s common stock
                exercisable at $1.75 per share.





EMPLOYMENT
      AGREEMENTS





On
      December 5, 2005, the Company entered into an amendment to the employment
      agreement with its President and Chief Executive Officer, Trevor Drinkwater,
      dated December 5, 2005 (the “First Amendment”). The effectiveness of the First
      Amendment was conditioned upon the closing of the TWC Transaction, which
      occurred on July 21, 2006. Prior to the effectiveness of the First Amendment,
      the Company agreed to pay Mr. Drinkwater the annual base compensation that
      would
      otherwise be payable during the first year following the closing of the TWC
      Transaction pursuant to the terms of the First Amendment (the “Annual Base
      Compensation”).




F-32


On
      July
      20, 2006, the Company entered into a second amendment to the employment
      agreement with Mr. Drinkwater (the “Second Amendment”) pursuant to which the
      Company agreed to pay Mr. Drinkwater, effective as of June 1, 2006, at a rate
      equal to the Annual Base Compensation. Upon the closing of the TWC Transaction
      on July 21, 2006, the First Amendment became effective and Mr. Drinkwater’s
      compensation shall be determined in accordance with the terms thereunder. On
      July 21, 2006, the rights and obligations under the terms of the Employment
      Agreement were assigned to the Distributor.





On
      December 5, 2005, the Company also entered into amendments to the employment
      agreements of each of (i) Rodney Satterwhite, the Company’s Chief Operating
      Officer, (ii) Michael Radiloff, the Company’s Executive Vice President of
      Marketing and (iii) Mitch Budin, the Company’s Executive Vice President of
      Sales. The effectiveness of each of such amendment was conditioned on the
      closing of the TWC Transaction, which occurred on July 21, 2006. Pursuant to
      such amendments, the employment agreement of each of Mr. Satterwhite, Mr.
      Radiloff and Mr. Budin was amended to provide for a two year term, with a
      one-year extension at the option of the Company and to grant to each such
      employee additional stock options to acquire 75,000 shares of the Company’s
      common stock, vesting in equal installments over five years. On July 21, 2006,
      the rights and obligations under the terms of each of these employment
      agreements were assigned to the Distributor.





**NOTE
      20.SELECTED
      QUARTERLY FINANCIAL DATA**




Selected
      unaudited quarterly financial data for the years ended December 31, 2006
      and 2005 are summarized below.


(In
                  thousands, except per share amounts)
              
              2006First
                  Quarter
              
              Second
                  Quarter
              
              Third
                  Quarter
              
              Fourth
                  QuarterAs
                  Restated
              
              As
                  Restated
              
              As
                  RestatedNet
                  revenues
              
              $
              27,912
              
              $
              76,084
              
              $
              15,015
              
              $
              -Gross
                  profit (loss)
              
              
              (885
              )
              
              (10,672
              )
              
              (303
              )
              
              -Income
                  (loss) before income taxes
              
              
              (6,766
              )
              
              (19,148
              )
              
              (4,453
              )
              
              (9,199
              )Loss
                  before extraordinary item
              
              
              (6,720
              )
              
              (17,921
              )
              
              (12,949
              )
              
              (7,774
              )Net
                  Income (loss)
              
              
              (6,720
              )
              
              (17,921
              )
              
              41,254
              
              
              (7,774
              )Basic
                  and diluted earnings (loss) per share
              
              $
              (0.11
              )
              $
              (0.29
              )
              $
              0.67
              
              $
              (0.13
              )EPS
                  before extraordinary item
              
              $
              (0.11
              )
              $
              (0.29
              )
              $
              (0.21
              )
              $
              (0.13
              )Weighted
                  average shares outstanding
              
              
              60,465
              
              
              60,829
              
              
              61,370
              
              
              61,132
 
 2005First
                  Quarter
              
              Second
                  Quarter
              
              Third
                  Quarter
              
              Fourth
                  QuarterAs
                  Restated
              
              As
                  RestatedNet
                  revenues
              
              $
              2,556
              
              $
              3,912
              
              $
              8,154
              
              $
              7,705Gross
                  profit (loss)
              
              
              (111
              )
              
              (1,731
              )
              
              2,368
              
              
              (1,080
              )Loss
                  before income taxes
              
              
              (2,232
              )
              
              (5,288
              )
              
              (3,847
              )
              
              (5,793
              )Net
                  loss
              
              
              (2,232
              )
              
              (5,296
              )
              
              (3,855
              )
              
              (5,777
              )Basic
                  and diluted loss per share
              
              $
              (0.08
              )
              $
              (0.13
              )
              $
              (0.09
              )
              $
              (0.12
              )Weighted
                  average shares outstanding
              
              
              28,000
              
              
              41,755
              
              
              43,349
              
              
              48,212




F-33




GENIUS
      PRODUCTS, INC AND SUBSIDIARIES


SCHEDULE
      II - Valuation and Qualifying Accounts


Years
      Ended December 31, 2004, 2005 and 2006


(In
      thousands)




Allowances
      are deducted from the assets to which they apply, except for sales returns
      and
      allowances.


Balance
                  at
              
              Charged
                  to
              
              Charged
                  toBeginning
                  of
              
              costs
                  and
              
              Other
              
              
              
              
              Balance
                  at EndPeriod
              
              expenses
              
              Accounts
              
              
              Deductions
              
              of
                  Period$
              3,784
              
              $
              1,070
              
              $
              -
              
              
              
              $
              -
              
              $
              4,854Year
                  ended December 31, 2004Allowance
                  for:Uncollectible
                  accounts
              
              $
              26
              
              $
              21
              
              $
              -
              
              
              
              $
              (5
              )
              $
              42Reserve
                  for potential product obsolescence
              
              
              -
              
              
              474
              
              
              -
              
              
              
              
              -
              
              $
              474Reserve
                  for sales returns and allowances
              
              
              157
              
              
              1,339
              
              
              -
              
              
              
              
              (174
              )
              $
              1,322Deferred
                  tax assets
              
              
              4,671
              
              
              2,649
              
              
              -
              
              
              
              
              -
              
              $
              7,320$
              4,854
              
              $
              4,483
              
              $
              -
              
              
              
              $
              (179
              )
              $
              9,158Year
                  ended December 31, 2005Allowance
                  for:Uncollectible
                  accounts
              
              $
              42
              
              $
              361
              
              $
              1,310
              
              (a)
              
              $
              (758
              )
              $
              956Reserve
                  for potential product obsolescence
              
              
              474
              
              
              1,827
              
              
              -
              
              
              
              
              -
              
              
              2,301Reserve
                  for sales returns and allowances
              
              
              1,322
              
              
              5,184
              
              
              217
              
              (a)
              
              
              (770
              )
              
              5,953Deferred
                  tax assets
              
              
              7,320
              
              
              12,280
              
              
              -
              
              
              
              
              -
              
              
              19,600$
              9,158
              
              $
              19,652
              
              $
              1,527
              
              
              
              $
              (1,528
              )
              $
              28,810Year
                  ended December 31, 2006Allowance
                  for:Uncollectible
                  accounts
              
              $
              956
              
              
              721
              
              
              (1,238
              
              (b)
              
              
              (439
              )
              
              -Reserve
                  for potential product obsolescence
              
              
              2,301
              
              
              4,602
              
              
              (6,223
              
              (b)
              
              
              (680
              )
              
              -Reserve
                  for sales returns and allowances
              
              
              5,953
              
              
              40,408
              
              
              (23,094
              
              (b)
              
              
              (23,267
              )
              
              -Reserve
                  for uncollectable advances
              
              
              -
              
              
              2,209
              
              
              (2,202
              
              (b)
              
              
              (7
              )
              
              -Deferred
                  tax assets
              
              
              19,600
              
              
              (19,600
              )
              
              -
              
              (b)
              
              
              -
              
              
              -$
              28,810
              
              $
              28,340
              
              $
              (32,757
              
              
              
              $
              (24,393
              )
              $
              -(a)
                  AVMC acquired reserve(b)
                  As part of the closing of the TWC Transaction, these amounts were
                  transferred to the Distributor.




F-34






GENIUS
      PRODUCTS, LLC AND SUBSIDIARIES





CONSOLIDATED
      FINANCIAL STATEMENTS





FOR
      THE
      PERIOD FROM JULY 22, 2006





THROUGH
      DECEMBER 31, 2006




F-35




GENIUS
      PRODUCTS, LLC AND SUBSIDIARIES





TABLE
      OF
      CONTENTS














REPORT OF ERNST & YOUNG
              LLP
            F-37GENIUS PRODUCTS, LLC BALANCE SHEET AS
              OF
              DECEMBER 31, 2006
            F-38GENIUS
                PRODUCTS, LLC STATEMENT OF OPERATIONS FOR THE PERIOD
              FROM
                JULY 22, 2006 THROUGH DECEMBER 31, 2006
            F-39GENIUS
                PRODUCTS, LLC STATEMENT OF MEMBERS’ EQUITY FOR THE
              PERIOD
                FROM JULY 22, 2006 THROUGH DECEMBER 31, 2006
            F-40GENIUS
                PRODUCTS, LLC STATEMENT OF CASH FLOWS FOR THE PERIOD
              FROM
                JULY 22, 2006 THROUGH DECEMBER 31, 2006
            F-41NOTES TO GENIUS PRODUCTS, LLC CONSOLIDATED
              FINANCIAL STATEMENTS
            F-42




F-36


Report
          of
          Independent Auditors
 
 
 To
          the
          Members
 
 Genius
          Products, LLC
  We
          have
          audited the accompanying consolidated balance sheet of Genius Products,
          LLC and
          subsidiaries as of December 31, 2006, and the related consolidated statements
          of
          operations, members' equity, and cash flows for the period from July 22,
          2006
          through December 31, 2006. These financial statements are the responsibility
          of
          the Company’s management. Our responsibility is to express an opinion on these
          financial statements based on our audit.
 
 We
          conducted our audit in accordance with auditing standards generally accepted
          in
          the United States. Those standards require that we plan and perform the
          audit to
          obtain reasonable assurance about whether the financial statements are
          free of
          material misstatement. We were not engaged to perform an audit of the Company’s
          internal control over financial reporting. Our audit included consideration
          of
          internal control over financial reporting as a basis for designing audit
          procedures that are appropriate in the circumstances, but not for the purpose
          of
          expressing an opinion on the effectiveness of the Company’s internal control
          over financial reporting. Accordingly, we express no such opinion. An audit
          also
          includes examining, on a test basis, evidence supporting the amounts and
          disclosures in the financial statements, assessing the accounting principles
          used and significant estimates made by management, and evaluating the overall
          financial statement presentation. We believe that our audit provides a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects. the consolidated financial position of Genius Products,
          LLC
          and subsidiaries at December 31, 2006, and the consolidated results of
          their
          operations and their cash flows for the period from July 22, 2006 through
          December 31, 2006, in conformity with U.S. generally accepted accounting
          principles.
  /s/
                    Ernst & Young LLP
 
 Los
          Angeles, California
 May
          1,
          2007
  F-37


**GENIUS
      PRODUCTS, LLC AND SUBSIDIARIES**


**CONSOLIDATED
        BALANCE SHEET**
 **AS
          OF DECEMBER 31, 2006**
 **(IN
            THOUSANDS)**





**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            8,326Accounts
                receivable, net of allowance for doubtful accounts and
                salesreturns
                of $2,963 and $42,057
            
            
            97,495Inventories,
                net
            
            
            7,589Prepaid
                expenses
            
            
            728Total
                current assets
            
            
            114,138Restricted
                cash
            
            
            309Property
                and equipment, net
            
            
            818Royalty
                advances
            
            
            20,042Film
                library, net
            
            
            8,102Notes
                receivable, related party
            
            
            86Goodwill
            
            
            84,982Other
                intangible assets, net
            
            
            16,172Deposits
                and other
            
            
            187Total
                assets
            
            $
            244,836**LIABILITIES
                AND MEMBERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            18,704Remittance
                to licensors, including related party
            
            
            106,338Accrued
                advertising and marketing
            
            
            13,375Other
                accrued expenses
            
            
            3,295Deferred
                revenue
            
            
            4,986Notes
                payable
            
            
            213Total
                current liabilities
            
            
            146,911Total
                members' equity
            
            
            97,925Total
                liabilities and members' equity
            
            $
            244,836




See
        accompanying notes.





F-38




**GENIUS
      PRODUCTS, LLC AND SUBSIDIARIES**


**CONSOLIDATED
        STATEMENT OF OPERATIONS**
 **FOR
          THE PERIOD FROM JULY 22, 2006 THROUGH DECEMBER 31, 2006**
 **(IN
            THOUSANDS, EXCEPT UNITS AND PER UNIT
            AMOUNTS)**







Revenues,
                net of sales returns, discounts and allowances of $71,983
            
            $
            155,591Cost
                of revenues:Manufacturing
                and distribution
            
            
            54,230Amortization
                and participation
            
            
            89,246Advertising
                and marketing
            
            
            24,568Total
                cost of revenues
            
            
            168,044Gross
                loss
            
            
            (12,453
            )Operating
                expenses:General
                and administrative
            
            
            7,566Total
                operating expenses
            
            
            7,566Loss
                from operations
            
            
            (20,019
            )Interest
                expense
            
            
            (195
            )Interest
                income and other
            
            
            504Net
                loss
            
            $
            (19,710
            )Net
                loss per unit
            
            $
            (0.32
            )Total
                Class G and Class W units
            
            
            61,005,126


See
        accompanying notes.





F-39




**GENIUS
        PRODUCTS, LLC AND SUBSIDIARIES**
 **STATEMENT
          OF MEMBERS' EQUITY**
 **FOR
            THE PERIOD FROM JULY 22, 2006 THROUGH DECEMBER 31, 2006**
 **(IN
              THOUSANDS)**


Genius
                  Products, Inc
              
              The
                  Weinstein Company Holdings LLC
              
              W-G
                  Holding Corp
              
              Total
                  Members'Class
                  G units
              
              Class
                  W Units
              
              Class
                  W Units
              
              EquityContribution
                  of assets, liabilities and businesses of Genius Products,
                  Inc.
              
              $
              117,960
              
              $
              -
              
              $
              -
              
              $
              117,960Stock
                  compensation expense
              
              
              281
              
              
              647
              
              
              10
              
              
              938Distribution
                  to members for costs incurred on behalf of Genius Products,
                  Inc.
              
              
              (379
              )
              
              (872
              )
              
              (12
              )
              
              (1,263
              )Net
                  loss
              
              
              (5,913
              )
              
              (13,600
              )
              
              (197
              )
              
              (19,710
              )Ending
                  members' equity at December 31, 2006
              
              $
              111,949
              
              $
              (13,825
              )
              $
              (199
              )
              $
              97,925




See
        accompanying notes.




F-40




**GENIUS
      PRODUCTS, LLC AND SUBSIDIARIES**


**CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **FOR
          THE PERIOD FROM JULY 22, 2006 THROUGH DECEMBER 31, 2006**
 **(IN
            THOUSANDS)**


Cash
                  flows from operating activities:Net
                  loss
              
              $
              (19,710
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              103Amortization
                  of intangible assets
              
              
              3,419Amortization
                  of film library
              
              
              484Change
                  in allowance for doubtful accounts and provision for
                  returns
              
              
              20,031Change
                  in provision for obsolete inventory
              
              
              4,383Loss
                  on disposal of fixed assets
              
              
              63Impairment
                  of royalty advances
              
              
              849Imputed
                  interest on notes receivable, related party
              
              
              (39
              )Stock
                  compensation expense
              
              
              938Interest
                  expense on notes payable
              
              
              13*Changes
                  in assets and liabilities:*Increase
                  in accounts receivable
              
              
              (67,211
              )Decrease
                  in inventory
              
              
              2,034Increase
                  in prepaid expenses and deposits
              
              
              (378
              )Decrease
                  in notes receivable
              
              
              288Increase
                  in royalty advances
              
              
              (17,134
              )Increase
                  in film library
              
              
              (1,252
              )Increase
                  in accounts payable
              
              
              13,288Decrease
                  in accrued expenses and other
              
              
              (3,912
              )Increase
                  in deferred revenue
              
              
              2,229Increase
                  in remittance due to licensors
              
              
              55,346Net
                  cash used in operating activities
              
              
              (6,168
              )Cash
                  flows from investing activities:Transaction
                  costs related to the TWC Transaction
              
              
              (4,305
              )Restricted
                  cash
              
              
              (6
              )Purchase
                  of property and equipment
              
              
              (261
              )Net
                  cash used in investing activities
              
              
              (4,572
              )Cash
                  flows from financing activities:Distribution
                  to Members
              
              
              (1,263
              )Net
                  cash used in financing activities
              
              
              (1,263
              )Net
                  decrease in cash and equivalents
              
              
              (12,003
              )Cash
                  at beginning of period
              
              
              20,329Cash
                  at end of period
              
              $
              8,326Noncash
                  transactionContribution
                  of assets, liabilities and businesses from Genius Products, Inc.
              
              $
              117,960
  See
      accompanying notes.




F-41




**GENIUS
      PRODUCTS, LLC AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**







**NOTE
      A. NATURE OF BUSINESS**  **AND
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** . Genius
      Products, LLC (the “Distributor” or the “Company”) is owned 70% by The Weinstein
      Company Holdings LLC (“TWC Holdings”), and its first-tier
      subsidiary, W-G Holding Corp., each affiliates of The Weinstein Company LLC
      (“TWC”), and
      30%
      by Genius Products, Inc. (“Genius”), the Distributor’s managing
      member. The
      Distributor will continue until terminated in accordance with the provisions
      of
      the Amended and Restated Limited Liability Company Agreement of the
      Distributor.





THE
      WEINSTEIN COMPANY TRANSACTION. On July 21, 2006, Genius completed a transaction
      (the “TWC Transaction”) with TWC, TWC Holdings and W-G Holding Corp. pursuant to
      which Genius, TWC Holdings and W-G Holding Corp jointly launched Genius
      Products, LLC to exploit the exclusive U.S. home video distribution rights
      to
      feature film and direct-to-video releases owned or controlled by TWC. At the
      closing of the TWC Transaction (the “Closing”), Genius contributed substantially
      all of its assets, employees and existing businesses to the Distributor, which
      holds the exclusive U.S. home video distribution rights for filmed entertainment
      and direct-to-video product of TWC. As a condition to the closing of the TWC
      Transaction, Genius issued an aggregate of 100 shares of its Series W Preferred
      Stock to TWC
      Holdings and W-G
      Holding Corp.





The
      Distributor also operates the former businesses of Genius, including the
      production of proprietary content and the licensing, marketing, sales and
      distribution of an expanding library of feature films, television programming,
      family, lifestyle and trend entertainment on DVD and other emerging platforms
      through its extensive network of retailers throughout the U.S. The Distributor
      primarily focuses on four core branded content areas: major
      theatrical/independent film, sports, lifestyle and family/faith based content.
      In addition to proprietary and TWC content, the Distributor markets, sells
      and
      distributes other major branded entertainment content, such as Classic Media,
      Entertainment Rights, ESPN, NBC News, Sesame Street, Sundance Home
      Entertainment, World Wrestling Entertainment, Inc., Discovery Communications,
      Inc., Imaginasian, Asia Extreme, Dragon Dynasty and IFC.





PRINCIPLES
      OF CONSOLIDATION. The consolidated financial statements of the Distributor
      include the accounts of the Distributor and its controlled subsidiaries after
      the elimination of intercompany accounts and transactions.





USE
      OF
      ESTIMATES. The preparation of consolidated financial statements in conformity
      with generally accepted accounting principles 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.




CASH
      AND
      CASH EQUIVALENTS. Cash equivalents include investments in time deposits,
      certificates of deposit and money market accounts with original maturities
      of
      three months or less.





RESTRICTED
      CASH. Restricted cash of $0.3 million at December 31, 2006 represents cash
      invested in certificates of deposit to collateralize a letter of credit issued
      to a landlord for an office lease.





ALLOWANCE
      FOR SALES RETURNS AND DOUBTFUL ACCOUNTS. The allowance for doubtful accounts
      and
      provision for sales returns includes management's estimate of the amount
      expected to be uncollectible or returned on specific accounts and losses or
      returns on other accounts as yet to be identified included in accounts
      receivable. The
      Distributor provides for future returns of home video product at the time the
      products are sold. The Distributor calculates an estimate of future returns
      of
      product by analyzing a combination of historical returns, current economic
      trends, projections of consumer demand for its product and point-of-sale data
      available from certain retailers. Based on this information, a percentage of
      each sale is reserved. The Distributor also analyzes other factors, including
      its historical experience with similar types of sales, information the
      Distributor receives from retailers and its assessment of the product's appeal
      based on domestic box office success and other research. Actual returns are
      charged against the reserve. The
      amounts the Distributor will ultimately realize could differ materially in
      the
      near term from the amounts estimated in arriving at the allowance for doubtful
      accounts and provision for sales returns in the accompanying financial
      statements.




F-42


CONCENTRATIONS
      OF CREDIT RISK. For the period from July 22, 2006 through December 31, 2006,
      Wal-Mart and Best Buy accounted for 31% and 5% of net revenues, respectively.
      At
      December 31, 2006, Wal-Mart and Best Buy comprised 50% and 7% of accounts
      receivable before allowances, respectively.





Financial
      instruments that potentially subject the Distributor to concentration of credit
      risk consist primarily of temporary cash investments and trade receivables.
      The
      Distributor restricts investment of temporary cash investments to financial
      institutions with investment grade credit ratings. The Distributor provides
      credit in the normal course of business to customers located throughout the
      United States. The Distributor performs ongoing credit evaluations of its
      customers, generally does not require collateral and maintains allowances for
      potential credit losses which, when realized, have been within the range of
      management’s expectations.





The
      Distributor maintains cash and cash equivalents at several financial
      institutions. From time to time the balances for these accounts exceed the
      Federal Deposit Insurance Corporation’s (“FDICs”) insured amount.





INVENTORIES.
      Inventories consist of raw materials and finished goods and are valued at the
      lower of cost or market. Cost is determined on an average cost basis which
      approximates the first-in-first-out method of valuation. Shipping and handling
      costs are recorded as expenses in the period in which they are incurred. The
      Distributor regularly monitors inventory for excess or obsolete items and makes
      any valuation corrections when such adjustments are needed.




ROYALTY
      AND DISTRIBUTION FEE ADVANCES. Royalty and distribution fee advances represent
      fixed minimum payments made to program suppliers for exclusive content
      distribution rights. A program supplier’s share of exclusive program
      distribution revenues is retained by the Distributor until the share equals
      the
      advance(s) paid to the program. Thereafter, any excess is paid to the
      program supplier. The Distributor records, as a cost of sales, an amount equal
      to the program supplier’s share of the net distribution revenues. Revenue and
      cost forecasts are continually reviewed by management and revised when warranted
      by changing conditions. When estimates of total revenues and costs indicate
      that
      an individual title or group of cross-collateralized titles which the
      Distributor exploits via home entertainment formats (such as home video, CD
      or
      broadcast) will result in an ultimate loss, an impairment charge is recognized
      to the extent that capitalized advance royalties and distribution fees and
      recoupable production costs exceed estimated fair value, based on projected
      cash
      flows, in the period when estimated.




LONG-LIVED
      ASSETS.





*Property
      and Equipment:* Property
      and equipment purchases are recorded at cost and are depreciated and amortized
      over the estimated useful lives of the assets (three to seven years generally)
      using the straight-line method.





*Film
      Library:* The
      Distributor capitalizes the costs of production and acquisition of film
      libraries. Costs of production include costs of film and tape conversion to
      DLT
      master format, menu design, authoring and compression. These costs are amortized
      to cost of revenues in accordance with Statement of Position (“SOP”) 00-2,
“Accounting by Producers or Distributors of Films” (“SOP 00-2”), using the
      individual film forecast method over a period of ten years. Costs are stated
      at
      the lower of unamortized film costs or estimated fair value. For acquired film
      libraries, ultimate revenue includes estimates over a period not to exceed
      ten
      years. Management regularly reviews and revises when necessary its ultimate
      revenue and cost estimates, which may result in a change in the rate of
      amortization of film costs and/or a write-down of all or a portion of
      unamortized film or library costs to estimated fair value. No assurances can
      be
      given that unfavorable changes to revenue and cost estimates will not occur,
      which may result in significant write-downs affecting the Distributor’s results
      of operations and financial condition.





*Goodwill* :
      The
      Distributor recorded the excess of net tangible and intangible assets acquired
      from Genius over their estimated fair value as goodwill. The Distributor has
      adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)
      No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”). Under SFAS No. 142,
      the Distributor is required to test goodwill for impairment at least annually.
      The Distributor evaluates the carrying value of goodwill as of December 31
      of each year and between annual evaluations if events occur or circumstances
      change that would more likely than not reduce the fair value of the reporting
      unit below its carrying amount. Such circumstances could include, but are not
      limited to: (1) a significant adverse change in legal factors or in
      business climate, (2) unanticipated competition, or (3) an adverse
      action or assessment by a regulator. In performing the impairment review, the
      Distributor determines the carrying amount of each reporting unit by assigning
      assets and liabilities, including the existing goodwill, to those reporting
      units. A reporting unit is defined as an operating segment or one level below
      an
      operating segment (referred to as a component). A component of an operating
      segment is deemed a reporting unit if the




F-43




component
      constitutes a business for which discrete financial information is available
      and
      segment management regularly reviews the operating results of that component.
      The Distributor’s
      reporting unit is Genius Products, LLC. To evaluate whether goodwill is
      impaired, the Distributor compares the fair value of the reporting unit to
      the
      reporting unit’s net book
      value, including goodwill. The Distributor determines the fair value of its
      reporting unit using the present value of its expected future cash flows. If
      the
      net book value plus the value
      of
      outstanding debt of the reporting unit exceeds its fair value, then the amount
      of the impairment loss must be measured. The impairment loss would be calculated
      by comparing the implied fair value of the reporting unit to its net book value
      plus the value of debt outstanding. In calculating the implied fair value of
      the
      reporting unit’s goodwill, the fair value of the reporting unit is allocated to
      all of the other assets and liabilities of that unit based on their fair values.
      The excess of the fair value of a reporting unit over the amount assigned to
      its
      other assets and liabilities is the implied fair value of goodwill. An
      impairment loss would be recognized when the carrying amount of goodwill exceeds
      its implied fair value. The Distributor conducted an impairment review as of
      December 31, 2006. Based on the analysis performed the Distributor
      determined that the fair value of its reporting unit’s goodwill exceeded its
      carrying amount, and therefore there was no indication of an impairment loss.
      The Distributor also evaluates other intangible assets to determine whether
      such
      assets have been impaired.





FAIR
      VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and cash
      equivalents, accounts receivable, prepaid expenses, accounts payable and accrued
      expenses approximate fair value.





ADVERTISING
      COSTS. The Distributor’s advertising expense is composed primarily of co-op
      advertising and third party radio and television advertising. In accordance
      with SOP 93-7, “Reporting on Advertising Costs”, the Distributor expenses
      advertising costs in the period in which the advertisement first takes place.
      For the 163-day period ended December 31, 2006, advertising and promotion
      expense was $24.6 million.




SHIPPING
      EXPENSES. In accordance with Emerging Issues Task Force (“EITF”) Issue 00-10,
“Accounting for Shipping and Handling Fees and Costs”, the Distributor
      classifies amounts related to shipping as cost of sales in the accompanying
      statement of operations.




STOCK-BASED
      COMPENSATION. The Distributor records stock compensation expense because some
      of
      its employees have received options to purchase the common stock of Genius
      Products, Inc.




Pursuant
      to EITF Issue 00-12 “Accounting by an Investor for Stock-Based Compensation
      Granted to Employees of an Equity Method Investee”, the stock compensation
      expense of Genius Products, Inc. for such options is allocated to its investee,
      the Distributor.




INCOME
      TAXES. The Distributor is taxed as a partnership for Federal and state income
      tax purposes. As such, no provision for income taxes has been recorded since
      the
      liability for such taxes is that of each of the individual members rather than
      the Distributor. The Distributor's income tax returns are subject to examination
      by the Federal and state taxing authorities, and changes, if any, could adjust
      the individual income tax of the members.




REVENUE
      RECOGNITION. Revenue from the sale or licensing of films is recognized upon
      meeting all recognition requirements of SOP 00-2 and Staff Accounting Bulletin
      (“SAB”) No. 104, “Revenue Recognition”. Revenues are recorded upon the receipt
      of goods by the customer for titles that do not have a “street date” (when it is
      available for sale by the customer). If a title has a street date, the
      Distributor recognizes the initial shipment as revenue on that date and all
      subsequent shipments after street date are recognized as revenue upon the
      receipt of goods by the customer. Under revenue sharing arrangements, rental
      revenue is recognized on or after the street date and when the Distributor
      is
      entitled to receipts and such receipts are determinable. Costs of sales and
      an
      allowance for returns are recorded at the time of revenue recognition. Revenues
      from royalties are recognized when received. Revenues from licensing are
      recognized when the title is available to the licensee. Cash payments received
      are recorded as deferred revenue until all the conditions of revenue recognition
      have been met. Long-term, non-interest bearing receivables are discounted to
      present value.




F-44


RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS.





In
      May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”),
      an amendment to Accounting Principles Bulletin Opinion No. 20, “Accounting
      Changes” (“APB No. 20”), and SFAS No. 3, “Reporting Accounting Changes
      in Interim Financial Statements” (“SFAS No. 3”). Though SFAS No. 154
      carries forward the guidance in APB No. 20 and SFAS No. 3 with respect
      to accounting for changes in estimates, changes in reporting entity, and the
      correction of errors, SFAS No. 154 establishes new standards on accounting
      for changes in accounting principles, whereby all such changes must be accounted
      for by retrospective application to the financial statements of prior periods
      unless it is impracticable to do so. SFAS No. 154 is effective for
      accounting changes and error corrections made in fiscal years beginning after
      December 15, 2005, with early adoption permitted for changes and
      corrections made in years beginning after May 2005. The Distributor
      implemented SFAS No. 154 in the period beginning July 22, 2006. The
      adoption of SFAS No. 154 did not have a material impact on the Distributor’s
      financial position of results of operations for the period July 22, 2006 through
      December 31, 2006.





In
      November 2005, the FASB issued FSP FAS 115-1, “The Meaning of
      Other-Than-Temporary Impairment and Its Application to Certain Investments”
(“FSP FAS 115-1”). FSP FAS 115-1 addresses the determination as to when an
      investment is considered impaired, whether that impairment is other than
      temporary, and the measurement of an impairment loss. The FSP also includes
      accounting considerations subsequent to the recognition of an
      other-than-temporary impairment and requires certain disclosures about
      unrealized losses that have not been recognized as other-than-temporary
      impairments. The guidance in FSP FAS 115-1 is effective for reporting periods
      beginning after December 15, 2005. The Distributor adopted FSP FAS 115-1 on
      July 22, 2006.  The adoption of FSP FAS 115-1 did not impact the
      Distributor's financial statements.





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments” (“SFAS No. 155”), which amends SFAS No. 133,
“Accounting for Derivatives Instruments and Hedging Activities” (“SFAS No. 133”)
      and SFAS No. 140, “Accounting for Transfers and Servicing of Financial
      Assets and Extinguishment of Liabilities” (“SFAS No. 140”). SFAS No. 155
      amends SFAS No. 133 to narrow the scope exception for interest-only and
      principal-only strips on debt instruments to include only such strips
      representing rights to receive a specified portion of the contractual interest
      or principal cash flows. SFAS No. 155 also amends SFAS No. 140 to
      allow qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      instrument. The Distributor is currently evaluating the impact of this new
      standard but believes that it will not have a material impact on its financial
      position, results of operations, or cash flows. This statement is effective
      for
      all financial instruments acquired or issued after the beginning of an entity's
      first fiscal year that begins after September 15, 2006.





In
      March
      2006, the EITF issued Issue 06-3, “How Sales Taxes Collected From Customers and
      Remitted to Governmental Authorities Should Be Presented in the Income Statement
      (That Is, Gross versus Net Presentation)” (“EITF 06-3”). A consensus was reached
      that entities may adopt a policy of presenting sales taxes in the income
      statement on either a gross or net basis. If taxes are significant, an entity
      should disclose its policy of presenting taxes and the amount of taxes. The
      guidance is effective for periods beginning after December 15, 2006. The
      Distributor presents sales net of sales taxes. The Distributor does not believe
      that the adoption of EITF 06-3 will impact the method for recording these sales
      taxes in the Distributor's financial statements.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets” (“SFAS No. 156”), which provides an approach to simplify efforts to
      obtain hedge-like (offset) accounting.  This Statement amends SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities”, with respect to the accounting for separately recognized
      servicing assets and servicing liabilities.  The Statement (1) requires an
      entity to recognize a servicing asset or servicing liability each time it
      undertakes an obligation to service a financial asset by entering into a
      servicing contract in certain situations; (2) requires that a separately
      recognized servicing asset or servicing liability be initially measured at
      fair
      value, if practicable;  (3) permits an entity to choose either the
      amortization method or the fair value method for subsequent measurement for
      each
      class of separately recognized servicing assets or servicing liabilities; (4)
      permits at initial adoption a one-time reclassification of available-for-sale
      securities to trading securities by an entity with recognized servicing rights,
      provided the securities reclassified offset the entity’s exposure to changes in
      the fair value of the servicing assets or liabilities; and (5) requires separate
      presentation of servicing assets and servicing liabilities subsequently measured
      at fair value in the balance sheet and additional disclosures for all separately
      recognized servicing assets and servicing liabilities.  SFAS No. 156 is
      effective for all separately recognized servicing assets and liabilities as
      of
      the beginning of an entity’s fiscal year that begins after September 15, 2006,
      with earlier adoption permitted in certain circumstances.  The Statement
      also describes the manner in which it should be initially applied.  The
      Distributor does not believe that SFAS No. 156 will have a material impact
      on
      its financial position, results of operations or cash flows.




F-45





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      No. 157”), which defines fair value, establishes a framework for measuring fair
      value and expands disclosures about fair value measurements.  This
      statement is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years.  Early adoption is encouraged, provided that the registrant has not
      yet issued financial statements for that fiscal year, including any financial
      statements for an interim period within that fiscal year. The
      Distributor is currently evaluating the effect that the application of SFAS
      No.
      157 will have on its results of operations and financial condition.




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), which improves
      financial reporting by requiring an employer to recognize the over or under
      funded status of a defined benefit postretirement plan as an asset or liability
      in its statement of financial position and to recognize changes in that funded
      status in the year in which the changes occur through comprehensive income
      of a
      business entity or changes in unrestricted net assets of a not-for-profit
      organization.  This statement also improves financial reporting by
      requiring an employer to measure the funded status of a plan as of the date
      of
      its year end statement of financial position, with limited exceptions. 
This statement amends SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS
      No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined
      Benefit Pension Plans and for Termination Benefits”, SFAS No. 106, “Employers’
Accounting for Postretirement Benefits Other Than Pensions” and SFAS No. 132
      (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement
      Benefits”.  Upon the initial application of this statement and
      subsequently, an employer should continue to apply the provisions in SFAS Nos.
      87, 88, and 106 in measuring plan assets and benefit obligations as of the
      date
      of its statement of financial position and in determining the amount of net
      periodic benefit cost.  An employer with publicly traded equity securities
      is required to initially recognize the funded status of a defined benefit
      postretirement plan and to provide the required disclosures as of the end of
      the
      fiscal year ending after December 31, 2006.  An employer without publicly
      traded equity securities is required to recognize the funded status of a defined
      benefit postretirement plan and to provide the required disclosures as of the
      end of the fiscal year ending after June 15, 2007.  Early application of
      the recognition or measurement date provisions is encouraged; however, early
      application must be for all of an employer’s benefit plans.  Retrospective
      application of the Statement is not permitted.  The Distributor does not
      believe that SFAS No. 158 will have a material impact on its financial position,
      results of operations or cash flows.





**NOTE
      B.INVENTORY**




Inventories
      consist of raw materials and finished goods and are valued at the lower of
      cost
      or market.




(In
                  thousands)
              
              December
                  31, 2006Raw
                  materials
              
              $
              1,377Finished
                  goods
              
              
              16,69918,076Less
                  allowance for obsolescence
              
              
              (10,487
              )Inventories,
                  net
              
              $
              7,589





**NOTE
      C.PROPERTY AND
      EQUIPMENT**




Property
      and equipment purchases are recorded at cost and are depreciated and amortized
      over the estimated useful lives of the assets (three to seven years generally)
      using the straight-line method.




F-46


(In
                  thousands)
              
              December
                  31, 2006
              
              Useful
                  livesComputers
                  and equipment
              
              $
              919
              
              
              3-5
                  yearsFurniture
                  and fixtures
              
              
              2
              
              
              3-7
                  years921Less
                  accumulated depreciation and amortization
              
              
              (103
              )Property
                  and equipment, net
              
              $
              818




Depreciation
      expense for the 163 days ended December 31, 2006 was $0.1
      million.




**NOTE
      D.FILM LIBRARY AND
      ROYALTY ADVANCES**




Following
      are the components of the Distributor’s film library and royalty
      advances:




(In
                  thousands)
              
              December
                  31, 2006Total
                  library, net of accumulated amortization of $484
              
              $
              8,102Net
                  royalty advances to content providers
              
              
              20,042Total
                  film library and royalty advances
              
              $
              28,144




The
        library consists of the acquired Wellspring library and other capitalized
        costs.
        The acquired film library is composed of the Wellspring library that was
        acquired on March 21, 2005, and additional titles licensed since the
        acquisition. The capitalized costs not related to the Wellspring library
        acquisition primarily represent film costs associated with certain productions
        by Tudor and Brandissimo. Film library costs are amortized over a ten year
        period beginning on each respective product’s release date. The Distributor
        expects to amortize $2.8 million of its library in 2007. The Distributor
        expects
        to amortize $6.9 million, or 85%, of the unamortized film library costs over
        the
        next five years, through December 31, 2011. Film library costs will be
        completely amortized by March 31, 2015. Net royalty advances are paid to
        content
        providers and are recoupable by the Distributor from royalties generated
        by
        product sales.





**NOTE
      E.BASIS OF
      CONTRIBUTED ASSETS AND LIABILITIES, INCLUDING GOODWILL**





The
      total
      basis of Genius’ contributed assets and liabilites was allocated to the
      estimated fair value of assets acquired and liabilities assumed as set forth
      in
      the following table:




F-47


(In
                  thousands)Cash
              
              $
              20,329Accounts
                  receivable, net
              
              
              50,315Film
                  library
              
              
              11,090Inventory
              
              
              14,006Other
                  assets
              
              
              3,144Intangible
                  assets
              
              
              19,591Liabilities
                  assumed
              
              
              (81,192
              )Goodwill
              
              
              80,677Total
                  consideration
              
              $
              117,960




The
      consideration and final goodwill were calculated as follows:





(In
                thousands, except per share amounts)Total
                Genius Products, Inc shares outstanding as of July 21,
                2006
            
            
            61,005Closing
                share price at July 21, 2006
            
            $
            1.95Equity
                market capitalization
            
            
            118,960Less
                cash retained at Genius Products, Inc.
            
            
            (1,000
            )Total
                consideration
            
            
            117,960Genius
                Products, Inc. - net book value at July 21, 2006
            
            
            18,692Less
                cash retained at Genius Products, Inc.
            
            
            (1,000
            )Adjusted
                net book value
            
            
            17,692Total
                consideration in excess of net book value
            
            
            100,268Amounts
                allocated to identifiable intangible assets
            
            
            (19,591
            )Amounts
                allocated to goodwill
            
            
            80,677Capitalized
                transaction costs
            
            
            4,305Goodwill
                at December 31, 2006
            
            $
            84,982


Other
        intangible assets:
 
 Intangible
        assets were recorded in connection with the TWC Transaction and are amortized
        over the estimated useful lives of the assets using the straight line
        method.


(In
                    thousands)
                
                December
                    31, 2006
                
                Useful
                    LivesDistribution
                    agreements
                
                $
                11,129
                
                
                3-6
                    yearsCustomer
                    relationships
                
                
                6,625
                
                
                7.5
                    yearsSales
                    order backlog
                
                
                1,837
                
                
                3
                    months19,591Less
                    accumulated amortization
                
                
                (3,419
                )Other
                    intangible assets, net
                
                $
                16,172
 
 Amortization
        expense for the 163 days ended December 31, 2006 was $3.4
        million.


(In
                  thousands)
              
              2007
              
              2008
              
              2009
              
              2010
              
              2011Amortization
                  expense for the next five years
              
              
              3,567
              
              
              3,563
              
              
              2,954
              
              
              2,578
              
              
              1,694




**NOTE
      F.NOTES PAYABLE AND
      CONVERTIBLE DEBENTURES**




On
      March 21, 2005, Genius completed its acquisition of American Vantage Media
      Company (“AVMC”), a subsidiary of American Vantage Companies (“AVC”). As part of
      this acquisition, Genius assumed notes payable to certain individuals and
      entities with a total principal balance of $4.0 million, bearing interest at
      7%,
      payable quarterly, with a maturity date of February 3, 2006. Genius repaid
      $3.8 million of these notes on February 7, 2006 and withheld payment on the
      balance as part of its contractual right to reserve for certain potential
      liabilities associated with the acquisition. In conjunction with the TWC
      Transaction, the Distributor assumed Genius’ rights and obligations with respect
      to the notes payable.




F-48




NOTE
      G.REMITTANCE DUE TO LICENSORS
      AND
      DEFERRED REVENUE




The
      Distributor records as net revenues the full amount it receives from sales
      of home video products (net of reserves and allowances), deducts its
      distribution fee, costs of goods sold (including manufacturing expenses) and
      certain marketing expenses, and remits the balance to TWC and other licensors.
      The remittance to licensors of $106.3 million at December 31, 2006 primarily
      related to amounts owed to TWC from sales of TWC's titles, *Scary Movie, Lucky Number Slevin, Feast, Clerks 2* and *Pulse* that
      were released on DVD during the period of July 22 through December 31,
      2006.




The
      deferred revenue of $5.0 million at December 31, 2006 primarily related to
      revenue associated with shipments at the end of the fourth quarter that had
      not
      yet been received by the customer or where a title had not had
      its “street date” (the date the product is available for retail sale). The
      Distributor recognizes its initial shipment of product as revenue on
      that date, and all subsequent shipments after street date are recognized as
      revenue upon the receipt of goods by the customer.





**NOTE
      H.ACCRUED
      EXPENSES**




The
      components of accrued expenses are as follows:




(In
                  thousands)
              
              December
                  31, 2006Accrued
                  payroll and related items
              
              $
              1,042Accrued
                  bonus
              
              
              696Due
                  to related company
              
              
              777Accrued
                  operating expenses
              
              
              780Total
                  accrued expenses
              
              $
              3,295
  **NOTE
      I.COMMITMENTS AND
      CONTINGENCIES**




The
      Distributor leases certain facilities and computer equipment under
      non-cancelable operating leases described below.





On
      January 17, 2007, the Distributor entered into a lease agreement with Del Mar
      Investors, L.P., under which the Distributor rents approximately 493 square
      feet
      of office space located in Del Mar, California, for a monthly rent of $1,800
      per
      month. The Distributor has leased this office space on a month-to-month basis.
      This office space is used by certain of the Distributor’s executive officers and
      employees.





On
      January 23, 2007, the Distributor entered into a lease agreement with Maguire

      Properties, L.P., under which the Distributor rents approximately 5,050 square
      feet of office space located in Santa Monica, California, for a monthly rent
      of
      $31,300 per month. The Distributor has the right to terminate this lease at
      any
      time upon five (5) business days’ prior written notice. The Distributor’s
      accounting and finance departments are currently housed on a temporary basis
      in
      this office space.





On
      January 5, 2007, the Distributor entered into a sublease agreement with The
      Advantage Network, LLC, under which the Distributor subleased to The Advantage
      Network, LLC its leasehold interest in a 5,603 square foot facility located
      in
      Solana Beach, California. This sublease is for a term commencing February 1,
      2007 and ending December 31, 2008, and provides for monthly rent of $10,600
      from
      February 1, 2007 through December 31, 2007, and $11,000 from January 1, 2008
      through December 31, 2008. Until March 2006, Genius used this facility as its
      principal executive offices pursuant to a sublease agreement entered into in
      November 2003. The November 2003 sublease is for a five-year term which
      commenced in January 2004, and was assigned to the Distributor as part of the
      TWC Transaction.





In
      addition to monthly rent for the Solana Beach facility, the Distributor is
      required to pay for increases in common area expenses over the base year of
      2004. The Distributor also has the option to extend the lease for an additional
      five-year period, although it does not anticipate exercising this option upon
      expiration of the initial term. Under the Distributor’s sublease agreement with
      The Advantage Network, LLC, the Distributor remains obligated to pay any rent
      and common area expenses under the November 2003 sublease in excess of the
      monthly rent paid by The Advantage Network, LLC.




F-49


On
      April
      21, 2006, Genius entered into a sublease agreement with World Trading Center,
      Inc., under which it subleased to World Trading Center, Inc. its leasehold
      interest in a warehouse facility (approximately 8,000 square feet) in Atlantic,
      Iowa. Genius’ rights under this sublease were assigned to the Distributor as
      part of the TWC Transaction. This sublease is for a term commencing April 21,
      2006 and continuing until June 30, 2007, and provides for monthly rent of $2,900
      for the duration of the term. Genius had previously subleased this warehouse
      space pursuant to a sublease agreement, dated December 31, 2003, with the Meader
      Family Trust, a related party at the time. Genius’ sublease with the Meader
      Family Trust provided for monthly rent of $2,900 and a term that expires in
      December 2007. Genius’ rights and obligations under this sublease were assigned
      to the Distributor as part of the TWC Transaction. The Distributor has been
      informed by the Meader Family Trust that it intends to terminate its sublease
      agreement with the Distributor effective as of July 1, 2007.





On
      March
      15, 2006, Genius entered into a lease agreement for a 17,400 square foot
      facility located in Santa Monica, California. This lease was assigned to the
      Distributor as part of the TWC Transaction. This facility has been used as
      Genius’, and the Distributor’s, principal executive offices. This lease is for a
      five-year term which commenced in March 2006. The Distributor has issued a
      letter of credit in the amount of $0.3 million to guarantee future lease
      payments due to the landlord of the Distributor's offices located at 2230
      Broadway in Santa Monica, California.  As of December 31, 2006, the letter
      of credit is collateralized by cash deposited with the bank that issued the
      letter of credit.  The cash that collateralizes the letter of credit is
      shown on the Distributor’s balance sheet as restricted cash.





On
      March
      22, 2005, as part of the acquisition of AVMC and Wellspring Media, Inc.
      (“Wellspring”), Genius assumed office space in New York on a month-to-month
      basis. Effective as of the closing of the TWC Transaction, the Distributor
      assumed all of Genius’ rights and obligations under the New York lease, and
      continues to occupy the New York space for monthly rent of $17,800.





On
      October 15, 2004, Genius entered into a sublease agreement for a 1,670 square
      foot facility located in Bentonville, Arkansas. This sublease has a term of
      5
      years and expires in October 2009. The monthly rent for this facility is $1,900
      with an annual increase of 3 percent. This sublease was assigned to the
      Distributor as part of the TWC Transaction.





As
      of
      December 31, 2006, future minimum annual commitments are as
      follows:




(In
                thousands)
              
              2007
              
              2008
              
              2009
              
              2010
              
              2011
              
              TotalLease
                  obligations
              
              $
              863
              
              $
              873
              
              $
              740
              
              $
              762
              
              $
              207
              
              $
              3,445Employment
                  agreements
              
              
              1,938
              
              
              1,783
              
              
              1,783
              
              
              1,194
              
              
              432
              
              
              7,130Consulting
                  agreements
              
              
              537
              
              
              138
              
              
              -
              
              
              -
              
              
              -
              
              
              675Royalty
                  advances
              
              
              29,137
              
              
              20,050
              
              
              8,200
              
              
              -
              
              
              -
              
              
              57,387Total
              
              $
              32,475
              
              $
              22,844
              
              $
              10,723
              
              $
              1,956
              
              $
              639
              
              $
              68,637


Except
      as
      described below, the Distributor is not a party to any legal or administrative
      proceedings, other than routine litigation incidental to the Distributor’s
      business that it does not believe, individually or in the aggregate, would
      be
      likely to have a material adverse effect on its financial condition or results
      of operations.





NEBG
      V.
      GENIUS ****





On
      December 11, 2006, NEBG, LLC, a national organization whose members are
      independent video retailers, Nolan Anaya, dba Captain Video, and Todd Zaganiacz,
      dba Video Zone (collectively, “Plaintiffs”), filed a complaint (the “Complaint”)
      in the Superior Court of Massachusetts naming TWC Holdings, Genius and the
      Distributor as defendants (collectively, “Defendants”). The Complaint alleged
      that Defendants, in connection with an exclusive revenue sharing agreement
      between TWC Holdings and Blockbuster for the rental of DVDs of TWC product
      (“TWC
      DVDs”), planned to include a message on such TWC DVDs urging consumers to call a
      toll-free number if they rented the TWC DVDs from Plaintiffs. The Complaint
      alleged that such a message would suggest that Plaintiffs were engaged in
      wrongdoing by renting such TWC DVDs to their customers, which would amount
      to
      false advertising and violate the First Sale Doctrine of the Copyright Act.
      The
      Complaint alleged Massachusetts state law counts of unfair competition, unfair
      or deceptive acts or practices, and untrue and misleading advertising, as well
      as counts of negligent misrepresentation and tortuous interference with
      advantageous business relationships, and requested that the court enjoin
      Defendants from distributing any TWC DVDs with the toll-free number
      message.




F-50


On
      January 4, 2007, Defendants removed the case to the U.S. District Court of
      Massachusetts. The court denied Plaintiffs’ motion for a temporary restraining
      order on January 5, 2007, and denied Plaintiffs’ motion for a preliminary
      injunction on January 18, 2007. Defendants filed a motion to dismiss the
      Complaint on February 2, 2007, and the court heard oral arguments on the motion
      on March 9, 2007. In the hearing, Plaintiffs conceded that there is nothing
      improper or misleading with respect to the message currently contained on TWC
      DVDs, “This DVD is intended for sale only”. The court focused on the issue of
      ripeness and questioned whether the Complaint states a cause of action given
      that the Defendants have not (and are not alleged to have) included a toll-free
      number message on any of the TWC DVDs. The court is considering the parties’
arguments, and Defendants are awaiting a ruling on the motion to
      dismiss.




Pursuant
      to the Distributor’s distribution agreements with certain of its content
      partners, the Distributor has agreed to either (i) provide a letter of credit
      to
      such content partners or (ii) fund and maintain an escrow account for the
      benefit of such content partners, in each case in order to ensure the
      satisfaction of the Distributor’s monetary obligations under the applicable
      distribution agreement.  The Distributor has not yet issued any such
      letters of credit or funded any such escrow accounts, but continues to exercise
      its distribution rights as set forth in all such agreements.  The aggregate
      amount of such commitments is approximately $21 million as of March 31,
      2007.





**NOTE
      J.MEMBERS'
      EQUITY**





*Units
      of Genius Products, LLC*





Effective
      July 22, 2006 and as of December 31, 2006, there are 18,301,538 Class G Units and 42,703,588 Class W Units of the Distributor issued
      and outstanding. The terms and conditions of the Class G Units and Class W
      Units
      are governed by the Amended and Restated Limited Liability Company Agreement
      of
      the Distributor dated July 21, 2006 (the “Distributor LLC Agreement”).





Under
      the
      Distributor LLC Agreement, Genius is obligated to contribute to the Distributor,
      as an additional capital contribution (or loan to the Distributor in the case
      of
      debt), the net proceeds received from any issuances by Genius of stock or
      securities convertible into or exchangeable for common stock, or upon the
      exercise, conversion or exchange of any convertible securities, or the
      sale
      of its property, incurrence of indebtedness, recapitalization or refinancing,
      or
      from any other capital raising transaction. However, the consideration received
      by Genius from the exercise of options, warrants or other convertible securities
      issued and outstanding as of July 21, 2006 (or any property acquired solely
      with
      such consideration) is not required to be contributed to the
      Distributor.





Under
      the
      Distributor LLC Agreement, no holder
      of
      Class G Units or Class W Units will be entitled to demand or receive a return
      of
      any capital contributions or otherwise withdraw from the Distributor without
      the
      consent of all members.





Under
      the
      Distributor LLC Agreement, if either the
      Distributor, TWC Holdings or certain affiliates of TWC Holdings pays, discharges
      or otherwise satisfies or assumes any liability or obligation for which it
      is
      entitled to indemnification from Genius pursuant to the Master Contribution
      Agreement dated December 5, 2005, as amended, the Distributor will redeem from
      Genius (without any further payment to Genius) a number of Class G Units, and
      issue to the holders of Class W Units (without any further payment by such
      holders) a number of additional Class W Units based on a formula set forth
      in
      the Distributor LLC Agreement (an “Indemnification Issuance”).





*Repurchase
      of Class W Units*





Under
      the
      Distributor LLC Agreement, if ,
      at any
      time prior to December 31, 2009:





(i)
      TWC
      terminates the Distribution Agreement between TWC and the Distributor (the
“TWC
      Distribution Agreement”) because the “Annual Video Ratio” is less than 60% or
      the “Semi-Annual Video Ratio” is less than 60% (as such terms are defined in the
      TWC Distribution Agreement) and the Annual Video Ratio or Semi-Annual Video
      Ratio, as applicable, giving rise to such termination is more than 50%, (as
      calculated pursuant to the terms of the TWC Distribution Agreement);
      or




F-51


(ii)
      TWC
      enters bankruptcy and does not (i) continue to substantially perform its
      obligations under the TWC Distribution Agreement, or (ii) provide for TWC’s
      obligations being assumed under the TWC Distribution Agreement by or through
      a
      successor, affiliate or other person; then,
      in
      either such case, the Distributor may repurchase from TWC
      Holdings and its
      first-tier subsidiary, W-G Holding Corp., a portion of the Class W Units owned
      by them as provided in the table below. The purchase price to be paid will
      be an
      amount equal to 75% of the cash amount that TWC Holdings and W-GHolding Corp.
      would receive upon a redemption of tendered units as described below under
      “Redemption Rights of Class W Units”, where the number of tendered units is
      equal to the number of Class W Units to be repurchased. The portion of Class
      W
      Units subject to the repurchase right during any calendar year will be
      determined as follows:




Year
                of Term
            Portion
                of Units
              Subject
                to Repurchase1/1/06
                - 12/31/06
            60%1/1/07
                - 12/31/07
            30%1/1/08
                - 12/31/08
            20%1/1/09
                - 12/31/09
            10%





If
      at any
      time prior to December 31, 2009, TWC terminates the TWC Distribution Agreement
      for the reasons described above and the Annual Video Ratio or Semi-Annual Video
      Ratio, as applicable, giving rise to such termination is less than 50% (as
      calculated pursuant to the terms of the TWC Distribution Agreement), then the
      Distributor will have no right to repurchase any portion of the Class W Units
      then held by TWC Holdings or W-G Holding Corp.





*Redemption
      Rights of Class W Units*





Each
      holder of Class W Units will have the right to require the Distributor to redeem
      all or a portion of the Class W Units held by it and not subject to a repurchase
      right by the Distributor under the provisions described above (the “Tendered
      Units”) in exchange (a “Redemption”) for a number of shares of Genius common
      stock equal to the number of Tendered Units, subject
      to adjustment for dividends, stock splits, reverse stock splits, distributions, Indemnification
      Issuances and
      certain other issuances by Genius. The
      Distributor may also deliver to the tendering party cash instead of shares,
      with
      a value based on the 30-day trailing volume weighted average price of Genius’
common stock.





*Limitation
      on the Authority of the Managing Member*





Genius
      is
      the managing member of the Distributor. However, Genius’ authority to operate
      the business and affairs of the Distributor is subject to certain limitations.
      For so long as TWC Holdings, W-G Holding Corp. and their transferees
      beneficially own units comprising at least 20% of the outstanding units of
      the
      Distributor, the managing member is not permitted to take certain actions on
      behalf of the Distributor (directly or through a subsidiary) without the prior
      approval of TWC Holdings, including without limitation the following: (i)
      creating or assuming any indebtedness or liability, or providing any indirect
      financial assistance, or assuming any mortgage, charge or other encumbrance
      on
      any property of the Distributor; (ii) selling, leasing, exchanging or disposing
      of, by any means, property or assets of the Distributor having a value in excess
      of $100,000; (iii) entering into or effecting any conversion, consolidation
      or
      merger involving the Distributor; (iv) taking any action to liquidate or
      dissolve the Distributor; (v) entering into, amending or waiving any contract
      with a member or with any party that is not at arm’s length; (vi) engaging,
      removing or replacing the Distributor’s independent auditors; (vii) guaranteeing
      the liabilities or debts of any other person than a subsidiary of the
      Distributor; (viii) requiring any guarantee from any member; (ix) declaring
      or
      making any distribution, including any distribution in-kind of securities or
      other non-cash assets; (x) issuing or granting any Class G Units, Class W Units
      or any other units, membership interests or economic interests in the
      Distributor (other than as provided in the Distributor LLC Agreement); (xi)
      utilizing sub-distributors, or licensees, or outsourcing any functions relating
      to the Distributor’s performance under the Distribution Agreement; (xii)
      appointing or removing the Distributor’s CEO, COO, CFO, or any other executive
      level officer or employee, or any other employee whose compensation is in excess
      of $150,000 per year; (xiii) approving the annual or quarterly budget for the
      Distributor, or varying more than 10% from the amount budgeted for any
      particular line item therein; (xiv) engaging in any debt or equity financing,
      refinancing, recapitalization or other capital raising transaction; (xv)
      approving or entering into any contracts, agreements, understandings or
      arrangements outside the ordinary course or providing for payments by or to
      the
      Distributor or obligations in excess of $100,000 per year; (xvi) commencing
      or
      settling any litigation; (xvii) licensing any item of product outside the
      ordinary course or on terms other than fair market value; (xviii) approving
      or
      adopting any material employee compensation plan or arrangement; (xix) creating
      any subsidiary or taking any of the actions described above with respect to
      any
      subsidiary. In addition, the Distributor generally must follow tax positions
      on
      its tax returns advocated by TWC Holdings.




F-52


*Allocation
      of Profits and Losses*





Profits
      and losses are allocated to the partners based upon their relative ownership
      of
      the Distributor.





**NOTE
      K.EMPLOYEE BENEFIT
      PLAN**





The
      Distributor sponsors a defined contribution plan (the “Plan”) under Section
      401(k) of the Internal Revenue Code, covering employees of the Distributor.
      Under the Plan, the Distributor may match contributions at the discretion of
      management. For the 163-day period ended December 31, 2006 the Distributor
      did
      not make any contributions to the Plan.





**NOTE
      L.RELATED-PARTY
      TRANSACTIONS**





SERVICES
      AGREEMENT





The
      Distributor provides certain services and pays certain direct costs, including
      filing fees, registration fees and audit fees, on behalf of Genius according
      to
      the terms of a services agreement. The Distributor incurred a total of $1.3
      million in corporate operating and payroll related expenses on behalf of Genius
      during the 163-day period ended December 31, 2006. Such amounts were reflected
      as a distribution to members in the accompanying financial statements.





TWC
      DISTRIBUTION AGREEMENT





On
      July
      17, 2006, the Distributor entered into a Distribution Agreement with TWC (the
      “TWC Distribution Agreement”), an affiliate of TWC Holdings and W-G Holding
      Corp., holders of the Distributor’s Series W Preferred Stock. Pursuant to the
      TWC Distribution Agreement, TWC granted to the Distributor the right to
      distribute, advertise, publicize, promote and market DVDs of motion pictures
      owned or released by TWC for an initial term of approximately five years,
      subject to early termination provisions described in the TWC Distribution
      Agreement. Under the TWC Distribution Agreement, after deducting permitted
      amounts from gross receipts for return reserves, the Distributor’s distribution
      fee and the Distributor’s reimbursable expenses, the Distributor is required to
      pay to TWC a portion of the net receipts from the sale of any such DVDs. As
      of
      March 31, 2007, the Distributor has paid to TWC an aggregate of $82.8 million
      in
      respect of such net receipts.





BANNON
      CONSULTING AGREEMENT




Stephen
      K. Bannon is the chairman of Genius’ Board of Directors. Mr. Bannon is also a
      principal with Bannon Strategic Advisors, Inc. (“Bannon Strategic Advisors”). On
      July 20, 2006, Genius and Bannon Strategic Advisors entered into a consulting
      agreement (the “Consulting Agreement”), pursuant to which Bannon Strategic
      Advisors has provided Genius with consulting and advisory services. Pursuant
      to
      the Consulting Agreement, Genius agreed to pay to Bannon Strategic Advisors
      a
      monthly consulting fee of $20,833 for a term of two years (i.e., an aggregate
      of
      $500,000) and reimburse Mr. Bannon for expenses incurred in connection with
      services provided to Genius. The Consulting Agreement was approved by the Board
      of Directors, with Mr. Bannon abstaining from the vote. On July 21, 2006, the
      rights and obligations of Genius pursuant to the Consulting Agreement were
      assigned to the Distributor. On January 2, 2007, the Distributor paid to Bannon
      Strategic Advisors a bonus of $200,000 for services rendered in 2006, and an
      additional bonus of $25,000 on March 13, 2007. These bonuses were approved
      by
      the compensation committee of Genius’ Board of Directors. Through March 31,
      2007, Genius and the Distributor in aggregate have paid Bannon Strategic
      Advisors $454,679 in respect of consulting fees and reimbursement of expenses
      incurred pursuant to the Consulting Agreement.




BRANDISSIMO!
      AGREEMENT





On
      November 1, 2005, Genius entered into an agreement with Brandissimo! Inc.
      (“Brandissimo”), a company which was formerly co-owned by
      Trevor Drinkwater, Genius’ President and a Director, and is currently
      co-owned by David Snyder, a former officer of Genius. Under this agreement,
      Genius was granted an exclusive “first look” at all Brandissimo-owned or
      controlled children’s projects to be produced for videogram distribution.
      Pursuant to the agreement, Genius is the exclusive videogram distributor for
      all
      Brandissimo-owned or controlled children’s projects produced or otherwise
      presented to us **.** Brandissimo
      will render production services for any and all children’s projects which Genius
      finances and produce during the term of the agreement. Over the course of the
      term, Genius will pay to Brandissimo a $0.1 million non-refundable,
      non-recoupable overhead fee. Under the agreement, Genius is entitled to receive
      a distribution fee ranging from 12% to 20% of gross receipts, depending on
      the
      products being distributed. All of Genius’ rights and obligations under this
      agreement were assigned to the Distributor in connection with the TWC
      Transaction.




F-53




FACILITY
      LEASES




From
      December 31, 2003 through April 21, 2006, Genius leased warehouse space in
      Atlantic, Iowa from the Meader Family Trust, which is affiliated with Michael
      Meader, formerly Genius’ President. Genius’ lease with the Meader Family Trust
      provided for monthly rent of $2,900 and a term that expires in December 2007.
      On
      April 21, 2006, Genius entered into a sublease agreement with World Trading
      Center, Inc., under which Genius subleased to World Trading Center, Inc. its
      leasehold interest in the warehouse facility. This sublease is for a term
      commencing April 21, 2006 and continuing until June 30, 2007, and provides
      for
      monthly rent of $2,900 for the duration of the term. Genius’ rights and
      obligations under its lease with the Meader Family Trust and its sublease with
      World Trading Center, Inc. were assigned to the Distributor as part of the
      TWC
      Transaction. Lease payments under Genius’ lease with the Meader Family Trust for
      the 202-day period ended July 21, 2006 were $20,300. Lease payments were $34,800
      and $34,800 in 2005 and 2004, respectively. The Distributor has been informed
      by
      the Meader Family Trust that it intends to terminate its sublease agreement
      with
      the Distributor effective as of July 1, 2007.





EMPLOYMENT
      AGREEMENTS





On
      December 5, 2005, Genius entered into an amendment to the employment agreement
      with its President and Chief Executive Officer, Trevor Drinkwater, dated
      December 5, 2005 (the “First Amendment”). The effectiveness of the First
      Amendment was conditioned upon the closing of the TWC Transaction, which
      occurred on July 21, 2006. Prior to the effectiveness of the First Amendment,
      Genius agreed to pay Mr. Drinkwater the annual base compensation that would
      otherwise be payable during the first year following the closing of the TWC
      Transaction pursuant to the terms of the First Amendment (the “Annual Base
      Compensation”).





On
      July
      20, 2006, Genius entered into a second amendment to the employment agreement
      with Mr. Drinkwater (the “Second Amendment”) pursuant to which Genius agreed to
      pay Mr. Drinkwater, effective as of June 1, 2006, at a rate equal to the Annual
      Base Compensation. Upon the closing of the TWC Transaction on July 21, 2006,
      the
      First Amendment became effective and Mr. Drinkwater’s compensation shall be
      determined in accordance with the terms thereunder. On July 21, 2006, the rights
      and obligations under the terms of the Employment Agreement were assigned to
      the
      Distributor.





On
      December 5, 2005, Genius also entered into amendments to the employment
      agreements of each of (i) Rodney Satterwhite, Genius’ Chief Operating Officer,
      (ii) Michael Radiloff, Genius’ Executive Vice President of Marketing and (iii)
      Mitch Budin, Genius’ Executive Vice President of Sales. The effectiveness of
      each of such amendment was conditioned on the closing of the TWC Transaction,
      which occurred on July 21, 2006. Pursuant to such amendments, the employment
      agreement of each of Mr. Satterwhite, Mr. Radiloff and Mr. Budin was amended
      to
      provide for a two year term, with a one-year extension at the option of Genius
      and to grant to each such employee additional stock options to acquire 75,000
      shares of Genius’ common stock, vesting in equal installments over five years.
      On July 21, 2006, the rights and obligations under the terms of each of these
      employment agreements were assigned to the Distributor.





**NOTE
      M.SUBSEQUENT
      EVENTS**




On
      February 20, 2007, the Distributor entered into a multi-year agreement with
      Sesame Workshop *®* of New
      York to be the exclusive
      North American home entertainment distributor of Sesame Workshop's library
      of
      more than 100 titles. Included are Sesame Street, Sesame Beginnings, and Elmo's
      World. The agreement also includes Pinky Dinky Doo, which premiered in April
      2006. The Distributor will maintain home video and certain digital distribution
      rights for the term of the agreement. The transaction will automatically
      increase the Distributor’s library by over 100 titles and further solidifies its
      emerging role as leaders in the growing family market.




F-54




**NOTE
      N.VALUATION AND
      QUALIFYING ACCOUNTS**




Allowances
      are deducted from the assets to which they apply, except for sales returns
      and
      allowances.


(In
                thousands)
            
            Balance
                at
            
            Charged
                to
            
            Charged
                toBeginning
                of
            
            costs
                and
            
            Other
            
            
            
            Balance
                at EndPeriod
                (a)
            
            expenses
            
            Accounts
            
            Deductions
            
            of
                PeriodPeriod
                from July 22, 2006 through December 31, 2006Uncollectible
                accounts
            
            $
            1,238
            
            $
            2,205
            
            $
            -
            
            $
            (480
            )
            $
            2,963Reserve
                for inventory obsolescence
            
            
            6,223
            
            
            6,266
            
            
            -
            
            
            (2,002
            )
            
            10,487Reserve
                for sales returns and allowances
            
            
            23,094
            
            
            52,851
            
            
            -
            
            
            (33,888
            )
            
            42,057Reserve
                for uncollectable advances
            
            
            2,202
            
            
            855
            
            
            -
            
            
            -
            
            
            3,057$
            32,757
            
            $
            62,177
            
            $
            -
            
            $
            (36,370
            )
            $
            58,564






(a)
      The
      beginning of the period is July 22, 2006 when the balances for these allowances
      were transferred from Genius Products, Inc. to Genius Products,
      LLC.











F-55