e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2008


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

For the transition period from to

Commission File Number 000-27915

GENIUS PRODUCTS, INC.

(Exact name of registrant as specified in its charter)


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

2230 BROADWAY
SANTA MONICA, CA 90404
(Address of principal executive offices)

(310) 453-1222
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

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

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


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

There were 67,609,094 shares outstanding of the issuer’s Common Stock as of July 31, 2008.

NOTICE ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE INFORMATION)


	June 30,			December 31,
	2008			2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,831		$	1,757
Prepaid expenses and other current assets		110			110
Notes Receivable from Distributor		8,506			—

Total current assets		10,447			1,867

Notes Receivable from Distributor		—			8,191
Investment in Distributor		24,630			73,823

Total assets	$	35,077		$	83,881


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued Expenses		6			—
Accounts payable to Distributor, net		292			198

Total current liabilities		298			198

Deferred tax liability		—			11,406

Total liabilities		298			11,604


Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized; no shares outstanding		—			—
Series W preferred stock, $.0001 par value; 100 shares authorized and outstanding		—			—
Common stock, $.0001 par value; 300,000,000 shares authorized; 67,609,094 and 67,709,094 shares outstanding, respectively		7			7
Additional paid-in capital		110,431			112,293
Accumulated deficit		(75,659	)		(40,023	)

Total stockholders’ equity		34,779			72,277


Total liabilities and stockholders’ equity	$	35,077		$	83,881

See accompanying notes to condensed unaudited interim financial statements.

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	Six Months Ended June 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(35,977	)	$	(4,083	)
Adjustments to reconcile net loss to net cash provided by operating activities
Impairment of investment in Distributor		38,775			—
Equity in net loss from Distributor		7,961			3,249
Operating expenses paid by Distributor		750			609
Stock compensation expense		142			551
Deferred tax benefit		(11,406	)		(161	)
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses, notes receivable and deposits		(315	)		83
Decrease in accounts payable		—			(59	)
Increase in Distributor payable		94			—
Increase in accrued expenses and other		6			32

Net cash provided by operating activities		30			221


Cash flows from financing activities:
Proceeds from exercise of options		44			1,411
Proceeds from exercise of warrants		—			1,833

Net cash provided by financing activities		44			3,244


Net increase in cash and cash equivalents		74			3,465
Cash and cash equivalents at beginning of period		1,757			3,745

Cash and cash equivalents at end of period	$	1,831		$	7,210

See accompanying notes to condensed unaudited interim financial statements.

GENIUS PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. NATURE OF BUSINESS

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

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

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

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

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

The Distributor currently distributes its library on DVDs, next-generation DVD, and electronically in a digital format. We plan to continue to expand the distribution of the Distributor’s theatrical and non-theatrical product through the diverse emerging digital distribution markets including: Video-on-Demand (“VOD”) and Electronic Sell-Through (“EST”) on the Internet to companies such as Amazon, Apple, MovieLink and Microsoft, Internet-based subscription VOD customers (such as NetFlix) and direct-to-television peer-to-peer network solutions. Through its partnerships, the Distributor has released 176 theatrical and non-theatrical titles since inception. The Distributor distributes products to basic channels distributed on cable, Direct Broadcast Satellite (“DBS”) and Internet Protocol Television (“IPTV”), which delivers television programming to households via a broadband connection using Internet protocols.

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

	•		Theatrical/Independent Films (includes Independent Film Channel (IFC®) , RHI Entertainment™ (Hallmark library), The Weinstein Company® and Wellspring™)

	•		Sports (includes ESPN® and World Wrestling Entertainment®)

	•		Lifestyle (includes Animal Planet, The Learning Channel (TLC™) and Wellspring™)

	•		Family/Faith (includes Classic Media, Discovery Kids™, and Sesame Workshop®)

THE WEINSTEIN COMPANY TRANSACTION

On July 21, 2006 (the “Closing Date”), the Company completed a transaction (the “TWC Transaction”) with TWC Holdings and W-G Holding (two subsidiaries of TWC) pursuant to which we launched the Distributor to exploit the exclusive U.S. home video distribution rights to feature film and direct-to-video releases owned or controlled by TWC. On the Closing Date, the Company contributed substantially all of its assets (except for $1 million in cash and certain liabilities), its employees, and its existing businesses to the Distributor.

Thus, the Distributor is owned 70% by TWC Holdings and W-G Holding and 30% by the Company. The 70% interest in the Distributor held by TWC Holdings and W-G Holding consists of Class W Units and is redeemable, at TWC Holdings’ and W-G Holding’s option commencing at any time from July 21, 2007 for up to 70% of the Company’s outstanding common stock, or with TWC Holdings’ and W-G Holding’s approval, cash. The Company’s 30% membership interest in the Distributor consists of the Distributor’s Class G Units (see Equity Investment in Distributor section below).

In addition, the Company issued an aggregate of 100 shares of the Company’s Series W Preferred Stock to TWC Holdings and W-G Holding in connection with the TWC Transaction. The Series W Preferred Stock provides the holders thereof with (i) the right to elect five of the seven directors on the Company’s Board of Directors, of which two are currently TWC executives, (ii) majority voting power over other actions requiring approval of our stockholders, and (iii) the right to approve certain specified actions. The Series W Preferred Stock has no rights to receive dividends and minimal liquidation value.

On the Closing Date, the Company entered into a Registration Rights Agreement with TWC Holdings and W-G Holding pursuant to which we agreed to register for resale the shares of our common stock issuable upon redemption of Class W Units in the Distributor currently held by them. The Company and/or the Distributor also entered into the following agreements on the Closing Date: (i) an Amended and Restated Limited Liability Company Agreement of the Distributor, (ii) Video Distribution Agreement (the “TWC Distribution Agreement”), (iii) Services Agreement, and (iv) Assignment and Assumption Agreement.

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

For a full description of the TWC Transaction, please see our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on July 26, 2006.

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

BASIS OF PRESENTATION

The accompanying interim consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods indicated. The results of operations for any interim period are not necessarily indicative of results for the full year. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company. All significant inter-company transactions and accounts have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

INVESTMENT IN DISTRIBUTOR

adjusted for non-cash basis differences (see Note 4) and costs incurred by the Distributor on behalf of the Company. Pursuant to Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, the Company will periodically assess whether a decrease in value of the investment has occurred (which is other than temporary) and which should be recognized immediately, resulting in an impairment loss.

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

In the second quarter of 2008, the Company hired an independent financial and strategic advisory firm to determine the fair value of the Distributor as of June 30, 2008. While it was determined that the goodwill on the Distributor’s balance sheet has not been impaired, the Company recorded an impairment charge of $38.8 million related to its investment in Distributor as the Company concluded that an other than temporary decline had occurred in the fair value of the Distributor as of June 30, 2008.

STOCK-BASED COMPENSATION

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

Subsequent to the Closing Date of the TWC Transaction, the Company’s stock-based compensation expense consists of expense associated with stock options held by and subsequently granted to independent members of the Company’s Board of Directors. The stock-based compensation expense associated with the former employees of the Company, who became employees of the Distributor as of the Closing Date, are recorded on the books of the Distributor. Stock-based compensation expense is calculated using the Black-Scholes-Merton formula as our closed-form valuation option pricing model (the “Option Model”). The Option Model requires the use of subjective and complex assumptions, per the requirements of FAS123R, that include: (i) the option’s expected term, (ii) the estimated future price volatility of the underlying stock, (iii) the risk-free interest rate, (iv) the dividend yield and (v) expected forfeitures.

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

For a complete discussion of the Option Model and assumptions used to calculate stock-based compensation expense, please refer to Note 8 below.

INCOME TAXES

The Company files a consolidated corporate tax return and accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting basis and the tax basis of the Company’s assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when some portion or the entire deferred tax asset will not be realized on a more likely than not basis. Based on the Company’s assessment of all available evidence, the Company has concluded that its deferred tax assets are not more likely than not to be realized. This conclusion is based primarily on our history of net operating losses, annual net operating loss limitations under Internal Revenue Code (“IRC”) Section 382, and the need to generate significant amounts of taxable income in future periods on a consistent and prolonged basis in order to utilize the deferred tax assets. Accordingly,

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

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have no material unrecognized tax benefits at June 30, 2008.

BASIC AND DILUTED LOSS PER COMMON SHARE

Basic earnings per share (EPS) is calculated using income available to common stockholders divided by the weighted average of common shares outstanding during the year. Diluted EPS is similar to Basic EPS except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the potential dilutive common shares, such as options and warrants, had been issued. The treasury stock method is used to calculate dilutive shares and reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised.

The effects of the potentially dilutive securities (options and warrants that are outstanding) were not included in the computation of diluted loss per share for the periods presented since to do so would have been anti-dilutive.

NOTE 3. FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards (“Statement”) No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. The Company adopted on January 1, 2008, certain provisions of FAS 157 related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis, and has determined that such adoption has no effect on its consolidated financial statements. The provisions of FAS 157 related to other non-financial assets and liabilities will be effective on January 1, 2009, and will be applied prospectively. The Company is currently evaluating the impact the provisions of FAS 157 will have on the Company’s consolidated financial statements as it relates to other non-financial assets and liabilities; however, we do not believe it will have a material impact on our consolidated financial condition or results of operations.

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

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

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

GENIUS PRODUCTS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)


			December 31,
	June 30, 2008		2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	427	$	3,102
Restricted cash — short term		13,412		7,765
Accounts receivable, net of allowance for doubtful accounts of $2,839 and $4,311 and sales returns of $45,809 and $68,159		42,584		123,295
Inventories, net of reserves for obsolescence of $12,989 and $13,257		11,418		11,282
Prepaid expenses and other current assets		606		1,110


Total current assets		68,447		146,554

Restricted cash — long term		3,186		3,323
Property and equipment, net of accumulated depreciation of $667 and $455		4,246		953
Royalty advances, net of uncollectible advances of $9,954 and $5,112		35,389		31,492
Film library, net of accumulated amortization of $9,707 and $6,452		14,482		14,403
Goodwill		87,512		87,512
Other intangible assets, net of accumulated amortization of $13,667 and $9,675		7,604		11,596
Deferred financing fees		1,323		1,654
Deposits and other		2,635		2,968


Total assets	$	224,824	$	300,455


LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable	$	23,885	$	31,477
Notes payable		15,981		31,297
Notes payable to Genius Products, Inc.		8,506		—
Remittance to TWC		61,666		78,759
Remittance to other licensors		23,155		20,000
Accrued advertising and marketing		16,045		24,515
Other accrued expenses		12,944		20,910
Deferred revenue		16,148		8,492


Total current liabilities		178,330		215,450

Long term liabilities:
Notes payable to Genius Products, Inc.		—		8,191
Long term notes payable		1,599		627
Long term capital lease		29		30


Total long term liabilities		1,628		8,848

Total members’ equity		44,866		76,157


Total liabilities and members’ equity	$	224,824	$	300,455

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


	Six Months Ended June 30,
	2008			2007
Genius Products, Inc. 30% share of net loss from the Distributor	$	8,153		$	86

Adjustments for basis differences		1,031			2,221

(Benefit)/Expense for stock compensation for Distributor employees		(1,129	)		942

Genius Products, Inc. 30% share of interest on the Distributor’s notes payable		(94	)		—


Equity in net loss from Distributor	$	7,961		$	3,249

In the quarterly period ended June 30, 2008, the Distributor continued to implement its strategic decision to move away from non-branded business, improve efficiencies, and restructure the organization. As a consequence, the Distributor eliminated thirty-two positions. The charge to operations relating to involuntary termination costs was $0.4 million. A roll-forward of the related liability is provided below:


Severance costs charged to G&A expense during the second fiscal quarter 2008	$	426,527
Severance costs paid during the second fiscal quarter 2008		(341,861	)

Accrued severance balance at June 30, 2008	$	84,667

NOTE 5. CONTINGENCIES

GUARANTY OF CREDIT FACILITY

On August 10, 2007, the Distributor entered into a three-year, senior secured revolving credit facility (the “Credit Agreement”) with Société Générale (“Soc Gen”), as lender and agent. The Credit Agreement provided for an initial commitment of $30 million and up to a total of $70 million. On November 1, 2007, the Distributor, Soc Gen and Alliance Leicester entered into the Amended and Restated Credit Agreement (the “Amended Credit Agreement”), which increased the total commitment to $50 million, based on expected incremental commitments. The Amended Credit Agreement terminates on June 30, 2010, and may be extended to August 10, 2010, under satisfaction of certain conditions. Borrowings outstanding under the Amended Credit Agreement were $15.0 million at June 30, 2008. The maximum amount available at June 30, 2008 was $16.5 million. Soc Gen holds a security interest in substantially all personal property of the Company, the Distributor, and its direct and indirect subsidiaries, other than TWC accounts receivable. TWC continues to have a first priority security interest in accounts receivable attributable to TWC content.

The Company and the direct and indirect subsidiaries of the Distributor have unconditionally guaranteed the obligations of the Distributor under the Amended Credit Agreement (i.e., full and punctual payment of the Distributor’s obligations, when and as due). Management has assessed the Company’s potential obligations under this guarantee and considered the provisions of FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, noting that the likelihood of making any payments related to this guarantee is remote and therefore has not recorded a liability on the Company’s balance sheets associated with this guarantee.

LITIGATION

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

Falcon Picture Group Matter

We have disclosed in prior reports filed with the Securities and Exchange Commission a complaint filed against the Company in the Circuit Court of Cook County, Illinois by Falcon Picture Group, LLC (“Falcon”), and the related counterclaim filed by the Company against Falcon and its owner, Carl Amari. There have been no material developments in these matters. For a complete description of the facts and circumstances surrounding this litigation, please see the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2007 under Part I, Item 3., “Legal Proceedings”, which is incorporated herein by reference.

Entertainment Resource Matter

We have disclosed in prior reports filed with the Securities and Exchange Commission a complaint filed against the Company in the Circuit Court of Broward County, Florida, Case No. 06-012249 CACE 05, by Larry S. Hyman, as assignee for Entertainment Resource, Inc. (“ERI”). There have been no material developments in this matter. For a complete description of the facts and circumstances surrounding the ERI litigation, please see the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2007 under Part I, Item 3., “Legal Proceedings”, which is incorporated herein by reference.

NOTE 6. NOTES RECEIVABLE FROM RELATED PARTY

On September 27, 2007, the Distributor borrowed $6.0 million from the Company and issued a promissory note in favor of the Company in the principal amount of $6.0 million. On November 1, 2007, the Distributor borrowed an additional $2.0 million from the Company and issued a promissory note in favor of the Company in the principal amount of $2.0 million. Under each of the aforementioned notes, interest is due on the unpaid principal balance at a monthly rate equal to the LIBOR Rate (as defined in the notes) plus five percent (5%) until paid. On March 16, 2008, the Company’s Board of Directors approved amendments to each of (i) that certain promissory note, dated September 27, 2007, by the Distributor in favor of the Company, in the principal amount of $6 million and (ii) that certain promissory note, dated November 1, 2007, by the Distributor in favor of the Company in the principal amount of $2 million, pursuant to which principal and accrued interest under the notes would be due and payable on demand at any time after January 1, 2009.

In the event payment of principal or interest due under the notes is not made when due, the outstanding principal balance will bear interest at the rate of two percent (2%) above the interest rate which is otherwise provided under the notes for so long as such event continues. If the notes are not paid when due, the Distributor agreed to pay the Company’s reasonable costs of collection, including, without limitation, all reasonable attorneys’ fees and all reasonable expenses actually incurred by the Company in connection with such collection efforts. The principal amount of the notes may be prepaid in whole or in part, provided that all accrued interest on the amount to be prepaid is also paid at such time. The proceeds from the notes were used to pay amounts owed by the Distributor to TWC under the TWC Distribution Agreement. As of June 30, 2008, an aggregate of $8.5 million in principal and accrued interest expense was outstanding under the notes.

Payments to TWC pursuant to the TWC Distribution Agreement are due 45 days from the last day in the calendar month. As needed, these terms are extended anywhere from 15 to 45 days in order to provide flexibility and manage cash flows. The Distributor expects TWC to continue to provide such flexibility through at least December 31, 2008.

NOTE 7. STOCKHOLDERS’ EQUITY

COMMON STOCK

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

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

A summary of warrant activity follows:


				Weighted
				Average		Aggregate
	Warrants			Exercise		Intrinsic
	Outstanding			Price		Value
December 31, 2007		10,425,958		$	2.45
Cancelled		(668,038	)

June 30, 2008		9,757,920		$	2.53	$	—

Warrants exercisable, June 30, 2008		9,757,920		$	2.53	$	—

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


					Weighted				Weighted
					average				average
					exercise price of				exercise price of
	Warrants		Average		warrants		Warrants		warrants
	outstanding		remaining life		outstanding		exercisable		exercisable
Under $1.50		275,718		0.10	$	1.40		275,718	$	1.40
$1.50 - $1.99		170,723		2.26		1.88		170,723		1.88
$2.00 - $2.99		7,664,479		2.09		2.48		7,664,479		2.48
$3.00 - $3.99		1,647,000		0.75		3.00		1,647,000		3.00

		9,757,920		1.81	$	2.53		9,757,920	$	2.53

NOTE 8. STOCK-BASED COMPENSATION

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


				Weighted
				Average		Aggregate
	Options			Exercise		Intrinsic
	Outstanding			Price		Value
December 31, 2007		17,770,041		$	1.82
Exercised		(50,000	)		0.89
Canceled		(173,666	)		1.81

June 30, 2008		17,546,375		$	1.83	$	—

Options exercisable, June 30, 2008		15,132,566		$	1.79	$	—

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


					Weighted				Weighted
					average				average
					exercise price of				exercise price of
	Options		Average		options		Options		options
	outstanding		remaining life		outstanding		exercisable		exercisable
Under $1.50		1,900,752		3.57	$	0.67		1,900,752	$	0.67
$1.50 - $1.99		10,573,373		6.49		1.72		9,156,064		1.69
$2.00 - $2.99		3,917,500		6.47		2.15		2,921,000		2.10
$3.00 - $3.99		793,750		5.58		3.00		793,750		3.00
$4.00 + over		361,000		4.08		5.07		361,000		5.07

		17,546,375		6.08	$	1.83		15,132,566	$	1.79

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


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

For market-based options, the Company utilizes the Monte Carlo Simulation as the stock option model to provide the most accurate fair value estimate due to the path dependency of the options valued under the provisions of this grant. Monte Carlo Simulation is a lattice model,
which — unlike the closed-form model – can incorporate a range of expected volatilities. These valuations were performed on a multi-tranche basis considering three vesting tranches and the weighted average volatility for these grants is calculated to be 54.89%. The risk-free rates have been determined based upon the interest rates for zero-coupon U.S. Treasury bonds as of June 30, 2008. A yield curve has been determined based upon interpolating between the rates ranging from 1.60% to 3.99%. Consistent with the service-based stock option grants, the dividend rate is 0.0% for the performance-based option grants.

Total share-based compensation expense recognized by the Company for the three and six months ended June 30, 2008 was $0.1 million and $0.04 million versus compensation expense of $0.4 million and $0.6 for the three and six months ended June 30, 2007. No income tax benefit was recognized in the statement of operations for share-based compensation arrangements for the Company.

In relation to options issued by the Company to employees of the Distributor, the Distributor recorded share-based compensation benefit of $0.3 million and $1.6 million for the three and six months ended June 30, 2008 versus an expense of $0.8 million and $1.3 million for the three and six months ended June 30, 2007.

NOTE 9. INCOME TAXES

The Company recorded a federal and state tax benefit of $11.4 million for the six months ended June 30, 2008. The tax benefit resulted from the reversal of the deferred tax liability related to our investment in the Distributor primarily due to the impairment recorded.

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

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto contained in this report. The discussion contains forward-looking statements that relate to future events or our future financial performance that involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. For additional information concerning these factors, see the information under the caption “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 19, 2008.

NATURE OF BUSINESS

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

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

•

Theatrical/Independent Films (includes Independent Film Channel (IFC®) , RHI Entertainment™ (Hallmark

			library), The Weinstein Company® and Wellspring™)

	•		Sports (includes ESPN® and World Wrestling Entertainment®)

	•		Lifestyle (includes Animal Planet, The Learning Channel (TLC™) and Wellspring™)

	•		Family/Faith (includes Classic Media, Discovery Kids™, and Sesame Workshop®)

The Distributor maintains in perpetuity distribution rights for TWC content released during the term of the TWC Distribution Agreement, subject to certain buy-back rights of the TWC content by TWC.

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

CRITICAL ACCOUNTING POLICIES

INVESTMENT IN DISTRIBUTOR

At the closing of the TWC Transaction, we contributed to the Distributor all of our operating businesses, including substantially all of our assets, except for $1 million in cash and certain liabilities, and received a 30% equity interest in the Distributor. The accompanying consolidated financial statements account for the Company’s investment in the Distributor (30% membership interest represented by the Distributor’s Class G units) using the equity method of accounting. On the Company’s consolidated statement of operations subsequent to the Closing Date, the Company recorded its 30% share of the Distributor’s profit or loss as equity in net profit or loss from the Distributor, adjusted for non-cash basis differences and costs incurred by the Distributor on behalf of the Company. Pursuant to Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, the Company will periodically assess whether a decrease in value of the investment has occurred (which is other than temporary) and which should be recognized immediately, resulting in an impairment loss.

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

STOCK-BASED COMPENSATION

(“EITF”) Issue No. 00-12, “Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee”, (“EITF 00-12”). EITF 00-12 requires that the Distributor recognize the costs of stock-based compensation incurred by an investor on its behalf.

INCOME TAXES

RESULTS OF OPERATIONS OF GENIUS PRODUCTS, INC.

All of the operations of the Company relate to the activity of the Distributor. We account for our 30% investment in the Distributor using the equity method of accounting, pursuant to Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB No. 18”). On our consolidated statement of operations, we record our 30% share of the Distributor’s profit (loss) as equity in net earnings (loss) from Distributor, adjusted for basis differences and costs incurred by the Distributor on behalf of the Company. Per the requirements of APB No. 18, we periodically assess whether a decrease in value of the investment has occurred which is other than temporary and which should be recognized immediately as an impairment loss. Under the equity method of accounting, only our investment in and amounts due to and from the Distributor have been included as an asset in our consolidated balance sheets.

The Company does not report its different product lines as segments as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), because we do not allocate our resources among product lines nor do we measure performance by product line. We do not maintain discrete financial information regarding product lines. Our sales, marketing and product development efforts among our different product lines are supported by one integrated group of individuals. Additionally, our warehousing costs also reflect support of all product lines and as such cannot be segmented.

Revenues

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

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

of non-TWC titles was $63.7 million. For the six months ended June 30, 2007, net revenue from sales of TWC titles was $141.9 million and net revenue from sales of non-TWC titles was $53.9 million

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

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

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

Consistent with other retail product distributors, the Distributor has experienced some degree of sales seasonality primarily caused by the quantity and quality of made for theatrical releases and the traditionally strong fourth quarter which represented almost 40% of 2007 net revenue.

Costs and expenses

Cost of Revenues

The Company had no costs of revenues for the three and six months ended June 30, 2008 and for the three months and six months ended June 30, 2007. All of the costs of revenues are reflected in the results of operations of the Distributor.

Costs of revenues for the Distributor consist primarily of the raw material and manufacturing costs of products sold to customers, packaging and shipping costs, advertising and marketing, amortization of the film library, and participations and royalties. Participation expenses related to TWC’s distribution agreement are calculated based on SOP 00-2 which amortizes such costs of revenues using the film forecast method over a period of two years.

The Distributor’s costs of revenues were $75.7 and $177.7 million for the three and six months ended June 30, 2008 versus $99.9 million and $176.0 million for the three and six months ended June 30, 2007.

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

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

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

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

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

Operating Expenses

General and administrative expenses increased by $0.5 million for the three months ended June 30, 2008 and increased by $2.1 million for the six months ended June 30, 2008. General and administrative expenses for the three months ended June 30, 2008 included $1.3 million of research and development costs relating to video game development, $0.4 million related to involuntary termination costs and $0.7 in other restructuring costs.

The Company’s 30% equity in the net loss of the Distributor was $3.2 and $8.0 million for the three and six months ended June 30, 2008 versus $1.0 million and $3.2 million for the three and six months ended June 30, 2007.

Other Income and Expense

The Company had interest income of $0.1 million and $0.2 million for the three and six months ended June 30, 2008 versus $0.1 million and $0.1 million for the three and six months ended June 30, 2007. Interest income in 2008 consists of interest earned on outstanding cash balances, and interest accrued on the two promissory notes totaling $8.0 million issued by the Distributor to the Company on September 27, 2007 and November 1, 2007, while interest income in 2007 consists of interest earned on outstanding cash balances only. The Distributor had net interest income of $0.2 million for the three months ended June 30, 2008, and net interest expense of $0.8 million for the six months ended June 30, 2008 versus net interest expense of $0.3 million and $0.5 million for the three and six months ended June 30, 2007. The increase in net interest expense is due to the promissory notes that were issued by the Distributor to the Company in 2007 and borrowings under the credit facility with Soc Gen. The Company had income tax benefit of $11.9 and $11.4 million for the three and six months ended June 30, 2008 versus income tax provision of $0.3 million and $0.2 million for the three and six months ended June 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2008, the Company had cash balances of $1.8 million and the Distributor had cash and restricted cash balances of $17.0 million. The restricted cash balances are associated with (i) required minimum cash balances pursuant to the Amended Credit Agreement, (ii) certain bank accounts that are subject to semi-monthly disbursements to the Distributor and other parties under a waterfall of funds prescribed by the Amended Credit Agreement, and (iii) an office lease security deposit.

We may consider additional issuances of equity and/or debt financing to fund future growth opportunities. The Company is reliant on the Distributor to pay certain costs. The Distributor has limited access to additional capital and has used its maximum availability under its current credit facility which was $16.5 million as of June 30, 2008. Accordingly, near term cash needs are met through support from TWC. Payments to TWC under the TWC Distribution Agreement are due 45 days from the last day in the calendar month. As needed, these terms are extended anywhere from 15 to 45 days in order to provide flexibility and manage cash flows. The Distributor expects TWC to continue to provide such flexibility through at least December 31, 2008. Accordingly, the Company and the Distributor are reliant upon the financial condition and cash flows of TWC.

In the event that non-TWC revenue increase, resulting in increased non-TWC receivables, the Distributor’s availability will increase under the Amended Credit Agreement with Societe Generale. Although we believe that the Distributor’s expanded product line offers us the opportunity for significantly improved operating results in future quarters, no assurance can be given that we will operate on a profitable basis in 2008, or ever, as such performance is subject to numerous variables and uncertainties, many of which are out of our control. Although we own 30% of the Distributor, we only have access to the cash on

the Distributor’s balance sheet to the extent that we agree with our partner, TWC, to make a distribution to us. As of June 30, 2008, the Company had no off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2008, the Distributor’s cash and cash equivalents were invested with financial institutions with investment grade credit ratings. Due to the short duration of the Distributor’s investment portfolio and the high quality of the Distributor’s investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of the Distributor’s portfolio. Therefore, we would not expect the Distributor’s operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on the Distributor’s investment portfolio.

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

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

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

Company management has concluded that, as of June 30, 2008, the following material weaknesses existed at both the Company and the Distributor:

•		*Timely and routine financial statement close/reporting process and the entity level controls surrounding this process.*

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

•		*Calculation of expenses related to stock compensation.*

		Management did not adequately supervise the accumulation, analysis, and computation of stock compensation during the quarter as the Company and Distributor lacked the appropriate financial personnel to undertake this computation.

•		*Formal processes over change management and access procedures related to our information technology systems.*

		We were unable to properly implement and maintain an effective information technology operating environment. In addition, we did not properly maintain access or program change controls related to our critical information technology systems including the General Ledger system and Order Processing/Management system.

•

Calculation of provision for income taxes and related oversight of this process.


			We did not properly supervise and review the calculation of the Company’s tax provision that was performed by an outside third party. This lack of supervision and review by management resulted in a material post-closing adjustment prior to the issuance of the financial statements.

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

	•		*Revenue recognition process; specifically, our controls in the areas of allocating and tracking Market Development Funds (“MDF”) Spending.*

			The Distributor has not fully implemented a formalized process and related controls to determine the appropriate classification of MDF related expenses. Due to this weakness, there is a reasonable possibility that the Distributor could materially record revenue improperly or misclassify MDF related expenses in its statements of operations.

	•		*Licensor participations expense and related liabilities, and film library amortization.*

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

	•		*Management’s estimation and forecasting process as it relates to inventory obsolescence reserve, and sales returns and price protection reserves.*

			In calculating the Distributor’s reserves, management utilized incorrect projections which resulted in material adjustments being recorded.

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

Changes in Internal Control over Financial Reporting

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

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

FALCON PICTURE GROUP MATTER

ENTERTAINMENT RESOURCE MATTER

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

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

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


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

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

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

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

31.1		Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act.*

31.2		Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act.*

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*


*		Filed herewith.


			PAGE
PART I FINANCIAL INFORMATION

Item 1 Financial Statements			4

Condensed consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007			4

Condensed consolidated Statements of Operations for the Three Months Ended June 30, 2008 and 2007 (unaudited), and for the Six Months Ended June 30, 2008 and 2007 (unaudited)			5

Condensed consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (unaudited)			6

Notes to Condensed consolidated Financial Statements (unaudited)			7

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			17

Item 3 Quantitative and Qualitative Disclosures About Market Risk			21

Item 4 Controls and Procedures			21

PART II OTHER INFORMATION

Item 1 Legal Proceedings			23

Item 1A Risk Factors			23

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			23

Item 3 Defaults Upon Senior Securities			23

Item 4 Submission of Matters to a Vote of Security Holders			23

Item 5 Other Information			23

Item 6 Exhibits			24

SIGNATURES			25
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Operating expenses:
Impairment of investment in Distributor	$	38,775		$	—		$	38,775		$	—
Selling, general and administrative		469			655			890			1,111
Equity in net loss from Distributor		3,174			1,021			7,961			3,249


Total operating expenses		42,418			1,676			47,626			4,360


Loss from operations		(42,418	)		(1,676	)		(47,626	)		(4,360	)

Interest and other income, net		117			67			243			117


Loss before provision for income taxes		(42,301	)		(1,609	)		(47,383	)		(4,243	)

Benefit (Provision) for income taxes		11,897			294			11,406			160


Net loss	$	(30,404	)	$	(1,315	)	$	(35,977	)	$	(4,083	)


Basic and diluted EPS

Net loss per share	$	(0.45	)	$	(0.02	)	$	(0.53	)	$	(0.06	)


Basic and diluted weighted average shares		67,635,468			66,069,255			67,679,424			65,136,522


	Three Months Ended						Six Months Ended
	June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
Revenues, net of sales, returns, discounts and allowances of $51,750 and $32,411 for the three months ended June 30, 2008 and 2007, respectively, and $80,756 and $64,083 for the six months ended June 30, 2008 and 2007, respectively	$	74,637		$	112,653		$	172,848		$	195,770

Total cost of revenues		(75,696	)		(99,891	)		(177,691	)		(176,046	)

Gross profit (loss)		(1,059	)		12,762			(4,843	)		19,724

Total operating expenses		(10,887	)		(10,385	)		(21,547	)		(19,483	)

(Loss) Income from operations		(11,946	)		2,377			(26,390	)		241

Interest income (expense), net		210			(264	)		(787	)		(527	)

Net income (loss )	$	(11,736	)	$	2,113		$	(27,177	)	$	(286	)


	GENIUS PRODUCTS, INC., a Delaware corporation
Dated: August 11, 2008	By:	/s/ Trevor Drinkwater
		Trevor Drinkwater
		President and Chief Executive Officer (Principal Executive Officer)


Dated: August 11, 2008	By:	/s/ Edward J. Byrnes
		Edward J. Byrnes
		Chief Financial Officer (Principal Financial and Accounting Officer)

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