**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**





(Mark
      One)




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




For
      the quarterly period ended March 31, 2007




** ̈**
            **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 ý 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 filerý




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




There
      were 65,873,620 shares outstanding of the issuer's Common Stock as of April
      30,
      2007.




1





**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**




**INDEX**


**PAGE****PART I**
              **FINANCIAL
                  INFORMATION**Item 1
              Financial
                  StatementsCondensed
                  Consolidated Balance Sheets at March 31, 2007 (unaudited) and December
                  31,
                  2006 (audited)
              4Condensed
                  Consolidated Statements of Operations for the Three Months Ended
                  March 31,
                  2007(unaudited) and 2006 (unaudited)
              5Condensed
                  Consolidated Statements of Cash Flow for the Three Months Ended
                  March 31,
                  2007 (unaudited) and 2006(unaudited)
              6Notes
                  to Condensed Consolidated Financial Statements (unaudited)
              7Item 2
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              15Item 3
              Quantitative
                  and Qualitative Disclosures About Market Risk
              18Item 4
              Controls
                  and Procedures
              18**PART II**
              **OTHER
                  INFORMATION**Item 1
              Legal
                  Proceedings
              20Item 1A
              Risk
                  Factors
              20Item 2
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              20Item 3
              Defaults
                  Upon Senior Securities
              20Item 4
              Submission
                  of Matters to a Vote of Security Holders
              20Item 5
              Other
                  Information
              20Item 6
              Exhibits
              21**SIGNATURES**
              21
  2


**NOTICE
      ABOUT FORWARD-LOOKING STATEMENTS**








This
      Quarterly Report on Form 10-Q includes “forward-looking statements”. To the
      extent that the information presented in this Quarterly Report discusses
      financial projections, information or expectations about our business plans,
      results of operations, products or markets, or otherwise makes statements about
      future events, such statements are forward-looking. Such forward-looking
      statements can be identified by the use of words such as “intends”,
“anticipates”, “believes”, “estimates”, “projects”, “forecasts”, “expects”,
“plans” and “proposes”.




Although
      we believe that the expectations reflected in these forward-looking statements
      are based on reasonable assumptions, there are a number of risks and
      uncertainties that could cause actual results to differ materially from such
      forward-looking statements. These include, among others, the cautionary
      statements in the “Risk Factors” and “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” sections of this Quarterly
      Report. These cautionary statements identify important factors that could cause
      actual results to differ materially from those described in the forward-looking
      statements.




When
      considering forward-looking statements in this Quarterly Report, you should
      keep
      in mind the cautionary statements in the “Risk Factors” and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”
sections, and other sections of this Quarterly Report. Except as required by
      law, we do not intend to update our forward-looking statements, whether written
      or oral, to reflect events or circumstances after the date of this Quarterly
      Report.




3





**PART
      I - FINANCIAL INFORMATION**





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


**GENIUS** **PRODUCTS,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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


March
                  31,
                2007
                (Unaudited)
              
              December
                  31,
                2006
                (Note
                  1)**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              6,203
              
              $
              3,745Prepaid
                  expenses and other current assets
              
              
              110
              
              
              110Amounts
                  receivable from affiliate, net
              
              
              694
              
              
              777Total
                  current assets
              
              
              7,007
              
              
              4,632Investment
                  in Distributor
              
              
              82,877
              
              
              84,796Total
                  assets
              
              $
              89,884
              
              $
              89,428**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              
              -
              
              $
              59Accrued
                  expenses
              
              $
              1,356
              
              
              865Total
                  current liabilities
              
              
              1,356
              
              
              924Deferred
                  tax liability
              
              
              13,154
              
              
              13,021Total
                  liabilities
              
              
              14,510
              
              
              13,945Commitments
                  and contingenciesStockholders'
                  equity:Preferred
                  stock, $.0001 par value; 10,000,000 shares authorized; no shares
                  outstanding
              
              
              -
              
              
              -Series
                  W preferred stock, $.0001 par value; 100 shares authorized and
                  outstanding
              
              
              -
              
              
              -Common
                  stock, $.0001 par value; 300,000,000 shares authorized; 65,421,762
                  and
                  63,305,195 shares outstanding, respectively
              
              
              7
              
              
              6Additional
                  paid-in capital
              
              
              108,034
              
              
              105,375Accumulated
                  deficit
              
              
              (32,667
              )
              
              (29,898
              )Total
                  stockholders' equity
              
              
              75,374
              
              
              75,483Total
                  liabilities and stockholders' equity
              
              $
              89,884
              
              $
              89,428


See
        accompanying notes to condensed unaudited interim financial statements. 4
  **GENIUS
          PRODUCTS, INC. AND SUBSIDIARIES**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(IN
          THOUSANDS, EXCEPT SHARE INFORMATION)**
 **(UNAUDITED)**
 Three
                      Months Ended March 31,2007
                  
                  2006(Restated)Revenues,
                      net of sales returns, discounts and allowances of $0 and $8,843,
                      respectively
                  
                  $
                  -
                  
                  $
                  27,912Total
                      cost of revenues
                  
                  
                  -
                  
                  
                  28,797Gross
                      loss
                  
                  
                  -
                  
                  
                  (885
                  )Operating
                      expenses (income):Selling,
                      general and administrative
                  
                  
                  456
                  
                  
                  5,683Gain
                      on sale, related party
                  
                  
                  -
                  
                  
                  (40
                  )Equity
                      in net loss from Distributor
                  
                  
                  2,228
                  
                  
                  -Total
                      operating expenses
                  
                  
                  2,684
                  
                  
                  5,643Loss
                      from operations
                  
                  
                  (2,684
                  )
                  
                  (6,528
                  )Interest
                      and other income (expense), net
                  
                  
                  49
                  
                  
                  (238
                  )Loss
                      before provision for income taxes
                  
                  
                  (2,635
                  )
                  
                  (6,766
                  )Provision
                      (benefit) for income taxes
                  
                  
                  134
                  
                  
                  (46
                  )Net
                      loss
                  
                  $
                  (2,769
                  )
                  $
                  (6,720
                  )**Basic
                      and diluted EPS**Net
                      loss per share
                  
                  $
                  (0.04
                  )
                  $
                  (0.11
                  )Basic
                      and diluted weighted average shares
                  
                  
                  64,193,425
                  
                  
                  60,473,122
  See
          accompanying notes to condensed unaudited interim financial
          statements.
  5
 **GENIUS
          PRODUCTS, INC. AND SUBSIDIARIES**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(IN
          THOUSANDS, EXCEPT WARRANT INFORMATION)**
 **(UNAUDITED)**
 Three
                    Months Ended March 31,2007
                
                2006(Restated)Cash
                    flows from operating activities:Net
                    loss
                
                $
                (2,769
                )
                $
                (6,720
                )Adjustments
                    to reconcile net loss to net cash provided by (used in) operating
                    activitiesDepreciation
                    and amortization
                
                
                -
                
                
                48Equity
                    in net loss from Distributor
                
                
                2,228
                
                
                -Amortization
                    and impairment of film library
                
                
                -
                
                
                311Change
                    in allowance for doubtful accounts and provision for
                    returns
                
                
                -
                
                
                9,147Operating
                    expenses paid by Distributor
                
                
                259
                
                
                -Change
                    in provision for obsolete inventory
                
                
                -
                
                
                (178
                )Common
                    stock issued for services
                
                
                -
                
                
                19Stock
                    compensation expense
                
                
                197
                
                
                921Debt
                    discounts
                
                
                -
                
                
                121Deferred
                    tax liability
                
                
                134
                
                
                (46
                )Changes
                    in assets and liabilities:Increase
                    in accounts receivable
                
                
                -
                
                
                (48,778
                )Increase
                    in inventories
                
                
                -
                
                
                (3,696
                )Decrease
                    in prepaid expenses, notes receivable and deposits
                
                
                83
                
                
                873Increase
                    in restricted cash
                
                
                -
                
                
                (301
                )Increase
                    in film library
                
                
                -
                
                
                (872
                )Increase
                    (decrease) in accounts payable
                
                
                (59
                )
                
                4,300Increase
                    in accrued expenses and other
                
                
                491
                
                
                5,494Increase
                    in deferred revenue
                
                
                -
                
                
                16,262Increase
                    in remittance to licensors
                
                
                -
                
                
                16,258Decrease
                    in debentures payable
                
                
                -
                
                
                (51
                )Increase
                    (decrease) in deferred gain, related party
                
                
                -
                
                
                80Net
                    cash provided by (used in) operating activities
                
                
                564
                
                
                (6,808
                )Cash
                    flows from investing activities:Purchase
                    of property and equipment
                
                
                -
                
                
                (272
                )Net
                    cash used in investing activities
                
                
                -
                
                
                (272
                )Cash
                    flows from financing activities:Net
                    borrowings (payments) on notes payable and debentures
                
                
                -
                
                
                (5,300
                )Proceeds
                    from exercise of options
                
                
                1,071
                
                
                139Proceeds
                    from exercise of warrants
                
                
                823
                
                
                46Net
                    cash provided by (used in) financing activities
                
                
                1,894
                
                
                (5,115
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                2,458
                
                
                (12,195
                )Cash
                    and cash equivalents at beginning of period
                
                
                3,745
                
                
                30,597Cash
                    and cash equivalents at end of period
                
                $
                6,203
                
                $
                18,402Supplemental
                    disclosure of cash flow informationInterest
                    paid
                
                $
                -
                
                $
                74
 
 Warrant
          holders cashless exercised 1,371,803 warrants during the quarter ended
          March 31,
          2007.
 
 See
          accompanying notes to condensed unaudited interim financial
          statements.


6


**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**




**NOTE
      1.** **** **NATURE
      OF BUSINESS, THE WEINSTEIN COMPANY TRANSACTION, AND INVESTMENT IN
      DISTRIBUTOR**




NATURE
      OF
      BUSINESS


Genius
          Products, Inc. (OTC BB:GNPI) ("we" "our" or the "Company"), along with
          The
          Weinstein Company Holdings LLC (“TWC Holdings”) and its first-tier subsidiary,
          W-G Holding Corp., (“W-G Holdings”) own Genius Products, LLC (the
          "Distributor"), a leading entertainment products company that distributes,
          licenses, acquires and produces an expanding library of feature films,
          television programming, family, lifestyle and trend entertainment on digital
          versatile discs (“DVD”), as well as the new high-definition DVD formats and all
          other hard carrier devices and on emerging digital distribution technologies.
          The Distributor primarily focuses on four core branded content areas: major
          theatrical/independent film, sports, lifestyle and family/faith based content.
          The Distributor handles the distribution, marketing and sales for many
          brands
          including The Weinstein Company®, Dimension
          FilmsTM,
          Independent Film Channel (IFC)®, WellspringTM,
          RHI
          EntertainmentTM, ImaginAsian
          Entertainment, Dragon DynastyTM, Peace
          Arch
          Entertainment, Laugh Factory, ESPN®, World
          Wrestling
          Entertainment, Inc.® (“WWE”),
          Animal
          Planet, The Learning Channel, Classic Media, Entertainment Rights, Sesame
          Workshop®,
          Plaza Sesamo®, Discovery
          KidsTM and
          Impact Entertainment, amongst others. The Company is the managing member
          of the
          Distributor, in which it holds a 30% equity interest.




The
      Distributor uses third-party distribution facilities located throughout the
      United States and ships and sells its products directly to retailers, rentailers
      and to wholesale distribution companies. The Distributor distributes to over
      25,000 retail locations. The Distributor sells to mass retail stores including
      Target, Wal-Mart, Kmart, Meijers, ShopKo, Costco and Sam’s Club; children’s toy
      stores including Toys R Us; electronics stores including Best Buy, Fry’s and
      Circuit City; bookstores including Borders and Barnes & Noble; music
      retailers including Trans World Entertainment and Virgin; internet retailers
      including Amazon, Netflix and iTunes; rental outlets including Blockbuster,
      Movie Gallery and Hollywood Video; direct marketing companies including QVC,
      Castalian Music and Columbia House; as well as other non-traditional outlets.
      The Distributor also distributes to wholesale distribution companies including
      Alliance Entertainment, Ingram, VPD and Baker & Taylor.




THE
      WEINSTEIN COMPANY (“TWC”) TRANSACTION


On
      July
      21, 2006 (the “Closing Date”), we completed a transaction (the “TWC
      Transaction”) with TWC Holdings and W-G Holdings (two subsidiaries of TWC)
      pursuant to which we launched 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. On the Closing Date, the Company contributed substantially
      all of its assets (except for $1 million in cash and certain liabilities),
      its
      employees, and its existing businesses to the Distributor.




As
      a
      result, the Distributor is owned 70% by TWC Holdings and W-G Holdings and 30%
      by
      the Company. This 70% interest in the Distributor consists of Class W Units
      and
      is redeemable, at TWC Holdings’ and W-G Holdings’ option commencing at any time
      from one year after the Closing Date, for up to 70% of the Company’s outstanding
      common stock, or with TWC Holdings’ and W-G Holdings’ approval, cash. Our 30%
      membership interest in the Distributor consists of the Distributor’s Class G
      Units (see Investment in Distributor section below).




In
      addition to granting TWC Holdings and W-G Holdings a 70% interest in the
      Distributor consisting of the Distributor’s Class W Units, to accomplish the TWC
      Transaction we issued an aggregate of 100 shares of the Company’s Series W
      Preferred Stock to TWC Holdings and W-G Holdings. The Series W Preferred Stock
      provides the holders thereof with (a) the right to elect five of the seven
      directors on our Board of Directors, of which two are currently TWC executives,
      (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 Date, we entered into a Registration Rights Agreement with TWC Holdings
      and W-G Holdings 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 TWC Holdings and W-G Holdings. In addition, the Company and/or
      the Distributor entered into the following agreements on the Closing Date:
      (i)
      Amended and Restated Limited Liability Company Agreement, (ii) Video
      Distribution Agreement, (iii) Services Agreement, and (iv) Assignment and
      Assumption Agreement.




From
      December 5, 2005 through the Closing Date, we operated under an interim
      distribution agreement with TWC and recorded the results from titles we released
      for TWC on our financial statements. After the Closing Date, substantially
      all
      of the operating activities we previously conducted, as well as the results
      from
      releasing TWC product, are reflected in the financial statements of the
      Distributor. A summary of the financial results of the Distributor is in Note
      3
      to our condensed consolidated financial statements.






7




INVESTMENT
      IN DISTRIBUTOR


The
      accompanying condensed consolidated financial statements account for our
      investment in the Distributor (30% membership interest represented by the
      Distributor’s Class G units) using the equity method of accounting. On our
      consolidated statement of operations subsequent to the Closing Date, we recorded
      our 30% share of the Distributor’s profit or loss as equity in net loss from
      Distributor, adjusted for non-cash basis differences (see Note 3) and costs
      incurred by the Distributor on behalf of the Company. Pursuant to Accounting
      Principles Board Opinion No. 18, “The Equity Method of Accounting for
      Investments in Common Stock”, we will 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.




Under
      the
      equity method of accounting, only our investment in and amounts due to and
      from
      the Distributor have been included as an asset in our condensed consolidated
      balance sheet. The TWC Transaction represented a non-monetary exchange of a
      business controlled by the Company for a non-controlling interest in the
      Distributor. Accordingly, the amount recorded for the Company’s investment in
      the Distributor was partially based on the Company’s fair value as determined by
      reference to the quoted market prices of the Company’s shares at the close of
      the market on the Closing Date and partially based on the historical basis
      of
      the net assets surrendered in the TWC Transaction. The Distributor is treated
      as
      a partnership for U.S. federal income tax purposes.




**NOTE
      2.** **** **BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**




The
      following accounting policies are applicable to the Company and to the
      Distributor, where noted.





BASIS
      OF
      PRESENTATION


The
      accompanying unaudited condensed consolidated financial statements of the
      Company have been prepared in accordance with United States generally accepted
      accounting principles for interim financial statements and with the instructions
      to Form 10-Q and Article 10 of Regulation S-X, promulgated by the Securities
      and
      Exchange Commission (the “SEC”). Accordingly, they do not include all of the
      information and disclosures required by United States generally accepted
      accounting principles for complete financial statements. In the opinion of
      management, all adjustments (consisting of normal recurring adjustments)
      considered necessary for a fair presentation have been included. The results
      of
      operations for interim periods are not necessarily indicative of the results
      that may be expected for the fiscal year. The condensed consolidated financial
      statements should be read in conjunction with the Company’s December 31, 2006
      consolidated financial statements and accompanying notes included in the
      Company’s Annual Report on Form 10-K (the “Annual Report”). All terms used but
      not defined elsewhere herein have the meanings ascribed to them in the Annual
      Report.





The
      condensed consolidated balance sheet at December 31, 2006 has been derived
      from
      the audited financial statements at that date but does not include all the
      information and footnotes required by United States generally accepted
      accounting principles for complete financial statements.





PRINCIPLES
      OF CONSOLIDATION


The
      condensed consolidated financial statements include the accounts of (i) Genius
      Products, Inc., (ii) our wholly owned subsidiary American Vantage Media, LLC
      (“AVM”) and (iii) Wellspring Media, LLC (“Wellspring Media”), a wholly owned
      subsidiary of AVM. Each of the aforementioned direct or indirect subsidiaries
      of
      the Company was acquired on March 21, 2005, in addition to Sanuk
      Corporation, American Vantage/Hypnotic, Inc. and Wellspring Productions, LLC
      (which are all inactive). All significant inter-company transactions and
      accounts have been eliminated in consolidation.




ALLOWANCE
      FOR SALES RETURNS AND DOUBTFUL ACCOUNTS




The
      Distributor’s allowance for doubtful accounts and provision for sales returns
      includes management's estimate of the amount expected to be uncollectible or
      returned on specific accounts and losses or returns on other accounts as yet
      to
      be identified included in accounts receivable. The Distributor provides for
      future returns of home video product at the time the products are sold. The
      Distributor calculates an estimate of future returns of product by analyzing
      a
      combination of historical returns, current economic trends, projections of
      consumer demand for its product and point-of-sale data available from certain
      retailers. Based on this information, a percentage of each sale is reserved.
      The
      Distributor also analyzes other factors, including historical experience with
      similar types of sales, information the Distributor receives from retailers
      and
      its assessment of the product's appeal based on domestic box office success
      and
      other research. Actual returns are charged against the reserve.  The
      amounts the Distributor 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


The
      Distributor’s 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. Shipping and handling costs are recorded
      as expenses in the period in which they are incurred. The Distributor regularly
      monitors inventory for excess or obsolete items and makes any valuation
      corrections when such adjustments are needed.






8




ROYALTY
      AND DISTRIBUTION FEE ADVANCES


The
      Distributor’s royalty and distribution fee advances represent fixed minimum
      payments made to program suppliers for exclusive content distribution rights.
      A
      program supplier’s share of exclusive program distribution revenues is retained
      by the Distributor until the share equals the advance(s) paid to the
      program supplier. Thereafter, any excess is paid to the program supplier in
      accordance with deal terms. The Distributor records as a cost of sales an amount
      equal to the program supplier’s share of the net distribution revenues. Revenue
      and cost forecasts are continually reviewed by management and revised when
      warranted by changing conditions. When estimates of total revenues and costs
      indicate that an individual title or group of cross-collateralized titles
      (titles grouped together so that the profits and losses of each are pooled
      for
      an aggregate net profit or loss) which we exploit via home entertainment formats
      will result in an ultimate loss, an impairment charge is recognized to the
      extent that capitalized advance royalties exceed estimated fair value, based
      on
      projected cash flows, in the period when estimated.




LONG-LIVED
      ASSETS


The
      Distributor capitalizes the costs of production and acquisition of film
      libraries. Costs of production include costs of film and tape conversion to
      digital linear tape (“DLT”) master format, menu design, authoring and
      compression. These costs are amortized to cost of revenues 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 not to exceed
      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 unamortized film costs or library to estimated fair value.




STOCK-BASED
      COMPENSATION


Under
      Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based
      Payment”, which was adopted by the Company beginning on January 1, 2006,
      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 using a modified prospective application.
      The valuation provisions apply to new awards and to awards that were outstanding
      on the effective date and subsequently modified or cancelled. Share-based
      compensation expense relates to share-based awards granted subsequent to January
      1, 2006 and share-based awards granted prior to, but not yet vested as of
      January 1, 2006, all based on the grant date fair value.




Subsequent
      to the Closing Date of the TWC Transaction, the Company’s stock-based
      compensation expense consists of expense associated with stock options held
      by
      and subsequently granted to independent members of the Company’s Board of
      Directors.




The
      Distributor records stock-based compensation expense associated with Company
      stock options held by and subsequently granted to the Distributor’s employees
      (the former employees of the Company before the TWC Transaction) in accordance
      with Emerging Issues Task Force (‘EITF’) Issue No. 00-12, “Accounting by an
      Investor for Stock-Based Compensation Granted to Employees of an Equity Method
      Investee”, (“EITF 00-12”).  EITF 00-12 requires that the Distributor
      recognize the costs of stock-based compensation incurred by an investor on
      its
      behalf.




INCOME
      TAXES


The
      Company files a consolidated corporate tax return and accounts for income taxes
      under SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This
      statement requires the recognition of deferred tax assets and liabilities for
      the future consequences of events that have been recognized in the Company’s
      consolidated financial statements or tax returns. The measurement of the
      deferred items is based on enacted tax laws. In the event the future
      consequences of differences between financial reporting bases and the tax bases
      of the Company’s assets and liabilities result in a deferred tax asset, SFAS
      No. 109 requires an evaluation of the probability of being able to realize
      the future benefits indicated by such asset. A valuation allowance related
      to a
      deferred tax asset is recorded when some portion or all of the deferred tax
      asset will not be realized on a more likely than not basis. Based on the
      Company’s assessment of all available evidence, the Company has concluded that
      its deferred tax assets do not meet the “more likely than not” threshold for
      recognition. This conclusion is based primarily on our history of net operating
      losses, annual net operating loss limitations under Internal Revenue Code
      (“IRC”) Section 382, 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. Accordingly, the Company has recorded a full
      valuation allowance on its deferred tax assets and has recorded a net deferred
      tax liability related to its investment in the Distributor. The deferred tax
      liability related to the Distributor is not offset against the deferred tax
      assets as the reversal period for this amount is not considered to be
      determinable on a more likely than not basis.




We
      adopted the provisions of FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
(“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with FASB Statement 109, “Accounting for Income Taxes”, and
      prescribes a recognition threshold and measurement process for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. We have no material unrecognized tax benefits at
      January 1, 2007 or at March 31, 2007.






9




REVENUE
      RECOGNITION


Revenue
      from the sale or licensing of films is recognized by the Distributor upon
      meeting all recognition requirements of SOP 00-2 and Staff Accounting Bulletin
      (“SAB”) No. 104, “Revenue Recognition”, which requires that there is a
      contract with the buyer, delivery or “Street Date” (when it is available for
      sale by the Distributor’s customer) has occurred, the price is determinable, and
      collectability is reasonably assured. The Distributor records revenue upon
      the
      receipt of goods by the customer for titles that do not have a Street Date.
      If a
      title has a Street Date, the Distributor recognizes the initial shipment as
      revenue on that Street Date and all subsequent shipments after the Street Date
      are recognized as revenue upon the receipt of goods by the customer. Under
      revenue sharing arrangements, rental revenue is recognized on or after the
      Street Date and when the Distributor is entitled to receipts and such receipts
      are determinable. Costs of sales and an allowance for returns are recorded
      at
      the time of revenue recognition. 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.




RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS


In
      September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” (“SAB No. 108”). SAB No. 108 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 No. 108
      establishes an approach that requires quantification of financial statement
      errors based on the effects on 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 have
      determined that there is no material impact from SAB No. 108 on our consolidated
      balance sheet, results of operations and cash flows.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
      permits entities to choose to measure many financial instruments and certain
      other items at “fair value”. The objective is to improve financial reporting by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. SFAS No. 159 is expected
      to
      expand the use of fair value measurement, which is consistent with the FASB’s
      long-term measurement objectives for accounting for financial instruments.
      SFAS
      No. 159 is effective for the first fiscal year that begins after November 15,
      2007. We do not believe the impact SFAS No. 159 will be material to our
      condensed consolidated financial statements.




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




Summaries
      of the statement of operations, balance sheets and the computations of the
      Company’s equity in net loss of the Distributor are shown below.




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


GENIUS
        PRODUCTS, LLC
 CONDENSED
        CONSOLIDATED STATEMENT OF OPERATIONS
 FOR
        THE
        THREE MONTHS ENDED MARCH 31, 2007
 (IN
        THOUSANDS)
 
 Revenues,
                  net of sales, returns, discounts and allowances of $31,672
              
              $
              83,117Total
                  cost of revenues
              
              
              (76,155
              )Gross
                  profit
              
              
              6,962Total
                  operating expenses
              
              
              (9,098
              )Loss
                  from operations
              
              
              (2,136
              )Interest,
                  net
              
              
              (263
              )Net
                  loss
              
              $
              (2,399
              )


10


GENIUS
        PRODUCTS, LLC
 CONDENSED
        CONSOLIDATED BALANCE SHEET
 AS
        OF
        MARCH 31, 2007
 (IN
        THOUSANDS)
 
 ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              10,502Accounts
                  receivable, net of allowance for doubtful accounts and sales returns
                  of
                  $42,908
              
              
              93,066Inventories,
                  net of reserves for obsolescence of $10,763
              
              
              9,734Prepaid
                  expenses and other current assets
              
              
              3,205Total
                  current assets
              
              
              116,507Restricted
                  cash
              
              
              312Property
                  and equipment, net
              
              
              791Royalty
                  advances
              
              
              24,598Film
                  library, net of accumulated amortization of $811
              
              
              7,774Goodwill
              
              
              84,982Other
                  intangible assets, net of accumulated amortization of
                  $4,311
              
              
              15,280Deposits
                  and other
              
              
              205Total
                  assets
              
              $
              250,449LIABILITIES
                  AND MEMBERS' EQUITYCurrent
                  liabilities:Accounts
                  payable
              
              
              24,144Remittance
                  to licensors, including related party
              
              
              83,266Accrued
                  advertising and marketing
              
              
              16,531Other
                  accrued expenses
              
              
              8,189Deferred
                  revenue
              
              
              22,870Notes
                  payable
              
              
              218Total
                  current liabilities
              
              
              155,218Total
                  members' equity
              
              
              95,231Total
                  liabilities and member's equity
              
              $
              250,449
 Our
          equity in net loss of the Distributor is adjusted each period for non-cash
          basis
          differences between the investment and the underlying equity in the Distributor
          and for the impact of certain costs incurred by the Distributor on behalf
          of the
          Company.
  For
                    the three months ended March 31, 2007Genius
                    Products, Inc. 30% share of net loss from the Distributor
                
                $
                720Adjustments
                    for basis differences
                
                
                1,111Charge
                    for stock compensation for Distributor employees
                
                
                397Equity
                    in net loss from Distributor
                
                $
                2,228


11


**NOTE
      4.UNAUDITED
      RESTATEMENT OF****QUARTER
      ENDED MARCH 31, 2006**  On
        April
        12, 2007, we determined that it was necessary to restate our unaudited
        consolidated financial statements and other financial information as of and
        for
        the quarter ended March 31, 2006. The restatements that we made at that time
        related to the following corrections of errors:
  1.
        The
        Company revised the computation of its stock option non-cash compensation
        expense under the provisions of SFAS No. 123R and EITF 96-18, “Accounting for
        Equity Instruments That Are Issued to Other Than Employees for Acquiring,
        or in
        Conjunction with Selling, Goods or Services” (“Stock Option Compensation
        Expense”), for the fiscal quarter ended March 31, 2006. For the three months
        ended March 31, 2006 the Company decreased its stock compensation expense
        by
        $0.1 million




2.
      The
      Company revised its reported net revenue amounts for the fiscal quarter ended
      March 31 2006 to properly reflect net revenue in the appropriate periods and
      to
      comply with the provisions of EITF 01-09, “Accounting for Consideration Given by
      a Vendor to a Customer.” The total non-cash adjustment required to decrease
      revenue for the three months ended March 31, 2006 was $0.7 million.




3.
      The
      Company revised its advertising and marketing expense to properly expense
      advertising and marketing related items as incurred and revised participations
      expense to comply with the provisions of SOP 00-2. The Company increased
      advertising and marketing expense by $2.6 million and reduced participation
      expense by $1.5 million for the three months ended March 31,
      2006.




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




5.
      The
      Company revised its tax provision amounts for the fiscal quarter ended March
      31,
      2006 to properly reflect its tax provision for this period.  The need
      for this correction resulted from the liability recognized in purchase
      accounting in connection with the Wellspring acquisition. For the three months
      ended March 31, 2006, the Company decreased its tax provision by approximately
      $46,000.




6.
      The
      Company revised the presentation of its advertising and marketing expenses
      and
      bad debt expense for the fiscal quarter ended March 31, 2006 to reclassify
      these
      amounts from operating expenses to cost of revenues.




The
      effects of the restatement on net revenues, cost of revenues, gross profit,
      provision for taxes, net loss, basic and diluted loss per common share, accounts
      receivable, film library, accrued expenses, and stockholders’ equity as of and
      for the quarter ended March 31, 2006 are reflected in the accompanying unaudited
      condensed consolidated financial statements, footnotes and
      schedules.




**NOTE
      5.** **** **COMMITMENTS
      AND CONTINGENCIES**




As
      of
      March 31, 2007, we did not have any future minimum annual rental commitments
      under existing non-cancelable operating leases since at the Closing Date of
      the
      TWC Transaction we transferred all of our lease obligations to the Distributor.




We
      may be
      subject to penalties of up to $1 million per month associated with the late
      filing of our Quarterly Report on Form 10-Q which has prevented us from
      maintaining current registration statements related to several equity issuances.




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




NEBG MATTER


We
      disclosed in our Annual Report on Form 10-K for the year ended December 31,
      2006
      a complaint filed against the Company, the Distributor and TWC Holdings
      (collectively, “Defendants”) by NEBG, LLC, Nolan Anaya dba Captain Video and
      Todd Zaganiacz dba Video Zone (collectively, “Plaintiffs”) in the Superior Court
      of Massachusetts (the “Court”). On May 18, 2007, the Court dismissed all of
      Plaintiffs’ claims against Defendants and this case is now
      closed.




12


WELLSPRING/WINSTAR
        MATTER
 We
        have
        disclosed in prior reports filed with the SEC a complaint filed against
        Wellspring Media, Inc. (“Wellspring”) in U.S. Bankruptcy Court for the District
        of Delaware by the Chapter 7 Trustee of the Winstar Communications, Inc.
        Estate
        (the “Trustee”). On May 8, 2007, Wellspring entered into a Settlement Agreement
        with the Trustee pursuant to which the Trustee released Wellspring and the
        Company, among others, from all claims relating to the dispute in exchange
        for
        Wellspring’s agreement to pay to the Trustee a cash settlement amount of
        $563,700. The former indirect owners of Wellspring have agreed to pay the
        settlement amount in satisfaction of their indemnification obligations to
        Wellspring.
  FALCON
        PICTURE GROUP MATTER
 We
        have
        disclosed in prior reports filed with the SEC a complaint filed against the
        Company in the Circuit Court of Cook County, Illinois by Falcon Picture Group,
        LLC (“Falcon”), and the related counterclaim filed by the Company against Falcon
        and its owner, Carl Amari. There have been no material developments in these
        matters.




**NOTE
      6.** **** **STOCKHOLDERS'
      EQUITY**




COMMON
      STOCK


During
      the three months ended March 31, 2006, we issued 49,472 common shares
      related to the exercise of warrants for proceeds of approximately $46,000.
      Additionally, during the three months ended March 31, 2006, we issued
      125,000 common shares related to the exercise of options for proceeds of
      approximately $139,000.




During
      the three months ended March 31, 2006, we issued 10,000 common shares for
      services rendered.




During
      the three months ended March 31, 2007, we issued 1,491,073 common shares
      related to the exercise of warrants for proceeds of $0.8 million. Additionally,
      during the three months ended March 31, 2007, we issued 625,493 common
      shares related to the exercise of options for proceeds of $1.1
      million.




SERIES
      W
      PREFERRED STOCK


As
      a
      condition to the closing of the TWC Transaction, we issued 100 shares of Series
      W Preferred Stock to TWC Holdings and its first-tier subsidiary, W-G Holdings
      (collectively, the “TWC Holders”). The Series W Preferred Stock provides the
      holders with significant rights, preferences and powers as described in Note
      1.




NON-EMPLOYEE
      WARRANTS


We
      did
      not issue any warrants during the first quarter of 2007.




A
      summary
      of warrant activity follows:


Warrants
                Outstanding
              
              Weighted
                Average
                Exercise
                Price
              
              Aggregate
                Intrinsic
                ValueDecember
                  31, 2006
              
              
              14,786,054
              
              $
              2.21Exercised
              
              
              (2,439,018
              )
              
              1.57
              
              $
              3,675,425March
                  31, 2007
              
              
              12,347,036
              
              $
              2.34
              
              $
              7,469,593Warrants
                  exercisable, March 31, 2007
              
              
              12,347,036
              
              $
              2.34
              
              $
              7,469,593
 The
        following information applies to warrants outstanding at March 31,
        2007:


Warrants
                Outstanding
              
              Average
                remaining
                  life
              
              Weighted
                average
                exercise
                  price
                of
                  warrants
                outstanding
              
              Warrants
                exercisable
              
              Weighted
                average
                exercise
                  price
                of
                  warrants
                exercisableUnder
                  $1.50
              
              
              2,230,937
              
              
              1.10
              
              $
              1.34
              
              
              2,230,937
              
              $
              1.34$1.50
                  - $1.99
              
              
              170,723
              
              
              3.52
              
              
              1.88
              
              
              170,723
              
              
              1.88$2.00
                  - $2.99
              
              
              8,298,376
              
              
              3.30
              
              
              2.48
              
              
              8,298,376
              
              
              2.48$3.00
                  - $3.99
              
              
              1,647,000
              
              
              2.00
              
              
              3.00
              
              
              1,647,000
              
              
              3.0012,347,036
              
              
              2.73
              
              $
              2.34
              
              
              12,347,036
              
              $
              2.34
  13
 **NOTE
        7.** **** **STOCK-BASED
        COMPENSATION**




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 March 31, 2007, we had reserved 27
      million of our common shares for issuance of share-based compensation awards
      under our stock option plans. At March 31, 2007, we had also reserved 7,394,213
      of our common shares for issuance of share-based compensation awards granted
      outside of our stock option plans. 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
      did
      not grant any options during the first quarter of 2007. The amount of
      share-based compensation expense recognized in the three months ended
      March 31, 2007 is based on options issued prior to January 1, 2007 and
      ultimately expected to vest.




Total
      share-based compensation expense recognized for the three months ended March
      31,
      2007 was $0.2 million. No income tax benefit was recognized in the statement
      of
      operations for share-based compensation arrangements for either the Company
      or
      the Distributor.




A
      total
      of $0.6 million of share-based compensation expense related to options issued
      by
      the Company to employees of the Distributor was recorded as compensation expense
      in the statement of operations for the Distributor for the three months ended
      March 31, 2007.




During
      the quarters ended March 31, 2007 and 2006, we received proceeds of $1.1 million
      and $139,000, respectively, related to the exercise of options. We estimated
      share-based compensation expense for the three months ended March 31, 2007
      using
      the Black-Scholes model with the following weighted average
      assumptions:


Three
                  months ended
                March
                  31, 2007Risk
                  free interest rate
              4.5%Expected
                  dividend yield
              -Expected
                  volatility
              106.6%Expected
                  life (in years)
              5.3
 A
        summary
        of option activity follows:


Options
                Outstanding
              
              Weighted
                Average
                Exercise
                Price
              
              Aggregate
                Intrinsic
                ValueDecember
                  31, 2006
              
              
              19,072,494
              
              $
              1.83Exercised
              
              
              (625,493
              )
              
              1.71
              
              $
              796,301Canceled
              
              
              (242,500
              )
              
              4.03March
                  31, 2007
              
              
              18,204,501
              
              $
              1.80
              
              $
              21,227,422Options
                  exercisable, March 31, 2007
              
              
              13,678,481
              
              $
              1.74
              
              $
              16,918,399
 The
        following information applies to options outstanding at March 31,
        2007:


Options
                Outstanding
              
              Average
                remaining
                  life
              
              Weighted
                average
                exercise
                  price
                of
                  options
                outstanding
              
              Options
                exercisable
              
              Weighted
                average
                exercise
                  price
                of
                  options
                exercisableUnder
                  $1.50
              
              
              2,169,972
              
              
              4.69
              
              $
              0.67
              
              
              2,169,972
              
              $
              0.67$1.50
                  - $1.99
              
              
              10,955,029
              
              
              7.65
              
              
              1.72
              
              
              7,610,676
              
              
              1.66$2.00
                  - $2.99
              
              
              4,068,500
              
              
              7.77
              
              
              2.17
              
              
              2,886,833
              
              
              2.11$3.00
                  - $3.99
              
              
              793,750
              
              
              6.83
              
              
              3.00
              
              
              793,750
              
              
              3.00$4.00
                  + over
              
              
              217,250
              
              
              3.90
              
              
              5.79
              
              
              217,250
              
              
              5.7918,204,501
              
              
              7.24
              
              $
              1.80
              
              
              13,678,481
              
              $
              1.74
  14
 **NOTE
        8.** **** **INCOME
        TAXES**




The
      Company recorded a federal and state tax provision of $0.1 million in the first
      quarter of 2007. The tax provision resulted from the net increase in the
      deferred tax liability related to our investment in the Distributor. As noted
      above, the Company currently has a full valuation allowance on its deferred
      tax
      assets and has recorded a net deferred tax liability relating to its investment
      in Distributor.




**NOTE
      9.**  **SUBSEQUENT
      EVENTS**




On
      April
      1, 2007, the Distributor acquired all the membership interest of Castalian
      Music, LLC, a fully integrated direct response TV marketing and fulfillment
      service for the music and video entertainment industry, from EMI North America
      for $3.5 million. The transaction will be accounted for as a purchase in the
      second quarter of 2007.





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




The
      following discussion of our financial condition and results of operations should
      be read in conjunction with the financial statements and notes thereto contained
      in this report. The discussion contains forward-looking statements that relate
      to future events or our future financial performance that involve known and
      unknown risks, uncertainties and other factors that may cause our actual
      results, levels of activity, performance or achievements to be materially
      different from those expressed or implied by the forward-looking statements.
      For
      additional information concerning these factors, see the information under
      the
      caption “Risk Factors” in our Annual Report on Form 10-K for the year ended
      December 31, 2006.




**NATURE
      OF BUSINESS**




The
      Company, along with TWC Holdings and its first-tier subsidiary, W-G Holdings,
      own the Distributor, a leading entertainment products company that distributes,
      licenses, acquires and produces an expanding library of feature films,
      television programming, family, lifestyle and trend entertainment on digital
      distribution technologies and on videogram, which encompasses videocassettes,
      videodiscs, videotapes, DVDs, other emerging platforms such as the new
      high-definition DVD formats, Universal Media Disc, CD-ROM, DVD-ROM and all
      other
      hard carrier devices.




The
      Distributor primarily focuses on the following four core, branded content areas,
      frequently referred to as “Content Verticals”:




·
            Theatrical/Independent
                Films(includes Independent Film Channel (IFC)®,
                RHI
                EntertainmentTM
                (Hallmark
                library), The Weinstein Company®
                and
                WellspringTM)




·
            Sports(includes ESPN® and World Wrestling Entertainment®
                (“WWE”))




·
            Lifestyle(includes Animal Planet, The Learning Channel (TLCTM)
                and
                WellspringTM)




·
            Family/Faith(includes Classic Media, Discovery KidsTM,
                Entertainment Rights and Sesame Workshop®)





The
      Distributor’s agreements with TWC, ESPN®, Classic Media, Sesame Workshop®, World
      Wrestling Entertainment, Inc.® and Discovery Communications, in combination with
      our acquisition of the Wellspring library in 2005, gives the Distributor a
      substantial library of high quality content comprising approximately 3,500
      feature films and documentaries and 4,000 **** hours
      of
      television programming. We believe that the Distributor’s catalog of titles is
      integral to a well-balanced content portfolio that can generate substantial
      revenues with a diverse group of retailers and wholesalers.




The
      Distributor’s business strategy is to leverage its increasing market share and
      retail sales volumes from its relationships with TWC and other key content
      providers to add additional content partners, engage in profitable production
      and licensing of new content, and expand into complementary businesses such
      as
      interactive software (video games), mobile devices and licensing of our
      proprietary brands and content. The Distributor intends to continue to acquire
      rights to film and television libraries and enter into distribution agreements
      with new branded content suppliers.




15




The
      Distributor currently has the exclusive U.S. home video distribution rights
      to
      feature film and direct-to-video releases owned or controlled by TWC, a film
      company created by Robert and Harvey Weinstein. The Distributor has released
      over 50 TWC titles on DVD, including the following recent or forthcoming
      titles:




·
            *School
                for Scoundrels*,
                starring Billy Bob Thornton;


·
            *Black
                Christmas*,
                starring Michelle Trachtenberg and Lacey
                Chabert;


·
            *Bobby*,
                starring Anthony Hopkins, Sharon Stone, Lawrence Fishburne, Demi
                Moore,
                William H. Macy, Lindsay Lohan, and Elijah
                Wood;


·
            *Arthur
                and the Invisibles*,
                starring Freddie Highmore;


·
            *Hannibal
                Rising*,
                starring Gong Li and Dominic West;


·
            *Factory
                Girl*,
                starring Sienna Miller and Jimmy Fallon;
                and


·
            *Miss
                Potter,*starringRenee
                Zellweger and Ewan McGregor.




The
      Distributor maintains in perpetuity distribution rights for TWC content released
      during the term of the Distributor’s distribution agreement with TWC (the “TWC
      Distribution Agreement”).




Under
      the
      TWC Distribution Agreement, TWC granted a license to the Distributor to
      manufacture, promote and sell in the U.S. and its territories and possessions,
      through December 31, 2010 (or December 31, 2013 if TWC extends the term), DVDs,
      videocassettes and other forms of pre-recorded home video of feature films
      and
      direct-to-video releases which TWC has the right to distribute on home video.
      These releases include films produced by TWC as well as films which TWC acquires
      or obtains the right to distribute on home video. The TWC Distribution Agreement
      provides that the Distributor will earn a fee on net sales of these home video
      products, depending on the level of these sales compared to theatrical box
      office revenues for the same films. The Distributor collects the proceeds from
      sales of home video products and remits these proceeds to TWC, minus the
      Distributor’s distribution fee, cost of goods sold (including manufacturing
      expenses) and certain marketing expenses.




The
      TWC
      Distribution Agreement contains complex provisions relating to payments,
      permitted expenses and other adjustments, and the foregoing discussion is
      intended only as a summary. For further information, the full text of the TWC
      Distribution Agreement is included as an exhibit to the Company’s Annual Report
      on Form 10-K.




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





All
      of
      the operations of the Company relate to the activity of the Distributor. The
      Company accounts for our investment in the Distributor using the equity method
      of accounting. On our consolidated statement of operations subsequent to the
      Closing Date of the TWC Transaction, we recorded our 30% share of the
      Distributor’s profit or loss as equity in net earnings (loss) from Distributor,
      adjusted for basis differences and costs incurred by the Distributor on behalf
      of the Company. Pursuant to Accounting Principles Board Opinion No. 18, “The
      Equity Method of Accounting for Investments in Common Stock”, we will
      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. Under the equity method of accounting, only
      our
      investment in and amounts due to and from the Distributor have been included
      as
      an asset in our consolidated balance sheet.




We
      did not compare the results of operations for the three months ended March
      31,
      2007 and 2006 due to the fact that the results of operations would not be
      comparable. The discussion below includes a description of the results of the
      Company and the Distributor for the quarter ended March 31, 2007.





*Revenues*




The
      Company had no revenue for the three months ended March 31, 2007. All of the
      revenue is reflected in the results of operations of the
      Distributor.




The
      Distributor generated revenues of $83.1 million, net of sales returns, discounts
      and allowances of $31.7 million for the three months ended March 31, 2007.
      Revenues for the three months ended March 31, 2007 were primarily composed
      of
      sales of TWC titles, *The
      Protector,*  *School
      for Scoundrels* , *Clerks
      2* ,
      and *Harsh
      Times* and sales of
      branded content including ESPN and WWE.




Consistent
      with other retail product distributors, the Company has experienced some degree
      of sales seasonality; however, subsequent to the July 21, 2006 completion of
      the
      TWC Transaction, sales seasonality will be reflected in the revenues and
      operations of the Distributor directly, and in the Company’s results of
      operations indirectly, through its equity interest in the
      Distributor.




We
      have
      also historically experienced higher returns during the first two quarters
      than
      during the last two quarters. However, historic changes in revenues may not
      be
      indicative of future trends and may not track industry seasonality norms.




16




*Costs
      and expenses*




*Cost
      of Revenues*




Cost
      of
      revenues consists primarily of the raw material and manufacturing costs of
      products sold to customers, packaging and shipping costs, advertising and
      marketing, amortization of our film library, and participations and royalties.
      Participation expenses related to TWC’s distribution agreement are accrued in
      the proportion that current year’s revenues for a title bear to management’s
      estimate of the ultimate revenue expected to be recognized for that
      title.




The
      Company had no cost of revenues for the three months ended March 31, 2007.
      All
      of the cost of revenues is reflected in the results of operations of the
      Distributor.




The
      Distributor’s cost of revenues for the three months ended March 31, 2007 include
      the following:




Manufacturing
      and distribution expenses were $29.1 million for the three months ended March
      31, 2007. Manufacturing and distribution expenses are primarily due to the
      video
      release of TWC’s titles during such period.




Advertising
      and marketing expenses were $8.8 million during the three months ended March
      31,
      2007. Advertising and marketing is primarily attributable to the advertising
      campaigns for the video release of TWC’s *The
      Protector, School for Scoundrels, Harsh Times, Black Christmas, and Bobby.* Advertising
      and marketing expenses are recorded in the period in which these expenses are
      incurred.




Amortization
      and participation expenses were $38.2 million for the three months ended March
      31, 2007. Amortization and participation expenses include amortization of film
      library and participation expenses related to TWC and other
      licensors.




*Operating
      Expenses*




The
      Company had general and administrative expenses of $0.5 million for the three
      months ended March 31, 2007. The general and administrative expenses reflect
      an
      allocation of the public company costs borne by the Distributor on behalf of
      the
      Company.




The
      Distributors’s general and administrative expenses were $9.1 million for the
      three months ended March 31, 2007 and amounted to 11% of net
      revenues.




During
      the three months ended March 31, 2007, the Company’s 30% equity in the net loss
      of the Distributor was $2.2 million.




*Other
      Income and Expense*




The
      Company had interest income of $0.05 million during the three months ended
      March
      31, 2007. Interest income relates to interest earned on outstanding cash
      balances. The Company had income tax expense of $0.1 million for the three
      months ended March 31, 2007. As result of the foregoing, the Company’s net loss
      was $2.8 million for the three months ended March 31, 2007.




The
      Distributor had interest income of $0.2 million and interest expense of $0.5
      million during the three months ended March 31, 2007. Interest income relates
      to
      interest earned on outstanding cash balances. Interest expense relates to
      interest on outstanding balances due to licensors. As result of the foregoing,
      the Distributor’s net loss was $2.4 million for the three months ended March 31,
      2007.




**LIQUIDITY
      AND CAPITAL RESOURCES**




Net
      cash
      provided by operations during the three months ended March 31, 2007 was $0.6
      million, primarily due to equity in net losses for Distributor, stock
      compensation expense, and increases in accrued expenses and other.




Cash
      provided by financing activities for three months ended March 31, 2007 was
      $1.9
      million, due to proceeds from the exercise of warrants and options.




17




At
      March
      31, 2007, the Company had cash balances of $6.2 million and the Distributor
      had
      cash balances of $10.5 million.




We
      may
      consider additional issuance of equity and/or 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 2007, 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 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
      March 31, 2007, the Distributor’s cash and cash equivalents were invested
      with financial institutions with investment grade credit ratings. Due to the
      short duration of the Distributor’s investment portfolio and the high quality of
      the Distributor’s investments, an immediate 10% change in interest rates would
      not have a material effect on the fair market value of the Distributor’s
      portfolio. Therefore, we would not expect the Distributor’s operating results or
      cash flows to be affected to any significant degree by the effect of a sudden
      change in market interest rates on the Distributor’s investment
      portfolio.




Neither
      we nor the Distributor enter into hedging or derivative instrument
      arrangements.





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





**Disclosure
      Controls and Procedures**




Disclosure
      controls and procedures (as defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other
      procedures that are designed to provide reasonable assurance that the
      information that we are required to disclose in the reports that we file or
      submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the SEC’s rules and forms, and that such
      information is accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate to allow
      timely decisions regarding required disclosure.




In
      connection with the preparation of this Quarterly Report, our management, with
      the participation of our Chief Executive Officer and our Chief Financial
      Officer, carried out an evaluation of the effectiveness of the design and
      operation of our disclosure controls and procedures as of March 31, 2007. In
      making this evaluation, our management considered the matters relating to the
      restatement of our financial statements for the quarters ended March 31,
      June 30 and September 30, 2006, and the material weaknesses 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 March 31, 2007.




In
      light
      of the material weaknesses described below, we performed additional analyses
      and
      other procedures to ensure that our consolidated financial statements included
      in this Quarterly Report were prepared in accordance with generally accepted
      accounting principles (“GAAP”). These measures included, among other things,
      expansion of our end-of-quarter closing procedures, including the expanded
      review and analysis of the accounting between the Company and the Distributor,
      and dedication of significant internal resources and external consultants to
      scrutinize account analyses, reserve estimates, asset valuations, proper
      accounting treatment for revenues and expenses and account reconciliations
      at a
      detailed level. 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.




Our
      management, under the supervision of our Chief Executive Officer and Chief
      Financial Officer, is responsible for establishing and maintaining adequate
      internal control over financial reporting. Internal control over financial
      reporting is a process designed to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external purposes in accordance with GAAP. Internal control over financial
      reporting includes policies and procedures that (i) pertain to the maintenance
      of records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of the assets of the Company, (ii) provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with GAAP, and that receipts
      and expenditures of the Company are being made only in accordance with
      authorizations of management and directors of the Company, and (iii) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use, or disposition of the Company’s assets that could have a
      material effect on the financial statements.




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.




18




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 identified certain material weaknesses in our internal control over
      financial reporting as of December 31, 2006 (disclosed in our Annual Report
      on
      Form 10-K for that year).




As
      of
      March 31, 2007, we have successfully remediated the lack of controls over the
      following items disclosed at December 31, 2006: (i) proper presentation of
      marketing related expenses associated with revenue generated from ‘Revenue
      Share” parties; and (ii) proper application of the provisions of SOP 00-2,
“Accounting by Producers or Distributors of Films” for the recognition of
      revenue and expenses associated with the Distributor’s agreement with TWC. We
      did not have a transaction similar to the TWC Transaction and our general and
      specific improvements noted in the paragraphs below have precluded a similar
      situation with regard to controls and errors surrounding the TWC Transaction.
      Therefore, management concluded that the items described above were no longer
      material weaknesses.




As
      of
      March 31, 2007, we continued to have ineffective controls over the following
      items: (i) timely and routine process for reconciling certain accounts to the
      general ledger; (ii) detailed documentation and analysis to support certain
      reserve estimates; (iii) proper application of stock compensation expense and
      incomplete record keeping related to stock option grants; (iv) timely assessment
      of accounts for realizability or impairment; (v) formal process over changes,
      access and controls and procedures related to our information technology
      systems; and (vi) proper control of sales cut-off and measurement at the end
      of
      accounting periods.




While
      we
      have taken actions in this first quarter to remediate these items, there has
      not
      been sufficient time to evaluate the effectiveness of our remediation as of
      March 31, 2007. Such continuing control deficiencies related primarily to the
      fact that our internal accounting personnel did not yet have sufficient depth,
      skills and experience to recognize errors and deficiencies in accounting
      policies and procedures required to properly account for the items described
      in
      the preceeding paragraph.




As
      a
      result of the material weaknesses described above and the fact that sufficient
      time has not elapsed to fully evaluate the effectiveness of the actions we
      have
      taken to correct them, our management concluded that as of March 31, 2007,
      we did not maintain effective internal control over financial
      reporting.




The
      foregoing control deficiencies caused certain errors in our financial statement
      accounts during 2006 and required adjustments of our financial statements.
      These
      errors were discovered by senior management and Ernst & Young LLP in
      connection with work on the audit for fiscal 2006. We intend to file amendments
      to our Quarterly Reports on Form 10-Q for the periods ending March 31,
      June 30 and September 30, 2006 reflecting these adjustments.
      Adjustments related to the period ended March 31, 2006 are discussed under
      Note
      4 to our condensed consolidated financial statements included in this Form
      10-Q.




In
      response to the continuing identified material weaknesses, we have taken action
      to remediate the specific accounting policies and procedures which led to the
      errors requiring restatement. We have established additional policies and
      enhanced the procedures that we will follow and have addressed these items
      as
      follows: (i) the Company has added additional accounting and financial personnel
      with industry experience, is implementing a formal closing process, has employed
      an experienced financial executive to oversee internal controls and procedures
      implementation, and engaged experienced outside consultants to assist the
      Company in complying with the requirements of Sarbanes Oxley by December 31,
      2007; (ii) the Company established formal processes and procedures including
      a
      review conducted by the Company’s senior executives to ensure appropriate
      documentation and analyses for all reserve estimates; (iii) the Company has
      engaged the services of an independent stock administration firm to assist
      with
      transactions, recordkeeping and the computation of compensation expense related
      to its stock options, allocated personnel within the organization to oversee
      the
      administration of stock options and performed a review of stock option grants
      to
      ensure accuracy of the information; (iv) the Company has implemented a periodic
      review process to assess the recoverability of amounts invested in specific
      projects; (v) the Company has hired an information technology professional
      and
      is currently in the process of hiring an additional professional to ensure
      formal processes are implemented with respect to changes, controls, access
      and
      standardized procedures. Additionally, the Company has engaged a major
      information technology infrastructure provider, that is SAS 70 compliant, to
      assist with hosting the Company’s financial systems; and (vi) the Company has
      implemented additional procedures and training of its accounting staff with
      respect to proper sales cut-off procedures at the end of accounting periods.
      As
      a result of these changes, we do not expect that the type of adjustments
      discussed in Note 4 to the condensed consolidated financial statements of the
      Company will recur.




We
      intend
      to further expand our internal accounting personnel, information technology
      systems and personnel and compliance capabilities by attracting additional
      talent, enhancing training and implementing system and process improvements
      in
      our accounting and record keeping. These ongoing efforts are focused on
      implementing process changes to strengthen our internal control and monitoring
      activities.




**Changes
      in Internal Control over Financial Reporting**




Other
      than as described above, there were no changes in our internal control over
      financial reporting during the quarter ended March 31, 2007, that materially
      affected, or are reasonably likely to affect, our internal control over
      financial reporting.




19




**PART
      II - OTHER INFORMATION**





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




Except
      as
      described below, neither we nor the Distributor are a party to any legal or
      administrative proceedings, other than routine litigation incidental to our
      business and that of the Distributor that we do not believe, individually or
      in
      the aggregate, would be likely to have a material adverse effect on our, or
      the
      Distributor’s, financial condition or results of operations.




**NEBG
      MATTER**




We
      disclosed in our Annual Report on Form 10-K for the year ended December 31,
      2006
      a complaint filed against the Company, the Distributor and TWC Holdings
      (collectively, “Defendants”) by NEBG, LLC, Nolan Anaya dba Captain Video and
      Todd Zaganiacz dba Video Zone (collectively, “Plaintiffs”) in the Superior Court
      of Massachusetts (the “Court”). On May 18, 2007, the Court dismissed all of
      Plaintiffs’ claims against Defendants and this case is now closed.





**WELLSPRING/WINSTAR
      MATTER**





We
      have
      disclosed in prior reports filed with the Securities and Exchange Commission
      a
      complaint filed against Wellspring Media, Inc. (“Wellspring”) in U.S. Bankruptcy
      Court for the District of Delaware by the Chapter 7 Trustee of the Winstar
      Communications, Inc. Estate (the “Trustee”). On May 8, 2007, Wellspring entered
      into a Settlement Agreement with the Trustee pursuant to which the Trustee
      released Wellspring and the Company, among others, from all claims relating
      to
      the dispute in exchange for Wellspring’s agreement to pay to the Trustee a cash
      settlement amount of $563,700. The former indirect owners of Wellspring have
      agreed to pay the settlement amount in satisfaction of their indemnification
      obligations to Wellspring.





**FALCON
      PICTURE GROUP MATTER**





We
      have
      disclosed in prior reports filed with the Securities and Exchange Commission
      a
      complaint filed against the Company in the Circuit Court of Cook County,
      Illinois by Falcon Picture Group, LLC (“Falcon”), and the related counterclaim
      filed by the Company against Falcon and its owner, Carl Amari. There have been
      no material developments in these matters. For a complete description of the
      facts and circumstances surrounding this litigation, please see the disclosure
      in our Annual Report on Form 10-K for the year ended December 31, 2006 under
      “Item 3. Legal Proceedings”, which is incorporated herein by reference.





**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,
      2006.





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




None.





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




None.





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





None.




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




None.





20


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





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.







**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:
                June 3, 2007
            
            GENIUS
                PRODUCTS, INC.,
              a
                Delaware CorporationBy:
            /s/
                Trevor DrinkwaterTrevor
                Drinkwater
              President
                and Chief Executive Officer
              (Principal
                Executive Officer)Dated:
                June 3, 2007
            
            By:
            /s/
                John MuellerJohn
                Mueller
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)






21