**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**Amendment
      No. 1 to**


**FORM
      10-Q**





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




For
      the
      quarterly period ended June 30, 2006




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




For
      the
      transition period from ____________ to ____________





COMMISSION
      FILE NUMBER 000-27915





**GENIUS
      PRODUCTS, INC.**


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





**DELAWARE**
            **33-0852923****(State
                or other jurisdiction**
              **of
                incorporation or organization)**
            **(IRS
                Employer**
              **Identification
                No.)**




**2230
      BROADWAY**


**SANTA
      MONICA, CA 90404**


**(Address
      of principal executive offices)**




**(310)
      453-1222**


**(Registrant’s
      telephone number)**




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


**SOLANA
      BEACH, CA 92075**


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


**if
      changed since last report)**




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




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




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





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




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













**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 June 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 June 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 June 30, 2006 (unaudited) and December
                  31,
                  2005 (audited)
              5Condensed
                  Consolidated Statements of Operations for the Three and Six Months
                  Ended
                  June 30, 2005 (unaudited) and 2006 (unaudited)
              6Condensed
                  Consolidated Statements of Cash Flow for the Six Months Ended June
                  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
              21Item 3
              Quantitative
                  and Qualitative Disclosures About Market Risk
              29Item 4
              Controls
                  and Procedures
              30**PART II**
              **OTHER
                  INFORMATION**Item 1
              Legal
                  Proceedings
              30Item 1a
              Risk
                  Factors
              31Item 2
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              31Item 3
              Defaults
                  Upon Senior Securities
              31Item 4
              Submission
                  of Matters to a Vote of Security Holders
              31Item 5
              Other
                  Information
              31Item 6
              Exhibits
              31**SIGNATURES**
              32




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




4


**PART
      I - FINANCIAL INFORMATION**




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





**GENIUS
        PRODUCTS, INC. AND SUBSIDIARIES**


**CONDENSED
        CONSOLIDATED BALANCE SHEETS**




December
                  31,
                2005
              
              
              June
                  30,
                2006
                Restated
                (Note
                  2)(unaudited)**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              30,597,164
              
              $
              43,385,570Accounts
                  receivable, net of allowance for doubtful accounts of
                  $942,361(June
                  30, 2006 - $1,238,061) and sales returns of $5,966,428 (June 30,
                  2006 -
                  $20,410,990)
              
              
              2,406,658
              
              
              50,719,654Inventories,
                  net
              
              
              5,567,953
              
              
              13,768,091Prepaid
                  expenses
              
              
              703,875
              
              
              446,718Notes
                  receivable, related party
              
              
              750,000
              
              
              -Total
                  current assets
              
              
              40,025,650
              
              
              108,320,033Restricted
                  cash
              
              
              -
              
              
              303,353Property
                  and equipment, net
              
              
              396,358
              
              
              736,434Royalty
                  advances
              
              
              -
              
              
              1,118,227Film
                  library, net of accumulated amortization of $4,027,308 and
                  $4,850,312
              
              
              19,727,179
              
              
              7,979,799Notes
                  receivable, related party
              
              
              1,712,353
              
              
              1,570,856Goodwill
              
              
              14,487,917
              
              
              14,487,917Deposits
                  and other
              
              
              15,545
              
              
              206,583Total
                  assets
              
              $
              76,365,002
              
              $
              134,723,202**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              9,242,560
              
              $
              7,591,524Notes
                  payable
              
              
              5,379,296
              
              
              200,000Remittance
                  due to licensor
              
              
              -
              
              
              60,568,871Accrued
                  expenses
              
              
              3,307,893
              
              
              20,861,181Deferred
                  revenue
              
              
              -
              
              
              10,549,480Customer
                  deposits
              
              
              189,423
              
              
              189,423Debentures
                  payable
              
              
              50,750
              
              
              -Redeemable
                  common stock
              
              
              414,471
              
              
              -Total
                  current liabilities
              
              
              18,584,393
              
              
              99,960,479Deferred
                  tax liability
              
              
              1,380,338
              
              
              -Deferred
                  gain, related party
              
              
              1,212,353
              
              
              1,250,415Total
                  liabilities
              
              
              21,177,084
              
              
              101,210,894Commitments
                  and contingenciesStockholders’
                  equity:Preferred
                  stock, $.0001 par value; 10,000,000 shares authorized; no
                  sharesoutstanding
              
              
              -
              
              
              -Common
                  stock, $.0001 par value; 100,000,000 shares authorized;60,438,154
                  and 61,002,626 shares outstanding
              
              
              6,044
              
              
              6,100Additional
                  paid-in capital
              
              
              93,919,755
              
              
              96,884,676Accumulated
                  deficit
              
              
              (38,737,881
              )
              
              (63,378,468
              )Total
                  stockholders’ equity
              
              
              55,187,918
              
              
              33,512,308Total
                  liabilities and stockholders' equity
              
              $
              76,365,002
              
              $
              134,723,202




See
        accompanying notes to condensed unaudited interim financial
        statements.


5


**GENIUS
        PRODUCTS, INC. AND SUBSIDIARIES**


**CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**





Three
                  Months Ended
                June
                  30,
              
              Six
                  Months Ended
                June
                  30,2005
                Restated
                (Note
                  3)
              
              2006
                Restated
                (Note
                  2)
              
              2005
                Restated
                (Note
                  3)
              
              2006
                Restated
                (Note
                  2)Revenues
              
              $
              5,189,109
              
              $
              104,186,422
              
              $
              7,954,299
              
              $
              140,941,827Sales
                  returns, discounts and allowances
              
              
              (1,276,659
              )
              
              (28,101,925
              )
              
              (1,485,963
              )
              
              (36,945,233
              )Net
                  revenues
              
              
              3,912,450
              
              
              76,084,497
              
              
              6,468,336
              
              
              103,996,594Costs
                  and expensesTotal
                  cost of revenues
              
              
              5,643,484
              
              
              86,755,819
              
              
              8,310,285
              
              
              115,553,011Gross
                  loss
              
              
              (1,731,034
              )
              
              (10,671,322
              )
              
              (1,841,949
              )
              
              (11,556,417
              )Operating
                  expenses (income):General
                  and administrative
              
              
              3,480,195
              
              
              8,772,310
              
              
              5,594,963
              
              
              14,455,361Gain
                  on sale, related party
              
              
              -
              
              
              (23,179
              )
              
              -
              
              
              (63,446
              )Total
                  operating expenses
              
              
              3,480,195
              
              
              8,749,131
              
              
              5,594,963
              
              
              14,391,915Loss
                  from operations
              
              
              (5,211,229
              )
              
              (19,420,453
              )
              
              (7,436,912
              )
              
              (25,948,332
              )Interest
                  expense
              
              
              (76,948
              )
              
              (8,315
              )
              
              (82,788
              )
              
              (8,315
              )Interest
                  income and other
              
              
              -
              
              
              280,670
              
              
              -
              
              
              42,723Loss
                  before provision for income taxes
              
              
              (5,288,177
              )
              
              (19,148,098
              )
              
              (7,519,700
              )
              
              (25,913,924
              )Provision
                  (benefit) for income taxes
              
              
              8,175
              
              
              (1,227,233
              )
              
              8,975
              
              
              (1,273,338
              )Net
                  loss
              
              $
              (5,296,352
              )
              $
              (17,920,865
              )
              $
              (7,528,675
              )
              $
              (24,640,586
              )Basic
                  and diluted net loss per share
              
              $
              (0.13
              )
              $
              (0.29
              )
              $
              (0.22
              )
              $
              (0.41
              )Basic
                  and diluted weighted average shares
              
              
              41,754,657
              
              
              60,829,229
              
              
              34,915,329
              
              
              60,647,509






See
        accompanying notes to condensed unaudited interim financial
        statements.


6


**GENIUS
        PRODUCTS, INC. AND SUBSIDIARIES**


**CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**





Six
                  Months Ended June 30,2005
                  Restated
                (Note
                  3)
              
              2006
                  Restated
                (Note
                  2)Cash
                  flows from operating activities:Net
                  loss
              
              $
              (7,528,675
              )
              $
              (24,640,586
              )Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Depreciation
                  and amortization
              
              
              248,047
              
              
              105,770Amortization
                  and impairment of film library
              
              
              1,145,924
              
              
              12,442,378Change
                  in allowance for doubtful accounts and provision for
                  returns
              
              
              (466,406
              )
              
              13,987,962Change
                  in provision for obsolete inventory
              
              
              -
              
              
              3,921,226Common
                  stock issued for services
              
              
              82,500
              
              
              19,100Amortization
                  of warrants issued for services
              
              
              149,295
              
              
              -Stock
                  compensation expense
              
              
              -
              
              
              2,047,856Interest
                  expense on redeemable common stock
              
              
              9,650
              
              
              -Deferred
                  tax liability
              
              
              -
              
              
              (1,380,338
              )*Changes
                  in assets and liabilities:*(Increase)
                  decrease in accounts receivable
              
              
              2,374,880
              
              
              (62,300,958
              )(Increase)
                  decrease in inventories
              
              
              (989,357
              )
              
              (12,121,364
              )(Increase)
                  decrease in prepaid expenses, notes receivable, deposits and
                  other
              
              
              (462,276
              )
              
              957,615(Increase)
                  decrease in royalty advances
              
              
              -
              
              
              (1,118,227
              )(Increase)
                  decrease in film library
              
              
              (2,420,745
              )
              
              (694,998
              )Increase
                  (decrease) in accounts payable
              
              
              (4,342,106
              )
              
              (1,651,036
              )Increase
                  (decrease) in accrued expenses
              
              
              19,914
              
              
              17,553,288Increase
                  (decrease) in deferred revenue
              
              
              -
              
              
              10,549,480Increase
                  (decrease) in remittance to licensor
              
              
              -
              
              
              60,568,871Increase
                  (decrease) in deferred gain, related party
              
              
              -
              
              
              38,062Net
                  cash provided by (used in) operating activities
              
              
              (12,179,355
              )
              
              18,284,101Cash
                  flows from investing activities:AVM
                  cash, net of expenses paid in cash
              
              
              (300,000
              )
              
              -Restricted
                  cash
              
              
              -
              
              
              (303,353
              )Purchase
                  of property and equipment
              
              
              (50,492
              )
              
              (445,847
              )Net
                  cash used in investing activities
              
              
              (350,492
              )
              
              (749,200
              )Cash
                  flows from financing activities:Payments
                  on notes payable and debentures
              
              
              -
              
              
              (5,230,046
              )Payments
                  on short-term debt
              
              
              (2,349,219
              )
              
              -Payments
                  of offering costs
              
              
              (834,391
              )
              
              -Proceeds
                  from exercise of options
              
              
              91,140
              
              
              325,251Proceeds
                  from exercise of warrants
              
              
              707,560
              
              
              158,300Proceeds
                  from issuance of common stock
              
              
              15,313,423
              
              
              -Net
                  cash provided by (used in) financing activities
              
              
              12,928,513
              
              
              (4,746,495
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              398,666
              
              
              12,788,406Cash
                  and cash equivalents at beginning of period
              
              
              1,223,881
              
              
              30,597,164Cash
                  and cash equivalents at end of period
              
              $
              1,622,547
              
              $
              43,385,570Supplemental
                  disclosure of cash flow information:Warrants
                  issued for offering costs
              
              $
              1,014,986
              
              $
              -Issuance
                  of common stock for offering costs
              
              $
              350,000
              
              $
              -Interest
                  paid
              
              $
              1,015
              
              $
              74,060Taxes
                  paid
              
              $
              800
              
              $
              -Non-cash
                  transactions:Reclassification
                  of redeemable common stock
              
              
              -
              
              
              414,471




See
        accompanying notes to condensed unaudited interim financial
        statements.


7


**NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**




**NOTE
      1.** **NATURE
      OF BUSINESS**





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




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





The
        Company’s interest in the Distributor consists of Class G Units representing a
        30% membership interest in the Distributor, and the interest of TWC or its
        affiliates consist of Class W Units representing a 70% membership interest
        in
        the Distributor. The 70% interest in the Distributor held by TWC or its
        affiliates 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. As further discussed in Note 9, commencing on December 5, 2005, the
        date we entered into a Master Contribution Agreement (the “Agreement”) in
        connection with the formation of a new venture to exploit the exclusive U.S.
        home video distribution rights to feature film and direct-to-video releases
        owned or controlled by TWC, through the Closing, we operated under an interim
        distribution agreement with TWC and recorded the results from titles we first
        released for TWC in March 2006 in our financial statements. Refer to Note
        15 for
        additional discussion regarding this transaction.




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




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




8


CONCENTRATIONS
        OF CREDIT RISK. For the three months ended June 30, 2006, Wal-Mart accounted
        for
        44.2% of net revenues. At June 30, 2006 this customer comprised 23.6% of
        the
        accounts receivable before allowances. For the three months ended June 30,
        2005,
        Dollar Tree accounted for 11% of net revenues. For the three months ended
        June
        30, 2006, this customer accounted for less than 1% of net revenues. At June
        30,
        2005, this customer comprised 11.6% of the accounts receivable before
        allowances.




For
        the
        six months ended June 30, 2006, Wal-Mart and Blockbuster accounted for 39.6%
        and
        9.0%, respectively, of net revenues. For the six months ended June 30, 2005,
        Anderson Merchandisers accounted for 13% of net revenues. For the six months
        ended June 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.





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 December 31, 2005, 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 December
        31, 2005, 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. For the three and six months ended June 30, 2006, the Company recognized
        a tax benefit of approximately $7.67 million and $10.36 million, respectively,
        which was substantially offset by a valuation allowance of $6.33 million
        and
        $8.98 million, respectively. As a result, in the three and six months ending
        June 30, 2006, the Company recorded $1.33 million and $1.38 million,
        respectively, of tax benefits attributable to the liability recognized from
        the
        purchase accounting in connection with the Wellspring acquisition.  In the
        three and six months ending June 30, 2006, the Company also recorded $0.11
        million of alternative minimum tax expense. The Company currently has a full
        valuation allowance on its deferred tax assets and has recorded a net deferred
        tax liability relating to the purchase accounting in connection with the
        Wellspring acquisition.  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 March 31, 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.




9


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
        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
        the
        theatrical release of films are recognized at the time of exhibition based
        on
        our participation with box office receipts. Revenues from royalties are
        recognized when received. Revenues from licensing are recognized when the
        title
        is available to the licensee. Cash payments received are recorded as deferred
        revenue until all the conditions of revenue recognition have been met.
        Long-term, non-interest bearing receivables are discounted to present
        value.





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




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




UNCERTAINTY
        IN INCOME TAXES. In June 2006, the FASB issued Interpretation No. 48,
“ Accounting
        for Uncertainty in Income Taxes — An Interpretation of FASB Statement
        No. 109”, (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in
        income taxes recognized in an enterprise’s financial statements in accordance
        with 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.





**NOTE
        2.** **UNAUDITED
        RESTATEMENT OF**  **QUARTER
        AND SIX MONTHS ENDED JUNE 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 three and six months ended June 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 six months ended June
        30, 2006. For the three and six months ended June 30, 2006, the Company
        increased its stock option compensation expense by $0.4 million and $0.3
        million, respectively.





10


2.The
        Company revised its
        reported net revenue amounts for the three and six months ended June 30,
        2006 to
        properly reflect net revenue in the appropriate periods and to comply with
        the
        provisions of EITF 01-09, “Accounting for Consideration Given by a Vendor to a
        Customer.” For each of the three and six months ended June 30, 2006, the Company
        increased its revenue in the amount of $2.3 million to correct timing errors
        in
        the recognition of invoices and expenses.  For the three and six months
        ended June 30, 2006, the Company decreased its revenue by $1.2 million and
        $1.9
        million, respectively, to correct errors in the treatment of revenue from
        revenue-sharing agreements.  As a result of the foregoing corrections, the
        net increases in revenue for the three and six months ended June 30, 2006
        were
        $1.1 million and $0.4 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. For the three and six months ended June 30, 2006,
        the
        Company decreased advertising and marketing expenses by $1.6 million and
        increased advertising and marketing expenses by $1.0 million, respectively.
        For
        the three and six months ended June 30, 2006, the Company increased
        participation expense by $0.4 million and decreased participation expense
        by
        $1.1 million, respectively.




4.The
        Company reduced an
        accrued liability on its balance sheet by approximately $0.4 million for
        each of
        the fiscal quarters ended March 31 and June 30, 2006, to reflect that the
        Company does not have any obligation associated with redeemable common stock
        that had been accrued for and disclosed in prior fiscal periods. The redeemable
        common stock was reclassified to additional paid-in capital.





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




6.The
        Company revised its
        tax provision amounts for the three and six months ended June 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. For the three and six months
        ended June 30, 2006, the Company decreased its tax provision by $1.3
        million and $1.4 million, respectively.





7.The
        Company revised the
        presentation of its advertising and marketing expenses and bad debt expense
        for
        the three and six months ended June 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 six months ended June 30, 2006 are as
        follows:




(In
                  thousands, except per share amounts)
              
              Three
                  months ended June 30, 2006
              
              Six
                  months ended June 30, 2006As
                  Originally Reported
              
              Restatement
                  Adjustments
              
              As
                  Restated
              
              As
                  Originally Reported
              
              Restatement
                  Adjustments
              
              As
                  RestatedNet
                  revenues
              
              $
              75,013
              
              $
              1,071
              
              $
              76,084
              
              $
              103,596
              
              $
              401
              
              $
              103,997Cost
                  of revenues
              
              
              60,207
              
              
              26,549
              
              
              86,756
              
              
              83,388
              
              
              32,165
              
              
              115,553Gross
                  profit
              
              
              14,806
              
              
              (25,478
              )
              
              (10,672
              )
              
              20,208
              
              
              (31,764
              )
              
              (11,556
              )Provision
                  (benefit) for income taxes
              
              
              107
              
              
              (1,334
              )
              
              (1,227
              )
              
              107
              
              
              (1,380
              )
              
              (1,273
              )Net
                  loss
              
              
              (3,980
              )
              
              (13,941
              )
              
              (17,921
              )
              
              (9,653
              )
              
              (14,989
              )
              
              (24,642
              )Loss
                  per common share:Basic
                  and diluted
              
              
              
              
              
              
              
              
              (0.29
              )Accounts
                  receivable
              
              
              48,457
              
              
              2,263
              
              
              50,720
              
              
              48,457
              
              
              2,263
              
              
              50,720Total
                  current assets
              
              
              110,958
              
              
              (2,638
              )
              
              108,320
              
              
              110,958
              
              
              (2,638
              )
              
              108,320Film
                  library
              
              
              22,926
              
              
              (14,946
              )
              
              7,980
              
              
              22,926
              
              
              (14,946
              )
              
              7,980Total
                  assets
              
              
              151,331
              
              
              (16,608
              )
              
              134,723
              
              
              151,331
              
              
              (16,608
              )
              
              134,723Accrued
                  expenses
              
              
              20,347
              
              
              514
              
              
              20,861
              
              
              20,347
              
              
              514
              
              
              20,861Total
                  current liabilities
              
              
              100,976
              
              
              (1,016
              )
              
              99,960
              
              
              100,976
              
              
              (1,016
              )
              
              99,960Stockholders'
                  equity
              
              
              47,826
              
              
              (14,314
              )
              
              33,512
              
              
              47,826
              
              
              (14,314
              )
              
              33,512




11


**NOTE
      3.** **RESTATEMENT
      OF QUARTER ENDED JUNE 30, 2005**




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




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




2.The
      Company revised
      royalty expense to increase the amount recognized during the three month period
      ended June 30. The total adjustment required to increase royalty expense to
      its proper amount was $0.4 million for the three month period ended
      June 30, 2005. This adjustment was necessary because the Company had
      recorded this amount as an asset as of June 30, 2005. The correct
      accounting treatment is to record this amount as royalty expense during the
      three month period ended June 30, 2005.





3.The
      Company revised
      production cost amortization expense to increase the amount recognized during
      the three month period ended June 30, 2005. The total adjustment required
      to increase production costs amortization expense to its proper amount was
      $63,547 for the three month period ended June 30, 2005. This adjustment was
      necessary because the Company had recorded this amount as an asset as of
      June 30, 2005 when the amount should have been expensed under SOP 00-2. The
      correct accounting treatment is to record this amount as expense during the
      three month period ended June 30, 2005.




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




Three
                months ended June 30, 2005
            
            Six
                months ended June 30, 2005As
                Originally Reported
            
            Restatement
                Adjustments
            
            As
                Restated
            
            As
                Originally Reported
            
            Restatement
                Adjustments
            
            As
                RestatedNet
                revenues
            
            $
            3,822,450
            
            $
            90,000
            
            $
            3,912,450
            
            $
            6,378,336
            
            $
            90,000
            
            $
            6,468,336Cost
                of revenues
            
            
            5,163,789
            
            
            479,695
            
            
            5,643,484
            
            
            7,830,590
            
            
            479,695
            
            
            8,310,285Gross
                profit
            
            
            (1,341,339
            )
            
            (389,695
            )
            
            (1,731,034
            )
            
            (1,452,254
            )
            
            (389,695
            )
            
            (1,841,949
            )Net
                loss
            
            $
            (4,906,657
            )
            $
            (389,695
            )
            $
            (5,296,352
            )
            $
            (7,138,980
            )
            $
            (389,695
            )
            $
            (7,528,675
            )Loss
                per common share:Basic
                and diluted
            
            $
            (0.12
            )
            $
            (0.01
            )
            $
            (0.13
            )
            $
            (0.17
            )
            $
            (0.01
            )
            $
            (0.18
            )Production
                masters
            
            $
            3,456,267
            
            $
            (63,547
            )
            $
            3,392,720
            
            $
            3,456,267
            
            $
            (63,547
            )
            $
            3,392,720Film
                library
            
            
            16,095,700
            
            
            (416,148
            )
            
            15,679,552
            
            
            16,095,700
            
            
            (416,148
            )
            
            15,679,552Total
                assets
            
            
            46,981,069
            
            
            (479,695
            )
            
            46,501,374
            
            
            46,981,069
            
            
            (479,695
            )
            
            46,501,374Accrued
                expenses
            
            
            1,595,815
            
            
            (90,000
            )
            
            1,505,815
            
            
            1,595,815
            
            
            (90,000
            )
            
            1,505,815Total
                current liabilities
            
            
            15,255,350
            
            
            (90,000
            )
            
            15,165,350
            
            
            15,255,350
            
            
            (90,000
            )
            
            15,165,350Stockholders'
                equity
            
            $
            31,725,719
            
            $
            (389,695
            )
            $
            31,336,024
            
            $
            31,725,719
            
            $
            (389,695
            )
            $
            31,336,024




12


**NOTE
      4.** **RESTRICTED
      CASH**




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




**NOTE
      5.** **INVENTORY**




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





December
                  31,
                2005
              
              June
                  30,
                2006
                Restated
                (Note
                  2)
                (unaudited)Raw
                  materials
              
              $
              71,085
              
              $
              106,670Finished
                  goods
              
              
              7,798,303
              
              
              19,884,0827,869,388
              
              
              19,990,752Allowance
                  for obsolescence
              
              
              (2,301,435
              )
              
              (6,222,661
              )Inventories,
                  net
              
              $
              5,567,953
              
              $
              13,768,091





**NOTE
      6.**  **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.





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




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





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




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





December
                  31,
                2005
              
              June
                  30,
                2006
                Restated
                (Note
                  2)
                (unaudited)Titles
                  released, net of accumulated amortization
              
              $
              4,573,191
              
              $
              --Acquired
                  library, net of accumulated amortization
              
              
              14,551,096
              
              
              7,820,000Titles
                  acquired and not released
              
              
              602,892
              
              
              159,799$
              19,727,179
              
              $
              7,979,799




13


The
        film
        library at June 30, 2006 is composed primarily of the Wellspring library
        that
        was acquired as part of the acquisition of American Vantage Media (“AVMC”) , a
        subsidiary of American Vantage Companies (“AVC”) and Wellspring Media, Inc. on
        March 21, 2005 and additional titles licensed since the acquisition. The
        film library is amortized over its expected revenue stream for a period of
        ten
        years from the acquisition date. The amortization period on the library which
        includes titles acquired and not released as of June 30, 2006 is approximately
        nine years on unamortized costs of $8.0 million. We estimate total amortization
        expense for our film library for the remainder of 2006 to be $0.6 million
        which
        is based upon revenue estimates for our film library for the remainder of
        the
        year.




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




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




On
        March 21, 2005, we completed our acquisition of AVMC. As part of this
        acquisition, we assumed notes payable to certain individuals and entities
        with a
        total principal balance of $4.0 million, bearing interest at 7%, payable
        quarterly, and a maturity date of February 3, 2006. We repaid $3.8 million
        of these notes on February 7, 2006 and withheld payment on the balance as
        part of our contractual right to reserve for certain potential liabilities
        associated with the acquisition.





On
        October 4, 2005, we entered into a Note and Warrant Purchase agreement with
        a group of investors (collectively, the “Investors”). Under the Purchase
        Agreement, the Investors loaned a total of $4.0 million to us in exchange
        for
        (i) promissory notes in favor of the Investors (the “Notes”) with a total
        principal balance of $4.0 million and (ii) five-year warrants to purchase a
        total of 280,000 shares of our common stock, par value $0.0001 per share,
        with
        an exercise price per share equal to $1.88 (the last reported sales price
        of our
        common stock, as reported by the Over the Counter Bulletin Board, on the
        closing
        date of October 5, 2005). The discount allocated to the warrants was $0.3
        million, calculated using the Black-Scholes Model, with the following weighted
        average assumptions: expected volatility 60%; risk-free interest rate of
        4.2%;
        expected life of five years and no dividends payable. The fair value of the
        warrants was classified as equity in 2005 in accordance with EITF 00-19,
        “Accounting for Derivative Financial Instruments Indexed to, and Potentially
        Settled in, a Company’s Own Stock” (“EITF 00-19”). The discount is amortized
        over the life of the Notes. As of December 31, 2005 the amortized discount
        was $0.2 million. On December 5, 2005, we repaid $2.5 million of the
        October 4, 2005 Notes with proceeds from our December 2005 private equity
        financing, and on March 6, 2006 we repaid the remaining $1.5
        million.





In
        2001,
        we issued a convertible debenture for $50,750 to a shareholder in place of
        redeemable common stock. The debenture bore interest at 8%, was due
        March 31, 2002, and was convertible into common shares at $0.50 per share;
        however, the conversion feature of this debenture has expired. Interest on
        the
        debenture was accrued through December 31, 2005. There was no beneficial
        conversion interest related to this debenture. We repaid the balance of the
        debenture in February 2006.




**NOTE
      9.** **REMITTANCE
      TO LICENSOR AND DEFERRED REVENUE**




Under
        the
        interim distribution agreement with TWC as discussed in Note 1, we record
        as net
        revenues the full amount we receive from sales of home video products (net
        of
        reserves and allowances), deduct our distribution fee, costs of goods sold
        (including manufacturing expenses) and certain marketing expenses, and remit
        the
        balance to TWC. The Remittance to licensor of $60.6 million at June 30, 2006
        primarily related to amounts owed to TWC from sales of TWC’s titles, *Wolf
        Creek, Hoodwinked, Doogal, Mrs. Henderson Presents,*and *Transamerica* that
        we
        released on DVD during the quarter ended June 30, 2006.




The
      increase in deferred revenue to $10.5 million at June 30, 2006 primarily related
      to invoices for shipments of *The
      Matador*and *The Libertine* which
      were not available for retail sale until a date subsequent to June 30, 2006.
      In
      accordance with our revenue recognition policy, if a title has a “street date”
(the date the product is available for retail sale), we recognize the initial
      shipment as revenue on that date. All subsequent shipments after street date
      are
      recognized as revenue upon the receipt of goods by the customer. Accordingly,
      revenue associated with these shipments was deferred until the “street
      date”.





14


**NOTE
      10.** **ACCRUED
      EXPENSES**




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





December 31, 2005
              
              June
                  30, 2006
                Restated
                (Note
                  2)
                (unaudited)Accrued
                  payroll and related items
              
              $
              483,697
              
              $
              629,858Accrued
                  commissions
              
              
              373,510
              
              
              122,528Unearned
                  revenue
              
              
              262,742
              
              
              38,400Accrued
                  severance
              
              
              308,591
              
              
              38,670Tax
                  payable
              
              
              74,637
              
              
              188,112Other
                  accrued expense1
              
              
              1,804,716
              
              
              19,843,613Total
                  accrued expenses
              
              $
              3,307,893
              
              $
              20,861,181




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




**NOTE
      11.** **COMMITMENTS
      AND CONTINGENCIES**




OPERATING
      LEASES


The
        Company leases certain facilities and computer equipment under non-cancelable
        operating leases. Rental expense for the three months ended June 30, 2006
        and
        2005 was $316,294 and $132,553, respectively. Rental expense for the six
        months
        ended June 30, 2006 and 2005 was $555,896 and $167,348, respectively.




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





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




Except
      as
      described below, we are not a party to any legal or administrative proceedings,
      other than routine litigation incidental to our business that we do not believe,
      individually or in the aggregate, would be likely to have a material adverse
      effect on our financial condition or results of operations.





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.





15


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 plans to
        vigorously defend against the allegations thereof and seek recovery of
        damages.




**NOTE
      12.** **STOCKHOLDERS’
      EQUITY**




COMMON
      STOCK


On
      March 2, 2005, we changed our state of incorporation from the state of
      Nevada to the state of Delaware and changed the par value of our common stock
      from $0.001 per share to $0.0001 per share. All transactions have been restated
      to reflect this change.




During
      the six months ended June 30, 2005, we issued a total of 18,037,925 common
      shares and returned no common shares to treasury. We issued 6,518,987 shares
      for
      proceeds of $10.3 million in conjunction with a private placement offering
      and
      issued 7.0 million shares in conjunction with the acquisition of American
      Vantage Media Corporation. We issued 712,338 shares at $2.16 to $2.27 per share
      for services rendered in connection with the private placement
      offering.




During
      the six months ended June 30, 2005, we issued 724,000 shares for the exercise
      of
      warrants at $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 six months ended June 30, 2005, we issued a total of 3,549,076 warrants
      to
      purchase common stock at $1.58 to $2.78 per share, of which 2,086,076 were
      issued in conjunction with the private placement offering, and 1,463,000 were
      issued in conjunction with the transaction to acquire American Vantage Media
      Corporation, of which, 63,000 warrants were issued as part of the offering
      costs.




During
      the six months ended June 30, 2005, we committed to issue shares totaling
      $82,500 related to recruiting expenses incurred during the six months ended
      June
      30, 2005.




During
        the six months ended June 30, 2006, we issued 293,575 common shares related
        to
        the exercise of warrants for proceeds of $158,300. Additionally, during the
        six
        months ended June 30, 2006, we issued 345,000 common shares related to the
        exercise of options for proceeds of $325,251.




During
      the six months ended June 30, 2006, we issued 10,000 common shares for services
      rendered.




16


WARRANTS


A
      summary
      of warrant activity follows:





Warrants
                Outstanding
              
              Weighted
                Average
                Exercise
                  PriceDecember
                  31, 2005
              
              
              16,228,915
              
              $
              2.15Granted
              
              
              -
              
              $
              -Exercised
              
              
              (293,575
              )
              $
              0.92Canceled
              
              
              -
              
              $
              -Total
              
              
              15,935,340
              
              $
              2.17Warrants
                  exercisable, June 30, 2006
              
              
              15,935,340
              
              $
              2.17




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





Warrants
                  outstanding
              
              Average
                  remaining life
              
              Weighted
                  average
                exercise
                price
                warrants
                  outstanding
              
              Warrants
                  exercisable
              
              Weighted
                  average
                exercise
                price
                warrants
                  exercisableUnder
                  $1.50
              
              
              3,518,868
              
              
              1.6
              
              $
              1.17
              
              
              3,518,868
              
              $
              1.17$1.50
                  - $1.99
              
              
              1,054,293
              
              
              3.9
              
              
              1.69
              
              
              1,054,293
              
              
              1.69$2.00
                  - $2.99
              
              
              9,715,179
              
              
              3.9
              
              
              2.44
              
              
              9,715,179
              
              
              2.44$3.00
                  - $3.99
              
              
              1,647,000
              
              
              2.8
              
              
              3.00
              
              
              1,647,000
              
              
              3.0015,935,340
              
              
              3.2
              
              $
              2.17
              
              
              15,935,340
              
              $
              2.17




PRIVATE
      PLACEMENTS


In
        May
        2005, we entered into a securities purchase agreement with certain institutional
        investors related to the private placement of 3,000,000 shares of our common
        stock and five-year warrants to purchase 270,000 shares of our common stock
        at
        an exercise price of $2.56 per share. The transaction closed on May 20,
        2005, and we realized gross proceeds of $5.25 million from the financing
        before
        deducting commissions and other expenses. The fair value of the warrants
        was
        classified as equity in 2005 in accordance with EITF 00-19.




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





**NOTE
      13.** **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 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.




17


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




We
        have
        adopted several stock option plans, all of which have been approved by our
        shareholders, that authorize the granting of options to purchase our common
        shares subject to certain conditions. At June 30, 2006, we had reserved
        15.8 million of our common shares for issuance of share-based compensation
        awards under our stock option plans. At June 30, 2006, we have granted
        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
        2,994,929 options during the first half of 2006. The amount of share-based
        compensation expense recognized in the three months ended June 30, 2006 and
        six
        months ended June 30, 2006 is based on options issued prior to January 1,
        2006 and issued during the first six months of 2006, and ultimately expected
        to
        vest, and it has been reduced for estimated forfeitures. FAS 123R requires
        forfeitures to be estimated at the time of grant and revised, if necessary,
        in
        subsequent periods if actual forfeitures differ from those
        estimates.




Total
        share-based compensation expense recognized for the three months and six
        months
        ended June 30, 2006 was $1.1 million and $2.0 million, respectively. For
        the
        three and six months ended June 30, 2006, no income tax benefit was recognized
        in the statement of earnings (loss) for share-based compensation arrangements.
        Management assessed the likelihood that deferred tax assets realization relating
        to future tax deductions from share-based compensation will be recovered
        from
        future taxable income and determined that a 100% valuation allowance was
        required due to uncertainty as to the recoverability of these
        items.




During
        the six months ended June 30, 2006 and 2005, we received proceeds of $325,251
        and $91,140, respectively, related to the exercise of
        options.




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





Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30, 2006
              
              June
                  30, 2006Risk
                  free interest rate
              
              
              5.1%
              
              
              4.9%Expected
                  dividend yield
              
              
              -
              
              
              -Expected
                  volatility
              
              
              57.9%
              
              
              58.7%Expected
                  life (in years)
              
              
              5.9
              
              
              5.8




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





Shares
              
              Weighted
                Average
                  Price
              
              Weighted
                Average
                Remaining
                  Contractual
                Life
              
              Aggregate
                Intrinsic
                ValueDecember
                  31, 2005
              
              
              18,722,883
              
              $
              1.79Granted
              
              
              2,994,929
              
              $
              1.87Exercised
              
              
              (295,000
              )
              $
              1.07Canceled
              
              
              (922,000
              )
              $
              2.15Outstanding
                  at June 30, 2006
              
              
              20,500,812
              
              $
              1.79
              
              
              7.6
              
              $
              4,430,455Vested
                  and expected to vest at June 30, 2006
              
              
              20,500,812
              
              $
              1.79
              
              
              7.6
              
              $
              4,430,455Options
                  exercisable, June 30, 2006
              
              
              12,129,517
              
              $
              1.75
              
              
              6.4
              
              $
              3,981,416




18


*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 six
        months ended June 30, 2005:





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




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





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




**NOTE
        14.** **LOSS
        PER SHARE**




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




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 six months ended June 30, 2006 and 2005, since to do so would
        have
        been anti-dilutive.




19





**NOTE
        15.** **SUBSEQUENT
        EVENTS**




DISTRIBUTION
        AGREEMENT WITH ESPN


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




The
        initial term of the Output Agreement commences on July 7, 2006 and
        continues, subject to the terms of the Output Agreement, through and including
        December 31, 2011 (the “ Term ”).
        Commencing immediately at the end of the Term, 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 Output Agreement, the
        Company shall pay ESPN a minimum guarantee of $4,500,000 in each of five
        Sales
        Periods (as defined in the Output Agreement) during the Term. The Company
        will
        receive a distribution fee which shall be computed in accordance with the
        terms
        of the Output Agreement.




COMPLETION
        OF ACQUISITION OR DISPOSITION OF ASSETS


As
      previously disclosed on a Current Report on Form 8-K filed by the Company on
      December 9, 2005, the Company, The Weinstein Company LLC, a Delaware
      limited liability company (“ TWC ”),
      and
      The Weinstein Company Holdings LLC, a Delaware limited liability company (such
      company or another company designated by TWC pursuant to the Agreement, the
      “ Distributor ”),
      entered into a Master Contribution Agreement on December 5, 2005 (the
“ Agreement ”)
      in
      connection with the formation of a new venture to exploit the exclusive U.S.
      home video distribution rights to feature film and direct-to-video releases
      owned or controlled by TWC (the “ Transaction ”).





The
        Company’s stockholders voted to approve the Transaction at a Special Meeting of
        Stockholders held on July 21, 2006 and the Transaction closed on such date.
        Under the terms of the Agreement, at the closing of the Transaction
        (“ Closing ”),
        the
        Company contributed to the Distributor, renamed Genius Products, LLC,
        substantially all of its assets, employees and existing businesses and certain
        liabilities, and the Distributor now holds a distribution agreement from
        TWC
        entitling it to distribute in the United States, and receive a distribution
        fee
        on, all filmed entertainment for which TWC owns or controls U.S. home video
        distribution rights. The Distributor is 70% owned by TWC or its owners and
        30%
        owned by the Company. The Company’s interest in the Distributor consists of
        Class G Units representing a 30% membership interest in the Distributor,
        and the
        interest of TWC or its affiliates consists of Class W Units representing
        a 70%
        membership interest in the Distributor. The 70% interest in the Distributor
        held
        by TWC or its affiliates 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. Beginning with our Form 10-Q for the third quarter of 2006, we will account
        for
        our investment in the Distributor on our financial statements using the equity
        method of accounting. Under the equity method of accounting, only our investment
        in and amounts due to and from the equity investee will be included in our
        consolidated balance sheet. As a result, we will record an asset on our balance
        sheet related to our investment interest in the Distributor. On our statement
        of
        operations, we will record our 30% share of the Distributor’s profit or loss as
        equity in net earnings (losses) from investee. We expect to record a gain
        upon
        consummation of the Transaction and that this gain will be based on the
        difference between the fair market value of assets contributed and the net
        book
        value, reduced for the portion of the gain associated with the retained economic
        interest in the Distributor. After the Closing, substantially all of our
        revenue
        and expenses as well as the results from releasing TWC product will be reflected
        in the financial statements of the Distributor. We will include separate
        quarterly and audited annual financial statements of the Distributor in a
        note
        to our financial statements. For
        additional information on the accounting for the Transaction and the pro
        forma
        information to be included beginning with our 10-Q for the period ended
        September 30, 2006, reference our Proxy Statement Schedule 14A as filed on
        June
        29, 2006.





AMENDMENT
        TO ARTICLES OF INCORPORATION


Effective
        July 21, 2006, we amended our articles of incorporation to authorize and
        issue
        to TWC 100 shares of Series W Preferred Stock in us. The Series W Preferred
        Stock provides TWC or its permitted transferees with (a) the right to elect
        five
        of the seven directors on our Board of Directors, (b) majority voting power
        over
        other actions requiring approval of our stockholders, and (c) the right to
        approve certain specified actions by the Company. The Series W Preferred
        Stock
        has no rights to receive dividends and minimal liquidation value. On the
        Closing, we amended and restated our Certificate of Incorporation to, among
        other things, provide for the designation of the Series W Preferred Stock.
        We
        and TWC also entered into a Registration Rights Agreement pursuant to which
        we
        will register for resale our shares of common stock issuable upon redemption
        of
        TWC’s Class W Units in the Distributor. In addition we amended the articles of
        incorporation to authorize us to issue 300,000,000 common shares at a par
        value
        of $0.0001 per share.




20


AMENDMENT
        AND RESTATEMENT OF 2004 STOCK INCENTIVE PLAN


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




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




The
      following discussion of our financial condition and results of operations should
      be read in conjunction with the financial statements and notes thereto contained
      in this report. The discussion contains forward-looking statements that relate
      to future events or our future financial performance that involve known and
      unknown risks, uncertainties and other factors that may cause our actual
      results, levels of activity, performance or achievements to be materially
      different from those expressed or implied by the forward-looking statements.
      For
      additional information concerning these factors, see the information under
      the
      caption “Business Risk Factors” in our annual report on Form 10-K for the year
      ended December 31, 2005.




OVERVIEW


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





We
      are a
      leading independent home-entertainment distribution company that produces,
      licenses and distributes an expanding library of motion pictures, television
      programming, family, lifestyle and trend entertainment on DVD and other emerging
      platforms. The Company primarily focuses on five core content areas that include
      major theatrical film, sports, lifestyle, family/faith and independent film.
      Genius handles the distribution, marketing and sales for such brands as Asia
      ExtremeTM, Baby Genius®, Dimension Films, Dragon DynastyTM, ESPN®, IFC®, NBC
      News®, Sundance Channel Home Entertainment® The Weinstein Company® and
      WellspringTM.




We
      sell
      our own proprietary content, license content from third parties for sale and
      distribute content for third parties for a fee. We currently have the exclusive
      U.S. home video distribution rights to feature film and direct-to-video releases
      owned or controlled by The Weinstein Company (“TWC”), a new film company created
      by Robert and Harvey Weinstein (as discussed below), as well as ESPN. We have
      released the following TWC titles on DVD: (i) *Derailed* ,
      starring Jennifer Aniston and Clive Owen on March 21;
      (ii) *Wolf
      Creek* ,
      an
      Australian horror film, on April 11; (iii) *Mrs. Henderson
      Presents* ,
      starring Judi Dench and Bob Hoskins, on April 18; (iv) *Hoodwinked* ,
      an
      updated retelling of the classic story of Red Riding Hood with the voices of
      Anne Hathaway, Glenn Close and Jim Belushi, on May 2; (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; and (vii) *The
      Libertine* ,
      starring Johnny Depp and *The
      Matador* ,
      starring Pierce Brosnan on July 4. Upcoming TWC films planned for home video
      release by us include: *Scary
      Movie 4,* directed
      by David Zucker *,*  *Lucky
      Number Slevin,* starring
      Bruce Willis, *Feast,* produced
      by Wes Craven, Ben Affleck and Matt Damon, and *Clerks
      II* ,
      directed by Kevin Smith. We will also release content on DVD for Rainbow Media
      and the Independent Film Channel or IFC.




21


We
      seek
      to leverage our increasing market share and retail sales volumes from our new
      relationship with The Weinstein Company to improve the distribution and sale
      of
      our owned, licensed and distributed content in our other core content areas:
      sports, lifestyle, family/faith and independent film, illustrated by our
      recently announced exclusive distribution deal with ESPN. We currently own
      or
      have the rights to publish DVDs and audio CDs under the trademarked brands
      described in the following table. These brands include both proprietary and
      licensed brands. We work with a broad range of retail outlets including
      Wal-Mart, Best Buy, Target, Blockbuster, Movie Gallery, Netflix and Amazon.com
      to implement our specialized distribution strategy that consists of in-store
      displays that highlight our brands and promote our products that relate to
      these
      brands. We call our specialized distribution strategy our Branded Distribution
      Network. We customize our displays and promotions based upon the buying
      patterns, habits and demographics of the consumers. As we add more content
      to
      our libraries, we intend to acquire, license, develop or distribute products
      with credible value and brand them for relevance to the consumer. We attempt
      to
      limit financial exposure through: i) detailed return on investment, or ROI,
      analysis on potential acquisitions of new content and ii) our newly implemented
      vendor managed inventory system that provides us a scalable infrastructure
      and
      cost effective technology to manage the supply chain process. Our brands and
      products are described below.





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





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




* See
      recent strategic transactions below




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.




22


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





Recent
      Strategic Transactions


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





The
        Company’s interest in the Distributor consists of Class G Units representing a
        30% membership interest in the Distributor, and the interest of TWC or its
        affiliates consists of Class W Units representing a 70% membership interest
        in
        the Distributor. The 70% interest in the Distributor held by TWC or its
        affiliates 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. As further discussed in Notes 1 and 9 to the consolidated financial
        statements included elsewhere herein, commencing on December 5, 2005, the
        date we entered into a Master Contribution Agreement (the “Agreement”) in
        connection with the formation of a new venture to exploit the exclusive U.S.
        home video distribution rights to feature film and direct-to-video releases
        owned or controlled by TWC, through the Closing, we operated under an interim
        distribution agreement with TWC and recorded the results from titles we first
        released for TWC commencing in March 2006 through the second quarter of 2006
        in
        our financial statements.





On
      the
      Closing, the Distributor adopted an Amended and Restated Limited Liability
      Company Agreement (the “LLC Agreement”) in the form agreed to by the parties.
      The Distributor, which will be renamed Genius Products, LLC, will operate the
      new distribution business and our existing businesses, and continue to operate
      under the LLC Agreement following the Closing.




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




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




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




23


•
            Audio
                and audiovisual works entitled “Kid
                Genius”;




•
            Audio
                and audiovisual works entitled “Little
                Tikes”;




•
            Audio
                works entitled “Wee Worship”; and




•
            Related
                intellectual property, agreements, documents and
                instruments.




Subject
      to limited exceptions, Mr. Moeller agreed to assume any and all obligations
      for royalties, advances, reporting requirements, and all other obligations
      of
      any kind arising out of or in connection with all talent agreements, producer
      agreements, and any and all other agreements relating to the Assets and due
      after the signing of the Asset Purchase Agreement.




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




•
            $250,000
                in cash on signing;




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




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




We
      will
      continue to distribute Baby Genius, Little Tikes and Wee Worship DVDs and music
      CDs and all new products under these brands. Under the distribution agreement,
      we will receive a distribution fee and recoup all of our expenses. The $3
      million purchase price was determined by negotiations between the parties and
      our assessment of the reasonable value of the Assets and the distribution
      arrangement.




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





**CRITICAL
      ACCOUNTING POLICIES**




ALLOWANCE
        FOR SALES RETURNS AND DOUBTFUL ACCOUNTS. The allowance for doubtful accounts
        and
        provision for sales returns includes management’s estimate of the amount
        expected to be uncollectible or returned on specific accounts and 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.




24


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




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




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




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




Long-lived
        assets are reviewed annually for impairment and whenever events or changes
        in
        circumstances indicate that the carrying amount of an asset may not be
        recoverable. 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.




25


INCOME
        TAXES. For the three and six months ended June 30, 2006, the Company recognized
        a tax benefit of approximately $7.67 million and $10.36 million, respectively,
        which was substantially offset by a valuation allowance of $6.33 million
        and
        $8.98 million, respectively. As a result, in the three and six months ending
        June 30, 2006, the Company recorded $1.33 million and $1.38 million,
        respectively, of tax benefits attributable to the liability recognized from
        the
        purchase accounting in connection with the Wellspring acquisition.  In the
        three and six months ending June 30, 2006, the Company also recorded $0.11
        million of alternative minimum tax expense. The Company currently has a full
        valuation allowance on its deferred tax assets and has recorded a net deferred
        tax liability relating to the purchase accounting in connection with the
        Wellspring acquisition.  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 March 31, 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.





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.




ACCOUNTING
      CHANGES. In May 2005, the FASB issued Statement of Financial Accounting
      Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”), an amendment to Accounting Principles Bulletin Opinion
      No. 20, “Accounting Changes” (“APB No. 20”), and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements”. Though SFAS
      No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3
      with respect to accounting for changes in estimates, changes in reporting
      entity, and the correction of errors, SFAS No. 154 establishes new
      standards on accounting for changes in accounting principles, whereby all such
      changes must be accounted for by retrospective application to the financial
      statements of prior periods unless it is impracticable to do so. SFAS
      No. 154 is effective for accounting changes and error corrections made in
      fiscal years beginning after December 15, 2005, with early adoption
      permitted for changes and corrections made in years beginning after
      May 2005. We implemented SFAS No. 154 in our fiscal year beginning
      January 1, 2006.




RECENTLY
        ISSUED ACCOUNTING PRONOUNCEMENTS. In February 2006, the FASB issued SFAS
        No. 155, “Accounting for Certain Hybrid Financial Instruments”, which
        amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging
        Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of
        Financial Assets and Extinguishment of Liabilities”. SFAS No. 155 amends
        SFAS No. 133 to narrow the scope exception for interest-only and
        principal-only strips on debt instruments to include only such strips
        representing rights to receive a specified portion of the contractual interest
        or 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
        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.





26





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




*Revenues:*





Revenues
        for the three and six months ended June 30, 2006 were composed of primarily
        sales of The Weinstein Company (“TWC”) titles, *Derailed,
        Mrs. Henderson Presents,Transamerica, Wolf Creek, Have No Fear: The Life
        of Pope
        John Paul II, Hoodwinked*and*Doogal,* sales
        of
        branded and proprietary products including branded classic movies and television
        shows on DVD as well as non-branded classic movies and television shows on
        DVD,
        and Wellspring titles from AVMC. Video revenues increased $100.4 million
        and
        $135.7 million during the three months and six months ended June 30, 2006,
        respectively to $104.2 million and $140.9 million, as compared to $3.8 million
        and $5.2 million during the comparable prior year periods. This increase
        from
        2005 was primarily due to the addition of revenues from the video release
        of
        TWC’s titles *.*




Theatrical
        revenues, 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 30% and 35% of gross revenues for the three and
        six
        months ended June 30, 2005, were immaterial for the three and six months
        ended
        June 30, 2006. In February 2006, we announced we will no longer release films
        theatrically.  Audio revenues declined due to lower sales of Baby Genius
        music, licensed music product, value music products and Lifestyles Music
        Program. Royalty and other revenues declined as a result of lower licensing
        revenues  from our acquisition of AVMC on March 22, 2005 and the sale of
        Baby Genius rights on December 31, 2005.




As
      a
      result of the foregoing, total gross revenues increased $99.0 million and $132.9
      million during the three and six months ended June 30, 2006, respectively,
      to
      $104.2 million and $140.9 million as compared to $5.2 million and $8.0 million
      during the comparable prior year periods, due primarily to increased sales
      of
      video products as discussed above.




Sales
      returns, discounts and allowances increased $26.8 million and $35.4 million
      during the three and six months ended June 30, 2006 to $28.1 million and $36.9
      million, respectively, as compared to $1.3 million and $1.5 million during
      the
      comparable prior year periods. The increase resulted primarily from the increase
      in sales from the video release of TWC’s *Derailed,
      Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked,*and*Doogal* .
      The
      provision for sales returns and allowances is calculated in accordance with
      historical averages and industry changes, but may vary in the future based
      on
      customer and product mix.




Net
      revenues increased $72.2 million and $97.5 million during the three and six
      months ended June 30, 2006, respectively, to $76.1 million and $104.0
      million as compared to $3.9 million and $6.5 million during the comparable
      prior year periods, primarily due to the increase in sales of DVDs from the
      release of TWC’s titles *.*





*Costs
      and expense:*




*Cost
        of 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. Generally,
        cost of revenues increased as a result of the increased sales. We include
        participations due to TWC in cost of revenues. Under our distribution agreement
        with TWC, we record participations 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.




Cost
        of
        revenues for activities unrelated to TWC titles declined significantly during
        the three and six months ended June 30, 2006 compared to the comparable periods
        in the prior year, consistent with the decline in revenues for non-TWC
        activities, as discussed above.





27


*Operating
      Expense:*




General
        and administrative expenses increased by $5.3 million and $8.9 million during
        the three and six months ended June 30, 2006, respectively, to $8.8 million
        and
        $14.5 million, as compared to $3.5 million and $5.6 million during the
        comparable prior periods. These increases were primarily due to increased
        payroll, rent, and utilities as a result of the acquisition of AVMC, increased
        payroll and overhead to support the increased sales volume anticipated as
        part
        of the new relationship with The Weinstein Company, increased transaction
        costs
        including investment banking, audit and legal fees of $2.4 million and $2.8
        million during the three and six months ended June 30, 2006, respectively,
        related to the transaction announced with The Weinstein Company, severance
        costs
        associated with employees and outside consultants of $1.1 million and $1.8
        million during the three and six months ended June 30, 2006 and warrants
        and
        options expense associated with compensation to certain employees and outside
        consultants of $1.1 million and $2.0 million during the three and six months
        ended June 30, 2006, respectively. General and administrative expenses were
        11.5% and 13.9% of net revenues for the three and six months ended June 30,
        2006, respectively, compared to 89.0% and 86.5% for the three and six months
        ended June 30, 2005.




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




The
      purchase price was payable as follows:




•
            $250,000
                in cash on signing;




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




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




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




We
        had
        interest income of $0.2 million and $0.4 million during the three and six
        months
        ended June 30, 2006, respectively, as compared to zero interest income for
        the
        comparable prior year periods. We had interest expense of $8,315 and $82,788
        during the three and six months ended June 30, 2006 as compared to $76,948
        and
        $0.2 million for the comparable prior year periods. The change resulted from
        reduced interest expense due to the repayment of notes payable during the
        first
        quarter of 2006 and an increase in interest income related to the higher
        average
        cash balance for the quarter ended June 30, 2006.




We
      had
      income tax benefit (previously expense) of $1.2 million and $1.3 million for
      the
      three and six months ended June 30, 2006 as compared to an expense of $8,175
      and
      $8,975 for the comparable prior year period. The change resulted from an
      alternative minimum tax incurred during the quarter ended June 30,
      2006.





As
      result
      of the foregoing, the net loss increased $12.6 million and $17.1 million during
      the three and six months ended June 30, 2006, respectively, to $17.9 million
      and
      $24.6 million as compared to $5.3 million and $7.5 million during the comparable
      prior periods.





**LIQUIDITY
      AND CAPITAL RESOURCES**




Net
        cash
        provided by operations during the six months ended June 30, 2006 was $18.3
        million, primarily due to increases in remittance to licensor, accrued expenses,
        allowance for doubtful accounts and provision for returns, amortization and
        impairment of film library and deferred revenue, offset by the net loss of
        $24.6
        million, and increases in accounts receivable, and inventories. These changes
        are primarily related to the release of TWC titles. The increase in accounts
        receivable relates primarily to sales of *Derailed,
        Mrs. Henderson Presents, Transamerica, Wolf Creek, Hoodwinked*and
*Doogal* during
        the six months ended June 30, 2006. The increase in accrued expenses and
        inventories primarily relate to invoices




28


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




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




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




At
      June
      30, 2006, we had cash balances of $43.4 million and net accounts receivable
      of
      $50.7 million. We feel that we have sufficient liquidity to fund our operations
      through the remainder of 2006. However, we will consider additional issuance
      of
      equity and debt financing to fund future growth opportunities. Although we
      believe that our expanded product line offers us the opportunity for
      significantly improved operating results in future quarters, no assurance can
      be
      given that we will operate on a profitable basis in 2006, or ever, as such
      performance is subject to numerous variables and uncertainties, many of which
      are out of our control.




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





Remainder
                of
                  2006
              
              2007
              
              2008
              
              2009
              
              2010
              
              Thereafter
              
              TotalLease
                  obligations
              
              $
              536,310
              
              $
              1,092,459
              
              $
              976,302
              
              $
              728,507
              
              $
              734,880
              
              $
              185,068
              
              $
              4,253,526Employment
                  agreements
              
              $
              958,068
              
              $
              1,275,833
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,233,901Consulting
                  agreements
              
              
              106,667
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              106,667Royalty
                  advances
              
              
              231,386
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              231,386Total
              
              $
              1,832,431
              
              $
              2,368,292
              
              $
              976,302
              
              $
              728,507
              
              $
              734,880
              
              $
              185,068
              
              $
              6,825,480




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




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




We
      do not
      enter into hedging or derivative instrument arrangements.





29


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




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




As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our management, including the
      Chief Executive Officer and the Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures. Based upon
      that evaluation, the Chief Executive Officer and the Chief Financial Officer
      concluded that information required to be disclosed in reports that we file
      or
      submit under the Securities Exchange Act of 1934 is recorded, processed,
      summarized, and reported within the time periods specified in the SEC’s rules
      and forms, and that such information is accumulated and communicated to our
      management, including our Chief Executive Officer and Chief Financial Officer,
      as appropriate, to allow timely decisions regarding the required
      disclosures.




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




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




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





**PART
      II - OTHER INFORMATION**




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




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




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





30





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




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




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




None




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




None.




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




None.




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




None.




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




EXHIBITS
      REQUIRED BY ITEM 601 OF REGULATION S-K


3.1
              Certificate
                  of Incorporation (incorporated by reference from Exhibit 3.1 to
                  the
                  Company’s Form 10-KSB filed on March 31, 2005). +3.2
              Bylaws
                  as amended (incorporated by reference from Exhibit 3.2 to the Company’s
                  Form 10-KSB filed on March 31, 2005). +10.1
              Second
                  Amendment to Master Contribution Agreement by and between Genius
                  Products,
                  Inc., The Weinstein Company LLC, The Weinstein Company Holdings
                  LLC and
                  The Weinstein Company Funding LLC entered into on April 26, 2006
                  (incorporated by reference from Exhibit 2.3 to the Company’s Form 8-K
                  filed on May 2, 2006). +10.2
              Third
                  Amendment to Master Contribution Agreement by and between Genius
                  Products,
                  Inc., The Weinstein Company LLC, The Weinstein Company Holdings
                  LLC and
                  The Weinstein Company Funding LLC entered into on May 30, 2006
                  (incorporated by reference from Exhibit 2.4 to the Company’s Form 8-K
                  filed on June 2, 2006). +10.3
              Fourth
                  Amendment to Master Contribution Agreement by and between Genius
                  Products,
                  Inc., The Weinstein Company LLC, The Weinstein Company Holdings
                  LLC and
                  The Weinstein Company Funding LLC entered into on June 28, 2006
                  (incorporated by reference from Exhibit 2.5 to the Company’s Form 8-K
                  filed on June 29, 2006). +31.1
              Certification
                  of Chief Executive Officer pursuant to Section 302(a) of the
                  Sarbanes-Oxley Act.*31.2
              Certification
                  of Chief Financial Officer pursuant to Section 302(a) of the
                  Sarbanes-Oxley Act.*32.1
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act.*32.2
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act.*




* Filed
        herewith.


+ Previously
        filed.





31





**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)




32