**EXHIBIT
      99.1**


**GENIUS
        PRODUCTS, LLC**
 **SUPPLEMENTAL
        BALANCE SHEET**
 **(UNAUDITED)**
 
 September
                  30,
                2006**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              21,549,726Accounts
                  receivable, net of allowance for doubtful accounts and
                  salesreturns
                  of $1,549,526 and $29,371,252
              
              
              97,847,579Inventories,
                  net
              
              
              14,271,241Prepaid
                  expenses
              
              
              1,145,972Total
                  current assets
              
              
              134,814,518Restricted
                  cash
              
              
              306,109Property
                  and equipment, net
              
              
              855,814Film
                  library, net of accumulated amortization of $5,028,415
              
              
              27,601,056Notes
                  receivable, related party
              
              
              1,712,353Customer
                  relationships, net of amortization
              
              
              6,568,711Value
                  of contracts, net of amortization
              
              
              1,609,028Goodwill
              
              
              75,352,092Deposits
                  and other
              
              
              211,008Total
                  assets
              
              $
              249,030,689**LIABILITIES
                  AND MEMBERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              15,827,285Notes
                  payable
              
              
              200,000Remittance
                  to licensor
              
              
              76,175,146Accrued
                  expenses
              
              
              37,871,763Deferred
                  revenue
              
              
              1,974,250Total
                  current liabilities
              
              
              132,048,444Deferred
                  gain, related party, net of current portion
              
              
              1,124,507Total
                  liabilities
              
              
              133,172,951Member's
                  equity
              
              
              115,857,738Total
                  liabilities and members' equity
              
              $
              249,030,689
 
 1


**GENIUS
      PRODUCTS, LLC**


**SUPPLEMENTAL
      UNAUDITED STATEMENT OF OPERATIONS**


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





DistributorRevenues:Video
                and DVD
            
            $
            112,823,797Theatrical
            
            
            13,390Audio
            
            
            33,614Royalties,
                licensing and other
            
            
            1,625Gross
                revenues
            
            
            112,872,425Sales
                returns, discounts and allowances
            
            
            (31,418,966
            )Net
                revenues
            
            
            81,453,459Costs
                and expensesCost
                of revenues:Video
                and DVD
            
            
            59,093,914Audio
            
            
            9,632Amortization
                of production masters and film library
            
            
            513,521Warehouse
                expense and other
            
            
            619,854Total
                cost of revenues
            
            
            60,236,921Gross
                profit
            
            
            21,216,539Operating
                expenses (income):Product
                development
            
            
            389,857Sales
                and marketing
            
            
            17,712,478General
                and administrative
            
            
            9,642,331Gain
                on sale, related party
            
            
            (24,400
            )Total
                operating expenses
            
            
            27,720,266Loss
                from operations
            
            
            (6,503,727
            )Interest
                expense
            
            
            (2,340
            )Interest
                income and other
            
            
            131,459Net
                loss
            
            $
            (6,374,608
            )





2




**GENIUS
        PRODUCTS, LLC**
 **SUPPLEMENTAL
        UNAUDITED STATEMENT OF MEMBERS' EQUITY**
 **FOR
        THE PERIOD JULY 22, 2006 THROUGH SEPTEMBER 30, 2006**
  
 Class
                  W Units
              
              Class
                  G Units
              
              TotalBalance,
                  July 22, 2006
              
              $
              -
              
              $
              119,340,384
              
              $
              119,340,384Add
                  net loss
              
              
              (4,462,226
              )
              
              (1,912,382
              )
              
              (6,374,608
              )Add
                  Stock option expenses paid by Genius Products, Inc.
              
              
              -
              
              
              2,891,962
              
              
              2,891,962Balance,
                  September, 30, 2006
              
              $
              (4,462,226
              )
              $
              120,319,964
              
              $
              115,857,738
 
 3


**GENIUS
        PRODUCTS, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**


For
                      the Peirod
                    July
                      22, 2006 to
                    September
                      30,
                    2006Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (6,374,608
                  )Adjustments
                      to reconcile net loss to net cash provided by operating
                      activities:Depreciation
                      and amortization
                  
                  
                  544,979Amortization
                      of intangible assets
                  
                  
                  2,431,943Amortization
                      of production masters and film library
                  
                  
                  513,521Change
                      in allowance for doubtful accounts and provision for
                      returns
                  
                  
                  6,953,067Change
                      in provision for obsolete inventory
                  
                  
                  1,293,542Stock
                      compensation expense
                  
                  
                  2,891,962Amortization
                      of deferred gain, related party
                  
                  
                  (24,400
                  )*Changes
                      in assets and liabilities:*Increase in
                      Accounts receivable
                  
                  
                  (54,764,298
                  )Decrease
                      in Inventories
                  
                  
                  3,395,016Increase
                      in Prepaid expenses, notes receivable and deposits
                  
                  
                  (772,825
                  )Increase
                      in Development film library
                  
                  
                  (3,228,132
                  )Increase in
                      Accounts payable
                  
                  
                  10,617,662Increase in
                      Accrued expenses and other
                  
                  
                  12,821,822Decrease
                      in Deferred revenue
                  
                  
                  (782,495
                  )Increase in
                      Remittance to licensor
                  
                  
                  26,168,202Net
                      cash provided by operating activities
                  
                  
                  1,684,958Cash
                      flows from investing activities:Restricted
                      cash
                  
                  
                  (306,109
                  )Purchase
                      of property and equipment
                  
                  
                  (672,713
                  )Net
                      cash used in investing activities
                  
                  
                  (978,822
                  )Cash
                      flows from financing activities:Members'
                      contribution
                  
                  
                  20,843,590Net
                      cash provided by financing activities
                  
                  
                  20,843,590Net
                      increase in cash and cash equivalents
                  
                  
                  21,549,726Cash
                      at beginning of period
                  
                  
                  -Cash
                      at end of period
                  
                  $
                  21,549,726
 
 4




GENIUS
      PRODUCTS, LLC
      ("DISTRIBUTOR")


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**







**NOTE
      A. NATURE OF BUSINESS** . 
      Genius Products, LLC (the “Distributor”) is a partnership that is jointly owned
      by Genius Products, Inc. and The Weinstein Company. Genius Products, Inc. is
      the
      managing member of Genius Products, LLC, in which it holds a 30% equity
      interest. Post closing of the Transaction, Genius Products, Inc’s entire
      business is conducted by the Distributor. The Distributor produces, licenses,
      and distributes a valuable library of motion pictures, television programming,
      family, lifestyle and trend entertainment on DVD and other emerging platforms
      through its expansive network of retailers throughout the U.S.  The
      Distributor handles the distribution, marketing and sales for such brands as
      Asia Extreme(TM), Baby Genius®, Discovery Communications, Inc., Dragon DynastyTM,
      Dimension Films, ESPN®, IFC®, Imaginasian, NBC News®, Sundance Channel Home
      Entertainment®, WellspringTM, The Weinstein Company® and World Wrestling
      Entertainment, Inc.





PERSONAL
      ASSETS AND LIABILITIES AND MEMBERS’ SALARIES. In accordance with the generally
      accepted method of presenting partnership financial statements, the Distributor
      financial statements do not include the personal assets and liabilities of
      the
      partners, including their obligation for income taxes on their distributive
      shares of the net income of the partnership.





CONCENTRATIONS
      OF CREDIT RISK. For the 71 days ending September 30, 2006, Wal-Mart and Best
      Buy
      accounted for 48% and 10% of net revenues. At September 30, 2006, Wal-Mart
      and
      Best Buy comprised 38% and 8% of the accounts receivable before allowances.





STOCK
      BASED COMPENSATION. Under FAS 123R, Genius Products, Inc. measures share-based
      compensation cost based on the estimated fair value of the award, and charges
      the expense over the employee's requisite service period to the Distributor.
      The
      Distributor includes this cost in compensation expense.





INCOME
      TAXES. The Distributor is a pass-through entity and consistent with its tax
      status as a partnership, does not pay federal income taxes.





REVENUE
      RECOGNITION. Revenue from the sale or licensing of films is recognized upon
      meeting all recognition requirements of SOP 00-2. Revenues are recorded upon
      the
      receipt of goods by the customer for titles that do not have a “street date”
(when it is available for sale by the customer). If a title has a street date,
      the Distributor recognizes the initial shipment as revenue on that date and
      all
      subsequent shipments after street date are recognized as revenue upon the
      receipt of goods by the customer. Under revenue sharing arrangements, rental
      revenue is recognized on or after the street date and when the Distributor
      is
      entitled to receipts and such receipts are determinable. Costs of sales and
      an
      allowance for returns are recorded at the time of revenue recognition. 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.





**NOTE
      B. RESTRICTED CASH**




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




**NOTE
      C. INVENTORY**





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




September
                  30,
                2006Raw
                  materials
              
              $
              875,903Finished
                  goods
              
              
              14,688,88015,564,783Less
                  Allowance for obsolescence
              
              
              (1,293,542
              )Inventories,
                  net
              
              $
              14,271,241


5




**NOTE
      D. 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.




September
                  30,
                2006
              
              Useful
                  livesComputers
                  and equipment
              
              $
              1,286,386
              
              
              3-5
                  yearsFurniture
                  and fixtures
              
              
              37,900
              
              
              3-7
                  yearsLeasehold
                  improvements
              
              
              22,365
              
              
              Lesser
                  of lease term or useful lifeTools
                  and dies
              
              
              54,141
              
              
              3
                  years1,400,792Less
                  Accumulated depreciation and amortization
              
              
              (544,978
              )Property
                  and equipment, net
              
              $
              855,814
 Depreciation
        expense for the 71 days ended September 30, 2006 was
        $20,987.





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




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


September
                  30,
                2006Library,
                  net of accumulated amortization
              
              $
              18,737,992Net
                  royalty advances to suppliers
              
              
              8,656,583Titles
                  acquired and not released
              
              
              206,481Total
                  library, net of accumulated amortization
              
              $
              27,601,056




We
      expect approximately 50% of titles released, net of accumulated amortization
      and
      excluding acquired library, will be amortized during the three year period
      ended
      December 31, 2008. The Company expects approximately 80% of titles
      released, net of accumulated amortization and excluding acquired library, will
      be amortized during the seven year period ended December 31, 2012 as the
      library is comprised primarily of mature titles which provide a longer, steadier
      stream of revenue. The film library, including titles acquired and not released
      of $18.9 million, net of accumulated amortization at September 30, 2006 composed
      of the Wellspring library that was acquired as part of the acquisition of
      American Vantage Media (“AVMC”) , a subsidiary of American Vantage Companies
      (“AVC”) and Wellspring Media, Inc. on March 21, 2005 and additional titles
      licensed since the acquisition. The film library is amortized over its expected
      revenue stream for a period of ten years from the acquisition date. The
      amortization period on the library which includes titles acquired and not
      released as of September 30, 2006 is approximately nine years on unamortized
      costs of $18.9 million. We estimate total amortization expense for our film
      library for the remainder of 2006 to be $2.3 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 $5.1 million during
      the twelve month period ending December 31, 2006.




6


**NOTE
      F. PURCHASE PRICE ALLOCATION AND ADJUSTMENT TO GOODWILL**





The
      total purchase price of the Genius Products, Inc. acquisition was allocated
      to
      the estimated fair value of assets acquired and liabilities assumed as set
      forth
      in the following table:




Cash
              
              $
              20,736,590Accounts
                  receivable, net
              
              
              51,748,701Film
                  library
              
              
              24,886,445Other
                  assets
              
              
              20,269,459Intangible
                  assets
              
              
              10,612,257Liabilities
                  assumed
              
              
              (84,372,160
              )Goodwill
              
              
              75,459,092Total
                  consideration
              
              $
              119,340,384
  *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.
 Total
        goodwill was calculated as follows:
 Total
                    Genius Products, Inc shares outstanding as of 7/21/2006
                
                
                61,005,126Closing
                    share price at 7/31/06
                
                $
                1.95Equity
                    market capitalization
                
                
                118,959,996Less
                    cash retained at Genius Products, Inc.
                
                
                (1,000,000
                )Plus
                    liabilities retained at Genius Products, Inc.
                
                
                1,380,388Total
                    consideration
                
                $
                119,340,384Genius
                    Products, Inc. - net book value at 7/21/06
                
                $
                47,483,564Less
                    cash and liabilities retained at Genius Products, Inc.
                
                
                380,388Adjusted
                    net book value
                
                
                47,863,952Total
                    consideration in excess of net book value
                
                
                71,476,432Amounts
                    allocated to identifiable intangible assets
                
                
                (10,612,257
                )Amounts
                    allocated to goodwill
                
                
                60,864,175Genius
                    Products, Inc. goodwill at 7/21/06
                
                
                14,487,917Goodwill
                    at 9/30/06
                
                $
                75,352,092
  7
 **NOTE
          G. NOTES PAYABLE AND CONVERTIBLE DEBENTURES**




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





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




The
      Distributor records as net revenues the full amount it receives from sales
      of
      home video products (net of reserves and allowances), deducts its distribution
      fee, costs of goods sold (including manufacturing expenses) and certain
      marketing expenses, and remits the balance to TWC. The Remittance to licensor
      of
      $76.2 million at September 30, 2006 primarily related to amounts owed to TWC
      from sales of TWC's titles, *The Libertine, The Matador, Scary Movie 4 and Lucky Number
      Slevin* that were released on DVD during the quarter ended September 30,
      2006.




The
      deferred revenue of $2.0 million at September 30, 2006 primarily related to
      revenue associated with shipments at the end of the quarter that had not yet
      been received by the customer. 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.


**NOTE
      I. ACCRUED EXPENSES**




The
      components of accrued expenses at September 30, 2006:




**September
                  30,**
                **2006**Accrued
                  payroll and related items
              
              $
              781,100Accrued
                  commissions
              
              
              122,528Tax
                  payable
              
              
              215,002Accrued
                  royalties
              
              
              4,579,379Accrued
                  operating expenses
              
              
              7,588,188Accrued
                  purchases for inventory
              
              
              2,623,161Other
                  accrued expense1
              
              
              21,962,405Total
                  accrued expenses
              
              $
              37,871,763




1 Other accrued expense primarily relates to marketing incentives and media costs
      related to The Weinstein Company titles and other items as of September 30,
      2006.




**NOTE
      J. COMMITMENTS AND CONTINGENCIES**




OPERATING
      LEASES




The
      Distributor leases certain facilities and computer equipment under
      non-cancelable operating leases. Rental expense for the period July 22 through
      September 30, 2006 was $222,145 For ease of comparison, the pro forma
      consolidated rental expense for the three and nine months ending September
      30,
      2006 were $265,348 and $831,847, respectively compared to rental expense for
      the
      three and nine months ended September 30, 2005 of $241,959 and $453,604,
      respectively.




8




As
      of September 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.




**NOTE
      K. MEMBER’S EQUITY**





*Units
      of Genius Products, LLC*





Genius
      Products, LLC (the “Distributor”) has outstanding 18,301,538 Class G Units and 42,703,588
      Class W Units. The terms and conditions of the Class G Units and Class W Units
      are governed by the Amended and Restated Limited Liability Company Agreement
      of
      the Distributor dated July 21, 2006 (the “LLC Agreement”).





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


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





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





*Repurchase
      of Class W Units*





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





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


(ii)
      TWC enters bankruptcy and does not (i) continue to substantially perform its
      obligations under the Distribution Agreement, or (ii) provide for TWC’s
      obligations being assumed under the Distribution Agreement by or through a
      successor, affiliate or other person;


then,
      in
      either such case, the Distributor may repurchase from TWC
      Holdings and its
      first-tier subsidiary, W-G Holding Corp., a portion of the Class W Units owned
      by them as provided in the table below. The purchase price to be paid will
      be an
      amount equal to 75% of the cash amount that TWC Holdings and W-GHolding Corp.
      would receive upon a redemption of tendered units as described below under
      “Redemption Rights of Class W Units”, where the number of tendered units are
      equal the number of Class W Units to be repurchased. The portion of Class W
      Units subject to the repurchase right during any calendar year will be
      determined as follows:





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




9


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





*Redemption
      Rights of Class W Units*





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





*Limitation
      on the Authority of the Managing Member*





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




**NOTE
      L. SUBSEQUENT EVENTS**





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




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




10




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




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




Recent
      Events





On
      September 19, 2006, Genius Products, LLC (the Distributor) provided earnings
      guidance for 2006 and revenue guidance for 2007, and reaffirmed its 2006 revenue
      guidance.





Genius
      Products, LLC reaffirmed its previously issued pro forma full-year 2006 gross
      revenues guidance of $370 million and net revenues guidance of $300 million,
      and
      also stated that it expects to achieve the following:





·
            Gross
                revenues of $120 million for the 3rdquarter of 2006





·
            Profitability
                on a non-GAAP adjusted net income basis in both the third and fourth
                quarter of 2006





·
            2007
                gross revenues in the range of $650 to $750 million





**RESULTS
      OF OPERATIONS FOR THE DISTRIBUTOR FOR THE PERIOD JULY 22 THROUGH SEPTEMBER
      30,
      2006**





The
      discussions in this section reflect the result of operations for the Distributor
      for the 71 day period from July 22 through September 30 (post Closing). After
      the Closing, substantially all of Genius Products, Inc.’s revenue and expenses
      as well as the results from releasing TWC product are reflected in the financial
      statements of the Distributor.





*Revenues:*




Video
      and DVD revenues for the 71 days ended September 30, 2006 were primarily
      composed of sales of The Weinstein Company (“TWC”) titles, *Scary Movie 4, Lucky Number Slevin,* 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 for the 71 days
      ended September 30, 2006 were $112.8 million.





Total
      gross revenues for the 71 days ended September 30, 2006 were $112.9
      million.




Sales
      returns, discounts and allowances were $31.4 million for the 71 days ended
      September 30, 2006. This resulted primarily from sales for the video release
      of
      TWC's *Scary Movie 4* and *Lucky
      Number Slevin* .
      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 for the 71 days ended September 30, 2006 were $81.5 million *.*




11


*Costs
      and expense:*




*Cost
      of Sales:*




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




Video
      and DVD cost of sales was $59.1 million for the 71 days ending September 30,
      2006. Video and DVD cost of sales are primarily due to the video release of
      TWC's titles during the 71 days ending September 30, 2006. Cost of sales related
      to TWC's titles include the remittance to The Weinstein Company and the related
      product cost of sales.





Warehouse
      expense and other were $0.6 million for the 71 days ending September 30,
      2006.




Amortization
      of production masters and film library was $0.5 million for the 71 days ending
      September 30, 2006. Amortization of production masters and film library is
      primarily the result of the acquisition of AVMC.




*Operating
      Expense:*




Product
      development expenses were $0.4 million for the 71 days ending September 30,
      2006. Product development expenses are related to the release of new
      titles.




Sales
      and marketing expenses were $17.7 million during the 71 days ending September
      30, 2006. Sales and marketing is primarily attributable to the advertising
      campaigns for the video release of TWC's *Scary Movie 4* which
      was released on August 15, 2006 and *Lucky
      Number Slevin* which was released on September 12, 2006.




General
      and administrative expenses $9.6 million during for the 71 days ending September
      30, 2006. General and administrative expenses primarily relate to payroll,
      rent,
      audit and legal fees and warrants and options expense. Warrant and option
      expense compensation to certain employees and outside consultants was $2.9
      million during the 71 days ending September 30, 2006. Expenses related to the
      Closing of the Transaction with The Weinstein Company were $0.3 million for
      the
      71 days ending September 30, 2006. General and administrative expenses were
      11.8% of net revenues for the 71 days ending September 30, 2006.





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




The
      purchase price was payable as follows:


·
              $250,000
                  in cash on signing;
 
 ·
              $750,000
                  by means of secured promissory note due and payable in full, together
                  with
                  all accrued interest, on January 30, 2006, bearing interest at the
                  rate of 4.5% per annum; and
 
 ·
              $2
                  million by means of a secured promissory note due and payable in
                  full,
                  together with all accrued interest, on the fifth anniversary of
                  the
                  closing date, bearing interest at a rate of 4.5% per
                  annum.




In
      conjunction with this transaction Genius Products, Inc., 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.
      Genius Products, Inc., subsequently received payment in full of the secured
      promissory note, due on January 30, 2006, in the amount of $750,000, plus
      interest. Genius Products, Inc., and the Distributor 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 71-day period ending September 30, 2006, the
      Distributor recognized a gain of $24,400 relating to the deferred gain of $1.2
      million at December 31, 2005.




The
      Distributor had interest income of $0.1 million during the 71 days ending
      September 30, 2006.




As
      result of the foregoing, the net loss was $6.4 million during the 71 days ending
      September 30, 2006.




12




**LIQUIDITY
      AND CAPITAL RESOURCES**




Net
      cash provided by operations during the 71 days ending September 30, 2006 was
      $1.7 million, primarily due to accrued expenses, accounts payable, remittance
      to
      licensor, and allowance for doubtful accounts and provision for returns, offset
      by the net loss of $6.4 million, and increases in accounts receivable, and
      additions to our film library. These items are primarily related to the release
      of TWC titles. Accounts receivable relates primarily to sales of *Scary Movie 4* and *Lucky
      Number Slevin* during the 71 days ending September 30, 2006. Accrued expenses primarily relate
      to invoices received but not paid for the production of inventory and sales
      and
      marketing expenses *Scary
      Movie 4* and *Lucky
      Number Slevin* .
      The remittance to licensor primarily represents the amount owed to TWC after
      deducting the related cost of sales, marketing costs, and our distribution
      fee
      from net sales of TWC titles during the 71 days ending September 30, 2006.
      Under
      the terms of the distribution agreement, the Distributor is required to pay
      TWC
      after collection of receipts, the amount of which is determined by net revenue,
      which as of September 30, 2006 had not been collected. However, since July
      21,
      2006, the Distributor bears the risk of accounts receivable collections.
      Allowance for doubtful accounts and provision for returns increased primarily
      as
      a result of reserves for returns related to the release of ** TWC
      titles.




Net
      cash used in investing activities for the 71days ending September 30, 2006,
      was
      $0.7 million, primarily attributed to the purchase of property and equipment.




Cash
      provided by financing activities for the 71 days ending September 30, 2006
      was
      $20.8 million, resulting from Members’ cash contribution.





At
      September 30, 2006, the Distributor had cash balances of $21.5 million. We
      feel
      that the Distributor has sufficient liquidity to fund operations through the
      remainder of 2006. However, the Distributor may consider additional issuance
      of
      debt financing to fund future growth opportunities. Although we believe that
      the
      Distributor’s expanded product line offers us and the Distributor the
      opportunity for significantly improved operating results in future quarters,
      no
      assurance can be given that we or the Distributor will operate on a profitable
      basis in 2006, or ever, as such performance is subject to numerous variables
      and
      uncertainties, many of which are out of our control.





The
      table below summarizes information as of September 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
              
              $
              4,253,526
 
   13