**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**Amendment
      No. 1 to**


**FORM
      10-Q**





(Mark
      One)


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




For
      the
      quarterly period ended March 31, 2006




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




For
      the
      transition period from _____________ to _____________




COMMISSION
      FILE NUMBER 000-27915




**GENIUS
      PRODUCTS, INC.**


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




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




**2230
      BROADWAY**


**SANTA
      MONICA, CA 90404**


**(Address
      of principal executive offices)**




**(310)
      453-1222**


**(Registrant’s
      telephone number)**







**740
      LOMAS SANTA FE, SUITE 210**


**SOLANA
      BEACH, CA 92075**


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


**if
      changed since last report)**




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




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




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





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




There
      were 60,762,626 shares outstanding of the issuer’s Common Stock as of
      May 11, 2006.













**EXPLANATORY
      NOTE**




On
      April
      12, 2007, the Audit Committee of the Board of Directors of the
      Company, acting on a recommendation from the Company’s management,
      determined that the Company’s unaudited condensed consolidated financial
      statements as of and for the quarters ended March 31, June 30, and
      September 30, 2006 should be restated to revise the accounting and related
      disclosures for net revenues, cost of revenues, gross profit, net loss, basic
      and diluted loss per common share, accounts receivable, production masters,
      film
      library, accrued expenses, and stockholders’ equity. The impact of the
      restatements on the quarter ended March 31, 2006 is further discussed in
      Note 2 to the unaudited condensed consolidated financial statements included
      herein.




This
      amendment is being filed for the purpose of amending and restating Items 1,
      2
      and 4 of Part I and Item 6 of Part II of the Form 10-Q originally filed
      solely to the extent necessary (i) to reflect the restatement of the
      Company’s unaudited condensed consolidated financial statements as of and for
      the period ended March 31, 2006, as described in Note 2 to the unaudited
      condensed consolidated financial statements, (ii) to make revisions to
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” as warranted by the restatement, (iii) to make revisions to
      Item 4 of Part I to reflect our evaluation of controls and procedures as of
      the date of filing of this amendment, (iv) to update the certifications
      required by the Sarbanes-Oxley Act of 2002, and (v) to update the exhibits.




This
      Amendment No. 1 to Quarterly Report on Form 10-Q is as of the date of the
      Form 10-Q originally filed, except for material subsequent events more fully
      described in Note 2 to the unaudited condensed consolidated financial
      statements.




2




**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**




**INDEX**




**PAGE****PART I**
              
              **FINANCIAL
                  INFORMATION**Item 1
              
              Financial
                  StatementsCondensed
                  Consolidated Balance Sheets at March 31, 2006 (unaudited) and
                  December 31, 2005 (audited)
              
              5Condensed
                  Consolidated Statements of Operations for the Three Months Ended
                  March 31,
                  2005 (unaudited) and 2006 (unaudited)
              
              6Condensed
                  Consolidated Statements of Cash Flow for the Three Months Ended
                  March 31,
                  2005 (unaudited) and 2006 (unaudited)
              
              7Notes
                  to Condensed Consolidated Financial Statements (unaudited)
              
              8Item 2
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              18Item 3
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              25Item 4
              
              Controls
                  and Procedures
              
              25**PART II**
              
              **OTHER
                  INFORMATION**Item 1
              
              Legal
                  Proceedings
              
              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
              
              26Item 5
              
              Other
                  Information
              
              26Item 6
              
              Exhibits
              
              26**SIGNATURES**
              
              27




3




**NOTICE
      ABOUT FORWARD-LOOKING STATEMENTS**




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




These
      factors include, among other things, our inability to raise additional working
      capital, changes in debt and equity markets, increased competitive pressures,
      changes in our business plan, our inability to complete the transaction with
      The
      Weinstein Company, the anticipated timing and financial performance of new
      DVD
      releases including *Derailed,
      Hoodwinked, Mrs. Henderson Presents, Wolf Creek, The Matador,* and
      sequels to *Sin
      City, Scary Movie,*and*Kill Bill,* and
      changes in the retail DVD and entertainment industries. Also, these
      forward-looking statements present our estimates and assumptions only as of
      the
      date of this report. For further details and a discussion of these and other
      risks and uncertainties, see “Forward-Looking Statements” and “Risk Factors” in
      our most recent Annual Report on Form 10-K. Unless otherwise required by law,
      we
      undertake no obligation to publicly update any forward-looking statement,
      whether as a result of new information, future events or otherwise.




4




**PART
      I - FINANCIAL INFORMATION**




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




**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**




**December 31,**
              **2005**
            
            **March 31,**
              **2006**
              **Restated**
              **(Note
                2)****(unaudited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            30,597,164
            
            $
            18,402,355Accounts
                receivable, net of allowance for doubtful accounts and sales returns
                of
                $6,908,789 and $8,366,779
            
            
            2,406,658
            
            
            42,038,129Inventories,
                net
            
            
            5,567,953
            
            
            9,441,962Prepaid
                expenses
            
            
            703,875
            
            
            565,460Notes
                receivable, related party
            
            
            750,000
            
            
            —Total
                current assets
            
            
            40,025,650
            
            
            70,447,906Restricted
                cash
            
            
            —
            
            
            300,650Property
                and equipment, net
            
            
            396,358
            
            
            620,489Film
                library and production masters, net of accumulated amortization of
                $4,027,308 and $4,401,737
            
            
            19,727,179
            
            
            20,288,203Notes
                receivable, related party
            
            
            1,712,353
            
            
            1,547,102Goodwill
            
            
            14,487,917
            
            
            14,487,917Deposits
                and other
            
            
            15,545
            
            
            195,913Total
                assets
            
            $
            76,365,002
            
            $
            107,888,180**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            9,242,560
            
            $
            13,542,394Notes
                payable
            
            
            5,379,296
            
            
            200,000Remittance
                to licensor
            
            
            —
            
            
            16,257,453Accrued
                expenses
            
            
            3,307,893
            
            
            8,802,175Deferred
                revenue
            
            
            —
            
            
            16,262,426Customer
                deposits
            
            
            189,423
            
            
            189,423Debentures
                payable
            
            
            50,750
            
            
            —Redeemable
                common stock
            
            
            414,471
            
            
            —Total
                current liabilities
            
            
            18,584,393
            
            
            55,253,871Deferred
                gain, related party
            
            
            1,212,353
            
            
            1,292,623Deferred
                tax liability
            
            
            1,380,338
            
            
            1,334,233Total
                liabilities
            
            
            21,177,084
            
            
            57,880,727Commitments
                and contingenciesStockholders’
                equityPreferred
                stock, $.0001 par value; 10,000,000 shares authorized; no shares
                outstanding
            
            
            —
            
            
            —Common
                stock, $.0001 par value; 100,000,000 shares authorized; 60,438,154
                and
                60,622,626 shares outstanding
            
            
            6,044
            
            
            6,062Additional
                paid-in capital
            
            
            93,919,755
            
            
            95,458,993Accumulated
                deficit
            
            
            (38,737,881
            )
            
            (45,457,602
            )Total
                stockholders’ equity
            
            
            55,187,918
            
            
            50,007,453Total
                liabilities and stockholders’ equity
            
            $
            76,365,002
            
            $
            107,888,180




See
        accompanying notes to condensed unaudited interim financial statements


5


**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**




**Three
                  Months Ended March 31,****2005**
              
              **2006**
                **Restated**
                **(Note
                  2)**Revenues,
                  net of sales returns, discounts and allowances of $209,304 and
                  $8,843,308,
                  respectively
              
              $
              2,555,886
              
              $
              27,912,097Total
                  cost of revenues
              
              
              2,666,801
              
              
              28,797,191Gross
                  loss
              
              
              (110,915
              )
              
              (885,094
              )Operating
                  expenses (income):General
                  and administrative
              
              
              2,114,769
              
              
              5,683,052Gain
                  on sale, related party
              
              
              —
              
              
              (40,267
              )Total
                  operating expenses
              
              
              2,114,769
              
              
              5,642,785Loss
                  from operations
              
              
              (2,225,684
              )
              
              (6,527,879
              )Interest
                  and other income (expense), net
              
              
              (5,840
              )
              
              (237,947
              )Loss
                  before provision for income taxes
              
              
              (2,231,524
              )
              
              (6,765,826
              )Provision
                  (benefit) for income taxes
              
              
              800
              
              
              (46,105
              )Net
                  loss
              
              $
              (2,232,324
              )
              $
              (6,719,721
              )Basic
                  and diluted net loss per share
              
              $
              (0.08
              )
              $
              (0.11
              )Basic
                  and diluted weighted average shares
              
              
              28,000,009
              
              
              60,465,789






See
        accompanying notes to condensed unaudited interim financial statements


6




**GENIUS
      PRODUCTS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**




**Three
                  Months Ended March 31,****2005**
              
              **2006**
                **Restated**
                **(Note
                  2)**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (2,232,324
              )
              $
              (6,719,721
              )Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Depreciation
                  and amortization
              
              
              35,922
              
              
              48,185Amortization
                  of film library
              
              
              —
              
              
              311,089Change
                  in allowance for doubtful accounts and provision for
                  returns
              
              
              (837,217
              )
              
              9,146,531Change
                  in provision for obsolete inventory
              
              
              —
              
              
              (178,041
              )Common
                  stock issued for services
              
              
              58,579
              
              
              19,100Stock
                  compensation expense
              
              
              —
              
              
              920,833Interest
                  expense on redeemable common stock
              
              
              4,825
              
              
              —Increase
                  (decrease) in Debentures payable
              
              
              —
              
              
              (50,750
              )Increase
                  (decrease) in Deferred gain, related party
              
              
              —
              
              
              80,270*Changes
                  in assets and liabilities:*(Increase)
                  decrease in Accounts receivable
              
              
              2,687,842
              
              
              (48,778,002
              )(Increase)
                  decrease in Inventories
              
              
              646,738
              
              
              (3,695,968
              )(Increase)
                  decrease in Prepaid expenses, notes receivable, deposits and
                  other
              
              
              16,800
              
              
              873,298(Increase)
                  decrease in film library
              
              
              (878,189
              )
              
              (872,113
              )Increase
                  (decrease) in Accounts payable
              
              
              (4,723,799
              )
              
              4,299,834Increase
                  (decrease) in Accrued expenses
              
              
              137,912
              
              
              5,494,282Increase
                  (decrease) in Deferred revenue
              
              
              —
              
              
              16,262,426Increase
                  (decrease) in Remittance to licensor
              
              
              —
              
              
              16,257,453Increase
                  (decrease) in Deferred tax liability
              
              
              —
              
              
              (46,105
              )Net
                  cash used in operating activities
              
              
              (5,082,911
              )
              
              (6,627,399
              )Cash
                  flows from investing activities:AVM
                  cash, net of expenses paid in cash
              
              
              (188,886
              )
              
              —Restricted
                  cash
              
              
              —
              
              
              (300,650
              )Purchase
                  of property and equipment
              
              
              (36,857
              )
              
              (272,316
              )Net
                  cash used in investing activities
              
              
              (225,743
              )
              
              (572,966
              )Cash
                  flows from financing activities:Payments
                  on notes payable
              
              
              —
              
              
              (5,179,296
              )Payments
                  on short-term debt
              
              
              (2,349,219
              )
              
              —Payments
                  of offering costs
              
              
              (718,589
              )
              
              —Proceeds
                  from exercise of options
              
              
              83,580
              
              
              138,551Proceeds
                  from exercise of warrants
              
              
              557,560
              
              
              46,301Proceeds
                  from issuance of common stock
              
              
              10,300,000
              
              
              —Net
                  cash (used in) provided by financing activities
              
              
              7,873,332
              
              
              (4,994,444
              )Net
                  increase (decrease) in cash and equivalents
              
              
              2,564,678
              
              
              (12,194,809
              )Cash
                  and cash equivalents at beginning of period
              
              
              1,223,880
              
              
              30,597,164Cash
                  and cash equivalents at end of period
              
              $
              3,788,558
              
              $
              18,402,355Supplemental
                  disclosure of cash flow information:Warrants
                  issued for offering costs
              
              $
              1,014,986
              
              $
              —Issuance
                  of common stock for offering costs
              
              $
              350,000
              
              $
              —Interest
                  paid
              
              $
              1,015
              
              $
              74,060Taxes
                  paid
              
              $
              800
              
              $
              —




See
        accompanying notes to condensed unaudited interim financial statements


7




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**




**NOTE
      1. NATURE OF BUSINESS**




Genius
      Products, Inc. (“we”, “our” or “the Company”) produces, publishes and
      distributes digital versatile discs or DVDs, universal mini discs or UMDs,
      and
      compact discs or CDs. Our products are marketed under both proprietary and
      licensed brands. We sell directly to major retailers and to third party
      distributors. We also sell our products through various websites on the
      Internet.




THE
        WEINSTEIN COMPANY TRANSACTION. On December 5, 2005, we entered into a
        Master Contribution Agreement (the “Agreement”) in connection with the formation
        of a new venture (an entity hereafter referred to as the “Distributor”) to
        exploit the exclusive U.S. home video distribution rights to feature film
        and
        direct-to-video releases owned or controlled by The Weinstein Company (“TWC”)
        (the “Transaction”) (see Item 2. Management’s Discussion and Analysis of
        Financial Condition and Results of Operations—Recent Strategic Transactions).
        Under the terms of the Agreement, at the closing of the Transaction (“Closing”),
        which is expected to be during the second quarter of 2006, we will contribute
        to
        the Distributor substantially all of our assets, employees and existing
        businesses and certain liabilities, and the Distributor will hold a distribution
        agreement from TWC entitling it to distribute in the United States, and receive
        a distribution fee on, all filmed entertainment for which TWC owns or controls
        U.S. home video distribution rights. The Distributor will be 70% owned by
        TWC or
        its affiliates and 30% owned by us. The Company’s interest in the Distributor
        will consist of Class G Units representing a 30% membership interest in the
        Distributor, and the interest of TWC or its affiliates will consist of Class
        W
        Units representing a 70% membership interest in the Distributor. The 70%
        interest in the Distributor held by TWC or its affiliates will be redeemable,
        at
        their option at any time from one year after the Closing, for up to 70% of
        our
        outstanding common stock, or with their approval, cash. We expect to file
        a
        proxy in late May or June 2006 to obtain shareholder approval for this
        Transaction. Commencing on December 5, 2005 through the Closing, we are
        operating under an interim distribution agreement with TWC and are recording
        the
        results from titles we first released for TWC in March 2006 in our financial
        statements.




BASIS
        OF
        PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The accompanying
        condensed consolidated financial statements as of and for the three months
        ended
        March 31, 2006 and 2005 have been prepared by us and are unaudited. The
        condensed consolidated financial statements have been prepared in accordance
        with generally accepted accounting principles, pursuant to the rules and
        regulations of the Securities and Exchange Commission. In the opinion of
        management, the accompanying condensed consolidated financial statements
        include
        all adjustments of a normal recurring nature that are necessary for a fair
        presentation of the results of operations and cash flows for the interim
        periods
        presented. Certain information and footnote disclosures normally included
        in
        financial statements have been condensed or omitted pursuant to such rules
        and
        regulations.





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.
      Although we believe that the disclosures are adequate to make the information
      presented not misleading, it is suggested that these interim consolidated
      financial statements be read in conjunction with the consolidated financial
      statements and the notes thereto included in the Company’s Form 10-K for the
      year ended December 31, 2005. Amounts related to disclosures of December 31,
      2005 balances within these interim statements were derived from the
      aforementioned Form 10-K. The results of operations for the three months ended
      March 31, 2006 are not necessarily indicative of the results to be expected
      for
      the full year.





CONCENTRATIONS
        OF CREDIT RISK. For the three month period ended March 31, 2006, Wal-Mart
        and Blockbuster accounted for 37.8% and 13.8% of net revenues, respectively.
        At
        March 31, 2006 these customers comprised 34.1% and 12.6%, respectively, of
        the accounts receivable before allowances. For the three months ended
        March 31, 2005, Sam’s Club, Target, 99 Cent Only Stores, and Anderson
        Merchandisers accounted for 16%, 14%, 13%, and 13% of net revenue, respectively.
        For the three months ended March 31, 2006, these customers accounted for
        1.5%, 7.4%, 0%, and 1.6% of net revenues, respectively. At March 31, 2005,
        these customers comprised 9.9%, 4.0%, 0% and 11.7%, respectively, of the
        accounts receivable before allowances.




8


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




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




Under
      SFAS No. 123R, share-based compensation cost is measured at the grant date,
      based on the estimated fair value of the award, and is recognized as expense
      over the employee’s requisite service period. The Company adopted the provisions
      of SFAS No. 123R using a modified prospective application. The valuation
      provisions of SFAS No. 123R apply to new awards and to awards that are
      outstanding on the effective date and subsequently modified or cancelled.
      Share-based compensation expense recognized under SFAS No. 123R includes
      share-based awards granted subsequent to December 31, 2005, based on the grant
      date fair value estimated in accordance with the provisions of SFAS No. 123R
      as
      well as share-based awards granted prior to, but not yet vested as of December
      31, 2005, based on the grant date fair value estimated in accordance with the
      provisions of SFAS No. 123R. In accordance with the modified prospective method,
      the consolidated financial statements for prior periods have not been restated
      to reflect, and do not include, the share-based compensation impact of SFAS
      No.
      123R.




INCOME
      TAXES. For the first three months ended March 31, 2006, the Company recognized
      a
      tax benefit of approximately $2.69 million, which was substantially offset
      by a
      valuation allowance of $2.64 million. As a result, the Company recorded $0.05
      million of tax benefits attributable to the liability recognized from the
      purchase accounting in connection with the Wellspring acquisition. The Company
      currently has a full valuation allowance on its deferred tax assets and has
      recorded a net deferred tax liability relating to the purchase accounting in
      connection with the Wellspring acquisition.  Based on the Company’s
      assessment of all available evidence, the Company concluded that it is not
      more
      likely than not that its deferred tax assets will be realized.  Management
      will continue to monitor the future recoverability of the tax assets which
      have
      a full valuation allowance as of March 31, 2006.




Pursuant
      to Internal Revenue Code Sec. 382 and 383, certain changes in the ownership
      structure (common stock issuances in the case of Genius Products, Inc.) may
      partially or fully limit future use of net operating losses and tax credits
      available to offset future taxable income and future tax liabilities,
      respectively. The Company’s net operating loss carryforwards are subject to
      substantial annual limitations due to changes in ownership structure that
      occurred prior to December 31, 2005.




REVENUE
      RECOGNITION. Revenue from the sale or licensing of films is recognized upon
      meeting all recognition requirements of Statement of Position (“SOP”) 00-2,
“Accounting by Producers or Distributors of Films” (“SOP 00-2”) and Staff
      Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” Revenues are
      recorded upon the receipt of goods by the customer for titles that do not have
      a
“street date” (when it is available for sale by the customer). If a title has a
      street date, we recognize the initial shipment as revenue on that street date
      and all subsequent shipments after street date are recognized as revenue upon
      receipt of goods by the customer. Under revenue sharing arrangements, rental
      revenue is recognized on or after the street date and when we are entitled
      to
      receipts and such receipts are determinable. Costs of sales and an allowance
      for
      returns are recorded at the time of revenue recognition. The allowance for
      returns calculation is based upon an analysis of historical customer and product
      returns performance as well as current customer inventory data as available.
      Updates to the returns calculation are performed quarterly. Revenues from the
      theatrical release of films are recognized at the time of exhibition based
      on
      our participation with box office receipts. Revenues from royalties are
      recognized when received. Revenues from licensing are recognized when the title
      is available to the licensee. Cash payments received are recorded as deferred
      revenue until all the conditions of revenue recognition have been met.
      Long-term, non-interest bearing receivables are discounted to present value.




9


ACCOUNTING
      CHANGES. In May 2005, the FASB issued SFAS No. 154, “Accounting
      Changes and Error Corrections” (“SFAS No. 154”), an amendment to Accounting
      Principles Bulletin Opinion No. 20, “Accounting Changes” (“APB
      No. 20”), and SFAS No. 3, “Reporting Accounting Changes in Interim
      Financial Statements”. Though SFAS No. 154 carries forward the guidance in
      APB No. 20 and SFAS No. 3 with respect to accounting for changes in
      estimates, changes in reporting entity, and the correction of errors, SFAS
      No. 154 establishes new standards on accounting for changes in accounting
      principles, whereby all such changes must be accounted for by retrospective
      application to the financial statements of prior periods unless it is
      impracticable to do so. SFAS No. 154 is effective for accounting changes
      and error corrections made in fiscal years beginning after December 15,
      2005, with early adoption permitted for changes and corrections made in years
      beginning after May 2005. We implemented SFAS No. 154 in our fiscal
      year beginning January 1, 2006. The adoption of SFAS No. 154 did not have a
      material impact on our financial position or results of operations for the
      quarter ended March 31, 2006.




RECLASSIFICATION.
      Certain line items have been reclassified in the accompanying financial
      statements to conform to the presentation in the annual report on Form 10-K
      for
      the year ended December 31, 2006.




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





**NOTE
      2. UNAUDITED RESTATEMENT OF QUARTER ENDED MARCH 31, 2006**




On
        April
        12, 2007, we determined that it was necessary to restate our unaudited condensed
        consolidated financial statements and other financial information as of and
        for
        the quarter ended March 31, 2006. The restatements that we made at that time
        related to the following corrections of errors:




1.The
        Company revised the
        computation of its stock option non-cash compensation expense under the
        provisions of SFAS No. 123R and Emerging Issues Task Force (“EITF”) Issue No.
        96-18 (“EITF 96-18”), “Accounting for Equity Instruments That Are Issued to
        Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
        or
        Services” (“Stock Option Compensation Expense”), for the fiscal quarter ended
        March 31, 2006. For the three months ended March 31, 2006, the Company decreased
        its Stock Option Compensation Expense by $0.1 million.




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




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




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




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




10


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




The
        effects of the restatement on net revenues, cost of revenues, gross profit,
        provision for taxes, net loss, basic and diluted loss per common share, accounts
        receivable, production masters, film library, accrued expenses, and
        stockholders’ equity as of and for the quarter ended March 31, 2006 are as
        follows:





(In
                  thousands, except per share amounts)
              
              Three
                  months ended March 31, 2006As
                  Originally Reported
              
              Restatement
                  Adjustments
              
              As
                  RestatedNet
                  revenues
              
              $
              28,583
              
              $
              (671
              )
              $
              27,912Cost
                  of revenues
              
              
              23,181
              
              
              5,616
              
              
              28,797Gross
                  profit (loss)
              
              
              5,402
              
              
              (6,287
              )
              
              (885
              )Provision
                  (benefit) for income taxes
              
              
              -
              
              
              (46
              )
              
              (46
              )Net
                  loss
              
              
              (5,674
              )
              
              (1,046
              )
              
              (6,720
              )Loss
                  per common share:Basic
                  and diluted
              
              
              (0.09
              )
              
              (0.02
              )
              
              (0.11
              )Accounts
                  receivable
              
              
              42,038
              
              
              -
              
              
              42,038Total
                  current assets
              
              
              70,448
              
              
              -
              
              
              70,448Production
                  masters
              
              
              5,195
              
              
              (5,195
              )
              
              -Film
                  library
              
              
              15,093
              
              
              5,195
              
              
              20,288Total
                  assets
              
              
              108,053
              
              
              (165
              )
              
              107,888Accrued
                  expenses
              
              
              6,410
              
              
              2,392
              
              
              8,802Total
                  current liabilities
              
              
              54,754
              
              
              500
              
              
              55,254Stockholders'
                  equity
              
              
              50,746
              
              
              (739
              )
              
              50,007




**NOTE
      3. RESTRICTED CASH**




Restricted
      cash of $0.3 million at March 31, 2006 represents cash invested in certificates
      of deposit to collateralize a letter of credit issued to a landlord for an
      office lease.




**NOTE
      4. INVENTORY**




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




**December 31, 2005**
              
              **March 31, 2006**
                **(unaudited)**Raw
                  materials
              
              $
              71,085
              
              $
              96,991Finished
                  goods
              
              
              7,798,303
              
              
              11,468,3657,869,388
              
              
              11,565,356Allowance
                  for obsolescence
              
              
              (2,301,435
              )
              
              (2,123,394
              )Inventories,
                  net
              
              $
              5,567,953
              
              $
              9,441,962




**NOTE
      5. PROPERTY AND EQUIPMENT**




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




**December 31, 2005**
              
              **March 31, 2006**
                **(unaudited)**
              
              **Useful lives**Computers
                  and equipment
              
              $
              711,646
              
              $
              932,902
              
              
              3-5
                  yearsFurniture
                  and fixtures
              
              
              35,445
              
              
              37,900
              
              
              3-7
                  yearsLeasehold
                  improvements
              
              
              22,365
              
              
              22,365
              
              
              Lesser
                  of lease term or
                useful
                  lifeTools
                  and dies
              
              
              —
              
              
              43,535
              
              
              3
                  years769,456
              
              
              1,036,702Accumulated
                  depreciation and amortization
              
              
              (373,098
              )
              
              (416,213
              )Property
                  and equipment, net
              
              $
              396,358
              
              $
              620,489




Depreciation
      expense for the three months ended March 31, 2006 and March 31, 2005
      was $48,185 and $33,510, respectively.




11





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




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




**December 31,**
                **2005**
              
              **March 31,**
                **2006**
                **(unaudited)**Titles
                  released, net of accumulated amortization
              
              $
              4,573,191
              
              $
              5,195,468Acquired
                  library, net of accumulated amortization
              
              
              14,551,096
              
              
              14,477,769Titles
                  acquired and not released
              
              
              602,892
              
              
              614,966$
              19,727,179
              
              $
              20,288,203




We
      expect
      approximately 49.1% of titles released, net of accumulated amortization and
      excluding acquired library, will be amortized during the three year period
      ended
      December 31, 2008. The Company expects approximately 80% of titles
      released, net of accumulated amortization and excluding acquired library, will
      be amortized during the seven year period ended December 31, 2012 as the
      library of titles released is comprised primarily of mature titles which provide
      a longer, steadier stream of revenue. The acquired library, including titles
      acquired and not released, of $15.1 million, net of accumulated amortization
      at
      March 31, 2006, is the Wellspring library that was acquired as part of the
      acquisition of AVMC and Wellspring Media, Inc. on March 22, 2005. The
      Wellspring library is amortized over its expected revenue stream for a period
      of
      ten years from the acquisition date. The remaining amortization period on the
      library which includes titles acquired and not released as of March 31,
      2006 is approximately nine years on unamortized costs of $15.1 million. We
      estimate total amortization expense for all of our libraries for 2006 to be
      $3.6
      million.




We
      expect
      that we will pay accrued participation liabilities of $4.0 million during the
      twelve month period ending December 31, 2006.





**NOTE
      7. ACQUISITION OF AVMC**




On
      March 21, 2005, we completed our acquisition of American Vantage Media
      Corporation (“AVMC”), a subsidiary of American Vantage Companies (“AVC”). The
      acquisition was completed through an Agreement and Plan of Merger (“Merger
      Agreement”) which provided for the issuance to AVC of (i) 7,000,000 shares
      of our common stock valued at $2.27 per share and (ii) warrants to purchase
      1,400,000 shares of our common stock, half at an exercise price of $2.56 per
      share and half at an exercise price of $2.78 per share, plus our assumption
      of
      approximately $15.2 million in debt of AVMC. The fair value of these warrants
      was estimated as $1,596,482 using the Black-Scholes model with the following
      weighted average assumptions: expected volatility of 60%, risk free interest
      of
      4.2%, an expected life of five years and no expected dividends. The purchase
      price is approximated by using the average closing market price of our common
      stock over the two-day period before and after the sale was announced. Direct
      costs incurred for the acquisition of $1,559,911 include $238,886 for legal
      and
      professional services related to the valuation of the Wellspring library, as
      well as a transaction fee of $1,249,183 paid in the form of 550,301 shares
      issued at a value of $2.27 per share, and 63,000 warrants, half at an exercise
      price of $2.56 and half at an exercise price of $2.78, for $71,842. The value
      of
      the warrants was estimated using the Black-Scholes model with the following
      weighted average assumptions: expected volatility of 60%, risk free interest
      of
      4.2%, an expected life of five years and no dividends. The fair value of the
      warrants was classified as equity in 2005 in accordance with EITF No. 00-19,
      “Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in, a Company’s Own Stock.”




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




Current
                assets
            
            $
            4,073,887Property
                and equipment
            
            
            31,414Wellspring
                library
            
            
            15,379,258Other
                assets
            
            
            238,167Liabilities
                assumed
            
            
            (13,783,912
            )Deferred
                tax liability
            
            
            (1,380,338
            )Goodwill
            
            
            14,487,917Total
                Consideration
            
            $
            19,046,393




12


After
      the
      acquisition of AVMC, we consider the Company as one operating segment and
      reporting unit. Goodwill from the acquisition is accounted for in accordance
      with SFAS No. 142 “Goodwill and Intangible Assets.” The Wellspring library
      acquired in the transaction is accounted for in accordance with SOP 00-2. None
      of the goodwill is expected to be deductible for tax purposes.




The
      following unaudited pro forma information represents our condensed consolidated
      results of operations as if the acquisition of AVMC had occurred on
      January 1, 2005. Such pro forma information does not purport to be
      indicative of the results that would have been obtained had these events
      actually occurred at the beginning of the periods presented, nor does it intend
      to be a projection of future results.




**Three Months Ended**
              **March 31,
                2005**Pro
                forma net revenue
            
            $
            4,265,667Pro
                forma net loss
            
            $
            (3,715,281
            )Pro
                forma net loss per shareBasic
                and diluted
            
            $
            (0.13
            )




**NOTE
      8. NOTES PAYABLE AND CONVERTIBLE DEBENTURES**




On
      March 21, 2005, we completed our acquisition of AVMC (see Note 7). As part
      of this acquisition, we assumed notes payable to certain individuals and
      entities with a total principal balance of $4.0 million, bearing interest at
      7%,
      payable quarterly, and a maturity date of February 3, 2006. We repaid $3.8
      million of these notes on February 7, 2006 and withheld payment on the
      balance as part of our contractual right to reserve for certain potential
      liabilities associated with the acquisition.




On
      October 4, 2005, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with a group of investors (collectively, the “Investors”).
      Under the Purchase Agreement, the Investors loaned a total of $4.0 million
      to us
      in exchange for (i) promissory notes in favor of the Investors (the
“Notes”) with a total principal balance of $4.0 million and (ii) five-year
      warrants to purchase a total of 280,000 shares of our common stock, par value
      $0.0001 per share, with an exercise price per share equal to $1.88 (the last
      reported sales price of our common stock, as reported by the Over the Counter
      Bulletin Board, on the closing date of October 5, 2005). The discount
      allocated to the warrants was $0.3 million, calculated using the Black-Scholes
      Model, with the following weighted average assumptions: expected volatility
      60%;
      risk-free interest rate of 4.2%; expected life of five years and no dividends
      payable. The fair value of the warrants was classified as equity in 2005 in
      accordance with EITF 00-19. The discount is amortized over the life of the
      Notes. As of December 31, 2005 the amortized discount was $0.2 million. On
      December 5, 2005, we repaid $2.5 million of the October 4, 2005 Notes
      with proceeds from our December 2005 private equity financing, and on
      March 6, 2006 we repaid the remaining $1.5 million.




In
      2001,
      we issued a convertible debenture for $50,750 to a shareholder in place of
      redeemable common stock. The debenture bore interest at 8%, was due
      March 31, 2002, and was convertible into common shares at $.50 per share;
      however, the conversion feature of this debenture has expired. Interest on
      the
      debenture was accrued through December 31, 2005. There was no beneficial
      conversion interest related to this debenture. We repaid the balance of the
      debenture in February 2006.




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




Under
      the
      interim distribution agreement with TWC (see Note 1), we record as net revenues
      the full amount we receive from sales of home video products (net of reserves
      and allowances), deduct our distribution fee, costs of goods sold (including
      manufacturing expenses) and certain marketing expenses, and remit the balance
      to
      TWC. The Remittance to licensor of $16.3 million at March 31, 2006
      primarily relates to amounts owed to TWC from sales of TWC’s title, *Derailed* that
      we
      released on DVD during the quarter ended March 31, 2006.




13


The
      deferred revenue of $16.3 million at March 31, 2006 primarily related to
      invoices for shipments of *Mrs. Henderson
      Presents, Wolf Creek* ,
      and *Have
      No Fear* : *The
      Life of Pope John Paul II* which
      had street dates subsequent to March 31, 2006.




**NOTE
      10. ACCRUED EXPENSES**




The
      components of accrued expenses at December 31, 2005 and March 31, 2006
      were:




**December 31, 2005**
              
              **March 31, 2006**
                **Restated**
                **(Note
                  2)**
                **(unaudited)**Accrued
                  payroll and related items
              
              $
              483,697
              
              $
              118,266Accrued
                  commissions
              
              
              373,510
              
              
              197,806Unearned
                  revenue
              
              
              262,742
              
              
              38,400Accrued
                  severance
              
              
              308,591
              
              
              241,330Tax
                  payable
              
              
              74,637
              
              
              74,637Other
                  accrued expense 1
              
              
              1,804,716
              
              
              8,131,736Total
                  accrued expenses
              
              $
              3,307,893
              
              $
              8,802,175




1Other accrued expense primarily relates to accrued purchases for inventory
      related to The Weinstein Company titles as of March 31,
      2006.




On
      February 20, 2006 we announced that Wellspring Media’s home entertainment
      distribution operations will transfer to our facility located in Santa Monica,
      California and that Wellspring will no longer distribute films theatrically.
      The
      primary goal of this corporate realignment is to improve our operating
      efficiencies. We estimated that we would incur costs of approximately $450,000
      in connection with this action. These costs consist primarily of one-time
      termination benefits of which we paid approximately $208,000 in the quarter
      ended March 31, 2006. We expect to pay the remaining balance by May 2006 when
      we
      complete the reorganization.




**NOTE
      11. COMMITMENTS AND CONTINGENCIES**




OPERATING
      LEASES




The
      Company leases certain facilities and computer equipment under non-cancelable
      operating leases. Rental expense for the three months ended March 31, 2006
      and 2005 was $239,601 and $34,795, respectively




As
      of
      March 31, 2006, the future minimum annual rental commitments required under
      existing non-cancelable operating leases are as follows:




**Remainder of**
              **2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **Thereafter**
            
            **Total**Lease
                obligations
            
            $
            804,465
            
            $
            1,092,459
            
            $
            976,302
            
            $
            728,507
            
            $
            734,880
            
            $
            185,068
            
            $
            4,521,681




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




WELLSPRING
      MATTER




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




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




14


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




FALCON
      PICTURE GROUP MATTER




In
      October 2005, we commenced litigation against Falcon Picture Group, LLC
      (“Falcon”) in the Superior Court of San Diego County, Case No. GIN047884 seeking
      damages of $975,000 arising out of Falcon’s breach of the license agreement. In
      October 2005, Falcon commenced litigation against the Company in the Circuit
      Court of Cook County, Illinois, Case No. 05H16850 (the “Illinois
      Proceeding”), based upon allegations, among other things, that the Company
      breached the terms of a license agreement by refusing to pay certain royalties
      to which Falcon supposedly was entitled. Falcon seeks a damages award of
      approximately $83,332 subject to proof at trial. Falcon further alleges that
      as
      a result of the Company’s purported default under the license agreement, Falcon
      is entitled to judgment declaring the license agreement to have been lawfully
      terminated. Although the Company has not yet responded to the complaint in
      the
      Illinois proceeding, the Company plans to vigorously defend against the
      allegations thereof.




**NOTE
      12. STOCKHOLDERS’ EQUITY**




COMMON
      STOCK




On
      March 2, 2005, we changed our state of incorporation from the state of
      Nevada to the state of Delaware and changed the par value of our common stock
      from $0.001 per share to $0.0001 per share. All transactions have been restated
      to reflect this change.




During
      the three months ended March 31, 2005, we issued a total of 14,875,925
      common shares and returned no common shares to treasury. We issued 6,518,987
      shares for proceeds of $10.3 million in conjunction with a private placement
      offering and issued 7.0 million shares in conjunction with the acquisition
      of American Vantage Media Corporation. We issued 712,338 shares at $2.16 to
      $2.27 per share for services rendered in connection with the private placement
      offering.




During
      the three months ended March 31, 2005, we issued 562,000 shares for the
      exercise of warrants at $.63 to $1.00 per share and 82,600 shares for the
      exercise of options at $.80 to $1.50 per share.




During
      the three months ended March 31, 2005, we issued a total of 3,549,076
      warrants to purchase common stock at $1.58 to $2.78 per share, of which
      2,086,076 were issued in conjunction with the private placement offering, and
      1,463,000 were issued in conjunction with the transaction to acquire American
      Vantage Media Corporation, of which, 63,000 warrants were issued as part of
      the
      offering costs.




During
      the three months ended March 31, 2006, we issued 49,472 common shares
      related to the exercise of warrants for proceeds of $46,301. Additionally,
      during the three months ended March 31, 2006, we issued 125,000 common
      shares related to the exercise of options for proceeds of $138,551.




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




STOCK
      OPTIONS AND WARRANTS




A
        summary
        of restated stock option and warrant activity, including options discussed
        in
        Note 12, follows:




**Options/Warrants**
              **Outstanding**
            
            **Weighted Average**
              **Price**December
                31, 2005
            
            
            34,951,798
            
            $
            1.95Granted
            
            
            2,156,000
            
            $
            1.92Exercised
            
            
            (208,575
            )
            $
            1.23Canceled
            
            
            (750,000
            )
            $
            2.25March
                31, 2006
            
            
            36,149,223
            
            $
            1.95Options
                and warrants exercisable, March 31, 2006
            
            
            27,530,769
            
            $
            1.96




15


The
        following restated table summarizes significant ranges of outstanding and
        exercisable options and warrants as of March 31, 2006:




**Options/warrants**
              **outstanding**
            
            **Average remaining**
              **life
                (in years)**
            
            **Weighted average**
              **exercise price options**
              **and
                warrants**
              **outstanding**
            
            **Options and warrants**
              **exercisable**
            
            **Weighted average**
              **exercise price options**
              **and
                warrants**
              **exercisable**Under
                $1.50
            
            
            6,514,840
            
            
            3.4
            
            $
            0.94
            
            
            6,514,840
            
            $
            0.94$1.50
                - $1.99
            
            
            12,716,422
            
            
            7.8
            
            
            1.69
            
            
            6,067,968
            
            
            1.61$2.00
                - $2.99
            
            
            13,928,711
            
            
            5.4
            
            
            2.35
            
            
            12,133,711
            
            
            2.37$3.00
                - $3.99
            
            
            2,440,750
            
            
            4.7
            
            
            3.00
            
            
            2,440,750
            
            
            3.00$4.00
                + over
            
            
            548,500
            
            
            4.7
            
            
            5.05
            
            
            373,500
            
            
            5.5436,149,223
            
            
            5.8
            
            $
            1.95
            
            
            27,530,769
            
            $
            1.96




PRIVATE
      PLACEMENTS




On
      March 2, 2005, we entered into a securities purchase agreement with certain
      institutional investors related to the private placement of 6,518,987 shares
      of
      our common stock, par value $0.0001 per share, and five-year warrants to
      purchase 1,303,797 shares of common stock, half at an exercise price of $2.56
      per share and half at an exercise price of $2.78 per share. The transaction
      closed on March 3, 2005 and we realized gross proceeds of $10.3 million
      from the financing, before deducting commissions and other expenses. We agreed
      to register for resale the shares of common stock issued in the private
      placement and shares issuable upon exercise of warrants. Such registration
      statement became effective on May 11, 2005. The fair value of the warrants
      was classified as equity in 2005 in accordance with EITF 00-19.




In
      May
      2005, we entered into a securities purchase agreement with certain institutional
      investors related to the private placement of 3,000,000 shares of our common
      stock and five-year warrants to purchase 270,000 shares of our common stock
      at
      an exercise price of $2.56 per share. The transaction closed on May 20,
      2005, and we realized gross proceeds of $5.25 million from the financing before
      deducting commissions and other expenses. The fair value of the warrants was
      classified as equity in 2005 in accordance with EITF 00-19.





On
      December 5, 2005, we entered into a securities purchase agreement with
      certain institutional investors related to the private placement of 16,000,000
      shares of our common stock, par value $0.0001 per share, and five-year warrants
      to purchase 4,800,000 shares of common stock with an exercise price of $2.40
      per
      share. The transaction closed on December 6, 2005 and we realized gross
      proceeds of $32 million from the financing, before deducting commissions and
      other expenses. The proceeds from the offering will provide working capital
      to
      fund new ventures as well as content acquisitions. The fair value of the
      warrants was classified as equity in 2005 in accordance with EITF
      00-19.





**NOTE
      13. STOCK-BASED COMPENSATION**




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




We
      estimate the fair value of our stock options using the Black-Scholes option
      pricing model (the “Option Model”). The Option Model requires the use of
      subjective and complex assumptions, including the option’s expected term and the
      estimated future price volatility of the underlying stock, to determine the
      fair
      value of the share-based awards. We estimated option expected terms in 2006
      based on the weighted average period of time that options granted are expected
      to be outstanding considering current vesting schedules. Beginning in 2006,
      the
      expected volatility assumption used in the Option Model changed from being
      based
      on historical volatility to implied volatility based on traded options on our
      stock in accordance with guidance provided in SFAS No. 123R and SAB 107. Prior
      to 2006, our measurement of expected volatility was based on the historical
      volatility of our stock. The risk-free interest rate used in the Option Model
      is
      based on the yield of U.S. Treasuries with a maturity closest to the expected
      term of our stock options.




We
      have
      adopted several stock option plans, all of which have been approved by our
      shareholders, that authorize the granting of options to purchase our common
      shares subject to certain conditions. At March 31, 2006, we had reserved
      21 million of our common shares for issuance of share-based compensation
      awards under our stock option plans. At March 31, 2006, we have granted
      8.8 million share-based compensation awards outside of our stock option
      plans. Options are granted at the fair value of the shares underlying the
      options at the date of the grant and generally become exercisable over periods
      ranging from three to five years and expire in ten years.




16


We
      issued
      2,156,000 options during the first quarter of 2006. The amount of share-based
      compensation expense recognized in the three months ended March 31, 2006 is
      based on options issued prior to January 1, 2006 and issued during the
      first quarter of 2006, and ultimately expected to vest, reduced for estimated
      forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time
      of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimates.




Total
        share-based restated compensation expense recognized for the three months
        ended
        March 31, 2006 was $0.9 million. For the three months ended March 31, 2006,
        no
        income tax benefit was recognized in the statement of earnings (loss) for
        share-based compensation arrangements. Management assessed the likelihood
        that
        deferred tax assets realization relating to future tax deductions from
        share-based compensation will be recovered from future taxable income and
        determined that a 100% valuation allowance was required due to uncertainty
        as to
        the recoverability of these items.




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




**Three Months Ended**
                **March
                  31, 2006**
                **Restated**
                **(Note
                  2)**Risk
                  free interest rate
              
              
              4.8
              %Expected
                  dividend yield
              
              
              —Expected
                  volatility
              
              
              59.0
              %Expected
                  life (in years)
              
              
              5.7




A
      summary
      of restated stock option activity during the three months ended March 31,
      2006 is presented below:




**Shares**
              
              **Weighted Average**
                **Price**
              
              **Weighted Average**
                **Remaining Contractual**
                **Life
                  (In Years)**
              
              **Aggregate Intrinsic**
                **Value**December 31,
                  2005
              
              
              18,722,883
              
              $
              1.79Granted
              
              
              2,156,000
              
              $
              1.92Exercised
              
              
              (125,000
              )
              $
              1.11Canceled
              
              
              (750,000
              )
              $
              2.25March 31,
                  2006
              
              
              20,003,883
              
              $
              1.79
              
              
              7.7
              
              $
              4,642,361Options
                  exercisable, March 31, 2006
              
              
              11,385,429
              
              $
              1.70
              
              
              6.5
              
              $
              4,163,747




*Pro
      Forma Information Under SFAS No. 123 for Periods Prior to Fiscal 2006*




At
      March 31, 2005, we accounted for stock options under the recognition and
      measurement principles of APB Opinion No. 25, “Accounting for Stock Issued
      to Employees,” and related Interpretations. Prior to the implementation of SFAS
      No. 123R, stock-based employee compensation expense was not generally reflected
      in net income, as all options granted had an exercise price equal to the market
      value of the underlying common stock on the date of grant. The following table
      illustrates the effect on net income and earnings per share if we had applied
      the fair value recognition provisions of SFAS No. 123R to stock-based
      employee compensation for the three months ended March 31, 2005:




**Three Months Ended**
              **March 31,
                2005**Net
                loss as reported
            
            $
            (2,232,323
            )Compensation
                cost at fair value
            
            
            (176,520
            )Pro
                forma net loss
            
            $
            (2,408,843
            )Basic
                and diluted net loss per shareAs
                reported
            
            $
            (0.08
            )Pro
                forma
            
            $
            (0.09
            )




17


The
      pro
      forma compensation cost recognized for the grant date fair value of the stock
      options granted during the three months ended March 31, 2005 was estimated
      using the Black-Scholes model with the following weighted-average assumptions:




**Three Months Ended**
              **March 31,
                2005**Risk
                free interest rate
            
            
            3.7
            %Expected
                dividend yield
            
            
            —Expected
                volatility
            
            
            60
            %Expected
                life (in years)
            
            
            1
                to 10 years




**NOTE
      14. LOSS PER SHARE**




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




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 three months ended March 31, 2006 and 2005, since to do so would have
        been
        antidilutive.




**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 “Business Risk Factors” in our annual report on Form 10-K for the year
      ended December 31, 2005.




OVERVIEW




Genius
      Products, Inc. (“we”, “our” or the “Company”) is an entertainment company that
      produces, publishes, licenses and distributes films, videos and music on digital
      versatile discs, or DVDs, universal mini discs, or UMDs, and compact discs,
      or
      CDs, under a variety of branded and non-branded names. Our products are sold
      at
      traditional, direct response, mail order and internet retailers nationwide
      and,
      to a lesser extent, internationally.




We
      sell
      our own proprietary content, license content from third parties and distribute
      content for third parties for a fee. We currently have U.S. home video
      distribution rights to selected films and will have the exclusive U.S. home
      video distribution rights to feature film and direct-to-video releases owned
      or
      controlled by The Weinstein Company (“TWC”), a new film company created by
      Robert and Harvey Weinstein (as discussed below) upon closing of our transaction
      with TWC. We have released the following four TWC titles on DVD:
      (i) *Derailed* ,
      starring Jennifer Aniston and Clive Owen on March 21;
      (ii) *Wolf
      Creek* ,
      an
      Australian horror film, on April 11; (iii) *Mrs. Henderson
      Presents* ,
      starring Judi Dench and Bob Hoskins, on April 18; and
      (iv) *Hoodwinked* ,
      an
      updated retelling of the classic story of Red Riding Hood with the voices of
      Anne Hathaway, Glenn Close and Jim Belushi, on May 2. Upcoming TWC films
      planned for home video release by us include: *Doogal,* with
      the
      voices of Whoopi Goldberg, Jimmy Fallon, William H. Macy and Jon
      Stewart; *Transamerica* ,
      starring Felicity Huffman, winner of the Golden Globe Award for best actress; *The
      Matador* ,
      starring Pierce Brosnan; *The
      Libertine,* starring
      Johnny Depp; *Scary
      Movie 4,* and *Lucky
      Number Slevin,* starring
      Bruce Willis. We will also release content on DVD for Rainbow Media and the
      Independent Film Channel or IFC.




We
        seek
        to leverage our increasing market share and retail sales volumes from our
        new
        relationship with The Weinstein Company to improve the distribution and sale
        of
        our owned, licensed and distributed content. We currently own or have the
        rights
        to publish DVDs and audio CDs under the trademarked brands described in the
        following table. These brands include both proprietary and licensed brands.
        We
        work with a broad range of retail outlets including Wal-Mart, Best Buy, Target,
        Blockbuster, Movie Gallery, Netflix and Amazon.com to implement our specialized
        distribution strategy that consists of in-store displays that highlight our
        brands and promote our products that relate to these brands. We call our
        specialized distribution strategy our Branded Distribution Network. We customize
        our displays and promotions based upon the buying patterns, habits and
        demographics of the consumers. As we add more content to our libraries, we
        intend to acquire, license, develop or distribute products with credible
        value
        and brand them for relevance to the consumer. We attempt to limit financial
        exposure through: (i) detailed return on investment, or ROI, analysis on
        potential acquisitions of new content and (ii) our newly implemented vendor
        managed inventory system that provides us a scalable infrastructure and cost
        effective technology to manage the supply chain process. Our brands and products
        are described below.




18
 
  **Licensed
                  Brands and
                  Trademarks**
                AMC
                  MonsterfestTM
                AMC
                  TV for Movie PeopleTM
                AMC®
                  Movies
                Bazooka®
                Genius
                  Entertainment®
                Hollywood
                  ClassicsTM
                IFILM®
                National
                  Lampoon®
                Sundance
                  Channel Home
                EntertainmentTM
                TV
                  Guide®
              **Selected
                  Owned or Licensed
                  Content**
                Berliner
                  Film Company
                J
                  Horror Library(through
                  Horizon
                Entertainment
                  and Pony Canyon Inc.)
                Jillian
                  Michaels
                NBC
                  News Presents
                Wellspring
                  Library
                
                **Selected
                    Distributed
                    Content**
                  Brandissimo!
                  Bauer
                    Martinez Entertainment
                  IFC
                  Legend
                    Films Library
                  Liberation
                    Entertainment Library
                  Pacific
                    Entertainment
                  Peace
                    Arch Entertainment
                  Porchlight
                    Entertainment
                  Shorts
                    Play
                  Shorts
                    Play Extreme
                  Tartan
                    Video USA
                  The
                    Weinstein Company
              **Licensed
                  Music
                  Brands**
                Ansel
                  Adams
                Baby
                  Genius® *
                Beatrix
                  PotterTM
                Curious
                  George®
                Guess
                  How Much I Love YouTM
                Jay
                  Jay the Jet Plane®
                Kid
                  Genius® *
                My
                  Little Pony®
                Paddington
                  BearTM
                Raggedy
                  Ann and AndyTM
                Rainbow
                  FishTM
                Spot
                  the DogTM
                The
                  Little Tikes® *
                The
                  SnowmanTM
                Tonka®
                Wee
                  WorshipTM *


*
            See
                recent strategic transactions below





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




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




Recent
      Severance




On
      February 20, 2006 we announced that Wellspring Media’s (“Wellspring”) home
      entertainment distribution operations will transfer to our facility located
      in
      Santa Monica, California and that Wellspring will no longer distribute films
      theatrically. The primary goal of this corporate realignment is to improve
      our
      operating efficiencies. We estimated that we would incur costs of approximately
      $450,000 in connection with this action. These costs consist primarily of
      employee severance arrangements and other related expenses. We expect to pay
      these costs and substantially complete the reorganization by May 2006.




19


Recent
      Strategic Transactions




*The
      Weinstein Company Transaction:* On
      December 5, 2005, we, The Weinstein Company LLC, a Delaware limited
      liability company (“TWC”), and The Weinstein Company Holdings LLC, a Delaware
      limited liability company (such company or another company designated by TWC
      pursuant to the Agreement (as defined below), the “Distributor”), entered into a
      Master Contribution Agreement (the “Agreement”) in connection with the formation
      of a new venture to exploit the exclusive U.S. home video distribution rights
      to
      feature film and direct-to-video releases owned or controlled by TWC (the
“Transaction”).




Under
        the
        terms of the Agreement, at the closing of the Transaction (“Closing”) we will
        contribute to the Distributor substantially all of our assets, employees
        and
        existing businesses and certain liabilities, and the Distributor will hold
        a
        distribution agreement from TWC entitling it to distribute in the United
        States,
        and receive a distribution fee on, all filmed entertainment for which TWC
        owns
        or controls U.S. home video distribution rights. The Distributor will be
        70%
        owned by TWC or its affiliates and 30% owned by us. Our interest in the
        Distributor will consist of Class G Units representing a 30% membership interest
        in the Distributor, and the interest of TWC or its affiliates will consist
        of
        Class W Units representing a 70% membership interest in the Distributor.
        The 70%
        interest in the Distributor held by TWC or its affiliates will be redeemable,
        at
        their option at any time from one year after the Closing, for up to 70% of
        our
        outstanding common stock, or with their approval, cash.




On
      April 26, 2006, we, TWC, The Weinstein Company Holdings LLC and The
      Weinstein Company Funding LLC entered into a Second Amendment to the Master
      Contribution Agreement (the “Second Amendment”). The Second Amendment amends the
      Master Contribution Agreement, dated as of December 5, 2005, as amended by
      the first Master Contribution Agreement on March 15, 2006 (the “First
      Amendment”), by and among the parties, and provides that The Weinstein Company
      Funding LLC (rather than the Weinstein Company Holdings LLC) will become the
      “Distributor” from and after the closing of the transactions contemplated by the
      Agreement.




Commencing
      on December 5, 2005 through the Closing, we are operating under an interim
      distribution agreement with TWC and are recording the results from titles we
      first released for TWC in March 2006 in our financial statements.




On
      or
      prior to Closing, the Distributor will adopt an Amended and Restated Limited
      Liability Company Agreement (the “LLC Agreement”) in the form agreed to by the
      parties. The Distributor, which will be renamed Genius Products, LLC, will
      operate the new distribution business and our existing businesses, and continue
      to operate under the LLC Agreement following the Closing.




At
      the
      Closing, we will also issue to TWC 100 shares of Series W Preferred Stock in
      us.
      The Series W Preferred Stock will provide TWC or its permitted transferees
      with
      (a) the right to elect five of the seven directors on our Board of
      Directors, (b) majority voting power over other actions requiring approval
      of our stockholders, and (c) the right to approve certain specified actions
      by the Company. The Series W Preferred Stock will have no rights to receive
      dividends and minimal liquidation value. On or prior to the Closing, we will
      amend and restate our Certificate of Incorporation to, among other things,
      provide for the designation of the Series W Preferred Stock.




At
      the
      Closing, we and TWC will also enter into a Registration Rights Agreement
      pursuant to which we will register for resale our shares of common stock
      issuable upon redemption of TWC’s Class W Units in the Distributor.




*Sale
      of Baby Genius:* On
      December 31, 2005, we entered into an Asset Purchase Agreement (the “Asset
      Purchase Agreement”) with Klaus Moeller, who was our founder and formerly our
      CEO. Under the Asset Purchase Agreement, we agreed to sell to Mr. Moeller
      all of our rights, title and interest in and to the following assets (the
“Assets”), subject to the terms, conditions and limitations set forth in the
      Asset Purchase Agreement:




•
            
            Audio
                and audiovisual works entitled “Baby Genius”;


•
            
            Audio
                and audiovisual works entitled “Kid Genius”;


•
            
            Audio
                and audiovisual works entitled “Little Tikes”;


•
            
            Audio
                works entitled “Wee Worship”; and


•
            
            Related
                intellectual property, agreements, documents and instruments.




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




20


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




•
            
            $250,000
                in cash on signing;


•
            
            $750,000
                by means of a secured promissory note due and payable in full, together
                with all accrued interest, on January 30, 2006, bearing interest at
                the rate of 4.5% per annum; and


•
            
            $2
                million by means of a secured promissory note due and payable in
                full,
                together with all accrued interest, on the fifth anniversary of the
                closing date, bearing interest at the rate of 4.5% per annum.




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




In
      conjunction with this transaction we recorded a gain on sale in the amount
      of
      $1,351,710, a note receivable in the amount of $1,712,353 representing the
      present value of a $2 million secured promissory note that we received in this
      transaction and a deferred gain of $1,212,353. We will recognize the deferred
      gain based upon the relative percentage of revenue we generate in each period
      relative to the total revenue expected to be generated over the term of the
      distribution agreement. During the quarter ended March 31, 2006, we
      recognized $40,267 of this gain. We have received payment in full for the
      secured promissory note, due on January 30, 2006, in the amount of
      $750,000, plus interest.




*Purchase
      of AVMC:* On
      March 21, 2005, we completed the acquisition of American Vantage Media
      Corporation, or AVMC, a subsidiary of American Vantage Companies, or AVC. The
      acquisition was completed through an agreement and plan of merger which provided
      for the issuance to AVC of (i) 7,000,000 shares of our common stock and
      (ii) warrants to purchase 1,400,000 shares of our common stock, half at an
      exercise price of $2.56 per share and half at an exercise price of $2.78 per
      share, plus our assumption of approximately $15.2 million in liabilities of
      AVMC. A subsidiary of AVMC is Wellspring Media, Inc., which owns the rights
      to a
      substantial film library. The Wellspring film library has approximately 700
      titles of independent and art-related films, documentaries and holistic living
      programs that we plan to expand through acquisition and distribution agreements
      with content providers.




**CRITICAL
      ACCOUNTING POLICIES**




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




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




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




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




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




21


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




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




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




REVENUE
      RECOGNITION. Revenue from the sale or licensing of films are recognized upon
      meeting all recognition requirements of SOP 00-2 and Staff Accounting Bulletin
      (“SAB”) No. 104, “Revenue Recognition”. Revenues are recorded upon the receipt
      of goods by the customer for titles that do not have a “street date” (when it is
      available for sale by the customer). If a title has a street date, we recognize
      the initial shipment as revenue on that date and all subsequent shipments after
      street date are recognized as revenue upon receipt of goods by the customer.
      Under revenue sharing arrangements, rental revenue is recognized on or after
      the
      street date and when we are entitled to receipts and such receipts are
      determinable. Costs of sales and an allowance for returns are recorded at the
      time of revenue recognition. The allowance for returns calculation is based
      upon
      an analysis of historical customer and product returns performance as well
      as
      current customer inventory data as available. Updates to the returns calculation
      are performed quarterly. Revenues from the theatrical release of films are
      recognized at the time of exhibition based on our participation with box office
      receipts. Revenues from royalties are recognized when received. Revenues from
      licensing are recognized when the title is available to the licensee. Cash
      payments received are recorded as deferred revenue until all the conditions
      of
      revenue recognition have been met. Long-term, non-interest bearing receivables
      are discounted to present value.




INCOME
      TAXES. For the first three months ended March 31, 2006, the Company recognized
      a
      tax benefit of approximately $2.69 million, which was substantially offset
      by a
      valuation allowance of $2.64 million. As a result, the Company recorded $0.05
      million of tax benefits attributable to the liability recognized from the
      purchase accounting in connection with the Wellspring acquisition. The Company
      currently has a full valuation allowance on its deferred tax assets and has
      recorded a net deferred tax liability relating to the purchase accounting in
      connection with the Wellspring acquisition.  Based on the Company’s
      assessment of all available evidence, the Company concluded that it is not
      more
      likely than not that its deferred tax assets will be realized.  Management
      will continue to monitor the future recoverability of the tax assets which
      have
      a full valuation allowance as of March 31, 2006.




Pursuant
      to Internal Revenue Code Sec. 382 and 383, certain changes in the ownership
      structure (common stock issuances in the case of Genius Products, Inc.) may
      partially or fully limit future use of net operating losses and tax credits
      available to offset future taxable income and future tax liabilities,
      respectively. The Company’s net operating loss carryforwards are subject to
      substantial annual limitations due to change in ownership structure occurred
      prior to December 31, 2005.




22


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




ACCOUNTING
      CHANGES. In May 2005, the FASB issued Statement of Financial Accounting
      Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”), an amendment to Accounting Principles Bulletin Opinion
      No. 20, “Accounting Changes” (“APB No. 20”), and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements”. Though SFAS
      No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3
      with respect to accounting for changes in estimates, changes in reporting
      entity, and the correction of errors, SFAS No. 154 establishes new
      standards on accounting for changes in accounting principles, whereby all such
      changes must be accounted for by retrospective application to the financial
      statements of prior periods unless it is impracticable to do so. SFAS
      No. 154 is effective for accounting changes and error corrections made in
      fiscal years beginning after December 15, 2005, with early adoption
      permitted for changes and corrections made in years beginning after
      May 2005. We implemented SFAS No. 154 in our fiscal year beginning
      January 1, 2006.




RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS




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




**RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005**




*Revenues:*




Revenues
        for the first quarter ended March 31, 2006 were composed primarily of sales
        of The Weinstein Company (“TWC”) title, *Derailed,* sales
        of
        branded and proprietary products including branded classic movies and television
        shows on DVD as well as non-branded classic movies and television shows on
        DVD,
        and Wellspring titles from AVMC. Gross revenues increased $34.0 million during
        the first quarter ended March 31, 2006 to $36.8 million, as compared to
        $2.8 million during the comparable prior year period.




Sales
      returns, discounts and allowances increased $8.6 million during the first
      quarter ended March 31, 2006 to $8.8 million, as compared to $0.2 million
      during the comparable prior year period. The increase primarily resulted from
      the increase in sales from the video release of TWC’s *Derailed* .
      Additionally, there has been an industry trend towards an increasing percentage
      of returns for the sale of DVD’s. The provision for sales returns and allowances
      is calculated in accordance with historical averages and industry changes,
      but
      may vary in the future based on customer and product mix.




Net
      revenues increased $25.3 million during the first quarter ended March 31,
      2006 to $27.9 million as compared to $2.6 million during the comparable prior
      year period, primarily due to the increase in sales of DVDs from the release
      of *Derailed.*




*Costs
      and expenses:*




For
      the
      restated three months ended March 31, 2006, we revised the presentation of
      advertising and marketing expenses to reclassify these amounts from operating
      expenses to cost of revenues. This conforms to the presentation in the annual
      report on Form 10-K for the year ended December 31, 2006.




23


*Cost
      of Revenues:*




Cost
        of
        revenues consists primarily of the cost of products sold to customers, packaging
        and shipping costs, amortization of production masters, advertising and
        marketing, and royalties paid on sales of licensed products. Generally, cost
        of
        revenues increased as a result of the increased sales. We include remittances
        to
        TWC in cost of revenues. Under our interim distribution agreement with TWC,
        we
        record remittances to TWC based upon net revenues we receive from sales of
        TWC
        titles released on DVD (net of reserves and allowances), deduct our distribution
        fee, deduct cost of goods sold (including manufacturing expenses), deduct
        certain marketing expenses, and record the remaining balance as a remittance
        to
        licensor under cost of revenues.




Total
      cost of revenues increased $26.1 million during the quarter ended March 31,
      2006 to $28.8 million, as compared to $2.7 million during the comparable prior
      period. The increase primarily resulted from an increase in video and DVD sales,
      primarily due to the video release of TWC’s *Derailed* during
      the quarter ended March 31, 2006. Cost of revenues related to *Derailed* include
      the remittance to The Weinstein Company and the related product costs.




*Operating
      Expenses:*




Operating
        expenses increased by $3.5 million during the quarter ended March 31, 2006
        to $5.6 million, as compared to $2.1 million during the comparable prior
        period.
        The increase was primarily due to increased payroll, rent, and utilities
        as a
        result of the acquisition of AVMC, increased payroll and overhead to support
        the
        increased sales volume anticipated as part of the new relationship with The
        Weinstein Company, increased transaction costs including investment banking,
        audit and legal fees of $0.6 million related to the transaction announced
        with
        The Weinstein Company, severance costs associated with employees and outside
        consultants of $0.7 million and warrants and options expense associated with
        compensation to certain employees and outside consultants of $1.0 million.
        General and administrative expenses were 20.4% of net revenues for the quarter
        ended March 31, 2006 compared to 82.7% for the quarter ended March 31, 2005.




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




The
      purchase price was payable as follows:




•
            
            $250,000
                in cash on signing;


•
            
            $750,000
                by means of secured promissory note due and payable in full, together
                with
                all accrued interest, on January 30, 2006, bearing interest at the
                rate of 4.5% per annum; and


•
            
            $2
                million by means of a secured promissory note due and payable in
                full,
                together with all accrued interest, on the fifth anniversary of the
                closing date, bearing interest at a rate of 4.5% per annum.




In
      conjunction with this transaction we recorded a gain on sale in the amount
      of
      $1,351,710 and recorded a note receivable in the amount of $1,712,353
      representing the present value of a $2 million secured promissory note that
      we
      received in this transaction and a deferred gain of $1,212,353. We have
      subsequently received payment in full of the secured promissory note, due on
      January 30, 2006, in the amount of $750,000, plus interest. We will
      recognize the deferred gain based upon the relative percentage of revenue we
      generate in each period relative to the total revenue expected to be generated
      over the term of the distribution agreement. For the quarter ended
      March 31, 2006, we recognized a gain of $40,267 relating to the deferred
      gain of $1.2 million at December 31, 2005.




We
        had
        interest and other expense of $237,947 during the quarter ended March 31,
        2006 as compared to $5,840 of interest expense for the comparable prior period.




As
      result
      of the foregoing, the net loss increased $4.5 million during the quarter ended
      March 31, 2006, to $6.7 million as compared to $2.2 million during the
      comparable prior period.




**LIQUIDITY
      AND CAPITAL RESOURCES**




Net
      cash
      used in operations during the three months ended March 31, 2006 was $6.8
      million, primarily due to the net loss of $6.7 million, increases in accounts
      receivable and inventories, offset by increases in accounts payable, deferred
      revenue, remittance to licensor, and allowance for doubtful accounts and
      provision for returns. These changes are primarily related to the release of
      two
      TWC titles, *Derailed* and *Wolf
      Creek* .
      The
      increase in accounts receivable relates primarily to sales of *Derailed* and the
      shipment of *Wolf
      Creek* during
      the quarter ended March 31, 2006. The increases in accounts payable and
      inventories primarily relate to invoices received but not paid for the
      production of inventory and sales and marketing expenses for *Derailed* and *Wolf
      Creek* .
      The
      increase in deferred revenue related primarily to invoices for shipments of *Wolf
      Creek,* which
      had a street date of April 11. The invoices for *Wolf
      Creek* were
      recorded as deferred revenue since the street date for Wolf Creek occurred
      after
      March 31, 2006. The remittance to licensor primarily represents the amount
      owed to TWC after deducting the related cost of sales, marketing costs, and
      our
      distribution fee from net sales of *Derailed* during
      the first quarter. Under the terms of the interim distribution agreement, we
      are
      required to pay TWC after collection of receipts, which as of March 31,
      2006 had not been collected. Allowance for doubtful accounts and provision
      for
      returns increased primarily as a result of reserves for returns related to
      the
      release of *Derailed* .
      For the
      three months ended March 31, 2005, net cash used in operations was
      $5.1 million, driven primarily by the net loss of $2.2 million and the
      decrease in accounts payable, offset by a decrease in accounts receivable.




24


Net
      cash
      used in investing activities for the three months ended March 31, 2006, was
      $0.3 million, primarily attributed to the purchase of property and equipment.
      For the three months ended March 31, 2005, net cash used in investing
      activities was $0.2 million, which was primarily due to the payment of
      obligations relating to the acquisition of AVMC.




Cash
      used
      in financing activities for the three months ended March 31, 2006 was $5.1
      million, resulting from the repayment of $3.8 million of the $4.0 million notes
      payable assumed as part of the acquisition of AVMC on March 31, 2005 and
      the repayment of $1.5 million of notes issued in October 2005, offset by
      proceeds from the exercise of options and warrants.




At
      March 31, 2006, we had cash balances of $18,402,355 and net accounts
      receivable of $42,038,129. We feel that we have sufficient liquidity to fund
      our
      operations through the remainder of 2006. However, we will consider additional
      issuance of equity and debt financing to fund future growth opportunities.
      Although we believe that our expanded product line offers us the opportunity
      for
      significantly improved operating results in future quarters, no assurance can
      be
      given that we will operate on a profitable basis in 2006, or ever, as such
      performance is subject to numerous variables and uncertainties, many of which
      are out of our control.




The
      table
      below summarizes information as of March 31, 2006 regarding certain future
      minimum contractual obligations and commitments for the next five years:




**Remainder of**
              **2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **Thereafter**
            
            **Total**Lease
                obligations
            
            $
            804,465
            
            $
            1,092,459
            
            $
            976,302
            
            $
            728,507
            
            $
            734,880
            
            $
            185,068
            
            $
            4,521,681Employment
                agreements
            
            
            1,148,659
            
            
            961,250
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,109,909Consulting
                agreements
            
            
            160,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            160,000Royalty
                advances
            
            
            231,386
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            231,386Total
            
            $
            2,344,510
            
            $
            2,053,709
            
            $
            976,302
            
            $
            728,507
            
            $
            734,880
            
            $
            185,068
            
            $
            7,022,976





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




As
      of
      March 31, 2006, our cash and cash equivalents were invested with financial
      institutions with investment grade credit ratings. Due to the short duration
      of
      our investment portfolio and the high quality of our investments, an immediate
      10% change in interest rates would not have a material effect on the fair market
      value of our portfolio. Therefore, we would not expect our operating results
      or
      cash flows to be affected to any significant degree by the effect of a sudden
      change in market interest rates on our investment portfolio.




We
      do not
      enter into hedging or derivative instrument arrangements.




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




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




As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our management, including the
      Chief Executive Officer and the Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures. Based upon
      that evaluation, the Chief Executive Officer and the Chief Financial Officer
      concluded that information required to be disclosed in reports that we file
      or
      submit under the Securities Exchange Act of 1934 is recorded, processed,
      summarized, and reported within the time periods specified in the SEC’s rules
      and forms, and that such information is accumulated and communicated to our
      management, including our Chief Executive Officer and Chief Financial Officer,
      as appropriate, to allow timely decisions regarding the required disclosures.




25


**Changes
      in Internal Controls Over Our Financial Reporting**




There
      was
      no change in our internal control over the financial reporting during the period
      covered by this report on Form 10-Q that has materially affected, or is
      reasonably likely to materially affect our internal control over financial
      reporting.




**PART
      II - OTHER INFORMATION**




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




We
      have
      disclosed in previous reports filed with the Securities and Exchange Commission
      (i) a complaint filed against our new subsidiary American Vantage Media
      Corporation and Wellspring Media, Inc. in U.S. Bankruptcy Court for the District
      of Delaware by the Chapter 7 Trustee of the Winstar Communications, Inc. Estate,
      and (ii) a possible rescission offer in Washington State. There have been
      no material developments in these matters. For a complete description of the
      facts and circumstances surrounding the Winstar litigation, see the disclosures
      in our Annual Report on Form 10-KSB for the year ended December 31, 2004
      under “Item 3. Legal Proceedings”, which are incorporated by reference herein.




In
      October, 2005 Genius commenced litigation against Falcon Picture Group, LLC
      (“Falcon”) in the Superior Court of San Diego County, Case No. GIN047884 seeking
      damages of $975,000 arising out of Falcon’s breach of the license agreement. In
      October, 2005, Falcon commenced litigation against Genius in the Circuit Court
      of Cook County, Illinois, Case No. 05H16850 (the “Illinois Proceeding”),
      based upon allegations, among other things, that Genius breached the terms
      of a
      license agreement by refusing to pay certain royalties to which Falcon
      supposedly was entitled. Falcon seeks a damages award of approximately $83,332
      subject to proof at trial. Falcon further alleges that as a result of Genius’
purported default under the license agreement, Falcon is entitled to a judgment
      declaring the license agreement to have been lawfully terminated. Although
      Genius has not yet responded to the complaint in the Illinois Proceeding, Genius
      plans to vigorously defend against the allegations thereof.




We
      are a
      party to routine litigation incidental to our business, none of which is likely
      to have a material adverse effect on us.




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




None




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




None.




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




None.




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




None.




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




EXHIBITS
      REQUIRED BY ITEM 601 OF REGULATION S-K




**Exhibit No.**
              
              **Description**10.1
              
              Lease
                  Agreement with PTL Realty dated as of March 8, 2006, by and between
                  Genius Products, Inc. and Ed Silver, Co-Trustee of Silver Trust
                  and Tess
                  Weinstein, Co-Trustee of Weinstein Trust, d/b/a PTL
                  Realty.+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.*




26




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.
                Previously
                  filed.






**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized.




Dated:September
                  26,
                  2007
              
              
              
              GENIUS
                  PRODUCTS, INC.,
                a
                  Delaware CorporationBy:
              
              /s/
                  Trevor DrinkwaterTrevor
                  Drinkwater
                President
                  and Chief Executive Officer
                (Principal
                  Executive Officer)Dated:September
                  26,
                  2007
              
              
              
              By:
              
              /s/
                  John MuellerJohn
                  Mueller
                Chief
                  Financial Officer
                (Principal
                  Financial and Accounting Officer)




27