**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**









**FORM
      10-Q**







(Mark
      One)




**x**
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**




For
      the
      quarterly period ended June 30, 2006




** ̈**
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                ACT**




For
      the
      transition period from  to




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)**
            **(IRS
                Employer**
              **Identification
                No.)**




**2230
      BROADWAY**


**SANTA
      MONICA, CA 90404**


**(Address
      of principal executive offices)**




**(310)
      453-1222**


**(Registrant’s
      telephone number)**




**740
      LOMAS SANTA FE DRIVE, SUITE 210**


SOLANA
      BEACH, CA 92075


**(Former
      name, former address and former fiscal year,**


**if
      changed since last report)**




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




Indicate
      by check mark 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.




Large
      accelerated filer  ̈ an accelerated filer  ̈ or
      a non-accelerated filer x




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




There
      were 61,002,626 shares outstanding of the issuer’s Common Stock as of June 30,
      2006.















**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**




**INDEX**





**PAGE****PART I**
            **FINANCIAL
                INFORMATION**Item 1
            Financial
                StatementsConsolidated
                Balance Sheets at June 30, 2006 (unaudited)
                and December 31, 2005 (audited)
            4Consolidated
                Statements of Operations for the Three and
                Six Months Ended June 30, 2005 and 2006 (unaudited)
            5Consolidated
                Statements of Cash Flow for the Six Months
                Ended June 30, 2005 and 2006 (unaudited)
            6Notes
                to Consolidated Financial Statements
                (unaudited)
            7Item 2
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            19Item 3
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            28Item 4
            Controls
                and Procedures
            28**PART II**
            **OTHER
                INFORMATION**Item 1
            Legal
                Proceedings
            28Item 1a
            Risk
                Factors
            29Item 2
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            29Item 3
            Defaults
                Upon Senior Securities
            29Item 4
            Submission
                of Matters to a Vote of Security
                Holders
            29Item 5
            Other
                Information
            29Item 6
            Exhibits
            29**SIGNATURES**
            30




**FORWARD-LOOKING
      STATEMENTS**




This
      report includes forward-looking statements within the meaning of the Private
      Securities Litigation Reform Act of 1995 relating to, among other things, our
      goals, plans and projections regarding our financial position, results of
      operations, market position, product development and business strategy. These
      statements may be identified by the use of words such as “will,” “may,”
“estimate,” “expect,” “intend,” “plan,” “believe,” “should”, “would”, “could” or
      the negative of these terms and other terms of similar meaning in connection
      with any discussion of future operating or financial performance. All
      forward-looking statements are based on our current views with respect to future
      events, are based on assumptions and involve inherent risks and uncertainties,
      including factors that could delay, divert or change any of them, and could
      cause actual outcomes and results to differ materially from current
      expectations.





These
      factors include, among other things, increased competitive pressures, including
      the rise of emerging distribution channels, the risk that The Weinstein Company
      could terminate Genius Products, LLC’s exclusive distribution rights, the
      anticipated timing and financial performance of new DVD releases
      including *,
      Scary Movie 4, Lucky Number Slevin, Pulse*and*Clerks
      II* ****** and
      changes in the retail DVD and entertainment industries. Also, these
      forward-looking statements present our estimates and assumptions only as of
      the
      date of this report. For further details and a discussion of these and other
      risks and uncertainties, see “Forward-Looking Statements” and “Risk Factors” in
      our most recent Annual Report on Form 10-K. Unless otherwise required by law,
      we
      undertake no obligation to publicly update any forward-looking statement,
      whether as a result of new information, future events or otherwise.




2


**PART
      I - FINANCIAL INFORMATION**




**ITEM 1.**  **FINANCIAL
      STATEMENTS**








3


**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**




December
                  31, 2005
              
              June
                  30, 2006**ASSETS**
              
              
              
              
              
              (unaudited)Current
                assets:Cash
                  and cash equivalents
              
              
              
              
              $
              30,597,164
              
              $
              43,489,769Accounts
                  receivable, net of allowance for doubtful accounts of
                  $942,361(June
                  30, 2006 - $1,238,061) and sales
                  returns of $5,966,428 (June
                  30, 2006 - $19,658,690)
              
              
              
              
              
              2,406,658
              
              
              48,457,391Inventories,
                  net
              
              
              
              
              
              5,567,953
              
              
              18,564,106Prepaid
                  expenses
              
              
              
              
              
              703,875
              
              
              446,718Notes
                  receivable, related party
              
              
              
              
              
              750,000
              
              
              -Total
                  current assets
              
              
              
              
              
              40,025,650
              
              
              110,957,984Restricted
                  cash
              
              
              
              
              
              -
              
              
              303,353Property
                  and equipment, net
              
              
              
              
              
              396,358
              
              
              736,434Film
                  library, net of accumulated amortization of $4,027,308 and
                  $4,850,312
              
              
              
              
              
              19,727,179
              
              
              22,926,070Notes
                  receivable, related party
              
              
              
              
              
              1,712,353
              
              
              1,712,353Goodwill
              
              
              
              
              
              14,487,917
              
              
              14,487,917Deposits
                  and other
              
              
              
              
              
              15,545
              
              
              206,583Total
                  assets
              
              
              
              
              $
              76,365,002
              
              $
              151,330,694**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              
              
              
              $
              9,242,560
              
              $
              7,591,524Notes
                  payable
              
              
              
              
              
              5,379,296
              
              
              200,000Remittance
                  due to Licensor
              
              
              
              
              
              -
              
              
              61,674,457Accrued
                  expenses
              
              
              
              
              
              3,307,893
              
              
              20,346,505Deferred
                  revenue
              
              
              
              
              
              -
              
              
              10,549,480Customer
                  deposits
              
              
              
              
              
              189,423
              
              
              189,423Debentures
                  payable
              
              
              
              
              
              50,750
              
              
              -Redeemable
                  common stock
              
              
              
              
              
              414,471
              
              
              424,121Total
                  current liabilities
              
              
              
              
              
              18,584,393
              
              
              100,975,510Deferred
                  tax liability
              
              
              
              
              
              1,380,338
              
              
              1,380,338Deferred
                  gain, related party
              
              
              
              
              
              1,212,353
              
              
              1,148,907Total
                  liabilities
              
              
              
              
              
              21,177,084
              
              
              103,504,755Commitments
                  and contingenciesStockholders’
                  equity:Preferred
                  stock, $.0001 par value; 10,000,000 shares authorized; no
                  sharesoutstanding
              
              
              
              
              
              -
              
              
              -Common
                  stock, $.0001 par value; 100,000,000 shares authorized;60,438,154
                  and 61,002,626 shares outstanding
              
              
              
              
              
              6,044
              
              
              6,100Additional
                  paid-in capital
              
              
              
              
              
              93,919,755
              
              
              96,211,014Accumulated
                  deficit
              
              
              
              
              
              (38,737,881
              )
              
              (48,391,175
              )Total
                  stockholders’ equity
              
              
              
              
              
              55,187,918
              
              
              47,825,939Total
                  liabilities and stockholders' equity
              
              
              
              
              $
              76,365,002
              
              $
              151,330,694




See
      accompanying notes to unaudited interim financial statements


4


**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,Restated
                  2005 (Note 2)
              
              2006
              
              Restated
                  2005 (Note 2)
              
              2006Revenues:Video
                  and DVD
              
              
              
              
              $
              3,797,130
              
              $
              101,925,551
              
              $
              5,216,392
              
              $
              138,132,136Theatrical
              
              
              
              
              
              467,469
              
              
              138,291
              
              
              467,469
              
              
              208,726Audio
              
              
              
              
              
              494,707
              
              
              244,501
              
              
              1,815,517
              
              
              1,021,055Royalties,
                  licensing and other
              
              
              
              
              
              429,803
              
              
              53,877
              
              
              454,921
              
              
              426,938Gross
                  revenues
              
              
              
              
              
              5,189,109
              
              
              102,362,220
              
              
              7,954,299
              
              
              139,788,855Sales
                  returns, discounts and allowances
              
              
              
              
              
              (1,276,659
              )
              
              (27,349,625
              )
              
              (1,485,963
              )
              
              (36,192,933
              )Net
                  revenues
              
              
              
              
              
              3,912,450
              
              
              75,012,595
              
              
              6,468,336
              
              
              103,595,922Costs
                  and expensesCost
                  of revenues:Video
                  and DVD
              
              
              
              
              
              2,751,420
              
              
              59,518,611
              
              
              4,383,583
              
              
              81,563,243Theatrical
              
              
              
              
              
              1,155,663
              
              
              -
              
              
              1,155,663
              
              
              103,705Audio
              
              
              
              
              
              699,600
              
              
              181,123
              
              
              1,490,400
              
              
              776,044Amortization
                  of production masters and film library
              
              
              
              
              
              1,036,801
              
              
              428,623
              
              
              1,209,471
              
              
              739,712Warehouse
                  expense and other
              
              
              
              
              
              -
              
              
              78,844
              
              
              71,168
              
              
              205,003Total
                  cost of revenues
              
              
              
              
              
              5,643,484
              
              
              60,207,201
              
              
              8,310,285
              
              
              83,387,707Gross
                  profit (loss)
              
              
              
              
              
              (1,731,034
              )
              
              14,805,394
              
              
              (1,841,949
              )
              
              20,208,215Operating
                  expenses (income):Product
                  development
              
              
              
              
              
              216,839
              
              
              504,471
              
              
              444,153
              
              
              1,251,348Sales
                  and marketing
              
              
              
              
              
              631,194
              
              
              11,025,945
              
              
              1,077,685
              
              
              16,548,664General
                  and administrative
              
              
              
              
              
              2,632,162
              
              
              7,400,260
              
              
              4,073,125
              
              
              12,295,355Gain
                  on sale, related party
              
              
              
              
              
              -
              
              
              (23,179
              )
              
              -
              
              
              (63,446
              )Total
                  operating expenses
              
              
              
              
              
              3,480,195
              
              
              18,907,497
              
              
              5,594,963
              
              
              30,031,921Loss
                  from operations
              
              
              
              
              
              (5,211,229
              )
              
              (4,102,103
              )
              
              (7,436,912
              )
              
              (9,823,706
              )Interest
                  expense
              
              
              
              
              
              (76,948
              )
              
              (8,315
              )
              
              (82,788
              )
              
              (163,976
              )Interest
                  income and other
              
              
              
              
              
              -
              
              
              237,887
              
              
              -
              
              
              441,388Loss
                  before provision for income taxes
              
              
              
              
              
              (5,288,177
              )
              
              (3,872,531
              )
              
              (7,519,700
              )
              
              (9,546,294
              )Provision
                  for income taxes
              
              
              
              
              
              8,175
              
              
              107,000
              
              
              8,975
              
              
              107,000Net
                  loss
              
              
              
              
              $
              (5,296,352
              )
              $
              (3,979,531
              )
              $
              (7,528,675
              )
              $
              (9,653,294
              )Basic
                  and diluted net loss per share
              
              
              
              
              $
              (0.13
              )
              $
              (0.07
              )
              $
              (0.22
              )
              $
              (0.16
              )Basic
                  and diluted weighted average shares
              
              
              
              
              
              41,754,657
              
              
              60,797,241
              
              
              34,915,329
              
              
              60,636,798




See
      accompanying notes to unaudited interim financial statements


5


**GENIUS
        PRODUCTS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**




Six
                  Months Ended June,2005
                  Restated
                (Note
                  2)
              
              2006Cash
                  flows from operating activities:Net
                  loss
              
              $
              (7,528,675
              )
              $
              (9,653,294
              )Adjustments
                  to reconcile net loss to net cash provided by(used
                  in) operating activities:Depreciation
                  and amortization
              
              
              248,047
              
              
              105,770Amortization
                  of production masters and film library
              
              
              1,145,924
              
              
              823,003Change
                  in allowance for doubtful accounts and provision for
                  returns
              
              
              (466,406
              )
              
              13,987,962Change
                  in provision for obsolete inventory
              
              
              -
              
              
              (680,774
              )Common
                  stock issued for services
              
              
              82,500
              
              
              19,100Amortization
                  of warrants issued for services
              
              
              149,295
              
              
              -Stock
                  compensation expense
              
              
              -
              
              
              1,758,666Debt
                  discounts
              
              
              -
              
              
              120,704Interest
                  expense on redeemable common stock
              
              
              9,650
              
              
              9,650*Changes
                  in assets and liabilities:*(Increase)
                  decrease in accounts receivable
              
              
              2,374,880
              
              
              (60,038,695
              )(Increase)
                  decrease in inventories
              
              
              (989,357
              )
              
              (12,315,379
              )(Increase)
                  decrease in prepaid expenses, notes receivable and
                  deposits
              
              
              (462,276
              )
              
              816,119(Increase)
                  decrease in development film library
              
              
              (2,420,745
              )
              
              (4,021,894
              )Increase
                  (decrease) in accounts payable
              
              
              (4,342,106
              )
              
              (1,651,036
              )Increase
                  (decrease) in accrued expenses and other
              
              
              19,914
              
              
              17,038,612Increase
                  (decrease) in deferred revenue
              
              
              -
              
              
              10,549,480Increase
                  (decrease) in remittance to licensor
              
              
              -
              
              
              61,674,457Increase
                  (decrease) in debentures payable
              
              
              -
              
              
              (50,750
              )Increase
                  (decrease) in deferred gain, related party
              
              
              -
              
              
              (63,446
              )Net
                  cash provided by (used in) operating activities
              
              
              (12,179,355
              )
              
              18,428,255Cash
                  flows from investing activities:AVM
                  cash, net of expenses paid in cash
              
              
              (300,000
              )
              
              -Restricted
                  cash
              
              
              -
              
              
              (303,353
              )Purchase
                  of property and equipment
              
              
              (50,492
              )
              
              (445,847
              )Net
                  cash used in investing activities
              
              
              (350,492
              )
              
              (749,200
              )Cash
                  flows from financing activities:Payments
                  on notes payable
              
              
              -
              
              
              (5,300,000
              )Payments
                  on short-term debt
              
              
              (2,349,219
              )
              
              -Payments
                  of offering costs
              
              
              (834,391
              )
              
              -Proceeds
                  from exercise of options
              
              
              91,140
              
              
              355,250Proceeds
                  from exercise of warrants
              
              
              707,560
              
              
              158,300Proceeds
                  from issuance of common stock
              
              
              15,313,423
              
              
              -Net
                  cash provided by (used in) financing activities
              
              
              12,928,513
              
              
              (4,786,450
              )Net
                  increase (decrease) in cash and equivalents
              
              
              398,666
              
              
              12,892,605Cash
                  at beginning of period
              
              
              1,223,881
              
              
              30,597,164Cash
                  at end of period
              
              $
              1,622,547
              
              $
              43,489,769Supplemental
                  disclosure of cash flow informationWarrants
                  issued for offering costs
              
              $
              1,014,986
              
              $
              -Issuance
                  of common stock for offering costs
              
              $
              350,000
              
              $
              -Interest
                  paid
              
              $
              1,015
              
              $
              74,060Taxes
                  paid
              
              $
              800
              
              $
              -




See
      accompanying notes to unaudited interim financial statements


6


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**




**NOTE
      1. NATURE OF BUSINESS.**  Genius
      Products, Inc. (OTC BB:GNPI), ("we", "our", or the "Company") along with The
      Weinstein Company, jointly own Genius Products, LLC, a leading independent
      home-entertainment distribution company that produces, licenses, and distributes
      an expanding library of motion pictures, television programming, family,
      lifestyle and trend entertainment on DVD and other emerging platforms through
      its network of retailers throughout the U.S.  Genius handles the
      distribution, marketing and sales for such brands as Asia Extreme(TM), Baby
      Genius®, Dimension Films, Dragon Dynasty(TM), ESPN®, IFC®, NBC News®, Sundance
      Channel Home Entertainment®, Wellspring(TM) and The Weinstein
      Company®.




THE
      WEINSTEIN COMPANY TRANSACTION. On July 21, 2006, we completed our pending
      strategic transaction with The Weinstein Company LLC (“TWC”) and formed a
      venture named Genius Products, LLC (the “Distributor”) to exploit the exclusive
      U.S. home video distribution rights to feature film and direct-to-video releases
      owned or controlled by TWC (the “Closing”). The transaction closed following a
      Special Meeting of Stockholders of the Company to approve the transaction and
      related matters. Under the terms of the transaction, Genius Products, Inc.
      contributed substantially all of its assets, employees and existing businesses
      to Genius Products, LLC, which holds the exclusive U.S. home video distribution
      rights for filmed entertainment and direct-to-video product of TWC. The new
      venture also operates the existing businesses of Genius Products, Inc., that
      involve the marketing, sales and distribution for other major branded
      entertainment content, including ESPN, NBC News, Sundance Home Entertainment,
      Asia Extreme, Dragon Dynasty and IFC. Genius Products, LLC is owned 70% by
      TWC
      and 30% by Genius Products, Inc. In addition, as part of the transaction with
      TWC, Genius Products, Inc. added to its Board of Directors two TWC executives,
      Larry Madden, Executive Vice President and Chief Financial Officer, and Irwin
      Reiter, Executive Vice President of Accounting and Financial Reporting.





The
      Company’s interest in the Distributor consists of Class G Units representing a
      30% membership interest in the Distributor, and the interest of TWC or its
      owners consist of Class W Units representing a 70% membership interest in the
      Distributor. The 70% interest in the Distributor held by TWC or its owners
      is
      redeemable, at their option at any time from one year after the Closing, for
      up
      to 70% of the outstanding common stock of Genius Products, or with their
      approval, cash. As further discussed in Note 8, commencing on December 5,
      2005, the date we entered into a Master Contribution Agreement (the “Agreement”)
      in connection with the formation of a new venture to exploit the exclusive
      U.S.
      home video distribution rights to feature film and direct-to-video releases
      owned or controlled by TWC, 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 14
      for
      additional discussion regarding this transaction.




BASIS
      OF
      PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




The
      accompanying consolidated financial statements as of and for the three and
      six
      months ended June 30, 2006 and 2005 have been prepared by the Company and are
      unaudited. The consolidated financial statements have been prepared in
      accordance with generally accepted accounting principles, pursuant to the rules
      and regulations of the Securities and Exchange Commission. In the opinion of
      management, the accompanying consolidated financial statements include all
      adjustments of a normal recurring nature that are necessary for a fair
      presentation of the results of operations and cash flows for the interim periods
      presented. Certain information and footnote disclosures normally included in
      financial statements have been condensed or omitted pursuant to such rules
      and
      regulations.




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United
      States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from those
      estimates. Although the Company believes that the disclosures are adequate
      to
      make the information presented not misleading, it is suggested that these
      interim consolidated financial statements be read in conjunction with the
      consolidated financial statements and the notes thereto included in the
      Company’s Form 10-K for the year ended December 31, 2005. Amounts related to
      disclosures of December 31, 2005 balances within these interim statements were
      derived from the aforementioned Form 10-K. The results of operations for the
      three and six months ended June 30, 2006 are not necessarily indicative of
      the
      results to be expected for the full year.




CONCENTRATIONS
        OF CREDIT RISK. For the three month period ended June 30, 2006, Wal-Mart
        accounted for 44.0% of net revenues. At June 30, 2006 this customer comprised
        23.7% of the accounts receivable before allowances. For the three month period
        ended June 30, 2005, Dollar Tree accounted for 11% of net revenues. For the
        three month period ended June 30, 2006, this customer accounted for less
        than 1%
        of net revenues. At June 30, 2005, this customer comprised 11.6% of the accounts
        receivable before allowances.
  For
        the
        six month period ended June 30, 2006, Wal-Mart and Blockbuster accounted
        for
        39.2% and 10.2%, respectively, of net revenues. For the six month period
        ended
        June 30, 2005, Anderson Merchandisers accounted for 13% of net revenues.
        For the
        six month period ended June 30, 2006, this customer accounted for less than
        1%
        of net revenues.






7




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.




STOCK-BASED
      COMPENSATION. In December 2004, the Financial Accounting Standards Board
      (FASB) revised Statement of Financial Accounting Standards No. 123
      (FAS 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 FAS 123R became effective for the Company beginning
      on January 1, 2006.




Under
      FAS
      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 FAS
      123R using a modified prospective application. The valuation provisions of
      FAS
      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 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 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 123. 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 FAS 123R.




INCOME
        TAXES. For the three and six months ended June 30, 2006, Company recognized
        a
        tax benefit of approximately $0.9 million and $3.7 million, respectively,
        which
        was fully offset by a valuation allowance. Except for $107,000 of alternative
        minimum taxes, the Company did not record any tax expense after considering
        the
        full year expected results and the likelihood of recoverability of deferred
        tax
        assets. Management will continue to monitor the future recoverability of
        the tax
        assets which have a full valuation allowance as of June 30, 2006.
  RECLASSIFICATIONS.
        Certain prior period amounts have been reclassified to conform to current
        period
        presentation.




REVENUE
      RECOGNITION. Revenue from the sale or licensing of films is recognized upon
      meeting all recognition requirements of SOP 00-2. 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. The allowance for returns
      calculation is based upon an analysis of historical customer and product returns
      performance as well as current customer inventory data as available. Updates
      to
      the returns calculation are performed quarterly. 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.




ACCOUNTING
      CHANGES. In May 2005, the FASB issued Statement of Financial Accounting
      Standards (“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”. 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 quarter ended
      June 30, 2006.




8




HYBRID
          FINANCIAL INSTRUMENTS. In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments”, which amends SFAS
          No. 133, “Accounting for Derivatives Instruments and Hedging Activities”
and SFAS No. 140, “Accounting for Transfers and Servicing of Financial
          Assets and Extinguishment of Liabilities”. 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 principle 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.
  UNCERTAINTY
        IN INCOME TAXES. 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.





**NOTE
      2: RESTATEMENT OF QUARTER ENDED JUNE 30, 2005**




The
        Company determined that it was necessary to restate our unaudited consolidated
        financial statements and other financial information at and for the quarter
        ended, June 30, 2005. The restatement relates to the following correction
        of errors:




1. The
      Company revised royalty revenue to increase the amount recognized during the
      three months ended June 30, 2005. The total adjustment required to increase
      revenue to its proper amount was $90,000 for the three months ended
      June 30, 2005. On May 2, 2005 the Company completed a sale of a title
      in its film library to a third-party licensee. At the time of the sale the
      rights to this title were not available and, therefore, the Company recorded
      the
      sale as unearned revenue. When the rights to these titles became available
      during the three months ended June 30, 2005, the Company did not recognize
      the revenue from the sale. The correct accounting treatment is to recognize
      the
      revenue when the rights become available.




2.
      The
      Company revised royalty expense to increase the amount recognized during the
      three month period ended June 30. The total adjustments required to
      increase royalty expense to its proper amount was $416,148 for the three month
      period ended June 30, 2005. This adjustment was necessary because the
      Company had recorded this amount as an asset as of June 30, 2005. The
      correct accounting treatment is to record this amount as royalties expense
      during the three month period ended June 30, 2005.





3.
      The
      Company revised production cost amortization expense to increase the amount
      recognized during the three month period ended June 30, 2005. The total
      adjustment required to increase production costs amortization expense to its
      proper amount was $63,547 for the three month period ended June 30, 2005.
      This adjustment was necessary because the Company had recorded this amount
      as an
      asset as of June 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 June 30, 2005.




9


The
        effects of the restatement on net revenues, cost of revenues, gross profit,
        net
        loss, basic and diluted loss per common share, production masters, film library,
        accrued expenses, and stockholders’ equity as of and for the three and six
        months ended June 30, 2005 are as follows:




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
              
              $
              3,822,450
              
              $
              90,000
              
              $
              3,912,450
              
              $
              6,378,336
              
              $
              90,000
              
              $
              6,468,336Cost
                  of revenues
              
              
              5,163,789
              
              
              479,695
              
              
              5,643,484
              
              
              7,830,590
              
              
              479,695
              
              
              8,310,285Gross
                  profit
              
              
              (1,341,339
              )
              
              (389,695
              )
              
              (1,731,034
              )
              
              (1,452,254
              )
              
              (389,695
              )
              
              (1,841,949
              )Net
                  loss
              
              $
              (4,906,657
              )
              $
              (389,695
              )
              $
              (5,296,352
              )
              $
              (7,138,980
              )
              $
              (389,695
              )
              $
              (7,528,675
              )Loss
                  per common share:Basic
                  and diluted
              
              $
              (0.12
              )
              $
              (0.01
              )
              $
              (0.13
              )
              $
              (0.17
              )
              $
              (0.01
              )
              $
              (0.18
              )Production
                  masters
              
              $
              3,456,267
              
              $
              (63,547
              )
              $
              3,392,720
              
              $
              3,456,267
              
              $
              (63,547
              )
              $
              3,392,720Film
                  library
              
              
              16,095,700
              
              
              (416,148
              )
              
              15,679,552
              
              
              16,095,700
              
              
              (416,148
              )
              
              15,679,552Total
                  assets
              
              
              46,981,069
              
              
              (479,695
              )
              
              46,501,374
              
              
              46,981,069
              
              
              (479,695
              )
              
              46,501,374Accrued
                  expenses
              
              
              1,595,815
              
              
              (90,000
              )
              
              1,505,815
              
              
              1,595,815
              
              
              (90,000
              )
              
              1,505,815Total
                  current liabilities
              
              
              15,255,350
              
              
              (90,000
              )
              
              15,165,350
              
              
              15,255,350
              
              
              (90,000
              )
              
              15,165,350Stockholders'
                  equity
              
              $
              31,725,719
              
              $
              (389,695
              )
              $
              31,336,024
              
              $
              31,725,719
              
              $
              (389,695
              )
              $
              31,336,024




**NOTE
      3. RESTRICTED CASH**




Restricted
      cash of $0.3 million at June 30, 2006 represents cash invested in certificates
      of deposit to collateralize a letter of credit issued to a landlord for an
      office lease.




**NOTE
      4. INVENTORY**




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


December
                  31,
                2005
              
              June
                  30,
                2006Raw
                  materials
              
              $
              71,085
              
              $
              106,670Finished
                  goods
              
              
              7,798,303
              
              
              20,078,0977,869,388
              
              
              20,184,767Allowance
                  for obsolescence
              
              
              (2,301,435
              )
              
              (1,620,661
              )Inventories,
                  net
              
              $
              5,567,953
              
              $
              18,564,106




**NOTE
      5. 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.




10


December
                  31, 2005
              
              June
                  30, 2006
              
              Useful
                  livesComputers
                  and equipment
              
              $
              711,646
              
              $
              1,095,827
              
              
              3-5
                  yearsFurniture
                  and fixtures
              
              
              35,445
              
              
              37,900
              
              
              3-7
                  yearsLeasehold
                  improvements
              
              
              22,365
              
              
              22,365
              
              
              Lesser
                  of lease term or
                useful
                  lifeTools
                  and dies
              
              
              -
              
              
              54,141
              
              
              3
                  years769,456
              
              
              1,210,233Accumulated
                  depreciation and amortization
              
              
              (373,098
              )
              
              (473,799
              )Property
                  and equipment, net
              
              $
              396,358
              
              $
              736,434




Depreciation
      expense for the six months ended June 30, 2006 and June 30, 2005 was $105,770
      and $80,776, respectively.





**NOTE
      6. INVESTMENT IN FILMS AND VIDEO**




Following
      are the components of our Production Masters and Film Library
      balances:


December
                  31,
                2005
              
              June
                  30,
                2006Titles
                  released, net of accumulated amortization
              
              $
              4,573,191
              
              $
              7,784,063Acquired
                  library, net of accumulated amortization
              
              
              14,551,096
              
              
              13,203,004Titles
                  acquired and not released
              
              
              602,892
              
              
              1,939,003$
              19,727,179
              
              $
              22,926,070




We
            expect
            approximately 49.9% of titles released, net of accumulated amortization
            and
            excluding acquired library, will be amortized during the three year period
            ended
            December 31, 2008. The Company expects approximately 80% of titles
            released, net of accumulated amortization and excluding acquired library,
            will
            be amortized during the seven year period ended December 31, 2012 as the
            library is comprised primarily of mature titles which provide a longer,
            steadier
            stream of revenue. The film library, including titles acquired and not
            released
            of $15.1 million, net of accumulated amortization at June 30, 2006 is
            composed
            of the Wellspring library that was acquired as part of the acquisition
            of
            American Vantage Media (“AVMC”) , a subsidiary of American Vantage Companies
            (“AVC”) and Wellspring Media, Inc. on March 21, 2005 and additional titles
            licensed since the acquisition. The film library is amortized over its
            expected
            revenue stream for a period of ten years from the acquisition date. The
            amortization period on the library which includes titles acquired and
            not
            released as of June 30, 2006 is approximately nine years on unamortized
            costs of
            $15.1 million. We estimate total amortization expense for our film library
            for
            the remainder of 2006 to be $3.4 million which is based upon revenue
            estimates
            for our film library for the remainder of the year.


We
      expect
      that we will pay accrued participation liabilities of $5.4 million during the
      twelve month period ending December 31, 2006.




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




On
      March 21, 2005, we completed our acquisition of American Vantage Media
      (“AVMC”), a subsidiary of American Vantage Companies (“AVC”). As part of this
      acquisition, we 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. We 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 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 initial
      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 were classified as equity in 2005 in accordance with Emerging
      Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The
      discount is amortized over the life of the Note. 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.






11


In
      2001,
      we issued a convertible debenture for $50,750 to a shareholder in place of
      redeemable common stock. The debenture bears 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
      8. REMITTANCE TO LICENSOR AND DEFERRED REVENUE**




Under
        the
        interim agreement with TWC as discussed in Note 1, we record as net revenues
        the
        full amount we receive from sales of home video products (net of reserves
        and
        allowances), deduct our distribution fee, costs of goods sold (including
        manufacturing expenses) and certain marketing expenses, and remit the balance
        to
        TWC. The Remittance to licensor of $61.7 million at June 30, 2006 primarily
        related to amounts owed to TWC from sales of TWC’s titles, *Wolf
        Creek, Hoodwinked, Doogal, Mrs. Henderson Presents, and Transamerica* that
        we
        released on DVD during the quarter ended June 30, 2006.




The
      increase in deferred revenue to $11.3 million at June 30, 2006 primarily related
      to invoices for shipments of *The
      Matador and The Libertine* which
      were not available for retail sale until a date subsequent to June 30, 2006.
      In
      accordance with our revenue recognition policy, if a title has a “street date”
(the date the product is available for retail sale), we recognize the initial
      shipment as revenue on that date. All subsequent shipments after street date
      are
      recognized as revenue upon the receipt of goods by the customer. Accordingly,
      revenue associated with these shipments were deferred until the “street
      date”.





**NOTE
      9. ACCRUED EXPENSES**




The
      components of accrued expenses at December 31, 2005 and June 30, 2006
      were:





**December 31, 2005**
            
            **June
                30, 2006**Accrued
                payroll and related items
            
            $
            483,697
            
            $
            629,858Accrued
                commissions
            
            
            373,510
            
            
            122,528Unearned
                revenue
            
            
            262,742
            
            
            38,400Accrued
                severance
            
            
            308,591
            
            
            38,670Tax
                payable
            
            
            74,637
            
            
            188,112Other
                accrued expense 1
            
            
            1,804,716
            
            
            19,328,937Total
                accrued expenses
            
            $
            3,307,893
            
            $
            20,346,505




1
      Other accrued expense primarily relates to accrued purchases for inventory
      related to The Weinstein Company titles and other items as of June 30,
      2006.




**NOTE
      10. COMMITMENTS AND CONTINGENCIES**




OPERATING
      LEASES




The
      Company leases certain facilities and computer equipment under non-cancelable
      operating leases. Rental expense for the three months ended June 30, 2006 and
      2005 was $326,898 and $132,553, respectively. Rental expense for the six months
      ended June 30, 2006 and 2005 was $566,499 and $167,348, respectively.




As
      of
      June 30, 2006, the future minimum annual rental commitments required under
      existing non-cancelable operating leases are as follows:


Remainder
                  of 2006
              
              2007
              
              2008
              
              2009
              
              2010
              
              Thereafter
              
              TotalLease
                  obligations
              
              $
              536,310
              
              $
              1,092,459
              
              $
              976,302
              
              $
              728,507
              
              $
              734,880
              
              $
              185,068
              
              $
              4,253,526




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.




12


WELLSPRING
      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 $3,000,000. 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), 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 subsidiaries, Wellspring and American Vantage
        Media,
        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 (“AVC”), the prior owner of AVMC. However, if the
        outcome of this litigation is adverse to us, and we are required to pay
        significant monetary damages that are not indemnified by others, our financial
        condition and results of operations will likely be materially and adversely
        affected.




FALCON
      PICTURE GROUP MATTER




In
      October 2005, we commenced litigation against Falcon Picture Group, LLC
      (“Falcon”) in the Superior Court of San Diego County, Case No. GIN047884 seeking
      damages of $975,000 arising out of Falcon’s breach of the license agreement. In
      October 2005, Falcon commenced litigation against Genius in the Circuit Court
      of
      Cook County, Illinois, Case No. 05H16850 (the “Illinois Proceeding”), based
      upon allegations, among other things, that Genius breached the terms of a
      license agreement by refusing to pay certain royalties to which Falcon
      supposedly was entitled. Falcon seeks a damages award of approximately $83,332
      subject to proof at trial. Falcon further alleges that as a result of Genius’
purported default under the license agreement, Falcon is entitled to judgment
      declaring the license agreement to have been lawfully terminated. Genius
      has dismissed its San Diego action against Falcon in favor of refiling the
      same
      action against Falcon and its owner, Carl Amari, as a counterclaim in the
      Illinois Action.  The counterclaim was filed in the Illinois Action on July
      12, 2006. **** Genius
      plans to vigorously defend against the allegations thereof and seek recovery
      of
      damages.




**NOTE
      11. STOCKHOLDERS’ EQUITY**




COMMON
      STOCK




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.




During
        the six months ended June 30, 2005, we issued a total of 18,037,925 common
        shares and returned no common shares to treasury. We issued 6,518,987 shares
        for
        proceeds of $10.3 million in conjunction with a private placement offering
        and
        issued 7.0 million shares in conjunction with the acquisition of American
        Vantage Media Corporation. We issued 712,338 shares at $2.16 to $2.27 per
        share
        for services rendered in connection with the private placement
        offering.
  During
        the six months ended June 30, 2005, we issued 724,000 shares for the exercise
        of
        warrants at $.63 to $1.00 per share and 82,600 shares for the exercise of
        options at $.80 to $1.50 per share.
  During
        the six months ended June 30, 2005, we issued a total of 3,549,076 warrants
        to
        purchase common stock at $1.58 to $2.78 per share, of which 2,086,076 were
        issued in conjunction with the private placement offering, and 1,463,000
        were
        issued in conjunction with the transaction to acquire American Vantage Media
        Corporation, of which, 63,000 warrants were issued as part of the offering
        costs.


13


During
        the six months ended June 30, 2005, we committed to issue shares totaling
        $82,500 related to recruiting expenses incurred during the six months ended
        June
        30, 2005.
  During
        the six months ended June 30, 2006, we issued 209,472 common shares related
        to
        the exercise of warrants for proceeds of $158,301. Additionally, during the
        six
        months ended June 30, 2006, we issued 345,000 common shares related to the
        exercise of options for proceeds of $355,251.
  During
        the six months ended June 30, 2006, we issued 10,000 common shares for services
        rendered.




WARRANTS




A
      summary
      of warrant activity follows:


Warrants
                Outstanding
              
              Weighted
                  Average Exercise PriceDecember
                  31, 2005
              
              
              16,313,190
              
              $
              2.15Granted
              
              
              -
              
              $
              -Exercised
              
              
              (209,472
              )
              $
              0.84Canceled
              
              
              -
              
              $
              -Total
              
              
              16,103,718
              
              $
              2.17Warrants
                  exercisable, June 30, 2006
              
              
              15,823,718
              
              $
              2.17




The
      following table summarizes significant ranges of outstanding and exercisable
      warrants as of June 30, 2006


Warrants
                  outstanding
              
              Average
                  remaining life
              
              Weighted
                  average exercise price warrants outstanding
              
              Warrants
                  exercisable
              
              Weighted
                  average exercise price warrants exercisableUnder
                  $1.50
              
              
              3,518,868
              
              
              1.5
              
              $
              1.17
              
              
              3,518,868
              
              $
              1.17$1.50
                  - $1.99
              
              
              1,092,673
              
              
              9.1
              
              
              1.68
              
              
              812,673
              
              
              1.62$2.00
                  - $2.99
              
              
              9,842,177
              
              
              4.4
              
              
              2.44
              
              
              9,842,177
              
              
              2.44$3.00
                  - $3.99
              
              
              1,650,000
              
              
              2.4
              
              
              3.00
              
              
              1,650,000
              
              
              3.0016,103,718
              
              
              2.9
              
              $
              2.17
              
              
              15,823,718
              
              $
              2.17




PRIVATE
      PLACEMENTS




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 fair value of the warrants were
      classified as equity in 2005 in accordance with Emerging Issues Task Force
      No.
      00-19, “Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company’s Own Stock.”




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 were classified as equity in 2005 in accordance with Emerging Issues
      Task Force No. 00-19, “Accounting for Derivative Financial Instruments Indexed
      to, and Potentially Settled in, a Company’s Own Stock.”





14


**NOTE
      12. STOCK-BASED COMPENSATION**




We
      use
      the Black-Scholes method of valuation for share-based option awards. In valuing
      the stock options, the Black-Scholes model incorporates assumptions about stock
      volatility, expected term of stock options, and risk free interest rates. The
      valuation is reduced by an estimate of stock option forfeitures.




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.
  Effective
        July 21, 2006, the stockholders voted to approve the amendment and restatement
        of our 2004 Stock Incentive Plan to (i) increase the number of shares of
        common
        stock available for issuance under the plan from 7,500,000 shares to 13,500,000
        shares, provided that the proposed transaction with The Weinstein Company
        is
        consummated, and (ii) prohibit option repricings under the Plan without receipt
        of stockholder approval for such repricings.




We
      have
      adopted several stock option plans, all of which have been approved by our
      shareholders, that authorize the granting of options to purchase our common
      shares subject to certain conditions. At June 30, 2006, we had reserved
      15.8 million of our common shares for issuance of share-based compensation
      awards under our stock option plans. At June 30, 2006, we have granted
      6.9 million share-based compensation awards outside of our stock option
      plan. 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.




We
      issued
      3,804,929 options during the first half of 2006. The amount of share-based
      compensation expense recognized in the three months ended June 30, 2006 and
      six
      months ended June 30, 2006 is based on options issued prior to January 1,
      2006 and issued during the first six months of 2006, and ultimately expected
      to
      vest, and it has been reduced for estimated forfeitures. FAS 123R requires
      forfeitures to be estimated at the time of grant and revised, if necessary,
      in
      subsequent periods if actual forfeitures differ from those
      estimates.




Total
        share-based compensation expense recognized for the three months and six
        months
        ended June 30, 2006 was $0.7 million and $1.8 million, respectively. For
        the
        three and six months ended June 30, 2006, no income tax benefit was recognized
        in the statement of earnings (loss) for share-based compensation arrangements.
        Management assessed the likelihood that deferred tax assets realization 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 as to the recoverability of these
        items.
  During
        the six months ended June 30, 2006 and 2005, we received proceeds of $355,250
        and $83,580, respectively, related to the exercise of
        options.




We
      estimated share-based compensation expense using the Black-Scholes model with
      the following weighted average assumptions:


Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30, 2006
              
              June
                  30, 2006Risk
                  free interest rate
              4.3%
              
              4.4%Expected
                  dividend yield
              -
              
              -Expected
                  volatility
              69%
              
              70%Expected
                  life (in years)
              3.1
              
              3.0




A
      summary
      of the changes in our stock option plan during the three months ended June
      30,
      2006 is presented below:


Shares
              
              Weighted
                  Average Price
              
              Weighted
                  Average Remaining Contractual Life
              
              Aggregate
                  Intrinsic ValueDecember
                  31, 2005
              
              
              21,400,146
              
              $
              1.81Granted
              
              
              3,804,929
              
              $
              1.87Exercised
              
              
              (345,000
              )
              $
              1.03Canceled
              
              
              (991,582
              )
              $
              2.21Outstanding
                  at June 30, 2006
              
              
              23,868,493
              
              $
              1.81
              
              
              6.9
              
              $
              4,704,157Vested
                  and expected to vest at June 30, 2006
              
              
              23,868,493
              
              $
              1.81
              
              
              6.9
              
              $
              4,704,157Options
                  excerciseable, June 30, 2006
              
              
              12,750,161
              
              $
              1.81
              
              
              6.0
              
              $
              4,179,514





15


*Pro
      Forma Information Under SFAS 123 for Periods Prior to Fiscal
      2006*




Prior
      to
      January 1, 2006, we accounted for stock options for our plan 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 FAS 123R, stock-based employee compensation expense was not
      generally reflected in net income, as all options granted under our plan 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
      FAS 123R to stock-based employee compensation for the three and six months
      ended June 30, 2005:


(Restated)
                Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30, 2005
              
              June
                  30, 2005Net
                  loss as reported
              
              $
              (5,296,352
              )
              $
              (7,138,981
              )Compensation
                  cost at fair value
              
              
              (145,492
              )
              
              (322,012
              )Pro
                  forma net loss
              
              $
              (5,441,844
              )
              $
              (7,460,993
              )Basic
                  and diluted net loss per shareAs
                  reported
              
              $
              (0.12
              )
              $
              (0.20
              )Pro
                  forma
              
              $
              (0.13
              )
              $
              (0.22
              )




The
      pro
      forma compensation cost recognized for the grant date fair value of the stock
      options granted during the three and six months ended June 30, 2005 was
      estimated using the Black-Scholes model with the following weighted-average
      assumptions:


Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30, 2005
              
              June
                  30, 2005Risk
                  free interest rate
              3.7%
              
              3.7%Expected
                  dividend yield
              -
              
              -Expected
                  volatility
              60%
              
              60%Expected
                  life (in years)
              1
                  to 10 years
              
              1
                  to 10 years




**NOTE
          13. INCOME TAXES**
  For
            the
            three and six months ended June 30, 2006, Company recognized a tax benefit
            of
            approximately $0.9 million and $3.7 million, respectively, which was
            fully
            offset by a valuation allowance. Except for $107,000 of alternative minimum
            taxes, the Company did not record any tax expense after considering the
            full
            year expected results and the likelihood of recoverability of deferred
            tax
            assets. Management will continue to monitor the future recoverability
            of the tax
            assets which have a full valuation allowance as of June 30, 2006.
  Significant
            components of the provision for income taxes for the six months ended
            June 30,
            2006 are as follows:
 16
  Significant
        components of the provision for income taxes for the six months ended June
        30,
        2006 is as follows:
 
 **June
                  30, 2006**Current
                  ProvisionFederal
              
              $
              80,000California
              
              
              27,000Deferred
                  ProvisionFederal
              
              $
              0California
              
              
              0Provision
                  for Income Taxes
              
              $
              107,000
 
 A
        reconciliation of the expected income tax (benefit) computed using the federal
        statutory income tax rate to our effective income tax rate is as follows:
 
 **June
                  30, 2006**Income
                  tax computed at federal statutory tax rate
              
              
              34.00%State
                  taxes, net of federal benefit
              
              
              5.82%Valuation
                  allowance
              
              
              -39.68%Other
              
              
              -0.14%0%
  Significant
        components of our deferred tax assets (liabilities) at December 31, 2005
        and June 30, 2006 consisted of the following:
  December
                    31,
                  2005
                
                June
                    30,
                  2006Net
                    Operating Losses
                
                $
                13,886,000
                
                $
                11,928,000Allowance
                    accounts
                
                
                404,000
                
                
                722,000State
                    deferred
                
                
                (401,000
                )
                
                (735,000
                )Other
                    reserves
                
                
                4,559,000
                
                
                9,796,000Accrued
                    vacation
                
                
                60,000
                
                
                60,000Deferred
                    compensation cost
                
                
                1,067,000
                
                
                1,067,000Depreciation
                
                
                25,000
                
                
                (2,500
                )Wellspring
                    deferred tax liability
                
                
                (1,380,000
                )
                
                (1,380,000
                )Stock
                    Options
                
                
                0
                
                
                719,000Net
                    deferred tax assets
                
                $
                18,220,000
                
                $
                22,174,500Less
                    valuation allowance
                
                
                (19,600,000
                )
                
                (23,554,500
                )Net
                    deferred tax asset (liability)
                
                $
                (1,380,000
                )
                $
                (1,380,000
                )
 
 As
          of
          June 30, 2006, we had total net operating loss carry-forwards for federal
          and
          state income tax purposes of $29,764,000 and $20,459,000 respectively which
          start expiring in 2012 through 2026. Included in our total net operating
          loss
          carryover, is approximately $12,900,000 of net operating losses we inherited
          as
          a result of the American Vantage Media (“AVMC”), a subsidiary of American
          Vantage Companies (“AVC”), and Wellspring Media, Inc. acquisition. 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
          entire deferred income tax assets have been offset by a valuation allowance
          since management does not believe the recoverability of the deferred income
          tax
          assets during the next year is more likely than not. Accordingly, we have
          not
          recognized a deferred income tax benefit as of June 30, 2006 in these financial
          statements.
  17
  Pursuant
            to Internal Revenue Code Sec. 382 and 383, certain changes in the ownership
            structure (common stock issuances in the case of Genius Products, Inc.)
            may
            partially or fully limit future use of net operating losses and tax credits
            available to offset future taxable income and future tax liabilities,
            respectively. The Company’s net operating loss carryforwards are subject to
            substantial annual limitations due to a change in ownership structure
            occurring
            prior to June 30, 2006.




**NOTE
      14. LOSS PER SHARE**




Basic
      loss per share is computed by dividing net loss by the weighted average number
      of common shares outstanding for the period. Diluted loss per share reflects
      the
      potential dilution that could occur if options and warrants were exercised
      or
      converted into common stock. Shares attributable to the exercise of outstanding
      options and warrants that are anti-dilutive are excluded from the calculation
      of
      diluted loss per share.




For
      the
      three and six months ended June 30, 2006, we excluded from the computation
      of
      diluted earnings per share stock options and warrants to purchase 39,972,211
      and
      39,644,864 shares, respectively. For the three and six months ended June 30,
      2005, we excluded from the computation of diluted earnings per share stock
      options and warrants to purchase 25,489,454 and 25,446,248, respectively. All
      potential shares were antidilutive and excluded from loss per share
      calculations.




**NOTE
      15. SUBSEQUENT EVENTS**




*Distribution
      Agreement with ESPN*




On
      July 7, 2006, we entered into an Output Distribution Agreement (the
“ *Output
      Agreement* ”)
      with
      ESPN Enterprises, Inc. (“ *ESPN* ”)
      whereby ESPN granted to us, among other things and subject to the terms and
      conditions set forth in the Output Agreement, the rights to be the exclusive
      videogram distributor of all audiovisual productions released by ESPN during
      the
      term of the Output Agreement in the United States and Canada.




The
      initial term of the Output Agreement commences on July 7, 2006 and
      continues, subject to the terms of the Output Agreement, through and including
      December 31, 2011 (the “ *Term* ”).
      Commencing immediately at the end of the Term, Genius shall have an additional
      six month period as a non-exclusive sell-off period for videograms, during
      which
      time Genius Products will have the right to continue to market, distribute
      and
      account for all videograms remaining in Genius Products’ inventory at the end of
      the Term. Subject to the terms of the Output Agreement, Genius Products shall
      pay ESPN a minimum guarantee of $4,500,000 in each of five Sales Periods (as
      defined in the Output Agreement) during the Term. Genius Products will receive
      a
      distribution fee which shall be computed in accordance with the terms of the
      Output Agreement.




*Completion
      of Acquisition or Disposition of Assets*


As
        previously disclosed on a Current Report on Form 8-K filed by the Company
        on
        December 9, 2005, the Company, The Weinstein Company LLC, a Delaware
        limited liability company (“ *TWC* ”),
        and
        The Weinstein Company Holdings LLC, a Delaware limited liability company
        (such
        company or another company designated by TWC pursuant to the Agreement, the
        “ *Distributor* ”),
        entered into a Master Contribution Agreement on December 5, 2005 (the
“ *Agreement* ”)
        in
        connection with the formation of a new venture 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* ”).
 
 The
          Company’s stockholders voted to approve the Transaction at a Special Meeting of
          Stockholders held on July 21, 2006 and the Transaction closed on such date.
          Under the terms of the Agreement, at the closing of the Transaction
          (“ *Closing* ”),
          the Company contributed to the Distributor substantially all of its assets,
          employees and existing businesses and certain liabilities, and the Distributor
          now holds a distribution agreement from TWC entitling it to distribute
          in the
          United States, and receive a distribution fee on, all filmed entertainment
          for
          which TWC owns or controls U.S. home video distribution rights. The Distributor
          is 70% owned by TWC or its owners and 30% owned by the Company. The Company’s
          interest in the Distributor consists of Class G Units representing a 30%
          membership interest in the Distributor, and the interest of TWC or its
          owners
          consists of Class W Units representing a 70% membership interest in the
          Distributor. The 70% interest in the Distributor held by TWC or its owners
          is
          redeemable, at their option at any time from one year after the Closing,
          for up
          to 70% of the outstanding common stock of Genius Products, or with their
          approval, cash. Beginning with our Form 10-Q for the third quarter of 2006, we will account
          for
          our investment in the Distributor on our financial statements using the
          equity
          method of accounting. Under the equity method of accounting, only our investment
          in and amounts due to and from the equity investee will be included in
          our
          consolidated balance sheet. As a result, we will record an asset on our
          balance
          sheet related to our investment interest in the Distributor. On our statement
          of
          operations, we will record our 30% share of the Distributor’s profit or loss as
          equity in net earnings (losses) from investee. We expect to record a gain
          upon
          consummation of the Transaction and that this gain will be based on the
          difference between the fair market value of assets contributed and the
          net book
          value, reduced for the portion of the gain associated with the retained
          economic
          interest in the Distributor. After the Closing, substantially all of our
          revenue
          and expenses as well as the results from releasing TWC product will be
          reflected
          in the financial statements of the Distributor. We will include separate
          quarterly and audited annual financial statements of the Distributor in
          a note
          to our financial statements. For
          additional information on the accounting for the Transaction and the pro
          forma
          information to be included beginning with our 10-Q for the period ended
          September 30, 2006, reference our Proxy Statement Schedule 14A as filed
          on June
          29, 2006.
  18
  *Amendment
          to Articles of Incorporation*
  Effective
          July 21, 2006, we amended our articles of incorporation to authorize and
          issue
          to TWC 100 shares of Series W Preferred Stock in us. The Series W Preferred
          Stock provides TWC or its 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 by the Company. 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.
          We
          and TWC also entered into a Registration Rights Agreement pursuant to which
          we
          will register for resale our shares of Common Stock issuable upon redemption
          of
          TWC’s Class W Units in the Distributor. In addition we amended the articles
          of
          incorporation to authorize us to issue 300,000,000 common shares at a par
          value
          of $0.0001 per share.
  *Amendment
        and Restatement of 2004 Stock Incentive Plan*
  Effective
        July 21, 2006, the stockholders voted to approve the amendment and restatement
        of our 2004 Stock Incentive Plan to (i) increase the number of shares of
        common
        stock available for issuance under the plan from 7,500,000 shares to 13,500,000
        shares, provided that the proposed transaction with The Weinstein Company
        is
        consummated, and (ii) prohibit option repricings under the Plan without receipt
        of stockholder approval for such repricings.




**ITEM 2.****MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**




The
      following discussion of our financial condition and results of operations should
      be read in conjunction with the financial statements and notes thereto contained
      in this report. The discussion contains forward-looking statements that relate
      to future events or our future financial performance that involve known and
      unknown risks, uncertainties and other factors that may cause our 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 “Business Risk Factors” in our annual report on Form 10-K for the year
      ended December 31, 2005.




OVERVIEW





On
        July
        21, 2006, Genius Products, Inc. (“we”, “our” or the “Company”) completed a
        strategic 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 exclusive U.S. home video
        distribution rights to feature film and direct-to-video releases owned or
        controlled by TWC (the “Closing”). Please see the discussion below under “Recent
        Strategic Transactions”. At the Closing we contributed to the Distributor all of
        our operating business, including substantially all of our assets, except
        for $1
        million cash and certain liabilities, and received a 30% equity interest
        in the
        Distributor. The discussions in this section reflect our operations prior
        to the
        Closing. Beginning with our Form 10-Q for the third quarter of 2006, we will
        account for our investment in the Distributor on our financial statements
        using
        the equity method of accounting. Under the equity method of accounting, only
        our
        investment in and amounts due to and from the equity investee will be included
        in our consolidated balance sheet. As a result, we will record an asset on
        our
        balance sheet related to our investment interest in the Distributor. On our
        statement of operations, we will record our 30% share of the Distributor’s
        profit or loss as equity in net earnings (losses) from investee. We expect
        to
        record a gain upon consummation of the Transaction and that this gain will
        be
        based on the difference between the fair market value of assets contributed
        and
        the net book value, reduced for the portion of the gain associated with the
        retained economic interest in the Distributor. After the Closing, substantially
        all of our revenue and expenses as well as the results from releasing TWC
        product will be reflected in the financial statements of the Distributor.
        We
        will include separate quarterly and audited annual financial statements of
        the
        Distributor in a note to our financial statements.





19




We
        are a
        leading independent home-entertainment distribution company that produces,
        licenses and distributes an expanding library of motion pictures, television
        programming, family, lifestyle and trend entertainment on DVD and other emerging
        platforms. The Company primarily focuses on five core content areas that
        include
        major theatrical film, sports, lifestyle, family/faith and independent film.
        Genius handles the distribution, marketing and sales for such brands as Asia
        ExtremeTM, Baby Genius®, Dimension Films, Dragon DynastyTM, ESPN®, IFC®, NBC
        News®, Sundance Channel Home Entertainment® The Weinstein Company® and
        WellspringTM.
  We
        sell
        our own proprietary content, license content from third parties for sale
        and
        distribute content for third parties for a fee. We currently have the exclusive
        U.S. home video distribution rights to feature film and direct-to-video releases
        owned or controlled by The Weinstein Company (“TWC”), a new film company created
        by Robert and Harvey Weinstein (as discussed below), as well as ESPN. We
        have
        released the following TWC titles on DVD: (i) *Derailed* ,
        starring Jennifer Aniston and Clive Owen on March 21;
        (ii) *Wolf
        Creek* ,
        an
        Australian horror film, on April 11; (iii) *Mrs. Henderson
        Presents* ,
        starring Judi Dench and Bob Hoskins, on April 18; (iv) *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 (vi) *Doogal* with the
        voices of Whoopi Goldberg, Jimmy Fallon, William H. Macy and Jon Stewart,
        on May
        16; (vii) *Transamerica* ,
        starring Felicity Huffman, winner of the Golden Globe Award for best actress,
        on
        May 23; (viii) *The
        Libertine* ,
        starring Johnny Depp and *The
        Matador* ,
        starring Pierce Brosnan on July 4. Upcoming TWC films planned for home video
        release by us include: *Scary
        Movie 4,* directed
        by David Zucke r*,*  *Lucky
        Number Slevin,* starring
        Bruce Willis, *Feast,* produced
        by Wes Craven, Ben Affleck and Matt Damon, and *Clerks
        II* ,
        directed by Kevin Smith. We will also release content on DVD for Rainbow
        Media
        and the Independent Film Channel or IFC.
  We
        seek
        to leverage our increasing market share and retail sales volumes from our
        new
        relationship with The Weinstein Company to improve the distribution and sale
        of
        our owned, licensed and distributed content in our other core content areas:
        sports, lifestyle, family/faith and independent film, illustrated by our
        recently announced exclusive distribution deal with ESPN. We currently own
        or
        have the rights to publish DVDs and audio CDs under the trademarked brands
        described in the following table. These brands include both proprietary and
        licensed brands. We work with a broad range of retail outlets including
        Wal-Mart, Best Buy, Target, Blockbuster, Movie Gallery, Netflix and Amazon.com
        to implement our specialized distribution strategy that consists of in-store
        displays that highlight our brands and promote our products that relate to
        these
        brands. We call our specialized distribution strategy our Branded Distribution
        Network. We customize our displays and promotions based upon the buying
        patterns, habits and demographics of the consumers. As we add more content
        to
        our libraries, we intend to acquire, license, develop or distribute products
        with credible value and brand them for relevance to the consumer. We attempt
        to
        limit financial exposure through: i) detailed return on investment, or ROI,
        analysis on potential acquisitions of new content and ii) our newly implemented
        vendor managed inventory system that provides us a scalable infrastructure
        and
        cost effective technology to manage the supply chain process. Our brands
        and
        products are described below.




**Licensed
                  Brands and Trademarks**
                
                Bazooka®
                Genius
                  Entertainment®
                Hollywood
                  ClassicsTM
                IFILM®
                National
                  Lampoon®
                Sundance
                  Channel Home
                EntertainmentTM
              **Selected
                  Owned or Licensed Content**
                
                Berliner
                  Film Company
                J
                  Horror Library(through
                  Horizon
                Entertainment
                  and Pony Canyon Inc.)
                Jillian
                  Michaels
                NBC
                  News Presents
                Wellspring
                  Library
              **Licensed
                  Music Brands**
                
                Ansel
                  Adams
                Baby
                  Genius®*
                Beatrix
                  PotterTM
                Curious
                  George®
                Guess
                  How Much I Love YouTM
                Jay
                  Jay the Jet Plane®




20






TV
                  Guide®
              **Selected
                  Distributed Content**
                
                Amity
                  Entertainment
                Brandissimo!
                Bauer
                  Martinez Entertainment
                Classic
                  Media
                Grodfilms
                IFC
                Legend
                  Films Library
                Liberation
                  Entertainment Library
                Pacific
                  Entertainment
                Peace
                  Arch Entertainment
                Porchlight
                  Entertainment
                Seven
                  Arts
                Tartan
                  Video USA
                ESPN
                The
                  Weinstein Company
              Kid
                  Genius®*
                My
                  Little Pony®
                Paddington
                  BearTM
                Raggedy
                  Ann and AndyTM
                Rainbow
                  FishTM
                Spot
                  the DogTM
                The
                  Little Tikes®*
                The
                  SnowmanTM
                Tonka®
                Wee
                  WorshipTM *







*  See
      recent strategic transactions below




For
      the
      three months ended June 30, 2006, our business includes revenues from three
      major sources, as follows:




•
            Sales
                of videos and DVDs (99.6% and 73.2% of gross revenues for the second
                quarter 2006 and 2005,
                respectively)




•
            Sales
                of audio CDs and cassettes (0.2% and 9.5% of gross revenues for the
                second
                quarter 2006 and 2005,
                respectively)




•
            Theatrical
                rental and other (0.2% and 9.0% of gross revenues for the second
                quarter
                2006 and 2005, respectively)




As
      a
      result of releasing titles under our new venture with TWC as discussed below,
      revenue from the sale of videos and DVDs has increased relative to audio CDs
      and
      theatrical and other.





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




We
      do not
      report our 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.




Recent
      Strategic Transactions





*The
      Weinstein Company Transaction:* On July
      21, 2006, we completed our pending strategic transaction with The Weinstein
      Company LLC (“TWC”) and formed a venture named Genius Products, LLC (the
“Distributor”) to exploit the exclusive U.S. home video distribution rights to
      feature film and direct-to-video releases owned or controlled by TWC (the
“Closing”). The transaction closed, following a Special Meeting of Stockholders
      of the Company to approve the transaction and related matters. Under the terms
      of the transaction, Genius Products, Inc. contributed substantially all of
      its
      assets, employees and existing businesses to Genius Products, LLC, which holds
      the exclusive U.S. home video distribution rights for filmed entertainment
      and
      direct-to-video product of TWC. The new venture also operates the existing
      businesses of Genius Products, Inc., that involves the marketing,
      sales and distribution for other major branded entertainment content, including
      ESPN, NBC News, Sundance Home Entertainment, Asia Extreme, Dragon Dynasty and
      IFC. Genius Products, LLC is owned 70% by TWC and 30% by Genius Products, Inc.
      In addition, as part of the transaction with TWC, Genius Products, Inc. added
      to
      its Board of Directors two TWC executives, Larry Madden, Executive Vice
      President and CFO, and Irwin Reiter, Executive Vice President of Accounting
      and
      Financial Reporting.





21


The
      Company’s interest in the Distributor consist of Class G Units representing a
      30% membership interest in the Distributor, and the interest of TWC or its
      owners consist of Class W Units representing a 70% membership interest in the
      Distributor. The 70% interest in the Distributor held by TWC or its owners
      is
      redeemable, at their option at any time from one year after the Closing, for
      up
      to 70% of the outstanding common stock of Genius Products, or with their
      approval, cash. As further discussed in Note 8 to the consolidated financial
      statements included elsewhere herein, commencing on December 5, 2005, the
      date we entered into a Master Contribution Agreement (the “Agreement”) in
      connection with the formation of a new venture to exploit the exclusive U.S.
      home video distribution rights to feature film and direct-to-video releases
      owned or controlled by TWC, through the Closing, we operated under an interim
      distribution agreement with TWC and recorded the results from titles we first
      released for TWC commencing in March 2006 through the second quarter of 2006
      in
      our financial statements.





On
      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 will be renamed Genius Products, LLC, will operate the
      new distribution business and our existing businesses, and continue to operate
      under the LLC Agreement following the Closing.




Effective
      July 21, 2006, we issued to TWC 100 shares of Series W Preferred Stock in us.
      The Series W Preferred Stock provides TWC or its 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
      by the Company. The Series W Preferred Stock has no rights to receive dividends
      and minimal liquidation value. On the Closing, we amended and restateed our
      Certificate of Incorporation to, among other things, provide for the designation
      of the Series W Preferred Stock.




We
      and
      TWC also entered into a Registration Rights Agreement pursuant to which we
      will
      register for resale our shares of Common Stock issuable upon redemption of
      TWC’s
      Class W Units in the Distributor.




*Sale
      of Baby Genius:* On
      December 31, 2005, we entered into an Asset Purchase Agreement (the “Asset
      Purchase Agreement”) with Klaus Moeller, who was our founder and formerly our
      CEO. 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:




•
            Audio
                and audiovisual works entitled “Baby
                Genius”;




•
            Audio
                and audiovisual works entitled “Kid
                Genius”;




•
            Audio
                and audiovisual works entitled “Little
                Tikes”;




•
            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.




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.




We
      will
      continue to distribute Baby Genius, Little Tikes and Wee Worship DVDs and music
      CDs and all new products under these brands. Under the distribution agreement,
      we will receive a distribution fee and recoup all of our expenses. 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.




In
      conjunction with this transaction we recorded a gain on sale in the amount
      of
      $1,351,710, a note receivable in the amount of $1,712,353 representing the
      present value of a $2 million secured promissory note that we received in this
      transaction and a deferred gain of $1,212,353. We will recognize the deferred
      gain based upon the relative percentage of revenue we generate in each period
      relative to the total revenue expected to be generated over the term of the
      distribution agreement. During the three and six months ended June 30,
      2006, we recognized $23,179 and $63,446 of this gain, respectively. We have
      received payment in full for the secured promissory note, due on
      January 30, 2006, in the amount of $750,000, plus interest.





22


**CRITICAL
      ACCOUNTING POLICIES**




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 for losses
      or
      returns on other accounts as yet to be identified included in accounts
      receivable. In estimating the allowance component for unidentified losses and
      returns, management relies on historical experience and takes into account
      current information obtained from retailers including retail sell-through data
      and retail inventory data as available. 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 a first-in-first-out method
      of
      valuation. The Company regularly monitors inventory for excess or obsolete
      items
      and makes any valuation corrections when such adjustments are
      needed.




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.




*Production
      Masters:* Music
      production masters are stated at cost net of accumulated amortization. Costs
      incurred for music production masters, including licenses to use certain
      classical compositions, royalties, and recording and design costs, are
      capitalized and amortized over a three or seven year period using the
      straight-line method from the time a title is initially released. All
      exploitation costs, including print and advertising (P&A) costs associated
      with our theatrical department, are expensed as incurred.




*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 direct operating
      expenses 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 costs of the library 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* :
      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
      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. 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.




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
      carrying amount, 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 carrying amount 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.




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. Impairment is necessary when the undiscounted cash flows estimated
      to be generated by the asset are less than the carrying amount of the
      asset.




23


REVENUE
      RECOGNITION. Revenue from the sale or licensing of films is recognized upon
      meeting all recognition requirements of SOP 00-2. 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. The allowance for returns
      calculation is based upon an analysis of historical customer and product returns
      performance as well as current customer inventory data as available. Updates
      to
      the returns calculation are performed quarterly. 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.




INCOME
        TAXES. For the three and six months ended June 30, 2006, Company recognized
        a
        tax benefit of approximately $0.9 million and $3.7 million, respectively,
        which
        was fully offset by a valuation allowance. Except for $107,000 of alternative
        minimum taxes, the Company did not record any tax expense after considering
        the
        full year expected results and the likelihood of recoverability of deferred
        tax
        assets. Management will continue to monitor the future recoverability of
        the tax
        assets which have a full valuation allowance as of June 30, 2006.
  Pursuant
        to Internal Revenue Code Sec. 382 and 383, certain changes in the ownership
        structure (common stock issuances in the case of Genius Products, Inc.) may
        partially or fully limit future use of net operating losses and tax credits
        available to offset future taxable income and future tax liabilities,
        respectively. The Company’s net operating loss carryforwards are subject to
        substantial annual limitations due to a change in ownership structure occurring
        prior to June 30, 2006.
 LOSS
        PER
        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 dilutive potential of common
        shares, from the exercise of options or warrants, had been issued. The treasury
        stock method is used to calculate dilutive shares which reduces the gross
        number
        of dilutive shares by the number of shares purchasable from the proceeds
        of the
        options assumed to be exercised.




ACCOUNTING
      CHANGES. In May 2005, the FASB issued Statement of Financial Accounting
      Standards (“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”. 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.




RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments”, which amends SFAS No. 133, “Accounting for
      Derivatives Instruments and Hedging Activities” and SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishment
      of Liabilities”. 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 principle 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
        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.





24


**RESULTS
      OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND
      2005**




*Revenues:*




Video
        and
        DVD revenues for the three and six months ended June 30, 2006 were composed
        of
        sales of The Weinstein Company (“TWC”) titles, *Derailed,
        Mrs. Henderson Presents,Transamerica, Wolf Creek, Have No Fear: The Life
        of Pope
        John Paul II, Hoodwinked and Doogal,* 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. Video revenues increased $98.1 million and
        $132.9 million during the three months and six months ended June 30, 2006,
        respectively to $101.9 million and $138.1 million, as compared to $3.8 million
        and $5.2 million during the comparable prior year periods. This increase
        from
        2005 was primarily due to the addition of revenues from the video release
        of
        TWC’s titles *.*


Theatrical
      revenues were composed of sales generated from film rentals by our theatrical
      division. Theatrical revenues were $0.1 million and $0.2 million for the three
      months and six months ended June 30, 2006, respectively, compared to $0.5
      million and $0.5 million for the comparable prior year periods. In February
      2006, we announced we will no longer release films theatrically.




Audio
      revenues for the three months and six months ended June 30, 2006 were composed
      of Baby Genius, Kid Genius, licensed music CDs, interactive music programs,
      non-branded and value music products sold at an entry level price point at
      retail. Audio revenues decreased $0.3 million and $0.8 million during the three
      months and six months ended June 30, 2006, respectively, to $0.2 million and
      $1.0 million, as compared to $0.5 million and $1.8 million during the comparable
      prior year periods. The decrease was attributable to lower sales of the Baby
      Genius music, licensed music product, value music products and Lifestyles Music
      Program.




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 decreased $0.4 million during the three months
      ended June 30, 2006 to $53,877, as compared to $0.4 million during the
      comparable prior year period. For the six months ended June 30, 2006, royalties,
      licensing, and other revenues decreased slightly to $0.4 million as compared
      to
      $0.5 million during the comparable prior year period. The changes resulted
      from
      a decrease in licensing revenues from our acquisition of AVMC on March 22,
      2005 and the sale of Baby Genius rights on December 31, 2005.




As
        a
        result of the foregoing, total gross revenues increased $97.2 million and
        $131.8
        million during the three and six months ended June 30, 2006, respectively,
        to
        $102.4 million and $139.8 million as compared to $5.2 million and $8.0 million
        during the comparable prior year periods, due primarily to increased sales
        of
        video products as discussed above.
  Sales
        returns, discounts and allowances increased $26.1 million and $34.7 million
        during the three and six months ended June 30, 2006 to $27.3 million and
        $36.2
        million, respectively, as compared to $1.3 million and $1.5 million during
        the
        comparable prior year periods. The increase resulted primarily from the increase
        in sales from the video release of TWC’s *Derailed,
        Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked, and
        Doogal* .
        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 $71.1 million and $97.1 million during the three and six
        months ended June 30, 2006, respectively, to $75.0 million and $103.6
        million as compared to $3.9 million and $6.5 million during the comparable
        prior year periods, primarily due to the increase in sales of DVDs from the
        release of TWC’s titles *.*
 *Costs
        and expense:*




*Cost
      of Sales:*




Cost
      of
      sales consists primarily of the cost of products sold to customers, packaging
      and shipping costs, amortization of production masters and royalties paid on
      sales of licensed products. For analytical purposes we review amortization
      of
      production masters 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 the
      increased sales. We include remittances to TWC in cost of sales. Under our
      distribution agreement with TWC, we record remittances to TWC based upon net
      revenues we receive from sales of TWC titles released on DVD (net of reserves
      and allowances), deduct our distribution fee, deduct cost of goods sold
      (including manufacturing expenses), deduct certain marketing expenses, and
      record the remaining balance as a remittance to licensor under cost of goods
      sold.




Video
        and
        DVD cost of sales increased $56.8 million and $77.2 million during the three
        and
        six months ended June 30, 2006, respectively, to $59.5 million and $81.6
        million, as compared to $2.7 million and $4.4 million during the comparable
        prior year periods. The increase resulted from an increase in video and DVD
        sales, primarily due to the video release of TWC’s titles ** during
        the three and six months ended June 30, 2006. Cost of sales related to TWC’s
        titles ** include
        the remittance to The Weintstein Company and the related product cost of
        sales.




25


Theatrical
        cost of sales, composed primarily of print and advertising costs related
        to
        sales generated from film rental by our theatrical division, were zero and
        $0.1
        million during the three and six months ended June 30, 2006, respectively,
        primarily from the theatrical release of *Unknown
        White Male* during
        the first quarter 2006, as compared to $1.2 million for both the three and
        six
        months ended June 30, 2005. Our theatrical division was discontinued in February
        2006.
  Audio
        cost of sales decreased $0.5 million and $0.7 million during the three and
        six
        months ended June 30, 2006, respectively, to $0.2 million and $0.8 million,
        as
        compared to $0.7 million and $1.5 million during the comparable prior year
        periods. The decrease in cost of sales was due to the lower audio sales during
        the three and six months ended June 30, 2006.
  Amortization
        of production masters and film library decreased $0.6 million and $0.5 million
        during the three and six months ended June 30, 2006, respectively, to $0.4
        million and $0.7 million, as compared to $1.0 million and $1.2 million during
        the comparable prior periods. Amortization of production masters and film
        library is primarily the result of the acquisition of AVMC.
  *Operating
        Expense:*
  Product
        development expenses increased $0.3 million and $0.8 million during the three
        and six months ended June 30, 2006, respectively, to $0.5 million and $1.3
        million, as compared to $0.2 million and $0.4 million during the comparable
        prior year periods. The increase was attributed to the addition of new titles
        into our libraries.
  Sales
        and
        marketing expenses increased $10.4 million and $15.5 million during the three
        and six months ended June 30, 2006, respectively, to $11.0 million and $16.5
        million as compared to $0.6 million and $1.1 million for the comparable prior
        year periods. The increase in sales and marketing is primarily attributable
        to
        the advertising campaigns for the video release of TWC’s *Derailed,
        Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked and
        Doogal* which
        were released during the six months ended June 30, 2006.




General
        and administrative expenses increased by $4.8 million and $8.2 million during
        the three and six months ended June 30, 2006, respectively, to $7.4 million
        and
        $12.3 million, as compared to $2.6 million and $4.1 million during the
        comparable prior periods. 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, increased transaction
        costs
        including investment banking, audit and legal fees of $2.4 million and $2.8
        million during the three and six months ended June 30, 2006, respectively,
        related to the transaction announced with The Weinstein Company, severance
        costs
        associated with employees and outside consultants of $1.1 million and $1.8
        million during the three and six months ended June 30, 2006 and warrants
        and
        options expense associated with compensation to certain employees and outside
        consultants of $0.7 million and $1.7 million during the three and six months
        ended June 30, 2006, respectively. General and administrative expenses were
        9.9%
        and 11.9% of net revenues for the three and six months ended June 30, 2006,
        respectively, compared to 67.3% and 63.0% for the three and six months ended
        June 30, 2005.




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.




The
      purchase price was payable as follows:




•
            $250,000
                in cash on signing;




•
            $750,000
                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
      $1,351,710 and recorded a note receivable in the amount of $1,712,353
      representing the present value of a $2 million secured promissory note that
      we
      received in this transaction and a deferred gain of $1,212,353. We have
      subsequently received payment in full of the secured promissory note, due on
      January 30, 2006, in the amount of $750,000, plus interest. We will
      recognize the deferred gain based upon the relative percentage of revenue we
      generate in each period relative to the total revenue expected to be generated
      over the term of the distribution agreement. For the three and six months ended
      June 30, 2006, we recognized a gain of $23,179 and $63,446 relating to the
      deferred gain of $1.2 million at December 31, 2005.




26




We
        had
        interest income of $0.2 million and $0.4 million during the three and six
        months
        ended June 30, 2006, respectively, as compared to zero interest income for
        the
        comparable prior year periods. We had interest expense of $8,315 and $82,788
        during the three and six months ended June 30, 2006 as compared to $76,948
        and
        $0.2 million for the comparable prior year periods. The change resulted from
        reduced interest expense due to the repayment of notes payable during the
        first
        quarter of 2006 and an increase in interest income related to the higher
        average
        cash balance for the quarter ended June 30, 2006.
  We
        had
        income tax expense of $0.1 million for the three and six months ended June
        30,
        2006 as compared to $8,175 and $8,975 for the comparable prior year period.
        The
        change resulted from an alternative minimum tax incurred during the quarter
        ended June 30, 2006.
 
 As
        result
        of the foregoing, the net loss decreased $1.3 million and increased $2.1
        million
        during the three and six months ended June 30, 2006, respectively, to $4.0
        million and $9.7 million as compared to $5.3 million and $7.5 million during
        the
        comparable prior periods.


**LIQUIDITY
        AND CAPITAL RESOURCES**




Net
          cash
          provided by operations during the six months ended June 30, 2006 was $18.4
          million, primarily due to increases in accrued expenses, deferred revenue,
          remittance to licensor, and allowance for doubtful accounts and provision
          for
          returns, offset by the net loss of $9.7 million, and increases in accounts
          receivable, inventories, and the development of our film library. These
          changes
          are primarily related to the release of TWC titles. The increase in accounts
          receivable relates primarily to sales of *Derailed,
          Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked and
          Doogal* during
          the six months ended June 30, 2006. The increase in accrued expenses and
          inventories primarily relate to invoices received but not paid for the
          production of inventory and sales and marketing expenses for *Matador* and *The
          Libertine* .
          The
          increase in deferred revenue related primarily to invoices for shipments
          of *The
          Matador* and *The
          Libertine,* which
          both had street dates on July 4. The invoices for *The
          Matador* and *The
          Libertine* were
          recorded as deferred revenue since the street date for these titles occurred
          after June 30, 2006. The remittance to licensor primarily represents the
          amount
          owed to TWC after deducting the related cost of sales, marketing costs,
          and our
          distribution fee from net sales of TWC titles during the six months ended
          June
          30, 2006. Under the terms of the distribution agreement, we are required
          to pay
          TWC after collection of receipts, the amount of which is determined by
          net
          revenue, which as of June 30, 2006 had not been collected. However, we
          bear 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 the release of *Derailed,
          Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked and
          Doogal* .
          For the
          six months ended June 30, 2005, net cash used in operations was
          $12.2 million, driven primarily by the net loss of $7.5 million, the
          increase in the development of our library, the decrease in accounts payable,
          offset by a decrease in accounts receivable.


Net
      cash
      used in investing activities for the six months ended June 30, 2006, was $0.7
      million, primarily attributed to the purchase of property and equipment. For
      the
      six months ended June 30, 2005, net cash used in investing activities was $0.4
      million, which was primarily due to the payment of obligations relating to
      the
      acquisition of AVMC.




Cash
      used
      in financing activities for the six months ended June 30, 2006 was $4.8 million,
      resulting from the repayment of $3.8 million of the $4.0 million notes payable
      assumed as part of the acquisition of AVMC on March 21, 2005 and the
      repayment of $1.5 million of notes issued in October 2005, offset by proceeds
      from the exercise of options and warrants. Cash provided by financing activities
      for the six months ended June 30, 2005 was $12.9 million, resulting from the
      issuance of common stock for proceeds of $15.3 million, proceeds from the
      exercise of warrants and common stock, offset by the repayment of short-term
      debt of $2.3 million and the payment of offering costs of $0.8
      million.




At
      June
      30, 2006, we had cash balances of $43,489,769 and net accounts receivable of
      $48,457,391. We feel that we have sufficient liquidity to fund our operations
      through the remainder of 2006. However, we will consider additional issuance
      of
      equity and debt financing to fund future growth opportunities. Although we
      believe that our 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 2006, or ever, as such
      performance is subject to numerous variables and uncertainties, many of which
      are out of our control.




The
      table
      below summarizes information as of June 30, 2006 regarding certain future
      minimum contractual obligations and commitments for the next five
      years:


Remainder
                  of 2006
              
              2007
              
              2008
              
              2009
              
              2010
              
              Thereafter
              
              TotalLease
                  obligations
              
              $
              536,310
              
              $
              1,092,459
              
              $
              976,302
              
              $
              728,507
              
              $
              734,880
              
              $
              185,068
              
              $
              4,253,526Employment
                  agreements
              
              $
              958,068
              
              $
              1,275,833
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,233,902Consulting
                  agreements
              
              
              106,667
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              106,667Royalty
                  advances
              
              
              231,386
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              231,386Total
              
              $
              1,832,431
              
              $
              2,368,292
              
              $
              976,302
              
              $
              728,507
              
              $
              734,880
              
              $
              185,068
              
              $
              6,825,480




27


**ITEM 3.****QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




As
      of
      June 30, 2006, our cash and cash equivalents were invested with financial
      institutions with investment grade credit ratings. Due to the short duration
      of
      our investment portfolio and the high quality of our investments, an immediate
      10% change in interest rates would not have a material effect on the fair market
      value of our portfolio. Therefore, we would not expect our operating results
      or
      cash flows to be affected to any significant degree by the effect of a sudden
      change in market interest rates on our investment portfolio.




We
      do not
      enter into hedging or derivative instrument arrangements.





**ITEM 4.****CONTROLS
      AND PROCEDURES**




We
      maintain disclosure controls and procedures (as defined in Exchange Act Rule
      13a-15(e) and 15d-15(e)) that are designed to ensure that information required
      to be disclosed in reports that we file or submit under the Securities Exchange
      Act of 1934 is recorded, processed, summarized, and reported within the time
      periods specified in the rules and forms of the Securities and Exchange
      Commission (“SEC”), 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 the required
      disclosures. In designing and evaluating the disclosure controls and procedures,
      we recognize that any controls and procedures, no matter how well designed
      and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives.




As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our management, including the
      Chief Executive Officer and the Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures. Based upon
      that evaluation, the Chief Executive Officer and the Chief Financial Officer
      concluded that information required to be disclosed in reports that we file
      or
      submit under the Securities Exchange Act of 1934 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 the required
      disclosures.




Although
      we are not required to be compliant with the provisions of Section 404 of the
      Sarbanes-Oxley Act in the current year, we anticipate that we will identify
      additional processes and procedures that will require further documentation,
      revision and possibly remediation as we begin our effort to implement Section
      404 of the Sarbanes-Oxley Act.




**Changes
      in Internal Controls Over Our Financial Reporting**




There
      was
      no change in our internal control over the financial reporting during the period
      covered by this report on Form 10-Q that has materially affected, or is
      reasonably likely to materially affect our internal control over financial
      reporting.





**PART
      II - OTHER INFORMATION**




**ITEM 1.****LEGAL
      PROCEEDINGS**




We
      have
      disclosed in previous reports filed with the Securities and Exchange Commission
      (i) a complaint filed against our new subsidiary American Vantage Media
      Corporation and Wellspring Media, Inc. in U.S. Bankruptcy Court for the District
      of Delaware by the Chapter 7 Trustee of the Winstar Communications, Inc. Estate,
      and (ii) a possible rescission offer in Washington State. There have been
      no material developments in these matters. For a complete description of the
      facts and circumstances surrounding the Winstar litigation, see the disclosures
      in our Annual Report on Form 10-KSB for the year ended December 31, 2004
      under “Item 3. Legal Proceedings”, which are incorporated by reference
      herein.




In
        October 2005, we commenced litigation against Falcon Picture Group, LLC
        (“Falcon”) in the Superior Court of San Diego County, Case No. GIN047884 seeking
        damages of $975,000 arising out of Falcon’s breach of the license agreement. In
        October 2005, Falcon commenced litigation against Genius in the Circuit Court
        of
        Cook County, Illinois, Case No. 05H16850 (the “Illinois Proceeding”), based
        upon allegations, among other things, that Genius breached the terms of a
        license agreement by refusing to pay certain royalties to which Falcon
        supposedly was entitled. Falcon seeks a damages award of approximately $83,332
        subject to proof at trial. Falcon further alleges that as a result of Genius’
purported default under the license agreement, Falcon is entitled to judgment
        declaring the license agreement to have been lawfully terminated. Genius
        has dismissed its San Diego action against Falcon in favor of refiling the
        same
        action against Falcon and its owner, Carl Amari, as a counterclaim in the
        Illinois Action.  The counterclaim was filed in the Illinois Action on July
        12, 2006. **** Genius
        plans to vigorously defend against the allegations thereof and seek recovery
        of
        damages.






28


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




There
      are
      no material changes from the risk factors previously disclosed in our Annual
      Report on Form 10-K for the fiscal year ended December 31,
      2005.




**ITEM 2.****UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




None




**ITEM 3.****DEFAULTS
      UPON SENIOR SECURITIES**




None.




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




None.




**ITEM 5.****OTHER
      INFORMATION**




None.




**ITEM 6.****EXHIBITS**




EXHIBITS
      REQUIRED BY ITEM 601 OF REGULATION S-K


3.1
            Certificate
                of Incorporation (incorporated by reference from Exhibit 3.1 to the
                Company’s Form 10-KSB filed on March 31, 2005).3.2
            Bylaws
                as amended (incorporated by reference from Exhibit 3.2 to the Company’s
                Form 10-KSB filed on March 31, 2005).10.1
            Second
                Amendment to Master Contribution Agreement by and between Genius
                Products,
                Inc., 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).10.2
            Third
                Amendment to Master Contribution Agreement by and between Genius
                Products,
                Inc., 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).10.3
            Fourth
                Amendment to Master Contribution Agreement by and between Genius
                Products,
                Inc., 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).31.1
            Certification
                of Chief Executive Officer pursuant to Section 302(a) of the
                Sarbanes-Oxley Act.*31.2
            Certification
                of Chief Financial Officer pursuant to Section 302(a) 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.





29


**SIGNATURES**




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





Dated:
                August 14, 2006
            
            GENIUS
                PRODUCTS, INC.,
              a
                Delaware CorporationBy:
            /s/
                Trevor DrinkwaterTrevor
                Drinkwater
              President
                and Chief Executive Officer
              (Principal
                Executive Officer)Dated:
                August 14, 2006
            
            By:
            /s/
                John MuellerJohn
                Mueller
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)








30