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 June 30, 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 July 31,
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 permanent equity in the Distributor’s
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 and six months ended June
30, 2007 and June 30, 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 August 11, 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 June 30, 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
            5Condensed
      consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31,
      2007
            5Condensed
      consolidated Statements of Operations for the Three Months Ended June 30,
      2008  and 2007 (unaudited), and for the Six Months Ended June
      30, 2008 and 2007 (unaudited)
            6Condensed
      consolidated Statements of Cash Flows for the Six Months Ended June 30,
      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
            26PART 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
            26Item 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)




June
      30,
                
                
                December
      31,2008
                
                
                2007Restated
      (Note 3)
                
                
                Restated(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                1,831
                
                
                $
                1,757Prepaid
      expenses and other current assets
                
                
                110
                
                
                
                110Notes
      Receivable from Distributor
                
                
                8,506
                
                
                
                -Total
      current assets
                
                
                10,447
                
                
                
                1,867Notes
      Receivable from Distributor
                
                
                -
                
                
                
                8,191Investment
      in Distributor
                
                
                20,250
                
                
                
                73,002Total
      assets
                
                $
                30,697
                
                
                $
                83,060LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accrued
      Expenses
                
                
                6
                
                
                
                -Accounts
      payable to Distributor, net
                
                
                292
                
                
                
                198Total
      current liabilities
                
                
                298
                
                
                
                198Class
      W option liability
                
                
                2,920
                
                
                
                4,168Deferred
      tax liability
                
                
                -
                
                
                
                12,797Total
      liabilities
                
                
                3,218
                
                
                
                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;67,609,094
      and 67,709,094 shares outstanding, respectively
                
                
                7
                
                
                
                7Additional
      paid-in capital
                
                
                110,431
                
                
                
                112,293Accumulated
      deficit
                
                
                (82,959
                )
                
                
                (46,403
                )Total
      stockholders' equity
                
                
                27,479
                
                
                
                65,897Total
      liabilities and stockholders' equity
                
                $
                30,697
                
                
                $
                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 June 30,
              
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Restated
      (Note 3)
              
              
              Restated
      (Note 3)
              
              
              Restated
      (Note 3)
              
              
              Restated
      (Note 3)Operating
      expenses:Impairment
      of investment in Distributor
              
              $
              34,912
              
              
              $
              -
              
              
              $
              34,912
              
              
              $
              -Selling,
      general and administrative
              
              
              1,279
              
              
              
              1,472
              
              
              
              2,640
              
              
              
              2,531Equity
      in net loss from Distributor
              
              
              8,846
              
              
              
              1,021
              
              
              
              13,633
              
              
              
              3,589Total
      operating expenses
              
              
              45,037
              
              
              
              2,493
              
              
              
              51,185
              
              
              
              6,120Loss
      from operations
              
              
              (45,037
              )
              
              
              (2,493
              )
              
              
              (51,185
              )
              
              
              (6,120
              )Other
      income, net
              
              
              2,888
              
              
              
              72
              
              
              
              1,491
              
              
              
              489Loss
      before provision for income taxes
              
              
              (42,149
              )
              
              
              (2,421
              )
              
              
              (49,694
              )
              
              
              (5,631
              )Benefit
      for income taxes
              
              
              13,288
              
              
              
              294
              
              
              
              12,797
              
              
              
              296Net
      loss
              
              $
              (28,861
              )
              
              $
              (2,127
              )
              
              $
              (36,897
              )
              
              $
              (5,335
              )Basic
      and diluted EPSNet
      loss per share
              
              $
              (0.43
              )
              
              $
              (0.03
              )
              
              $
              (0.55
              )
              
              $
              (0.08
              )Basic
      and diluted weighted average shares
              
              
              67,635,468
              
              
              
              66,069,255
              
              
              
              67,679,424
              
              
              
              65,136,522See
      accompanying notes to condensed unaudited interim financial
      statements.




6




GENIUS PRODUCTS,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(IN
THOUSANDS)


(UNAUDITED)




Six
      Months Ended June 30,2008
                  
                  
                  2007Restated
      (Note 3)
                  
                  
                  Restated (Note 3)Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (36,897
                  )
                  
                  $
                  (5,335
                  )Adjustments
      to reconcile net loss to net cash provided by operating
      activitiesImpairment
      of investment in Distributor
                  
                  
                  34,912
                  
                  
                  
                  -Equity
      in net loss from Distributor
                  
                  
                  13,633
                  
                  
                  
                  3,589Operating
      expenses paid by Distributor
                  
                  
                  2,500
                  
                  
                  
                  2,029Stock
      compensation expense
                  
                  
                  142
                  
                  
                  
                  551Deferred
      tax benefit
                  
                  
                  (12,797
                  )
                  
                  
                  (296
                  )Revaluation
      of Class W option liability
                  
                  
                  (1,248
                  )
                  
                  
                  (372
                  )Changes
      in assets and liabilities:(Increase)
      decrease in prepaid expenses, notes receivable and
deposits
                  
                  
                  (315
                  )
                  
                  
                  83Decrease
      in accounts payable
                  
                  
                  -
                  
                  
                  
                  (60
                  )Increase
      in Distributor payable
                  
                  
                  94
                  
                  
                  
                  -Increase
      in accrued expenses and other
                  
                  
                  6
                  
                  
                  
                  32Net
      cash provided by operating activities
                  
                  
                  30
                  
                  
                  
                  221Cash
      flows from financing activities:Proceeds
      from exercise of options
                  
                  
                  44
                  
                  
                  
                  1,411Proceeds
      from exercise of warrants
                  
                  
                  -
                  
                  
                  
                  1,833Net
      cash provided by financing activities
                  
                  
                  44
                  
                  
                  
                  3,244Net
      increase in cash and cash equivalents
                  
                  
                  74
                  
                  
                  
                  3,465Cash
      and cash equivalents at beginning of period
                  
                  
                  1,757
                  
                  
                  
                  3,745Cash
      and cash equivalents at end of period
                  
                  $
                  1,831
                  
                  
                  $
                  7,210See
      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 176 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), 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.




10





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 historically recorded a full
valuation allowance on its deferred tax assets and had recorded a net deferred
tax liability related to its investment in the Distributor.  The
deferred tax liability related to the Distributor was not offset against the
deferred tax assets as the reversal period for this amount was not considered to
be determinable on a more likely than not basis.  In the current
period, the tax basis of our investment in Distributor exceeded the amount for
financial reporting purposes.  Accordingly, the entire deferred tax
liability was reversed.




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 June 30, 2008.





BASIC AND
DILUTED LOSS PER COMMON SHARE


Basic
earnings per share (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 increased by
$0.8 million and $1.7 million for three and six months ended June 30, 2008
respectively, and increased by $0.8 million and $1.4 million for three and six
months ended June 30, 2007 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 June 30, 2008 and 2007.  As a result of these
re-measurements, other income for the three and six months ended June 30, 2008
increased by $2.8 million to $2.9 million, and $1.3 million to $1.5 million,
respectively, and other income for the three and six months ended June 30, 2007
increased by $0.01 million to $0.1 million and $0.4 million to  $0.5
million, respectively.




11




The
cumulative impact of the above-described restatement adjustments (and, in the
case of the Company’s impairment of its investment in Distributor, the events
described in Note 5) on impairment of investment in Distributor, selling,
general and administrative expenses, equity in net loss from Distributor, other
income, 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 and six months ended June 30, 2008 and 2007 are as
follows:





(In
      thousands)
              
              Three
      Months Ended June 30, 2008 (Unaudited)
              
              
              Six
      Months Ended June 30, 2008 (Unaudited)As
      Originally Reported
              
              
              Restatement
                Adjustments
              
              
              As
      Restated
              
              
              As
      Originally Reported
              
              
              Restatement
                Adjustments
              
              
              As
      RestatedImpairment
      of investment in Distributor
              
              $
              38,775
              
              
              $
              (3,863
              )
              
              $
              34,912
              
              
              $
              38,775
              
              
              $
              (3.863
              )
              
              $
              34,912Selling,
      general and administrative
              
              
              469
              
              
              
              810
              
              
              
              1,279
              
              
              
              890
              
              
              
              1,750
              
              
              
              2,640Equity
      from net loss from Distributor
              
              
              3,174
              
              
              
              5,672
              
              
              
              8,846
              
              
              
              7,961
              
              
              
              5,672
              
              
              
              13,633Other
      income
              
              
              117
              
              
              
              2,771
              
              
              
              2,888
              
              
              
              243
              
              
              
              1,248
              
              
              
              1,491Benefit
      for income taxes
              
              
              11,897
              
              
              
              1,391
              
              
              
              13,288
              
              
              
              11,406
              
              
              
              1,391
              
              
              
              12,797Net
      loss
              
              
              (30,404
              )
              
              
              1,543
              
              
              
              (28,861
              )
              
              
              (35,977
              )
              
              
              (920
              )
              
              
              (36,897
              )Net
      loss per share
              
              
              (0.45
              )
              
              
              0.02
              
              
              
              (0.43
              )
              
              
              (0.53
              )
              
              
              (0.02
              )
              
              
              (0.55
              )Investment
      in  Distributor
              
              
              24,630
              
              
              
              (4,380
              )
              
              
              20,250
              
              
              
              24,630
              
              
              
              (4,380
              )
              
              
              20,250Total
      assets
              
              
              35,077
              
              
              
              (4,380
              )
              
              
              30,697
              
              
              
              35,077
              
              
              
              (4,380
              )
              
              
              30,697Class
      W option liability
              
              
              -
              
              
              
              2,920
              
              
              
              2,920
              
              
              
              -
              
              
              
              2,920
              
              
              
              2,920Total
      liabilities
              
              
              298
              
              
              
              2,920
              
              
              
              3,218
              
              
              
              298
              
              
              
              2,920
              
              
              
              3,218Accumulated
      deficit
              
              
              (75,659
              )
              
              
              (7,300
              )
              
              
              (82,959
              )
              
              
              (75,659
              )
              
              
              (7,300
              )
              
              
              (82,959
              )Total
      stockholders' equity
              
              
              34,779
              
              
              
              (7,300
              )
              
              
              27,479
              
              
              
              34,779
              
              
              
              (7,300
              )
              
              
              27,479






(In
      thousands)
              
              Three
      Months Ended June 30, 2007 (Unaudited)
              
              
              Six
      Months Ended June 30, 2007 (Unaudited)As
      Originally reported
              
              
              Restatement
                Adjustments
              
              
              As
      Restated
              
              
              As
      Originally reported
              
              
              Restatement
                Adjustments
              
              
              As
      RestatedSelling,
      general and administrative
              
              $
              655
              
              
              $
              817
              
              
              $
              1,472
              
              
              $
              1,111
              
              
              $
              1,420
              
              
              $
              2,531Equity
      in net loss from Distributor
              
              
              1,021
              
              
              
              -
              
              
              
              1,021
              
              
              
              3,249
              
              
              
              340
              
              
              
              3,589Other
      income
              
              
              67
              
              
              
              5
              
              
              
              72
              
              
              
              117
              
              
              
              372
              
              
              
              489Benefit
      for income taxes
              
              
              294
              
              
              
              -
              
              
              
              294
              
              
              
              160
              
              
              
              136
              
              
              
              296Net
      loss
              
              
              (1,315
              )
              
              
              (812
              )
              
              
              (2,127
              )
              
              
              (4,083
              )
              
              
              (1,252
              )
              
              
              (5,335
              )Net
      loss per share
              
              
              (0.02
              )
              
              
              (0.01
              )
              
              
              (0.03
              )
              
              
              (0.06
              )
              
              
              (0.02
              )
              
              
              (0.08
              )Investment
      in Distributor
              
              
              82,283
              
              
              
              1,138
              
              
              
              83,421
              
              
              
              82,283
              
              
              
              1,138
              
              
              
              83,421Total
      assets
              
              
              90,297
              
              
              
              1,138
              
              
              
              91,435
              
              
              
              90,297
              
              
              
              1,138
              
              
              
              91,435Class
      W option liability
              
              
              -
              
              
              
              2,644
              
              
              
              2,644
              
              
              
              -
              
              
              
              2,644
              
              
              
              2,644Deferred
      tax liability
              
              
              12,860
              
              
              
              1,371
              
              
              
              14,231
              
              
              
              12,860
              
              
              
              1,371
              
              
              
              14,231Total
      liabilities
              
              
              13,758
              
              
              
              4,015
              
              
              
              17,773
              
              
              
              13,758
              
              
              
              4,015
              
              
              
              17,773Accumulated
      deficit
              
              
              (33,982
              )
              
              
              (2,877
              )
              
              
              (36,859
              )
              
              
              (33,982
              )
              
              
              (2,877
              )
              
              
              (36,859
              )Total
      stockholders' equity
              
              
              76,539
              
              
              
              (2,877
              )
              
              
              73,662
              
              
              
              76,539
              
              
              
              (2,877
              )
              
              
              73,662


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 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 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
June 30, 2007, the cash redemption value of the Redeemable Class W Units
increased by $156.9 million, to $434.5 million (resulting in a deficit balance
in the Class G Units member’s deficit of $334.8 million as of June 30, 2007),
and as of June 30, 2008, the cash redemption value of the Redeemable Class W
Units decreased by $374.5 million, to $60.0 million (resulting in a deficit
balance in the Class G Units member’s deficit of $12.5 million as of June 30,
2008).




12


The
Distributor recorded an impairment of $1.1 million to the Class W Purchased Call
Option (included in deposits and other) asset in the six months ended June 30,
2007 (with a corresponding increase to the Distributor’s other expense for the
six months ended June 30, 2007 of $1.1 million).





In
addition to the above, for the six months ended June 30, 2008, the Distributor
performed an interim review of its goodwill and intangible assets due to the
current economic market conditions in accordance with FAS 142, “Goodwill and Other Intangible
Assets” and FAS 144, “Accounting for the Impairment of
Disposal of Long Lived Assets.”  Based on the Distributor’s
impairment review, the Distributor recorded an impairment charge of $18.9
million against its goodwill and an impairment charge of $1.7 million against
its intangible assets as of June 30, 2008.
 
 The
cumulative impact of the above-described restatement adjustments (and, in the
case of goodwill and other intangible assets, the events described in Note 5) on
other income (expense), net income (loss), goodwill, other intangible assets,
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
and  six months ended June 30, 2008 and 2007 are as
follows:





(In thousands)
                          
                          Three
      Months Ended June 30, 2008 (Unaudited)
                          
                          
                          Six
      Months Ended June 30, 2008 (Unaudited)As
      Originally Reported
                          
                          
                          Restatement
                            Adjustments
                          
                          
                          As
      Restated
                          
                          
                          As
      Originally Reported
                          
                          
                          Restatement
                            Adjustments
                          
                          
                          As
      RestatedOther
      income (expense)
                          
                          $
                          210
                          
                          
                          $
                          -
                          
                          
                          $
                          210
                          
                          
                          $
                          (787
                          )
                          
                          $
                          -
                          
                          
                          $
                          (787
                          )Net
      loss
                          
                          
                          (11,736
                          )
                          
                          
                          (20,592
                          )
                          
                          
                          (32,328
                          )
                          
                          
                          (27,177
                          )
                          
                          
                          (20,592
                          )
                          
                          
                          (47,769
                          )Goodwill
                          
                          
                          87,512
                          
                          
                          
                          (18,906
                          )
                          
                          
                          68,606
                          
                          
                          
                          87,512
                          
                          
                          
                          (18,906
                          )
                          
                          
                          68,606Other
      intangible assets
                          
                          
                          7,604
                          
                          
                          
                          (1,686
                          )
                          
                          
                          5,918
                          
                          
                          
                          7,604
                          
                          
                          
                          (1,686
                          )
                          
                          
                          5,918Deposits
      and other
                          
                          
                          2,635
                          
                          
                          
                          2,649
                          
                          
                          
                          5,284
                          
                          
                          
                          2,635
                          
                          
                          
                          2,649
                          
                          
                          
                          5,284Total
      assets
                          
                          
                          224,824
                          
                          
                          
                          (17,943
                          )
                          
                          
                          206,881
                          
                          
                          
                          224,824
                          
                          
                          
                          (17,943
                          )
                          
                          
                          206,881Redeemable
      Class W units
                          
                          
                          -
                          
                          
                          
                          60,000
                          
                          
                          
                          60,000
                          
                          
                          
                          -
                          
                          
                          
                          60,000
                          
                          
                          
                          60,000Member's
      equity (deficit)
                          
                          
                          44,866
                          
                          
                          
                          (77,943
                          )
                          
                          
                          (33,077
                          )
                          
                          
                          44,866
                          
                          
                          
                          (77,943
                          )
                          
                          
                          (33,077
                          )






(In thousands)
              
              Three
      Months Ended June 30, 2007 (Unaudited)
              
              
              Six
      Months Ended June 30, 2007 (Unaudited)As
      Originally Reported
              
              
              Restatement
                Adjustments
              
              
              As
      Restated
              
              
              As
      Originally Reported
              
              
              Restatement
                Adjustments
              
              
              As
      RestatedOther
      expense
              
              $
              (264
              )
              
              $
              -
              
              
              $
              (264
              )
              
              $
              (527
              )
              
              $
              (1,134
              )
              
              $
              (1,661
              )Net
      income (loss)
              
              
              2,113
              
              
              
              -
              
              
              
              2,113
              
              
              
              (286
              )
              
              
              (1,134
              )
              
              
              (1,420
              )Deposits
      and other
              
              
              223
              
              
              
              2,649
              
              
              
              2,872
              
              
              
              223
              
              
              
              2,649
              
              
              
              2,872Total
      assets
              
              
              270,864
              
              
              
              2,649
              
              
              
              273,513
              
              
              
              270,864
              
              
              
              2,649
              
              
              
              273,513Redeemable
      Class W units
              
              
              -
              
              
              
              434,495
              
              
              
              434,495
              
              
              
              -
              
              
              
              434,495
              
              
              
              434,495Member's
      equity (deficit)
              
              
              97,025
              
              
              
              (431,846
              )
              
              
              (334,821
              )
              
              
              97,025
              
              
              
              (431,846
              )
              
              
              (334,821
              )


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 account for
the Class W Option Liability.  The Distributor is owned 70% by TWC
Holdings, Weinstein GP Holdings LLC 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.




13





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) $60.0 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 $60.0
million.




The Class
W Option Liability recorded at fair value in the Company’s balance sheet as of
June 30, 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 has determined the fair value of the Class W
Option Liability as of June 30, 2008 to be $2.9 million resulting in an increase
to other income of $2.8 million for the three months ended June 30, 2008 (as
compared to March 31, 2008), and an increase to other income of $1.2 million for
the six months ended June 30, 2008 (as compared to December 31, 2007). The
following table summarizes our fair value measurements using significant Level 3
inputs, and changes therein, for three and six months ended June 30,
2008:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2008
              
              
              June
      30, 2008Class
      W Option Liability:Balance
      at beginning of period
              
              $
              5,691
              
              
              $
              4,168Re-measurement
      of Class W Option Liability
              
              
              (2,771
              )
              
              
              (1,248
              )Balance
      at June 30, 2008
              
              $
              2,920
              
              
              $
              2,920





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.




14





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
                        
                        
                        Six
      Months EndedJune
      30, 2008
                          Restated (Note 3)
                        
                        
                        June
      30, 2007
                          Restated (Note 3)
                        
                        
                        June
      30, 2008
                          Restated (Note 3)
                        
                        
                        June
      30, 2007
                          Restated (Note 3)Revenues,
      net of sales, returns, discounts and allowances of $51,750 and
      $32,411 for the threemonths
      ended June 30, 2008 and 2007, respectively, and $80,756 and $64,083 for
      the six monthsended
      June 30, 2008 and 2007, respectively
                        
                        $
                        74,637
                        
                        
                        $
                        112,653
                        
                        
                        $
                        172,848
                        
                        
                        $
                        195,770Total
      cost of revenues
                        
                        
                        (75,697
                        )
                        
                        
                        (99,891
                        )
                        
                        
                        (177,691
                        )
                        
                        
                        (176,046
                        )Gross
      profit (loss)
                        
                        
                        (1,060
                        )
                        
                        
                        12,762
                        
                        
                        
                        (4,843
                        )
                        
                        
                        19,724Total
      operating expenses
                        
                        
                        (12,572
                        )
                        
                        
                        (10,385
                        )
                        
                        
                        (23,233
                        )
                        
                        
                        (19,483
                        )Impairment
      charge
                        
                        
                        (18,906
                        )
                        
                        
                        -
                        
                        
                        
                        (18,906
                        )
                        
                        
                        -(Loss)
      Income from operations
                        
                        
                        (32,538
                        )
                        
                        
                        2,377
                        
                        
                        
                        (46,982
                        )
                        
                        
                        241Other
      income (expense), net
                        
                        
                        210
                        
                        
                        
                        (264
                        )
                        
                        
                        (787
                        )
                        
                        
                        (1,661
                        )Net
      income (loss)
                        
                        $
                        (32,328
                        )
                        
                        $
                        2,113
                        
                        
                        $
                        (47,769
                        )
                        
                        $
                        (1,420
                        )




15




GENIUS
PRODUCTS, LLC


CONDENSED
CONSOLIDATED BALANCE SHEETS


(IN
THOUSANDS)




June
      30, 2008
                    
                    
                    December
      31, 2007Restated
      (Note 3)
                    
                    
                    Restated(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    427
                    
                    
                    $
                    3,102Restricted
      cash - short term
                    
                    
                    13,412
                    
                    
                    
                    7,765Accounts
      receivable, net of allowance for doubtful accounts of $2,839 and
      $4,311and
      sales returns of $45,809 and $68,159
                    
                    
                    42,584
                    
                    
                    
                    123,295Inventories,
      net of reserves for obsolescence of $12,989 and $13,257
                    
                    
                    11,418
                    
                    
                    
                    11,282Prepaid
      expenses and other current assets
                    
                    
                    606
                    
                    
                    
                    1,110Total
      current assets
                    
                    
                    68,447
                    
                    
                    
                    146,554Restricted
      cash - long term
                    
                    
                    3,186
                    
                    
                    
                    3,323Property
      and equipment, net of accumulated depreciation of $667 and
      $455
                    
                    
                    4,246
                    
                    
                    
                    953Royalty
      advances, net of uncollectible advances of $9,954 and
    $5,112
                    
                    
                    35,389
                    
                    
                    
                    31,492Film
      library, net of accumulated amortization of $9,707 and
    $6,452
                    
                    
                    14,482
                    
                    
                    
                    14,403Goodwill
                    
                    
                    68,606
                    
                    
                    
                    87,512Other
      intangible assets, net of accumulated amortization of $13,667 and
      $9,675
                    
                    
                    5,918
                    
                    
                    
                    11,596Deferred
      financing fees
                    
                    
                    1,323
                    
                    
                    
                    1,654Deposits
      and other
                    
                    
                    5,284
                    
                    
                    
                    5,617Total
      assets
                    
                    $
                    206,881
                    
                    
                    $
                    303,104LIABILITIES
      AND MEMBER'S DEFICITCurrent
      liabilities:Accounts
      payable
                    
                    $
                    23,885
                    
                    
                    $
                    31,477Notes
      payable
                    
                    
                    15,981
                    
                    
                    
                    31,297Notes
      payable to Genius Products, Inc.
                    
                    
                    8,506
                    
                    
                    
                    -Remittance
      to TWC
                    
                    
                    61,666
                    
                    
                    
                    78,759Remittance
      to other licensors
                    
                    
                    23,155
                    
                    
                    
                    20,000Accrued
      advertising and marketing
                    
                    
                    16,045
                    
                    
                    
                    24,515Other
      accrued expenses
                    
                    
                    12,944
                    
                    
                    
                    20,910Deferred
      revenue
                    
                    
                    16,148
                    
                    
                    
                    8,492Total
      current liabilities
                    
                    
                    178,330
                    
                    
                    
                    215,450Long
      term liabilities:Notes
      payable to Genius Products, Inc.
                    
                    
                    -
                    
                    
                    
                    8,191Long
      term notes payable
                    
                    
                    1,599
                    
                    
                    
                    627Long
      term capital lease
                    
                    
                    29
                    
                    
                    
                    30Total
      long term liabilities
                    
                    
                    1,628
                    
                    
                    
                    8,848Redeemable
      Class W units
                    
                    
                    60,000
                    
                    
                    
                    284,378Total
      member's deficit
                    
                    
                    (33,077
                    )
                    
                    
                    (205,572
                    )Total
      liabilities and member's deficit
                    
                    $
                    206,881
                    
                    
                    $
                    303,104




16




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.


With
respect to the six months ended June 30, 2007, and as a result of restating the
Distributor’s financial statements as described in Note 3, the net loss for the
six months ended June 30, 2007 increased by $1.1 million to $1.4
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 six months ended June 30, 2007).


With
respect to the six months ended June 30, 2008, the Distributor performed an
interim review of its goodwill and intangible assets due to the current economic
market conditions in accordance with FAS 142, “Goodwill and Other Intangible
Assets” and FAS 144, “Accounting for the Impairment of
Disposal of Long Lived Assets.” The Distributor believes it is more than
likely that the carrying value of the Distributor’s goodwill and intangible
assets exceed their fair value as of June 30, 2008.  Based on the
Distributor’s impairment review, the Distributor recorded an impairment charge
of $18.9 million against its goodwill and an impairment charge of $1.7 million
against its intangible assets as of June 30, 2008.  In light of the
continued adverse economic conditions in the marketplace, the Distributor will
continue to monitor its goodwill and intangible assets for possible future
impairment.  The aforementioned impairments of the Distributor’s
goodwill and intangible assets resulted in a basis difference adjustment to the
Company’s investment in the Distributor of $6.2 million (which is 30% of the net
loss from the Distributor for the six months ended June 30,
2008).




Six
      Months Ended June 30,2008
                
                
                2007
                  Restated (Note 3)Genius
      Products, Inc. 30% share of net loss from the Distributor
                
                $
                14,331
                
                
                $
                426Adjustments
      for basis differences
                
                
                525
                
                
                
                2,221(Benefit)/Expense
      for stock compensation for Distributor employees
                
                
                (1,129
                )
                
                
                942Genius
      Products, Inc. 30% share of interest on the Distributor's notes
      payable
                
                
                (94
                )
                
                
                -Equity
      in net loss from Distributor
                
                $
                13,633
                
                
                $
                3,589


In the
quarterly period ended June 30, 2008, the Distributor continued to implement 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 charge to operations relating to
involuntary termination costs was $0.4 million.  A roll-forward of the
related liability is provided below:




Severance
      costs charged to G&A expense during the second fiscal quarter
      2008
              
              $
              426,527Severance
      costs paid during the second fiscal quarter 2008
              
              
              (341,861
              )Accrued
      severance balance at June 30, 2008
              
              $
              84,667




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 $15.0 million at June 30, 2008. The maximum amount
available at June 30, 2008 was $16.5 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.




17





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.





NOTE
7.  NOTES RECEIVABLE FROM RELATED PARTY





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 June 30, 2008, an aggregate of $8.5 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.




18





NOTE
8.  STOCKHOLDERS' EQUITY




COMMON
STOCK


During
the six months ended June 30, 2008, we issued 50,000 common shares related to
the exercise of stock options for proceeds of $0.04 million.  In
addition, the Company retired 150,000 shares of its common stock in the second
quarter.  No warrants were exercised during the six months ended June
30, 2008.





During
the six months ended June 30, 2007, we issued 2,368,573 common shares related to
the exercise of warrants (some of which were cashless exercises) for proceeds of
$1.8 million. Additionally, during the six months ended June 30, 2007, we issued
830,495 common shares related to the exercise of options for proceeds of $1.4
million.





A summary
of warrant activity follows:




WeightedAverage
              
              
              AggregateWarrants
              
              
              Exercise
              
              
              IntrinsicOutstanding
              
              
              Price
              
              
              ValueDecember
      31, 2007
              
              
              10,425,958
              
              
              $
              2.45Cancelled
              
              
              (668,038
              )June
      30, 2008
              
              
              9,757,920
              
              
              $
              2.53
              
              
              $
              -Warrants
      exercisable, June 30, 2008
              
              
              9,757,920
              
              
              $
              2.53
              
              
              $
              -




The
following information applies to warrants outstanding at June 30,
2008:




Weighted
              
              
              
              
              
              Weightedaverage
              
              
              
              
              
              averageexercise
      price of
              
              
              
              
              
              exercise
      price ofWarrants
              
              
              Average
              
              
              warrants
              
              
              Warrants
              
              
              warrantsoutstanding
              
              
              remaining
      life
              
              
              outstanding
              
              
              exercisable
              
              
              exercisableUnder
      $1.50
              
              
              
              275,718
              
              
              
              0.10
              
              
              $
              1.40
              
              
              
              275,718
              
              
              $
              1.40$1.50
      - $1.99
              
              
              
              170,723
              
              
              
              2.26
              
              
              
              1.88
              
              
              
              170,723
              
              
              
              1.88$2.00
      - $2.99
              
              
              
              7,664,479
              
              
              
              2.09
              
              
              
              2.48
              
              
              
              7,664,479
              
              
              
              2.48$3.00
      - $3.99
              
              
              
              1,647,000
              
              
              
              0.75
              
              
              
              3.00
              
              
              
              1,647,000
              
              
              
              3.009,757,920
              
              
              
              1.81
              
              
              $
              2.53
              
              
              
              9,757,920
              
              
              $
              2.53




NOTE
9.  STOCK-BASED COMPENSATION





The
following table summarizes the activity for outstanding options for the three
months ended June 30, 2008:




WeightedAverage
              
              
              AggregateOptions
              
              
              Exercise
              
              
              IntrinsicOutstanding
              
              
              Price
              
              
              ValueDecember
      31, 2007
              
              
              17,770,041
              
              
              $
              1.82Exercised
              
              
              (50,000
              )
              
              
              0.89Canceled
              
              
              (173,666
              )
              
              
              1.81June
      30, 2008
              
              
              17,546,375
              
              
              $
              1.83
              
              
              $
              -Options
      exercisable, June 30, 2008
              
              
              15,132,566
              
              
              $
              1.79
              
              
              $
              -




19




The
following table summarizes additional information regarding outstanding and
exercisable stock options as of June 30, 2008:




Weighted
              
              
              
              
              
              Weightedaverage
              
              
              
              
              
              averageexercise
      price of
              
              
              
              
              
              exercise
      price ofOptions
              
              
              Average
              
              
              options
              
              
              Options
              
              
              optionsoutstanding
              
              
              remaining
      life
              
              
              outstanding
              
              
              exercisable
              
              
              exercisableUnder
      $1.50
              
              
              
              1,900,752
              
              
              
              3.57
              
              
              $
              0.67
              
              
              
              1,900,752
              
              
              $
              0.67$1.50
      - $1.99
              
              
              
              10,573,373
              
              
              
              6.49
              
              
              
              1.72
              
              
              
              9,156,064
              
              
              
              1.69$2.00
      - $2.99
              
              
              
              3,917,500
              
              
              
              6.47
              
              
              
              2.15
              
              
              
              2,921,000
              
              
              
              2.10$3.00
      - $3.99
              
              
              
              793,750
              
              
              
              5.58
              
              
              
              3.00
              
              
              
              793,750
              
              
              
              3.00$4.00
      + over
              
              
              
              361,000
              
              
              
              4.08
              
              
              
              5.07
              
              
              
              361,000
              
              
              
              5.0717,546,375
              
              
              
              6.08
              
              
              $
              1.83
              
              
              
              15,132,566
              
              
              $
              1.79


For the
service-based stock options, the Distributor estimated share-based compensation
expense for the three months ended June 30, 2008 and 2007 using the
Black-Scholes-Merton formula with the following weighted average
assumptions:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2008
              
              
              June
      30, 2008Risk
      free interest rate
              
              
              3.8%
              
              
              
              3.6%Expected
      dividend yield
              
              
              -
              
              
              
              -Expected
      volatility
              
              
              74.5%
              
              
              
              73.7%Expected
      life (in years)
              
              
              6.0
              
              
              
              6.0




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 54.89%.  The risk-free rates have
been determined based upon the interest rates for zero-coupon U.S. Treasury
bonds as of June 30, 2008.  A yield curve has been determined based
upon interpolating between the rates ranging from 1.60% to
3.99%.  Consistent with the service-based stock option grants, the
dividend rate is 0.0% for the performance-based option grants.





Total
share-based compensation expense recognized by the Company for the three and six
months ended June 30, 2008 was $0.1 million and $0.04 million versus
compensation expense of $0.4 million and $0.6 for the three and six months ended
June 30, 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 $0.3 million and $1.6
million for the three and six months ended June 30, 2008 versus an expense of
$0.8 million and $1.3 million for the three and six months ended June 30,
2007.




NOTE
10.  INCOME TAXES





The
Company recorded a federal and state tax benefit of $12.8 million for the six
months ended June 30, 2008.  The tax benefit resulted from the
reversal of the deferred tax liability related to our investment in the
Distributor primarily due to the impairment recorded.




20


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.





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 176
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.




21




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), 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.





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
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.




22





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 historically 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 was not offset against the
deferred tax assets as the reversal period for this amount was not considered to
be determinable on a more likely than not basis.  In the current
period, the tax basis of our investment in Distributor surpassed the amount for
financial reporting purposes.  Accordingly, the entire deferred tax
liability was reversed.





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 June 30, 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.




23


Revenues





The
Company had no revenue for the three and six months ended June 30, 2008 and the
three and six months ended June 30, 2008.  All of the revenue is
reflected in the results of operations of the Distributor. The Distributor
generated net revenue of $74.6 million net of sales returns, discounts and
allowances of $51.8 million for the three months ended June 30, 2008 versus net
revenue of $112.7 million net of sales returns, discounts and allowances of
$32.4 million for the three  months ended June 30,
2007.  The Distributor generated net revenue of $172.8 million net of
sales returns, discounts and allowances of $80.8 million for the six months
ended June 30, 2008 versus net revenue of $195.8 million net of sales returns,
discounts and allowances of $64.1 million for the six  months ended
June 30, 2007.




Net
revenue from sales of TWC titles was $50.0 million, and net revenue from sales
of non-TWC titles was $24.6 million for the three months ended June 30,
2008.  For the three months ended June 30, 2007, net revenue from
sales of TWC titles was $81.2 million and net revenue from sales of non-TWC
titles was $31.5 million.  For the six months ended June 30, 2008, net
revenue from sales of TWC titles was $109.1 million, and net revenue from sales
of non-TWC titles was $63.7 million.  For the six months ended June
30, 2007, net revenue from sales of TWC titles was $141.9 million and net
revenue from sales of non-TWC titles was $53.9 million





TWC
related revenues were primarily comprised of major TWC titles released during
the three months ended June 30, 2008, which include The Great Debaters, The Diary of the
Dead and Cassandra’s Dream. For the three months ended June 30, 2007, TWC
related revenues were primarily comprised of major titles including Hannibal Rising, Black Christmas,
Arthur and the Invisibles, Bobby, and Miss Potter.  The US box
office for the TWC titles released during the three months ended June 30, 2008
declined by 49%, and the US box office declined by 20% during the six months
ended June 30, 2008.





Net
revenue from non-TWC titles decreased by $6.9 million or 21.9% for the three
months ended June 30, 2008 versus the three months ended June 20, 2007 due to
timing of releases.  Net revenue from non-TWC titles increased by $10.4
million or 19.3% for the six months ended June 30, 2008 versus the six months
ended June 30, 2007 primarily driven by stronger performance of new titles from
our key content partners.





Sales
returns, discounts and allowances as a percentage of gross revenue was 40.9% for
the three months ended June 30, 2008, versus 22.3% for the three months ended
June 30, 2007.  Sales returns, discounts and allowances as a
percentage of gross revenue was 31.9% for the six months ended June 30, 2008,
versus 24.7% for the six months ended June 30, 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.





Costs and
expenses




Cost
of Revenues




The
Company had no costs of revenues for the three and six months ended June 30,
2008 and for the three months and six months ended June 30, 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 $75.7 and $177.7 million for the three and
six months ended June 30, 2008 versus $99.9 million and $176.0 million for the
three and six months ended June 30, 2007.





Product
cost, supply chain, and inventory obsolescence costs were $17.9 million for the
three months ended June 30, 2008 and $34.5 million for the six months ended June
30, 2008 versus $13.5 million and $33.8 million for the three and six months
ended June 30, 2007.   The increase in cost of $0.7 million for
the six months ended June 30, 2008 was primarily due to increases in product
cost and obsolescence offset by efficiencies achieved in the supply
chain.




Bad debt and customer deductions decreased by $0.6 for
the three months ending June 30, 2008 and $1.5 million for the six months ending
June 30, 2008 versus a charge of $0.2 million for the six months ended June 30,
2007 due to improved accounts receivable collections, and better management of
customer deductions.




Amortization of intangibles and film library increased
by $1.4 million and $6.5 million in the three and six months ended June 30, 2008
versus the three and six months ended June 30, 2007.  Based on an
evaluation of fair market value and re-alignment of company resources during the
first six months of 2008, the Distributor accelerated the amortization of its
film library by $0.9 million and also wrote off the value of certain intangible
assets which were deemed to be impaired.




24




Marketing and advertising costs decreased by $5.5
million for the three months ended June 30, 2008 and $7.0 million for six months
ended June 30, 2008.  The reduction in marketing cost was primarily
due to efficiencies in managing market development funds, a decrease in the
number of TWC titles being released, and implementing strict budgetary
controls.


Participations for TWC titles decreased by $23.3 million
for the three months ended June 30, 2008 and $13.4 million for the six months
ended June 30, 2008.  The reduction in participation cost was directly
related to 30% decline in revenue in the six months ended June 30, 2008 versus
six months ended June 30, 2007.  Participation expenses for non-TWC
titles decreased by $0.5 million for the three months ended June 30, 2008 and
increased by $16.4 million for the six months ended June 30,
2008.  The six month increase was primarily driven by a 19.3% increase
in non-TWC revenue.




Operating
Expenses


The
Company had selling, general and administrative expenses of $1.3 million and
$2.6 million for the three and six months ended June 30, 2008, respectively,
versus $1.5 million and $2.5 million for the three and six months ended June 30,
2007, respectively.
 
 The
Company’s 30% equity in the net loss of the Distributor was $8.8 and $13.6
million for the three and six months ended June 30, 2008 versus
$1.0 million and $3.6 million for the three and six months ended
June 30, 2007.  Included within the Company’s 30% equity in the
net loss of the Distributor for the three and six months ended June 30, 2008 was
$6.2 million resulting from the Distributor recording an impairment to its
goodwill and intangible assets.
 
 In the
second quarter of 2008, the Company hired an independent financial and strategic
advisory firm to determine the fair value of the Distributor as of June 30,
2008, which resulted in the Company recording an impairment charge of $34.9
million for the three and six months ended June 30, 2008, as the Company
concluded that an other than temporary decline had occurred in the fair value of
the Distributor as of June 30, 2008.





Other Income and
Expense





The
Company had other income of $2.8 million and $1.3 million for the three and six
months ended June 30, 2008 versus $0.01 million and $0.4 million for the three
and six months ended June 30, 2007.  Other income reflects the
re-measurement of the Class W Option Liability.  The Company also had
interest income of $0.1 million and $0.2 million for the three and six months
ended June 30, 2008, and $0.1 million and $0.1 million for the three and six
months ended June 30, 2007.





LIQUIDITY
AND CAPITAL RESOURCES




At June 30, 2008, the Company had cash
balances of $1.8 million and the Distributor had cash and restricted cash
balances of $17.0 million.  The restricted cash balances are associated
with (i) required minimum cash balances pursuant to the Amended 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
used its maximum availability under its current credit facility which was
$16.5 million as of June 30, 2008.  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.  In addition, the financing historically
provided by TWC will not be available to the Distributor effective
January 1, 2009.




In the
event that non-TWC revenue increase, 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 June 30, 2008, the Company had no off-balance
sheet arrangements.





25




ITEM 3.QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




As of
June 30, 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.





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 June 30, 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.
              Management
      did not adequately supervise the accumulation, analysis, and computation
      of stock compensation 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.




26




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 inventory obsolescence
      reserve, and sales returns and price protection reserves.
              In
      calculating the Distributor’s reserves, management utilized incorrect
      projections which resulted in material adjustments being
      recorded.




The
Company will continue its efforts to strengthen its accounting and finance
departments and aggressively pursue remediation of all material
weaknesses.  The Company filled the position of Chief Accounting
Officer in the second quarter of 2008.





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.


27
  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.


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).





10.1
            Severance
      Agreement, effective as of May 9, 2008, by and among John Mueller, Genius
      Products, Inc. and Genius Products, LLC (Incorporated by reference to
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on May 30, 2008).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.


28


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
      26, 2009
            By:
            /s/ Trevor
      DrinkwaterTrevor
      Drinkwater
              President
      and Chief Executive Officer
              (Principal Executive
      Officer)Dated:  March
      26, 2009
            By:
            /s/ Edward J.
      ByrnesEdward J.
      Byrnes
              Chief
      Financial Officer
              (Principal Financial
      and Accounting Officer)






















29