UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q/A


Amendment
No. 1





(Mark
One)




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




For the
quarterly period ended March 31, 2008




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




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.)




3301
EXPOSITION BLVD., SUITE 100


SANTA
MONICA, CA 90404


(Address
of principal executive offices)




(310)
401-2200


(Registrant's
telephone number, including area code)





(Former
name, former address and former fiscal year,


if
changed since last report)




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




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


Large accelerated
      filer o
              Accelerated filer
      x
              Non-accelerated
      filer o
              Smaller reporting
      company o


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




There
were 67,609,094 shares outstanding of the issuer's Common Stock as of April 30,
2008.















EXPLANATORY
NOTE
 
 During
meetings held on October 8, 2008 and November 13, 2008, the Audit Committee of
the Board of Directors of Genius Products, Inc. (the “Company”), acting on a
recommendation from the Company’s management, determined that it was necessary
to restate (i) the Company’s unaudited consolidated financial statements and
other financial information as of and for the three months ended September 30,
2006, March 31, June 30 and September 30, 2007 and March 31 and June 30, 2008,
and (ii) the audited consolidated financial statements and other financial
information of the Company and Genius Products, LLC (the “Distributor”) as of
December 31, 2006 and 2007 and for the periods then ended.
 
 The
aforementioned restatements relate to (i) an error in the application of
generally accepted accounting principles with respect to the recognition in the
Company’s financial statements of costs paid on its behalf by the Distributor
and (ii) an error in the application of generally accepted accounting principles
with respect to the accounting classification and measurement of certain
redemption rights of the holders of the Distributor’s Class W
Units.
 
 The
Company’s prior accounting methodology with respect to costs paid on its behalf
by the Distributor was based on the view that such costs should be recognized in
the Company’s financial statements to the extent of the Company’s economic
participation and ownership interest in the Distributor.  The Company
has now determined that it should recognize all such costs incurred on its
behalf by the Distributor in the Company’s financial
statements.
 
 The
Distributor’s prior accounting methodology with respect to the accounting
classification and measurement of the aforementioned redemption rights did not
properly classify and measure the Distributor’s Class W Units as redeemable
securities.  The Distributor will now recognize, as an asset, the fair
market value of such redemption rights in the Distributor’s financial
statements.  In addition, the Distributor has now recorded the
redeemable Class W Units outside of permanent equity in its financial
statements.  This accounting change in the Distributor’s financial
statements has also resulted in the need to restate the Company’s financial
statements to reflect a corresponding liability related to the aforementioned
redemption rights at the end of each of the aforementioned reporting
periods.
 
 The
impact of these restatements as of and for the three months ended March 31, 2007
and March 31, 2008, are further discussed in Note 3 and Note 5 to the unaudited
condensed consolidated financial statements of the Company included
herein.
 
 This
amendment is being filed for the purpose of amending and restating Items 1 and 2
of Part I and Item 6 of Part II of the Company’s Quarterly Report on Form 10-Q
originally filed with the Securities and Exchange Commission on May 12, 2008,
solely to the extent necessary (i) to reflect the restatement of the Company’s
unaudited condensed consolidated financial statements as of and for the three
months ended March 31, 2007 and 2008, as described in Note 3 and Note 5 to the
unaudited condensed consolidated financial statements of the Company, (ii) to
make revisions to “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” as warranted by the restatements, (iii) to update the
certifications required by the Sarbanes-Oxley Act of 2002, and (iv) to update
the exhibits .






2




GENIUS
PRODUCTS, INC. AND SUBSIDIARIES




INDEX




PAGEPART I
                  FINANCIAL INFORMATIONItem 1
                  Financial
      Statements
                  4Condensed
      consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31,
      2007
                  5Condensed
      consolidated Statements of Operations for the Three Months Ended March 31,
      2008  and 2007 (unaudited)
                  6Condensed
      consolidated Statements of Cash Flows for the Three Months Ended March 31,
      2008  and 2007 (unaudited)
                  7Notes
      to Condensed consolidated Financial Statements (unaudited)
                  8Item 2
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  20Item 3
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  25Item 4
                  Controls
      and Procedures
                  25PART II
                  OTHER INFORMATIONItem 1
                  Legal
      Proceedings
                  26Item 1A
                  Risk
      Factors
                  26Item 2
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  26Item 3
                  Defaults
      Upon Senior Securities
                  27Item 4
                  Submission
      of Matters to a Vote of Security Holders
                  27Item 5
                  Other
      Information
                  27Item 6
                  Exhibits
                  27SIGNATURES
                  28




3


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.


4


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,
                    2008
                  
                  
                  December
      31,Restated
      (Note 3)
                  
                  
                  2007(unaudited)
                  
                  
                  RestatedASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  1,822
                  
                  
                  $
                  1,757Prepaid
      expenses and other current assets
                  
                  
                  110
                  
                  
                  
                  110Notes
      Receivable from Distributor, net
                  
                  
                  8,352
                  
                  
                  
                  -Total
      current assets
                  
                  
                  10,284
                  
                  
                  
                  1,867Notes
      Receivable from Distributor, net
                  
                  
                  -
                  
                  
                  
                  8,191Investment
      in Distributor
                  
                  
                  65,527
                  
                  
                  
                  73,002Total
      assets
                  
                  $
                  75,811
                  
                  
                  $
                  83,060LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable to Distributor, net
                  
                  
                  298
                  
                  
                  
                  198Total
      current liabilities
                  
                  
                  298
                  
                  
                  
                  198Class
      W option liability
                  
                  
                  5,691
                  
                  
                  
                  4,168Deferred
      tax liability
                  
                  
                  13,288
                  
                  
                  
                  12,797Total
      liabilities
                  
                  
                  19,277
                  
                  
                  
                  17,163Commitments
      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;67,759,094
      and 67,709,094 shares outstanding, respectively
                  
                  
                  7
                  
                  
                  
                  7Additional
      paid-in capital
                  
                  
                  110,966
                  
                  
                  
                  112,293Accumulated
      deficit
                  
                  
                  (54,439
                  )
                  
                  
                  (46,403
                  )Total
      stockholders' equity
                  
                  
                  56,534
                  
                  
                  
                  65,897Total
      liabilities and stockholders' equity
                  
                  $
                  75,811
                  
                  
                  $
                  83,060See
      accompanying notes to condensed unaudited interim financial
      statements.


5




GENIUS
PRODUCTS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT PER SHARE INFORMATION)


(UNAUDITED)




Three
      Months Ended March 31,2008
              
              
              2007Restated
      (Note 3)
              
              
              Restated
      (Note 3)Operating
      expenses:Selling,
      general and administrative
              
              $
              1,361
              
              
              $
              1,059Equity
      in net loss from Distributor
              
              
              4,787
              
              
              
              2,568Total
      operating expenses
              
              
              6,148
              
              
              
              3,627Loss
      from operations
              
              
              (6,148
              )
              
              
              (3,627
              )Other
      income (expense)
              
              
              (1,397
              )
              
              
              416Loss
      before provision for income taxes
              
              
              (7,545
              )
              
              
              (3,211
              )Provision
      (benefit) for income taxes
              
              
              491
              
              
              
              (2
              )Net
      loss
              
              $
              (8,036
              )
              
              $
              (3,209
              )Basic
      and diluted EPSNet
      loss per share
              
              $
              (0.12
              )
              
              $
              (0.05
              )Basic
      and diluted weighted average shares
              
              
              67,723,929
              
              
              
              64,193,425See
      accompanying notes to condensed unaudited interim financial
      statements.


6




GENIUS PRODUCTS, INC. AND
SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS


(IN THOUSANDS)


(UNAUDITED)




Three
      Months Ended March 31,2008
              
              
              2007Restated
      (Note 3)
              
              
              Restated
      (Note 3)Cash
      flows from operating activities:Net
      loss
              
              $
              (8,036
              )
              
              $
              (3,209
              )Adjustments
      to reconcile net loss to net cash provided by (used in)operating
      activitiesEquity
      in net loss from Distributor
              
              
              4,787
              
              
              
              2,568Operating
      expenses paid by Distributor
              
              
              1,343
              
              
              
              862Stock
      compensation expense
              
              
              (26
              )
              
              
              197Deferred
      tax liability
              
              
              491
              
              
              
              (2
              )Revaluation
      of Class W option liability
              
              
              1,523
              
              
              
              (367
              )Changes
      in assets and liabilities:(Increase)
      decrease in prepaid expenses, notes receivable and
deposits
              
              
              (161
              )
              
              
              83Decrease
      in accounts payable
              
              
              -
              
              
              
              (59
              )Increase
      in Distributor payable
              
              
              100
              
              
              
              -Increase
      in accrued expenses and other
              
              
              -
              
              
              
              491Net
      cash provided by operating activities
              
              
              21
              
              
              
              564Cash
      flows from financing activities:Proceeds
      from exercise of options
              
              
              44
              
              
              
              1,071Proceeds
      from exercise of warrants
              
              
              -
              
              
              
              823Net
      cash provided by financing activities
              
              
              44
              
              
              
              1,894Net
      increase in cash and cash equivalents
              
              
              65
              
              
              
              2,458Cash
      and cash equivalents at beginning of period
              
              
              1,757
              
              
              
              3,745Cash
      and cash equivalents at end of period
              
              $
              1,822
              
              
              $
              6,203See
      accompanying notes to condensed unaudited interim financial
      statements.




7




GENIUS
PRODUCTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(UNAUDITED)




NOTE
1.  NATURE OF BUSINESS





Genius
Products, Inc. (“we”, “us”, “our” or the “Company”), through our 30%-owned
subsidiary, Genius Products, LLC (the “Distributor”), is a leading independent
home entertainment products company that acquires, produces and licenses,
through the Distributor’s multiple distribution agreements with content
partners, an extensive library of motion pictures, television programming,
and  trend entertainment on digital versatile disks (“DVD”) and
digitally.  The Distributor works in partnership with major retailers
to distribute widely recognized home entertainment brands to a diversified
customer base.  The remaining 70% of the Distributor is owned by The
Weinstein Company Holdings LLC (“TWC Holdings”) (which includes a 1% percentage
interest owned indirectly through its wholly-owned subsidiary, W-G Holding Corp.
(“W-G Holding”).  TWC Holdings is the subsidiary company of The
Weinstein Company LLC (“TWC”), the largest provider of content for the
Distributor’s library.





Through
the Distributor, for which the Company serves as managing member, we produce and
distribute a vast and growing content library that encompasses approximately
3,550 feature films and documentaries and 4,000 hours of television
programming.  This library includes feature
films and television programming from critically acclaimed producers such as The
Weinstein Company®, for which the Distributor hasthe exclusive U.S. home
video distribution rights,and RHI EntertainmentTM
(Hallmark library).  Additional content, such as independent films,
sports, family, and lifestyle productions, come from partnerships with
established consumer brands:  IFC®, ESPN®, World Wrestling
Entertainment®, Classic Media, Sesame Workshop®, Discovery KidsTM, Animal Planet
and The Learning Channel (TLCTM).





The
Distributor has developed a fully integrated direct-to-retail distribution
platform that parallels the home entertainment divisions of the major Hollywood
studios.  This platform provides direct sales and marketing, inventory
management and state-of-the-art supply-chain services.  In
collaboration with leading replicators and third-party logistics and
supply-chain companies, the Distributor has rapidly scaled this network, which
has helped to facilitate its rapid growth in revenues.




The
Distributor primarily sells to major national retailers including Wal-Mart,
Blockbuster Entertainment, Best Buy, Circuit City, Kmart, Target, NetFlix,
Costco, Sam’s Club, Amazon, Borders, Toys R Us and Columbia
House.  The Distributor co-produces programming with its branded
content partners and mitigates the impact of its production costs through
minimum guarantees from its retail partners.  We believe that the
strong relationships the Distributor has developed with these well-known
retailers and branded content partners help promote the Distributor’s
programming and heighten consumer awareness of its programs.




The
Distributor collaborates with its retail and content partners to create sales
programs that exploit their widely recognized brands and endorse related
content.  These sales programs focus on brands to provide the retailer
with solutions that simplify the retailer’s buying process, improve shelf-space
utilization and help consumers quickly make informed purchase
decisions.  The Distributor’s ability to deliver unique, innovative
solutions that improve the sales and rentals of its content has enabled it to
compete successfully and maintain strong relationships with its retail and
content partners.




The
Distributor currently distributes its library on DVDs, next-generation
DVD, and electronically in a digital format.  We plan to
continue to expand the distribution of the Distributor’s theatrical and
non-theatrical product through the diverse emerging digital distribution markets
including: Video-on-Demand (“VOD”) and Electronic Sell-Through (“EST”) on the
Internet to companies such as Amazon, Apple, MovieLink and Microsoft,
Internet-based subscription VOD customers (such as NetFlix) and
direct-to-television peer-to-peer network solutions.  Through its
partnerships, the Distributor has released 128 theatrical and non-theatrical
titles since inception (including ninety titles released in
2007).  The Distributor distributes products to basic channels
distributed on cable, Direct Broadcast Satellite (“DBS”) and Internet Protocol
Television (“IPTV”), which delivers television programming to households via a
broadband connection using Internet protocols.




The
Distributor primarily focuses on four core branded content categories that we
call Content Verticals:





·
            Theatrical/Independent
      Films (includes Independent Film Channel (IFC®) , RHI
      EntertainmentTM (Hallmark library), Tartan, The Weinstein
      Company®  and WellspringTM)·
            Sports
      (includes ESPN® and World Wrestling
  Entertainment®)


·
            Lifestyle
      (includes Animal Planet, The Learning Channel (TLCTM) and
      WellspringTM)·
            Family/Faith
      (includes Classic Media, Discovery KidsTM, and Sesame
      Workshop®)





8




THE
WEINSTEIN COMPANY TRANSACTION
 On July
21, 2006 (the “Closing Date”), the Company completed a transaction (the “TWC
Transaction”) with TWC Holdings and W-G Holding (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.
 
 Thus, the
Distributor is owned 70% by TWC Holdings and W-G Holding and 30% by the
Company.  The 70% interest in the Distributor held by TWC Holdings and
W-G Holding consists of Class W Units and is redeemable, at TWC Holdings’ and
W-G Holding’s option commencing at any time from July 21, 2007  for up
to 70% of the Company’s outstanding common stock, or with TWC Holdings’ and W-G
Holding’s approval, cash.   The redemption value of the Class W
Units may not be less than $60.0 million.   The Company’s 30%
membership interest in the Distributor consists of the Distributor’s Class G
Units (see Equity Investment in Distributor section below).
 
 In
addition, the Company issued an aggregate of 100 shares of the Company’s Series
W Preferred Stock to TWC Holdings and W-G Holding in connection with the TWC
Transaction.  The Series W Preferred Stock provides the holders
thereof with (i) the right to elect five of the seven directors on the
Company’s Board of Directors, of which two are currently TWC executives,
(ii) majority voting power over other actions requiring approval of our
stockholders, and (iii) 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, the Company entered into a Registration Rights Agreement with TWC
Holdings and W-G Holding 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 them.  The Company and/or the Distributor
also entered into the following agreements on the Closing Date: (i) an Amended
and Restated Limited Liability Company Agreement of the Distributor, (ii) Video
Distribution Agreement (the “TWC Distribution Agreement”), (iii) Services
Agreement, and (iv) Assignment and Assumption Agreement.
 
 From
December 5, 2005 through the Closing Date, the Company operated under an interim
distribution agreement with TWC and recorded the results from titles we released
for TWC on our consolidated 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.
 
 For a
full description of the TWC Transaction, please see our Current Report on Form
8-K filed with the Securities and Exchange Commission (the “SEC”) on July 26,
2006.
 
 NOTE
2.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
  BASIS
OF PRESENTATION
 
 The
accompanying interim consolidated financial statements are unaudited, but in the
opinion of management, reflect all adjustments necessary for a fair presentation
of the results for the periods indicated.  The results of operations for
any interim period are not necessarily indicative of results for the full year.
 The accompanying financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the year
ended December 31, 2007.
 
 PRINCIPLES
OF CONSOLIDATION
 The
consolidated financial statements include the accounts of the
Company.   All significant inter-company transactions and accounts
have been eliminated in consolidation.
 
 USE OF
ESTIMATES
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS.
 The
carrying amounts of cash and cash equivalents, prepaid expenses, accounts
payable, accrued expenses, and Class W Option Liability approximate the fair
value thereof.





9





INVESTMENT
IN DISTRIBUTOR
 At the
closing of the TWC Transaction, we contributed to the Distributor all of our
operating businesses, including substantially all of our assets, except for $1
million in cash and certain liabilities, and received a 30% equity interest in
the Distributor. The accompanying consolidated financial statements account for
the Company’s investment in the Distributor (30% membership interest represented
by the Distributor’s Class G units) using the equity method of
accounting.  On the Company’s consolidated statement of operations
subsequent to the Closing Date, the Company recorded its 30% share of the
Distributor’s profit or loss as equity in net profit or loss from the
Distributor, adjusted for non-cash basis differences (see Note 5 ) 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”, the Company 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 the Company’s investment in and amounts due to
and from the Distributor have been included as an asset in the Company’s
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.  On the Closing Date, we recorded a gain based on the
difference between the fair market value of assets contributed and their net
book value, reduced for the portion of the gain associated with the retained
economic interest in the Distributor.  The Distributor is treated as a
partnership for U.S. federal income tax purposes.
 
 CLASS
W OPTION LIABILITY
 The
Company records the Class W Option Liability at fair value in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements(“FAS 157”), which the Company adopted beginning on January 1,
2008.  The Company has utilized a lattice valuation model to simulate
future stock movements of the Company’s Common Stock in order to determine the
fair value of the Class W Option Liability.  The assumptions used in
preparing such model include, among other things, inputs such as volatility,
risk-free interest rates, dividend yield, expected time of redemption and
assessment of counterparty risk.
 
 STOCK-BASED
COMPENSATION
 Under
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, are 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 stock-based compensation expense associated with the
former employees of the Company, who became employees of the Distributor as of
the Closing Date, are recorded on the books of the
Distributor.  Stock-based compensation expense is calculated using the
Black-Scholes-Merton formula as our closed-form valuation option pricing model
(the “Option Model”). The Option Model requires the use of subjective and
complex assumptions, per the requirements of FAS123R, that include: (i) the
option's expected term, (ii) the estimated future price volatility of the
underlying stock, (iii) the risk-free interest rate, (iv) the dividend yield and
(v) expected forfeitures.
 
 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.
 
 For a
complete discussion of the Option Model and assumptions used to calculate
stock-based compensation expense, please refer to Note 9
below.
 
 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 basis and the tax basis
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 the entire 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 are not more likely than not to be realized. 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.




10




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
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.  We have no material unrecognized
tax benefits at March 31, 2008.
 
 BASIC AND
DILUTED LOSS PER COMMON SHARE
 Basic EPS
is calculated using income available to common stockholders divided by the
weighted average of common shares outstanding during the year. Diluted EPS is
similar to Basic EPS except that the weighted average of common shares
outstanding is increased to include the number of additional common shares that
would have been outstanding if the potential dilutive common shares, such as
options and warrants, had been issued. The treasury stock method is used to
calculate dilutive shares and reduces the gross number of dilutive shares by the
number of shares purchasable from the proceeds of the options assumed to be
exercised.
 
 The
effects of the potentially dilutive securities (options and warrants that are
outstanding) were not included in the computation of diluted loss per share for
the periods presented since to do so would have been anti-dilutive.
 
 NOTE
3.                      RESTATEMENT
OF FINANCIAL STATEMENTS OF THE COMPANY
 
 During
meetings held on October 8, 2008 and November 13, 2008, the Audit Committee of
the Board of Directors of the Company, acting on a recommendation from the
Company’s management, determined that it was necessary to restate (i) the
Company’s unaudited consolidated financial statements and other financial
information as of and for the three months ended September 30, 2006, March 31,
June 30 and September 30, 2007 and March 31 and June 30, 2008, and (ii) the
audited consolidated financial statements and other financial information of the
Company and the Distributor as of December 31, 2006 and 2007 and for the periods
then ended.
 
 The
aforementioned restatements relate to (i) an error in the application of
generally accepted accounting principles with respect to the recognition in the
Company’s financial statements of costs paid on its behalf by the Distributor
and (ii) an error in the application of generally accepted accounting principles
with respect to the accounting classification and measurement of certain
redemption rights of the holders of the Distributor’s Class W
Units.
 
 The
Company’s prior accounting methodology with respect to costs paid on its behalf
by the Distributor was based on the view that such costs should be recognized in
the Company’s financial statements to the extent of the Company’s economic
participation and ownership interest in the Distributor.  The Company
has now determined that it should recognize all such costs incurred on its
behalf by the Distributor in the Company’s financial statements.  As a
result of this change, selling, general and administrative expenses for the
three months ended March 31, 2008 and 2007 increased by $0.9 million and $0.6
million, respectively.
 
 In
addition, the Company previously did not account for its obligation to deliver
shares of its Common Stock to the Distributor upon the redemption of the
aforementioned Class W Units.  The Company has now accounted for such
obligation as a written call option (the “Class W Option Liability”), by
recording the fair value of the Class W Option Liability as of July 21, 2006
(i.e., the date that the Class W Units of the Distributor were issued), and
subsequently re-measuring the fair value of the Class W Option Liability through
its Statements of Operations (in other income (expense)) at the end of every
reporting period.  As of July 21, 2006, the Class W Option Liability
was valued at $3.8 million.  Subsequently, the Company has re-measured
and recorded in its financial statements the fair value movements in the Class W
Option Liability as of March 31, 2008 and 2007.  As a result of these
re-measurements, other income for the three months ended March 31, 2008
decreased by $1.5 million to $1.4 million of other expense, and other income for
the three months ended March 31, 2007 increased by $0.4 million to $0.4
million.
 
 The
cumulative impact of the above-described restatement adjustments on selling,
general and administrative expenses, equity in net loss from Distributor, other
income (expense), provision (benefit) for income taxes, net loss, net loss per
share, investment in Distributor, total assets, Class W Option Liability,
deferred tax liability, total liabilities, accumulated deficit and total
stockholders’ equity as of and for the three months ended March 31, 2008 and
2007 are as follows:


11


(In
      thousands)
              
              Three
      Months Ended March 31, 2008 (Unaudtied)
              
              
              Three
      Months Ended March 31, 2007 (Unaudited)As
      Originally reported
              
              
              Restatement
                Adjustments
              
              
              As
      Restated
              
              
              As
      Originally reported
              
              
              Restatement
                Adjustments
              
              
              As
      RestatedSelling,
      general and administrative
              
              $
              421
              
              
              $
              940
              
              
              $
              1,361
              
              
              $
              456
              
              
              $
              603
              
              
              
              1,059Equity
      in net loss from Distributor
              
              
              4,787
              
              
              
              -
              
              
              
              4,787
              
              
              
              2,228
              
              
              
              340
              
              
              
              2,568Other
      income (expense)
              
              
              126
              
              
              
              (1,523
              )
              
              
              (1,397
              )
              
              
              49
              
              
              
              367
              
              
              
              416Provision
      (Benefit) for income taxes
              
              
              491
              
              
              
              -
              
              
              
              491
              
              
              
              134
              
              
              
              (136
              )
              
              
              (2
              )Net
      loss
              
              
              (5,573
              )
              
              
              (2,463
              )
              
              
              (8,036
              )
              
              
              (2,769
              )
              
              
              (440
              )
              
              
              (3,209
              )Net
      loss per share
              
              
              (0.08
              )
              
              
              (0.04
              )
              
              
              (0.12
              )
              
              
              (0.04
              )
              
              
              (0.01
              )
              
              
              (0.05
              )Investment
      in Distributor
              
              
              67,288
              
              
              
              (1,761
              )
              
              
              65,527
              
              
              
              82,877
              
              
              
              1,955
              
              
              
              84,832Total
      assets
              
              
              77,572
              
              
              
              (1,761
              )
              
              
              75,811
              
              
              
              89,884
              
              
              
              1,955
              
              
              
              91,839Class
      W option liability
              
              
              -
              
              
              
              5,691
              
              
              
              5,691
              
              
              
              -
              
              
              
              2,649
              
              
              
              2,649Deferred
      tax liability
              
              
              11,897
              
              
              
              1,391
              
              
              
              13,288
              
              
              
              13,154
              
              
              
              1,371
              
              
              
              14,525Total
      liabilities
              
              
              12,195
              
              
              
              7,082
              
              
              
              19,277
              
              
              
              14,510
              
              
              
              4,020
              
              
              
              18,530Accumulated
      deficit
              
              
              (45,596
              )
              
              
              (8,843
              )
              
              
              (54,439
              )
              
              
              (32,667
              )
              
              
              (2,065
              )
              
              
              (34,732
              )Total
      stockholders' equity
              
              
              65,377
              
              
              
              (8,843
              )
              
              
              56,534
              
              
              
              75,374
              
              
              
              (2,065
              )
              
              
              73,309


RESTATEMENT
OF FINANCIAL STATEMENTS OF THE DISTRIBUTOR
 The
restatements to the Distributor’s financial statements relate to an error in the
application of generally accepted accounting principles with respect to the
accounting classification and measurement of certain redemption rights of the
holders of the Distributor’s Class W Units.
 
 The
Distributor’s prior accounting methodology with respect to the accounting
classification and measurement of the aforementioned redemption rights did not
properly classify and measure the Distributor’s Class W Units as redeemable
securities.  The Distributor has now recorded the cash redemption
value of the Class W Units outside of permanent equity in its financial
statements.  Subsequent changes to the cash redemption value of such
units has resulted in increase or decrease, as applicable, to the Redeemable
Class W Units amount, with a corresponding increase or decrease, as applicable,
in member’s deficit, which now consists of only the value of the Distributor’s
Class G Units.  As of July 21, 2006 (the issuance date of the
Distributor’s Class W Units), the value of the Redeemable Class W Units was
recorded at $277.6 million.
 
 The
Distributor also previously did not account for its right to receive shares of
the Company’s Common Stock upon the redemption of the aforementioned Class W
Units.  The Distributor has now recognized, as an asset, the fair
market value relating to its right to obtain shares of the Company’s Common
Stock to affect the Class W Unit redemption in the Distributor’s financial
statements as a Class W Purchased Call Option (included in deposits and
other).  As of July 21, 2006, this Class W Purchased Call Option was
valued at $3.8 million and is carried at cost within deposits and
other.  Any impairments of the Class W Purchased Call Option have been
reflected in the Distributor’s Statements of Operations in other income
(expense).
 
 As of
March 31, 2007, the cash redemption value of the Redeemable Class W Units
increased by $169.7 million, to $447.3 million (resulting in a deficit balance
in the Class G Units member’s deficit of $349.4 million as of March 31, 2007),
and as of March 31, 2008, the cash redemption value of the Class W Units
decreased by $336.6 million, to $110.7 million (resulting in a deficit balance
in the Class G Units member’s deficit of $49.9 million as of March 31,
2008).
 
 The
Distributor recorded an impairment of $1.1 million to the Class W Purchased Call
Option asset (included in deposits and other) as of March 31, 2007 (with a
corresponding increase to the Distributor’s other expense for the three months
ended March 31, 2007 of $1.1 million).
 
 The
cumulative impact of the above-described restatement adjustments on other
expense, net loss, Class W Purchased Call Option (included in deposits and
other), total assets, Redeemable Class W Units, and member’s equity (deficit) as
of and for the three months ended March 31, 2008 and 2007 are as
follows:





(In
      thousands)
              
              Three
      Months Ended March 31, 2008 (Unaudited)
              
              
              Three
      Months Ended March 31, 2007 (Unaudited)As
      Originally Reported
              
              
              Restatement
                Adjustments
              
              
              As
      Restated
              
              
              As
      Originally Reported
              
              
              Restatement
                Adjustments
              
              
              As
      RestatedOther
      expense
              
              $
              (997
              )
              
              $
              -
              
              
              $
              (997
              )
              
              $
              (263
              )
              
              $
              (1,134
              )
              
              $
              (1,397
              )Net
      loss
              
              
              (15,441
              )
              
              
              -
              
              
              
              (15,441
              )
              
              
              (2,399
              )
              
              
              (1,134
              )
              
              
              (3,533
              )Deposits
      and other
              
              
              2,366
              
              
              
              2,649
              
              
              
              5,015
              
              
              
              205
              
              
              
              2,649
              
              
              
              2,854Total
      assets
              
              
              267,479
              
              
              
              2,649
              
              
              
              270,128
              
              
              
              250,449
              
              
              
              2,649
              
              
              
              253,098Redeemable
      Class W units
              
              
              -
              
              
              
              110,673
              
              
              
              110,673
              
              
              
              -
              
              
              
              447,267
              
              
              
              447,267Member's
      equity (deficit)
              
              
              58,075
              
              
              
              (108,024
              )
              
              
              (49,949
              )
              
              
              95,231
              
              
              
              (444,618
              )
              
              
              (349,387
              )


12


NOTE
4.  FAIR VALUE MEASUREMENTS
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“Statement”) No. 157, Fair Value Measurements(“FAS 157”). FAS 157 establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value and
expands on required disclosures about fair value measurement. The Company
adopted on January 1, 2008, certain provisions of FAS 157 related to
financial assets and liabilities as well as other assets and liabilities carried
at fair value on a recurring basis.  The adoption of FAS 157 for
financial assets and liabilities did not have a material impact on the Company’s
consolidated financial statements.  The provisions of FAS 157
related to other non-financial assets and liabilities will be effective on
January 1, 2009, and will be applied prospectively. The Company is
currently evaluating the impact the provisions of FAS 157 will have on the
Company’s consolidated financial statements as it relates to other non-financial
assets and liabilities.
 
 The
Company adopted the provisions of FAS 157 as of January 1, 2008, to value the
Class W Option Liability.  The Distributor is owned 70% by TWC
Holdings and W-G Holding (collectively, the “TWC Parties”) and 30% by the
Company.  The Company’s 30% membership interest in the Distributor
consists of the Distributor’s Class G Units.  The 70% interest in the
Distributor held by the TWC Parties consists of Class W
Units.   Pursuant to the Distributor’s Amended and Restated
Limited Liability Company Agreement (the “Distributor LLC Agreement”), at any
time after July 21, 2007, the TWC Parties have the option to redeem all or a
portion of their Class W Units for either (i) shares of the Company’s common
stock or, (ii) at the option of the Distributor (and with the consent of the TWC
Parties), cash.  In order to exercise such redemption right, the TWC
Parties must provide to the Distributor and the Company written notice of
redemption (“Notice of Redemption”), specifying the number of Class W Units
being tendered for redemption.
 
 Upon
receipt of a Notice of Redemption, the number of Company common shares issuable
to the TWC Parties is determined by multiplying (i) the number Class W Units
being redeemed, by (ii) a fraction, the numerator of which is the number of
outstanding Company common shares as of the date of the Notice of Redemption,
and the denominator of which is the number of outstanding Company common shares
as of July 21, 2006 (the intent of this adjustment factor being that the TWC
Parties would receive no less than 70% of the Company’s common stock upon
redemption of all of the Class W Units).  Notwithstanding the
above-described computation, in the event that the trading price of the
Company’s common stock is less than $0.42 as of the date of the Notice of
Redemption, the number of common shares issuable to the TWC Parties is
determined by dividing (i) $60 million dollars (the “Floor Amount”), by (ii) the
trading price of the Company’s common stock as of the date of the Notice of
Redemption (such calculation being referred to as the “Floor
Calculation”).  In other words, if on the date of the Notice of
Redemption the trading price of the Company’s common stock is less than $0.42,
then the TWC Parties would be entitled to receive either cash or shares of the
Company’s common stock with a value of no less than the Floor Amount of $60
million.
 
 The
Class W Option Liability recorded at fair value in the Company’s balance sheet
as of March 31, 2008 is categorized based upon the level of judgment associated
with the inputs used to measure its fair value.  Hierarchical levels
defined by FAS 157 are directly related to the amount of subjectivity associated
with the inputs to the fair valuation of the Class W Option Liability, which is
as follows:
 
 Level
1 – inputs are un-adjusted quoted prices in active markets for identical assets
or liabilities at the measurement date;
 Level
2 – inputs other than Level 1 inputs that are either directly or indirectly
observable; and
 Level
3 – unobservable inputs developed using estimates and assumptions developed by
management, which reflect those that a market participant would
use.
 
 The
Company has utilized a lattice valuation model to simulate future stock
movements of the Company’s Common Stock in order to determine the fair value of
the Class W Option Liability.  The assumptions used in preparing such
model include, among other things, inputs such as volatility, risk-free interest
rates, dividend yield, expected time of redemption and assessment of
counterparty risk, which the Company has classified as unobservable, Level 3
inputs.  The Company determined the fair value of the Class W Option
Liability as of March 31, 2008 to be $5.7 million resulting in a corresponding
decrease to other income of $1.5 million for the three months ended March 31,
2008 (as compared to December 31, 2007).  The following table
summarizes our fair value measurements using significant Level 3 inputs, and
changes therein, for the three months ended March 31,
2008 :






Three
      Months
                EndedMarch
      31, 2008Class
      W Option Liability:Balance
      at December 31, 2007
              
              $
              4,168Re-measurement
      of Class W Option Liability
              
              
              1,523Balance
      at March 31, 2008
              
              $
              5,691







In
addition, in February 2007, the FASB issued FAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities-including an
amendment of FASB Statement No. 115” (“FAS 159”), which the Company
adopted as of January 1, 2008.  FAS 159 expands the use of fair value
accounting but does not affect existing standards that require assets or
liabilities to be carried at fair value. Under FAS 159, a company may elect to
use fair value to measure certain financial assets and liabilities and any
changes in fair value are recognized in earnings.  The Company did not
elect the fair value option upon adoption of FAS 159.




13




NOTE
5 .  INVESTMENT IN DISTRIBUTOR (GENIUS PRODUCTS,
LLC)
 
 Summaries
of the statements of operations, balance sheet and the computations of the
Company’s equity in net loss of the Distributor are shown
below.




GENIUS
PRODUCTS, LLC


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(IN
THOUSANDS)


(UNAUDITED)




Three
      Months Ended March 31,2008
              
              
              2007Restated
      (Note 3)
              
              
              Restated
      (Note 3)Revenues,
      net of sales, returns, discounts and allowances of $29,006 and
      $31,672
              
              $
              98,211
              
              
              $
              83,117Total
      cost of revenues
              
              
              (101,995
              )
              
              
              (76,155
              )Gross (loss)
              
              
              (3,784
              )
              
              
              6,962Total
      operating expenses
              
              
              (10,660
              )
              
              
              (9,098
              )Loss
      from operations
              
              
              (14,444
              )
              
              
              (2,136
              )Other
      expense
              
              
              (997
              )
              
              
              (1,397
              )Net
      loss
              
              $
              (15,441
              )
              
              $
              (3,533
              )





14




GENIUS
PRODUCTS, LLC


CONDENSED
CONSOLIDATED BALANCE SHEETS


(IN
THOUSANDS)




March
      31, 2008
                      Restated (Note
      3)
                  
                  
                  December
      31,
                    2007(unaudited)
                  
                  
                  RestatedASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  5,552
                  
                  
                  $
                  3,102Restricted
      cash - short term
                  
                  
                  5,877
                  
                  
                  
                  7,765Accounts
      receivable, net of allowance for doubtful accounts of $3,352 and
      $4,311and
      sales returns of $42,104 and $68,159
                  
                  
                  90,283
                  
                  
                  
                  123,295Inventories,
      net of reserves for obsolescence of $13,974 and $13,257
                  
                  
                  9,667
                  
                  
                  
                  11,282Prepaid
      expenses and other current assets
                  
                  
                  940
                  
                  
                  
                  1,110Total
      current assets
                  
                  
                  112,319
                  
                  
                  
                  146,554Restricted
      cash - long term
                  
                  
                  3,186
                  
                  
                  
                  3,323Property
      and equipment, net of accumulated depreciation of $560 and
      $455
                  
                  
                  2,732
                  
                  
                  
                  953Royalty
      advances, net of uncollectible advances of $7,890 and
    $5,112
                  
                  
                  37,481
                  
                  
                  
                  31,492Film
      library, net of accumulated amortization of $8,702 and
    $6,452
                  
                  
                  12,154
                  
                  
                  
                  14,403Goodwill
                  
                  
                  87,512
                  
                  
                  
                  87,512Other
      intangible assets, net of accumulated amortization of $13,030 and
      $9,675
                  
                  
                  8,241
                  
                  
                  
                  11,596Deferred
      financing fees
                  
                  
                  1,488
                  
                  
                  
                  1,654Deposits
      and other
                  
                  
                  5,015
                  
                  
                  
                  5,617Total
      assets
                  
                  $
                  270,128
                  
                  
                  $
                  303,104LIABILITIES
      AND MEMBER'S DEFICITCurrent
      liabilities:Accounts
      payable
                  
                  $
                  39,178
                  
                  
                  $
                  31,477Notes
      payable
                  
                  
                  25,732
                  
                  
                  
                  31,297Notes
      payable to Genius Products, Inc.
                  
                  
                  8,352
                  
                  
                  
                  -Remittance
      to TWC
                  
                  
                  72,261
                  
                  
                  
                  78,759Remittance
      to other licensors
                  
                  
                  24,114
                  
                  
                  
                  20,000Accrued
      advertising and marketing
                  
                  
                  18,185
                  
                  
                  
                  24,515Other
      accrued expenses
                  
                  
                  17,495
                  
                  
                  
                  20,910Deferred
      revenue
                  
                  
                  2,965
                  
                  
                  
                  8,492Total
      current liabilities
                  
                  
                  208,282
                  
                  
                  
                  215,450Long
      term liabilities:Notes
      payable to Genius Products, Inc.
                  
                  
                  -
                  
                  
                  
                  8,191Long
      term notes payable
                  
                  
                  1,081
                  
                  
                  
                  627Long
      term capital lease
                  
                  
                  41
                  
                  
                  
                  30Total
      long term liabilities
                  
                  
                  1,122
                  
                  
                  
                  8,848Redeemable
      Class W units
                  
                  
                  110,673
                  
                  
                  
                  284,378Total
      member's deficit
                  
                  
                  (49,949
                  )
                  
                  
                  (205,572
                  )Total
      liabilities and member's deficit
                  
                  $
                  270,128
                  
                  
                  $
                  303,104


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.
 
 As a
result of restating the Distributor’s financial statements as detailed in Note
3, the net loss of the Distributor for the three months ended March 31, 2007
increased by $1.1 million to $3.5 million.  This resulted in a basis
difference adjustment to our investment in the Distributor of $0.3 million (30%
of the net loss from the Distributor for the three months ended March 31,
2007).




15




Three
      Months Ended March 31,2008
              
              
              2007
                Restated (Note 3)Genius
      Products, Inc. 30% share of net loss from the Distributor
              
              $
              4,632
              
              
              $
              1,060Adjustments
      for basis differences
              
              
              1,111
              
              
              
              1,111(Benefit)/Expense
      for stock compensation for Distributor employees
              
              
              (908
              )
              
              
              397Genius
      Products, Inc. 30% share of interest on the Distributor's notes
      payable
              
              
              (48
              )
              
              
              -Equity
      in net loss from Distributor
              
              $
              4,787
              
              
              $
              2,568




NOTE 6 .   CONTINGENCIES




GUARANTY
OF CREDIT FACILITY
 On August
10, 2007, the Distributor entered into a three-year, senior secured revolving
credit facility (the “Credit Agreement”) with Société Générale (‘‘Soc Gen’’), as
lender and agent.    The Credit Agreement provided for an
initial commitment of $30 million and up to a total of $70
million.  On November 1, 2007, the Distributor, Soc Gen and Alliance
Leicester entered into the Amended and Restated Credit Agreement (the “Amended
Credit Agreement”), which increased the total commitment to $50 million, based
on expected incremental commitments.  The Amended Credit Agreement
terminates on June 30, 2010, and may be extended to August 10, 2010, under
satisfaction of certain conditions.  Borrowings outstanding under the
Amended Credit Agreement were $25.1 million at March 31, 2008. The maximum
amount available at March 31, 2008 was $25.2 million.  Soc Gen holds a
security interest in substantially all personal property of the Company, the
Distributor, and its direct and indirect subsidiaries, other than TWC accounts
receivable. TWC continues to have a first priority security interest in accounts
receivable attributable to TWC content.
 
 The
Company and the direct and indirect subsidiaries of the Distributor have
unconditionally guaranteed the obligations of the Distributor under the Amended
Credit Agreement (i.e., full and punctual payment of the Distributor’s
obligations, when and as due).  Management has assessed the Company’s
potential obligations under this guarantee and considered the provisions of FIN
45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees,noting that the likelihood of
making any payments related to this guarantee is remote and therefore has not
recorded a liability on the Company’s balance sheets associated with this
guarantee.
 
 LITIGATION
 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.
 
 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, 2007 under
Part I, Item 3., “Legal Proceedings”, which is incorporated herein by
reference.
 
 Entertainment Resource
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 Broward County,
Florida, Case No. 06-012249 CACE 05, by Larry S. Hyman, as assignee for
Entertainment Resource, Inc. (“ERI”).  There have been no material
developments in this matter.  For a complete description of the facts
and circumstances surrounding the ERI litigation, please see the disclosure in
our Annual Report on Form 10-K for the year ended December 31, 2007 under Part
I, Item 3., “Legal Proceedings”, which is incorporated herein by
reference.


16




NOTE
7 .  NOTES PAYABLE TO RELATED PARTY (RELATED PARTY
LOANS)
 
 On
September 27, 2007, the Distributor borrowed $6.0 million from the Company and
issued a promissory note in favor of the Company in the principal amount of $6.0
million.  On November 1, 2007, the Distributor borrowed an additional
$2.0 million from the Company and issued a promissory note in favor of the
Company in the principal amount of $2.0 million.  Under each of the
aforementioned notes, interest is due on the unpaid principal balance at a
monthly rate equal to the LIBOR Rate (as defined in the notes) plus five percent
(5%) until paid.  On March 16, 2008, the Company ’s Board of Directors
approved amendments to each of (i) that certain promissory note, dated September
27, 2007, by the Distributor in favor of the Company, in the principal amount of
$6 million and (ii) that certain promissory note, dated November 1, 2007, by the
Distributor in favor of the Company in the principal amount of $2 million,
pursuant to which principal and accrued interest under the notes would be due
and payable on demand at any time after January 1, 2009.
 
 In the
event payment of principal or interest due under the notes is not made when due,
the outstanding principal balance will bear interest at the rate of two percent
(2%) above the interest rate which is otherwise provided under the notes for so
long as such event continues. If the notes are not paid when due, the
Distributor agreed to pay the Company’s reasonable costs of collection,
including, without limitation, all reasonable attorneys’ fees and all reasonable
expenses actually incurred by the Company in connection with such collection
efforts.  The principal amount of the notes may be prepaid in whole or
in part, provided that all accrued interest on the amount to be prepaid is also
paid at such time.  The proceeds from the notes were used to pay
amounts owed by the Distributor to TWC under the TWC Distribution
Agreement.  As of March 31, 2008, an aggregate of $8.4 million in
principal and accrued interest expense was outstanding under the
notes.
 
 Payments
to TWC pursuant to the TWC Distribution Agreement are due 45 days from the last
day in the calendar month.  As needed, these terms are extended anywhere
from 15 to 45 days in order to provide flexibility and manage cash flows. 
The Distributor expects TWC to continue to provide such flexibility through at
least December 31, 2008.
 
 NOTE
8 .  STOCKHOLDERS' EQUITY
  COMMON
STOCK
 During
the three months ended March 31, 2008, we issued 50,000 common shares related to
the exercise of stock options for proceeds of $0.04 million.  No
warrants were exercised during the three months ended March 31,
2008.
 
 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.
  A summary
of warrant activity follows:


WeightedAverage
              
              
              AggregateWarrants
              
              
              Exercise
              
              
              IntrinsicOutstanding
              
              
              Price
              
              
              ValueDecember
      31, 2007
              
              
              10,425,958
              
              
              $
              2.45Exercised
              
              
              -
              
              
              
              -March
      31, 2008
              
              
              10,425,958
              
              
              $
              2.45
              
              
              $
              25,581,631Warrants
      exercisable, March 31, 2008
              
              
              10,425,958
              
              
              $
              2.45
              
              
              $
              25,581,631





The
following information applies to warrants outstanding at March 31,
2008:





17




Weighted
              
              
              
              
              
              Weightedaverage
              
              
              
              
              
              averageexercise
      price of
              
              
              
              
              
              exercise
      price ofWarrants
              
              
              Average
              
              
              warrants
              
              
              Warrants
              
              
              warrantsoutstanding
              
              
              remaining
      life
              
              
              outstanding
              
              
              exercisable
              
              
              exercisableUnder
      $1.50
              
              
              
              943,757
              
              
              
              0.22
              
              
              $
              1.40
              
              
              
              943,757
              
              
              $
              1.40$1.50
      - $1.99
              
              
              
              170,723
              
              
              
              2.51
              
              
              
              1.88
              
              
              
              170,723
              
              
              
              1.88$2.00
      - $2.99
              
              
              
              7,664,478
              
              
              
              2.34
              
              
              
              2.48
              
              
              
              7,664,478
              
              
              
              2.48$3.00
      - $3.99
              
              
              
              1,647,000
              
              
              
              1.00
              
              
              
              3.00
              
              
              
              1,647,000
              
              
              
              3.0010,425,958
              
              
              
              1.94
              
              
              $
              2.45
              
              
              
              10,425,958
              
              
              $
              2.45




NOTE
9 .   STOCK-BASED COMPENSATION





The
following table summarizes the activity for outstanding options for the three
months ended March 31, 2008:




WeightedAverage
              
              
              AggregateOptions
              
              
              Exercise
              
              
              IntrinsicOutstanding
              
              
              Price
              
              
              ValueDecember
      31, 2007
              
              
              17,770,041
              
              
              $
              1.82Exercised
              
              
              (50,000
              )
              
              
              0.89Canceled
              
              
              (76,666
              )
              
              
              1.73March
      31, 2008
              
              
              17,643,375
              
              
              $
              1.83
              
              
              $
              (19,902,057
              )Options
      exercisable, March 31, 2008
              
              
              14,586,443
              
              
              $
              1.79
              
              
              $
              (15,899,638
              )




The
following table summarizes additional information regarding outstanding
and  exercisable stock options as of March 31, 2008:




Weighted
              
              
              
              
              
              Weightedaverage
              
              
              
              
              
              averageexercise
      price of
              
              
              
              
              
              exercise
      price ofOptions
              
              
              Average
              
              
              options
              
              
              Options
              
              
              optionsoutstanding
              
              
              remaining
      life
              
              
              outstanding
              
              
              exercisable
              
              
              exercisableUnder
      $1.50
              
              
              
              1,900,752
              
              
              
              3.82
              
              
              $
              0.67
              
              
              
              1,900,752
              
              
              $
              0.67$1.50
      - $1.99
              
              
              
              10,670,373
              
              
              
              6.75
              
              
              
              1.72
              
              
              
              8,654,941
              
              
              
              1.69$2.00
      - $2.99
              
              
              
              3,917,500
              
              
              
              6.72
              
              
              
              2.15
              
              
              
              2,876,000
              
              
              
              2.10$3.00
      - $3.99
              
              
              
              793,750
              
              
              
              5.82
              
              
              
              3.00
              
              
              
              793,750
              
              
              
              3.00$4.00
      + over
              
              
              
              361,000
              
              
              
              4.33
              
              
              
              5.07
              
              
              
              361,000
              
              
              
              5.0717,643,375
              
              
              
              6.34
              
              
              $
              1.83
              
              
              
              14,586,443
              
              
              $
              1.79




For the
service-based stock options, the Distributor estimated share-based compensation
expense for the three months ended March 31, 2008 and 2007 using the
Black-Scholes-Merton formula with the following weighted average
assumptions:





18




Three
      Months Ended March 31,2008
              
              
              2007Risk
      free interest rate
              
              
              3.3%
              
              
              
              4.5%Expected
      dividend yield
              
              
              -
              
              
              
              -Expected
      volatility
              
              
              73.0%
              
              
              
              106.6%Expected
      life (in years)
              
              
              6.0
              
              
              
              5.3





For
market-based options, the Company utilizes the Monte Carlo Simulation as the
stock option model to provide the most accurate fair value estimate due to the
path dependency of the options valued under the provisions of this
grant.  Monte Carlo Simulation is a lattice model, which - unlike the
closed-form model – can incorporate a range of expected
volatilities.  These valuations were performed on a multi-tranche
basis considering three vesting tranches and the weighted average volatility for
these grants is calculated to be 54.94%.  The risk-free rates have
been determined based upon the interest rates for zero-coupon U.S. Treasury
bonds as of March 31, 2008.  A yield curve has been determined based
upon interpolating between the rates ranging from 1.22% to
3.45%.  Consistent with the service-based stock option grants, the
dividend rate is 0.0% for the performance-based option grants.





Total
share-based compensation benefit recognized by the Company for the three months
ended March 31, 2008 was $0.07 million versus compensation expense of $0.2
million for the three months ended March 31, 2007.  No income tax
benefit was recognized in the statement of operations for share-based
compensation arrangements for the Company.





In
relation to options issued by the Company to employees of the Distributor, the
Distributor recorded share-based compensation benefit of $1.3 million for the
three months ended March 31, 2008 versus an expense of $0.6 million for the
three months ended March 31, 2007.




NOTE
10 .   INCOME TAXES





The
Company recorded a federal and state tax provision of $0.5 million for the three
months ended March 31, 2008.  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
11 .   SUBSEQUENT EVENTS





In April
2008, the Distributor began to execute its strategic decision to move away from
non-branded business, improve efficiencies, and restructure the
organization.  As a consequence, the Distributor eliminated thirty two
positions.  The expected charge to operations relating to involuntary
termination costs is approximately $0.9 million.


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 Part I, Item 1A in our Annual Report on Form 10-K for
the year ended December 31, 2007 filed on March 19, 2008.





NATURE
OF BUSINESS





Genius
Products, Inc. (“we”, “us”, “our” or the “Company”), through our 30%-owned
subsidiary, Genius Products, LLC (the “Distributor”), is a leading independent
home entertainment products company that acquires, produces and licenses,
through the Distributor’s multiple distribution agreements with content
partners, an extensive library of motion pictures, television programming,
and  trend entertainment on digital versatile disks (“DVD”) and
digitally.  The Distributor works in partnership with major retailers
to distribute widely recognized home entertainment brands to a diversified
customer base.  The remaining 70% of the Distributor is owned by The
Weinstein Company Holdings LLC (“TWC Holdings”) (which includes a 1% percentage
interest owned indirectly through its wholly-owned subsidiary, W-G Holding Corp.
(“W-G Holding”).  TWC Holdings is the subsidiary of The Weinstein
Company LLC (“TWC”), the largest provider of content for the Distributor’s
library.




19




Through
the Distributor, for which the Company serves as managing member, we produce and
distribute a vast and growing content library that encompasses approximately
3,550 feature films and documentaries and 4,000 hours of television
programming.  This library includes feature films and television
programming from critically acclaimed producers such as The Weinstein Company®,
for which the Distributor has the exclusive U.S. home video distribution rights,
and RHI EntertainmentTM (Hallmark library).  Additional content, such
as independent films, sports, family, and lifestyle productions, come from
partnerships with established consumer brands:  IFC®, ESPN®, World
Wrestling Entertainment®, Classic Media, Sesame Workshop®, Discovery KidsTM,
Animal Planet and The Learning Channel (TLCTM).
 
 The
Distributor has developed a fully integrated direct-to-retail distribution
platform that parallels the home entertainment divisions of the major Hollywood
studios.  This platform provides direct sales and marketing, inventory
management and state-of-the-art supply-chain services.  In
collaboration with leading replicators and third-party logistics and
supply-chain companies, the Distributor has rapidly scaled this network, which
has helped to facilitate its rapid growth in revenues.
  The
Distributor primarily sells to major national retailers including Wal-Mart,
Blockbuster Entertainment, Best Buy, Circuit City, Kmart, Target, NetFlix,
Costco, Sam’s Club, Amazon, Borders, Toys R Us and Columbia
House.  The Distributor co-produces programming with its branded
content partners and mitigates the impact of its production costs through
minimum guarantees from its retail partners.  We believe that the
strong relationships the Distributor has developed with these well-known
retailers and branded content partners help promote the Distributor’s
programming and heighten consumer awareness of its programs.
  The
Distributor collaborates with its retail and content partners to create sales
programs that exploit their widely recognized brands and endorse related
content.  These sales programs focus on brands to provide the retailer
with solutions that simplify the retailer’s buying process, improve shelf-space
utilization and help consumers quickly make informed purchase
decisions.  The Distributor’s ability to deliver unique, innovative
solutions that improve the sales and rentals of its content has enabled it to
compete successfully and maintain strong relationships with its retail and
content partners.
  The
Distributor currently distributes its library on DVDs, next-generation DVD, and
electronically in a digital format.  We plan to continue to expand the
distribution of the Distributor’s theatrical and non-theatrical product through
the diverse emerging digital distribution markets including: Video-on-Demand
(“VOD”) and Electronic Sell-Through (“EST”) on the Internet to companies such as
Amazon, Apple, MovieLink and Microsoft, Internet-based subscription VOD
customers (such as NetFlix) and direct-to-television peer-to-peer network
solutions.  Through its partnerships, the Distributor has released 128
theatrical and non-theatrical titles since inception.  The Distributor
distributes products to basic channels distributed on cable, Direct Broadcast
Satellite (“DBS”) and Internet Protocol Television (“IPTV”), which delivers
television programming to households via a broadband connection using Internet
protocols.
  The
Distributor primarily focuses on four core branded content categories that we
call Content Verticals:
 
 ·
              Theatrical/Independent
      Films (includes Independent Film Channel (IFC®) , RHI
      EntertainmentTM (Hallmark library), Tartan, The Weinstein
      Company®  and
WellspringTM)
 ·
              Sports
      (includes ESPN® and World Wrestling
  Entertainment®)
 ·
              Lifestyle
      (includes Animal Planet, The Learning Channel (TLCTM) and
      WellspringTM)
 ·
              Family/Faith
      (includes Classic Media, Discovery KidsTM, and Sesame
      Workshop®)
  The
Distributor maintains in perpetuity distribution rights for TWC content released
during the term of the TWC Distribution Agreement, subject to certain buy-back
rights of the TWC content by TWC.
 
 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 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.




20




CRITICAL
ACCOUNTING POLICIES
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS.
 The
carrying amounts of cash and cash equivalents, prepaid expenses, accounts
payable, accrued expenses, and Class W Option Liability approximate the fair
value thereof.
 
 INVESTMENT
IN DISTRIBUTOR
 At the
closing of the TWC Transaction, we contributed to the Distributor all of our
operating businesses, including substantially all of our assets, except for $1
million in cash and certain liabilities, and received a 30% equity interest in
the Distributor. The accompanying consolidated financial statements account for
the Company’s investment in the Distributor (30% membership interest represented
by the Distributor’s Class G units) using the equity method of
accounting.  On the Company’s consolidated statement of operations
subsequent to the Closing Date, the Company recorded its 30% share of the
Distributor’s profit or loss as equity in net profit or loss from the
Distributor, adjusted for non-cash 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”, the Company 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 the Company’s investment in and amounts due to
and from the Distributor have been included as an asset in the Company’s
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.  On the Closing Date, we recorded a gain based on the
difference between the fair market value of assets contributed and their net
book value, reduced for the portion of the gain associated with the retained
economic interest in the Distributor.  The Distributor is treated as a
partnership for U.S. federal income tax purposes.
 
 CLASS
W OPTION LIABILITY
 The
Company records the Class W Option Liability at fair value in accordance with
SFAS No. 157, Fair Value
Measurements(“FAS 157”).  The Company has utilized a
lattice valuation model to simulate future stock movements of the Company’s
Common Stock in order to determine the fair value of the Class W Option
Liability.  The assumptions used in preparing such model include,
among other things, inputs such as volatility, risk-free interest rates,
dividend yield, expected time of redemption and assessment of counterparty
risk.
 
 STOCK-BASED
COMPENSATION
 Under
SFAS No. 123R, “Share-Based Payment” (“FAS 123R”), 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, are 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 stock-based compensation expense associated with the
former employees of the Company, who became employees of the Distributor as of
the Closing Date, are recorded on the books of the
Distributor.  Stock-based compensation expense is calculated using the
Black-Scholes-Merton formula as our closed-form valuation option pricing model
(the “Option Model”). The Option Model requires the use of subjective and
complex assumptions, per the requirements of FAS123R, that include: (i) the
option's expected term, (ii) the estimated future price volatility of the
underlying stock, (iii) the risk-free interest rate, (iv) the dividend yield and
(v) expected forfeitures.
 
 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 basis and the tax basis
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 the entire 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 are not more likely than not to be realized. 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.
   21
 
 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
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.  We have no material unrecognized
tax benefits or exposure at March 31, 2008.
 
 RESULTS
OF OPERATIONS OF GENIUS PRODUCTS, INC.
 
 All of
the operations of the Company relate to the activity of the
Distributor.  We account for our 30% investment in the Distributor
using the equity method of accounting, pursuant to Accounting Principles Board
(“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in
Common Stock” (“APB No. 18”).  On our consolidated statement of
operations, we record our 30% share of the Distributor’s profit (loss) as equity
in net earnings (loss) from Distributor, adjusted for basis differences and
costs incurred by the Distributor on behalf of the Company.   Per the
requirements of APB No. 18, we periodically assess whether a decrease in value
of the investment has occurred which is other than temporary and which should be
recognized immediately as 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
sheets.
 
 The
Company does not report its different product lines as segments as defined by
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information (“SFAS No. 131”), because we do not allocate our resources among
product lines nor do we measure performance by product line.  We do
not maintain discrete financial information regarding product
lines.  Our sales, marketing and product development efforts among our
different product lines are supported by one integrated group of
individuals.  Additionally, our warehousing costs also reflect support
of all product lines and as such cannot be segmented.
 
 Revenues
 
 The
Company had no revenue for the three months ended March 31, 2008 and the three
months ended March 31, 2007.  All of the revenue is reflected in the
results of operations of the Distributor. The Distributor generated net revenue
of $98.2 million net of sales returns, discounts and allowances of $29.0 million
for the three months ended March 31, 2008 versus net revenue of $83.1 million
net of sales returns, discounts and allowances of $31.7 million for the
three  months ended March 31, 2007.
 
 Net
revenue from sales of TWC titles was $59.1 million, and net revenue from sales
of non-TWC titles was $39.1 million for the three months ended March 31,
2008.  For the three months ended March 31, 2007, net revenue from
sales of TWC titles was $60.7 million and net revenue from sales of non-TWC
titles was $22.4 million.
 
 TWC-related
revenues were primarily comprised of major TWC titles released during the three
months ended March 31, 2008, which include The Mist, Awake, The Hunting Party, and strong
repeat sales of Halloween which was initially
released in December 2007.  For the three months ended March 31, 2007,
TWC-related revenues were primarily comprised of major titles including School for Scoundrels, The Protector, Harsh Times, and Shut Up and
Sing.
 
 Net
revenue from non-TWC titles increased by 75% for the three months ended March
31, 2008 versus the three months ended March 31, 2007, driven by strong revenue
from titles from World Wrestling Entertainment®, Sesame Workshop®, Classic
Media, RHI EntertainmentTM, and Promenade.
 
 Sales
returns, discounts and allowances as a percentage of gross revenue was 23% for
the three months ended March 31, 2008, versus 28% for the three months ended
March 31, 2007.
 
 Consistent
with other retail product distributors, the Distributor has experienced some
degree of sales seasonality primarily caused by the quantity and quality of made
for theatrical releases and the traditionally strong fourth quarter which
represented almost 40% of 2007 net revenue.
 
 We have
also historically experienced higher returns during the first and third quarters
of the year than during the second and fourth quarters.






22




Costs and
expenses




Cost
of Revenues




The
Company had no costs of revenues for the three months ended March 31, 2008 and
for the three months ended March 31, 2007.  All of the costs of
revenues are reflected in the results of operations of the
Distributor.
 
 Costs of
revenues for the Distributor consist primarily of the raw material and
manufacturing costs of products sold to customers, packaging and shipping costs,
advertising and marketing, amortization of the film library, and participations
and royalties. Participation expenses related to TWC’s distribution agreement
are calculated based on SOP 00-2 which amortizes such costs of revenues using
the film forecast method over a period of two years.
 
 The
Distributor’s costs of revenues were $102.0 million for the three months ended
March 31, 2008 versus $76.2 million for the three months ended March 31,
2007.
 
 Product
cost, supply chain, and inventory obsolescence costs were $16.4 million for the
three months ended March 31, 2008 versus $20.3 million for the three months
ended March 31, 2007.   A reduction in cost of $3.9 million is
due to efficiencies in purchasing and supply chain.
 
 Bad debt
and customer deductions decreased by $1.1 million in the three months ended
March 31, 2008 versus the three months ended March 31, 2007.
 
 Amortization
of intangibles and film library increased by $4.4 million in the three months
ended March 31, 2008 versus the three months ended March 31,
2007.  Based on an evaluation of fair value and re-alignment of
company resources, the Distributor accelerated the amortization of its film
library by $1.9 million and also reviewed the value of all intangible assets
which resulted in an impairment of $2.5 million.
 
 Marketing
and advertising costs decreased by $0.4 million in the three months ended March
31, 2008 versus the three months ended March 31, 2007.
 
 Participations
for TWC titles increased by $10.0 million in the three months ended March 31,
2008 versus the three months ended March 31, 2007 due to the quantity of release
titles.  Participation expenses for non-TWC titles increased by $17.0
million in the three months ended March 31, 2008 versus the three months ended
March 31, 2007 primarily driven by the increase in the Distributor’s non-TWC
branded business (net revenue from sales of non-TWC titles increased by 75% for
the three months ended March 31, 2008 versus the three months ended March 31,
2007) and evaluation of unamortized advances which resulted in recording advance
impairments of $2.8 million.




Operating
Expenses




The
Company had selling, general and administrative expenses of $1.4 million for the
three months ended March 31, 2008 versus $1.1 million for the three months ended
March 31, 2007.  The selling, general and administrative expenses
reflect an allocation of the public company costs borne by the Distributor on
behalf of the Company.
 
 The
Distributors’ selling, general and administrative expenses were $10.7 million
for the three months ended March 31, 2008 versus $9.1 million for the three
months ended March 31, 2007, an increase of $1.6 million which primarily
resulted from an increase in headcount.  Selling, general and
administrative expenses for the three months ended March 31, 2008 included $1.2
million of research and development costs relating to video game
development.  Stock compensation income for the three months ended
March 31, 2008 was $1.3 million versus an expense of $0.6 million for the three
months ended March 31, 2007.
  The
Company’s 30% equity in the net loss of the Distributor was $4.8 million for the
three months ended March 31, 2008 versus  $2.6 million for the three
months ended March 31, 2007.




Other Income and
Expense





The
Company had other expense of $1.4 million for the three months ended March 31,
2008 versus other income of $0.4 million for the three months ended March 31,
2007.  For the three months ended March 31, 2008 the Company had
interest income of $0.1 million earned on outstanding cash balances accrued on
the two promissory notes totaling $8.0 million, and other expense of $1.5
million related to the re-measurement of the Class W Option
Liability.  For the three months ended March 31, 2007, the Company had
interest income of $0.1 million earned on outstanding cash balances, and other
income of $0.4 million related to the re-measurement of the Class W Option
Liability.




23




The
Distributor had other expense of $1.0 million for the three months ended March
31, 2008 versus $1.4 million for the three months ended March 31,
2007.  For the three months ended March 31, 2008 the Distributor had
interest expense of $1.0 million on interest due on promissory notes issued by
the Company to the Distributor and borrowings under the credit facility with
Societe Generale.  For the three months ended March 31, 2007, the
Company had interest expense of $0.3 million on interest due to the promissory
notes issued by the Company to the Distributor and borrowings under the credit
facility with Societe Generale, and other expense of $1.1 million related to the
impairment of the Class W Purchased Call Option.


LIQUIDITY
AND CAPITAL RESOURCES




Net
cash provided by operations during the three months ended March 31, 2008 was
$0.02 million primarily due to net loss of $8.0 million offset by equity in net
losses from the Distributor of $4.8 million, operating expenses paid by the
Distributor of $1.3 million, and re-measurement of the Class W Option Liability
of $1.5 million.
  Cash provided by financing
activities for the three months ended March 31, 2008 was $0.04 million
reflecting proceeds from exercise of options.




At March 31, 2008, the Company had cash
balances of $1.8 million and the Distributor had cash and restricted cash
balances of $14.6 million.  The restricted cash balances are associated
with (i) required minimum cash balances pursuant to the Credit Agreement, (ii)
certain bank accounts that are subject to semi-monthly disbursements to the
Distributor and other parties under a waterfall of funds prescribed by the
Amended Credit Agreement, and (iii) an office lease security
deposit.





We may consider additional issuances of
equity and/or debt financing to fund future growth opportunities. The Company is
reliant on the Distributor to pay certain costs.  The Distributor has
limited access to additional capital and has little availability under its
current credit facility.  The Distributor utilized its maximum availability
which was $25.2 million as of March 31, 2008 of its $50 million facility.
 Accordingly, near term cash needs are met through support from TWC.
Payments to TWC under the TWC Distribution Agreement are due 45 days from the
last day in the calendar month.  As needed, these terms are extended
anywhere from 15 to 45 days in order to provide flexibility and manage cash
flows.  The Distributor expects TWC to continue to provide such flexibility
through at least December 31, 2008.




Management
expects that as non-TWC revenue increases, resulting in increased non-TWC
receivables, the Distributor’s availability will increase under the Amended
Credit Agreement with Societe Generale.  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 2008, 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.  As of March 31, 2008, the Company had
no off-balance sheet arrangements.





ITEM 3.QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




As of
March 31, 2008, 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





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and that such information is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosures.




24




As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures.  Based on the foregoing
evaluation, and in light of the material weaknesses in internal controls
described below, our Chief Executive Officer and our Chief Financial Officer
concluded that as of the end of the period covered by this report our disclosure
controls and procedures were not effective in timely alerting them to material
information to be included in our reports files or submitted under the Exchange
Act.





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 in the United States (“GAAP”). These measures
included, among other things, expansion of our quarter-end closing procedures,
including the expanded review and analysis of the accounting between the Company
and the Distributor, 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.





A
material weakness is “a deficiency, or a combination of deficiencies (within the
meaning of PCAOB Auditing Standard No. 5), in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.”





Company
management has concluded that, as of March 31, 2008, the following material
weaknesses existed at both the Company and the Distributor:





·
            Timely
      and routine financial statement close/reporting process and the entity
      level controls surrounding this process.
              We were unable
      to execute a timely financial close, nor were we able to properly
      accumulate certain analyses and reconciliations in a consistent and
      accurate manner, allowing for the proper application of GAAP. In addition
      management did not adequately supervise the financial close and reporting
      process which resulted in material post-closing
      adjustments.  Furthermore, the Company was unable to timely and
      properly calculate its computation of its equity in the net loss of the
      Distributor.





·
            Calculation
      of expenses related to stock compensation.
              We
      were unable to properly accumulate, analyze and compute stock compensation
      in a timely manner during the quarter as the Company and Distributor
      lacked the appropriate financial personnel to undertake this
      computation.





·
            Formal
      processes over change management and access procedures related to our
      information technology systems.
              We
      were unable to properly implement and maintain an effective information
      technology operating environment. In addition, we did not properly
      maintain access or program change controls related to our critical
      information technology systems including the General Ledger system and
      Order Processing/Management system.·
            Calculation
      of provision for income taxes and related oversight of this
      process.
              We
      did not properly supervise and review the calculation of the Company’s tax
      provision that was performed by an outside third party.  This
      lack of supervision and review by management resulted in a material
      post-closing adjustment prior to the issuance of the financial
      statements.




Also, our
management has found additional material weaknesses specifically related to the
Distributor:





·
            Revenue
      recognition process; specifically, our controls in the areas of allocating
      and tracking Market Development Funds (“MDF”) Spending.
              The
      Distributor has not fully implemented a formalized process and related
      controls to determine the appropriate classification of MDF related
      expenses.  Due to this weakness, there is a reasonable
      possibility that the Distributor could materially record revenue
      improperly or misclassify MDF related expenses in its statements of
      operations.





·
            Licensor
      participations expense and related liabilities, and film library
      amortization.
              The
      analyses and models utilized by the Distributor to calculate licensor
      participation expense and film library amortization and impairment
      pursuant to the provisions of SOP 00-2 "Accounting by Producers or
      Distributors of Films" utilized incorrect data and assumptions
      which resulted in material
adjustments.





·
            Management’s
      estimation and forecasting process as it relates to our inventory
      obsolescence reserve.
              In
      calculating the Distributor’s inventory obsolescence, management utilized
      incorrect projections which resulted in a material audit adjustment being
      recorded.




25




The
Company will continue its efforts to strengthen its accounting and finance
departments and aggressively pursue remediation of all material
weaknesses.  Recruiting efforts are under way to fill the position of
Chief Accounting Officer.





Changes
in Internal Control over Financial Reporting





Other
than as described above, there were no changes in our internal control over
financial reporting that occurred during our most recent fiscal quarter that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.








PART
II - OTHER INFORMATION




ITEM 1. LEGAL
PROCEEDINGS




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, 2007 under
Part I, Item 3., “Legal Proceedings”, which is incorporated herein by
reference.





ENTERTAINMENT
RESOURCE 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 Broward County,
Florida, Case No. 06-012249 CACE 05, by Larry S. Hyman, as assignee for
Entertainment Resource, Inc. (“ERI”).  There have been no material
developments in this matter.  For a complete description of the facts
and circumstances surrounding the ERI litigation, please see the disclosure in
our Annual Report on Form 10-K for the year ended December 31, 2007 under Part
I, 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 year ended December 31, 2007.


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




On
February 17, 2008, James G. Ellis, who had previously been appointed as a
director by the holders of the Company’s Series W Preferred Stock, resigned from
the Company’s Board of Directors and all committees thereof.  On April
21, 2008, the holders of the Company’s Series W Preferred Stock, pursuant to
their rights under the Company’s Amended and Restated Certificate of
Incorporation to elect up to five of the Company’s directors and to appoint a
replacement for any such director in the event he or she resigns, appointed
Richard Koenigsberg as a director by unanimous written consent.


ITEM
5. OTHER
INFORMATION




None.


26
  ITEM
6. EXHIBITS




3.1
            Amended
      and Restated Certificate of Incorporation of the Registrant (Incorporated
      by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form
      10-Q filed with the Securities and Exchange Commission on November 20,
      2006).





3.2
            Amended
      Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the
      Registrant’s Annual Report on Form 10-KSB filed with the Securities and
      Exchange Commission on March 31,
2005).





4.1
            Specimen
      Certificate for Common Stock (Incorporated by reference to Exhibit 4.8 to
      the Registrant’s Annual Report on Form 10-KSB filed with the Securities
      and Exchange Commission on April 14, 2000).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.


27


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.







GENIUS
      PRODUCTS, INC.,
              a
      Delaware corporationDated:  March
      25, 2009
            By:
            /s/ Trevor
      DrinkwaterTrevor
      Drinkwater
              President
      and Chief Executive Officer
              (Principal Executive
      Officer)Dated:  March
      25, 2009
            By:
            /s/ Edward J.
      ByrnesEdward J.
      Byrnes
              Chief
      Financial Officer
              (Principal Financial
      and Accounting Officer)




28