**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**Amendment
      No. 1 to**


**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 September 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)**





**NOT
      APPLICABLE**


**(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 61,534,357 shares outstanding of the issuer's Common Stock as of September
      30, 2006.














**EXPLANATORY
      NOTE**




On
      April
      12, 2007, the Audit Committee of the Board of Directors of the
      Company, acting on a recommendation from the Company’s management,
      determined that the Company’s unaudited condensed consolidated financial
      statements as of and for the quarters ended March 31, June 30, and
      September 30, 2006 should be restated to revise the accounting and related
      disclosures for net revenues, cost of revenues, gross profit, net loss, basic
      and diluted loss per common share, accounts receivable, production masters,
      film
      library, accrued expenses, and stockholders’ equity. The impact of the
      restatements on the quarter ended September 30, 2006 is further discussed
      in Note 2 to the unaudited condensed consolidated financial statements included
      herein.




This
      amendment is being filed for the purpose of amending and restating Items 1,
      2
      and 4 of Part I and Item 6 of Part II of the Form 10-Q originally filed
      solely to the extent necessary (i) to reflect the restatement of the
      Company’s unaudited condensed consolidated financial statements as of and for
      the period ended September 30, 2006, as described in Note 2 to the unaudited
      condensed consolidated financial statements, (ii) to make revisions to
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” as warranted by the restatement, (iii) to make revisions to
      Item 4 of Part I to reflect our evaluation of controls and procedures as of
      the date of filing of this amendment, (iv) to update the certifications
      required by the Sarbanes-Oxley Act of 2002, and (v) to update the
      exhibits.




This
      Amendment No. 1 to Quarterly Report on Form 10-Q is as of the date of the
      Form 10-Q originally filed, except for material subsequent events more fully
      described in Note 2 to the unaudited condensed consolidated financial
      statements.





2




**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**




**INDEX**




**PAGE****PART I**
              **FINANCIAL
                  INFORMATION**Item 1
              Financial
                  StatementsCondensed
                  Consolidated Balance Sheets at September 30, 2006 (unaudited) and
                  December
                  31, 2005 (audited)
              5Condensed
                  Consolidated Statements of Operations for the Three and Nine Months
                  Ended
                  September 30, 2005 (unaudited) and 2006 (unaudited)
              6Condensed
                  Consolidated Statements of Cash Flow for the Nine Months Ended
                  September
                  30, 2005 (unaudited) and 2006 (unaudited)
              7Notes
                  to Condensed Consolidated Financial Statements (unaudited)
              8Item 2
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              30Item 3
              Quantitative
                  and Qualitative Disclosures About Market Risk
              40Item 4
              Controls
                  and Procedures
              40**PART II**
              **OTHER
                  INFORMATION**Item 1
              Legal
                  Proceedings
              42Item 1A
              Risk
                  Factors
              42Item 2
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              42Item 3
              Defaults
                  Upon Senior Securities
              42Item 4
              Submission
                  of Matters to a Vote of Security Holders
              42Item 5
              Other
                  Information
              43Item 6
              Exhibits
              43**SIGNATURES**
              44




3




**NOTICE
      ABOUT 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 certain content
        providers, including The Weinstein Company®, ESPN®, World Wrestling
        Entertainment, Inc.® and Discovery KidsTM 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, Clerks II, Wordplay, Feast, Pulse,
        Alex Rider: Operation Stormbreaker* 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.





**CLOSING
      OF THE WEINSTEIN COMPANY TRANSACTION**





On
      July
      21, 2006, we completed a transaction (the “Transaction”) with The Weinstein
      Company LLC (“TWC”) and its affiliates pursuant to which we launched 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”). As a result of the Closing of this
      Transaction, for the period from July 22 through September 30 (post Closing),
      our financial statements reflect our investment in the Distributor using the
      equity method of accounting. Under the equity method of accounting, only our
      investment in and amounts due to and from the Distributor are included in our
      consolidated balance sheet. As a result, we recorded an asset on our balance
      sheet related to our investment interest in the Distributor. On our statement
      of
      operations, we recorded our 30% share of the Distributor's profit or loss as
      equity in net earnings (losses) from the Distributor. After the Closing,
      substantially all of our revenue and expenses as well as the results from
      releasing TWC product are reflected in the financial statements of the
      Distributor. The financial statements for the Distributor are shown in Exhibit
      99.1 to this Quarterly Report.




4


**PART
      I - FINANCIAL INFORMATION**





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





**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(UNAUDITED)**


**(IN
      THOUSANDS,** **EXCEPT
      SHARE AND PAR VALUE INFORMATION** **)**





December
                31,
              2005
            
            September
                30,
              2006
              Restated
              (Note
                2)**ASSETS**
            
            
            
            (unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            30,597
            
            $
            1,071Accounts
                receivable, net of allowance for doubtful accounts of $942 andsales
                returns of $5,966
            
            
            2,407
            
            
            -Inventories,
                net
            
            
            5,568
            
            
            -Prepaid
                expenses
            
            
            704
            
            
            110Notes
                receivable, related party
            
            
            750
            
            
            777Total
                current assets
            
            
            40,026
            
            
            1,958Property
                and equipment, net
            
            
            396
            
            
            -Film
                library, net of accumulated amortization of $4,027
            
            
            19,727
            
            
            -Notes
                receivable, related party
            
            
            1,712
            
            
            -Investment
                in Distributor
            
            
            -
            
            
            92,123Goodwill
            
            
            14,488
            
            
            -Deposits
                and other
            
            
            16
            
            
            -Total
                assets
            
            $
            76,365
            
            $
            94,081**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            9,243
            
            $
            -Notes
                payable
            
            
            5,379
            
            
            -Accrued
                expenses
            
            
            3,308
            
            
            185Customer
                deposits
            
            
            189
            
            
            -Debentures
                payable
            
            
            51
            
            
            -Redeemable
                common stock
            
            
            414
            
            
            -Total
                current liabilities
            
            
            18,584
            
            
            185Deferred
                gain, related party
            
            
            1,212
            
            
            -Deferred
                tax liability
            
            
            1,380
            
            
            14,445Total
                liabilities
            
            
            21,177
            
            
            14,630Commitments
                and contingenciesStockholders’
                equity:Series
                W preferred stock, $.0001 par value, 100 shares authorized; 100 sharesoutstanding
            
            
            -
            
            
            -Preferred
                stock, $.0001 par value; 10,000,000 shares authorized; no sharesoutstanding
            
            
            -
            
            
            -Common
                stock, $.0001 par value; 300,000,000 shares authorized; 60,438,154and
                61,534,357 shares outstanding
            
            
            6
            
            
            6Additional
                paid-in capital
            
            
            93,920
            
            
            101,569Accumulated
                deficit
            
            
            (38,738
            )
            
            (22,124
            )Total
                stockholders’ equity
            
            
            55,188
            
            
            79,451Total
                liabilities and stockholders' equity
            
            $
            76,365
            
            $
            94,081




See
      accompanying notes to condensed unaudited interim financial
      statements




5




**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**


**(IN
      THOUSANDS,** **EXCEPT
      PER SHARE INFORMATION** **)**





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,2005
              Restated
              (Note
                3)
            
            2006
              Restated
              (Note
                2)
            
            2005
              Restated
              (Note
                3)
            
            2006
              Restated
              (Note
                2)Revenues
            
            $
            10,204
            
            $
            18,952
            
            $
            18,159
            
            $
            159,893Sales
                returns, discounts and allowances
            
            
            (2,050
            )
            
            (3,937
            )
            
            (3,537
            )
            
            (40,882
            )Net
                revenues
            
            
            8,154
            
            
            15,015
            
            
            14,622
            
            
            119,011Total
                cost of revenues
            
            
            5,786
            
            
            15,318
            
            
            14,096
            
            
            130,870Gross
                profit (loss)
            
            
            2,368
            
            
            (303
            )
            
            526
            
            
            (11,859
            )Operating
                expenses (income):General
                and administrative
            
            
            3,393
            
            
            4,166
            
            
            8,988
            
            
            18,621Equity
                in net loss from Distributor
            
            
            -
            
            
            63
            
            
            -
            
            
            63Restructuring
            
            
            2,745
            
            
            -
            
            
            2,745
            
            
            -Gain
                on sale, related party
            
            
            -
            
            
            -
            
            
            -
            
            
            (63
            )Total
                operating expenses
            
            
            6,138
            
            
            4,229
            
            
            11,733
            
            
            18,621Loss
                from operations
            
            
            (3,771
            )
            
            (4,531
            )
            
            (11,208
            )
            
            (30,480
            )Interest
                expense
            
            
            (76
            )
            
            (3
            )
            
            (159
            )
            
            (11
            )Interest
                income and other
            
            
            -
            
            
            81
            
            
            -
            
            
            124Loss
                before provision for income taxes
            
            
            (3,847
            )
            
            (4,453
            )
            
            (11,366
            )
            
            (30,367
            )Provision
                for income taxes
            
            
            8
            
            
            8,053
            
            
            17
            
            
            6,780Loss
                before Extraordinary item
            
            
            (3,855
            )
            
            (12,506
            )
            
            (11,383
            )
            
            (37,147
            )Extraordinary
                gain
            
            
            -
            
            
            53,760
            
            
            -
            
            
            53,760Net
                income (loss)
            
            $
            (3,855
            )
            $
            41,254
            
            $
            (11,383
            )
            $
            16,613**Basic
                EPS**Loss
                before extraordinary item
            
            $
            (0.09
            )
            $
            (0.20
            )
            $
            (0.30
            )
            $
            (0.61
            )Extraordinary
                gain
            
            
            NA
            
            $
            0.88
            
            
            NA
            
            $
            0.88Net
                income (loss)
            
            $
            (0.09
            )
            $
            0.68
            
            $
            (0.30
            )
            $
            0.27Basic
                weighted average shares
            
            
            43,378,990
            
            
            61,370,448
            
            
            37,767,552
            
            
            60,888,488




See
      accompanying notes to condensed unaudited interim financial
      statements




6


**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**


**(IN
      THOUSANDS)**





Nine
                Months Ended September 30,2005
              Restated
              (Note
                3)
            
            2006
              Restated
              (Note
                2)Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (11,383
            )
            $
            16,613Adjustments
                to reconcile net income (loss) to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            1,797
            
            
            116Amortization
                and impairment of film library
            
            
            -
            
            
            12,508Change
                in allowance for doubtful accounts and provision for
                returns
            
            
            267
            
            
            17,423Operating
                expenses paid by related company
            
            
            -
            
            
            181Change
                in provision for obsolete inventory
            
            
            -
            
            
            3,922Common
                stock issued for services
            
            
            289
            
            
            -Extraordinary
                gain
            
            
            -
            
            
            (60,046
            )Equity
                in net income from Distributor
            
            
            -
            
            
            (36
            )Amortization
                of warrants issued for services
            
            
            149
            
            
            -Stock
                compensation expense
            
            
            1,850
            
            
            6,447Interest
                expense on redeemable common stock
            
            
            14
            
            
            -Deferred
                tax liability
            
            
            -
            
            
            13,065*Changes
                in assets and liabilities:*(Increase)
                decrease in Accounts receivable
            
            
            1,226
            
            
            (65,331
            )(Increase)
                decrease in Inventories
            
            
            (980
            )
            
            (12,360
            )(Increase)
                decrease in Prepaid expenses, notes receivable, deposits and
                other
            
            
            (289
            )
            
            73(Increase)
                decrease in Notes receivable
            
            
            -
            
            
            206(Increase)
                decrease in Film library
            
            
            (2,753
            )
            
            (1,456
            )(Increase)
                decrease in Prepaid Royalties
            
            
            (713
            )
            
            -(Increase)
                decrease in Royalty Advances
            
            
            -
            
            
            (2,416
            )Increase
                (decrease) in Accounts payable
            
            
            (4,877
            )
            
            (3,827
            )Increase
                (decrease) in Accrued expenses and other
            
            
            1,515
            
            
            17,470Increase
                (decrease) in Deferred revenue
            
            
            -
            
            
            2,494Increase
                (decrease) in Remittance to licensor
            
            
            -
            
            
            50,992Net
                cash used in operating activities
            
            
            (13,888
            )
            
            (3,962
            )Cash
                flows from investing activities:AVM
                cash, net of expenses paid in cash
            
            
            341
            
            
            -Restricted
                cash
            
            
            -
            
            
            (303
            )Investment
                in Distributor
            
            
            -
            
            
            (20,329
            )Patents
                and trademarks
            
            
            (10
            )
            
            -Purchase
                of property and equipment
            
            
            (135
            )
            
            (448
            )Net
                cash provided by (used in) investing activities
            
            
            196
            
            
            (21,080
            )Cash
                flows from financing activities:Payments
                on notes payable
            
            
            (2,336
            )
            
            (5,230
            )Payments
                of offering costs
            
            
            (834
            )
            
            -Proceeds
                from exercise of options
            
            
            84
            
            
            529Proceeds
                from exercise of warrants
            
            
            757
            
            
            217Proceeds
                from issuance of common stock
            
            
            15,128
            
            
            -Net
                cash provided by (used in) financing activities
            
            
            12,799
            
            
            (4,484
            )Net decrease
                in cash and cash equivalents
            
            
            (893
            )
            
            (29,526
            )Cash
                and cash equivalents at beginning of period
            
            
            1,224
            
            
            30,597Cash
                and cash equivalents at end of period
            
            $
            331
            
            $
            1,071





Supplemental
                disclosure of cash flow information:Warrants
                issued for offering costs
            
            $
            1,015
            
            $
            -Issuance
                of common stock for offering costs
            
            
            350
            
            
            -Interest
                paid
            
            
            1
            
            
            -Taxes
                paid
            
            
            1
            
            
            -Noncash
                transactions:Noncash
                net asset exchanged for investment in Distributor
            
            
            
            
            $
            11,851Write-off
                of redeemable common stock
            
            
            
            
            
            414




Warrant
      holders cashless exercised 139,231 warrants during the quarter ended September
      30, 2006.




See
      accompanying notes to condensed unaudited interim financial
      statements


7


**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**




**NOTE
      1** **.** **NATURE
      OF BUSINESS, THE WEINSTEIN COMPANY TRANSACTION,** **BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





Genius
      Products, Inc. (OTC BB:GNPI) (“we” “our” or the “Company”), along with The
      Weinstein Company Holdings LLC and its first-tier
      subsidiary, W-G Holding Corp. ,
      own
      Genius Products, LLC, a leading independent home-entertainment distribution
      company that produces, licenses, and distributes a valuable library of motion
      pictures, television programming, family, lifestyle and trend entertainment
      on
      DVD and other emerging platforms through its expansive network of retailers
      throughout the U.S.  Genius handles the distribution, marketing and sales
      for such brands as Asia Extreme(TM), Baby Genius®, Discovery Communications,
      Inc., Dragon DynastyTM, Dimension Films, ESPN®, IFC®, Imaginasian, NBC News®,
      Sundance Channel Home Entertainment®, WellspringTM, The Weinstein Company® and
      World Wrestling Entertainment, Inc. ®,  Genius Products, Inc. is the
      managing member of Genius Products, LLC, in which it holds a 30% equity
      interest.




THE
      WEINSTEIN COMPANY TRANSACTION


On
      July
      21, 2006, we completed a transaction (the “Transaction”) with The Weinstein
      Company LLC (“TWC”) and its affiliates pursuant to which we launched 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 our stockholders 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 venture also
      operates the former businesses of Genius Products, Inc., including the
      marketing, sales and distribution for other major branded entertainment content,
      such as ESPN, NBC News, Sundance Home Entertainment, World Wrestling
      Entertainment, Inc., Discovery Communications, Inc., Imaginasian, Asia Extreme,
      Dragon Dynasty and IFC. Genius Products, LLC is owned 70% by TWC’s parent
      company, The Weinstein Company Holdings LLC, and its first-tier
      subsidiary, W-G Holding Corp. and
      30%
      by Genius Products, Inc. As a
      condition to the closing of the transaction with TWC Holdings, we issued 100
      shares of Series W Preferred Stock to TWC
      Holdings and its
      first-tier subsidiary, W-G Holding Corp. The Series W Preferred Stock provides
      the holders with significant rights, preferences and powers including described
      in Note 8 to our financial statements. In
      addition, as part of the Transaction, Genius Products, Inc. added to its Board
      of Directors two TWC executives; Larry Madden, Executive Vice President and
      Chief Financial Officer of TWC, and Irwin Reiter, Executive Vice President
      of
      Accounting and Financial Reporting of TWC.




Our
      interest in the Distributor consists of Class G Units representing a 30%
      membership interest in the Distributor, and the interest of The Weinstein
      Company Holdings LLC and W-G
      Holding Corp., consists
      of Class W Units representing a 70% membership interest in the Distributor.
      The
      70% interest in the Distributor held by The Weinstein Company Holdings LLC
      and W-G
      Holding Corp. is
      redeemable, at their option at any time from one year after the Closing, for
      up
      to 70% of our outstanding common stock, or with their approval, cash. From
      December 5, 2005, the date we entered into a Master Contribution Agreement
      relating to the Transaction through the Closing, we operated under an interim
      distribution agreement with TWC and recorded the results from titles we first
      released for TWC in March 2006 in our financial statements. Refer to Note 4
      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
      nine
      months ended September 30, 2006 and 2005 have been prepared by us 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 (“SEC”). 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.




8




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 we believe 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 nine
      months ended September 30, 2006 are not necessarily indicative of the results
      to
      be expected for the full year.




INVESTMENT
      IN DISTRIBUTOR


At
      the
      Closing of the Transaction, 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 30% equity interest in the
      Distributor. The Distributor is treated as a partnership for U.S. federal income
      tax purposes. Accordingly, the book accounting for the Distributor follows
      its
      tax status as a partnership. The accompanying financial statements 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 Distributor have been included in our consolidated balance sheet. As a
      result, we recorded an asset on our balance sheet related to our investment
      interest in the Distributor. The Transaction represents a non-monetary exchange
      of a business controlled by the Company for a non-controlling interest in the
      Distributor. Accordingly, the amount to be initially recorded for the Company’s
      investment in the Distributor is partially based on the Company’s fair value as
      determined by reference to the quoted market prices of the Company’s shares on
      the close of market on the date of Closing and partially based on the historical
      basis of the net assets surrendered in the Transaction. On our statement of
      operations, we have recorded our 30% share of the Distributor’s profit or loss
      as equity in net earnings (losses) from Distributor. We recorded a gain 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. The carrying amount of our investment
      in
      the Distributor will subsequently be adjusted to recognize our share of the
      earnings or losses of the Distributor after the Transaction. Pursuant to
      Accounting Principles Board Opinion No. 18, we will be required to periodically
      assess whether a decrease in value of the investment has occurred which is
      other
      than temporary and which should be recognized immediately resulting in an
      impairment loss.




From
      December 5, 2005 through the Closing, we operated under an interim distribution
      agreement with TWC and recorded the results from titles we released for TWC
      on
      our financial statements. After Closing, substantially all of our revenue and
      expenses as well as the results from releasing TWC product are reflected in
      the
      financial statements of the Distributor. We have included separate financial
      statements of the Distributor in an Exhibit following our financial
      statements.




CONCENTRATIONS
      OF CREDIT RISK


For
      the
      21-day period ending July 21, 2006, Wal-Mart accounted for 33% of net revenues.
      At the Closing we transferred all of our accounts receivable assets to the
      Distributor and there were no accounts receivables balances at September 30,
      2006 for Genius Products, Inc (see Exhibit 99.1 Note A for a description of
      the
      accounts receivable balances on the Distributor’s balance sheet at September 30,
      2006). For the three month period ended September 30, 2005, Wal-Mart and
      Anderson Merchandisers accounted for 39% and 13% of net revenues,
      respectively.




For
      the
      202 day period January 1, 2006 to July 21, 2006, Wal-Mart accounted for
      38% of net revenues. For the nine month period ended September 30, 2005,
      Anderson Merchandisers accounted for 13% of net revenues. For the nine month
      period ended September 30, 2006, this customer accounted for less than 1% of
      net
      revenues.




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.




9




STOCK-BASED
      COMPENSATION


In
      December 2004, the Financial Accounting Standards Board (“FASB”) revised
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS No.
      123R”), “Share-Based Payment,” which establishes accounting for share-based
      awards exchanged for employee services and requires companies to expense the
      estimated fair value of these awards over the requisite employee service period.
      The accounting provisions of SFAS No. 123R became effective for the Company
      beginning on January 1, 2006.




Under
      SFAS No. 123R, share-based compensation cost is measured at the grant date,
      based on the estimated fair value of the award, and is recognized as expense
      over the employee's requisite service period. The Company adopted the provisions
      of SFAS No. 123R using a modified prospective application. The valuation
      provisions of SFAS No. 123R apply to new awards and to awards that are
      outstanding on the effective date and subsequently modified or cancelled.
      Share-based compensation expense recognized under SFAS No. 123R includes
      share-based awards granted subsequent to January 1, 2006, based on the grant
      date fair value estimated in accordance with the provisions of SFAS No. 123R
      as
      well as share-based awards granted prior to, but not yet vested as of January
      1,
      2006, based on the grant date fair value estimated in accordance with the
      provisions of SFAS No. 123R. In accordance with the modified prospective method,
      the consolidated financial statements for prior periods have not been restated
      to reflect, and do not include, the share-based compensation impact of SFAS
      No.
      123R.




INCOME
      TAXES


The
      Company accounts for income taxes under SFAS No. 109, “ Accounting
      for Income Taxes” (“SFAS No. 109”) .
      This
      statement requires the recognition of deferred tax assets and liabilities for
      the future consequences of events that have been recognized in the Company’s
      consolidated financial statements or tax returns. The measurement of the
      deferred items is based on enacted tax laws. In the event the future
      consequences of differences between financial reporting bases and the tax bases
      of the Company’s assets and liabilities result in a deferred tax asset, SFAS
      No. 109 requires an evaluation of the probability of being able to realize
      the future benefits indicated by such asset. A valuation allowance related
      to a
      deferred tax asset is recorded when it is more likely than not that some portion
      or all of the deferred tax asset will not be realized.




For
        the
        three and nine months ended September 30, 2006, the Company recognized a
        tax
        expense of approximately $8.1 million and $6.8 million. The Company currently
        has a full valuation allowance on its deferred tax assets and has recorded
        a net
        deferred tax liability relating to its investment in Genius Products, LLC.
        The
        deferred tax liability related to Genius Products, LLC is not offset against
        the
        deferred tax assets as the reversal period for this amount is not considered
        to
        be determinable on a more likely than not basis. Based on the Company’s
        assessment of all available evidence, the Company concluded that it is not
        more
        likely than not that its deferred tax assets will be realized. Management
        will
        continue to monitor the future recoverability of the tax assets which have
        a
        full valuation allowance as of September 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 changes in ownership structure that
      occurred prior to December 31, 2005.




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 Statement of Position (“SOP”) 00-2, “Accounting by Producers or
      Distributors of Films” (“SOP 00-2”) and Staff Accounting Bulletin (“SAB”) No.
      104, “Revenue Recognition”. Revenues are recorded upon the receipt of goods by
      the customer for titles that do not have a “street date” (when it is available
      for sale by the customer). If a title has a street date, we recognize the
      initial shipment as revenue on that street date and all subsequent shipments
      after street date are recognized as revenue upon the receipt of goods by the
      customer. Under revenue sharing arrangements, rental revenue is recognized
      on or
      after the street date and when we are entitled to receipts and such receipt
      is
      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.




10




RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS


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




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




In
      May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections” (“SFAS No. 154”), an amendment to Accounting Principles
      Bulletin Opinion No. 20, “Accounting Changes” (“APB No. 20”), and SFAS
      No. 3, “Reporting Accounting Changes in Interim Financial Statements”
(“SFAS No. 3”). Though SFAS No. 154 carries forward the guidance in APB
      No. 20 and SFAS No. 3 with respect to accounting for changes in
      estimates, changes in reporting entity, and the correction of errors, SFAS
      No. 154 establishes new standards on accounting for changes in accounting
      principles, whereby all such changes must be accounted for by retrospective
      application to the financial statements of prior periods unless it is
      impracticable to do so. SFAS No. 154 is effective for accounting changes
      and error corrections made in fiscal years beginning after December 15,
      2005, with early adoption permitted for changes and corrections made in years
      beginning after May 2005. We implemented SFAS No. 154 in our fiscal
      year beginning January 1, 2006. The adoption of SFAS No. 154 did not have a
      material impact on our financial position of results of operations.




11




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




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




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




In
      September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” (“SAB No. 108”). This SAB provides guidance on the consideration of
      the effects of prior year misstatements in quantifying current year
      misstatements for the purpose of a materiality assessment. SAB 108 establishes
      an approach that requires quantification of financial statement errors based
      on
      the effects of each of the Company’s balance sheet and statement of operations
      financial statements and the related financial statement disclosures. The SAB
      permits existing public companies to record the cumulative effect of initially
      applying this approach in the first year ending after November 15, 2006 by
      recording the necessary correcting adjustments to the carrying values of assets
      and liabilities as of the beginning of that year with the offsetting adjustment
      recorded to the opening balance of retained earnings. Additionally, the use
      of
      the cumulative effect transition method requires detailed disclosure of the
      nature and amount of each individual error being corrected through the
      cumulative adjustment and how and when it arose. We are currently evaluating
      the
      impact SAB 108 may have to our consolidated balance sheet and statement of
      operations.




12




**NOTE
      2.** **UNAUDITED
      RESTATEMENT OF**  **QUARTER
      AND NINE MONTHS ENDED SEPTEMBER 30, 2006**





On
      April
      12, 2007, we determined that it was necessary to restate our unaudited
      consolidated financial statements and other financial information as of and
      for
      the quarter and nine months ended September 30, 2006. The restatements that
      we made at that time related to the following corrections of
      errors:




1.
      The
      Company revised the computation of its stock option non-cash compensation
      expense under the provisions of SFAS No. 123R and Emerging Issues Task Force
      (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
      Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services” (“Stock Option Compensation Expense”), for the three and nine months
      ended September 30, 2006.




Additionally,
        the Company revised its computation of Stock Option Compensation Expense
        in the
        three and nine months ended September 30, 2006 to properly reflect the
        accelerated vesting of employee and non-employee awards of stock options
        which
        occurred upon the closing of the Transaction as of July 21, 2006. This non-cash
        adjustment was necessary as the Stock Option Compensation Expense related
        to the
        accelerated vesting was initially recorded in the records of the Distributor.
        For the three and nine months ended September 30, the Company increased stock
        compensation expense by $4.1 million and $4.4 million,
        respectively.




2.
      The
      Company revised its reported net revenue amounts for the three and nine months
      ended September 30, 2006 to properly reflect net revenue in the appropriate
      period. The need for these corrections resulted from cut-offs due to the closing
      of the Transaction on July 21, 2006 (as opposed to a month-end cut-off
      date), cut-offs at June 30 and errors in the timing of recognition of
      invoices and expenses. For the three and nine months ended September 30, the
      Company decreased its revenue in the amount of $2.0 million and increased its
      revenue in the amount of $0.3 million, respectively. In addition, the Company
      identified errors in the treatment of revenue from revenue-sharing agreements
      and revised its reported net revenue to comply with the provisions of EITF
      01-09, “Accounting for Consideration Given by a Vendor to a Customer.” The total
      non-cash adjustments required to decrease revenue and cost of revenue for the
      three and nine months ended September 30 were $0.3 million and $2.2 million,
      respectively.




3.
      The
      Company revised its advertising and marketing expense to properly expense
      advertising and marketing related items as incurred and revised participations
      expense to comply with the provisions of SOP 00-2. The Company decreased
      advertising and marketing expense by $3.5 and $2.5 million for the three and
      nine months ended September 30, respectively. For the three and nine months
      ended September 30, the Company increased participation expense by $2.2 and
      $1.1
      million, respectively.




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




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




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




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




13




8.
      The
      Company revised its tax provision amounts for the fiscal quarters ended March
      31, June 30 and September 30, 2006 to properly reflect its tax provision for
      these periods.  The need for these corrections resulted from the liability
      recognized in purchase accounting in connection with the Wellspring acquisition
      and the Transaction. For the three and nine months ended September 30, the
      Company increased its tax provision by $13.1 million and $11.8 million,
      respectively, including amounts attributable to the extraordinary
      gain.




9.
      The
      Company revised the presentation of its advertising and marketing expenses
      of
      $6.0 million and $ 22.5 million for the three and nine months ended September
      30, 2006 to reclassify these amounts from operating expenses to cost of
      revenues.




The
      effects of the restatement on net revenues, cost of revenues, gross profit,
      provision for taxes, net loss, basic and diluted loss per common share, accounts
      receivable, film library, accrued expenses, and stockholders’ equity as of and
      for the three and nine months ended September 30, 2006 are as follows:





(In
                thousands, except per share amounts)
            
            Three
                months ended September 30, 2006
            
            Nine
                months ended September 30, 2006As
                Originally Reported
            
            Restatement
                Adjustments
            
            As
                Restated
            
            As
                Originally Reported
            
            Restatement
                Adjustments
            
            As
                RestatedNet
                revenues
            
            $
            17,341
            
            $
            (2,326
            )
            $
            15,015
            
            $
            120,937
            
            $
            (1,926
            )
            $
            119,011Cost
                of revenues
            
            
            10,400
            
            
            4,918
            
            
            15,318
            
            
            93,787
            
            
            37,084
            
            
            130,871Gross
                profit (loss)
            
            
            6,941
            
            
            (7,244
            )
            
            (303
            )
            
            27,149
            
            
            (39,009
            )
            
            (11,860
            )Provision
                for income taxes
            
            
            (107
            )
            
            8,160
            
            
            8,053
            
            
            -
            
            
            6,780
            
            
            6,780Net
                income
            
            
            46,965
            
            
            (5,711
            )
            
            41,254
            
            
            37,311
            
            
            (20,698
            )
            
            16,613Income
                per common share:Basic
            
            
            
            
            
            
            
            
            0.67
            
            
            
            
            
            
            
            
            0.27Diluted
            
            
            
            
            
            
            
            
            0.63
            
            
            
            
            
            
            
            
            0.26Accounts
                receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                current assets
            
            
            1,071
            
            
            887
            
            
            1,958
            
            
            1,071
            
            
            887
            
            
            1,958Film
                library
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                assets
            
            
            98,568
            
            
            (4,487
            )
            
            94,081
            
            
            98,568
            
            
            (4,487
            )
            
            94,081Accrued
                expenses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                current liabilities
            
            
            426
            
            
            (241
            )
            
            185
            
            
            426
            
            
            (241
            )
            
            185Stockholders'
                equity
            
            
            98,142
            
            
            (18,691
            )
            
            79,451
            
            
            98,142
            
            
            (18,691
            )
            
            79,451





14





**NOTE
      3.** **RESTATEMENT
      OF QUARTERS ENDED JUNE 30 AND SEPTEMBER 30, 2005**





When
      we
      completed our Form 10-K for the year ended 2005, we determined that it was
      necessary to restate our unaudited consolidated financial statements and other
      financial information at, and for the quarters ended, June 30 and
      September 30, 2005. The restatement that we made at that time related to
      the following correction of errors:




1. We
      revised our theatrical revenue to decrease the amount recognized during the
      three months September 30, 2005. The total adjustment required to decrease
      theatrical revenue to its proper amount was $0.3 million for the three months
      ended September 30, 2005. This adjustment was necessary because we had
      accrued this amount of revenue for the three months ended June 30, 2005 for
      film rental earned but not billed during that period and, therefore, overstated
      theatrical revenue by this amount in the three months ended September 30,
      2005. The correct accounting treatment is to reverse this accrual during the
      three months ended September 30, 2005 to properly state theatrical
      revenue.




2.
      We
      revised our royalty expense to increase the amount recognized during the three
      month period ended September 30, 2005. The total adjustment required to
      increase royalty expense to its proper amount was $74,311 for the three month
      period ended September 30, 2005. This adjustment was necessary because we
      had recorded this amount as an asset as of September 30, 2005. The correct
      accounting treatment is to record this amount as royalty expense during the
      three month period ended September 30, 2005.




3.
      We
      revised production cost amortization expense to increase the amount recognized
      during the three month period ended September 30, 2005. The total
      adjustment required to increase production costs amortization expense to its
      proper amount was $41,474 for the three month period ended September 30,
      2005. This adjustment was necessary because we had recorded this amount as
      an
      asset as of September 30, 2005 when the amount should have been expensed
      under SOP 00-2. The correct accounting treatment is to record this amount as
      expense during the three month period ended September 30,
      2005.




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




Three
                months ended September 30, 2005
            
            Nine
                months ended September 30, 2005As
                Originally Reported
            
            Restatement
                Adjustments
            
            As
                Restated
            
            As
                Originally Reported
            
            Restatement
                Adjustments
            
            As
                RestatedNet
                revenues
            
            $
            8,405,643
            
            $
            (251,603
            )
            $
            8,154,040
            
            $
            14,783,979
            
            $
            (161,603
            )
            $
            14,622,376Cost
                of revenues
            
            
            5,670,430
            
            
            115,785
            
            
            5,786,215
            
            
            13,501,019
            
            
            595,480
            
            
            14,096,499Gross
                profit
            
            
            2,735,213
            
            
            (367,388
            )
            
            2,367,825
            
            
            1,282,960
            
            
            (757,083
            )
            
            525,877Net
                loss
            
            $
            (3,487,410
            )
            $
            (367,388
            )
            $
            (3,854,798
            )
            $
            (10,626,389
            )
            $
            (757,083
            )
            $
            (11,383,472
            )Loss
                per common share:Basic
                and diluted
            
            $
            (0.08
            )
            $
            (0.01
            )
            $
            (0.09
            )
            $
            (0.24
            )
            $
            (0.02
            )
            $
            (0.26
            )Accounts
                receivable
            
            $
            5,649,464
            
            $
            (251,603
            )
            $
            5,397,861
            
            $
            5,649,464
            
            $
            (251,603
            )
            $
            5,397,861Total
                current assets
            
            
            13,552,223
            
            
            (251,603
            )
            
            13,300,620
            
            
            13,552,223
            
            
            (251,603
            )
            
            13,300,620Production
                masters
            
            
            3,615,641
            
            
            (105,021
            )
            
            3,510,620
            
            
            3,615,641
            
            
            (105,021
            )
            
            3,510,620Film
                library
            
            
            16,270,146
            
            
            (490,459
            )
            
            15,779,687
            
            
            16,270,146
            
            
            (490,459
            )
            
            15,779,687Total
                Assets
            
            
            46,674,832
            
            
            (847,083
            )
            
            45,827,749
            
            
            46,674,832
            
            
            (847,083
            )
            
            45,827,749Accrued
                expenses
            
            
            3,235,852
            
            
            (90,000
            )
            
            3,145,852
            
            
            3,235,852
            
            
            (90,000
            )
            
            3,145,852Total
                Current Liabilities
            
            
            16,464,609
            
            
            (90,000
            )
            
            16,374,609
            
            
            16,464,609
            
            
            (90,000
            )
            
            16,374,609Stockholders'
                equity
            
            $
            30,210,223
            
            $
            (757,083
            )
            $
            29,453,140
            
            $
            30,210,223
            
            $
            (757,083
            )
            $
            29,453,140




15




The
      restatement adjustments above for accounts receivable, production masters,
      film
      library, accrued expenses, and stockholders’ equity include the cumulative
      effect of the restatement for the quarters ended June 30, 2005 and
      September 30, 2005.




**N** **OTE
      4.** **COMPLETION
      OF THE WEINSTEIN COMPANY TRANSACTION**





On
      July
      21, 2006, we completed the Transaction with TWC and its affiliates pursuant
      to
      which we launched 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 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. Genius Products, LLC is owned 70% by TWC’s parent company, The Weinstein
      Company Holdings LLC, and its first-tier
      subsidiary, W-G Holding Corp. and 30%
      by Genius Products, Inc. In addition, as part of the Transaction, Genius
      Products, Inc. added to its Board of Directors two TWC executives; Larry Madden,
      Executive Vice President and Chief Financial Officer of TWC, and Irwin Reiter,
      Executive Vice President of Accounting and Financial Reporting of
      TWC.




At
      the
      Closing, the Distributor adopted an Amended and Restated Limited Liability
      Company Agreement (the “LLC Agreement”) in the form agreed to by the parties.
      The Distributor, which was renamed Genius Products, LLC, now operates the new
      distribution business as well as our businesses that we conducted prior to
      the
      Closing.




At
      the
      Closing, we issued to The Weinstein Company Holdings LLC and W-G
      Holding Corp. 100
      shares of Series W Preferred Stock. The Series W Preferred Stock provides them
      and their permitted transferees with (a) the right to elect five of the
      seven directors on our Board of Directors, (b) majority voting power over
      other actions requiring approval of our stockholders, and (c) the right to
      approve certain specified actions. The Series W Preferred Stock has no rights
      to
      receive dividends and minimal liquidation value. On the Closing, we amended
      and
      restated our Certificate of Incorporation to, among other things, provide for
      the designation of the Series W Preferred Stock.




At
      the
      Closing, we entered into a Registration Rights Agreement with TWC pursuant
      to
      which we agreed to register for resale the shares of our common stock issuable
      upon redemption of Class W Units in the Distributor currently held by The
      Weinstein Company Holdings LLC and W-G
      Holding Corp .
      In
      addition, pursuant to the terms of the Agreement, we entered into the following
      agreements at the Closing:




·
            Amended
                and Restated Limited Liability Company
                Agreement;





·
            Video
                Distribution Agreement;





·
            Registration
                Rights Agreement;





·
            Services
                Agreement; and





·
            Assignment
                and Assumption Agreement.





The
      Transaction represents a nonmonetary exchange of a business controlled by Genius
      Products, Inc. for a non-controlling interest in the Distributor. Accordingly,
      the amount recorded for our investment in the Distributor was partially based
      on
      our fair value as determined by reference to the quoted market prices of our
      shares on the close of market on the date of Closing and partially based on
      the
      historical basis of the net assets surrendered in the Transaction. We recognized
      a partial gain of $60.0 million.




16




Our
      investment in the Distributor was determined as follows:





Total
                Genius Product, Inc. shares outstanding as of 7/21/2006
            
            
            61,005,126Closing
                share price on 7/21/06
            
            $
            1.95Equity
                market capitalization
            
            
            118,960Less
                cash retained at Genus Products, Inc.
            
            
            (1,000
            )Total
                consideration
            
            
            117,960Ownership
                interest retained
            
            
            30
            %Genius
                Products, Inc. - net book value at 7/21/2006
            
            $
            33,180Less
                cash and liabilities retained at Genius Products, Inc.
            
            
            (1,000
            )Adjusted
                net book value
            
            
            32,180Consideration
                in excess of net book value
            
            
            85,780Ownership
                interest surrendered
            
            
            70
            %Genius
                Products, Inc's partial gain before taxes
            
            
            60,046Less
                tax provision
            
            
            (6,286
            )Extraordinary
                gain, net of taxes
            
            
            53,760




**UNAUDITED
      PRO FORMA CONSOLIDATED FINANCIAL INFORMATION FOR GENIUS PRODUCTS,
      INC.**




The
      following tables present the unaudited pro forma consolidated financial
      information of the Company and its subsidiaries, adjusted to give effect to
      the
      Transaction with TWC. The unaudited pro forma consolidated financial information
      should be read in conjunction with, and is qualified in its entirety by
      reference to, the Company’s consolidated financial statements and the notes
      thereto and the related “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations”, each of which is included elsewhere in
      this quarterly report.




The
      unaudited pro forma consolidated statement of operations for the nine months
      ended September 30, 2006 gives effect to the Transaction as if it had occurred
      as of January 1, 2006 excluding the gain resulting from the net assets
      transferred. The pro forma adjustments are described in the accompanying notes
      and are based upon available information and certain assumptions that management
      believes are reasonable including: (i) the accompanying pro forma statement
      of operations is based on the individual historical statement of operations
      for
      the Company for the nine months ended September 30, 2006 which includes revenues
      from TWC titles sold while operating under an interim agreement as discussed
      further below. For pro forma purposes, the Company’s historical results have
      been adjusted to reflect only its proportionate share of its net loss;
      (ii) the exclusion of the effect of convertible Class W Units;
      (iii) the contributed assets and liabilities to the Distributor; and (iv)
      no additional specifically identifiable intangible assets. The pro forma
      financial information does not purport to represent what the results of
      operations or financial condition of the Company actually would have been had
      the Transaction occurred on such dates or to project its results of operations
      or financial condition for any future date or period.




17




**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**UNAUDITED
      PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**


**(** **IN
      THOUSANDS,** **EXCEPT
      PER SHARE INFORMATION)**




Nine
                  Months Ended September 30, 2006Historical
                Restated
                (Note
                  2)
              
              Pro
                  Forma
                Adjustments
                  (1)
              
              Pro
                  FormaRevenues
              
              
              159,893
              
              
              (159,893
              )
              
              -Sales
                  returns, discounts and allowances
              
              
              (40,882
              )
              
              40,882
              
              
              -Net
                  revenues
              
              
              119,011
              
              
              (119,011
              )
              
              -Total
                  cost of revenues
              
              
              130,870
              
              
              (130,870
              )
              
              -Gross
                  profit (loss)
              
              
              (11,859
              )
              
              11,859
              
              
              -Operating
                  expenses (income):General
                  and administrative
              
              
              18,621
              
              
              (18,621
              )
              
              -Equity
                  in net loss (income) from Distributor
              
              
              63
              
              
              (10,862
              )
              
              (10,799
              )Gain
                  on sale, related party
              
              
              (63
              )
              
              63
              
              
              -Total
                  operating expenses
              
              
              18,621
              
              
              (29,420
              )
              
              (10,799
              )(Loss)
                  income from operations
              
              
              (30,480
              )
              
              41,279
              
              
              10,799Interest
                  expense
              
              
              (11
              )
              
              11
              
              
              -Interest
                  income and other
              
              
              124
              
              
              (124
              )
              
              -(Loss)
                  income before provision for income taxes
              
              
              (30,367
              )
              
              41,167
              
              
              10,799Provision
                  for income taxes
              
              
              6,780
              
              
              (6,780
              )
              
              -(Loss)
                  income before extraordinary item
              
              
              (37,147
              )
              
              47,946
              
              
              10,799Extraordinary
                  gain
              
              
              53,760
              
              
              (53,760
              )
              
              -Net
                  income (loss)
              
              $
              16,613
              
              $
              (5,814
              )(2)
              $
              10,799**Basic
                  EPS**Loss
                  before extraordinary item
              
              $
              (0.61
              )
              $
              0.79
              
              $
              NAExtraordinary
                  gain
              
              $
              0.88
              
              $
              (0.88
              )
              $
              NANet
                  income (loss)
              
              $
              0.27
              
              $
              (0.09
              )
              $
              (0.18
              )Basic
                  weighted average shares
              
              
              60,888,488
              
              
              60,888,488
              
              
              60,888,488





**Diluted
                  EPS**
                Loss
                  before extraordinary item
              
              $
              (0.57
              )
              $
              0.74
              
              $
              NAExtraordinary
                  gain
              
              $
              0.83
              
              $
              (0.83
              )
              $
              NANet
                  income (loss)
              
              $
              0.26
              
              $
              (0.09
              )
              $
              (0.17
              )Diluted
                  weighted average shares
              
              
              65,013,918
              
              
              65,013,918
              
              
              65,013,918





**Notes
      to Unaudited Pro Forma Consolidated Financial Statements**




(1)
            Represents
                the adjustments to transfer all results from operations from Genius
                Products, Inc to the Distributor and Genius Products, Inc’s 30% share of
                the equity in net earnings (loss) from the Distributor for the nine
                months
                ended September 30, 2006.




(2)
            Represents
                Genius Products, Inc’s 30% interest in the net loss of the Distributor for
                the nine months ended September 30, 2006. Because the Distributor
                was not
                fully operational until after the Closing on July 22, 2006, the
                accompanying pro forma statement of operations is based on the individual
                statement of operations for Genius Products, Inc. for the nine months
                ended September 30, 2006 adjusted to show Genius Products’ 30% interest in
                the net loss for the period prior to the Closing plus Genius Products,
                Inc’s 30% interest in the net loss of the Distributor post Closing through
                September 30, 2006.





**NOTE
      5.** **INVESTMENT
      IN DISTRIBUTOR (GENIUS PRODUCTS, LLC)**





Under
      the
      equity method of accounting, only our investment in and amounts due to and
      from
      the Distributor have been included in our balance sheet. As a result, we
      recorded an asset on our balance sheet related to our investment interest in
      the
      Distributor. The financial statements, related footnotes and management’s
      discussion and analysis for the Distributor are shown in Exhibit 99.1 which
      includes the unaudited balance sheet as of September 30, 2006, the unaudited
      statement of operations and unaudited statement of cash flows for the period
      July 22, 2006 to September 30, 2006.




18




Summaries
      of the statement of operations for the Distributor and a computation of equity
      in net loss of the Distributor for the period from July 22, 2006 through
      September 30, 2006 are shown below.





GENIUS
      PRODUCTS LLC


SUPPLEMENTAL
      UNAUDITED CONDENSED STATEMENT OF OPERATIONS


FOR
      THE
      PERIOD JULY 22, 2006 THROUGH SEPTEMBER 30, 2006




Revenues,
                net of sales, returns, discounts and allowances of $31,054
            
            $
            80,047Total
                cost of revenues
            
            
            78,843Gross
                profit
            
            
            1,204Total
                operating expenses
            
            
            218Income
                from operations
            
            
            986Interest
                and other income
            
            
            165Net
                income
            
            $
            1,149




Our equity
      in net income of the Distributor
      is adjusted each period for basis differences between the investment and the
      underlying equity in the Distributor and for the impact of certain costs
      incurred by the Distributor on behalf of the Company.


Genius
                  Products, Inc. 30% share of net income from the
                  Distributor
              
              $
              345Adjustments
                  for basis differences
              
              
              (309
              )Charge
                  for stock compensation for Distributor employees
              
              
              (99
              )Equity
                  in net loss from Distributor
              
              $
              (63
              )


**NOTE
      6.** **SUPPLEMENTAL
      UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION FOR GENIUS PRODUCTS,
      INC.**





If
      and
      when TWC Holdings converts its Class W Units into 70% of the common stock of
      Genius Products, Inc. we expect to account for that transaction as a common
      control merger. Thereafter, the financial statements of Genius Products, Inc.
      would reflect the full consolidation of the Distributor’s financial statements
      with the Genius Products, Inc. financial statements. We have prepared
      supplemental pro forma financial statements adjusted to give effect to the
      Transaction with TWC and assuming that TWC exercises its right to convert its
      interest in the Distributor into the common equity of Genius Products,
      Inc.




The
      unaudited supplemental pro forma balance sheet presents Genius Products, Inc.
      financial statements as if the Transaction and conversion by TWC had occurred
      at
      September 30, 2006. The supplemental unaudited statement of operations for
      the
      three and nine months ended September 30, 2006 consolidates the Distributor
      and
      Genius Products, Inc. as if the Transaction and conversion by TWC had occurred
      as of July 1, 2006 and January 1, 2006, respectively. The supplemental pro
      forma adjustments are described in the accompanying notes and are based upon
      available information and certain assumptions that management believes are
      reasonable including: (i) no intercompany balances at September 30, 2006 and;
      (ii) no additional specifically identifiable intangible assets. The supplemental
      pro forma financial information does not purport to represent what the results
      of operations or financial condition of Genius Products, Inc. actually would
      have been had the Transaction and conversion occurred on such dates or to
      project its results of operations or financial condition for any future date
      or
      period.





19





**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**SUPPLEMENTAL
      UNAUDITED PRO FORMA BALANCE SHEET**


**AS
      OF SEPTEMBER 30, 2006**




Genius
                Products,
                  Inc.
                Restated
                (Note
                  2)
                (1)
              
              Distributor
                  (2)
              
              Pro
                  Forma Adjustments (3)
              
              
              Pro
                  Forma**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,071
              
              $
              21,445
              
              $
              -
              
              
              $
              22,516Accounts
                  receivable, net of allowance for doubtful accounts and sales returns
                  of
                  $1,550 and $29,371
              
              
              -
              
              
              97,848
              
              
              -
              
              
              
              97,848Inventories,
                  net
              
              
              -
              
              
              9,669
              
              
              -
              
              
              
              9,669Prepaid
                  expenses
              
              
              110
              
              
              991
              
              
              -
              
              
              
              1,101Notes
                  receivable
              
              
              777
              
              
              (777
              )
              
              -
              
              
              
              -Total
                  current assets
              
              
              1,958
              
              
              129,176
              
              
              -
              
              
              
              131,134Restricted
                  cash
              
              
              -
              
              
              306
              
              
              -
              
              
              
              306Property
                  and equipment, net
              
              
              -
              
              
              856
              
              
              -
              
              
              
              856Vendor
                  advances
              
              
              -
              
              
              6,339
              
              
              -
              
              
              
              6,339Film
                  library, net of accumulated amortization of $18,090
              
              
              -
              
              
              7,779
              
              
              -
              
              
              
              7,779Notes
                  receivable, related party
              
              
              -
              
              
              1,595
              
              
              -
              
              
              
              1,595Investment
                  in Distributor
              
              
              92,123
              
              
              -
              
              
              (92,123
              )
              
              
              -Intangible
                  assets
              
              
              -
              
              
              17,063
              
              
              
              
              
              
              17,063Goodwill
              
              
              -
              
              
              84,982
              
              
              (84,982
              )
              (4)
              
              -Deposits
                  and other
              
              
              -
              
              
              211
              
              
              -
              
              
              
              211Total
                  assets
              
              $
              94,081
              
              $
              248,307
              
              $
              (177,105
              )
              
              $
              165,283**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              -
              
              $
              15,827
              
              $
              -
              
              
              $
              15,827Notes
                  payable
              
              
              -
              
              
              200
              
              
              -
              
              
              
              200Remittance
                  to licensor
              
              
              -
              
              
              86,048
              
              
              -
              
              
              
              86,048Accrued
                  expenses
              
              
              185
              
              
              24,405
              
              
              -
              
              
              
              24,590Deferred
                  revenue
              
              
              -
              
              
              1,974
              
              
              -
              
              
              
              1,974Redeemable
                  common stock
              
              
              -
              
              
              -
              
              
              -
              
              
              
              -Total
                  current liabilities
              
              
              185
              
              
              128,454
              
              
              -
              
              
              
              128,639Deferred
                  gain, related party, net of current portion
              
              
              -
              
              
              1,207
              
              
              -
              
              
              
              1,207Deferred
                  tax liability
              
              
              14,445
              
              
              -
              
              
              (6,285
              )
              
              
              8,160Total
                  liabilities
              
              
              14,630
              
              
              129,661
              
              
              (6,285
              )
              
              
              138,006Stockholders’
                  equity:Series
                  W preferred stock, $.0001 par value; 100 shares authorized; 100
                  shares
                  outstanding
              
              
              -
              
              
              -
              
              
              -
              
              
              
              -Preferred
                  stock, $.0001 par value; 10,000,000 shares authorized; no shares
                  outstanding
              
              
              -
              
              
              -
              
              
              -
              
              
              
              -Common
                  stock, $.0001 par value; 300,000,000 shares authorized; 61,534,357
                  shares
                  outstanding
              
              
              6
              
              
              -
              
              
              -
              
              
              
              6Member's
                  equity
              
              
              
              
              
              118,646
              
              
              (118,646
              )
              
              
              -Additional
                  paid-in capital
              
              
              101,569
              
              
              -
              
              
              -
              
              
              
              101,569Accumulated
                  deficit
              
              
              (22,124
              )
              
              -
              
              
              (52,147
              )
              
              
              (74,271
              )Total
                  stockholders’ equity
              
              
              79,451
              
              
              118,646
              
              
              (170,820
              )
              
              
              27,277Total
                  liabilities and stockholders' equity
              
              $
              94,081
              
              $
              248,307
              
              $
              (177,105
              )
              
              $
              165,283




20




**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**SUPPLEMENTAL
      UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**


**THREE
      MONTHS ENDED SEPTEMBER 30, 2006**




Genius
                  Products,
                Inc.
                  (5)
              
              Distributor
                  (6)
              
              Pro
                  Forma
                Adjustments
                  (7)
              
              Pro
                  FormaRevenues
              
              
              18,952
              
              
              111,101
              
              
              -
              
              
              130,053Sales
                  returns, discounts and allowances
              
              
              (3,937
              )
              
              (31,054
              )
              
              -
              
              
              (34,991
              )Net
                  revenues
              
              
              15,015
              
              
              80,047
              
              
              -
              
              
              95,062Total
                  cost of revenues
              
              
              15,318
              
              
              78,843
              
              
              -
              
              
              94,161Gross
                  profit (loss)
              
              
              (303
              )
              
              1,204
              
              
              -
              
              
              901Operating
                  expenses (income):General
                  and administrative
              
              
              4,165
              
              
              242
              
              
              (1,524
              )(8)
              
              2,884Equity
                  in net loss from Distributor
              
              
              63
              
              
              -
              
              
              (63
              )Gain
                  on sale, related party
              
              
              -
              
              
              (24
              )
              
              -
              (9)
              
              (24
              )Total
                  operating expenses
              
              
              4,228
              
              
              218
              
              
              (1,586
              )
              
              2,860Income
                  (loss) from operations
              
              
              (4,531
              )
              
              986
              
              
              1,586
              
              
              (1,959
              )Interest
                  expense
              
              
              (3
              )
              
              (2
              )
              
              -
              
              
              (5
              )Interest
                  income and other
              
              
              81
              
              
              165
              
              
              -
              
              
              246Income
                  (loss) before provision for income tax
              
              
              (4,453
              )
              
              1,149
              
              
              1,586
              
              
              (1,718
              )Provision
                  for income tax
              
              
              8,053
              
              
              -
              
              
              -
              
              
              8,053Income
                  (loss) before extraordinary item
              
              
              (12,506
              )
              
              1,149
              
              
              1,586
              
              
              (9,771
              )Extraordinary
                  gain
              
              
              53,760
              
              
              -
              
              
              (53,760
              )
              
              -Net
                  income (loss)
              
              $
              41,254
              
              $
              1,149
              
              $
              (52,174
              )
              $
              (9,771
              )**Basic
                  EPS**Income
                  (loss) before extraordinary item
              
              $
              (0.20
              )
              
              NA
              
              
              0.10
              
              $
              (0.05
              )Extraordinary
                  gain
              
              
              0.88
              
              
              NA
              
              
              .38
              
              
              NANet
                  income (loss)
              
              $
              0.67
              
              
              NA
              
              
              .36
              
              $
              (0.04
              )Basic
                  weighted average shares
              
              
              61,370,448
              
              
              NA
              
              
              143,155,917
              
              
              204,526,365**Diluted
                  EPS**Income
                  (loss) before extraordinary item
              
              
              NA
              
              
              NA
              
              
              NA
              
              
              NAExtraordinary
                  gain
              
              $
              0.82
              
              
              NA
              
              
              NA
              
              
              NANet
                  income (loss)
              
              $
              0.63
              
              
              NA
              
              
              NA
              
              
              NADiluted
                  weighted average shares
              
              
              65,495,878
              
              
              NA
              
              
              152,781,921
              (10)
              
              218,277,799




21




**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**SUPPLEMENTAL
      UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**


**NINE
      MONTHS ENDED SEPTEMBER 30, 2006**




Genius
                Products, Inc. (5)
            
            Distributor
                (6)
            
            Pro
                Forma Adjustments (7)
            
            
            
            Pro
                FormaRevenues
            
            
            159,893
            
            
            111,101
            
            
            -
            
            
            
            270,994Sales
                returns, discounts and allowances
            
            
            (40,882
            )
            
            (31,054
            )
            
            -
            
            
            
            (71,936
            )Net
                revenues
            
            
            119,011
            
            
            80,047
            
            
            -
            
            
            
            199,058Total
                cost of revenues
            
            
            130,870
            
            
            78,843
            
            
            -
            
            
            
            209,714Gross
                profit (loss)
            
            
            (11,859
            )
            
            1,204
            
            
            -
            
            
            
            (10,655
            )Operating
                expenses (income):General
                and administrative
            
            
            18,621
            
            
            242
            
            
            (2,528
            )
            (8)
            
            16,335Equity
                in net loss from Distributor
            
            
            63
            
            
            -
            
            
            (63
            )
            
            
            -Gain
                on sale, related party
            
            
            (63
            )
            
            (24
            )
            
            -
            
            (9)
            
            (87
            )Total
                operating expenses
            
            
            18,621
            
            
            216
            
            
            (2,590
            )
            
            
            16,
                248Income
                (loss) from operations
            
            
            (30,480
            )
            
            986
            
            
            2,590
            
            
            
            (26,903
            )Interest
                expense
            
            
            (11
            )
            
            (2
            )
            
            -
            
            
            
            (13
            )Interest
                income and other
            
            
            124
            
            
            165
            
            
            -
            
            
            
            289Income
                (loss) before provision for income taxes
            
            
            (30,367
            )
            
            1,149
            
            
            2,590
            
            
            
            (26,628
            )Provision
                for income taxes
            
            
            6,780
            
            
            -
            
            
            -
            
            
            
            6,780Income
                (loss) before extraordinary item
            
            
            (37,147
            )
            
            1,149
            
            
            2,590
            
            
            
            (33,407
            )Extraordinary
                gain
            
            
            53,760
            
            
            -
            
            
            (53,760
            )
            
            
            -Net
                income (loss)
            
            $
            16,613
            
            $
            1,149
            
            $
            (51,170
            )
            
            $
            (33,407
            )**Basic
                EPS**Income
                (loss) before extraordinary item
            
            $
            (0.61
            )
            
            NA
            
            
            0.02
            
            
            $
            (0.16
            )Extraordinary
                item
            
            $
            0.88
            
            
            NA
            
            
            NA
            
            
            $
            -Net
                income (loss)
            
            $
            0.27
            
            
            NA
            
            
            NA
            
            
            $
            (0.16
            )Basic
                weighted average shares
            
            
            60,888,488
            
            
            NA
            
            
            142,053,117
            
            
            
            202,941,606**Diluted
                EPS**Income
                (loss) before extraordinary item
            
            $
            NA
            
            
            NA
            
            
            NA
            
            
            
            NAExtraordinary
                item
            
            $
            0.83
            
            
            NA
            
            
            NA
            
            
            
            NANet
                income (loss)
            
            $
            0.26
            
            
            NA
            
            
            NA
            
            
            
            NADiluted
                weighted average shares
            
            
            65,013,918
            
            
            NA
            
            
            151,679,121
            
            (10)
            
            216,693,040




22


**Notes
      to Supplemental Unaudited Pro Forma Consolidated Financial
      Information**




(1)
            Represents
                the Genius Products, Inc. unaudited balance sheet as of September
                30,
                2006.




(2)
            Represents
                the Distributor unaudited balance sheet as of September 30,
                2006.




(3)
            Represents
                the consolidation of Genius Products, Inc. and the Distributor as
                if TWC
                exercised its right to convert its interest into the common equity
                of
                Genius Products, Inc.





(4)
            Represents
                the goodwill for the transaction.





(5)
            Represents
                the Genius Products, Inc. unaudited statement of operations for the
                three
                and nine months ended September 30,
                2006.





(6)
            Represents
                the Distributor unaudited statement of operations for the 71 days
                ended
                September 30, 2006 giving effect to the Transaction as closing on
                July 21,
                2006.





(7)
            Represents
                the adjustment to consolidate the pro forma Genius Products, Inc.
                and
                Distributor statement of operations for the three and nine months
                ended
                September 30, 2006.(8)
            Represents
                the adjustment to eliminate intangible asset amortization related
                to the
                transaction.(9)
            Represents
                the adjustment to eliminate the earnings from investee.(10)
            Represents
                the additional shares to be issued to TWC upon conversion of their
                interest in the Distributor into the common equity of Genius Products,
                Inc.




**NOTE
      7.** **COMMITMENTS
      AND CONTINGENCIES**





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. On September
      26, the Trustee for Winstar filed a Demand for Arbitration with the American
      Arbitration Association.




23




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 the Company in the Circuit
      Court of Cook County, Illinois, Case No. 05H16850 (the “Illinois
      Proceeding”), based upon allegations, among other things, that the Company
      breached the terms of a license agreement 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 the Company’s purported default under the license agreement, Falcon
      is entitled to judgment declaring the license agreement to have been lawfully
      terminated. The Company 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. **** The
      Company is vigorously defending against the allegations thereof and seeking
      recovery of damages.





**NOTE
      8.** **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 three months ended March 31, 2005, we issued
      a total of 14,875,925 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 three months ended March 31, 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.




During
        the three months ended June 30, 2005, we committed to issue shares totaling
        $82,500 related to recruiting expenses incurred during the quarter. 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 three months ended June 30, 2005, 162,000 common shares
        were issued related to the exercise of warrants for proceeds of $157,560. 
During the three months ended June 30, 2005, we issued 724,000 shares for
        the
        exercise of warrants at $0.63 to $1.00 per share and 82,600 shares for the
        exercise of options at $0.80 to $1.50 per share.





During
        the three months ended September 30, 2005, we committed to issue shares
        totaling $117,250 related to recruiting expenses incurred during the quarter.
        As
        of September 30, 2005, 30,000 common shares were committed related to the
        exercise of warrants. During the nine months ended September 30, 2006, we
        issued
        348,703 common shares related to the exercise of warrants for proceeds of
        $0.2
        million. 139,231 of these warrants were cashless exercises. Additionally,
        during
        the nine months ended September 30, 2006, we issued 737,500 common shares
        related to the exercise of options for proceeds of $0.6 million. During the
        nine
        months ended September 30, 2006, we issued 10,000 common shares for services
        rendered.




24




SERIES
      W
      PREFERRED STOCK




As
      a
      condition to the closing of the transaction with TWC Holdings, we issued 100
      shares of Series W Preferred Stock to TWC
      Holdings and its
      first-tier subsidiary, W-G Holding Corp. The Series W Preferred Stock provides
      the holders with significant rights, preferences and powers:




A. Voting .
      The
      holders of Series W Preferred Stock have the following voting
      rights:




1. General .
      Except
      as required by our certificate of incorporation or applicable law, the holders
      of Series W Preferred Stock are entitled to vote on all matters submitted to
      a
      vote of our stockholders, voting together with the holders of common stock
      (and
      of any other shares of our capital stock entitled to vote at a meeting of
      stockholders) as one class.




2. Voting
      Power When Threshold Amount Held .
      So long
      as the “TWC Holders” (the members of the Distributor other than Genius Products)
      and their permitted transferees (i) own the shares of Series W Preferred Stock,
      and (ii) collectively beneficially own or have the right to acquire at least
      20%
      of our outstanding common stock (assuming conversion, exchange or redemption
      of
      Class W Units) (the “Threshold Amount”), the holders of Series W Preferred Stock
      will, in the aggregate, have voting rights and powers equal to the greatest
      of
      (i) 100 votes; (ii) the number of votes attributable to the number of shares
      of
      common stock that TWC Holders and their permitted transferees beneficially
      own
      or have the right to acquire, less the number of votes attributable to the
      shares of common stock which they may vote directly; and (iii) the number of
      votes that, together with all other votes entitled to be directly cast by the
      holders of shares of Series W Preferred Stock, entitle the holders of Series
      W
      Preferred Stock to exercise one vote more than one-half of all votes entitled
      to
      be cast by all holders of our capital stock.




3. Board
      of Directors .
      At any
      meeting, or in any written consent, of stockholders for the election or removal
      of directors, the holders of Series W Preferred Stock (voting separately as
      a
      single class) will be entitled to elect five (5) directors to our Board (the
      “Series W Directors”), three (3) of whom at the time of their election must be
      independent directors under applicable listing standards, and to remove, without
      cause, from office any Series W Director and to fill any vacancy caused by
      the
      resignation, death or removal of any Series W Director. Vacancies on the board
      resulting from the death, resignation or removal of a Series W Director may
      be
      filled by the remaining Series W Directors. So long as TWC and each of its
      affiliates and permitted transferees owns or has a right to own the Threshold
      Amount, the holders of our common stock (voting separately as a single class)
      are entitled to elect two (2) directors (the “At-Large Directors”), and to
      remove, without cause, from office any At-Large Director and, in the absence
      of
      any At-Large Directors, to fill any vacancy caused by the resignation, death
      or
      removal of any At-Large Director. Vacancies on the board resulting from the
      death, resignation or removal of an At-Large Director may be filled by the
      remaining At-Large Director.




4. Protective
      Provisions .
      The
      holders of Series W Preferred Stock have special protective provisions under
      our
      Charter. These protective provisions provide that the Company may not, without
      the approval of the holders of at least a majority of the Series W Preferred
      Stock, take certain important actions, including without limitation the
      following: (i) create or assume any indebtedness or liability, or provide any
      indirect financial assistance, or assume any mortgage, charge or other
      encumbrance on any property; (ii) sell, lease, exchange or dispose of, by any
      means, property or assets having a value in excess of $100,000; (iii) enter
      into
      or effect any conversion, consolidation or merger; (iv) take any action to
      liquidate or dissolve Genius Products; (v) engage, remove or replace the
      Company’s independent auditors; (vi) guarantee the liabilities or debts of any
      person other than a subsidiary; (vii) declare or make any dividends or
      distributions, except dividends or distributions payable solely to holders
      of
      common stock; (viii) appoint or remove the Company’s CEO, COO, CFO, or any other
      executive level officer or employee of the Company, or any other employee whose
      base compensation is in excess of $150,000 per year; (ix) change the size of
      our
      board of directors; (x) approve the annual or quarterly budget for the Company
      or the Distributor, or vary more than 10% from the amount budgeted for any
      material line item therein; (xi) engage in any debt or equity financing,
      refinancing, recapitalization or other capital raising transaction; (xii)
      approve or enter into any contracts, agreements, understandings or arrangements
      outside the ordinary course or providing for payments by or to the Company
      or
      any of its subsidiaries of obligations in excess of $100,000 per year; (xiii)
      commence or settle any litigation; (xiv) license any item of product outside
      the
      ordinary course or on terms other than fair market value; (xv) approve or adopt
      any material employee compensation plan or arrangement; (xvi) create any
      subsidiaries other than the Distributor; (xvii) amend our Charter or bylaws;
      or
      (xviii) authorize or issue any shares of capital stock or convertible
      instruments, with certain exceptions.




25




5. Vote
      Below Threshold Amount .
      At such
      time as the TWC Holders and their permitted transferees no longer beneficially
      own or have the right to acquire the Threshold Amount, the voting rights of
      the
      holders of the Series W Preferred Stock described above will immediately
      terminate and each share of Series W Preferred Stock will entitle the holder
      thereof to the number of votes represented by the number of shares of common
      stock into which all Class W Units held by TWC Holders and their permitted
      transferees would be converted, exchanged or redeemed pursuant to the LLC
      Agreement, divided by the number of shares of Series W Preferred Stock
      outstanding at the record date for such vote.




B. Dividend
      Provisions .
      The
      holders of outstanding shares of Series W Preferred Stock will be entitled
      to
      receive dividends, when, as and if declared by the board of directors, out
      of
      our assets legally available therefor, as may be declared from time to time
      by
      our board of directors.




C. Liquidation .
      In the
      event of the liquidation, dissolution, winding up or sale or other disposition
      of all or substantially all of the assets of the Company, whether voluntary
      or
      involuntary (“Liquidation”), the holders of Series W Preferred Stock will be
      entitled to receive with respect to each shares of Series W Preferred Stock,
      after payment of or provision for payment of the debts and other liabilities
      of
      Genius Products, cash or any other assets of Genius Products in an amount (or
      having a fair market value) equal to $0.01 plus all accrued but unpaid dividends
      up to and including the date of Liquidation.




D. Conversion .
      The
      Series W Preferred Stock will not be convertible into any other class of stock
      of the Company.




WARRANTS




A
      summary
      of warrant activity follows:




Warrants
                Outstanding
            
            Weighted
                Average Exercise PriceDecember
                31, 2005
            
            
            16,228,915
            
            $
            2.15Exercised
            
            
            (900,470
            )
            $
            1.36Canceled
            
            
            -
            
            $
            -Total
            
            
            15,328,445
            
            $
            2.19Warrants
                exercisable September 30, 2006
            
            
            15,328,445
            
            $
            2.19




The
      following table summarizes significant ranges of outstanding and exercisable
      warrants as of September 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
            
            
            1.3
            
            $
            1.17
            
            
            3,518,868
            
            $
            1.17$1.50
                - $1.99
            
            
            447,398
            
            
            3.9
            
            
            1.83
            
            
            447,398
            
            
            1.83$2.00
                - $2.99
            
            
            9,715,179
            
            
            3.6
            
            
            2.44
            
            
            9,715,179
            
            
            2.44$3.00
                - $3.99
            
            
            1,647,000
            
            
            2.5
            
            
            3.00
            
            
            1,647,000
            
            
            3.0015,328,445
            
            
            3.0
            
            $
            2.19
            
            
            15,328,445
            
            $
            2.19





26




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 was
      classified as equity in 2005 in accordance with EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock” (“EITF 00-19”).




On
      December 5, 2005, we entered into a securities purchase agreement with
      certain institutional investors related to the private placement of 16,000,000
      shares of our common stock, par value $0.0001 per share, and five-year warrants
      to purchase 4,800,000 shares of common stock with an exercise price of $2.40
      per
      share. The transaction closed on December 6, 2005 and we realized gross
      proceeds of $32 million from the financing, before deducting commissions and
      other expenses. The proceeds from the offering will provide working capital
      to
      fund new ventures as well as content acquisitions. The fair value of the
      warrants was classified as equity in 2005 in accordance with EITF
      00-19.





**NOTE
      9.** **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. 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 No. 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 repricing under the plan
      without receipt of stockholder approval for such repricing.




We
      have
      adopted several stock option plans, all of which have been approved by our
      stockholders, that authorize the granting of options to purchase our common
      shares subject to certain conditions. At September 30, 2006, we had reserved
      21.8 million of our common shares for issuance of share-based compensation
      awards under our stock option plans. At September 30, 2006, we have granted
      9.4 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
      3,569,929 options during the first nine months of 2006. The amount of
      share-based compensation expense recognized in the three months ended September
      30, 2006 and nine months ended September 30, 2006 is based on options issued
      prior to January 1, 2006 and issued during the first nine months of 2006,
      and ultimately expected to vest, and it has been reduced for estimated
      forfeitures. SFAS No. 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.




27




Total
      share-based compensation expense recognized for the three and nine months ended
      September 30, 2006, was $4.3 million and $6.4 million, respectively. For the
      three and nine months ended September 30, 2006, no income tax benefit was
      recognized in the statement of earnings (loss) for share-based compensation
      arrangements. A total of $0.1 million of share based compensation expense was
      recorded as compensation expense in the statement of operations for the
      Distributor for the 72 days ending September 30, 2006. This change was reflected
      as an increase in the Investment in Distributor and for Genius Products, Inc.
      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 nine months ended September 30, 2006 and 2005, we received proceeds of
      $0.6
      million and $0.08 million, 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
            
            Nine
                Months EndedSeptember
                30, 2006
            
            September
                30, 2006Risk
                free interest rate
            
            
            4.7%
            
            
            4.9%Expected
                dividend yield
            
            
            -
            
            
            -Expected
                volatility
            
            
            54.8%
            
            
            58.1%Expected
                life (in years)
            
            
            5.7
            
            
            5.8





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




Shares
            
            Weighted
                Average Price
            
            Weighted
                Average Remaining Contractual Life
            
            Aggregate
              Intrinsic
                ValueDecember
                31, 2005
            
            
            18,722,883
            
            $
            1.79Granted
            
            
            3,569,929
            
            $
            1.91Exercised
            
            
            (697,500
            )
            $
            0.84Canceled
            
            
            (1,028,500
            )
            $
            2.06Options
                outstanding at September 30, 2006
            
            
            20,566,812
            
            $
            1.83
            
            
            7.5
            
            $
            37,610,710Vested
                at September 30, 2006
            
            
            20,566,812
            
            $
            1.83
            
            
            7.5
            
            $
            37,610,710Options
                exercisable, September 30, 2006
            
            
            15,119,547
            
            $
            1.78
            
            
            6.9
            
            $
            26,905,946




*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 SFAS No. 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
      SFAS No. 123R to stock-based employee compensation for the three and nine
      months ended September 30, 2005:




28




(Restated)
            
            (Restated)Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30, 2005
            
            September
                30, 2005Net
                loss as reported
            
            $
            (3,854,798
            )
            $
            (11,383,472
            )Compensation
                cost at fair value
            
            
            (258,266
            )
            
            (591,939
            )Pro
                forma net loss
            
            $
            (4,113,064
            )
            $
            (11,975,411
            )Basic
                and diluted net loss per shareAs
                reported
            
            $
            (0.08
            )
            $
            (0.28
            )Pro
                forma
            
            $
            (0.09
            )
            $
            (0.32
            )





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




Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30, 2005
            
            September
                30, 2005Risk
                free interest rate
            
            
            4.0%
            
            
            3.4%Expected
                dividend yield
            
            
            -
            
            
            -Expected
                volatility
            
            
            69%
            
            
            42%Expected
                life (in years)
            
            
            3.0
                years
            
            
            3.7
                years





**NOTE
      10.** **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.




The
      effects of the potentially dilutive securities (options and warrants that are
      outstanding) were not included in the computation of diluted loss per share
      for
      the three and nine months ended September 30, 2006 and 2005, since to do so
      would have been anti-dilutive .





**NOTE
      11.** **SUBSEQUENT
      EVENTS**




On
        October 17, 2006 Genius Products, LLC announced that it had entered into
        a
        multi-year agreement with World Wrestling Entertainment, Inc. (WWE®), to be the
        exclusive home entertainment distributor of all WWE® DVD titles, effective
        November 1, 2006. Under the terms of the multi-year agreement, Genius Products,
        LLC will be the exclusive U.S. distributor for all WWE® DVDs. New releases will
        include content from WWE’s 90,000-hour video library, the largest of its kind in
        the world, featuring content from RAW®, SmackDown!® and ECW® (Extreme
        Championship WrestlingTM), pay-per-view events, including WrestleMania, and past
        and present Superstar profiles, among others. Genius Products, LLC assumes
        distribution for WWE®’s titles on November 1, 2006. The first title to be
        distributed features one of WWE®’s greatest legends, *BORN
        TO CONTROVERSY: THE RODDY PIPERTM STORY* (November 14, 2006, street date). This will be followed by *THE
        SPECTACULAR LEGACY OF THE AWA* ®
        (November 21, 2006, street date) and the RAW brand’s pay-per-view, *WWE
        CYBER SUNDAY* TM
2006
        (December 5, 2006, street date). Genius Products, LLC will release a minimum
        of
        25 new titles in 2007, with additional plans to exploit WWE®’s DVD catalog of
        more than 100 titles. In 2006, 10 of WWE®’s DVD releases achieved the No. 1
        position on the Sports DVD charts, according to Nielsen VideoScan. *WRESTLEMANIA* ®
22
        debuted at No. 5 among all DVD releases in the U.S. and is now the No. 1
        best-selling WWE® DVD of all-time. Home entertainment revenue accounted for $42
        million, or 10 percent, of WWE®’s revenues for fiscal year 2006, more than
        double from the prior fiscal year.




29




On
      October 18, 2006, Genius Products, LLC announced that it had entered into a
      multi-year agreement with ImaginAsian Entertainment, Inc. to be the exclusive
      home entertainment distributor for ImaginAsian's expanding portfolio of
      Asian-genre motion pictures and television programs. ImaginAsian Entertainment,
      Inc., a multimedia company, through its multiple platforms, seeks to reach
      the
      major sub-segments of the Asian American community with entertainment, news
      and
      information. This community is one of the fastest growing, most economically
      influential ethnic populations in the U.S. Under the five year agreement, Genius
      Products, LLC has acquired the rights to distribute DVDs in North America under
      the ImaginAsian Home Video banner.




On
      October 26, 2006, Genius Products, LLC announced that it had entered into an
      agreement with Discovery Communications, Inc. (DCI) to be the exclusive home
      entertainment distributor of Discovery Kids programming. Under the terms of
      the
      multi-year agreement, which marks Discovery Kids’ first ever home entertainment
      distribution agreement, Genius Products, LLC will be the exclusive distributor
      in the U.S. for Discovery Kids branded television properties, including content
      from the Ready Set Learn!TM block on TLC and Discovery Kids Channel. Genius
      Products, LLC plans a rollout of the Discovery Kids properties beginning in
      February 2007, delivering a minimum of 16 titles per year. Properties for
      release on DVD include *Kenny
      the Shark* , *Tutenstein* and *Flight
      29 Down* ,
      as seen
      on the Discovery Kids Channel and *Paz* and *Save-Ums* from
      Ready Set Learn!TM, the preschool block that airs on TLC and Discovery Kids
      Channel. Home video release dates for the Discovery Kids titles will be
      announced on an ongoing basis.




On
      November 15, 2006, Genius Products, LLC announced that it will act as the
      exclusive distributor to TWC in executing and servicing TWC’s strategic alliance
      with Blockbuster. TWC and Blockbuster Inc. (NYSE: BBI, BBI.B) entered into
      a
      four-year exclusive alliance, which provides Blockbuster exclusive rental rights
      to TWC’s theatrical and direct-to-video movies, beginning Jan. 1, 2007. Under
      the terms of the agreement, TWC and Blockbuster will share rental revenues
      from
      TWC’s theatrical and direct-to-video titles.  Genius Products, LLC will
      provide distribution services to TWC in connection with the deal. This deal
      however, does not include the exclusive rights in connection with retail
      sell-thru sales of TWC’s home entertainment product. Through the agreement,
      Blockbuster will carry future theatrical and direct-to-video titles released
      by
      TWC and will have a three-year rental exclusivity for each title released. 
In exchange for exclusivity, Blockbuster will pay TWC a minimum guarantee,
      determined by box office performance, for each theatrical picture, and based
      on
      the acquisition or production costs for each DTV title.  Blockbuster plans
      to showcase the TWC movies in special sections in its stores and online. It
      will
      also offer customers the TWC movies under its in-store guaranteed availability
      program, which guarantees customers that select movies will be in-stock or
      they
      get a “rain-check” free rental coupon for that movie. Blockbuster also plans to
      share general trending information with TWC, such as the types of movies and
      actors the Blockbuster consumer would like to see more of, which could provide
      valuable insights for future film projects.





**ITEM 2**.**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
      GENIUS PRODUCTS, INC.**




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. For the period from July 22 through September 30 (post Closing), we
      accounted 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 Distributor are included
      in our consolidated balance sheet. As a result, we recorded an asset on our
      balance sheet related to our investment interest in the Distributor. On our
      statement of operations, we recorded our 30% share of the Distributor's profit
      or loss as equity in net earnings (losses) from the Distributor. We recorded
      a
      gain upon consummation of the Transaction 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 are reflected in the financial
      statements of the Distributor.




30




We,
      through the Distributor, 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 Distributor primarily
      focuses on five core content areas that include major theatrical film, sports,
      lifestyle, family/faith and independent film. The Distributor handles the
      distribution, marketing and sales for such brands as Asia ExtremeTM, Baby
      Genius®, Dimension Films, Dragon DynastyTM, Discovery Communications, Inc.,
      ESPN®, IFC®, Imaginasian, NBC News®, Sundance Channel Home Entertainment® The
      Weinstein Company® and WellspringTM and World Wrestling Entertainment, Inc.
®




The
      Distributor sells proprietary content, license content from third parties for
      sale and distributes content for third parties for a fee. The Distributor
      currently has 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, Discovery Communications and World Wrestling
      Entertainment®. The Distributor has 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; (v) *Doogal* with the
      voices of Whoopi Goldberg, Jimmy Fallon, William H. Macy and Jon Stewart, on
      May
      16; (vi) *Transamerica* ,
      starring Felicity Huffman, winner of the Golden Globe Award for best actress,
      on
      May 23; (vii) *The
      Libertine* ,
      starring Johnny Depp and *The
      Matador* ,
      starring Pierce Brosnan on July 4; (viii) *Scary Movie 4,* directed
      by David Zucker *,* on
      August 15; and (ix) *Lucky Number Slevin,* starring
      Bruce Willis on September 12. Upcoming releases include *Feast,* produced
      by Wes Craven, Ben Affleck and Matt Damon, *Clerks
      II* ,
      directed by Kevin Smith. The Distributor will also release content on DVD for
      Rainbow Media and the Independent Film Channel or IFC.




The
      Distributor seeks to leverage its increasing market share and retail sales
      volumes from its relationship with The Weinstein Company to improve the
      distribution and sale of owned, licensed and distributed content in its other
      core content areas: sports, lifestyle, family/faith and independent film,
      illustrated by the recently announced exclusive distribution agreements with
      ESPN, World Wrestling Entertainment and Discovery Communications. The
      Distributor currently owns or has 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. The Distributor works with a broad range
      of retail outlets including Wal-Mart, Best Buy, Target, Blockbuster, Movie
      Gallery, Netflix and Amazon.com to implement a specialized distribution strategy
      that consists of in-store displays that highlight our brands and promote its
      products that relate to these brands. The Distributor calls this specialized
      distribution strategy its Branded Distribution Network. The Distributor
      customizes its displays and promotions based upon the buying patterns, habits
      and demographics of the consumers. As the Distributor adds more content to
      its
      libraries, it intends to acquire, license, develop or distribute products with
      credible value and brand them for relevance to the consumer. The Distributor
      attempts 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.
      The Distributor’s brands and products are described below.




31




**Licensed
                Brands and Trademarks**
            **Selected
                Owned or Licensed Content**
            **Licensed
                Music Brands**Bazooka®
            Berliner
                Film Company
            Ansel
                AdamsGenius
                Entertainment®
            J
                Horror Library(through
                Horizon
            Baby
                Genius® *Entertainment
                and Pony Canyon Inc.)Hollywood
                ClassicsTM
            Jillian
                Michaels
            Beatrix
                PotterTMIFILM®
            NBC
                News Presents
            Curious
                George®National
                Lampoon®
            Wellspring
                Library
            Guess
                How Much I Love YouTMSundance
                Channel Home EntertainmentTM
            
            Jay
                Jay the Jet Plane**Selected
                Distributed Content**
            Kid
                Genius® *Amity
                Entertainment
            My
                Little Pony®Brandissimo!
            Paddington
                BearTMBauer
                Martinez Entertainment
            Raggedy
                Ann and AndyTMClassic
                Media
            Rainbow
                FishTMDiscovery
                Communications
            Spot
                the DogTMGrodfilms
            The
                Little Tikes® *IFC®
            The
                SnowmanTMImaginAsian
            Tonka®Legend
                Films Library
            Wee
                WorshipTM *Liberation
                Entertainment LibraryPacific
                EntertainmentPeace
                Arch EntertainmentPorchlight
                EntertainmentSeven
                ArtsTartan
                Video USAESPN®The
                Weinstein Company®World
                Wrestling Entertainment®





* See
      recent strategic transactions below





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.




32




Recent
      Strategic Transactions





*The
      Weinstein Company Transaction:* On July
      21, 2006, we completed a strategic transaction with The Weinstein Company LLC
      (“TWC”) and its affiliates pursuant to which we launched 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 our stockholders to approve the transaction and related matters.
      Under the terms of the transaction, we contributed substantially all of our
      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 venture also operates the former businesses
      of Genius Products, Inc., including the marketing, sales and distribution
      for other major branded entertainment content, such as Discovery Communications,
      ESPN, NBC News, Sundance Home Entertainment, Asia Extreme, Dragon Dynasty and
      IFC and World Wrestling Entertainment®. Genius Products, LLC is owned 70% by
      TWC’s parent company, The Weinstein Company Holdings LLC, and its first-tier
      subsidiary, W-G Holding Corp., and
      30%
      by Genius Products, Inc. In addition, as part of the transaction with TWC,
      we
      added to our Board of Directors two TWC executives, Larry Madden, Executive
      Vice
      President and CFO, and Irwin Reiter, Executive Vice President of Accounting
      and
      Financial Reporting.





Our
      interest in the Distributor consists of Class G Units representing a 30%
      membership interest in the Distributor, and the interest of The Weinstein
      Company Holdings LLC and W-G
      Holding Corp. consists of
      Class
      W Units representing a 70% membership interest in the Distributor. The 70%
      interest in the Distributor held by TWC and its affiliates 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, Inc., or with their approval,
      cash.
      From December 5, 2005, the date we entered into a Master Contribution
      Agreement relating to the transaction with 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.




Effective
      July 21, 2006, we issued to The Weinstein Company Holdings LLC and W-G
      Holding Corp. 100
      shares of our Series W Preferred Stock. The Series W Preferred
      Stock provides them and their permitted transferees with (a) the right
      to elect five of the seven directors on our Board of Directors,
      (b) majority voting power over other actions requiring approval of our
      stockholders, and (c) the right to approve certain specified actions. The
      Series W Preferred Stock has no rights to receive dividends and minimal
      liquidation value. On the Closing, we amended and restated our Certificate
      of
      Incorporation to, among other things, provide for the designation of the Series
      W Preferred Stock.




We
      and
      TWC also entered into a Registration Rights Agreement pursuant to which we
      agreed to register for resale our shares of common stock issuable upon
      redemption of TWC's Class W Units in the Distributor.




We
      recognized a partial gain on sale of $60.0 million before taxes representing
      the
      excess of total consideration less net assets transferred in the transaction.
      The taxes related to the partial gain recognized were offset by our existing
      deferred tax assets.





*Sale
      of Baby Genius:* On
      December 31, 2005, pursuant to an Asset Purchase Agreement, as amended (the
“Asset Purchase Agreement”) with Klaus Moeller, who was our founder and formerly
      our CEO, and later Pacific Entertainment, Inc., we sold to Pacific Entertainment
      all of our rights, 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”;




33




·
            Audio
                works entitled “Wee Worship”; and





·
            Related
                intellectual property, agreements, documents and
                instruments.




Subject
      to limited exceptions, Pacific Entertainment 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.




The
      Distributor 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, the Distributor will receive a distribution fee and
      recoup all of its 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 nine months ended
      September 30, 2006, we recognized $0 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.





Recent
      Events




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




The
      initial term of the Distribution Agreement commenced on July 7, 2006 and
      continues, subject to the terms of the Distribution Agreement, through and
      including December 31, 2011 (the “ Term ”).
      Commencing immediately at the end of the Term, the Company shall have an
      additional six month period as a non-exclusive sell-off period for videograms,
      during which time the Company will have the right to continue to market,
      distribute and account for all videograms remaining in the Company’s inventory
      at the end of the Term. Subject to the terms of the Distribution Agreement,
      the
      Company shall pay ESPN a minimum guarantee of $4,500,000 in each of five Sales
      Periods (as defined in the Distribution Agreement) during the Term. The Company
      will receive a distribution fee which shall be computed in accordance with
      the
      terms of the Distribution Agreement. On July 21, 2006, the rights and
      obligations under the terms of Distribution Agreement were assigned to Genius
      Products, LLC.





On
      July 20, 2006, Genius Products, Inc. entered into a Consulting Agreement
      with Bannon Strategic Advisors, Inc. pursuant to which the Company agreed to
      pay
      Bannon Strategic Advisors a fee of $20,833 per month for consulting and advisory
      services provided in accordance with the terms of the Consulting Agreement.
      Stephen Bannon, the Chairman of the Board of Directors of the Company, is
      affiliated with Bannon Strategic Advisors. On July 21, 2006, the rights and
      obligations under the terms of Consulting Agreement were assigned to Genius
      Products, LLC.




34




As
      previously disclosed on a Current Report on Form 8-K filed by the Company
      on December 9, 2005 (the “ Prior
      Report ”),
      the
      Company entered into an amendment to the employment agreement with its President
      and Chief Executive Officer, Trevor Drinkwater, dated December 5, 2005 (the
“ First
      Amendment ”).
      The
      effectiveness of the First Amendment was conditioned upon the closing of the
      Transaction, which occurred on July 21, 2006. The First Amendment was
      attached as Exhibit 99.1 to the Prior Report.




Prior
      to
      the effectiveness of the First Amendment, the Company agreed to pay
      Mr. Drinkwater the annual base compensation that would otherwise be payable
      during the first year following the closing of the Transaction pursuant to
      the
      terms of the First Amendment (the “ Annual
      Base Compensation ”).
      On
      July 20, 2006, the Company entered into a second amendment to the
      employment agreement with Mr. Drinkwater (the “ Second
      Amendment ”)
      pursuant to which the Company agreed to pay Mr. Drinkwater, effective as of
      June 1, 2006, at a rate equal to the Annual Base Compensation. Upon the
      closing of the Transaction with The Weinstein Company on July 21, 2006, the
      First Amendment became effective and Mr. Drinkwater’s compensation shall be
      determined in accordance with the terms thereunder.





**CRITICAL
      ACCOUNTING POLICIES**





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





ALLOWANCE
      FOR SALES RETURNS AND DOUBTFUL ACCOUNTS. The allowance for doubtful accounts
      and
      provision for sales returns includes management's estimate of the amount
      expected to be uncollectible or returned on specific accounts and losses or
      returns on other accounts as yet to be identified included in accounts
      receivable. 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 on an average cost
      basis, which approximates the 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.




35




*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. An impairment loss is recognized when the undiscounted cash flows
      estimated to be generated by the asset are less than the carrying amount of
      the
      asset.




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




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 from the exercise of dilutive options
      or
      warrants. The treasury stock method is used to calculate dilutive shares,
      reducing the gross number of dilutive shares by the number of shares purchasable
      from the proceeds of the options and warrants assumed to be
      exercised.




THE
      FOLLOWING CRITICAL ACCOUNTING POLICIES APPLY ONLY TO GENIUS PRODUCTS,
      INC.





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




36




INCOME
      TAXES




For
      the
      three and nine months ended September 30, 2006, the Company recognized a tax
      expense of approximately $8.1 million and $6.8 million. The Company currently
      has a full valuation allowance on its deferred tax assets and has recorded
      a net
      deferred tax liability relating to its investment in Genius Products, LLC.
      The
      deferred tax liability related to Genius Products, LLC is not offset against
      the
      deferred tax assets as the reversal period for this amount is not to be
      determinable on a more likely than not basis. Based on the Company’s assessment
      of all available evidence, the Company concluded that it is not more likely
      than
      not that is deferred tax assets will not be realized. Management will continue
      to monitor the future recoverability of the tax assets which have a full
      valuation allowance as of September 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 changes in ownership structure that
      occurred prior to December 31, 2005.




**RESULTS
      OF OPERATIONS OF GENIUS PRODUCTS, INC.**





The
      discussions in this section reflect our operations for the 21 and 202 day
      periods ending July 21, 2006, the periods prior to the Closing. For the 71-day
      period from July 22 through September 30 (post Closing), we 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 Distributor are included in our consolidated
      balance sheet. On our statement of operations, we recorded our 30% share of
      the
      Distributor's profit or loss as equity in net earnings (losses) from
      Distributor. After the Closing, substantially all of our revenue and expenses
      as
      well as the results from releasing TWC product are reflected in the financial
      statements of the Distributor. We did not compare the results of operations
      for
      the 21-day period ending July 21, 2006 with the three and nine months ended
      September 30, 2005 due to the fact that the time periods involved are not
      comparable, and the prior year periods consisted entirely of non-TWC product.





*Revenues:*




Revenues
      for the 21 days ending July 21, 2006 were primarily composed of sales of The
      Weinstein Company (“TWC”) titles, *The
      Matador* and *The
      Libertine,* sales of
      branded and proprietary products including branded classic movies and television
      shows on DVD as well as non-branded classic movies and television shows on
      DVD,
      and Wellspring titles from AVMC.





Theatrical
      revenues, representing film rentals by our theatrical division; audio revenues,
      representing 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; and royalties, licensing and other revenues from Wellspring
      Media, Inc. and the license of our Baby Genius brand name; which together
      aggregated approximately 20% and 25% of gross revenues for the three and nine
      months ended September 30, 2005, were immaterial for the three and nine months
      ended September 30, 2006.




Total
      gross revenues for the 21 and 202 days ended July 21, 2006 were $19.0 million
      and $159.9 million, respectively.




Sales
      returns, discounts and allowances were $3.9 million and $40.9 million for the
      21
      and 202 days ended July 21, 2006. This resulted primarily from the increase
      in
      sales from the video release of TWC's *The
      Matador* and *The
      Libertine* .
      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.




37




Net
      revenues for the 21 and 202 days ended July 21, 2006 were $15.0 million and
      $119.0 million, respectively *.*





*Costs
      and expense:*




*Cost
      of Revenues:*




Cost
      of
      revenues consists primarily of the cost of products sold to customers, packaging
      and shipping costs, advertising and marketing, amortization of film library,
      participations and royalties paid on sales of licensed products. Cost of
      revenues increased as a result of sales growth associated with TWC titles.
      We
      include amounts due to TWC in cost of revenues. Under our distribution agreement
      with TWC, we record amounts due 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.




*Operating
      Expense:*




General
      and administrative expenses were $4.2 million and $18.6 million during the
      21
      and 202 days ending July 21, 2006. General and administrative expenses primarily
      relate to payroll, rent, and transaction costs. Investment banking, audit and
      legal fees of $1.4 million and $4.2 million for the 21 and 202 days ending
      July
      21, 2006, respectively related to the Closing of the Transaction with The
      Weinstein Company. General and administrative also includes warrants and options
      expense associated with compensation to certain employees and outside
      consultants of $4.2 million and $6.3 million during for the 21 and 202 days
      ending July 21, 2006. General and administrative expenses were 27.7% and 15.6%
      of net revenues for the 21 and 202 days ending July 21, 2006.




On
      December 31, 2005, we sold to Klaus Moeller, our founder and former Chief
      Executive Officer, and subsequently to Pacific Entertainment, Inc., 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
      $1.4 million and recorded a note receivable in the amount of $1.7 million
      representing the present value of a $2 million secured promissory note that
      we
      received in this transaction and a deferred gain of $1.2 million. We have
      subsequently received payment in full of the secured promissory note, due on
      January 30, 2006, in the amount of $0.8 million, 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 21 and 202 days ending
      July
      21, 2006, we recognized a gain of zero and $0.06 million, respectively relating
      to the deferred gain of $1.2 million at December 31, 2005.




We
      had
      interest income of $0.1 million and $0.1 million during 21 and 202 days ending
      July 21, 2006, respectively. We had interest expense of zero and zero during
      the
      21 and 202 days ending July 21, 2006. Interest income related interest earned
      on
      outstanding cash balances.




38




We
      had
      income tax expense of $8.1 million and $6.8 million for the 21 and 202 days
      ending July 21, 2006.





As
      result
      of the foregoing, the net loss before extraordinary gain was $12.5 million
      and
      $37.1 million during the 21 and 202 days ending July 21, 2006.





*Equity
      in net earnings (losses) from Distributor*





During
      the 71-day period from July 22 through September 30, the Company’s 30% interest
      in the net income of the Distributor was $0.3 million.





**LIQUIDITY
      AND CAPITAL RESOURCES**




Net
      cash
      used in operations during the nine months ending September 30, 2006 was $4.0
      million, primarily due to increases in accounts receivable, inventories, a
      decrease in accounts payable and the additions to our film library offset by
      increases in accrued expenses, remittance to licensor, allowance for doubtful
      accounts and provision for returns, and net income of $16.6 million. 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* , *Doogal, The Matador, The Libertine, Scary Movie 4* and *Lucky
      Number Slevin* during
      the nine months ending September 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 *Scary
      Movie 4* and *Lucky
      Number Slevin* .
      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 nine months ended September 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 September 30, 2006 had not been collected. However, prior to July 21,
      2006, we bore 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 ** TWC
      titles. For the nine months ended September 30, 2005, net cash used in
      operations was $13.9 million, driven primarily by the net loss of $11.4
      million, the increase in the development of our library, the decrease in
      accounts payable, offset by a decrease in accounts receivable. On July 21,
      2006,
      we contributed substantially all of our assets and liabilities to the
      Distributor. These assets and liabilities are reflected on the balance sheet
      of
      the Distributor at September 30, 2006.




Net
      cash
      used in investing activities for the nine months ending September 30, 2006,
      was
      $21.1 million, primarily attributed to the investment in distributor. For the
      nine months ending September 30, 2005, net provided by investing activities
      was
      $0.2 million.




Cash
      used
      in financing activities for the nine months ending September 30, 2006 was $4.5
      million, principally resulting from the repayment of $5.2 million in notes
      payable. Cash provided by financing activities for the nine months ended
      September 30, 2005 was $12.8 million, resulting from the issuance of common
      stock for proceeds of $15.2 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
      September 30, 2006, Genius Products, LLC had cash balances of $21.4 million.
      We
      feel that we have sufficient liquidity to fund our operations through the
      remainder of 2006. However, we may consider additional issuance of equity and
      debt financing to fund future growth opportunities. Although we believe that
      the
      Distributor’s expanded product line offers us the opportunity for significantly
      improved operating results in future quarters, no assurance can be given that
      we
      will operate on a profitable basis in 2006, or ever, as such performance is
      subject to numerous variables and uncertainties, many of which are out of our
      control. Although we own 30% of Genius Products, LLC, the Distributor, we only
      have access to the cash on the Distributor’s balance sheet to the extent that we
      agree with our partner, TWC, to make a distribution to us.




39




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




As
      of
      September 30, 2006, the cash and cash equivalents at Genius Products, Inc.
      and
      Genius Products, LLC 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**




**Evaluation
      of Disclosure 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. In making
      this evaluation, our management considered deficiencies in our disclosure
      controls and procedures reported in our Annual Report on Form 10-K for the
      period ended December 31, 2005 and the disclosure and control deficiencies
      discussed below.  Based on this evaluation, our Chief Executive Officer and
      Chief Financial Officer concluded that our disclosure controls and procedures
      were not effective at the reasonable assurance level as of September 30, 2006.





We
      are
      not currently subject to the management reporting and auditor attestation
      requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We currently
      expect to become subject to these requirements for our fiscal year ending
      December 30, 2007. Our management is responsible for establishing and
      maintaining adequate internal control over financial reporting to provide
      reasonable assurance regarding the reliability of our financial reporting and
      the preparation of consolidated financial statements for external purposes
      in
      accordance with U.S. generally accepted accounting principles. Because we are
      not currently subject to the requirements of Section 404, our management
      has not yet assessed the effectiveness of our internal control over financial
      reporting. In addition, our independent registered public accounting firm has
      not audited our internal controls over financial reporting. Our management
      and
      independent registered public accounting firms have, however, from time to
      time
      identified actual or potential control deficiencies, which have resulted in
      changes in our internal controls as described below. We may also identify
      additional control deficiencies that require further remedial action as we
      prepare to comply with Section 404.





An
      internal control deficiency exists when the design or operation of a control
      does not allow management or employees, in the normal course of performing
      their
      assigned functions, to prevent or detect misstatements on a timely basis. A
      “significant deficiency” is a control deficiency, or combination of control
      deficiencies, that adversely affects the company’s ability to initiate,
      authorize, record, process, or report external financial data reliably in
      accordance with accounting principles generally accepted in the United States
      of
      America. In the case of a significant deficiency, a more-than-remote likelihood
      exists of a misstatement of the company’s annual or interim consolidated
      financial statements that is more than inconsequential. A
      material weakness is a control deficiency, or combination of control
      deficiencies (within the meaning of PCAOB Auditing Standard No. 2), that results
      in there being more than a remote likelihood that a material misstatement of
      the
      annual or interim financial statements will not be prevented or detected on
      a
      timely basis by employees in the normal course of their assigned functions.
      Management has identified the following deficiencies in our internal control
      over financial reporting as of September 30, 2006:




40




During
      the third quarter 2006 we discovered a control deficienty
      that certain items that had been shipped but had not been invoiced. We
      determined that we did not maintain effective controls to ensure that we
      recorded revenues for all shipments that actually occurred in the period.
      Specifically, effective controls were not designed and in place to ensure that
      we identified items that had shipped but had not yet been invoiced. As a result,
      our management concluded that as of September 30, 2006, we did not maintain
      effective internal control over financial reporting. The foregoing material
      weakness caused certain errors in our financial statement accounts during the
      three months ended June 30, 2006 and September 30, 2006, and required
      adjustments of our financial statements.





In
      connection with our third quarter 2006 closing process we were unable
      to monthly reconciliations between detailed sub-ledger and general ledger
      on certain key account balances in a timely manner. This deficiency was
      primarily attributable to a change in personnel and an overall lack of
      adequate resources.





In
      response to the identified control deficiencies which management believes are
      material weaknesses, described above, we have implemented changes to controls
      and processes to ensure all shipments during the period are invoiced in a timely
      manner. We have also established specific controls and procedures and have
      hired
      additional personnel to ensure the timely reconciliation between sub-ledger
      and
      general ledger on key account balances.





In
      addition, our management, with oversight from our Audit Committee, has dedicated
      significant resources and intends to engage external consultants to support
      management in its efforts to improve our control environment. Since June 30,
      2006, we hired several additional internal accounting personnel with
      entertainment industry experience, increased training of accounting personnel
      and added personnel with information systems and accounting experience. We
      intend to further expand our internal accounting and compliance capabilities
      by
      hiring additional talent and enhancing training in critical areas. These ongoing
      efforts are focused on implementing process changes to strengthen our internal
      control and monitoring activities.





In
      light
      of both of the control deficiencies described above, we performed additional
      analyses and other procedures to ensure that our consolidated financial
      statements included in this quarterly report were prepared in accordance with
      GAAP. These measures included, among other things, expansion of our weekly,
      month-end and quarter-end closing procedures, including the reconciliation
      process of orders, shipments and invoices, and dedication of significant
      internal resources and external consultants to scrutinize orders and shipments.
      We have also retained outside consultants to implement systems enhancements
      to
      automate several system functions that will prevent invoicing and shipping
      errors and improve the timely reconciliations of key sub-ledger and general
      ledger accounts. As a result of these and other expanded procedures, we
      concluded that the consolidated financial statements included in this quarterly
      report present fairly, in all material respects, our financial position, results
      of operations and cash flows for the periods presented in conformity with GAAP.




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




**Change
      in Internal Control Over 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, other than the deficiencies and remediation measures which are
      described above.




41




**PART
      II - OTHER INFORMATION**




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




We
      have
      disclosed in previous reports filed with the Securities and Exchange Commission
      a complaint filed against our 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. 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, 2005 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.




**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**




On
      July
      21, 2006, in connection with our strategic transaction with The Weinstein
      Company LLC (“TWC”), we issued to TWC’s parent company, The Weinstein Company
      Holdings LLC, and its first-tier subsidiary, W-G
      Holding Corp., 100
      shares of our Series W Preferred Stock. The
      sale
      of such securities was not registered under the Securities Act of 1933, as
      amended (the “Act”), or any state securities laws pursuant to an exemption from
      registration under Section 4(2) of the Act and Regulation D promulgated
      thereunder.




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




None.




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




We
      held a
      Special Meeting of Stockholders on July 21, 2006 to consider and vote upon
      a
      strategic transaction with The Weinstein Company LLC and its affiliates. Proxies
      for the meeting were solicited pursuant to Regulation 14A of the Securities
      Exchange Act of 1934 and there was no solicitation in opposition to that of
      management. All of the proposals presented at the meeting were approved by
      the
      following votes:




**Proposal**
            **Shares
                Voted**
              **“FOR”**
            **Shares
                Voted**
              **“AGAINST”**
            **Shares**
              **“ABSTAINING”**
            **Broker**
              **“NON-VOTE”**1
                -
                Contribution of assets pursuant to Master Contribution Agreement
            40,702,755
            62,872
            56,842
            02
                -
                Amendment and restatement of Certificate of Incorporation (“Charter”)
            17,907,056
            0
            0
            02A
                - Charter provisionrestricting
                our acts or activities
            22,718,969
            140,052
            56,392
            02B
                -Increase
                in our authorized shares of common stock to 300,000,000
                shares
            22,735,763
            122,925
            56,725
            02C
                - Authorization ofSeries
                W Preferred Stock
            22,742,713
            106,188
            66,512
            02D
                -Modification
                of the rights, preferences and powers of our Common Stock
            22,750,966
            98,372
            66,075
            02E
                - Charter provisionby
                which we elect out of Delaware law restricting business combinations
                with
                interested stockholders
            22,759,813
            86,525
            69,075
            02F
                - Charter provisionby
                which we renounce an interest or expectancy in, or in being offered
                the
                opportunity to participate in, corporate opportunities engaged in
                by TWC
                (including its affiliates and related persons)
            22,635,761
            185,027
            94,625
            03
                -
                Amendment and restatement of 2004 Stock Incentive Plan to (i) increase
                shares available for issuance from 7,500,000 shares to 13,500,000
                shares
                and (ii) prohibit option repricings under the Plan without receipt
                of
                stockholder approval
            40,179,486
            529,858
            113,125
            04
                -Adjournments
                of the Special Meeting, if necessary, to permit further solicitation
                of
                proxies
            37,340,109
            3,426,285
            56,075
            0




42




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




None.




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




3.1
            Amended
                and RestatedCertificate
                of Incorporation,dated
                July 21, 2006.
                +3.2
            Bylaws
                (incorporated by reference from Exhibit 3.2 to the Registrant’s Form
                10-KSB filed on March 31, 2005). +10.1
            Form
                of Amended and Restated Limited Liability Company Agreement of Genius
                Products, LLC, dated July 21, 2006(incorporated
                by reference from Appendix C to the Registrant’s Definitive Proxy
                Statement filed on June 29, 2006). +10.2
            Form
                of Distribution Agreement, dated July 17, 2006, by and between Genius
                Products, LLC and The Weinstein Company LLC(incorporated
                by reference from Appendix D to the Registrant’s Definitive Proxy
                Statement filed on June 29, 2006). +10.3
            Amended
                and Restated 2004 Stock Incentive Plan (incorporated by reference
                from
                Appendix F to the Registrant’s Definitive Proxy Statement filed on
                June 29, 2006). +10.4
            Output
                Distribution Agreement, dated July 7, 2006, by and between Genius
                Products, Inc. and ESPN Enterprises, Inc. (incorporated by reference
                from
                Exhibit 10.1 to the Registrant’s Form 8-K/A filed on September 29, 2006).
                +10.5
            Consulting
                Agreement, dated July 20, 2006, by and between Genius Products, Inc.
                and
                Bannon Strategic Advisors, Inc. (incorporated by reference from Exhibit
                10.1 to the Registrant’s Form 8-K filed on July 26, 2006). +10.6
            Amendment
                No. 2 to Employment Agreement, dated July 20, 2006, by and between
                Genius
                Products, Inc. and Trevor Drinkwater (incorporated by reference from
                Exhibit 10.2 to the Registrant’s Form 8-K filed on July 26, 2006).
                +10.7
            Registration
                Rights Agreement, dated July 21, 2006, by and between Genius Products,
                Inc. and The Weinstein Company LLC. +10.8
            Services
                Agreement, dated July 21, 2006, by and between Genius Products, Inc.
                and
                Genius Products, LLC.+99.1
            Financial
                Statements of Genius Products, LLC *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.


+  Previously
      filed.





43




**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:
                  September 26, 2007
              
              GENIUS
                  PRODUCTS, INC.,
                a
                  Delaware CorporationBy:
              /s/
                  Trevor DrinkwaterTrevor
                  Drinkwater
                President
                  and Chief Executive Officer
                (Principal
                  Executive Officer)Dated:
                  September 26, 2007
              
              By:
              /s/
                  John MuellerJohn
                  Mueller
                Chief
                  Financial Officer
                (Principal
                  Financial and Accounting
                  Officer)






44