**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**





(Mark
      One)




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




For
      the quarterly period ended September 30, 2006




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




For
      the transition period from  to




COMMISSION
      FILE NUMBER 000-27915




**GENIUS
      PRODUCTS, INC.**


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





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




**2230
      BROADWAY**


**SANTA
      MONICA, CA 90404**


**(Address
      of principal executive offices)**




**(310)
      453-1222**


**(Registrant's
      telephone number)**





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


**if
      changed since last report)**




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




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




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




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




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













**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**




**INDEX**






**PAGE****PART I**
            **FINANCIAL
                INFORMATION**Item 1
            Financial
                StatementsConsolidated
                Balance Sheets at September 30, 2006 (unaudited)
                and December 31, 2005 (audited)
            4Consolidated
                Statements of Operations for the Three and Nine
                Months Ended September 30, 2005 and 2006 (unaudited)
            5Consolidated
                Statements of Cash Flow for the Nine Months Ended
                September 30, 2005 and 2006 (unaudited)
            6Notes
                to Consolidated Financial Statements
                (unaudited)
            7Item 2
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            26Item 3
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            34Item 4
            Controls
                and Procedures
            34**PART II**
            **OTHER
                INFORMATION**Item 1
            Legal
                Proceedings
            36Item 1A
            Risk
                Factors
            36Item 2
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            36Item 3
            Defaults
                Upon Senior Securities
            36Item 4
            Submission
                of Matters to a Vote of Security
                Holders
            36Item 5
            Other
                Information
            37Item 6
            Exhibits
            38**SIGNATURES**
            39




2





**FORWARD-LOOKING
      STATEMENTS**




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





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





**CLOSING
      OF THE WEINSTEIN COMPANY TRANSACTION**





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










3


**PART
      I - FINANCIAL INFORMATION**


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





**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**




December
                  31,
                2005
              
              September
                  30,
                2006
                  (Note 3)**ASSETS**
              
              
              
              (unaudited)Current
                  assets:Cash
                  and cash equivalents
              
              $
              30,597,164
              
              $
              1,071,021Accounts
                  receivable, net of allowance for doubtful accounts of $942,361
                  and sales
                  returns of $5,966,428
              
              
              2,406,658
              
              
              -Inventories,
                  net
              
              
              5,567,953
              
              
              -Prepaid
                  expenses
              
              
              703,875
              
              
              -Notes
                  receivable, related party
              
              
              750,000
              
              
              -Total
                  current assets
              
              
              40,025,650
              
              
              1,071,021Property
                  and equipment, net
              
              
              396,358
              
              
              -Film
                  library, net of accumulated amortization of $4,027,308
              
              
              19,727,179
              
              
              -Notes
                  receivable, related party
              
              
              1,712,353
              
              
              -Investment
                  in Distributor
              
              
              -
              
              
              97,496,696Goodwill
              
              
              14,487,917
              
              
              -Deposits
                  and other
              
              
              15,545
              
              
              -Total
                  assets
              
              $
              76,365,002
              
              $
              98,567,717**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              9,242,560
              
              $
              -Notes
                  payable
              
              
              5,379,296
              
              
              -Accrued
                  expenses
              
              
              3,307,893
              
              
              -Customer
                  deposits
              
              
              189,423
              
              
              -Debentures
                  payable
              
              
              50,750
              
              
              -Redeemable
                  common stock
              
              
              414,471
              
              
              425,730Total
                  current liabilities
              
              
              18,584,393
              
              
              425,730Deferred
                  gain, related party
              
              
              1,212,353
              
              
              -Deferred
                  tax liability
              
              
              1,380,338
              
              
              -Total
                  liabilities
              
              
              21,177,084
              
              
              425,730Commitments
                  and contingenciesStockholders’
                  equity:Series
                  W preferred stock, $.0001 par value, 100 shares authorized; 100
                  shares
                  outstanding
              
              
              -
              
              
              -Preferred
                  stock, $.0001 par value; 10,000,000 shares authorized; no shares
                  outstanding
              
              
              -
              
              
              -Common
                  stock, $.0001 par value; 300,000,000 shares authorized; 60,438,154
                  and
                  61,534,357 shares outstanding
              
              
              6,044
              
              
              6,149Additional
                  paid-in capital
              
              
              93,919,755
              
              
              99,562,348Accumulated
                  deficit
              
              
              (38,737,881
              )
              
              (1,426,510
              )Total
                  stockholders’ equity
              
              
              55,187,918
              
              
              98,141,987Total
                  liabilities and stockholders' equity
              
              $
              76,365,002
              
              $
              98,567,717




See
      accompanying notes to unaudited interim financial
      statements


4


**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**


Three
                  Months Ended September 30,
              
              Nine
                  Months Ended September 30,Restated
                  2005
                (Note
                  2)
              
              2006
                (Note
                  3)
              
              Restated
                  2005
                (Note
                  2)
              
              2006
                (Note
                  3)Revenues:Video
                  and DVD
              
              $
              8,084,989
              
              $
              21,366,228
              
              $
              13,301,381
              
              $
              159,498,364Theatrical
              
              
              457,903
              
              
              -
              
              
              925,372
              
              
              208,726Audio
              
              
              1,565,909
              
              
              299,486
              
              
              3,381,426
              
              
              1,320,541Royalties,
                  licensing and other
              
              
              95,471
              
              
              -
              
              
              550,392
              
              
              426,938Gross
                  revenues
              
              
              10,204,272
              
              
              21,665,714
              
              
              18,158,571
              
              
              161,454,569Sales
                  returns, discounts and allowances
              
              
              (2,050,232
              )
              
              (4,324,610
              )
              
              (3,536,195
              )
              
              (40,517,543
              )Net
                  revenues
              
              
              8,154,040
              
              
              17,341,104
              
              
              14,622,376
              
              
              120,937,026Costs
                  and expensesCost
                  of revenues:Video
                  and DVD
              
              
              4,026,373
              
              
              10,022,773
              
              
              8,409,956
              
              
              91,586,016Theatrical
              
              
              531,987
              
              
              -
              
              
              1,687,650
              
              
              103,705Audio
              
              
              626,610
              
              
              181,112
              
              
              2,117,010
              
              
              957,156Amortization
                  of production masters and film library
              
              
              562,757
              
              
              114,399
              
              
              1,772,228
              
              
              854,111Warehouse
                  expense and other
              
              
              38,488
              
              
              81,383
              
              
              109,655
              
              
              286,386Total
                  cost of revenues
              
              
              5,786,215
              
              
              10,399,667
              
              
              14,096,499
              
              
              93,787,374Gross
                  profit
              
              
              2,367,825
              
              
              6,941,437
              
              
              525,877
              
              
              27,149,652Operating
                  expenses (income):Product
                  development
              
              
              276,822
              
              
              116,783
              
              
              720,975
              
              
              1,368,131Sales
                  and marketing
              
              
              609,377
              
              
              5,957,629
              
              
              1,687,062
              
              
              22,506,293General
                  and administrative
              
              
              2,506,852
              
              
              2,198,703
              
              
              6,579,977
              
              
              14,494,058Restructuring
              
              
              2,745,422
              
              
              -
              
              
              2,745,422
              
              
              -Gain
                  on sale, related party
              
              
              -
              
              
              -
              
              
              -
              
              
              (63,446
              )Total
                  operating expenses
              
              
              6,138,473
              
              
              8,273,115
              
              
              11,733,436
              
              
              38,305,036Loss
                  from operations
              
              
              (3,770,648
              )
              
              (1,331,678
              )
              
              (11,207,559
              )
              
              (11,155,384
              )Interest
                  expense
              
              
              (75,975
              )
              
              (2,797
              )
              
              (158,763
              )
              
              (166,773
              )Interest
                  income and other
              
              
              -
              
              
              71,020
              
              
              -
              
              
              512,408Loss
                  before provision for income taxes
              
              
              (3,846,623
              )
              
              (1,263,455
              )
              
              (11,366,322
              )
              
              (10,809,749
              )Provision
                  for income taxes
              
              
              8,175
              
              
              (107,000
              )
              
              17,150
              
              
              -Loss
                  before equity in net loss from Distributor
              
              
              (3,854,798
              )
              
              (1,156,455
              )
              
              (11,383,472
              )
              
              (10,809,749
              )Equity
                  in net loss from Distributor
              
              
              -
              
              
              (1,912,383
              )
              
              -
              
              
              (1,912,383
              )Loss
                  before Extraordinary item
              
              
              (3,854,798
              )
              
              (3,068,838
              )
              
              (11,383,472
              )
              
              (12,722,132
              )Extraordinary
                  gain
              
              
              -
              
              
              50,033,503
              
              
              -
              
              
              50,033,503Net
                  income (loss)
              
              $
              (3,854,798
              )
              $
              46,964,665
              
              $
              (11,383,472
              )
              $
              37,311,371**Basic
                  EPS**Income
                  (loss) before extraordinary item
              
              $
              (0.09
              )
              $
              (0.05
              )
              $
              (0.30
              )
              $
              (0.21
              )Extraordinary
                  item
              
              
              NA
              
              $
              0.82
              
              
              NA
              
              $
              0.83Net
                  income (loss)
              
              $
              (0.09
              )
              $
              0.77
              
              $
              (0.30
              )
              $
              0.62Basic
                weighted average shares
              
              
              43,378,990
              
              
              61,339,102
              
              
              37,767,552
              
              
              60,873,472**Diluted
                  EPS**Income
                  (loss) before extraordinary item
              
              
              NA
              
              
              NA
              
              
              NA
              
              
              NAExtraordinary
                  item
              
              
              NA
              
              $
              0.76
              
              
              NA
              
              $
              0.77Net
                  income (loss)
              
              
              NA
              
              $
              0.72
              
              
              NA
              
              $
              0.58Diluted
                  weighted average shares
              
              
              NA
              
              
              65,464,532
              
              
              NA
              
              
              64,998,902




See
      accompanying notes to unaudited interim financial statements


5


**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**


Nine
                  Months Ended September,2005
                  Restated
                (Note
                  2)
              
              2006Cash
                  flows from operating activities:Net
                  income/(loss)
              
              $
              (11,383,472
              )
              $
              37,311,371Adjustments
                  to reconcile net income/(loss) to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              1,797,293
              
              
              130,450Amortization
                  of production masters and film library
              
              
              -
              
              
              937,402Change
                  in allowance for doubtful accounts and provision for
                  returns
              
              
              267,086
              
              
              17,063,330Change
                  in provision for obsolete inventory
              
              
              -
              
              
              (680,774
              )Common
                  stock issued for services
              
              
              288,733
              
              
              19,100Extraordinary
                  gain
              
              
              -
              
              
              (50,033,503
              )Equity
                  in net loss from Distributor
              
              
              -
              
              
              1,912,382Amortization
                  of warrants issued for services
              
              
              149,295
              
              
              -Stock
                  compensation expense
              
              
              1,850,104
              
              
              1,758,666Debt
                  discounts
              
              
              -
              
              
              120,705Interest
                  expense on redeemable common stock
              
              
              14,474
              
              
              9,650*Changes
                  in assets and liabilities:*(Increase)
                  decrease in Accounts receivable
              
              
              1,226,071
              
              
              (64,701,375
              )(Increase)
                  decrease in Inventories
              
              
              (979,728
              )
              
              (12,711,072
              )(Increase)
                  decrease in Prepaid expenses, notes receivable and
                  deposits
              
              
              (288,891
              )
              
              885,264(Increase)
                  decrease in Development film library
              
              
              (2,752,831
              )
              
              (6,096,668
              )(Increase)
                  decrease in Prepaid Royalties
              
              
              (712,903
              )
              
              -Increase
                  (decrease) in Accounts payable
              
              
              (4,877,202
              )
              
              (4,032,937
              )Increase
                  (decrease) in Accrued expenses and other
              
              
              1,514,660
              
              
              21,552,625Increase
                  (decrease) in Deferred revenue
              
              
              -
              
              
              2,756,745Increase
                  (decrease) in Remittance to licensor
              
              
              -
              
              
              50,006,944Increase
                  (decrease) in Debentures payable
              
              
              -
              
              
              (50,750
              )Increase
                  (decrease) in Deferred tax liability
              
              
              -
              
              
              (178,020
              )Increase
                  (decrease) in Deferred gain, related party
              
              
              -
              
              
              (63,447
              )Net
                  cash used in operating activities
              
              
              (13,887,311
              )
              
              (4,083,912
              )Cash
                  flows from investing activities:AVM
                  cash, net of expenses paid in cash
              
              
              340,656
              
              
              -Investment
                  in Distributor
              
              
              -
              
              
              (20,665,569
              )Patents
                  and trademarks
              
              
              (9,800
              )
              
              -Purchase
                  of property and equipment
              
              
              (134,911
              )
              
              (453,816
              )Net
                  cash provided by (used in) investing activities
              
              
              195,945
              
              
              (21,119,385
              )Cash
                  flows from financing activities:Payments
                  on notes payable
              
              
              (2,335,934
              )
              
              (5,300,000
              )Payments
                  of offering costs
              
              
              (834,391
              )
              
              -Proceeds
                  from exercise of options
              
              
              83,580
              
              
              355,250Proceeds
                  from exercise of warrants
              
              
              757,120
              
              
              621,904Proceeds
                  from issuance of common stock
              
              
              15,128,423
              
              
              -Net
                  cash provided by (used in) financing activities
              
              
              12,798,798
              
              
              (4,322,846
              )Net decrease
                  in cash and cash equivalents
              
              
              (892,568
              )
              
              (29,526,143
              )Cash
                  at beginning of period
              
              
              1,223,881
              
              
              30,597,164Cash
                  at end of period
              
              $
              331,313
              
              $
              1,071,021


Supplemental
                  disclosure of cash flow informationWarrants
                  issued for offering costs
              
              $
              1,014,986
              
              $
              -Issuance
                  of common stock for offering costs
              
              
              350,000
              
              
              -Interest
                  paid
              
              
              1,015
              
              
              166,773Taxes
                  paid
              
              
              800
              
              
              -Noncash
                  transactionNoncash
                  net asset exchanged for investment in Distributor
              
              
              
              
              $
              27,020,363Stock
                  compensation recoupable from investment in Distributor
              
              
              
              
              
              2,891,962




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




See
      accompanying notes to unaudited interim financial statements


6


GENIUS
      PRODUCTS, INC. AND
      SUBSIDIARIES


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**


**(UNAUDITED)**




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




THE
      WEINSTEIN COMPANY TRANSACTION. On July 21, 2006, we completed a transaction
      (the
“Transaction”) with The Weinstein Company LLC (“TWC”) and its affiliates
      pursuant to which we launched a venture named Genius Products, LLC (the
“Distributor”) to exploit the exclusive U.S. home video distribution rights to
      feature film and direct-to-video releases owned or controlled by TWC (the
“Closing”). The transaction closed following a special meeting of our
      stockholders to approve the transaction and related matters. Under the terms
      of
      the Transaction, Genius Products, Inc. contributed substantially all of its
      assets, employees and existing businesses to Genius Products, LLC, which holds
      the exclusive U.S. home video distribution rights for filmed entertainment
      and
      direct-to-video product of TWC. The venture also operates the former businesses
      of Genius Products, Inc., including the marketing, sales and distribution for
      other major branded entertainment content, such as ESPN, NBC News, Sundance
      Home
      Entertainment, World Wrestling Entertainment, Inc., Discovery Communications,
      Inc., Imaginasian, Asia Extreme, Dragon Dynasty and IFC. Genius Products, LLC
      is
      owned 70% by TWC’s parent company, The Weinstein Company Holdings LLC, and its first-tier
      subsidiary, W-G Holding Corp. and
      30% by Genius Products, Inc. As a
      condition to the closing of the transaction with TWC Holdings, we issued 100
      shares of Series W Preferred Stock to TWC
      Holdings and its
      first-tier subsidiary, W-G Holding Corp. The Series W Preferred Stock provides
      the holders with significant rights, preferences and powers including described
      in Note 7 to our financial statements. In
      addition, as part of the Transaction, Genius Products, Inc. added to its Board
      of Directors two TWC executives; Larry Madden, Executive Vice President and
      Chief Financial Officer of TWC, and Irwin Reiter, Executive Vice President
      of
      Accounting and Financial Reporting of TWC.





Our
      interest in the Distributor consists of Class G Units representing a 30%
      membership interest in the Distributor, and the interest of The Weinstein
      Company Holdings LLC and W-G
      Holding Corp., consists
      of Class W Units representing a 70% membership interest in the Distributor.
      The
      70% interest in the Distributor held by The Weinstein Company Holdings LLC
      and W-G
      Holding Corp. is redeemable, at their option at any time from one year after the Closing,
      for
      up to 70% of our outstanding common stock, or with their approval, cash. From
      December 5, 2005, the date we entered into a Master Contribution Agreement
      relating to the Transaction through the Closing, we operated under an interim
      distribution agreement with TWC and recorded the results from titles we first
      released for TWC in March 2006 in our financial statements. Refer to Note 3
      for
      additional discussion regarding this transaction.




BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




The
      accompanying consolidated financial statements as of and for the three and
      nine
      months ended September 30, 2006 and 2005 have been prepared by us and are
      unaudited. The consolidated financial statements have been prepared in
      accordance with generally accepted accounting principles, pursuant to the rules
      and regulations of the Securities and Exchange Commission. 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 we believe that the disclosures are adequate to make the information
      presented not misleading, it is suggested that these interim consolidated
      financial statements be read in conjunction with the consolidated financial
      statements and the notes thereto included in the Company's Form 10-K for the
      year ended December 31, 2005. Amounts related to disclosures of December 31,
      2005 balances within these interim statements were derived from the
      aforementioned Form 10-K. The results of operations for the three and nine
      months ended September 30, 2006 are not necessarily indicative of the results
      to
      be expected for the full year.





Investment
      in Distributor





At
      the Closing of the Transaction, we contributed to the Distributor all of our
      operating business, including substantially all of our assets, except for $1
      million cash and certain liabilities, and received 30% equity interest in the
      Distributor. The Distributor is treated as a partnership for U.S. federal income
      tax purposes. Accordingly, the book accounting for the Distributor follows
      its
      tax status as a partnership. The accompanying financial statements account
      for
      our investment in the Distributor on our financial statements using the equity
      method of accounting.




7




Under
      the equity method of accounting, only our investment in and amounts due to
      and
      from the Distributor have been included in our consolidated balance sheet.
      As a
      result, we recorded an asset on our balance sheet related to our investment
      interest in the Distributor. The Transaction represents a non-monetary exchange
      of a business controlled by Genius Products for a non-controlling interest
      in
      the Distributor. Accordingly, the amount to be initially recorded for Genius
      Products’ investment in the Distributor is partially based on Genius Products’
fair value as determined by reference to the quoted market prices of Genius
      Products’ shares on the close of market on the date of Closing and partially
      based on the historical basis of the net assets surrendered in the Transaction.
      On our statement of operations, we have recorded our 30% share of the
      Distributor’s profit or loss as equity in net earnings (losses) from
      Distributor. We recorded a gain based on the difference between the fair market
      value of assets contributed and the net book value, reduced for the portion
      of
      the gain associated with the retained economic interest in the Distributor.
      The
      carrying amount of our investment in the Distributor will subsequently be
      adjusted to recognize our share of the earnings or losses of the Distributor
      after the Transaction. Pursuant to Accounting Principles Bulletin No. 18, we
      will be required to periodically assess whether a decrease in value of the
      investment has occurred which is other than temporary and which should be
      recognized immediately resulting in an impairment loss.




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





CONCENTRATIONS
      OF CREDIT RISK. For the 21-day period ending July 21, 2006, the following
      customers accounted for more than 10% of net revenue: Video Product
      Distributors, Inc. at 17%, Best Buy at 15%, Ingram Entertainment at 13%,
      Wal-Mart at 13%, and Target at 11%. At the Closing we transferred all of our
      accounts receivable assets to the Distributor and there were no accounts
      receivables balances at September 30, 2006 for Genius Products, Inc (see Exhibit
      99.1 Note A for a description of the accounts receivable balances on the
      Distributor’s balance sheet at September 30, 2006). For the three month period
      ended September 30, 2005, Wal-Mart and Anderson Merchandisers accounted for
      39%
      and 13% of net revenues, respectively.





For
      the 202 day period January 1, 2006 to July 21, 2006, Wal-Mart accounted for
      39% of net revenues. For the nine month period ended September 30, 2005,
      Anderson Merchandisers accounted for 13% of net revenues. For the nine month
      period ended September 30, 2006, this customer accounted for less than 1% of
      net
      revenues.





Financial
      instruments that potentially subject us to concentration of credit risk consist
      primarily of temporary cash investments and trade receivables. The Company
      restricts investment of temporary cash investments to financial institutions
      with investment grade credit ratings. We provide credit in the normal course
      of
      business to customers located throughout the United States. We perform ongoing
      credit evaluations of our customers, generally do not require collateral and
      maintain allowances for potential credit losses which, when realized, have
      been
      within the range of management's expectations.




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




Under
      FAS 123R, share-based compensation cost is measured at the grant date, based
      on
      the estimated fair value of the award, and is recognized as expense over the
      employee's requisite service period. The Company adopted the provisions of
      FAS
      123R using a modified prospective application. The valuation provisions of
      FAS
      123R apply to new awards and to awards that are outstanding on the effective
      date and subsequently modified or cancelled. Share-based compensation expense
      recognized under SFAS 123R includes share-based awards granted subsequent to
      January 1, 2006, based on the grant date fair value estimated in accordance
      with
      the provisions of SFAS 123R as well as share-based awards granted prior to,
      but
      not yet vested as of January 1, 2006, based on the grant date fair value
      estimated in accordance with the provisions of SFAS 123. In accordance with
      the
      modified prospective method, the consolidated financial statements for prior
      periods have not been restated to reflect, and do not include, the share-based
      compensation impact of FAS 123R.




INCOME
      TAXES. The
      Company accounts for income taxes under SFAS No. 109, *Accounting
      for Income Taxes* .
      This
      statement requires the recognition of deferred tax assets and liabilities for
      the future consequences of events that have been recognized in the Company’s
      consolidated financial statements or tax returns. The measurement of the
      deferred items is based on enacted tax laws. In the event the future
      consequences of differences between financial reporting bases and the tax bases
      of the Company’s assets and liabilities result in a deferred tax asset, SFAS
      No. 109 requires an evaluation of the probability of being able to realize
      the future benefits indicated by such asset. A valuation allowance related
      to a
      deferred tax asset is recorded when it is more likely than not that some portion
      or all of the deferred tax asset will not be realized. The Company currently
      has
      a full valuation allowance on its deferred tax assets. 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. This conclusion
      is based primarily on our history of net operating losses as compared to only
      a
      recent trend of profitable operations, the potential for future stock option
      deductions to significantly reduce taxable income, annual net operating loss
      limitations under Section 382 of the Code and the need to generate
      significant amounts of taxable income in future periods on a consistent and
      prolonged basis in order to utilize the deferred tax assets.




8




RECLASSIFICATIONS.
      Certain prior period amounts have been reclassified to conform to current period
      presentation.




REVENUE
      RECOGNITION. Revenue from the sale or licensing of films is recognized upon
      meeting all recognition requirements of SOP 00-2. Revenues are recorded upon
      the
      receipt of goods by the customer for titles that do not have a “street date”
(when it is available for sale by the customer). If a title has a street date,
      we recognize the initial shipment as revenue on that street date and all
      subsequent shipments after street date are recognized as revenue upon the
      receipt of goods by the customer. Under revenue sharing arrangements, rental
      revenue is recognized on or after the street date and when we are entitled
      to
      receipts and such receipt is determinable. Costs of sales and an allowance
      for
      returns are recorded at the time of revenue recognition. The allowance for
      returns calculation is based upon an analysis of historical customer and product
      returns performance as well as current customer inventory data as available.
      Updates to the returns calculation are performed quarterly. Revenues from
      royalties are recognized when received. Revenues from licensing are recognized
      when the title is available to the licensee. Cash payments received are recorded
      as deferred revenue until all the conditions of revenue recognition have been
      met. Long-term, non-interest bearing receivables are discounted to present
      value.




RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS.





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





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




In
      May 2005, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 154, “Accounting Changes and Error Corrections” (“SFAS
      No. 154”), an amendment to Accounting Principles Bulletin Opinion
      No. 20, “Accounting Changes” (“APB No. 20”), and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements”. Though SFAS
      No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3
      with respect to accounting for changes in estimates, changes in reporting
      entity, and the correction of errors, SFAS No. 154 establishes new
      standards on accounting for changes in accounting principles, whereby all such
      changes must be accounted for by retrospective application to the financial
      statements of prior periods unless it is impracticable to do so. SFAS
      No. 154 is effective for accounting changes and error corrections made in
      fiscal years beginning after December 15, 2005, with early adoption
      permitted for changes and corrections made in years beginning after
      May 2005. We implemented SFAS No. 154 in our fiscal year beginning
      January 1, 2006. The adoption of SFAS No. 154 did not have a material
      impact on our financial position of results of operations for the quarter ended
      June 30, 2006.





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




9





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




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




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








10


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





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





1. We
      revised our theatrical revenue to decrease the amount recognized during the
      three months September 30, 2005. The total adjustment required to decrease
      theatrical revenue to its proper amount was $251,603 for the three months ended
      September 30, 2005. This adjustment was necessary because we had accrued
      this amount of revenue for the three months ended June 30, 2005 for film
      rental earned but not billed during that period and, therefore, overstated
      theatrical revenue by this amount in the three months ended September 30,
      2005. The correct accounting treatment is to reverse this accrual during the
      three months ended September 30, 2005 to properly state theatrical
      revenue.





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





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





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




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





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




11


**NOTE
      3. COMPLETION OF THE WEINSTEIN COMPANY TRANSACTION**





On
      July 21, 2006, we completed the Transaction with TWC and its affiliates pursuant
      to which we launched a venture named Genius Products, LLC (the “Distributor”) to
      exploit the exclusive U.S. home video distribution rights to feature film and
      direct-to-video releases owned or controlled by TWC. The transaction closed
      following a Special Meeting of Stockholders of the Company to approve the
      transaction and related matters. Under the terms of the Transaction, Genius
      Products, Inc. contributed substantially all of its assets, employees and
      existing businesses to Genius Products, LLC, which holds the exclusive U.S.
      home
      video distribution rights for filmed entertainment and direct-to-video product
      of TWC. Genius Products, LLC is owned 70% by TWC’s parent company, The Weinstein
      Company Holdings LLC, and its first-tier
      subsidiary, W-G Holding Corp. and 30% by Genius Products, Inc. In addition, as part of the Transaction, Genius
      Products, Inc. added to its Board of Directors two TWC executives; Larry Madden,
      Executive Vice President and Chief Financial Officer of TWC, and Irwin Reiter,
      Executive Vice President of Accounting and Financial Reporting of
      TWC.


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





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





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




·
              Amended
                  and Restated Limited Liability Company
                  Agreement;
 
 ·
              Video
                  Distribution Agreement;
 
 ·
              Registration
                  Rights Agreement;
 
 ·
              Services
                  Agreement; and
 
 ·
              Assignment
                  and Assumption Agreement.





The
      Transaction represents a nonmonetary exchange of a business controlled by Genius
      Products, Inc. for a non-controlling interest in the Distributor. Accordingly,
      the amount recorded for our investment in the Distributor was partially based
      on
      our fair value as determined by reference to the quoted market prices of our
      shares on the close of market on the date of Closing and partially based on
      the
      historical basis of the net assets surrendered in the Transaction. We recognized
      a partial gain of $50.0 million.





Our
      investment in the Distributor was determined as follows:


Total
                  Genius Product, Inc. shares outstanding as of 7/21/2006
              
              
              61,005,126Closing
                  share price on 7/21/06
              
              $
              1.95Equity
                  market capitalization
              
              
              118,959,996Less
                  cash retained at Genus Products, Inc.
              
              
              (1,000,000
              )Plus
                  liabilities retained at Genius Products, Inc.
              
              
              1,380,388Total
                  consideration
              
              
              119,340,384Genius
                  Products, Inc. - net book value
              
              $
              47,483,564Less
                  cash and liabilities retained at Genius Products, Inc.
              
              
              380,388Adjusted
                  net book value
              
              
              47,863,952Consideration
                  in excess of net book value
              
              
              71,476,432Ownership
                  interest surrendered
              
              
              70
              %Genius
                  Products, Inc's partial gain before taxes
              
              
              50,033,502Adjusted
                  net book value
              
              
              47,863,952Genius
                  Products, Inc. investment in Distributor at 7/21/06
              
              
              97,897,454Genius
                  Products, Inc. 30% share of net loss in Distributor
              
              
              (1,912,382
              )Genius
                  Products Inc. re-evaluation of tax liability to Investment
              
              
              (1,380,338
              )Stock
                  option expenses paid by Genius Products, Inc.
              
              
              2,891,962Genius
                  Products, Inc. investment in Distributor at 9/30/06
              
              
              97,496,696




12


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




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




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





13


**GENIUS
        PRODUCTS, INC. AND SUBSIDIARIES**
 **UNAUDITED
        PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**
  Nine
                  Months Ended September 30, 2006Historical
              
              Pro
                  Forma Adjustments (1)
              
              Pro
                  FormaRevenues:Video
                  and DVD
              
              $
              159,498,364
              
              $
              (159,498,364
              )
              $
              -Theatrical
              
              
              208,726
              
              
              (208,726
              )
              
              -Audio
              
              
              1,320,541
              
              
              (1,320,541
              )
              
              -Royalties,
                  licensing and other
              
              
              426,938
              
              
              (426,938
              )
              
              -Gross
                  revenues
              
              
              161,454,569
              
              
              (161,454,569
              )
              
              -Sales
                  returns, discounts and allowances
              
              
              (40,517,543
              )
              
              40,517,543
              
              
              -Net
                  revenues
              
              
              120,937,026
              
              
              (120,937,026
              )
              
              -Costs
                  and expensesCost
                  of revenues:Video
                  and DVD
              
              
              91,586,016
              
              
              (91,586,016
              )
              
              -Theatrical
              
              
              103,705
              
              
              (103,705
              )
              
              -Audio
              
              
              957,156
              
              
              (957,156
              )
              
              -Amortization
                  of production masters and film library
              
              
              854,111
              
              
              (854,111
              )
              
              -Warehouse
                  expense and other
              
              
              286,386
              
              
              (286,386
              )
              
              -Total
                  cost of revenues
              
              
              93,787,374
              
              
              (93,787,374
              )
              
              -Gross
                  profit (loss)
              
              
              27,149,652
              
              
              (27,149,652
              )
              
              -Operating
                  expenses (income):Product
                  development
              
              
              1,368,131
              
              
              (1,368,131
              )
              
              -Sales
                  and marketing
              
              
              22,506,293
              
              
              (22,506,293
              )
              
              -General
                  and administrative
              
              
              14,494,058
              
              
              (14,494,058
              )
              
              -Gain
                  on sale, related party
              
              
              (63,446
              )
              
              63,446
              
              
              -Total
                  operating expenses
              
              
              38,305,036
              
              
              (38,305,036
              )
              
              -Income
                  (loss) from operations
              
              
              (11,155,384
              )
              
              11,155,384
              
              
              -Interest
                  expense
              
              
              (166,773
              )
              
              166,773
              
              
              -Interest
                  income and other
              
              
              512,408
              
              
              (512,408
              )
              
              -Income
                  (loss) before provision for income tax
              
              
              (10,809,749
              )
              
              10,809,749
              
              
              -Provision
                  for income tax
              
              
              -
              
              
              -
              
              
              -Income
                  (loss) before equity in net loss from
                  Distributor
              
              
              (10,809,749
              )
              
              10,809,749
              
              
              -Equity
                  in net loss from Distributor
              
              
              (1,912,383
              )
              
              (3,242,925
              )
                  (2)
              
              (5,155,307
              )Loss
                  before Extraordinary item
              
              
              (12,722,132
              )
              
              7,566,824
              
              
              (5,155,307
              )Extraordinary
              
              
              50,033,503
              
              
              (50,033,503
              )
              
              -Net
                  Income (Loss)
              
              $
              37,311,371
              
              $
              (42,466,679
              )
              $
              (5,155,307
              )**Basic
                  EPS**Income
                  (loss) before extraordinary item
              
              $
              (0.21
              )
              $
              0.13
              
              $
              (0.08
              )Extraordinary
                  item
              
              $
              0.83
              
              $
              (0.83
              )
              $
              -Net
                  income (loss)
              
              $
              0.58
              
              $
              (0.70
              )
              $
              (0.08
              )Basic
                weighted average shares
              
              
              60,873,472
              
              
              60,873,472
              
              
              60,873,472**Diluted
                  EPS**Income
                  (loss) before extraordinary item
              
              
              NA
              
              
              NA
              
              
              NAExtraordinary
                  item
              
              $
              0.77
              
              
              NA
              
              
              NANet
                  income (loss)
              
              $
              0.58
              
              
              NA
              
              
              NADiluted
                  weighted average shares
              
              
              64,998,902
              
              
              64,998,902
              
              
              64,998,902


14


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




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




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








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





Under
      the equity method of accounting, only our investment in and amounts due to
      and
      from the Distributor have been included in our balance sheet. As a result,
      we recorded an asset on our balance sheet related to our investment interest
      in
      the Distributor. The financial statements, related footnotes and management’s
      discussion and analysis for the Distributor are shown in Exhibit 11 which
      includes the unaudited balance sheet as of September 30, 2006, the unaudited
      statement of operations and unaudited statement of cash flows for the period
      July 22, 2006 to September 30, 2006.


GENIUS
        PRODUCTS LLC
 SUPPLEMENTAL
        UNAUDITED CONDENSED STATEMENT OF OPERATIONS
 FOR
        THE
        PERIOD JULY 22, 2006 THROUGH SEPTEMBER 30, 2006
 
 
 
 DistributorGross
                  revenues
              
              $
              112,872,425Net
                  revenues
              
              
              81,453,459Total
                  cost of revenues
              
              
              60,236,921Gross
                  profit
              
              
              21,216,539Total
                  operating expenses
              
              
              27,720,266Loss
                  from operations
              
              
              (6,503,727
              )Net
                  loss
              
              $
              (6,374,608
              )
 **NOTE
        5. SUPPLEMENTAL UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION FOR
        GENIUS PRODUCTS, INC.**





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





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








15




**GENIUS
        PRODUCTS, INC. AND SUBSIDIARIES**
 **SUPPLEMENTAL
        UNAUDITED PRO FORMA BALANCE SHEET**
 **AS
        OF SEPTEMBER 30, 2006**
 
 Genius
                  Products, Inc. (1)
              
              Distributor
                  (2)
              
              Pro
                  Forma Adjustments (3)
              
              Pro
                  Forma**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,071,021
              
              $
              21,549,726
              
              $
              -
              
              $
              22,620,747Accounts
                  receivable, net of allowance for doubtful accounts and sales returns
                  of
                  $1,549,526 and $29,371,252
              
              
              -
              
              
              97,847,579
              
              
              -
              
              
              97,847,579Inventories,
                  net
              
              
              -
              
              
              14,271,241
              
              
              -
              
              
              14,271,241Prepaid
                  expenses
              
              
              -
              
              
              1,145,972
              
              
              -
              
              
              1,145,972Total
                  current assets
              
              
              1,071,021
              
              
              134,814,518
              
              
              -
              
              
              135,885,539Restricted
                  cash
              
              
              -
              
              
              306,109
              
              
              -
              
              
              306,109Property
                  and equipment, net
              
              
              -
              
              
              855,814
              
              
              -
              
              
              855,814Film
                  library, net of accumulated amortization of $5,028,415
              
              
              -
              
              
              27,601,056
              
              
              -
              
              
              27,601,056Notes
                  receivable, related party
              
              
              -
              
              
              1,712,353
              
              
              -
              
              
              1,712,353Investment
                  in Distributor
              
              
              97,496,696
              
              
              -
              
              
              (97,496,696
              )
              
              -Customer
                  relationships net of amortization
              
              
              -
              
              
              6,568,711
              
              
              (6,568,711
              )
              
              -Value
                  of contracts, net of amortization
              
              
              -
              
              
              1,609,028
              
              
              (1,609,028
              )
              
              -Goodwill
              
              
              -
              
              
              75,352,092
              
              
              (62,244,513
              )
                  (4)
              
              13,107,579Deposits
                  and other
              
              
              -
              
              
              211,008
              
              
              -
              
              
              211,008Total
                  assets
              
              $
              98,567,717
              
              $
              249,030,689
              
              $
              (167,918,948
              )
              $
              179,679,458**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              -
              
              $
              15,827,285
              
              $
              -
              
              $
              15,827,285Notes
                  payable
              
              
              -
              
              
              200,000
              
              
              -
              
              
              200,000Remittance
                  to licensor
              
              
              -
              
              
              76,175,146
              
              
              -
              
              
              76,175,146Accrued
                  expenses
              
              
              -
              
              
              37,871,763
              
              
              -
              
              
              37,871,763Deferred
                  revenue
              
              
              -
              
              
              1,974,250
              
              
              -
              
              
              1,974,250Redeemable
                  common stock
              
              
              425,730
              
              
              -
              
              
              -
              
              
              425,730Total
                  current liabilities
              
              
              425,730
              
              
              132,048,444
              
              
              -
              
              
              132,474,174Deferred
                  gain, related party, net of current portion
              
              
              -
              
              
              1,124,507
              
              
              -
              
              
              1,124,507Deferred
                  tax liability
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  liabilities
              
              
              425,730
              
              
              133,172,951
              
              
              -
              
              
              133,598,681Stockholders’
                  equity:Series
                  W preferred stock, $.0001 par value; 100 shares authorized; 100
                  shares
                  outstanding
              
              
              -
              
              
              -
              
              
              -
              
              
              -Preferred
                  stock, $.0001 par value; 10,000,000 shares authorized; no shares
                  outstanding
              
              
              -
              
              
              -
              
              
              -
              
              
              -Common
                  stock, $.0001 par value; 300,000,000 shares authorized; 61,534,357
                  shares
                  outstanding
              
              
              6,149
              
              
              -
              
              
              -
              
              
              6,149Member's
                  equity
              
              
              
              
              
              115,857,738
              
              
              (115,857,738
              )
              
              -Additional
                  paid-in capital
              
              
              99,562,348
              
              
              -
              
              
              -
              
              
              99,562,348Accumulated
                  deficit
              
              
              (1,426,510
              )
              
              -
              
              
              (52,061,210
              )
              
              (53,487,720
              )Total
                  stockholders’ equity
              
              
              98,141,987
              
              
              115,857,738
              
              
              (167,918,948
              )
              
              46,080,777Total
                  liabilities and stockholders' equity
              
              $
              98,567,717
              
              $
              249,030,689
              
              $
              (167,918,948
              )
              $
              179,679,458


16


**GENIUS
        PRODUCTS, INC. AND SUBSIDIARIES**
 **SUPPLEMENTAL
        UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**
 **THREE
        MONTHS ENDED SEPTEMBER 30, 2006**
 
 Genius
                  Products, Inc. (5)
              
              Distributor
                  (6)
              
              Pro
                  Forma Adjustments (7)
              
              Pro
                  FormaRevenues:Video
                  and DVD
              
              $
              21,366,228
              
              $
              112,823,797
              
              $
              -
              
              $
              134,190,025Theatrical
              
              
              -
              
              
              13,390
              
              
              -
              
              
              13,390Audio
              
              
              299,486
              
              
              33,614
              
              
              -
              
              
              333,100Royalties,
                  licensing and other
              
              
              -
              
              
              1,625
              
              
              -
              
              
              1,625Gross
                  revenues
              
              
              21,665,714
              
              
              112,872,425
              
              
              -
              
              
              134,538,139Sales
                  returns, discounts and allowances
              
              
              (4,324,610
              )
              
              (31,418,966
              )
              
              
              
              
              (35,743,576
              )Net
                  revenues
              
              
              17,341,104
              
              
              81,453,459
              
              
              -
              
              
              98,794,563Costs
                  and expensesCost
                  of revenues:Video
                  and DVD
              
              
              10,022,773
              
              
              59,093,914
              
              
              -
              
              
              69,116,687Audio
              
              
              181,112
              
              
              9,632
              
              
              -
              
              
              190,744Amortization
                  of production masters and film library
              
              
              114,399
              
              
              513,521
              
              
              -
              
              
              627,920Warehouse
                  expense and other
              
              
              81,383
              
              
              619,854
              
              
              -
              
              
              701,237Total
                  cost of revenues
              
              
              10,399,667
              
              
              60,236,921
              
              
              -
              
              
              70,636,588Gross
                  profit
              
              
              6,941,437
              
              
              21,216,539
              
              
              -
              
              
              28,157,976Operating
                  expenses (income):Product
                  development
              
              
              116,783
              
              
              389,857
              
              
              -
              
              
              506,640Sales
                  and marketing
              
              
              5,957,629
              
              
              17,712,478
              
              
              -
              
              
              23,670,107General
                  and administrative
              
              
              2,198,703
              
              
              9,642,331
              
              
              (2,434,518
              )
                  (8)
              
              9,406,516Gain
                  on sale, related party
              
              
              -
              
              
              (24,400
              )
              
              -
              
              
              (24,400
              )Total
                  operating expenses
              
              
              8,273,115
              
              
              27,720,266
              
              
              (2,434,518
              )
              
              33,558,863Income
                  (loss) from operations
              
              
              (1,331,678
              )
              
              (6,503,727
              )
              
              2,434,518
              
              
              (5,400,887
              )Interest
                  expense
              
              
              (2,797
              )
              
              (2,340
              )
              
              -
              
              
              (5,137
              )Interest
                  income and other
              
              
              71,020
              
              
              131,459
              
              
              -
              
              
              202,479Income
                  (loss) before provision for income tax
              
              
              (1,263,455
              )
              
              (6,374,608
              )
              
              2,434,518
              
              
              (5,203,545
              )Provision
                  for income tax
              
              
              (107,000
              )
              
              -
              
              
              -
              
              
              (107,000
              )Income
                  (loss) before equity in net loss from Distributor
              
              
              (1,156,455
              )
              
              (6,374,608
              )
              
              2,434,518
              
              
              (5,096,545
              )Equity
                  in net loss from distributor
              
              
              (1,912,383
              )
              
              -
              
              
              1,912,383
              (9)
              
              -Loss
                  before extraordinary item
              
              
              (3,068,838
              )
              
              (6,374,608
              )
              
              4,346,901
              
              
              (5,096,545
              )Extraordinary
                  gain
              
              
              50,033,503
              
              
              -
              
              
              (50,033,503
              )
              
              -Net
                  income (loss)
              
              $
              46,964,665
              
              $
              (6,374,608
              )
              $
              4,346,901
              
              $
              (5,096,545
              )**Basic
                  EPS**Income
                  (loss) before extraordinary item
              
              $
              (0.05
              )
              
              NA
              
              
              NA
              
              $
              (0.03
              )Extraordinary
                  item
              
              $
              0.82
              
              
              NA
              
              
              NA
              
              
              NANet
                  income (loss)
              
              $
              0.77
              
              
              NA
              
              
              NA
              
              $
              (0.03
              )Basic
                weighted average shares
              
              
              61,339,102
              
              
              NA
              
              
              143,124,571
              
              
              204,463,673**Diluted
                  EPS**Income
                  (loss) before extraordinary item
              
              
              NA
              
              
              NA
              
              
              NA
              
              
              NAExtraordinary
                  item
              
              $
              0.77
              
              
              NA
              
              
              NA
              
              
              NANet
                  income (loss)
              
              $
              0.72
              
              
              NA
              
              
              NA
              
              
              NADiluted
                  weighted average shares
              
              
              65,464,532
              
              
              NA
              
              
              152,750,575
              (10)
              
              218,215,107
   17
 **GENIUS
          PRODUCTS, INC. AND SUBSIDIARIES**
 **SUPPLEMENTAL
          UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**
 **NINE
          MONTHS ENDED SEPTEMBER 30, 2006**
 
 Genius
                    Products, Inc. (5)
                
                Distributor
                    (6)
                
                Pro
                    Forma Adjustments (7)
                
                Pro
                    FormaRevenues:Video
                    and DVD
                
                $
                159,498,364
                
                $
                112,823,797
                
                $
                -
                
                $
                272,322,161Theatrical
                
                
                208,726
                
                
                13,390
                
                
                -
                
                
                222,116Audio
                
                
                1,320,541
                
                
                33,614
                
                
                -
                
                
                1,354,155Royalties,
                    licensing and other
                
                
                426,938
                
                
                1,625
                
                
                -
                
                
                428,563Gross
                    revenues
                
                
                161,454,569
                
                
                112,872,425
                
                
                -
                
                
                274,326,994Sales
                    returns, discounts and allowances
                
                
                (40,517,543
                )
                
                (31,418,966
                )
                
                -
                
                
                (71,936,509
                )Net
                    revenues
                
                
                120,937,026
                
                
                81,453,459
                
                
                -
                
                
                202,390,485Costs
                    and expensesCost
                    of revenues:Video
                    and DVD
                
                
                91,586,016
                
                
                59,093,914
                
                
                -
                
                
                150,679,930Theatrical
                
                
                103,705
                
                
                -
                
                
                -
                
                
                103,705Audio
                
                
                957,156
                
                
                9,632
                
                
                -
                
                
                966,788Amortization
                    of production masters and film library
                
                
                854,111
                
                
                513,521
                
                
                -
                
                
                1,367,632Warehouse
                    expense and other
                
                
                286,386
                
                
                619,854
                
                
                -
                
                
                906,240Total
                    cost of revenues
                
                
                93,787,374
                
                
                60,236,921
                
                
                -
                
                
                154,024,295Gross
                    profit
                
                
                27,149,652
                
                
                21,216,539
                
                
                -
                
                
                48,366,191Operating
                    expenses (income):Product
                    development
                
                
                1,368,131
                
                
                389,857
                
                
                -
                
                
                1,757,988Sales
                    and marketing
                
                
                22,506,293
                
                
                17,712,478
                
                
                -
                
                
                40,218,771General
                    and administrative
                
                
                14,494,058
                
                
                9,642,331
                
                
                (2,434,518
                )
                    (8)
                
                21,701,871Gain
                    on sale, related party
                
                
                (63,446
                )
                
                (24,400
                )
                
                -
                
                
                (87,846
                )Total
                    operating expenses
                
                
                38,305,036
                
                
                27,720,266
                
                
                (2,434,518
                )
                
                63,590,784Loss
                    from operations
                
                
                (11,155,384
                )
                
                (6,503,727
                )
                
                2,434,518
                
                
                (15,224,593
                )Interest
                    expense
                
                
                (166,773
                )
                
                (2,340
                )
                
                -
                
                
                (169,113
                )Interest
                    income and other
                
                
                512,408
                
                
                131,459
                
                
                -
                
                
                643,867Loss
                    before provision for income tax
                
                
                (10,809,749
                )
                
                (6,374,608
                )
                
                2,434,518
                
                
                (14,749,839
                )Provision
                    for income tax
                
                
                -
                
                
                -
                
                
                -
                
                
                -Loss
                    before equity earnings from Distributor
                
                
                (10,809,749
                )
                
                (6,374,608
                )
                
                2,434,518
                
                
                (14,749,839
                )Equity
                    in net loss from Distributor
                
                
                (1,912,383
                )
                
                -
                
                
                1,912,383
                (9)
                
                -Loss
                    before extraordinary item
                
                
                (12,722,132
                )
                
                (6,374,608
                )
                
                4,346,901
                
                
                (14,749,839
                )Extraordinary
                    gain
                
                
                50,033,503
                
                
                -
                
                
                (50,033,503
                )
                
                -Net
                    income (loss)
                
                $
                37,311,371
                
                $
                (6,374,608
                )
                $
                (45,686,602
                )
                $
                (14,749,839
                )**Basic
                    EPS**Income
                    (loss) before extraordinary item
                
                $
                (0.21
                )
                
                NA
                
                
                NA
                
                $
                (0.08
                )Extraordinary
                    item
                
                $
                0.83
                
                
                NA
                
                
                NA
                
                $
                -Net
                    income (loss)
                
                $
                0.62
                
                
                NA
                
                
                NA
                
                $
                (0.07
                )Basic
                  weighted average shares
                
                
                60,873,472
                
                
                NA
                
                
                142,038,101
                
                
                202,911,573**Diluted
                    EPS**Income
                    (loss) before extraordinary item
                
                $
                (0.20
                )
                
                NA
                
                
                NA
                
                
                NAExtraordinary
                    item
                
                $
                0.77
                
                
                NA
                
                
                NA
                
                
                NANet
                    income (loss)
                
                $
                0.58
                
                
                NA
                
                
                NA
                
                
                NADiluted
                    weighted average shares
                
                
                64,998,902
                
                
                NA
                
                
                151,664,105
                (10)
                
                216,663,007


18


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




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




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




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





(4)
            Represents
                the goodwill for the transaction.





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





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





(7)
            Represents
                the adjustment to consolidate the pro forma Genius Products, Inc.
                and
                Distributor statement of operations for the three and nine months
                ended
                September 30, 2006.





(8)
            
            Represents
                the adjustment to eliminate intangible asset amortization related
                to the
                transaction.





(9)
            
            Represents
                the adjustment to eliminate the earnings from
                investee.





(10)
            Represents
                the additional shares to be issued to TWC upon conversion of their
                interest in the Distributor into the common equity of Genius Products,
                Inc.





**NOTE
      6. COMMITMENTS AND CONTINGENCIES**





WELLSPRING
      MATTER





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




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





We
      believe that, if an adverse judgment against Wellspring occurs or an adverse
      settlement is reached, our subsidiaries, Wellspring and American Vantage Media,
      will be entitled to full indemnification against any such losses by the initial
      owners of Wellspring (prior to AVMC), and we will be entitled to indemnification
      by American Vantage Companies (“AVC”), the prior owner of AVMC. However, if the
      outcome of this litigation is adverse to us, and we are required to pay
      significant monetary damages that are not indemnified by others, our financial
      condition and results of operations will likely be materially and adversely
      affected.




FALCON
      PICTURE GROUP MATTER




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





19





**NOTE
      7. STOCKHOLDERS' EQUITY**




COMMON
      STOCK




On
      March 2, 2005, we changed our state of incorporation from the state of
      Nevada to the state of Delaware and changed the par value of our common stock
      from $0.001 per share to $0.0001 per share. All transactions have been restated
      to reflect this change. During
      the three months ended March 31, 2005, we issued a total of 14,875,925 common
      shares and returned no common shares to treasury. We issued 6,518,987 shares
      for
      proceeds of $10.3 million in conjunction with a private placement offering
      and
      issued 7.0 million shares in conjunction with the acquisition of American
      Vantage Media Corporation. We issued 712,338 shares at $2.16 to $2.27 per share
      for services rendered in connection with the private placement offering. 
During
      the three months ended March 31, 2005, we issued a total of 3,549,076 warrants
      to purchase common stock at $1.58 to $2.78 per share, of which 2,086,076 were
      issued in conjunction with the private placement offering, and 1,463,000 were
      issued in conjunction with the transaction to acquire American Vantage Media
      Corporation, of which, 63,000 warrants were issued as part of the offering
      costs.




During
      the three months ended June 30, 2005, we committed to issue shares totaling
      $82,500 related to recruiting expenses incurred during the quarter. During
      the
      six months ended June 30, 2005, we committed to issue shares totaling $82,500
      related to recruiting expenses incurred during the six months ended June 30,
      2005. During
      the three months ended June 30, 2005, 162,000 common shares were issued
      related to the exercise of warrants for proceeds of $157,560.  During the
      three months ended June 30, 2005, we issued 724,000 shares for the exercise
      of
      warrants at $.63 to $1.00 per share and 82,600 shares for the exercise of
      options at $.80 to $1.50 per share.


During
      the three months ended September 30, 2005, we committed to issue shares
      totaling $117,250 related to recruiting expenses incurred during the quarter.
      As
      of September 30, 2005, 30,000 common shares were committed related to the
      exercise of warrants.During the nine months ended September 30, 2006, we
      issued 348,703 common shares related to the exercise of warrants for proceeds
      of
      $158,301. 139,231 of these warrants were cashlessly exercises. Additionally,
      during the nine months ended September 30, 2006, we issued 737,500 common shares
      related to the exercise of options for proceeds of $599,650. During
      the nine months ended September 30, 2006, we issued 10,000 common shares for
      services rendered.




SERIES
      W PREFERRED STOCK





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




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


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





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




20





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





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





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





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




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





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





21


WARRANTS




A
      summary of warrant activity follows:


Warrants
                  Outstanding
              
              Weighted
                  Average Exercise PriceDecember
                  31, 2005
              
              
              16,313,190
              
              $
              2.15Granted
              
              
              -
              
              $
              -Exercised
              
              
              (816,367
              )
              $
              1.39Canceled
              
              
              (100,000
              )
              $
              2.00Total
              
              
              15,396,823
              
              $
              2.20Warrants
                  exercisable September 30, 2006
              
              
              15,116,823
              
              $
              2.20
 Warrants
                    outstanding
                
                Average
                    remaining life
                
                Weighted
                    average exercise price warrants outstanding
                
                Warrants
                    exercisable
                
                Weighted
                    average exercise price warrants exercisableUnder
                    $1.50
                
                
                3,518,868
                
                
                1.4
                
                $
                1.17
                
                
                3,518,868
                
                $
                1.17$1.50
                    - $1.99
                
                
                485,778
                
                
                8.8
                
                
                1.81
                
                
                205,778
                
                
                1.72$2.00
                    - $2.99
                
                
                9,742,177
                
                
                4.2
                
                
                2.44
                
                
                9,742,177
                
                
                2.44$3.00
                    - $3.99
                
                
                1,650,000
                
                
                2.2
                
                
                3.00
                
                
                1,650,000
                
                
                3.0015,396,823
                
                
                2.7
                
                $
                2.19
                
                
                15,116,823
                
                $
                2.20
 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 Emerging Issues
      Task Force No. 00-19, “Accounting for Derivative Financial Instruments Indexed
      to, and Potentially Settled in, a Company's Own Stock.”




On
      December 5, 2005, we entered into a securities purchase agreement with
      certain institutional investors related to the private placement of 16,000,000
      shares of our common stock, par value $0.0001 per share, and five-year warrants
      to purchase 4,800,000 shares of common stock with an exercise price of $2.40
      per
      share. The transaction closed on December 6, 2005 and we realized gross
      proceeds of $32 million from the financing, before deducting commissions and
      other expenses. The proceeds from the offering will provide working capital
      to
      fund new ventures as well as content acquisitions. The fair value of the
      warrants was classified as equity in 2005 in accordance with Emerging Issues
      Task Force No. 00-19, “Accounting for Derivative Financial Instruments Indexed
      to, and Potentially Settled in, a Company's Own Stock.”





**NOTE
      8. STOCK-BASED COMPENSATION**




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




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




22




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




We
      have adopted several stock option plans, all of which have been approved by
      our
      stockholders, that authorize the granting of options to purchase our common
      shares subject to certain conditions. At September 30, 2006, we had reserved
      21.8 million of our common shares for issuance of share-based compensation
      awards under our stock option plans. At September 30, 2006, we have granted
      7.7 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 4,629,929 options during the first nine months of 2006. The amount of
      share-based compensation expense recognized in the three months ended September
      30, 2006 and nine months ended September 30, 2006 is based on options issued
      prior to January 1, 2006 and issued during the first nine months of 2006,
      and ultimately expected to vest, and it has been reduced for estimated
      forfeitures. 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 and nine months ended
      September 30, 2006, was $3.1 million and $4.9 million, respectively. For the
      three and nine months ended September 30, 2006, no income tax benefit was
      recognized in the statement of earnings (loss) for share-based compensation
      arrangements. A total of $2.9 million of share based compensation expense was
      recorded as compensation expense in the statement of operations for the
      Distributor for the 72 days ending September 30, 2006. This change was reflected
      as an increase in the Investment in Distributor and for Genius Products, Inc.
      Management assessed the likelihood that deferred tax assets realization relating
      to future tax deductions from share-based compensation will be recovered from
      future taxable income and determined that a 100% valuation allowance was
      required due to uncertainty as to the recoverability of these
      items.




During
      the nine months ended September 30, 2006 and 2005, we received proceeds of
      $755,947 and $83,580, respectively, related to the exercise of
      options.




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




Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30, 2006
            
            September
                30, 2006Risk
                free interest rate
            4.30%
            
            4.40%Expected
                dividend yield
            -
            
            -Expected
                volatility
            83%
            
            78%Expected
                life (in years)
            3.6
            
            3.4





Shares
            
            Weighted
                Average Price
            
            Weighted
                Average Remaining Contractual Life
            
            Aggregate
                Intrinsic ValueDecember
                31, 2005
            
            
            21,400,146
            
            $
            1.81Granted
            
            
            4,629,929
            
            $
            1.87Exercised
            
            
            (737,500
            )
            $
            0.82Canceled
            
            
            (3,337,043
            )
            $
            1.93Options
                outstanding at September 30, 2006
            
            
            21,955,532
            
            $
            1.84
            
            
            6.9
            
            $
            4,853,791Vested
                and expected to vest at September 30, 2006
            
            
            21,955,532
            
            $
            1.84
            
            
            6.9
            
            $
            4,853,791Options
                exercisable, September 30, 2006
            
            
            17,245,336
            
            $
            1.83
            
            
            6.4
            
            $
            4,627,101







23




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




Prior
      to January 1, 2006, we accounted for stock options for our plan under the
      recognition and measurement principles of APB Opinion No. 25, “Accounting
      for Stock Issued to Employees,” and related Interpretations. Prior to the
      implementation of FAS 123R, stock-based employee compensation expense was not
      generally reflected in net income, as all options granted under our plan had
      an
      exercise price equal to the market value of the underlying common stock on
      the
      date of grant. The following table illustrates the effect on net income and
      earnings per share if we had applied the fair value recognition provisions
      of
      FAS 123R to stock-based employee compensation for the three and nine months
      ended September 30, 2005:




(Restated)
              
              (Restated)Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30, 2005
              
              September
                  30, 2005Net
                  loss as reported
              
              $
              (3,854,798
              )
              $
              (11,383,472
              )Compensation
                  cost at fair value
              
              
              (258,266
              )
              
              (591,939
              )Pro
                  forma net loss
              
              $
              (4,113,064
              )
              $
              (11,975,411
              )Basic
                  and diluted net loss per shareAs
                  reported
              
              $
              (0.08
              )
              $
              (0.28
              )Pro
                  forma
              
              $
              (0.09
              )
              $
              (0.32
              )
 
 The
      pro forma compensation cost recognized for the grant date fair value of the
      stock options granted during the three and nine months ended September 30,
      2005
      was estimated using the Black-Scholes model with the following weighted-average
      assumptions:


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


**NOTE
      9. INCOME TAXES**




For
        the
        nine months ended September 30, 2006, the Company did not record a tax expense
        or benefit after considering the full year expected results and the likelihood
        of recoverability of deferred tax assets.  As a result of the
        Transaction with TWC, as further discussed in Note 3, the Company recorded
        a
        deferred tax liability of $16,632,000.  The Company considered the expected
        reversal of this deferred tax liability in assessing the realizabilty of
        the
        deferred tax assets recorded at September 30, 2006.  As a result of this
        assessment, the valuation allowance was reduced by approximately $17.6 million
        during the nine months ended September 30, 2006.





Significant
      components of the provision for income taxes for the nine months ended September
      30, 2006 is as follows:




**September
                  30,**
                **2006**Current
                  ProvisionFederal
              
              $
              0California
              
              
              0Deferred
                  ProvisionFederal
              
              $
              0California
              
              
              0Provision
                  for Income Taxes
              
              $
              0
  24
 A
        reconciliation of the expected income tax (benefit) computed using the federal
        statutory income tax rate to our effective income tax rate is as
        follows:





**September
                30,**
              **2006**Income
                tax computed at federal statutory tax rate
            
            
            34.00%State
                taxes, net of federal benefit
            
            
            6.41%Valuation
                allowance
            
            
            -43.76%Other
            
            
            3.35%0%




Significant
      components of our deferred tax assets (liabilities) at December 31, 2005
      and September 30, 2006 consisted of the following:




December
                  31,
                2005
              
              September
                  30,
                2006Net
                  Operating Losses
              
              $
              13,886,000
              
              $
              14,962,000Allowance
                  accounts
              
              
              404,000
              
              
              0State
                  deferred
              
              
              (401,000
              )
              
              832,000Other
                  reserves
              
              
              4,559,000
              
              
              1,417,000Accrued
                  vacation
              
              
              60,000
              
              
              0Deferred
                  compensation cost
              
              
              1,067,000
              
              
              1,067,000Depreciation
              
              
              25,000
              
              
              0Wellspring
                  deferred tax liability
              
              
              (1,380,000
              )
              
              0Investment
                  In Genius Products, LLC
              
              
              
              
              
              (16,632,000
              )Stock
                  Options
              
              
              0
              
              
              495,000Net
                  deferred tax assets
              
              $
              18,220,000
              
              $
              2,141,000Less
                  valuation allowance
              
              
              (19,600,000
              )
              
              (2,141,000
              )Net
                  deferred tax asset (liability)
              
              $
              (1,380,000
              )
              $
              (0
              )


**NOTE
      10. LOSS PER SHARE**




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




For
      the three and nine months ended September 30, 2006, we excluded from the
      computation of diluted earnings per share stock options and warrants to purchase
      33,226,925 shares. For the three and nine months ended September 30, 2005,
      we
      excluded from the computation of diluted earnings per share stock options and
      warrants to purchase 25,489,454 and 25,446,248, respectively. All potential
      shares were antidilutive and excluded from loss per share
      calculations.





**NOTE
      11. SUBSEQUENT EVENTS**




On
      October 17, 2006 Genius Products, LLC announced that it had entered into a
      multi-year agreement with World Wrestling Entertainment, Inc. (WWE®), to be the
      exclusive home entertainment distributor of all WWE® DVD titles, effective
      November 1, 2006. Under the terms of the multi-year agreement, Genius 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.




25




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.




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.





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




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




OVERVIEW





On
      July 21, 2006, Genius Products, Inc. (“we”, “our” or the “Company”) completed a
      strategic transaction with The Weinstein Company LLC (“TWC”) and its parent
      company, The Weinstein Company Holdings, LLC, and formed a venture named Genius
      Products, LLC (the “Distributor”) to exploit the exclusive U.S. home video
      distribution rights to feature film and direct-to-video releases owned or
      controlled by TWC (the “Closing”). Please see the discussion below under “Recent
      Strategic Transactions”. At the Closing we contributed to the Distributor all of
      our operating business, including substantially all of our assets, except for
      $1
      million cash and certain liabilities, and received a 30% equity interest in
      the
      Distributor. The discussions in this section reflect our operations prior to
      the
      Closing. For the period from July 22 through September 30 (post Closing), we
      accounted for our investment in the Distributor on our financial statements
      using the equity method of accounting. Under the equity method of accounting,
      only our investment in and amounts due to and from the Distributor are included
      in our consolidated balance sheet. As a result, we recorded an asset on our
      balance sheet related to our investment interest in the Distributor. On our
      statement of operations, we recorded our 30% share of the Distributor's profit
      or loss as equity in net earnings (losses) from the Distributor. We recorded
      a
      gain upon consummation of the Transaction based on the difference between the
      fair market value of assets contributed and the net book value, reduced for
      the
      portion of the gain associated with the retained economic interest in the
      Distributor. After the Closing, substantially all of our revenue and expenses
      as
      well as the results from releasing TWC product are reflected in the financial
      statements of the Distributor.





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




26




The
      Distributor sells proprietary content, license content from third parties for
      sale and distributes content for third parties for a fee. The Distributor
      currently has the exclusive U.S. home video distribution rights to feature
      film
      and direct-to-video releases owned or controlled by The Weinstein Company
      (“TWC”), a new film company created by Robert and Harvey Weinstein (as discussed
      below), as well as ESPN, Discovery Communications and World Wrestling
      Entertainment®. The Distributor has released the following TWC titles on DVD:
      (i) *Derailed* , starring Jennifer Aniston and Clive Owen on March 21;
      (ii) *Wolf Creek* , an Australian horror film, on April 11; (iii) *Mrs. Henderson Presents* , starring Judi Dench and Bob Hoskins, on April 18; (iv) *Hoodwinked* , an updated retelling of the classic story of Red Riding Hood with the voices
      of Anne Hathaway, Glenn Close and Jim Belushi, on May 2 (vi) *Doogal* with the voices of Whoopi Goldberg, Jimmy Fallon, William H. Macy and Jon
      Stewart, on May 16; (vii) *Transamerica* , starring Felicity Huffman, winner of the Golden Globe Award for best actress,
      on May 23; (viii) *The Libertine* , starring Johnny Depp and *The Matador* , starring Pierce Brosnan on July 4 (viii) *Scary Movie 4,* directed by David Zucker *,* on August 15, and (ix) *Lucky Number Slevin,* starring Bruce Willis on September 12. Upcoming releases include *Feast,* produced by Wes Craven, Ben Affleck and Matt Damon, *Clerks
      II* ,
      directed by Kevin Smith. The Distributor will also release content on DVD for
      Rainbow Media and the Independent Film Channel or IFC.




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




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




27




For
      the 21 days ending July 21, 2006, our business includes revenues from three
      major sources, as follows:




·
            Sales
                of videos and DVDs (99.6%)




·
            Sales
                of audio CDs and cassettes (0.2%)




·
            Theatrical
                rental and other (0.2%)




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





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




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




Recent
      Strategic Transactions





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





Our
      interest in the Distributor consist of Class G Units representing a 30%
      membership interest in the Distributor, and the interest of The Weinstein
      Company Holdings LLC and W-G
      Holding Corp. consists of
      Class W Units representing a 70% membership interest in the Distributor. The
      70%
      interest in the Distributor held by TWC or its owners is redeemable, at their
      option at any time from one year after the Closing, for up to 70% of the
      outstanding common stock of Genius Products, Inc., or with their approval,
      cash.
      From December 5, 2005, the date we entered into a Master Contribution
      Agreement relating to the transaction with TWC through the Closing, we operated
      under an interim distribution agreement with TWC and recorded the results from
      titles we first released for TWC commencing in March 2006 through the second
      quarter of 2006 in our financial statements.





On
      the Closing, the Distributor adopted an Amended and Restated Limited Liability
      Company Agreement (the “LLC Agreement”) in the form agreed to by the parties.




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




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




We
      recognized a partial gain on sale of $50.0 million before taxes representing
      the
      excess of total consideration less net assets transferred in the transaction.
      The taxes related to the partial gain recognized were offset by our existing
      deferred tax assets.




28


*Sale
      of Baby Genius:* On December 31, 2005, pursuant to an Asset Purchase Agreement, as amended
      (the “Asset Purchase Agreement”) with Klaus Moeller, who was our founder and
      formerly our CEO, and later Pacific Entertainment, Inc., we sold to Pacific
      Entertainment all of our right, title and interest in and to the following
      assets (the “Assets”), subject to the terms, conditions and limitations set
      forth in the Asset Purchase Agreement:


·
              Audio
                  and audiovisual works entitled “Baby
                  Genius”;
 
 ·
              Audio
                  and audiovisual works entitled “Kid
                  Genius”;
 
 ·
              Audio
                  and audiovisual works entitled “Little
                  Tikes”;
 
 ·
              Audio
                  works entitled “Wee Worship”; and
 
 ·
              Related
                  intellectual property, agreements, documents and
                  instruments.




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




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


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




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




In
      conjunction with this transaction we recorded a gain on sale in the amount
      of
      $1,351,710, a note receivable in the amount of $1,712,353 representing the
      present value of a $2 million secured promissory note that we received in this
      transaction and a deferred gain of $1,212,353. We will recognize the deferred
      gain based upon the relative percentage of revenue we generate in each period
      relative to the total revenue expected to be generated over the term of the
      distribution agreement. During the three and nine months ended
      September 30, 2006, we recognized $24,400 and $63,446 of this gain,
      respectively. We have received payment in full for the secured promissory note,
      due on January 30, 2006, in the amount of $750,000, plus
      interest.





Recent
      Events




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




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





29




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




As
      previously disclosed on a Current Report on Form 8-K filed by the Company
      on December 9, 2005 (the “ *Prior
      Report* ”),
      the
      Company entered into an amendment to the employment agreement with its President
      and Chief Executive Officer, Trevor Drinkwater, dated December 5, 2005 (the
“ *First
      Amendment* ”).
      The
      effectiveness of the First Amendment was conditioned upon the closing of the
      Transaction (as defined in Item 2.01 below), which occurred on July 21,
      2006. The First Amendment was attached as Exhibit 99.1 to the Prior Report.




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





**CRITICAL
      ACCOUNTING POLICIES**





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





ALLOWANCE
      FOR SALES RETURNS AND DOUBTFUL ACCOUNTS. The allowance for doubtful accounts
      and
      provision for sales returns includes management's estimate of the amount
      expected to be uncollectible or returned on specific accounts and for losses
      or
      returns on other accounts as yet to be identified included in accounts
      receivable. In estimating the allowance component for unidentified losses and
      returns, management relies on historical experience and takes into account
      current information obtained from retailers including retail sell-through data
      and retail inventory data as available. The amounts we will ultimately realize
      could differ materially in the near term from the amounts estimated in arriving
      at the allowance for doubtful accounts and provision for sales returns in the
      accompanying financial statements.




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




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




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




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




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




30




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




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




REVENUE
      RECOGNITION. Revenue from the sale or licensing of films is recognized upon
      meeting all recognition requirements of SOP 00-2. Revenues are recorded upon
      the
      receipt of goods by the customer for titles that do not have a “street date”
(when it is available for sale by the customer). If a title has a street date,
      we recognize the initial shipment as revenue on that date and all subsequent
      shipments after street date are recognized as revenue upon the receipt of goods
      by the customer. Under revenue sharing arrangements, rental revenue is
      recognized on or after the street date and when we are entitled to receipts
      and
      such receipts are determinable. Costs of sales and an allowance for returns
      are
      recorded at the time of revenue recognition. The allowance for returns
      calculation is based upon an analysis of historical customer and product returns
      performance as well as current customer inventory data as available. Updates
      to
      the returns calculation are performed quarterly. Revenues from royalties are
      recognized when received. Revenues from licensing are recognized when the title
      is available to the licensee. Cash payments received are recorded as deferred
      revenue until all the conditions of revenue recognition have been met.
      Long-term, non-interest bearing receivables are discounted to present
      value.




LOSS
      PER SHARE. Basic EPS is calculated using income available to common stockholders
      divided by the weighted average of common shares outstanding during the year.
      Diluted EPS is similar to Basic EPS except that the weighted average of common
      shares outstanding is increased to include the number of additional common
      shares that would have been outstanding if the dilutive potential of common
      shares, from the exercise of options or warrants, had been issued. The treasury
      stock method is used to calculate dilutive shares which reduces the gross number
      of dilutive shares by the number of shares purchasable from the proceeds of
      the
      options assumed to be exercised.




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





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





INCOME
      TAXES As of September 30, 2006, we had total net operating loss carry-forwards
      for federal and state income tax purposes of $36,845,000 and $27,538,000
      respectively which start expiring in 2012 through 2026. Included in our total
      net operating loss carryover, is approximately $12,900,000 of net operating
      losses we inherited as a result of the American Vantage Media (“AVMC”), a
      subsidiary of American Vantage Companies (“AVC”), and Wellspring Media, Inc.
      acquisition. The utilization of net operating loss carry-forwards may be limited
      due to the ownership change under the provisions of Internal Revenue Code
      Section 382 and similar state provisions.




The
      entire deferred income tax assets have been offset by a valuation allowance
      since management does not believe the recoverability of the deferred income
      tax
      assets during the next year is more likely than not. Accordingly, we have not
      recognized a deferred income tax benefit as of September 30, 2006 in these
      financial statements.





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 carry-forwards are subject to
      substantial annual limitations due to a change in ownership structure occurring
      prior to June 30, 2006.





31


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





The
      discussions in this section reflect our operations for the 21 and 202 day
      periods ending July 21, 2006, the periods prior to the Closing. For the71-day
      period from July 22 through September 30 (post Closing), we account for our
      investment in the Distributor on our financial statements using the equity
      method of accounting. Under the equity method of accounting, only our investment
      in and amounts due to and from the Distributor are included in our consolidated
      balance sheet. On our statement of operations, we recorded our 30% share of
      the
      Distributor's profit or loss as equity in net earnings (losses) from
      Distributor. After the Closing, substantially all of our revenue and expenses
      as
      well as the results from releasing TWC product are reflected in the financial
      statements of the Distributor. We did not compare the results of operations
      for
      the 21-day period ending July 21, 2006 with the three and nine months ended
      September 30, 2005 due to the fact that the time periods involved are not
      comparable, and the prior year periods consisted entirely of non-TWC product.





*Revenues:*




Video
      and DVD revenues for the 21 days ending July 21, 2006 were primarily composed
      of
      sales of The Weinstein Company (“TWC”) titles, *The Matador* and *The Libertine,* sales of branded and proprietary products including branded classic movies
      and
      television shows on DVD as well as non-branded classic movies and television
      shows on DVD, and Wellspring titles from AVMC. Video revenues for the 21 days
      and 202 days ended July 21, 2006 were $21.3 million and $159.5 million,
      respectively.


Theatrical
      revenues were composed of sales generated from film rentals by our theatrical
      division. Theatrical revenues were zero and $0.2 million for the 21 and 202
      days
      ended July 21, 2006. In February 2006, we announced we will no longer release
      films theatrically.




Audio
      revenues for the 21 and 202 days ended July 21, 2006 were composed of Baby
      Genius, Kid Genius, licensed music CDs, interactive music programs, non-branded
      and value music products sold at an entry level price point at retail. Audio
      revenues were $0.3 million and $1.3 million for the 21 and 202 days ended July
      21, 2006.





Royalties,
      licensing and other revenues were composed of royalties from licensing fees
      from
      Wellspring Media, Inc. and the license of our Baby Genius brand name. Royalties,
      licensing and other revenues for the 21 and 202 days ending July 21, 2006 were
      zero and $0.4 million, respectively.




Total
      gross revenues for the 21 and 202 days ended July 21, 2006 were $21.7 million
      and $161.4 million, respectively.




Sales
      returns, discounts and allowances were $4.3 million and $40.5 million for the
      21
      and 202 days ended July 21, 2006. This resulted primarily from the increase
      in
      sales from the video release of TWC's *The Matador* and *The
      Libertine* .
      The provision for sales returns and allowances is calculated in accordance
      with
      historical averages and industry changes, but may vary in the future based
      on
      customer and product mix.




Net
      revenues for the 21 and 202 days ended July 21, 2006 were $17.3 million and
      $120.9 million, respectively *.*





*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 were $10.0 million and $91.6 million for the 21 and 202
      days ending July 21, 2006. Video and DVD cost of sales are primarily due to
      the
      video release of TWC's titles. Cost of sales related to TWC's titles include
      the
      remittance to The Weinstein Company and the related product cost of
      sales.




Theatrical
      cost of sales, composed primarily of print and advertising costs related to
      sales generated from film rental by our theatrical division, were zero and
      $0.1
      million during the 21and 202 days ending July 21, 2006. Our theatrical division
      was discontinued in February 2006.




Audio
      cost of sales were $0.2 million and $1.0 million for the 21 and 202 days ending
      July 21, 2006. Audio cost of sales were attributable to the sale of audio
      CDs.




32




Amortization
      of production masters and film library was $0.1 million and $0.9 million for
      the
      21 and 202 days ending July 21, 2006. Amortization of production masters and
      film library is primarily the result of the acquisition of AVMC.




*Operating
      Expense:*




Product
      development expenses were $0.1 million and $1.4 million for the 21 and 202
      days
      ending July 21, 2006. Product development expenses are related to the release
      of
      new titles.




Sales
      and marketing expenses were $5.9 million and $22.5 million during the 21 and
      202
      days ending July 21, 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.




General
      and administrative expenses were $2.2 million and $14.5 million during the
      21
      and 202 days ending July 21, 2006. General and administrative expenses primarily
      relate to payroll, rent, and transaction costs. Investment banking, audit and
      legal fees of $1.4 million and $4.2 million for the 21 and 202 days ending
      July
      21, 2006, respectively related to the Closing of the Transaction with The
      Weinstein Company. General and administrative also includes warrants and options
      expense associated with compensation to certain employees and outside
      consultants of $0.2 million and $1.9 million during for the 21 and 202 days
      ending July 21, 2006. General and administrative expenses were 12.7% and 12.0%
      of net revenues for the 21 and 202 days ending July 21, 2006.




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




The
      purchase price was payable as follows:


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




In
      conjunction with this transaction we recorded a gain on sale in the amount
      of
      $1,351,710 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 21 and 202 days ending
      July
      21, 2006, we recognized a gain of zero and $63,446, respectively relating to
      the
      deferred gain of $1.2 million at December 31, 2005.




We
      had interest income of $0.1 million and $0.5 million during 21 and 202 days
      ending July 21, 2006, respectively. We had interest expense of zero and $0.2
      million during the 21 and 202 days ending July 21, 2006. Interest expense was
      associated with note payable that were partially repaid in the first quarter
      and
      interest income related interest earned on outstanding cash balances.




We
      had income tax expense of ($0.1) million and zero for the 21 and 202 days ending
      July 21, 2006.





As
      result of the foregoing, the net loss before extraordinary gain was $3.1 million
      and $12.7 million during the 21 and 202 days ending July 21, 2006.





*Equity
      in net earnings (losses) from Distributor*





During
      the 71-day period from July 22 through September 30, the Company’s 30% interest
      in the net loss of the Distributor was


$1.9
      million.




33


**LIQUIDITY
      AND CAPITAL RESOURCES**




Net
      cash used in operations during nine months ending September 30, 2006 was $4.0
      million, primarily due to increases in accounts receivable, inventories, a
      decrease in accounts payable and the additions to our film library offset by
      increases in accrued expenses, remittance to licensor, allowance for doubtful
      accounts and provision for returns, and net income of $37.3 million. These
      changes are primarily related to the release of TWC titles. The increase in
      accounts receivable relates primarily to sales of *Derailed, Mrs. Henderson Presents, Transamerica, Wolf Creek,
      Hoodwinked* , *Doogal, The Matador, The Libertine, Scary Movie 4* and *Lucky
      Number Slevin* during the nine months ending September 30, 2006. The increase in accrued
      expenses and inventories primarily relate to invoices received but not paid
      for
      the production of inventory and sales and marketing expenses for *Scary
      Movie 4* and *Lucky
      Number Slevin* .
      The remittance to licensor primarily represents the amount owed to TWC after
      deducting the related cost of sales, marketing costs, and our distribution
      fee
      from net sales of TWC titles during the nine months ended 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 September 30, 2006 had not been collected. However, prior to July 21,
      2006, we bore the risk of accounts receivable collections. Allowance for
      doubtful accounts and provision for returns increased primarily as a result
      of
      reserves for returns related to the release of ** TWC
      titles. For the nine months ended September 30, 2005, net cash used in
      operations was $13.9 million, driven primarily by the net loss of $11.4
      million, the increase in the development of our library, the decrease in
      accounts payable, offset by a decrease in accounts receivable. On July 21,
      2006,
      we contributed substantially all of our assets and liabilities to the
      Distributor. These assets and liabilities are reflected on the balance sheet
      of
      the Distributor at September 30, 2006.




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




Cash
      used in financing activities for nine months ending September 30, 2006 was
      $4.4
      million, resulting from the repayment of $5.3 million in notes payable. Cash
      provided by financing activities for the nine months ended September 30, 2005
      was $12.8 million, resulting from the issuance of common stock for proceeds
      of
      $15.2 million, proceeds from the exercise of warrants and common stock, offset
      by the repayment of short-term debt of $2.3 million and the payment of offering
      costs of $0.8 million.




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




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




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




We
      do not enter into hedging or derivative instrument arrangements.




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




**Evaluation
      of Disclosure Controls and Procedures**





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




As
      of the end of the period covered by this report, we carried out an evaluation,
      under the supervision and with the participation of our management, including
      the Chief Executive Officer and the Chief Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures. In making this evaluation, our management
      considered deficiencies in our disclosure controls and procedures reported
      in our Annual Report on Form 10-K for the period ended December 31, 2005
      and the disclosure and control deficiencies discussed below.  Based on this
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures were not effective at the reasonable
      assurance level as of September 30, 2006.





34





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





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





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





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





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





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





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


35





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




**Change
      in Internal Control Over Financial
      Reporting**




There
      was no change in our internal control over the financial reporting during the
      period covered by this report on Form 10-Q that has materially affected, or
      is
      reasonably likely to materially affect our internal control over financial
      reporting, other than the deficiencies and remediation measures which are
      described above.








**PART
      II - OTHER INFORMATION**




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




We
      have disclosed in previous reports filed with the Securities and Exchange
      Commission a complaint filed against our American Vantage Media Corporation
      and
      Wellspring Media, Inc. in U.S. Bankruptcy Court for the District of Delaware
      by
      the Chapter 7 Trustee of the Winstar Communications, Inc. Estate. There have
      been no material developments in these matters. For a complete description
      of
      the facts and circumstances surrounding the Winstar litigation, see the
      disclosures in our Annual Report on Form 10-KSB for the year ended
      December 31, 2005 under “Item 3. Legal Proceedings”, which are incorporated
      by reference herein.




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




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




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




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




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




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




None.




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




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




36


**Proposal**
                **Shares
                    Voted**
                  **“FOR”**
                **Shares
                    Voted**
                  **“AGAINST”**
                **Shares**
                  **“ABSTAINING”**
                **Broker**
                  **“NON-VOTE”**1
                    -
                    Contribution of assets pursuant to Master Contribution Agreement
                40,702,755
                62,872
                56,842
                02
                    -
                    Amendment and restatement of Certificate of Incorporation (“Charter”)
                17,907,056
                0
                0
                02A
                    - Charter provisionrestricting
                    our acts or activities
                22,718,969
                140,052
                56,392
                02B
                    -Increase
                    in our authorized shares of common stock to 300,000,000
                    shares
                22,735,763
                122,925
                56,725
                02C
                    - Authorization ofSeries
                    W Preferred Stock
                22,742,713
                106,188
                66,512
                02D
                    -Modification
                    of the rights, preferences and powers of our Common Stock
                22,750,966
                98,372
                66,075
                02E
                    - Charter provisionby
                    which we elect out of Delaware law restricting business combinations
                    with
                    interested stockholders
                22,759,813
                86,525
                69,075
                02F
                    - Charter provisionby
                    which we renounce an interest or expectancy in, or in being offered
                    the
                    opportunity to participate in, corporate opportunities engaged
                    in by TWC
                    (including its affiliates and related persons)
                22,635,761
                185,027
                94,625
                03
                    - Amendment and restatement of 2004 Stock Incentive Plan to (i)
                    increase
                    shares available for issuance from 7,500,000 shares to 13,500,000
                    shares
                    and (ii) prohibit option repricings under the Plan without receipt
                    of
                    stockholder approval
                40,179,486
                529,858
                113,125
                04
                    -Adjournments
                    of the Special Meeting, if necessary, to permit further solicitation
                    of
                    proxies
                37,340,109
                3,426,285
                56,075
                0
 **ITEM 5.****OTHER
        INFORMATION**




None.




37




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




3.1
              Amended
                  and RestatedCertificate
                  of Incorporation,dated
                  July 21, 2006.*3.2
              Bylaws
                  (incorporated by reference from Exhibit 3.2 to the Registrant’s Form
                  10-KSB filed on March 31, 2005).10.1
              Form
                  of Amended and Restated Limited Liability Company Agreement of
                  Genius
                  Products, LLC, dated July 21, 2006(incorporated
                  by reference from Appendix C to the Registrant’s Definitive Proxy
                  Statement filed on June 29, 2006).10.2
              Form
                  of Distribution Agreement, dated July 17, 2006, by and between
                  Genius
                  Products, LLC and The Weinstein Company LLC(incorporated
                  by reference from Appendix D to the Registrant’s Definitive Proxy
                  Statement filed on June 29, 2006).10.3
              Amended
                  and Restated 2004 Stock Incentive Plan (incorporated by reference
                  from
                  Appendix F to the Registrant’s Definitive Proxy Statement filed on
                  June 29, 2006).10.4
              Output
                  Distribution Agreement, dated July 7, 2006, by and between Genius
                  Products, Inc. and ESPN Enterprises, Inc. (incorporated by reference
                  from
                  Exhibit 10.1 to the Registrant’s Form 8-K/A filed on September 29,
                  2006).10.5
              Consulting
                  Agreement, dated July 20, 2006, by and between Genius Products,
                  Inc. and
                  Bannon Strategic Advisors, Inc. (incorporated by reference from
                  Exhibit
                  10.1 to the Registrant’s Form 8-K filed on July 26, 2006).10.6
              Amendment
                  No. 2 to Employment Agreement, dated July 20, 2006, by and between
                  Genius
                  Products, Inc. and Trevor Drinkwater (incorporated by reference
                  from
                  Exhibit 10.2 to the Registrant’s Form 8-K filed on July 26, 2006).10.7
              Registration
                  Rights Agreement, dated July 21, 2006, by and between Genius Products,
                  Inc. and The Weinstein Company LLC. *10.8
              Services
                  Agreement, dated July 21, 2006, by and between Genius Products,
                  Inc. and
                  Genius Products, LLC. *99.1
              Financial
                  Statements of Genius Products, LLC *31.1
              Certification
                  of Chief Executive Officer pursuant to Section 302(a) of the
                  Sarbanes-Oxley Act.*31.2
              Certification
                  of Chief Financial Officer pursuant to Section 302(a) of the
                  Sarbanes-Oxley Act.*32.1
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act.*32.2
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act.*
  *  Filed
        herewith.


38


**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:
                November 20, 2006
            
            GENIUS
                PRODUCTS, INC.,
              a
                Delaware CorporationBy:
            /s/
                Trevor DrinkwaterTrevor
                Drinkwater
              President
                and Chief Executive Officer
              (Principal
                Executive Officer)Dated:
                November 20, 2006
            
            By:
            /s/
                John MuellerJohn
                Mueller
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)






39