~~Table of Contents~~UNITED STATES

~~UNITED STATES~~ SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~ September 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 to

Commission File Number 000-27915

GENIUS PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

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

~~2230 BROADWAY~~3301 ~~SANTA~~EXPOSITION ~~MONICA~~BLVD., CASUITE ~~90404 (Address of principal executive offices)~~100

~~(310) 453-1222~~SANTA ~~(Registrant’s telephone number~~MONICA, ~~including~~CA ~~area code)~~90404

(~~Former name, former address and former fiscal year,~~Address ifof ~~changed~~principal ~~since~~executive ~~last report~~offices)

~~Indicate by check mark whether the registrant~~ (1310) ~~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 401-2200

(Registrant's ~~Indicate~~telephone ~~by check mark whether the registrant is a large accelerated filer~~number, anincluding ~~accelerated~~area 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 onecode):

~~Large accelerated filer o Accelerated filer þ Non-accelerated filer o~~ (DoFormer name, ~~not~~former ~~check~~address ifand aformer ~~smaller~~fiscal ~~reporting company) Smaller reporting company o~~year,

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

~~There~~Indicate by ~~were~~check ~~67,609,094~~mark ~~shares~~whether ~~outstanding~~the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the ~~issuer’s~~Exchange ~~Common~~Act ~~Stock~~during asthe ofpreceding ~~July 31~~12 months (or for such shorter period that the registrant was required to file such reports), ~~2008~~and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

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

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

			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

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

2There were 67,609,094 shares outstanding of the issuer's Common Stock as of March 9, 2009.

~~Table~~GENIUS PRODUCTS, ofINC. ~~Contents~~AND SUBSIDIARIES

~~NOTICE ABOUT FORWARD-LOOKING STATEMENTS~~FORM 10-Q

~~This Quarterly Report on Form 10-Q includes “forward-looking statements”. To the extent that the~~FOR ~~information~~THE ~~presented~~QUARTERLY inPERIOD ~~this~~ENDED ~~Quarterly~~SEPTEMBER ~~Report discusses financial projections~~30, 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”. 2008

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. INDEX

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.

		PAGE
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements	4

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

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

	Condensed consolidated Statements of Cash Flows for the Nine Months Ended September 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	22

Item 3	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4	Controls and Procedures	30

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	31

Item 1A	Risk Factors	32

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3	Defaults Upon Senior Securities	32

Item 4	Submission of Matters to a Vote of Security Holders	32

Item 5	Other Information	32

Item 6	Exhibits	33

SIGNATURES		34

3 2

~~Table~~NOTICE ofABOUT ~~Contents~~FORWARD-LOOKING STATEMENTS

~~PART~~This Quarterly IReport —on ~~FINANCIAL~~Form ~~INFORMATION~~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”.

~~ITEM~~Although we 1believe 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. ~~FINANCIAL~~These ~~STATEMENTS~~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.

~~GENIUS~~When considering ~~PRODUCTS~~forward-looking statements in this Quarterly Report, ~~INC~~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. ~~AND~~Except ~~SUBSIDIARIES~~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.

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~ 3

~~(IN~~PART I ~~THOUSANDS,~~- ~~EXCEPT~~FINANCIAL ~~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

ITEM 1. FINANCIAL STATEMENTS

See accompanying notes to condensed unaudited interim financial statements.


GENIUS PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE INFORMATION)





	September 30,			December 31,
	2008			2007
	(Unaudited)			(Restated)

ASSETS
Current assets:
Cash and cash equivalents	$	1,840		$	1,757
Prepaid expenses and other current assets		-			110
Notes Receivable from Distributor		8,691			-
Total current assets		10,531			1,867

Notes Receivable from Distributor		-			8,191
Investment in Distributor		4,287			73,002
Total assets	$	14,818		$	83,060

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued Expenses		7			-
Accounts payable to Distributor, net		305			198
Total current liabilities		312			198

Class W Option Liability		2,253			4,168
Deferred tax liability		-			12,797
Total liabilities		2,565			17,163

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		110,533			112,293
Accumulated deficit		(98,287	)		(46,403	)
Total stockholders' equity		12,253			65,897

Total liabilities and stockholders' equity	$	14,818		$	83,060


See accompanying notes to condensed unaudited interim financial statements.

~~Table~~GENIUS PRODUCTS, ofINC. ~~Contents~~AND SUBSIDIARIES

~~GENIUS~~CONDENSED CONSOLIDATED ~~PRODUCTS,~~STATEMENTS ~~INC.~~OF ~~AND SUBSIDIARIES~~ OPERATIONS

~~CONDENSED~~(IN THOUSANDS, ~~CONSOLIDATED~~EXCEPT ~~STATEMENTS~~PER OFSHARE ~~OPERATIONS~~INFORMATION)

(~~IN THOUSANDS, EXCEPT PER SHARE INFORMATION~~UNAUDITED)

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007 Restated (Note 3)			2008			2007 Restated (Note 3)
Operating expenses:
Impairment of investment in Distributor	$	1,121		$	-		$	36,033		$	-
Selling, general and administrative		1,229			1,336			3,868			3,867
Equity in net loss from Distributor		13,784			3,010			27,417			6,599

Total operating expenses		16,134			4,346			67,318			10,466

Loss from operations		(16,134	)		(4,346	)		(67,318	)		(10,466	)

Interest and other income, net		806			(31	)		2,297			457

Loss before provision for income taxes		(15,328	)		(4,377	)		(65,021	)		(10,009	)

Benefit (Provision) for income taxes		-			(104	)		12,797			193
Net loss	$	(15,328	)	$	(4,481	)	$	(52,224	)	$	(9,816	)

Basic and diluted EPS

Net loss per share	$	(0.23	)	$	(0.07	)	$	(0.77	)	$	(0.15	)

Basic and diluted weighted average shares		67,609,094			66,951,924			67,655,809			65,738,041

	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

See accompanying notes to condensed unaudited interim financial statements.

~~See accompanying notes to condensed unaudited interim financial statements.~~ 5

5GENIUS PRODUCTS, INC. AND SUBSIDIARIES

~~Table~~CONDENSED CONSOLIDATED ofSTATEMENTS ~~Contents~~OF CASH FLOWS

~~GENIUS PRODUCTS, INC. AND SUBSIDIARIES~~(IN THOUSANDS)

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~(UNAUDITED)

(IN THOUSANDS)

	Nine Months Ended September 30,
	2008			2007 Restated (Note 3)
Cash flows from operating activities
Net loss	$	(52,224	)	$	(9,816	)
Adjustments to reconcile net loss to net cash provided by operating activities
Impairment of investment in Distributor		36,033			-
Equity in net loss from Distributor		27,417			6,599
Operating expenses paid by Distributor		3,489			3,192
Stock compensation expense		312			654
Deferred tax benefit		(12,797	)		(193	)
Revaluation of Class W option liability		(1,915	)		(255	)
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses, notes receivable and deposits		110			(91	)
Decrease in accounts payable		-			(59	)
Decrease in Distributor payable		(393	)		-
Increase in accrued expenses		7			157
Net cash provided by operating activities		39			188

Cash flows from investing activities:
Short-term note receivable from related party		-			(6,000	)
Net cash used in investing activities		-			(6,000	)

Cash flows from financing activities:
Proceeds from exercise of options		44			1,595
Proceeds from exercise of warrants		-			3,634
Net cash provided by financing activities		44			5,229

Net increase (decrease) in cash and cash equivalents		83			(583	)
Cash and cash equivalents at beginning of period		1,757			3,745
Cash and cash equivalents at end of period	$	1,840		$	3,162

~~(UNAUDITED)~~See accompanying notes to condensed unaudited interim financial statements.

	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~~GENIUS PRODUCTS, ~~accompanying~~INC. ~~notes~~AND ~~to condensed unaudited interim financial statements.~~ SUBSIDIARIES

6NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~Table of Contents~~(UNAUDITED)

~~GENIUS PRODUCTS, INC~~NOTE 1. NATURE ~~AND~~OF ~~SUBSIDIARIES~~ BUSINESS

~~NOTES~~The financial ~~TO CONDENSED~~statements ~~CONDENSED~~and ~~CONSOLIDATED~~related ~~FINANCIAL~~footnote ~~STATEMENTS~~disclosures reflect the results of operations of the Company and the Distributor, as applicable, as of and for the periods ended September 30, 2008 and 2007. The financial statements and related footnote disclosures do not reflect the impact of any events that have occurred since September 30, 2008, which events are more particularly described in Note 11 to the Company’s financial statements and in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2009.

Genius Products, Inc. (~~UNAUDITED~~“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”), and a 14% percentage interest owned indirectly through its indirect wholly-owned subsidiary, Weinstein GP Holdings LLC (“Weinstein GP Holdings”)). TWC Holdings is the subsidiary company of The Weinstein Company LLC (“TWC”), the largest provider of content for the Distributor’s library.

~~NOTE~~Through the 1Distributor, for which the Company serves as managing member, we produce and distribute a vast content library that encompasses approximately 3,550 feature films and documentaries and 4,000 hours of television programming. ~~NATURE~~This OFlibrary ~~BUSINESS~~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: ESPN®, World Wrestling Entertainment®, Sesame Workshop®, Discovery Kids™, Animal Planet and The Learning Channel (TLC™).

~~Genius~~The Distributor ~~Products,~~has ~~Inc.~~developed ~~(“we”,~~a ~~“us”,~~fully ~~“our”~~integrated ~~or the “Company”), through our 30%~~direct-~~owned~~to-retail ~~subsidiary,~~distribution ~~Genius~~platform ~~Products,~~that ~~LLC~~parallels (the ~~“Distributor”), is a leading independent~~ home entertainment ~~products company~~divisions ~~that~~of ~~acquires, produces and licenses, through~~ the ~~Distributor’s~~major ~~multiple distribution~~Hollywood ~~agreements~~studios. This ~~with~~platform ~~content~~provides ~~partners,~~direct ansales ~~extensive~~and ~~library of motion pictures~~marketing, ~~television programming,~~inventory management and ~~trend~~ ~~entertainment~~state-of-the-art onsupply-chain ~~digital versatile disks (“DVD”) and digitally~~services. ~~The Distributor works~~In incollaboration ~~partnership~~ with ~~major~~leading ~~retailers~~replicators toand ~~distribute~~third-party ~~widely~~logistics ~~recognized home entertainment brands to a~~and ~~diversified~~supply-chain ~~customer~~companies, ~~base. The remaining 70% of~~ the Distributor ishas ~~owned~~rapidly byscaled ~~The~~this ~~Weinstein~~network, ~~Company~~which ~~Holdings~~has ~~LLC~~helped ~~(“TWC~~to ~~Holdings”)~~facilitate ~~(which includes a 1% percentage interest owned indirectly through~~ its ~~wholly-owned~~ ~~subsidiary,~~rapid ~~W-G~~growth ~~Holding~~in ~~Corp~~revenues. ~~(“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~~ The Distributor, ~~for~~primarily ~~which~~sells ~~the~~to ~~Company~~major ~~serves~~national asretailers ~~managing~~including ~~member~~Wal-Mart, ~~we produce and distribute~~ aBlockbuster ~~vast~~Entertainment, ~~and~~Best ~~growing~~Buy, ~~content~~Circuit ~~library~~City, ~~that~~Kmart, ~~encompasses approximately 3~~Target,~~550~~ ~~feature films and~~NetFlix, ~~documentaries~~Costco, ~~and~~Sam’s 4Club,~~000~~ ~~hours~~Amazon, ofBorders, ~~television programming. This~~Toys ~~library~~R ~~includes~~Us ~~feature films~~ and ~~television~~Columbia ~~programming~~House.We ~~from critically~~believe ~~acclaimed~~that ~~producers~~the ~~such~~strong asrelationships ~~The Weinstein Company®, for which~~ the Distributor has ~~the~~developed ~~exclusive U.S.~~with ~~home video distribution rights, and RHI Entertainment™ (Hallmark library). Additional~~these ~~content,~~well-known ~~such~~retailers as ~~independent~~well ~~films,~~as ~~sports, family, and lifestyle productions, come from partnerships~~ with ~~established~~the ~~consumer~~Distributor’s ~~brands: IFC®,~~branded ~~ESPN®,~~content ~~World Wrestling Entertainment®,~~partners ~~Classic~~help ~~Media,~~promote ~~Sesame~~the ~~Workshop®,~~Distributor’s ~~Discovery~~programming ~~Kids™, Animal Planet~~ and ~~The~~heighten ~~Learning~~consumer ~~Channel~~awareness ~~(TLC™).~~of its programs.

The Distributor ~~has~~collaborates ~~developed~~with aits ~~fully~~retail ~~integrated~~and ~~direct-~~content partners to~~-retail~~ ~~distribution~~create ~~platform~~sales programs that ~~parallels~~ ~~the~~exploit ~~home~~their ~~entertainment~~widely ~~divisions~~recognized ofbrands ~~the~~and ~~major~~endorse ~~Hollywood studios~~related content. ~~This~~These ~~platform~~sales ~~provides~~programs focus on brands to provide the retailer ~~direct~~with ~~sales~~solutions ~~and~~that ~~marketing~~simplify the retailer’s buying process, ~~inventory~~improve ~~management~~shelf-space utilization and ~~state-of-the-art~~help ~~supply-chain~~consumers ~~services~~quickly make informed purchase decisions. ~~In collaboration~~The ~~with~~Distributor’s ~~leading~~ability ~~replicators~~to ~~and~~deliver ~~third-party~~unique, ~~logistics~~innovative solutions ~~and~~that ~~supply-chain~~improve ~~companies,~~ the ~~Distributor~~ ~~has~~sales ~~rapidly~~and ~~scaled~~rentals ~~this~~of ~~network,~~its ~~which~~content has ~~helped~~enabled it to compete ~~facilitate~~successfully ~~its~~and ~~rapid~~maintain ~~growth~~strong inrelationships with its retail and ~~revenues~~content partners.

The Distributor currently ~~primarily~~distributes its ~~sells~~library toon ~~major~~DVDs, ~~national~~next-generation DVD, ~~retailers~~and ~~including~~electronically ~~Wal-Mart,~~in ~~Blockbuster Entertainment,~~a ~~Best~~digital ~~Buy,~~format. We ~~Circuit~~plan ~~City,~~to ~~Kmart,~~continue ~~Target,~~to expand ~~NetFlix,~~the ~~Costco,~~distribution ~~Sam~~of the Distributor’s ~~Club,~~theatrical ~~Amazon,~~and ~~Borders,~~non-theatrical ~~Toys~~product Rthrough Usthe ~~and~~diverse ~~Columbia~~emerging ~~House. The~~digital ~~Distributor~~distribution comarkets including: Video-~~produces~~on-Demand ~~programming~~(“VOD”) ~~with~~and ~~its~~Electronic ~~branded~~Sell-Through ~~content~~(“EST”) on the Internet to ~~partners~~companies ~~and~~such ~~mitigates~~as ~~the~~Amazon, ~~impact~~Apple, ofMovieLink ~~its~~and ~~production~~Microsoft, ~~costs~~Internet-based subscription ~~through~~VOD ~~minimum~~customers ~~guarantees~~(such ~~from~~as ~~its~~NetFlix) and direct-to-television ~~retail~~peer-to-peer ~~partners~~network solutions. WeThrough ~~believe~~its ~~that~~partnerships, the Distributor ~~strong~~has ~~relationships~~released ~~the~~176 ~~Distributor~~theatrical ~~has~~and ~~developed~~non-theatrical ~~with~~titles ~~these~~since ~~well-known~~inception. The ~~retailers~~Distributor ~~and~~distributes ~~branded~~products ~~content~~to ~~partners~~basic ~~help~~channels distributed ~~promote~~on ~~the~~cable, ~~Distributor’s~~Direct ~~programming~~Broadcast Satellite (“DBS”) and Internet Protocol ~~heighten~~Television ~~consumer~~(“IPTV”), ~~awareness~~which ofdelivers ~~its~~television ~~programs.~~programming to households via a broadband connection using Internet protocols.

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.7

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~~primarily ~~non-theatrical~~focuses ~~product through the diverse emerging digital distribution markets including: Video-~~on~~-Demand~~ ~~(“VOD”)~~four ~~and~~core ~~Electronic~~branded ~~Sell-Through~~content ~~(“EST”)~~categories onthat ~~the Internet to companies~~we ~~such~~call asContent 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.Verticals:

~~The~~· ~~Distributor~~Theatrical/Independent ~~primarily~~Films ~~focuses~~(includes onRHI ~~four~~Entertainment™ ~~core~~(Hallmark ~~branded~~library), ~~content~~The ~~categories~~Weinstein ~~that~~Company® weand ~~call~~Wellspring™) ~~Content Verticals:~~ · Sports (includes ESPN® and World Wrestling Entertainment®)

•· 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®)

7THE WEINSTEIN COMPANY TRANSACTION

~~Table~~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 ~~Contents~~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.

~~THE~~On ~~WEINSTEIN~~April 22, ~~COMPANY~~2008, ~~TRANSACTION~~TWC Holdings transferred an approximate 15% percentage interest in the Distributor to its indirect wholly-owned subsidiary Weinstein GP Holdings. Thus, the Distributor is owned 70% by TWC Holdings, Weinstein GP Holdings and W-G Holding and 30% by the Company. The 70% interest in the Distributor held by TWC Holdings, Weinstein GP 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 not less than 70% of the Company’s outstanding common stock, or with TWC Holdings’, Weinstein GP Holdings’ and W-G Holding’s approval, cash. The redemption value of the Class W Units may not be less than $60.0 million. The Company’s 30% membership interest in the Distributor consists of the Distributor’s Class G Units (see Note 5 below).

~~On July 21~~In addition, ~~2006~~on (the “Closing Date~~”),~~ the Company ~~completed~~issued aan ~~transaction~~aggregate ~~(the~~of ~~“TWC~~100 ~~Transaction”)~~shares of ~~with~~the Company’s Series W Preferred Stock to TWC Holdings and W-G Holding ~~(two~~in connection ~~subsidiaries~~with ofthe TWC) ~~pursuant~~Transaction. On toApril ~~which~~22, we2008, ~~launched~~W-G ~~the~~Holding ~~Distributor~~transferred to ~~exploit~~TWC ~~the~~Holdings ~~exclusive~~all ~~U.S.~~of ~~home~~its ~~video~~Series ~~distribution~~W ~~rights~~Preferred toStock, ~~feature~~so ~~film~~that effective on such date TWC Holdings owns all of the issued and outstanding ~~direct-to-video~~shares ~~releases~~of ~~owned~~the orCompany’s ~~controlled~~Series byW ~~TWC~~Preferred Stock. OnThe Series W Preferred Stock provides the ~~Closing~~holders ~~Date,~~thereof with (i) the ~~Company~~right ~~contributed~~to elect ~~substantially~~five ~~all~~ of ~~its~~the ~~assets~~seven ~~(except~~directors ~~for~~on ~~$1 million~~the inCompany’s ~~cash~~Board ~~and~~of ~~certain~~Directors, ~~liabilities)~~of which two are currently TWC executives, ~~its~~(ii) majority voting power over other actions ~~employees~~requiring approval of our stockholders, and ~~its~~(iii) the ~~existing~~right ~~businesses~~ to ~~the~~approve certain ~~Distributor~~specified actions. The Series W Preferred Stock has no rights to receive dividends and minimal liquidation value.

~~Thus~~On the Closing Date, the ~~Distributor~~Company isentered ~~owned~~into ~~70%~~a byRegistration ~~TWC~~Rights Agreement with TWC Holdings and W-G Holding ~~and~~pursuant ~~30%~~to bywhich ~~the~~we ~~Company. The~~agreed ~~70% interest~~to inregister ~~the~~for ~~Distributor~~resale ~~held~~the shares byof ~~TWC~~our ~~Holdings~~common ~~and~~stock ~~W-G~~issuable ~~Holding~~upon ~~consists~~redemption of Class W Units ~~and~~in isthe ~~redeemable,~~Distributor atcurrently ~~TWC~~held ~~Holdings’~~by ~~and~~them. The ~~W-G~~Company ~~Holding’s~~and/or ~~option~~the ~~commencing at any time from July 21,~~Distributor ~~2007 for~~also upentered tointo ~~70% of~~ the ~~Company’s~~following ~~outstanding~~agreements ~~common~~on ~~stock,~~the orClosing ~~with~~Date: ~~TWC~~(i) ~~Holdings’~~an Amended and ~~W-G Holding’s~~Restated ~~approval,~~Limited ~~cash. The~~Liability Company’s ~~30%~~Agreement ~~membership~~of ~~interest in~~ the Distributor, ~~consists~~(ii) ofVideo Distribution Agreement (the ~~Distributor’s~~ ~~Class G~~“TWC ~~Units~~Distribution Agreement”), (~~see~~iii) ~~Equity~~Services Agreement, ~~Investment~~and in(iv) ~~Distributor~~Assignment ~~section~~and ~~below)~~Assumption Agreement.

InFrom December ~~addition~~5, ~~the~~2005 ~~Company~~through ~~issued~~the anClosing ~~aggregate~~Date, ~~of 100 shares of~~ the Company’s ~~Series W~~operated ~~Preferred Stock~~under toan ~~TWC~~interim distribution ~~Holdings~~agreement ~~and W-G Holding in connection~~ with ~~the~~ TWC ~~Transaction. The~~and ~~Series W Preferred~~recorded ~~Stock provides~~ the ~~holders~~results ~~thereof~~from ~~with~~titles ~~(i) the~~we ~~right~~released for toTWC ~~elect~~on ~~five~~our ofconsolidated ~~the~~financial ~~seven directors~~statements. onAfter the ~~Company’s~~Closing ~~Board of Directors~~Date, ~~of which two are currently TWC executives,~~ ~~(ii) majority voting~~substantially ~~power~~all ~~over~~of ~~other~~the ~~actions~~operating ~~requiring~~activities ~~approval~~we ofpreviously ~~our stockholders~~conducted, ~~and~~as ~~(iii) the right to~~well ~~approve~~as ~~certain~~the ~~specified~~results ~~actions. The~~from ~~Series W~~releasing ~~Preferred~~TWC ~~Stock~~product, ~~has~~are noreflected ~~rights~~in tothe ~~receive dividends~~financial ~~and~~statements ~~minimal~~of ~~liquidation~~the ~~value~~Distributor.

OnFor ~~the~~a full ~~Closing~~description ~~Date,~~of the ~~Company entered into a Registration Rights Agreement with~~ TWC ~~Holdings~~Transaction, ~~and W-G~~please ~~Holding~~see ~~pursuant to which we agreed to register for resale the shares of~~ our ~~common~~Current ~~stock issuable~~Report ~~upon~~on ~~redemption of Class W Units in the Distributor currently held by them. The Company~~Form ~~and/or~~8-K ~~the~~filed ~~Distributor~~with ~~also entered into~~ the ~~following~~Securities ~~agreements on the Closing Date: (i) an Amended~~ and ~~Restated~~Exchange ~~Limited~~Commission ~~Liability Company Agreement of the Distributor,~~ (~~ii) Video Distribution Agreement (~~the “~~TWC Distribution Agreement~~SEC”), ~~(iii) Services~~on ~~Agreement,~~July ~~and (iv)~~26, ~~Assignment and Assumption Agreement~~2006.

~~From December 5, 2005 through the Closing Date, the Company operated under an interim distribution~~RECENT ~~agreement~~RESTRUCTURING 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. TRANSACTIONS

~~For~~Since September a30, ~~full~~2008, ~~description of~~ the ~~TWC~~Company ~~Transaction,~~and ~~please~~the ~~see~~Distributor ~~our~~have ~~Current~~been ~~Report~~parties onto ~~Form 8-K filed with~~certain ~~the~~restructuring ~~Securities~~transactions ~~and~~more ~~Exchange~~particularly ~~Commission~~described ~~(the~~in ~~“SEC”)~~Note ~~on July 26, 2006~~11.

NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING ~~POLICIES~~ 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~~ with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007.

~~PRINCIPLES~~As OFmore fully ~~CONSOLIDATION~~described in Note 11 (under the heading “Recent Events Relating to Liquidity and Capital Resources”), the Distributor is not in compliance with the terms, conditions and covenants of the Amended Credit Agreement and has experienced a significant reduction in net revenue and liquidity. Management plans with respect to these matters is also described in Note 11. As the Company relies solely on the Distributor to fund its operations and is also the guarantor of the Distributor’s credit facility (see Note 6), any adverse impact on the operations and liquidity of the Distributor could also adversely impact the Company’s results of operations and liquidity. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~The consolidated financial statements include the accounts of the Company. All significant inter-company transactions and accounts have been eliminated in consolidation.~~ 8

~~USE~~ PRINCIPLES OF ~~ESTIMATES~~ CONSOLIDATION

The ~~preparation of~~ consolidated financial statements ininclude ~~conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect~~ the ~~reported~~ ~~amounts~~accounts of ~~assets and liabilities and disclosure of contingent assets and liabilities at~~ the Company. All ~~date~~significant ofinter-company ~~the~~transactions ~~financial statements~~ and ~~the reported amounts of revenues and expenses during the~~accounts ~~reporting~~have ~~period.~~been ~~Actual~~eliminated ~~results~~in ~~could differ from those estimates~~consolidation.

~~INVESTMENT~~USE ~~IN DISTRIBUTOR~~OF ESTIMATES

~~At the closing of the TWC Transaction, we contributed to the Distributor all of our operating~~The ~~businesses,~~preparation ~~including substantially all~~ of ~~our~~consolidated ~~assets,~~financial ~~except~~statements ~~for $1 million~~ in ~~cash~~conformity ~~and~~with ~~certain~~generally ~~liabilities,~~accepted ~~and~~accounting ~~received~~principles arequires ~~30%~~management ~~equity~~to ~~interest~~make inestimates ~~the Distributor. The accompanying consolidated~~and ~~financial~~assumptions ~~statements~~that ~~account~~affect ~~for~~ the ~~Company’s~~reported ~~investment~~amounts inof ~~the~~assets ~~Distributor~~and ~~(30%~~liabilities ~~membership~~and ~~interest~~disclosure ~~represented~~of bycontingent ~~the~~assets ~~Distributor’s~~and ~~Class G~~liabilities ~~units)~~at ~~using~~ the ~~equity~~date ~~method~~ of ~~accounting. On~~ the ~~Company’s~~financial statements ~~consolidated~~and ~~statement of operations subsequent to~~ the ~~Closing~~reported ~~Date,~~amounts ~~the Company recorded its 30% share~~ of ~~the~~revenues ~~Distributor’s~~and ~~profit~~expenses orduring ~~loss as~~the ~~equity~~reporting inperiod. ~~net~~Actual ~~profit~~results orcould ~~loss~~differ from ~~the~~those ~~Distributor,~~ estimates.

8FAIR VALUE OF FINANCIAL INSTRUMENTS.

~~Table~~The carrying amounts of ~~Contents~~cash and cash equivalents, prepaid expenses, accounts payable, accrued expenses, and Class W Option Liability approximate the fair value thereof.

~~adjusted for non-cash basis differences (see Note 4)~~INVESTMENT ~~and~~IN 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. DISTRIBUTOR

InAt the closing ~~second~~of ~~quarter~~the ofTWC ~~2008~~Transaction, we contributed to the ~~Company~~Distributor ~~hired~~all anof ~~independent~~our operating ~~financial~~businesses, including substantially all of our assets, except for $1 million in cash and ~~strategic~~certain ~~advisory~~liabilities, and received a 30% equity interest in ~~firm~~the toDistributor. ~~determine~~The accompanying consolidated financial statements account for the ~~fair~~Company’s ~~value~~investment ofin the Distributor as(30% ofmembership ~~June 30,~~interest ~~2008.~~represented by ~~While~~the itDistributor’s ~~was~~Class ~~determined that~~G units) using the ~~goodwill~~equity onmethod of accounting. On the ~~Distributor~~Company’s ~~balance~~consolidated ~~sheet~~statement ~~has~~of ~~not~~operations subsequent ~~been~~to ~~impaired~~the Closing Date, the Company recorded ~~an impairment~~its ~~charge~~30% share of ~~$38.8~~the Distributor’s ~~million~~profit ~~related~~or toloss ~~its~~as ~~investment~~equity in net profit or loss from the Distributor, asadjusted for non-cash basis differences (see Note 5) and costs incurred by the ~~Company~~Distributor ~~concluded~~on ~~that~~behalf anof ~~other~~the Company. Pursuant to ~~than~~Accounting ~~temporary~~Principles ~~decline~~Board ~~had~~Opinion ~~occurred~~No. 18, “The Equity Method of Accounting for Investments in Common Stock”, the ~~fair~~Company will periodically assess whether a decrease in value of the ~~Distributor~~investment ashas ofoccurred ~~June 30~~(which is other than temporary) and which should be recognized immediately, ~~2008.~~resulting in an impairment loss.

~~STOCK~~Under the equity method of accounting, only the Company’s investment in and amounts due from the Distributor have been included as an asset in the Company’s condensed consolidated balance sheet. The TWC Transaction represented a non-~~BASED~~monetary ~~COMPENSATION~~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.

~~Under~~CLASS ~~Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment”, which~~W ~~was~~OPTION 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. LIABILITY

~~Subsequent~~The Company torecords the ~~Closing~~Class ~~Date~~W ofOption ~~the~~Liability ~~TWC~~at ~~Transaction,~~fair ~~the~~value ~~Company’s~~in ~~stock-based~~accordance ~~compensation~~with ~~expense~~Statement ~~consists~~ of ~~expense~~Financial ~~associated~~Accounting ~~with~~Standards ~~stock~~(“SFAS”) ~~options~~No. 157, ~~held~~Fair byValue ~~and subsequently granted to~~Measurements ~~independent~~(“FAS 157”), ~~members~~which of the Company’s ~~Board~~adopted ofbeginning ~~Directors~~on January 1, 2008. The ~~stock-based~~Company ~~compensation~~has ~~expense associated~~utilized ~~with~~a ~~the~~lattice ~~former~~valuation ~~employees~~model ofto ~~the~~simulate future ~~Company,~~stock ~~who~~movements ~~became employees~~ of the ~~Distributor~~Company’s asCommon ~~of the~~Stock ~~Closing~~in ~~Date,~~order ~~are~~to ~~recorded~~determine on the fair ~~books~~value of the ~~Distributor. Stock-based~~Class ~~compensation~~W ~~expense is calculated using the Black-Scholes-Merton formula as our closed-form valuation option pricing model (the “~~Option ~~Model”)~~Liability. The ~~Option~~assumptions ~~Model~~used ~~requires the use of subjective and complex~~in ~~assumptions,~~preparing ~~per~~such ~~the~~model ~~requirements of FAS123R~~include, ~~that~~among ~~include:~~other ~~(i) the option’s expected term~~things, ~~(ii) the~~inputs ~~estimated~~such ~~future~~as ~~price~~ volatility ~~of the underlying stock~~, ~~(iii) the~~ risk-free interest ~~rate~~rates, ~~(iv) the~~ dividend yield, expected time of redemption and assessment ~~(v) expected~~of ~~forfeitures~~counterparty risk.

~~The Distributor records stock~~STOCK-~~based compensation expense associated with Company stock options held~~BASED 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. COMPENSATION

~~For~~Under SFAS aNo. ~~complete~~123R, ~~discussion~~“Share-Based ofPayment”, which was adopted by the ~~Option~~Company ~~Model~~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 ~~assumptions~~is ~~used~~recognized as expense over the employee's requisite service period using a modified prospective application. The valuation provisions apply to ~~calculate~~new ~~stock~~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, ~~please~~2006, ~~refer~~and share-based awards granted prior to, ~~Note~~but 8not yet ~~below.~~vested as of January 1, 2006, are based on the grant date fair value.

~~INCOME~~Subsequent to ~~TAXES~~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 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, 9

9The 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.

~~Table~~For a complete discussion of ~~Contents~~the Option Model and assumptions used to calculate stock-based compensation expense, please refer to Note 9 below.

~~the~~INCOME 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. TAXES

WeThe Company ~~adopted~~files ~~the~~a ~~provisions~~consolidated ofcorporate ~~FASB~~tax ~~Interpretation~~return and accounts for income taxes under SFAS No. 48109, “Accounting for ~~Uncertainty in~~ Income Taxes” —(“SFAS anNo. ~~Interpretation~~109”). ofThis statement ~~FASB~~requires ~~Statement~~the ~~No. 109”~~recognition ~~(“FIN~~of ~~48”),~~deferred ontax ~~January 1,~~assets ~~2007.~~and ~~FIN~~liabilities 48for ~~clarifies~~ the ~~accounting~~future ~~for~~consequences ~~uncertainty~~of inevents ~~income~~that ~~taxes~~have been recognized in anthe ~~enterprise~~Company’s consolidated financial statements inor ~~accordance~~tax ~~with~~returns. ~~FASB~~The ~~Statement~~measurement ~~109,~~of ~~“Accounting~~the deferred ~~for~~items ~~Income~~is ~~Taxes”,~~based ~~and~~on ~~prescribes~~enacted atax laws. In the event the future ~~recognition~~consequences ~~threshold~~of differences between financial reporting basis and ~~measurement~~the ~~process~~tax ~~for~~basis of ~~financial~~the ~~statement~~Company’s ~~recognition~~assets and ~~measurement~~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 ~~position~~asset ~~taken~~is recorded when some portion or ~~expected~~the toentire deferred tax asset will not be ~~taken~~realized inon a ~~tax~~more ~~return~~likely than not basis. ~~FIN~~Based 48on the ~~also~~Company’s ~~provides~~assessment ~~guidance~~of ~~on de-recognition~~all available evidence, ~~classification~~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, ~~interest~~annual ~~and~~net operating ~~penalties~~loss limitations under Internal Revenue Code (“IRC”) Section 382, and ~~accounting~~the need to generate significant amounts of taxable income in ~~interim~~future periods on a consistent and prolonged basis in order to utilize the deferred tax assets. Accordingly, ~~disclosure~~the Company has historically recorded a full valuation allowance on its deferred tax assets and ~~transition~~had recorded a net deferred tax liability related to its investment in the Distributor. WeThe deferred ~~have~~tax noliability ~~material~~related ~~unrecognized~~to the Distributor was not offset against the deferred tax ~~benefits~~assets atas ~~June~~ the reversal period for this amount was not considered to be determinable on a more likely than not basis. In the nine month period ended September 30, 2008, the tax basis of our investment in Distributor exceeded the amount for financial reporting purposes. Accordingly, the entire deferred tax liability was reversed.

~~BASIC~~We adopted ~~AND~~the ~~DILUTED~~provisions ~~LOSS~~of ~~PER~~FASB ~~COMMON~~Interpretation ~~SHARE~~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 September 30, 2008.

~~Basic~~BASIC ~~earnings per share (EPS) is calculated using income available to common stockholders divided~~AND byDILUTED ~~the~~LOSS ~~weighted~~PER ~~average~~COMMON 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. SHARE

~~The~~Basic earnings ~~effects~~per ofshare ~~the~~(EPS) ~~potentially~~is ~~dilutive~~calculated ~~securities~~using ~~(options~~income ~~and~~available ~~warrants~~to ~~that~~common stockholders ~~are~~divided by the weighted average of common shares outstanding) ~~were~~during ~~not~~the ~~included~~year. inDiluted ~~the~~EPS ~~computation~~is ofsimilar ~~diluted~~to ~~loss~~Basic ~~per~~EPS ~~share~~except ~~for~~that the ~~periods~~weighted ~~presented~~average of ~~since~~common shares outstanding is increased to doinclude sothe number of additional common shares that would have been ~~anti-~~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.

~~NOTE~~The effects ~~3. FAIR~~of ~~VALUE~~the ~~MEASUREMENTS~~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.

~~In September 2006, the FASB issued Statement of Financial Accounting Standards (“Statement”)~~NOTE No3. ~~157,~~ RESTATEMENT ~~Fair~~OF ~~Value~~FINANCIAL ~~Measurements~~STATEMENTS ~~(“FAS 157”).~~OF ~~FAS 157~~THE 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. COMPANY

InDuring meetings ~~addition,~~held inon ~~February 2007~~October 8, ~~the~~2008 ~~FASB~~and ~~issued~~November ~~FAS No. 159~~13, ~~“The~~2008, ~~Fair~~the ~~Value~~Audit ~~Option~~Committee ~~for Financial~~of ~~Assets~~the ~~and~~Board ~~Financial~~of ~~Liabilities-including~~Directors anof ~~amendment~~the ofCompany, ~~FASB~~acting ~~Statement~~on ~~No. 115”~~a ~~(“FAS 159”), which~~recommendation ~~the~~from the Company’s ~~adopted~~management, asdetermined ofthat ~~January 1,~~it ~~2008.~~was ~~FAS~~necessary ~~159~~to ~~expands~~restate (i) the Company’s ~~use~~unaudited ofconsolidated ~~fair~~financial ~~value~~statements ~~accounting but~~and ~~does~~other ~~not~~financial information ~~affect~~as ~~existing~~of ~~standards~~and ~~that~~for ~~require~~the ~~assets~~three ormonths ~~liabilities~~ended toSeptember be30, ~~carried~~2006, atMarch ~~fair~~31, ~~value.~~June ~~Under~~30 ~~FAS~~and ~~159~~September 30, a2007 ~~company~~and ~~may~~March ~~elect~~31 toand ~~use~~June ~~fair~~30, ~~value~~2008, toand ~~measure~~(ii) ~~certain~~the audited consolidated financial ~~assets~~statements and ~~liabilities~~ ~~and~~other ~~any~~financial ~~changes~~information inof ~~fair~~the Company ~~value~~and ~~are~~the ~~recognized~~Distributor inas ~~earnings.~~of ~~The~~December ~~Company~~31, ~~did~~2006 and ~~not~~2007 ~~elect~~and for the ~~fair~~periods ~~value~~then ~~option upon adoption of FAS 159~~ended.

~~NOTE 4. INVESTMENT IN DISTRIBUTOR (GENIUS PRODUCTS, LLC)~~ 10

~~Summaries~~The aforementioned restatements relate to (i) an error in the application of generally accepted accounting principles with respect to the recognition in the Company’s financial statements of ~~operations,~~costs ~~balance~~paid ~~sheet~~on its behalf by the Distributor and (ii) an error in the ~~computations~~application of generally accepted accounting principles with respect to the ~~Company’s~~accounting classification and measurement of certain ~~equity~~redemption inrights ~~net~~of ~~loss~~the holders of the Distributor’s ~~are~~Class ~~shown below.~~W Units.

10The Company’s prior accounting methodology with respect to costs paid on its behalf by the Distributor was based on the view that such costs should be recognized in the Company’s financial statements to the extent of the Company’s economic participation and ownership interest in the Distributor. The Company has now determined that it should recognize all such costs incurred on its behalf by the Distributor in the Company’s financial statements. As a result of this change, selling, general and administrative expenses increased by $0.9 million and $2.3 million for the three and nine months ended September 30, 2007, respectively.

~~Table~~In addition, the Company previously did not account for its obligation to deliver shares of ~~Contents~~its Common Stock to the Distributor upon the redemption of the aforementioned Class W Units. The Company has now accounted for such obligation as a written call option (the “Class W Option Liability”), by recording the fair value of the Class W Option Liability as of July 21, 2006 (i.e., the date that the Class W Units of the Distributor were issued), and subsequently re-measuring the fair value of the Class W Option Liability through its Statements of Operations (in other income/expense) at the end of every reporting period. As of July 21, 2006, the Class W Option Liability was valued at $3.8 million. Subsequently, the Company has re-measured and recorded in its financial statements the fair value movements in the Class W Option Liability as of September 30, 2007. As a result of these re-measurements, other income for the three months ended September 30, 2007 decreased by $0.1 million to $0.03 million of other expense, and other income for the nine months ended September 30, 2007 increased by $0.3 million to $0.5 million.

~~GENIUS~~The cumulative ~~PRODUCTS,~~impact ~~LLC~~of the above-described restatement adjustments on selling, ~~CONDENSED~~general ~~CONSOLIDATED~~and ~~STATEMENTS~~administrative OFexpenses, ~~OPERATIONS~~equity in net loss from Distributor, other ~~(IN~~income ~~THOUSANDS~~(expense) , provision (~~UNAUDITED~~benefit) for income taxes, loss before extraordinary item, net loss, net loss per share, investment in Distributor, total assets, Class W Option Liability, deferred tax liability, total liabilities, accumulated deficit and total stockholders’ equity as of and for the three and nine months ended September 30, 2007 are as follows:

	Three Months Ended						Six Months Ended
	Three Months Ended September 30, 2007 (Unaudited)									Nine Months Ended September 30, 2007 (Unaudited)
	June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
(In thousands)	As Originally Reported			Restatement Adjustments			As Restated			As Originally Reported			Restatement Adjustments			As Restated
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
Selling, general and administrative	$	448		$	888		$	1,336		$	1,559		$	2,308		$	3,867
Total cost of revenues		(75,696	)		(99,891	)		(177,691	)		(176,046	)
Equity in net loss from distributor		3,010			-			3,010			6,259			340			6,599
Gross profit (loss)		(1,059	)		12,762			(4,843	)		19,724
Other income (expense)		86			(117	)		(31	)		202			255			457
Total operating expenses		(10,887	)		(10,385	)		(21,547	)		(19,483	)
Provision (benefit) for income taxes		104			-			104			(57	)		(136	)		(193	)
(Loss) Income from operations		(11,946	)		2,377			(26,390	)		241
Loss before extraordinary item		(3,476	)		(1,005	)		(4,481	)		(7,559	)		(2,257	)		(9,816	)
Interest income (expense), net		210			(264	)		(787	)		(527	)
Net loss		(3,476	)		(1,005	)		(4,481	)		(7,559	)		(2,257	)		(9,816	)
Net income (loss )	$	(11,736	)	$	2,113		$	(27,177	)	$	(286	)
Net loss per share		(0.05	)		(0.02	)		(0.07	)		(0.11	)		(0.04	)		(0.15	)
Investment in Distributor		79,391			250			79,641			79,391			250			79,641
Total assets		89,636			250			89,886			89,636			250			89,886
Class W option liability		-			2,761			2,761			-			2,761			2,761
Deferred tax liability		12,964			1,371			14,335			12,964			1,371			14,335
Total liabilities		13,986			4,132			18,118			13,986			4,132			18,118
Accumulated deficit		(37,458	)		(3,882	)		(41,340	)		(37,458	)		(3,882	)		(41,340	)
Total stockholders' equity		75,650			(3,882	)		71,768			75,650			(3,882	)		71,768

11RESTATEMENT OF FINANCIAL STATEMENTS OF THE DISTRIBUTOR

~~Table~~The restatements to the Distributor’s financial statements relate to an error in the application of ~~Contents~~generally accepted accounting principles with respect to the accounting classification and measurement of certain redemption rights of the holders of the Distributor’s Class W Units.

~~GENIUS~~The Distributor’s ~~PRODUCTS~~prior accounting methodology with respect to the accounting classification and measurement of the aforementioned redemption rights did not properly classify and measure the Distributor’s Class W Units as redeemable securities. The Distributor has now recorded the cash redemption value of the Class W Units outside permanent equity in its financial statements. Subsequent changes to the cash redemption value of such units have resulted in increase or decrease, ~~LLC~~as applicable, to the Redeemable ~~CONDENSED~~Class ~~CONSOLIDATED~~W ~~BALANCE~~Units ~~SHEETS~~amount, with a corresponding increase or decrease, as applicable, in member’s deficit, which now consists of only the value of the Distributor’s Class G Units. As of July 21, 2006 (INthe ~~THOUSANDS~~issuance date of the Distributor’s Class W Units), the value of the Class W Units was recorded at $277.6 million.

			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

12The Distributor also previously did not account for its right to receive shares of the Company’s Common Stock upon the redemption of the aforementioned Class W Units. The Distributor has now recognized, as an asset, the fair market value relating to its right to obtain shares of the Company’s Common Stock to affect the Class W Unit redemption in the Distributor’s financial statements as a Class W Purchased Call Option (included in deposits and other). As of July 21, 2006, this Class W Purchased Call Option was valued at $3.8 million and is carried at cost within deposits and other. Any impairments of the Class W Purchased Call Option have been reflected in the Distributor’s Statements of Operations in other income (expense).

~~Table~~As of September ~~Contents~~30, 2007, the cash redemption value of the Redeemable Class W Units increased by $166.2 million, to $443.8 million (resulting in a deficit balance in the Class G Units member’s deficit of $350.2 million as of September 30, 2007).

~~Our~~The Distributor ~~equity~~recorded inan ~~net~~impairment ~~loss~~ of $1.1 million to the ~~Distributor~~Class isW ~~adjusted~~Purchased ~~each~~Call Option ~~period~~(included ~~for~~in ~~non-cash~~deposits ~~basis~~and ~~differences between~~other) asset in the ~~investment~~nine ~~and~~months ~~the~~ended ~~underlying~~September 30, ~~equity~~2007 in(with ~~the~~a ~~Distributor~~corresponding ~~and~~increase ~~for~~to the ~~impact~~Distributor’s ofother ~~certain~~expense for ~~costs~~the ~~incurred~~nine bymonths ~~the~~ended ~~Distributor~~September on30, ~~behalf~~2007 of ~~the~~$1.1 ~~Company~~million).

	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

The cumulative impact of the above-described restatement adjustments on other expense, net loss, Class W Purchased Call Option (included in deposits and other), total assets, Redeemable Class W Units, and member’s equity (deficit) as of and for the three and nine months ended September 30, 2007 are as follows:

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:


	Three Months Ended September 30, 2007 (Unaudited)									Nine Months Ended September 30, 2007 (Unaudited)
	As Originally Reported			Restatement Adjustments			As Restated			As Originally Reported			Restatement Adjustments			As Restated
Other expense	$	(1,226	)	$	-		$	(1,226	)	$	(1,753	)	$	(1,134	)	$	(2,887	)
Net loss		(5,179	)		-			(5,179	)		(5,465	)		(1,134	)		(6,599	)
Deposits and other		228			2,649			2,877			228			2,649			2,877
Total assets		336,557			2,649			339,206			336,557			2,649			339,206
Redeemable Class W Units		-			443,812			443,812			-			443,812			443,812
Member's equity (deficit)		90,992			(441,163	)		(350,171	)		90,992			(441,163	)		(350,171	)

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 4. FAIR VALUE MEASUREMENTS

~~NOTE~~In September 52006, the FASB issued Statement of Financial Accounting Standards (“Statement”) No. 157, ~~CONTINGENCIES~~Fair Value Measurements (“FAS 157”). FAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. The Company adopted on January 1, 2008, certain provisions of FAS 157 related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis. The 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.

~~GUARANTY~~The Company OFadopted ~~CREDIT~~the ~~FACILITY~~provisions of FAS 157 as of January 1, 2008, to account for the Class W Option Liability. The Distributor is owned 70% by TWC Holdings, Weinstein GP Holdings LLC and W-G Holding (collectively, the “TWC Parties”) and 30% by the Company. The Company’s 30% membership interest in the Distributor consists of the Distributor’s Class G Units. The 70% interest in the Distributor held by the TWC Parties consists of Class W Units. Pursuant to the Distributor’s Amended and Restated Limited Liability Company Agreement (the “Distributor LLC Agreement”), at any time after July 21, 2007, the TWC Parties have the option to redeem all or a portion of their Class W Units for either (i) shares of the Company’s common stock or, (ii) at the option of the Distributor (and with the consent of the TWC Parties), cash. In order to exercise such redemption right, the TWC Parties must provide to the Distributor and the Company written notice of redemption (“Notice of Redemption”), specifying the number of Class W Units being tendered for redemption.

OnUpon receipt ~~August 10,~~of ~~2007~~a Notice of Redemption, the ~~Distributor~~number ~~entered~~of ~~into~~Company acommon ~~three-year,~~shares ~~senior~~issuable to ~~secured~~the ~~revolving~~TWC ~~credit facility~~Parties is determined by multiplying (i) the ~~“Credit~~number ~~Agreement”)~~Class ~~with~~W ~~Société~~Units ~~Générale~~being ~~(“Soc~~redeemed, ~~Gen”~~by (ii) a fraction, asthe ~~lender~~numerator ~~and~~of ~~agent.~~which ~~The~~is the number of ~~Credit~~outstanding ~~Agreement~~Company ~~provided~~common ~~for~~shares anas ~~initial~~of ~~commitment~~the date of ~~$30 million~~the Notice of Redemption, and upthe todenominator aof ~~total~~which is the number of ~~$70~~outstanding Company common shares ~~million.~~as Onof ~~November 1,~~July ~~2007~~21, 2006 (the ~~Distributor,~~intent ~~Soc~~of ~~Gen~~this ~~and~~adjustment ~~Alliance~~factor ~~Leicester~~being ~~entered~~that ~~into~~ the TWC ~~Amended~~Parties ~~and~~would ~~Restated~~receive ~~Credit~~no ~~Agreement~~less (than 70% of the ~~“Amended~~Company’s ~~Credit~~common ~~Agreement”),~~stock ~~which~~upon redemption ~~increased~~of all of the ~~total commitment~~Class toW ~~$50 million~~Units). Notwithstanding the above-described computation, ~~based~~in onthe ~~expected~~event ~~incremental~~that ~~commitments.~~the ~~The~~trading ~~Amended~~price ~~Credit~~of ~~Agreement~~the ~~terminates~~Company’s oncommon ~~June 30,~~stock ~~2010,~~is ~~and~~less ~~may~~than be$0.42 ~~extended~~as toof ~~August 10,~~the ~~2010~~date of the Notice of Redemption, ~~under~~the ~~satisfaction~~number of ~~certain conditions.~~common ~~Borrowings~~shares ~~outstanding~~issuable ~~under~~to the ~~Amended~~TWC ~~Credit~~Parties ~~Agreement~~is determined ~~were~~by dividing (i) $1560.0 million atdollars ~~June 30~~(the “Floor Amount”), ~~2008.~~by ~~The~~(ii) the ~~maximum~~trading ~~amount~~price ~~available~~of atthe ~~June 30,~~Company’s ~~2008~~common ~~was~~stock ~~$16.5 million.~~as ~~Soc~~of ~~Gen~~the ~~holds~~date ~~a security~~of ~~interest~~the inNotice ~~substantially~~of Redemption ~~all~~(such ~~personal~~calculation ~~property~~being ofreferred to as the ~~Company~~“Floor Calculation”). In other words, if on the ~~Distributor,~~date ~~and~~of ~~its~~the Notice of ~~direct~~Redemption ~~and~~the ~~indirect~~trading ~~subsidiaries,~~price ~~other~~of ~~than~~the ~~TWC~~Company’s ~~accounts~~common ~~receivable~~stock is less than $0.42, then the TWC ~~continues~~Parties would be entitled to ~~have~~receive aeither ~~first~~cash or shares of the ~~priority~~Company’s ~~security~~common ~~interest~~stock inwith ~~accounts~~a ~~receivable~~value ~~attributable~~of tono ~~TWC~~less ~~content~~than the Floor Amount of $60.0 million.

The ~~Company and the direct and indirect subsidiaries of the Distributor have unconditionally~~Class ~~guaranteed~~W ~~the~~Option ~~obligations~~Liability ofrecorded ~~the~~at ~~Distributor~~fair ~~under~~value ~~the~~in ~~Amended Credit Agreement (i.e., full and punctual payment of~~ the ~~Distributor~~Company’s ~~obligations,~~balance ~~when~~sheet ~~and~~ as ~~due). Management has assessed the~~of ~~Company’s~~September ~~potential~~30, ~~obligations~~2008 ~~under~~is ~~this~~categorized ~~guarantee~~based ~~and~~upon ~~considered~~ the ~~provisions~~level of ~~FIN~~judgment ~~45,~~associated ~~Guarantor’s~~with ~~Accounting~~the ~~and~~inputs ~~Disclosure~~used ~~Requirements~~to ~~for~~measure ~~Guarantees,~~its ~~noting~~fair ~~that~~value. Hierarchical ~~the~~levels defined ~~likelihood~~by ~~of making~~FAS ~~any~~157 ~~payments~~are directly related to ~~this~~the ~~guarantee~~amount isof ~~remote~~subjectivity ~~and~~associated with ~~therefore~~the ~~has~~inputs ~~not~~to ~~recorded~~the afair ~~liability on~~valuation of the ~~Company’s~~Class ~~balance~~W ~~sheets~~Option ~~associated~~Liability, ~~with~~which ~~this guarantee.~~is as follows:

~~LITIGATION~~Level 1 – inputs are un-adjusted quoted prices in active markets for identical assets or liabilities at the measurement date;

~~Except~~Level as2 ~~described below, neither we nor the Distributor are a party to any legal or~~– ~~administrative~~inputs ~~proceedings,~~ other than ~~routine~~Level ~~litigation~~1 ~~incidental~~inputs ~~to our business and~~ that ~~of the~~are ~~Distributor~~either ~~that~~directly ~~we do not believe, individually~~ or ~~in the aggregate, would be likely to have a~~indirectly ~~material~~observable; ~~adverse effect on our, or the Distributor’s, financial condition or results of operations.~~ and

~~Falcon~~Level ~~Picture~~3 ~~Group~~– unobservable ~~Matter~~inputs developed using estimates and assumptions developed by management, which reflect those that a market participant would use.

13 12

~~Table~~The Company has utilized a lattice valuation model to simulate future stock movements of ~~Contents~~the Company’s Common Stock in order to determine the fair value of the Class W Option Liability. The assumptions used in preparing such model include, among other things, inputs such as volatility, risk-free interest rates, dividend yield, expected time of redemption and assessment of counterparty risk, which the Company has classified as unobservable, Level 3 inputs. The Company has determined the fair value of the Class W Option Liability as of September 30, 2008 to be $2.3 million resulting in an increase to other income of $0.7 million for the three months ended September 30, 2008 (as compared to June 30, 2008), and an increase of $1.9 million for the nine months ended September 30, 2008 (as compared to December 31, 2007). The following table summarizes our fair value measurements using significant Level 3 inputs, and changes therein, for the three and nine months ended September 30, 2008:

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.

	Three Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2008


Class W Option Liability:
Balance at beginning of period	$	2,920		$	4,168
Re-measurement of Class W Option Liability		(667	)		(1,915	)
Balance at September 30, 2008	$	2,253		$	2,253

~~Entertainment~~In addition, ~~Resource~~in ~~Matter~~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.

~~We have disclosed in prior reports filed with the Securities and Exchange Commission a complaint~~NOTE ~~filed against the Company in the Circuit Court of Broward County, Florida, Case No~~5. ~~06-012249~~ INVESTMENT ~~CACE 05,~~IN byDISTRIBUTOR ~~Larry S. Hyman, as assignee for Entertainment Resource, Inc.~~ (~~“ERI”).~~GENIUS ~~There have been no material developments in this matter. For a complete description of the facts and circumstances surrounding the ERI litigation~~PRODUCTS, ~~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.~~ LLC)

~~NOTE~~Summaries of 6.the ~~NOTES~~statements ~~RECEIVABLE~~of ~~FROM~~operations, ~~RELATED~~balance ~~PARTY~~sheet, statements of cash flows, and the computations of the Company’s equity in net loss of the Distributor are shown below.

~~On September 27, 2007, the Distributor borrowed $6.0 million from the Company and issued a~~GENIUS ~~promissory note in favor of the Company in the principal amount of $6.0 million. On November 1~~PRODUCTS, ~~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. LLC

~~In the event payment of principal or interest due under the notes is not made when due, the~~CONDENSED ~~outstanding~~CONSOLIDATED ~~principal~~STATEMENTS ~~balance~~OF 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. OPERATIONS

~~Payments to TWC pursuant to the TWC Distribution Agreement are due 45 days from the last day in the~~(IN 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. THOUSANDS)

~~NOTE 7. STOCKHOLDERS’ EQUITY~~ (UNAUDITED)

COMMON STOCK

	Three Months Ended						Nine Months Ended
	September 30, 2008			September 30, 2007 Restated (Note 3)			September 30, 2008			September 30, 2007 Restated (Note 3)
Revenues, net of sales, returns, discounts and allowances of $31,562 and $42,081 for the three months ended September 30, 2008 and 2007, respectively, and $112,318 and $106,163 for the nine months ended September 30, 2008 and 2007, respectively	$	77,241		$	93,413		$	250,089		$	289,183

Total cost of revenues		(111,581	)		(86,601	)		(289,273	)		(262,647	)
Gross profit (loss)		(34,340	)		6,812			(39,184	)		26,536

Total operating expenses		(4,370	)		(10,765	)		(27,602	)		(30,248	)
Impairment charge		-			-			(18,906	)		-
Loss from operations		(38,710	)		(3,953	)		(85,692	)		(3,712	)

Other expense		(3,340	)		(1,226	)		(4,127	)		(2,887	)
Net loss	$	(42,050	)	$	(5,179	)	$	(89,819	)	$	(6,599	)

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. 13

~~During the six months ended June 30, 2007, we issued 2,368,573 common shares related to the~~GENIUS ~~exercise of warrants (some of which were cashless exercises) for proceeds of $1.8 million. Additionally~~PRODUCTS, ~~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.~~ LLC

ACONDENSED CONSOLIDATED ~~summary~~BALANCE ~~of warrant activity follows:~~ SHEETS

14(IN THOUSANDS)

	September 30, 2008 (Unaudited)			December 31, 2007 (Restated)

ASSETS
Current assets:
Cash and cash equivalents	$	3,987		$	3,102
Restricted cash - short term		2,959			7,765
Accounts receivable, net of allowance for doubtful accounts of $3,263 and $4,311 and sales returns of $41,947 and $68,159		57,887			123,295
Inventories, net of reserves for obsolescence of $12,676 and $13,257		12,109			11,282
Prepaid expenses and other current assets		747			1,110

Total current assets		77,689			146,554

Restricted cash - long term		3,187			3,323
Property and equipment, net of accumulated depreciation of $775 and $455		6,712			953
Royalty advances, net of uncollectible advances of $34,055 and $5,112		11,503			31,492
Film library, net of accumulated amortization of $16,853 and $6,452		3,503			14,403
Goodwill		68,606			87,512
Other intangible assets, net of accumulated amortization of $14,178 and $9,675		5,287			11,596
Deferred financing fees		1,158			1,654
Deposits and other		3,413			5,617

Total assets	$	181,058		$	303,104

LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Accounts payable	$	16,089		$	31,477
Notes payable		17,924			31,297
Notes payable to Genius Products, Inc.		8,691			-
Remittance to TWC		89,029			78,759
Remittance to other licensors		28,407			20,000
Accrued advertising and marketing		13,294			24,515
Other accrued expenses		12,429			20,910
Deferred revenue		9,860			8,492

Total current liabilities		195,723			215,450

Long term liabilities:
Notes payable to Genius Products, Inc.		-			8,191
Long term notes payable		1,449			627
Long term capital lease		15			30

Total long term liabilities		1,464			8,848

Redeemable Class W Units		60,000			284,378

Total member's deficit		(76,129	)		(205,572	)

Total liabilities and member's deficit	$	181,058		$	303,104

				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~~GENIUS PRODUCTS, ~~following~~LLC ~~information~~AND ~~applies to warrants outstanding at June 30, 2008:~~ SUBSIDIARIES

					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

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~NOTE 8. STOCK-BASED COMPENSATION~~(IN THOUSANDS)

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

	Nine Months Ended September 30,
	2008			2007 (Restated)
Cash flows from operating activities:
Net loss	$	(89,819	)	$	(6,599	)
Adjustments to reconcile net loss to net cash provided (used) in operating activities:
Depreciation and amortization		320			255
Amortization of intangible assets		6,309			3,065
Amortization of film library		12,234			916
Amortization of deferred financing costs		496			64
Change in allowance for doubtful accounts and provision for returns		(27,260	)		6,160
Change in provision for obsolete inventory		(581	)		(644	)
Stock compensation expense		(1,627	)		1,843
Interest expense on notes payable		500			7
Impairment of goodwill		18,906			-
Impairment of Class W purchased call option		-			1,134
Changes in assets and liabilities:
(Increase) decrease in restricted cash		4,942			(8,370	)
(Increase) decrease in accounts receivable		94,420			(47,740	)
(Increase) decrease in inventory		(246	)		(11,234	)
(Increase) decrease in prepaid expenses and deposits		4,530			(64	)
(Increase) decrease in notes receivable		-			86
(Increase) decrease in royalty advances		29,389			(17,022	)
(Increase) decrease in film library		2,399			(9,075	)
Increase (decrease) in accounts payable		(12,751	)		15,310
Increase (decrease) in accrued expenses and other		(19,960	)		6,972
Increase (decrease) in deferred revenue		1,368			53,683
Increase (decrease) in remittance to TWC		10,270			(30,541	)
Increase (decrease) in remittance to other licensors		(10,916	)		11,158

Net cash provided by (used in) operating activities		22,923			(30,636	)
Cash flows from investing activities:
Purchase of Castalian (net of working capital acquired of $527)		-			(3,683	)
Purchase of property and equipment		(6,079	)		(228	)

Net cash used in investing activities		(6,079	)		(3,911	)
Cash flows from financing activities:
Proceeds from Credit Facility		26,927			36,000
Repayments of Credit Facility		(39,368	)		(213	)
Repayments of long term capital lease		(29	)		-
Deferred Financing Costs Paid		-			(1,463	)
Distribution to Members		(3,489	)		(3,311	)

Net cash provided by (used in) financing activities		(15,959	)		31,013

Net increase (decrease) in cash and equivalents		885			(3,534	)
Cash at beginning of period		3,102			8,326

Cash at end of period	$	3,987		$	4,792
Non-cash transactions Redeemable Class W units re-measurement to redemption value	$	224,378		$	23,400

See accompanying notes to condensed unaudited interim financial statements.

				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~~Our equity ~~following~~in ~~table~~net ~~summarizes~~loss ~~additional~~of ~~information~~the ~~regarding~~Distributor ~~outstanding~~is adjusted each period for non-cash basis differences between the investment and ~~exercisable~~the ~~stock~~underlying equity in the Distributor ~~options~~and asfor the impact of ~~June 30,~~certain ~~2008:~~costs incurred by the Distributor on behalf of the Company.

15With respect to the nine months ended September 30, 2007, and as a result of restating the Distributor’s financial statements as described in Note 3, the net loss for the nine months ended September 30, 2007 increased by $1.1 million to $6.6 million. This resulted in a basis difference adjustment to our investment in the Distributor of $0.3 million (30% of the net loss from the Distributor for the nine months ended September 30, 2007).

~~Table~~With respect to the nine months ended September 30, 2008, the Distributor performed an interim review of ~~Contents~~its goodwill and intangible assets due to the current economic market conditions in accordance with FAS 142, “Goodwill and Other Intangible Assets” and FAS 144, “Accounting for the Impairment of Disposal of Long Lived Assets.” The Distributor believes it is more than likely that the carrying value of the Distributor’s goodwill and intangible assets exceed their fair value as of September 30, 2008. Based on the Distributor’s impairment review, the Distributor recorded an impairment charge of $18.9 million against its goodwill and an impairment charge of $1.8 million against its intangible assets as of September 30, 2008. In light of the continued adverse economic conditions in the marketplace, the Distributor will continue to monitor its goodwill and intangible assets for possible future impairment. The aforementioned impairments of the Distributor’s goodwill and intangible assets resulted in a basis difference adjustment to the Company’s investment in the Distributor of $6.2 million (which is 30% of the net loss from the Distributor for the nine months ended September 30, 2008).

						Weighted				Weighted
	Nine Months Ended September 30,
						average				average
	2008			2007 Restated (Note 3)
						exercise price of				exercise price of
Genius Products, Inc. 30% share of net loss from the Distributor	$	26,946		$	1,979
	Options			Average		options		Options		options
Adjustments for basis differences		1,759			3,330
	outstanding			remaining life		outstanding		exercisable		exercisable
(Benefit)/Expense for stock compensation for Distributor employees		(1,139	)		1,290
Under $1.50		1,900,752			3.57	$	0.67		1,900,752	$	0.67
Genius Products, Inc. 30% share of interest on the Distributor's notes payable		(149	)		-
$1.50 - $1.99		10,573,373			6.49		1.72		9,156,064		1.69
Equity in net loss from Distributor	$	27,418		$	6,599
$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~~NOTE ~~the three months ended June 30, 2008 and 2007 using the Black-Scholes-Merton formula with the following weighted average assumptions:~~ 6. CONTINGENCIES

	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

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 September 30, 2010, and may be extended to August 10, 2010, under satisfaction of certain conditions. Borrowings outstanding under the Amended Credit Agreement were $16.9 million at September 30, 2008. The maximum amount available at September 30, 2008 was $20.6 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. See Note 11 for a description of recent events related to the Distributor’s compliance with the terms and conditions of the Amended Credit Agreement.

~~For market-based options, the~~ The Company ~~utilizes~~and the ~~Monte~~direct ~~Carlo~~and ~~Simulation~~indirect assubsidiaries of the ~~stock~~Distributor ~~option model~~have tounconditionally ~~provide~~guaranteed the ~~most~~obligations ~~accurate fair value estimate due to the path dependency~~ of the ~~options~~Distributor ~~valued~~ under the ~~provisions~~Amended Credit ofAgreement ~~this grant~~(i. ~~Monte Carlo Simulation is a lattice model~~e., ~~which~~full —and ~~unlike~~punctual ~~the closed-form~~payment ~~model – can incorporate a range~~ of ~~expected~~the ~~volatilities. These valuations were~~Distributor’s ~~performed~~obligations, onwhen aand ~~multi-tranche~~as ~~basis~~due). Management ~~considering~~has ~~three~~assessed ~~vesting tranches and~~ the ~~weighted average~~Company’s ~~volatility~~potential ~~for~~obligations ~~these~~under ~~grants~~this isguarantee ~~calculated~~and toconsidered bethe ~~54.89%.~~provisions ~~The~~of ~~risk-free~~FIN 45, ~~rates~~Guarantor’s ~~have~~Accounting ~~been determined~~and ~~based~~Disclosure ~~upon~~Requirements ~~the interest rates~~ for ~~zero-coupon~~Guarantees, ~~U.S.~~noting ~~Treasury~~that ~~bonds~~the aslikelihood of ~~June 30, 2008. A yield~~ ~~curve~~making ~~has~~any ~~been~~payments ~~determined~~related ~~based~~to ~~upon~~this ~~interpolating~~guarantee ~~between~~is ~~the~~remote ~~rates~~and ~~ranging~~therefore ~~from~~has ~~1.60% to 3.99%.~~not ~~Consistent~~recorded ~~with~~a ~~the~~liability ~~service-based~~on ~~stock option grants,~~ the ~~dividend~~Company’s ~~rate~~balance issheets ~~0.0%~~associated ~~for~~with ~~the~~this ~~performance-based option grants~~guarantee.

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. 16

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. LITIGATION

~~NOTE~~Except ~~9. INCOME~~as described ~~TAXES~~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.

~~The~~Falcon ~~Company~~Picture ~~recorded a federal and state tax benefit of $11.4 million for the six months ended June~~Group ~~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.~~ Matter

16We 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/A for the year ended December 31, 2007 under Part I, Item 3., “Legal Proceedings”, which is incorporated herein by reference.

~~Table~~Entertainment ~~of Contents~~Resource Matter

~~ITEM 2~~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. ~~MANAGEMENT’~~ 06-012249 CACE 05, by Larry S. ~~DISCUSSION~~Hyman, ~~AND~~as ~~ANALYSIS~~assignee OFfor Entertainment ~~FINANCIAL~~Resource, ~~CONDITION~~Inc. ~~AND~~(“ERI”). There ~~RESULTS~~have OFbeen ~~OPERATIONS~~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/A for the year ended December 31, 2007 under Part I, Item 3., “Legal Proceedings”, which is incorporated herein by reference.

~~The following discussion of our financial condition and results of operations should be read in~~NOTE ~~conjunction with the financial statements and notes thereto contained in this report~~7. NOTES ~~The discussion~~RECEIVABLE ~~contains~~FROM ~~forward-looking~~RELATED 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. PARTY

~~NATURE~~On September OF27, ~~BUSINESS~~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.

~~Genius~~In ~~Products,~~the event ~~Inc.~~payment ~~(“we”,~~of ~~“us”,~~principal ~~“our”~~ or interest due under the ~~“Company”),~~notes ~~through~~is ~~our~~not ~~30%-owned~~made ~~subsidiary~~when due, ~~Genius~~the ~~Products,~~outstanding ~~LLC~~principal ~~(the~~balance ~~“Distributor”),~~will isbear ainterest ~~leading~~at ~~independent~~the ~~home~~rate ~~entertainment~~of ~~products~~two percent ~~company~~(2%) ~~that~~above ~~acquires,~~the ~~produces~~interest ~~and~~rate ~~licenses,~~which ~~through~~is otherwise provided under the ~~Distributor’s~~notes ~~multiple~~for ~~distribution~~so ~~agreements~~long ~~with~~as ~~content~~such ~~partners,~~event ancontinues. ~~extensive~~If ~~library~~the ofnotes ~~motion~~are ~~pictures,~~not ~~television~~paid ~~programming~~when due, the ~~and~~Distributor ~~trend~~agreed ~~entertainment~~to onpay ~~digital~~the ~~versatile~~Company’s ~~disks~~reasonable ~~(“DVD”)~~costs ~~and~~of ~~digitally.~~collection, including, ~~The~~without ~~Distributor~~limitation, ~~works in~~all ~~partnership~~reasonable ~~with~~attorneys’ ~~major~~fees ~~retailers~~and toall ~~distribute~~reasonable expenses ~~widely~~actually ~~recognized~~incurred ~~home~~by ~~entertainment~~the ~~brands~~Company toin ~~a diversified~~connection ~~customer~~with ~~base.~~such collection efforts. The ~~remaining~~principal ~~70%~~amount of the ~~Distributor~~notes ismay ~~owned~~be byprepaid ~~The~~in ~~Weinstein~~whole ~~Company~~or ~~Holdings~~in ~~LLC~~part, ~~(“TWC~~provided ~~Holdings”)~~that ~~(which~~all ~~includes~~accrued ainterest 1%on ~~percentage~~the ~~interest~~amount ~~owned~~to ~~indirectly~~be ~~through~~prepaid ~~its~~is also ~~wholly-owned~~paid ~~subsidiary,~~at ~~W-G~~such ~~Holding Corp~~time. The ~~(“W-G~~proceeds ~~Holding”).~~from ~~TWC~~the ~~Holdings~~notes iswere ~~the~~used ~~subsidiary~~to ~~of The~~pay ~~Weinstein~~amounts ~~Company~~owed ~~LLC~~by (“the Distributor to TWC~~”),~~ under the ~~largest~~TWC ~~provider~~Distribution Agreement. As of ~~content~~September ~~for~~30, ~~the~~2008, ~~Distributor’s~~an ~~library~~aggregate of $8.7 million in principal and accrued interest expense was outstanding under the notes.

~~Through~~Payments to ~~the~~TWC ~~Distributor,~~pursuant ~~for~~to ~~which~~ the ~~Company~~TWC ~~serves~~Distribution asAgreement ~~managing~~are ~~member,~~due we45 ~~produce~~days ~~and~~from ~~distribute~~the last aday ~~vast~~in ~~and~~the ~~growing~~calendar ~~content~~month. Through ~~library~~December ~~that~~31, ~~encompasses approximately 3~~2008,~~550~~ ~~feature~~these terms ~~films~~were ~~and documentaries~~extended ~~and~~by ~~4,000~~TWC ~~hours~~anywhere offrom ~~television~~15 ~~programming.~~to ~~This~~45 ~~library~~days ~~includes~~in ~~feature~~order ~~films~~to ~~and~~provide ~~television~~flexibility ~~programming~~and ~~from~~manage ~~critically~~cash ~~acclaimed~~flows. As ~~producers~~of ~~such~~January as1, ~~The~~2009 ~~Weinstein~~and ~~Company®,~~in ~~for~~connection ~~which~~with the ~~Distributor~~restructuring ~~has~~transactions ~~the~~described ~~exclusive~~in ~~U.S.~~Note ~~home video distribution rights~~11, ~~and~~the ~~RHI~~TWC ~~Entertainment™~~Distribution ~~(Hallmark~~Agreement ~~library).~~was ~~Additional~~amended ~~content,~~and ~~such~~restated asand ~~independent~~TWC ~~films, sports, family,~~ and ~~lifestyle productions,~~the ~~come~~Distributor ~~from~~agreed ~~partnerships~~to ~~with~~a schedule ~~established~~of ~~consumer~~payment ~~brands:~~for ~~IFC®,~~all ~~ESPN®,~~amounts ~~World~~owed ~~Wrestling Entertainment®,~~by ~~Classic~~the ~~Media,~~Distributor ~~Sesame~~to ~~Workshop®~~TWC, ~~Discovery~~which schedules ~~Kids™,~~governs ~~Animal~~the ~~Planet~~payments ~~and~~going ~~The Learning Channel (TLC™)~~forward.

~~The Distributor has developed a fully integrated direct-to-retail distribution platform that~~NOTE ~~parallels the home entertainment divisions of the major Hollywood studios~~8. STOCKHOLDERS' 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. EQUITY

~~The Distributor primarily sells to major national retailers including Wal-Mart, Blockbuster~~COMMON 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. STOCK

~~The Distributor collaborates with its retail and content partners to create sales programs that~~During ~~exploit~~the ~~their~~nine ~~widely~~months ~~recognized~~ended ~~brands~~September ~~and~~30, ~~endorse~~2008, ~~related~~we ~~content.~~issued ~~These~~50,000 ~~sales~~common ~~programs~~shares ~~focus on~~related ~~brands~~ to ~~provide~~ the ~~retailer~~exercise ~~with~~of ~~solutions~~stock ~~that~~options ~~simplify~~for ~~the~~proceeds ~~retailer’s~~of ~~buying process, improve shelf-space utilization and help consumers quickly make informed purchase decisions~~$0.04 ~~The~~million. In ~~Distributor’s~~addition, ~~ability~~the toCompany ~~deliver~~retired ~~unique~~150,000 ~~innovative~~shares ~~solutions~~of ~~that~~its ~~improve~~common ~~the~~stock ~~sales~~in ~~and~~the ~~rentals of~~second ~~its~~quarter. No ~~content~~warrants ~~has~~were ~~enabled~~exercised itduring tothe ~~compete~~nine ~~successfully~~months ~~and maintain strong relationships with its~~ended ~~retail~~September ~~and~~30, ~~content partners~~2008.

~~The~~During the ~~Distributor~~nine ~~currently~~months ~~distributes~~ended ~~its~~September ~~library~~30, ~~on DVDs~~2007, ~~next-generation~~we ~~DVD~~issued 3,189,320 ~~and~~common ~~electronically~~shares inrelated ~~a digital format. We plan~~ to ~~continue to expand~~ the ~~distribution~~exercise of ~~the~~warrants ~~Distributor’s theatrical~~(some ~~and~~of ~~non-theatrical~~which ~~product~~were ~~through~~cashless ~~the~~exercises) ~~diverse emerging digital distribution markets~~for ~~including:~~proceeds ~~Video-on-Demand~~of ~~(“VOD”)~~$3.6 ~~and~~million. ~~Electronic~~Additionally, ~~Sell-Through~~during ~~(“EST”) on~~ the ~~Internet~~nine tomonths ~~companies such~~ended ~~as Amazon~~September 30, ~~Apple~~2007, ~~MovieLink~~we ~~and~~issued ~~Microsoft~~993,829 ~~Internet-based~~common ~~subscription~~shares ~~VOD~~related ~~customers (such as NetFlix) and direct-~~to~~-television~~ ~~peer-to-peer~~the ~~network~~exercise ~~solutions.~~of ~~Through~~options ~~its partnerships, the~~for ~~Distributor~~proceeds ~~has~~of ~~released 176 theatrical and non-theatrical titles since inception~~$1.6 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 protocolsmillion.

~~The Distributor primarily focuses on four core branded content categories that we call Content Verticals:~~ 17

•A ~~Theatrical/Independent~~summary of ~~Films~~warrant ~~(includes~~activity ~~Independent Film Channel (IFC®) , RHI Entertainment™ (Hallmark~~follows:

	Warrants Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value
December 31, 2007		10,425,958		$	2.45
Cancelled		(943,757	)
September 30, 2008		9,482,201		$	2.56		$	-
Warrants exercisable, September 30, 2008		9,482,201		$	2.56		$	-

~~Table~~The following ofinformation ~~Contents~~applies to warrants outstanding at September 30, 2008:

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®)

	Warrants Outstanding		Average Remaining Life		Weighted Average Exercise Price of Warrants Outstanding		Warrants Exercisable		Weighted Average Exercise Price of Warrants Exercisable
Under $1.50		-		-
$1.50 - $1.99		170,722		2.01		1.88		170,722		1.88
$2.00 - $2.99		7,664,479		1.84		2.48		7,664,479		2.48
$3.00 - $3.99		1,647,000		0.50		3.00		1,647,000		3.00
		9,482,201		1.61	$	2.56		9,482,201	$	2.56

~~The Distributor maintains in perpetuity distribution rights for TWC content released during the~~NOTE ~~term of the TWC Distribution Agreement, subject to certain buy~~9. STOCK-~~back~~BASED ~~rights of the TWC content by TWC.~~ COMPENSATION

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~~following ~~will~~table ~~earn~~summarizes ~~a fee on sales of these home video products, depending on~~ the ~~level~~activity offor ~~these sales~~outstanding ~~compared~~options ~~to theatrical box office revenues~~ for the ~~same films. The Distributor collects the~~nine ~~proceeds~~months ~~from~~ended ~~sales~~September ~~of home video products and remits these proceeds to TWC~~30, ~~minus the Distributor’s distribution fee, cost of goods sold (including manufacturing expenses) and certain marketing expenses.~~ 2008:

CRITICAL ACCOUNTING POLICIES

	Options Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value
December 31, 2007		17,770,041		$	1.82
Exercised		(50,000	)		0.89
Canceled		(1,045,000	)		2.14
September 30, 2008		16,675,041		$	1.81	$	-
Options exercisable, September 30, 2008		14,489,356		$	1.77	$	-

~~INVESTMENT~~The following INtable ~~DISTRIBUTOR~~summarizes additional information regarding outstanding and exercisable stock options as of September 30, 2008:

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.

	Options Outstanding		Average Remaining Life		Options Outstanding		Options Exercisable		Options Exercisable
Under $1.50		1,900,752		3.32	$	0.67		1,900,752	$	0.67
$1.50 - $1.99		10,161,039		6.34		1.72		8,902,854		1.70
$2.00 - $2.99		3,633,500		6.50		2.16		2,706,000		2.11
$3.00 - $3.99		706,250		6.00		3.00		706,250		3.00
$4.00 + over		273,500		5.10		5.42		273,500		5.42
		16,675,041		5.99	$	1.81		14,489,356	$	1.77

~~Under~~For 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~~service-~~monetary~~based ~~exchange~~stock ~~of a business controlled by the Company for a non-controlling interest in the Distributor. Accordingly~~options, the ~~amount recorded for the Company’s investment in the~~ Distributor ~~was~~estimated ~~partially~~ share-based ~~on the Company’s fair value as~~compensation ~~determined~~expense byfor ~~reference to~~ the ~~quoted~~three ~~market prices of the Company’s shares at the close of the market on the Closing Date~~ and ~~partially~~nine ~~based~~months onended ~~the~~September ~~historical basis of the net assets surrendered in the TWC Transaction. On the Closing Date~~30, we2008 ~~recorded a gain based on the difference between the fair market value of assets contributed~~ and ~~their~~2007 ~~net book value, reduced~~using ~~for~~ the ~~portion~~Black-Scholes-Merton offormula ~~the gain associated~~ with the ~~retained~~following ~~economic~~weighted ~~interest in the Distributor. The~~average ~~Distributor is treated as a partnership for U.S. federal income tax purposes.~~ assumptions:

~~STOCK-BASED COMPENSATION~~ 18

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.

	Three Months Ended September 30, 2008		Nine Months Ended September 30, 2008
Risk free interest rate		3.6%		3.6%
Expected dividend yield		-		-
Expected volatility		73.9%		73.8%
Expected life (in years)		6.0		6.0

~~Subsequent~~For market-based tooptions, the ~~Closing~~Company ~~Date~~utilizes of the ~~TWC~~Monte ~~Transaction,~~Carlo ~~the~~Simulation ~~Company’s~~as the stock~~-based~~ ~~compensation expense~~option ~~consists~~model ofto ~~expense~~provide ~~associated~~the ~~with~~most ~~stock~~accurate ~~options~~fair ~~held~~value byestimate ~~and~~due ~~subsequently granted~~ to the ~~independent~~path ~~members~~dependency of the ~~Company’s~~options ~~Board~~valued under the provisions of ~~Directors~~this grant. ~~The~~Monte ~~stock-based~~Carlo ~~compensation~~Simulation ~~expense associated~~is ~~with~~a ~~the~~lattice ~~former~~model, ~~employees~~which of- unlike the closed-form ~~Company,~~model ~~who~~– ~~became~~can ~~employees~~incorporate a range of ~~the~~expected volatilities. These ~~Distributor~~valuations aswere ~~of the~~performed ~~Closing~~on ~~Date,~~a ~~are~~multi-tranche basis ~~recorded~~considering onthree ~~the~~vesting ~~books~~tranches ofand the ~~Distributor. Stock-based~~weighted ~~compensation~~average ~~expense~~volatility for these grants is calculated ~~using~~to ~~the~~be ~~Black~~54.46%. The risk-~~Scholes-Merton~~free ~~formula~~rates ashave been ~~our~~determined ~~closed-form~~based ~~valuation~~upon ~~option pricing model (~~the ~~“Option~~interest ~~Model”).~~rates ~~The~~for ~~Option~~zero-coupon ~~Model~~U.S. ~~requires~~Treasury bonds ~~the~~as ~~use~~ of ~~subjective~~September ~~and complex assumptions~~30, ~~per~~2008. A ~~the~~yield ~~requirements~~curve ofhas ~~FAS123R,~~been ~~that~~determined based ~~include:~~upon ~~(i) the~~interpolating ~~option’s~~between ~~expected term, (ii)~~ the ~~estimated~~rates ~~future~~ranging ~~price~~from ~~volatility~~1.02% ofto 3.85%. Consistent with the ~~underlying~~service-based stock option grants, ~~(iii)~~ the dividend ~~risk-free~~rate ~~interest~~is ~~rate, (iv) the~~0.0% ~~dividend~~for ~~yield~~the ~~and~~performance-based ~~(v) expected~~option ~~forfeitures~~grants.

~~The Distributor records stock~~Total share-based compensation expense ~~associated~~recognized ~~with~~by the Company ~~stock~~for ~~options~~the ~~held by~~three and nine ~~subsequently~~months ~~granted~~ended toSeptember ~~the~~30, ~~Distributor’s~~2008 ~~employees~~was ~~(the~~$0.1 ~~former~~million ~~employees~~and $0.2 million versus compensation expense of $0.1 million and $0.7 for the ~~Company~~three and nine months ~~before~~ended ~~the~~September ~~TWC~~30, ~~Transaction)~~2007. No income tax benefit was recognized in ~~accordance~~the statement ~~with~~of ~~Emerging~~operations ~~Issues~~for ~~Task~~share-based ~~Force~~compensation arrangements for the Company.

18In relation to options issued by the Company to employees of the Distributor, the Distributor recorded a share-based compensation benefit of $0.01 million and $1.6 million for the three and nine months ended September 30, 2008 versus an expense of $0.5 million and $1.8 million for the three and nine months ended September 30, 2007.

~~Table~~NOTE 10. INCOME ~~of Contents~~TAXES

~~(“EITF”)~~The Company ~~Issue~~recorded ~~No. 00-12, “Accounting~~a byfederal anand ~~Investor~~state ~~for~~tax ~~Stock-Based~~benefit ~~Compensation~~of ~~Granted~~$12.8 ~~to Employees~~million offor anthe ~~Equity~~nine months ~~Method~~ended ~~Investee”~~September 30, ~~(“EITF 00-12”)~~2008. ~~EITF~~The ~~00-12~~tax ~~requires~~benefit ~~that~~resulted ~~the~~from ~~Distributor~~the ~~recognize~~reversal of the ~~costs~~deferred oftax ~~stock-based~~liability ~~compensation~~related ~~incurred~~to byour aninvestment ~~investor~~in onthe Distributor ~~its~~primarily ~~behalf~~due to the impairment recorded.

~~INCOME TAXES~~NOTE 11. SUBSEQUENT EVENTS

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

WeOn January ~~adopted~~1, 2009 (the ~~provisions~~“Quadrant ofTransaction ~~FASB~~Closing ~~Interpretation No. 48~~Date”), ~~“Accounting~~the ~~for~~Company, ~~Uncertainty in Income~~the ~~Taxes~~Distributor, —TWC anHoldings, ~~Interpretation~~Weinstein ofGP ~~FASB~~Holdings, ~~Statement~~W-G ~~No. 109”~~Holding (~~“FIN 48”)~~collectively, ~~on January 1~~W-G Holding, ~~2007.~~TWC ~~FIN~~Holdings ~~48 clarifies~~and ~~the~~Weinstein ~~accounting~~GP ~~for~~Holdings ~~uncertainty~~being inreferred ~~income~~to ~~taxes~~herein ~~recognized~~as inthe “TWC anParties”), ~~enterprise’s~~Quadrant ~~financial statements~~Management, inInc. ~~accordance~~(“Quadrant”) ~~with~~and ~~FASB~~GNPR ~~Statement~~Investments ~~109~~LLC, an ~~“Accounting~~affiliate ~~for~~of ~~Income~~Quadrant ~~Taxes~~(“GNPR Investments”), ~~and~~entered ~~prescribes~~into a ~~recognition~~ ~~threshold~~Purchase and ~~measurement~~Sale Agreement ~~process~~(the ~~for~~“Purchase ~~financial~~Agreement”) ~~statement~~in ~~recognition~~connection ~~and~~with ~~measurement of~~the arestructuring ~~tax~~of ~~position~~the Distributor’s ~~taken~~distribution orrelationship ~~expected~~with toTWC beand ~~taken~~the insale aby ~~tax~~the ~~return. FIN~~TWC 48Parties of ~~also~~substantially ~~provides~~all ~~guidance~~of ~~on de-recognition,~~their ~~classification,~~respective ~~interest~~shares and ~~penalties,~~ownership ~~accounting~~interests in ~~interim periods, disclosure~~the Company and ~~transition. We~~the ~~have~~Distributor no(the ~~material~~“Quadrant ~~unrecognized tax benefits or exposure at June 30, 2008~~Transaction”).

~~RESULTS~~Pursuant to OFthe ~~OPERATIONS~~Purchase OFAgreement ~~GENIUS~~and ~~PRODUCTS~~effective as of the Quadrant Transaction Closing Date, ~~INC~~the Distributor and TWC agreed to settle all monetary obligations owing to TWC by the Distributor on an accrued basis for all distribution activity through September 30, 2008 pursuant to the Distribution Agreement between the Distributor and TWC (as amended, the “TWC Distribution Agreement”). In connection with such settlement, (i) the Distributor issued to TWC a promissory note in the principal amount of $20 million (the “TWC Note”), which is payable on January 1, 2011 and accrues interest at a rate of 5% per annum, (ii) the Distributor agreed to pay to TWC up to an additional $43.3 million, from the Quadrant Transaction Closing Date through February 2010, subject to the satisfaction by TWC of certain conditions set forth in the Purchase Agreement and (iii) the Distributor agreed to pay to TWC a further amount to the extent the estimate of amounts payable from October through and including December 2008 is less than the actual amounts determined to be payable for such period, based on the monthly accounting statements for such periods and subject to audit by TWC (to the extent such estimate exceeds the actual amounts determined to be payable for such period, such excess may be offset by the Distributor against future amounts owed to TWC). Subject to the Distributor’s satisfaction of the aforementioned payment obligations, all remaining amounts owed by the Distributor to TWC through December 31, 2008 shall be reduced to zero and shall be extinguished.

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. 19

~~The~~Also pursuant ~~Company~~to ~~does~~the ~~not~~Purchase ~~report~~Agreement ~~its~~and ~~different~~effective ~~product~~as ~~lines~~of asthe ~~segments~~Quadrant asTransaction Closing ~~defined~~Date, by(i) ~~SFAS~~the ~~No. 131, Disclosures~~TWC ~~about~~Parties ~~Segments~~sold ofto GNPR Investments an ~~Enterprise~~aggregate ~~and~~of 122,010,252 ~~Related~~Class ~~Information~~W Units of the Distributor (~~“SFAS~~representing ~~No. 131”~~a 60% ownership interest in the Distributor) and the TWC Note for $20 million, ~~because~~and we(ii) dothe TWC ~~not~~Parties ~~allocate~~sold ~~our~~to ~~resources~~the ~~among~~Company ~~product~~an ~~lines~~aggregate ~~nor~~of do100 weshares ~~measure~~of ~~performance~~the byCompany’s ~~product~~Series ~~line. We~~W doPreferred ~~not~~Stock ~~maintain~~(representing ~~discrete~~100% ~~financial~~of ~~information~~the ~~regarding~~issued ~~product~~and ~~lines~~outstanding shares of such Series W Preferred Stock). Immediately ~~Our~~following ~~sales~~the Quadrant Transaction Closing Date, ~~marketing~~the ~~and product~~TWC ~~development~~Parties ~~efforts~~collectively ~~among~~retained ~~our~~20,335,042 ~~different~~Class W ~~product~~Units ~~lines~~of ~~are~~the ~~supported~~Distributor, byrepresenting ~~one~~a ~~integrated~~10% ~~group~~ownership interest in the ofDistributor; ~~individuals.~~provided ~~Additionally~~that in connection with such sale, ~~our~~the ~~warehousing~~TWC ~~costs~~Parties transferred ~~also~~to ~~reflect~~the ~~support~~applicable ofpurchaser all ~~product~~of ~~lines~~its ~~and~~rights to assert any asmanagement, ~~such~~control ~~cannot~~or bevoting ~~segmented~~rights over the Distributor.

~~Revenues~~In consideration for the sale of the Series W Preferred Stock, the Company issued to TWC Holdings two warrants (the “TWC Warrants”) entitling TWC Holdings to purchase in the aggregate 27,043,636 shares of the Company’s common stock (representing 10% of the fully-diluted shares of the Company immediately following the Quadrant Transaction Closing Date). The first of the TWC Warrants has a term of six (6) years, entitles TWC Holdings to purchase, for an exercise price of $0.0001 per share, up to 13,521,818 shares of the Company’s common stock and becomes exercisable in twelve (12) equal monthly installments commencing on January 1, 2010. The second of the TWC Warrants has a term of seven (7) years, entitles TWC Holdings to purchase, for an exercise price of $0.0001 per share, up to 13,521,818 shares of the Company’s common stock and becomes exercisable in twelve (12) equal monthly installments commencing on January 1, 2011. The vesting of shares under each of the TWC Warrants is conditioned on the effectiveness of the amended and restated TWC Distribution Agreement and TWC continuing to be in the principal business of producing, distributing, licensing and acquiring theatrical motion pictures, with unvested shares subject to forfeiture in the event that TWC terminates such agreement or ceases to engage in such business activities.

~~The Company had no revenue for the three and six months ended June 30, 2008 and the three and six~~AMENDED ~~months~~TWC ~~ended~~DISTRIBUTION 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. AGREEMENT

~~Net~~Pursuant ~~revenue~~to ~~from~~the ~~sales~~Purchase Agreement and effective as of the Quadrant Transaction Closing Date, the Distributor and TWC ~~titles~~entered ~~was~~into ~~$50.0 million~~an Amended and Restated Distribution Agreement (the “Amended TWC Distribution Agreement”), amending and ~~net~~restating ~~revenue~~the TWC ~~from~~Distribution ~~sales~~Agreement. The Amended TWC Distribution Agreement provides for, among other things, (i) the grant to the Distributor of ~~non~~the exclusive right, in the United States and its territories, to distribute, design, manufacture, advertise, publicize, promote and market TWC-owned or controlled motion picture titles, with TWC retaining digital distribution rights to such titles; ~~was~~(ii) ~~$24.6 million~~a ~~for~~term expiring on December 31, 2010, subject to extension by mutual consent until December 31, 2011; (iii) an increase in the ~~three~~distribution fee ~~months~~payable ~~ended~~to ~~June 30~~the Distributor for theatrical titles released on home video after January 1, ~~2008~~2009; (iv) the elimination of all performance-based adjustments to the distribution fee payable to the Distributor (i.e., ~~For~~adjustments based on the ~~three~~level ~~months~~of ~~ended~~home ~~June~~video sales of a title as compared to theatrical box office 30performance); (v) the addition of provisions requiring that all Distributor home video inventory created on or after October 1, ~~2007~~2008 and unsold at the end of the term be purchased by TWC at Distributor’s cost, ~~net~~with ~~revenue~~all ~~from~~inventory ~~sales~~created prior to such date and unsold at the end of the term to be delivered to TWC ~~titles~~at ~~was~~no cost; ~~$81.2 million~~(vi) the pre-approval by TWC of the outsourcing (and ~~net~~the ~~revenue~~Distributor’s right ~~from~~to ~~sales~~recoup outsourced costs) of certain distribution services; (vii) an ~~non~~increase in the Distributor’s permissible returns reserve; (viii) the elimination of provisions requiring the Distributor to maintain dedicated staff for the distribution of TWC product; (ix) the elimination of provisions requiring the Distributor to present content acquisition opportunities to TWC before the Distributor engages in such opportunities; (x) additional rights of the Distributor to recoup the costs of all approved third party manufacturing, distribution and marketing expenses, including all supply-chain expenses; (xi) the addition of potential incentive payments to TWC ~~titles~~if ~~was~~certain $distribution fees are earned by the Distributor from January 1, 2009 through December 31, 2010, subject to certain terms and conditions; (xii) the ability of the Distributor to cross-collateralize and recoup up to $7.5 million. ~~For~~of unrecouped distribution and marketing expenses each month (up to $10 million for the ~~six~~period ~~months~~from ~~ended~~October ~~June 30~~1, 2009 ~~2008~~through March 31, ~~net~~2010), ~~revenue~~subject ~~from~~to ~~sales~~certain terms and conditions; (xiii) the requirement to deliver to TWC monthly accounting statements within forty (40) days after the end of each month; (xiv) the elimination of provisions allowing TWC ~~titles~~to ~~was~~terminate ~~$109.1 million~~the agreement based on performance levels of the Distributor, such that TWC retains the right to terminate the Amended TWC Distribution Agreement only upon material default, an insolvency event or certain change of control events; (xv) the elimination of TWC’s right and/or obligation ~~net~~to ~~revenue~~“buy ~~from~~back” ~~sales~~the distribution rights granted to the Distributor, with all such distribution rights terminating on expiration or termination of the term; (xvi) the elimination of “most favored nation” clauses in favor of TWC, except with respect only to distribution fees payable to the Distributor.

19EXCHANGE AGREEMENT AND OTHER QUADRANT TRANSACTION DOCUMENTS

~~Table of Contents~~Exchange Agreement

ofPursuant to ~~non-~~the Purchase Agreement, the Company, GNPR Investments and the TWC Parties ~~titles~~entered ~~was~~into ~~$63.7 million.~~an Exchange Agreement (the “Exchange Agreement”), pursuant to which ~~For~~GNPR Investments and the ~~six~~TWC ~~months~~Parties agreed, subject to obtaining all necessary ~~ended~~approvals ~~June 30~~from the Company’s Board of Directors and stockholders, ~~2007~~to transfer to the Company all of their respective Class W Units of the Distributor in exchange for shares of a newly created Series A Interim Convertible Preferred Stock of the Company, ~~net~~which ~~revenue~~Series ~~from~~A ~~sales~~Convertible Preferred Stock would entitle (i) GNPR Investments to convert their preferred shares into shares of the Company’s common stock representing 60% of all issued and outstanding common shares and (ii) the TWC ~~titles~~Parties ~~was~~to ~~$141.9 million~~convert their preferred shares into shares of the Company’s common stock representing 10% of all issued and ~~net~~outstanding ~~revenue~~common shares. The ~~from~~transactions contemplated by the Exchange Agreement were ~~sales~~consummated effective as of ~~non~~January 15, 2009, and, as a result, effective as of such date, the Distributor became a wholly-~~TWC~~owned ~~titles~~subsidiary ~~was~~of ~~$53.9 million~~the Company.

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~~Amendment ~~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~~Distributor ofLLC 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.Agreement

~~Sales~~Pursuant to ~~returns,~~the ~~discounts~~Purchase ~~and~~Agreement, ~~allowances~~the asparties aagreed ~~percentage~~to ofamend ~~gross~~and ~~revenue~~restate ~~was 40.9% for~~ the ~~three~~ ~~months~~Distributor’s ~~ended~~Amended ~~June 30,~~and ~~2008,~~Restated ~~versus~~Limited ~~22.3%~~Liability ~~for~~Company ~~the~~Agreement ~~three~~upon ~~months~~the consummation ~~ended June 30~~of, ~~2007.~~and ~~Sales~~to ~~returns~~reflect, ~~discounts~~ ~~and~~the ~~allowances~~transactions ascontemplated ain ~~percentage~~the ofExchange Agreement, ~~gross~~subject ~~revenue~~to ~~was~~obtaining ~~31.9%~~any ~~for~~necessary ~~the~~Company ~~six~~Board ~~months~~of ~~ended~~Directors ~~June~~and/or ~~30,~~stockholder ~~2008,~~approvals ~~versus~~in ~~24.7%~~connection ~~for~~with ~~the~~such ~~six months ended June 30, 2007~~amendments.

~~Consistent with other retail product distributors, the Distributor has experienced some degree of~~Amendment ~~sales~~to ~~seasonality~~Credit ~~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.~~ Agreement

~~Costs~~In connection with the Quadrant Transaction and ~~expenses~~effective as of December 31, 2008, the Distributor entered into a Limited Consent and Amendment No. 3 to Amended and Restated Credit Agreement (the “Credit Agreement Amendment”) with Société Générale, as administrative agent, collateral agent and L/C Issuer, the lenders party thereto, and Alliance & Leicester Commercial Finance plc (collectively, the “Lenders”). The Credit Agreement Amendment amends the existing Amended and Restated Credit Agreement, dated as of November 1, 2007 (as amended, the “Credit Agreement”).

~~Cost~~Pursuant to the Credit Agreement Amendment, among other things, (i) the Lenders consented to the Quadrant Transaction, (ii) the maturity date of ~~Revenues~~the credit facility was set at August 31, 2009; (iii) the total commitment of the revolving credit facility is subject to reduction from $37.5 million to $30 million on March 31, 2009, and to $25 million on June 30, 2009; (iv) the percentage of receivables that count towards establishing the Distributor’s borrowing base is reduced over time from 80% currently to 65% as of June 30, 2009 and thereafter; (v) the interest rate for each LIBOR Loan and Base Rate Loan (each as defined in the Credit Agreement Amendment) are increased to set amounts of 4% and 3%, respectively; and (vi) additional financial covenants of the Distributor are added, requiring the Distributor to maintain certain minimum Borrowing Base Percentages and OIBDA (each as defined in the Credit Agreement Amendment).

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

~~Costs~~Pursuant to ofthe ~~revenues~~Purchase ~~for~~Agreement, the ~~Distributor~~Company ~~consist~~also ~~primarily~~entered ofinto ~~the~~a ~~raw~~Stockholder ~~material~~Rights Agreement with TWC Holdings and ~~manufacturing~~GNPR ~~costs~~Investments, pursuant to which (i) GNPR ofInvestments ~~products~~granted ~~sold~~to TWC Holdings the right to ~~customers~~participate, ~~packaging~~on ~~and~~a ~~shipping~~pro ~~costs~~rata basis, ~~advertising~~in ~~and~~a ~~marketing,~~proposed bona fide sale or transfer by GNPR Investments of any ~~amortization~~equity securities of the ~~film~~Company; ~~library,~~(ii) TWC Holdings and ~~participations~~GNPR Investments agreed to vote for any proposed acquisition of the Company approved by the Company’s Board of Directors and ~~royalties.~~a ~~Participation~~majority ~~expenses~~of ~~related~~its common stockholders; and (iii) TWC Holdings granted to the Company a right of first refusal with respect to any proposed sale by TWC’s ~~distribution~~Holdings ~~agreement~~of ~~are~~any ~~calculated~~of ~~based~~its onequity ~~SOP~~securities ~~00-2~~of ~~which~~the ~~amortizes~~Company (with such ~~costs~~right of ~~revenues~~ ~~using~~first refusal transferring to GNPR Investments if the Company ~~film~~declines ~~forecast~~to ~~method~~exercise ~~over~~such aright), ~~period~~in ofeach ~~two~~case ~~years.~~subject to limited exceptions.

~~The~~In addition, ~~Distributor’s~~the ~~costs~~Company ofalso ~~revenues~~entered ~~were~~into ~~$75.7~~a Registration Rights Agreement with TWC Holdings and ~~$177.7 million~~GNPR Investments, pursuant to which the Company agreed to register for resale the ~~three~~shares ~~and~~of ~~six~~Company ~~months~~common stock issuable (i) upon conversion of ~~ended~~the ~~June 30,~~Series ~~2008~~A ~~versus~~Interim ~~$99.9 million~~Convertible Preferred Stock that was issued to TWC Holdings and ~~$176.0 million~~GNPR ~~for~~Investments upon the ~~three~~consummation of the transactions contemplated by the Exchange Agreement and/or ~~six~~(ii) ~~months~~upon ~~ended~~the ~~June~~exercise of the TWC 30Warrants. Pursuant to the Registration Rights Agreement, ~~2007.~~the Company agreed to file an initial registration statement with the Securities and Exchange Commission no later than the forty-fifth (45th) day after the Quadrant Transaction Closing Date.

~~Product~~Pursuant to ~~cost,~~the ~~supply~~Purchase ~~chain,~~Agreement and ~~inventory~~effective ~~obsolescence~~as ~~costs~~of ~~were $17.9 million for~~ the ~~three months~~Closing ~~ended June 30~~Date, ~~2008~~each ~~and~~of ~~$34.5 million~~(i) ~~for~~that certain ~~the~~Master ~~six~~Contribution ~~months~~Agreement, ~~ended~~dated ~~June 30,~~as ~~2008~~of ~~versus~~December ~~$13.~~5 ~~million~~, ~~and~~2005, ~~$33.8 million~~by ~~for~~and among the ~~three~~Company, ~~and~~TWC ~~six~~Holdings ~~months~~and ~~ended~~TWC ~~June 30,~~and ~~2007.~~(ii) ~~The~~that ~~increase~~certain ~~in cost~~Registration ofRights ~~$0.7 million~~Agreement, ~~for~~dated ~~the~~on ~~six~~or ~~months~~about ~~ended~~July ~~June 30~~21, ~~2008~~2006, ~~was~~between ~~primarily~~the ~~due~~Company toand ~~increases in product~~TWC, ~~cost~~were ~~and~~terminated ~~obsolescence offset by efficiencies achieved~~ in ~~the~~their ~~supply chain~~entirety.

~~Bad debt and customer deductions decreased by $0.6 for the three months ended~~QUADRANT ~~June 30,~~SERVICES 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. AGREEMENT

~~Amortization~~On January of2, ~~intangibles~~2009, ~~and~~the ~~film~~Special ~~library~~Committee ~~increased~~of bythe ~~$1.4 million~~Board ~~and~~of ~~$6.5 million~~Directors inof the ~~three~~Company, on ~~and~~behalf ~~six~~of ~~months~~the ~~ended June 30~~Company, ~~2008~~entered ~~versus~~into ~~the~~a ~~three~~letter ~~and~~agreement (the “Restructuring ~~six~~Services ~~months~~Agreement”) ~~ended~~with ~~June 30~~Quadrant, ~~2007.~~pursuant ~~Based~~to onwhich anthe ~~evaluation~~Company ofagreed ~~fair~~to ~~market value~~pay ~~and~~to ~~re-alignment~~Quadrant of$4 ~~company~~million ~~resources~~in ~~during~~cash ~~the~~(by ~~first~~no ~~six~~later ~~months~~than ofJanuary ~~2008~~2, ~~the~~2009) in ~~Distributor~~consideration ~~accelerated~~for ~~the~~restructuring ~~amortization~~services ofprovided ~~its~~by ~~film~~Quadrant ~~library~~since bySeptember 2008, including, among other services, securing $~~0.9~~ 20 million in debt financing for the Company and ~~also~~the ~~wrote~~Distributor, ~~off~~negotiating the ~~value~~restructuring of ~~certain~~the Distributor’s ~~intangible~~payment ~~assets~~obligations ~~which~~to ~~were~~TWC ~~deemed~~and tonegotiating and obtaining Société beGénérale’s ~~impaired~~consent to the Quadrant Transaction.

~~Marketing~~NOTE ~~and advertising costs decreased by $5.5 million for the three months~~AND ~~ended~~WARRANT ~~June 30,~~PURCHASE 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. AGREEMENT

20On February 17, 2009, the Company and the Distributor entered into a Note and Warrant Purchase Agreement (the “Note and Warrant Purchase Agreement”) with certain institutional investors (the “Investors”), pursuant to which, among other things, (i) the Distributor issued to the Investors promissory notes with an aggregate principal balance of $5 million (the “Investor Notes”) and (ii) the Company issued to the Investors five-year warrants to purchase an aggregate of up to 1,109,073,910 shares of the Company’s Common Stock at an exercise price of $0.0001 per share (the “Investor Warrants”). Pursuant to the terms of the Note and Warrant Purchase Agreement, the Company and the Distributor may engage in subsequent closings and issue an aggregate of up to $9.5 million of Investor Notes and an aggregate of up to 1,984,587,356 Investor Warrants.

~~Table of Contents~~21

~~Participations~~The principal ~~for~~amounts ~~TWC~~of ~~titles~~the ~~decreased~~Investor byNotes ~~$23.3 million~~are ~~for~~due ~~the~~and ~~three~~payable ~~months ended~~on ~~June 30~~December 31, ~~2008~~ 2010 and ~~$13.4 million~~accrue ~~for~~interest ~~the~~at ~~six~~a ~~months~~rate ~~ended~~of ~~June 30,~~5% ~~2008. The~~per ~~reduction~~annum inas ~~participation~~of ~~cost~~February ~~was~~17, 2009. At ~~directly~~the ~~related~~Distributor’s tooption ~~30%~~and ~~decline~~provided inthat the expiration ~~revenue~~date inof the ~~six~~Amended ~~months~~TWC ~~ended~~Distribution ~~June 30,~~Agreement ~~2008~~is ~~versus~~extended ~~six~~to ~~months~~no ~~ended~~earlier ~~June 30,~~than ~~2007.~~December ~~Participation~~31, ~~expenses~~2011, ~~for~~the ~~non-TWC~~maturity ~~titles~~date ~~decreased~~of bythe ~~$0.5 million~~Investor ~~for the~~Notes ~~three~~may ~~months~~be ~~ended~~extended ~~June 30~~until December 31, ~~2008~~2011, ~~and~~in ~~increased~~which bycase ~~$16.4 million~~the ~~for~~Investor ~~the~~Notes ~~six~~shall accrue interest at a ~~months~~rate ~~ended~~of ~~June 30,~~10% ~~2008~~per annum for such extension period. Repayment ~~The~~of ~~six~~all ~~month~~of the ~~increase~~Investor ~~was~~Notes ~~primarily~~is ~~driven~~subordinated byto aamounts ~~19.3%~~owed ~~increase~~by inthe ~~non-TWC~~Distributor ~~revenue.~~to Société Générale.

~~Operating~~The Investor ~~Expenses~~Warrants are mandatorily exercisable at such time that the Company has sufficient authorized Common Stock to allow for the exercise of the Investor Warrants and the conversion of the Company’s Series A Interim Convertible Preferred Stock.

~~General~~The Company ~~and~~is ~~administrative~~obligated ~~expenses~~to ~~increased~~register ~~by $0.5 million~~ for resale the ~~three~~shares ~~months~~of ~~ended~~Common ~~June 30,~~Stock issuable ~~2008~~upon ~~and~~exercise ~~increased~~of bythe ~~$2.1 million~~Investor ~~for~~Warrants ~~the~~on ~~six~~a ~~months~~registration ~~ended~~statement ~~June 30,~~to ~~2008.~~be ~~General~~filed within forty-five (45) days after the closing of the Note and Warrant Purchase ~~administrative~~Agreement; ~~expenses~~provided ~~for~~that if the ~~three~~Company ~~months~~takes ~~ended~~material ~~June 30,~~steps ~~2008~~toward ~~included~~terminating the ~~$1.3 million~~registration of ~~research and~~its ~~development~~Common ~~costs~~Stock ~~relating~~under tothe ~~video~~Exchange ~~game~~Act ~~development~~by May 30, ~~$0.4 million~~2009, ~~related~~the obligation to ~~involuntary termination~~file ~~costs~~the ~~and~~registration ~~$0.7~~statement inwill ~~other~~be ~~restructuring~~delayed ~~costs.~~for one year.

The Company’s ~~30%~~intends ~~equity~~to inuse the ~~net~~proceeds ~~loss~~ of the ~~Distributor~~Investor ~~was~~Notes ~~$3.2~~to ~~and~~repay ~~$8.0 million for the three~~existing ~~and~~indebtedness ~~six~~or ~~months ended June 30, 2008 versus $1.0 million and $3.2 million~~ for ~~the~~other ~~three~~general ~~and~~corporate ~~six months ended June 30, 2007~~purposes.

~~In the second quarter of 2008, the Company hired an independent financial and strategic advisory~~RECENT ~~firm~~EVENTS toRELATING ~~determine~~TO ~~the~~LIQUIDITY ~~fair~~AND ~~value~~CAPITAL 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. RESOURCES

~~Other~~As ~~Income~~a result of the recent economic conditions (including a decrease in consumer confidence resulting in lower spending levels) and a ~~Expense~~reduced slate of pictures, the Distributor has experienced a significant reduction in net revenues and liquidity issues. In addition, the Distributor is currently not in compliance with certain terms, conditions and covenants of the Amended Credit Agreement, and also is in a dispute with TWC relating to payments under the TWC Distribution Agreement. Based on current operating results, the Distributor will fall short of generating enough cash flow from continuing operations to timely meet its financial commitments and obligations. In addition, the financing historically provided by TWC will not be available to the Distributor effective January 1, 2009. Currently, the Distributor is carefully evaluating all capital and operational expenditures on a go forward basis, including an internal restructuring of its resources and overhead to decrease its operating expenses. Further, the Distributor is also in discussions with its lender and TWC to cure and/or resolve such instances of non-compliance and disputes. The Distributor is pursuing these options to alleviate the liquidity shortfall position that it currently finds itself in. At this time, the Distributor is unable to conclude if the aforementioned actions being taken will be successful. If the Distributor is unable to cure such instances of non-compliance under the Amended Credit Agreement, the Distributor’s lender could, among other remedies, cease to extend future loans to the Distributor, accelerate any amounts owed by the Distributor under the Amended Credit Agreement and/or foreclose on its security interest in the Distributor’s assets. If the Distributor is unable to successfully resolve its disputes with TWC, TWC could seek to terminate the TWC Distribution Agreement. In either such case and/or if the Distributor is unable to successfully reduce its overhead costs in the near future, the Distributor’s ability to generate sufficient cash flows to continue its operations and service its obligations under the credit facility may be adversely affected. As the Company relies solely on the Distributor to fund its operations and is also the guarantor of the Distributor’s credit facility (See Note 6), any adverse impact on the operations and liquidity of the Distributor could also adversely impact the Company’s results of operations and liquidity. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~The~~ITEM ~~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~~MANAGEMENT'S ~~$0.1 million~~DISCUSSION ~~for~~AND ~~the~~ANALYSIS ~~three~~OF ~~and~~FINANCIAL ~~six~~CONDITION ~~months~~AND ~~ended~~RESULTS ~~June 30, 2007.~~OF 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. OPERATIONS

~~LIQUIDITY~~Management’s discussion ~~AND~~and ~~CAPITAL~~analysis ~~RESOURCES~~of financial condition and results of operation of the Company and the Distributor, as applicable, as of and for the periods ended September 30, 2008 and 2007are based upon events and circumstances as of September 30, 2008 and do not reflect the impact of any events that occurred since September 30, 2008, which events are more particularly described under the heading “Subsequent Events” and in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2009.

AtThe following ~~June 30,~~discussion ~~2008,~~of ~~the~~our ~~Company~~financial ~~had~~condition ~~cash~~and ~~balances~~results of ~~$1.8 million~~operations ~~and~~should be ~~the~~read ~~Distributor~~in ~~had~~conjunction ~~cash~~with the financial statements and ~~restricted~~ ~~cash~~notes ~~balances~~thereto ofcontained in ~~$17~~this report.~~0 million.~~ The ~~restricted~~discussion ~~cash~~contains ~~balances~~forward-looking ~~are~~statements ~~associated~~that ~~with (i)~~relate ~~required~~to ~~minimum~~future ~~cash~~events ~~balances~~or ~~pursuant~~our tofuture ~~the~~financial ~~Amended~~performance ~~Credit~~that ~~Agreement~~involve known and unknown risks, ~~(ii) certain~~uncertainties ~~bank~~and ~~accounts~~other factors that may cause our actual ~~are~~results, ~~subject~~levels toof ~~semi-monthly~~activity, ~~disbursements~~performance or achievements to ~~the~~be ~~Distributor~~materially different ~~and~~from ~~other~~those ~~parties~~expressed ~~under~~or aimplied ~~waterfall~~by ofthe forward-looking statements. For ~~funds~~additional ~~prescribed~~information byconcerning these factors, see the ~~Amended~~information ~~Credit~~under ~~Agreement~~the caption “Risk Factors” in Part I, ~~and~~Item ~~(iii) an~~1A ~~office~~in ~~lease~~our ~~security~~Amendment ~~deposit~~No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2007 filed on March 25, 2009.

~~We may consider additional issuances of equity and/or debt financing to fund future growth~~NATURE ~~opportunities.~~OF 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. BUSINESS

InGenius Products, Inc. (“we”, “us”, “our” or the ~~event~~ ~~that~~“Company”), ~~non~~through our 30%-~~TWC~~owned subsidiary, ~~revenue~~Genius ~~increase~~Products, ~~resulting~~LLC in(the ~~increased~~“Distributor”), ~~non-TWC~~is ~~receivables~~a leading independent home entertainment products company that acquires, produces and licenses, through the Distributor’s ~~availability~~multiple ~~will~~distribution ~~increase~~agreements ~~under~~with ~~the~~content partners, ~~Amended~~an ~~Credit~~extensive ~~Agreement~~library ~~with~~of ~~Societe~~motion pictures, television programming, ~~Generale. Although~~and trend weentertainment ~~believe~~on ~~that~~digital ~~the~~versatile disks (“DVD”) and digitally. The Distributor’s ~~expanded~~works ~~product~~in ~~line~~partnership ~~offers~~with usmajor ~~the~~retailers ~~opportunity~~to ~~for~~distribute ~~significantly~~widely ~~improved~~recognized ~~operating~~home ~~results~~entertainment inbrands ~~future~~to ~~quarters,~~a nodiversified customer ~~assurance~~base. The ~~can~~remaining be70% of the Distributor is owned by The ~~given~~Weinstein ~~that~~Company weHoldings ~~will~~LLC ~~operate~~(“TWC onHoldings”) (which includes a ~~profitable~~1% ~~basis~~percentage interest inowned ~~2008~~indirectly through its wholly-owned subsidiary, orW-G ~~ever~~Holding Corp. (“W-G Holding”), asand ~~such~~a ~~performance~~14% ispercentage ~~subject to~~interest ~~numerous~~owned ~~variables~~indirectly ~~and~~through ~~uncertainties,~~its indirect ~~many~~wholly-owned ofsubsidiary, ~~which~~Weinstein ~~are~~GP ~~out~~Holdings ofLLC ~~our~~(“Weinstein ~~control~~GP Holdings”)). TWC ~~Although~~Holdings weis ~~own~~the ~~30%~~ subsidiary company of ~~the~~The ~~Distributor~~Weinstein Company LLC (“TWC”), wethe ~~only~~largest ~~have~~provider ~~access~~of tocontent for the ~~cash on~~Distributor’s library.

21 22

~~Table~~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 ~~Contents~~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: ESPN®, World Wrestling Entertainment®, Sesame Workshop®, Discovery Kids™, Animal Planet and The Learning Channel (TLC™).

~~the~~ The Distributor’s ~~balance~~has ~~sheet~~developed a fully integrated direct-to-retail distribution platform that parallels the ~~extent~~home ~~that~~entertainment wedivisions ~~agree~~of ~~with~~the ~~our~~major ~~partner,~~Hollywood studios. This ~~TWC,~~platform toprovides ~~make~~direct asales and marketing, inventory ~~distribution~~management toand usstate-of-the-art supply-chain services. As In collaboration ofwith ~~June 30,~~leading ~~2008~~replicators and third-party logistics and supply-chain companies, the ~~Company~~Distributor ~~had~~has norapidly ~~off-balance~~scaled ~~sheet~~this ~~arrangements.~~network, which has helped to facilitate its rapid growth in revenues.

~~ITEM 3~~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. ~~QUANTITATIVE~~ We believe ~~AND~~that ~~QUALITATIVE~~the ~~DISCLOSURES~~strong ~~ABOUT~~relationships ~~MARKET~~the ~~RISK~~Distributor has developed with these well-known retailers as well as with the Distributor’s branded content partners help promote the Distributor’s programming and heighten consumer awareness of its programs.

AsThe Distributor ofcollaborates ~~June 30,~~with ~~2008,~~its ~~the~~retail ~~Distributor’s cash~~ and ~~cash~~content ~~equivalents~~partners ~~were~~to ~~invested~~create ~~with financial~~sales ~~institutions~~programs ~~with~~that ~~investment~~exploit ~~grade~~their ~~credit~~widely ~~ratings.~~recognized ~~Due~~brands toand ~~the~~endorse ~~short~~related content. These ~~duration~~sales ofprograms ~~the~~focus ~~Distributor’s investment~~on ~~portfolio~~brands ~~and~~to provide the ~~high~~retailer with ~~quality~~solutions ofthat simplify the ~~Distributor~~retailer’s ~~investments~~buying process, animprove ~~immediate 10% change~~shelf-space inutilization ~~interest~~and ~~rates~~help ~~would~~consumers ~~not~~quickly ~~have~~make ainformed ~~material~~purchase decisions. The ~~effect~~Distributor’s onability ~~the~~to ~~fair~~deliver ~~market~~unique, ~~value of the Distributor’s~~innovative ~~portfolio.~~solutions ~~Therefore,~~that weimprove ~~would~~the ~~not~~sales ~~expect~~and ~~the~~rentals ~~Distributor’s~~of ~~operating~~its ~~results~~content orhas ~~cash~~enabled ~~flows~~it to be ~~affected~~compete tosuccessfully ~~any~~and ~~significant~~maintain ~~degree~~strong byrelationships ~~the~~with ~~effect~~its ofretail ~~a sudden change in market interest rates on the~~and ~~Distributor’s~~content ~~investment portfolio~~partners.

~~Neither~~The Distributor wecurrently ~~nor~~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 ~~enter~~theatrical ~~into~~and ~~hedging~~non-theatrical orproduct ~~derivative~~through the ~~instrument~~diverse ~~arrangements~~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.

~~ITEM 4. CONTROLS~~The Distributor ~~AND~~primarily ~~PROCEDURES~~focuses on four core branded content categories that we call Content Verticals:

~~Disclosure~~· ~~Controls~~Theatrical/Independent Films (includes RHI Entertainment™ (Hallmark library), The Weinstein Company® and ~~Procedures~~ Wellspring™)

We· ~~maintain~~Sports ~~disclosure~~(includes ~~controls~~ESPN® and ~~procedures~~World ~~that~~Wrestling 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. Entertainment®)

As· ofLifestyle ~~the~~(includes ~~end~~Animal ~~of the period covered by this report~~Planet, weThe ~~carried~~Learning ~~out~~Channel an(TLC™) ~~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. Wellspring™)

In· ~~light~~Family/Faith 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”).~~includes ~~These~~Discovery ~~measures included~~Kids™, ~~among other things, expansion of our quarter-end closing procedures, including the expanded review~~ and ~~analysis~~Sesame 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. Workshop®)

AThe Distributor ~~material~~maintains ~~weakness~~in isperpetuity “adistribution ~~deficiency,~~rights orfor aTWC ~~combination~~content ofreleased during ~~deficiencies (within~~ the ~~meaning~~term of ~~PCAOB Auditing~~the ~~Standard~~TWC ~~No. 5),~~Distribution ~~in internal control over financial reporting~~Agreement, ~~such~~subject ~~that~~to ~~there~~certain ~~is a~~buy-back ~~reasonable~~rights ~~possibility that a material misstatement~~ of the ~~Company’s~~TWC ~~annual~~content orby ~~interim financial statements will not be prevented or detected on a timely basis~~TWC.”

~~Company~~Under ~~management~~the TWC ~~has~~Distribution ~~concluded~~Agreement, ~~that~~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 ~~June 30,~~these ~~2008~~home video products, depending on the ~~following~~level ~~material~~of ~~weaknesses~~these sales compared to theatrical box ~~existed~~office atrevenues ~~both~~for the ~~Company~~same ~~and~~films. The Distributor collects the proceeds from sales of home video products and remits these proceeds to TWC, minus the Distributor:’s distribution fee, cost of goods sold (including manufacturing expenses) and certain marketing expenses. The TWC Distribution Agreement was substantially amended on January 1, 2009 in connection with the Quadrant Transaction (see Note 11 of the condensed unaudited interim financial statements).

• 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.23

•CRITICAL ACCOUNTING 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.POLICIES

•FAIR VALUE ~~Formal~~OF ~~processes~~FINANCIAL 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.INSTRUMENTS

•The carrying ~~Calculation~~amounts of ~~provision~~cash ~~for~~and ~~income~~cash ~~taxes~~equivalents, prepaid expenses, accounts payable, accrued expenses, and ~~related~~Class ~~oversight~~W ofOption ~~this~~Liability ~~process~~approximate the fair value thereof.

22INVESTMENT IN DISTRIBUTOR

~~Table~~At the closing of ~~Contents~~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.

WeUnder ~~did~~the equity ~~not~~method ~~properly~~of ~~supervise~~accounting, only the Company’s investment in and ~~review~~amounts due to and from the ~~calculation~~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 ~~tax~~investment ~~provision~~in ~~that~~the Distributor was ~~performed~~partially based on the Company’s fair value as determined by anreference ~~outside~~to ~~third~~the ~~party.~~quoted ~~This~~market ~~lack~~prices of the ~~supervision~~Company’s shares at the close of the market on the Closing Date and partially ~~review~~based byon ~~management~~the ~~resulted~~historical basis of the net assets surrendered in the TWC Transaction. On the Closing Date, we recorded a ~~material~~gain ~~post-closing~~based ~~adjustment~~on ~~prior~~the difference tobetween the ~~issuance~~fair market value of assets contributed and their net book value, reduced for the ~~financial~~portion ~~statements~~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.

~~Also,~~CLASS ~~our management has found additional material weaknesses specifically related to the~~W ~~Distributor:~~ OPTION LIABILITY

•The Company ~~Revenue~~records ~~recognition~~the ~~process;~~Class ~~specifically,~~W ~~our~~Option ~~controls~~Liability at fair value in ~~the~~accordance ~~areas~~with Statement of ~~allocating~~Financial ~~and~~Accounting ~~tracking~~Standards ~~Market~~(“SFAS”) ~~Development~~No. 157, ~~Funds~~Fair Value Measurements (“~~MDF~~FAS 157”), ~~Spending.~~which the Company adopted beginning on January 1, 2008. The ~~Distributor~~Company has ~~not~~utilized ~~fully~~a ~~implemented~~lattice avaluation ~~formalized~~model ~~process~~to ~~and~~simulate future ~~related~~stock ~~controls~~movements of the Company’s Common Stock in order to determine the fair ~~appropriate~~value ~~classification~~ of ~~MDF~~the ~~related~~Class ~~expenses.~~W ~~Due~~Option toLiability. The ~~this~~assumptions ~~weakness,~~used ~~there~~in preparing issuch amodel ~~reasonable~~include, ~~possibility~~among ~~that~~other ~~the~~things, ~~Distributor~~inputs ~~could~~such ~~materially~~as ~~record~~volatility, risk-free ~~revenue~~interest ~~improperly~~rates, ordividend ~~misclassify~~yield, ~~MDF~~expected ~~related~~time ~~expenses~~of inredemption ~~its~~and assessment ~~statements~~ of ~~operations~~counterparty risk.

• 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 00STOCK-~~2 “Accounting by Producers or Distributors of Films” utilized incorrect data and assumptions which resulted in material adjustments.~~BASED COMPENSATION

•Under SFAS ~~Management’s~~No. ~~estimation~~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 ~~forecasting~~is ~~process~~recognized as itexpense over ~~relates~~the toemployee's ~~inventory~~requisite ~~obsolescence~~service ~~reserve,~~period using a modified prospective application. The valuation provisions apply to new awards and ~~sales~~to ~~returns~~awards that were outstanding on the effective date and ~~price~~subsequently ~~protection~~modified ~~reserves~~or cancelled. Share-based Incompensation ~~calculating~~expense ~~the~~relates ~~Distributor’s~~to ~~reserves~~share-based awards granted subsequent to January 1, ~~management~~2006, ~~utilized~~and ~~incorrect~~share-based ~~projections~~awards ~~which~~granted ~~resulted~~prior into, ~~material~~but ~~adjustments~~not yet ~~being~~vested ~~recorded~~as of January 1, 2006, are based on the grant date fair value.

~~The~~Subsequent to the Closing Date of the TWC Transaction, the Company’s ~~will~~stock-based compensation ~~continue~~expense ~~its~~consists ~~efforts~~of toexpense ~~strengthen~~associated ~~its~~with ~~accounting~~stock options held by and ~~finance~~subsequently ~~departments~~granted ~~and~~to independent members of the Company’s Board of ~~aggressively~~Directors. The ~~pursue~~stock-based ~~remediation~~compensation expense associated with the former employees of ~~all~~the ~~material~~Company, ~~weaknesses~~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 ~~Company~~Option ~~filled~~Model requires the ~~position~~use of subjective and ~~Chief~~complex ~~Accounting~~assumptions, ~~Officer~~per inthe requirements of FAS123R, that include: (i) the option's ~~second~~expected ~~quarter~~term, (ii) the estimated future price volatility of ~~2008.~~the underlying stock, (iii) the risk-free interest rate, (iv) the dividend yield and (v) expected forfeitures.

~~Changes in Internal Control over Financial Reporting~~ 24

~~Other than as described above, there were no changes in our internal control over financial~~INCOME ~~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.~~ TAXES

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

~~ITEM~~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. ~~LEGAL~~FIN ~~PROCEEDINGS~~48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have no material unrecognized tax benefits or exposure at September 30, 2008.

~~FALCON~~RESULTS OF ~~PICTURE~~OPERATIONS ~~GROUP~~OF ~~MATTER~~ GENIUS PRODUCTS, INC.

WeAll ~~have~~of the ~~disclosed~~operations inof ~~prior~~the ~~reports~~Company ~~filed~~relate ~~with~~to the ~~Securities~~activity ~~and~~of ~~Exchange~~the Distributor. We ~~Commission~~account afor ~~complaint filed~~our ~~against~~30% ~~the~~investment ~~Company~~ in the ~~Circuit~~Distributor using ~~Court~~the ofequity ~~Cook~~method ~~County~~of accounting, ~~Illinois~~pursuant byto ~~Falcon~~Accounting ~~Picture~~Principles ~~Group~~Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in ~~LLC~~Common Stock” (“~~Falcon~~APB No. 18”). On our consolidated statement of operations, ~~and~~we ~~the~~record ~~related~~our ~~counterclaim~~30% ~~filed~~share byof the ~~Company~~Distributor’s ~~against~~profit ~~Falcon~~(loss) ~~and~~as ~~its~~equity in ~~owner~~net earnings (loss) from Distributor, adjusted for basis differences and ~~Carl~~costs ~~Amari.~~incurred ~~There~~by ~~have~~the ~~been~~Distributor noon ~~material~~behalf ~~developments~~of inthe ~~these~~Company. Per ~~matters~~the requirements of APB No. ~~For~~18, we periodically assess whether a ~~complete~~decrease ~~description~~in value of the ~~facts~~investment ~~and~~has ~~circumstances~~occurred ~~surrounding~~which ~~this~~is ~~litigation,~~other ~~please~~than ~~see~~temporary ~~the~~and ~~disclosure~~which inshould ~~our Annual~~be ~~Report~~recognized onimmediately ~~Form~~as ~~10-K~~an ~~for~~impairment loss. Under the ~~year~~equity ~~ended~~method of ~~December 31~~accounting, ~~2007~~only ~~under~~our ~~Part I,~~investment ~~Item 3.,~~in ~~“Legal~~and amounts due to and from the ~~Proceedings”,~~Distributor ~~which~~have isbeen ~~incorporated~~included ~~herein~~as byan ~~reference.~~asset in our consolidated balance sheets.

~~ENTERTAINMENT~~The Company ~~RESOURCE~~does ~~MATTER~~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.

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. Revenues

~~ITEM~~The Company 1Ahad no revenue for the three and nine months ended September 30, 2008 and the three and nine months ended September 30, 2007. All ~~RISK~~of ~~FACTORS~~the revenue is reflected in the results of operations of the Distributor. The Distributor generated net revenue of $77.2 million net of sales returns, discounts and allowances of $31.5 million for the three months ended September 30, 2008 versus net revenue of $93.4 million net of sales returns, discounts and allowances of $42.1 million for the three months ended September 30, 2007. The Distributor generated net revenue of $250.1 million net of sales returns, discounts and allowances of $112.3 million for the nine months ended September 30, 2008 versus net revenue of $289.2 million net of sales returns, discounts and allowances of $106.2 million for the nine months ended September 30, 2007.

~~There~~The Distributor’s ~~are~~net norevenue ~~material~~attributable ~~changes~~to ~~from~~TWC titles for the ~~risk~~three and nine months ended September 30, 2008 were $47.6 million and $156.7 million, respectively, a decrease of $3.4 million (or 6.7%) and $36.2 million (or 18.8%), respectively, as compared to the three and nine months ended September 30, 2007. The quality of the U.S. box office performance for the TWC titles is one of the principal factors ~~previously~~that ~~disclosed~~contribute to changes in ~~our~~revenues attributable ~~Annual~~to ~~Report~~TWC ontitles. TWC titles released during the three and ~~Form 10-K~~nine ~~for~~months ended September 30, 2008 included, among others, Superhero, Rogue, The Promotion, Pulse 2, Blueberry Knights, Tortoise, Thai Chi Master, Last Winter, and Where in the ~~year~~World is Osama Bin Laden?, The Mist and The Great Debaters. These titles represented approximately 55% of the Distributor’s third quarter net revenue. The U.S. box office revenues generated by all TWC titles released during the three and nine months ended September ~~December 31~~30, 2008 declined by 7% and 20%, respectively, as compared to the three and nine months ended September 30 2007. We also experienced a higher rate of returns due to the weaker slate of releases.

~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~ 25

~~None~~Net revenue from non-TWC titles for the three and nine months ended September 30, 2008 were $29.6 million and $93.4 million, respectively, a decrease of $12.8 million (or 30.2%) and $2.9 million (or 3.0%), respectively, as compared to the three and nine months ended September 30, 2007. The decrease in net revenues for the three and nine months ended September 30, 2008 was primarily due to a reduced slate of holiday-themed titles released in the third quarter of 2008, as compared to the third quarter of 2007.

23Cost of Revenues

~~Table~~The Company did not have any costs of ~~Contents~~revenues for the three and nine months ended September 30, 2008 or for the three months and nine months ended September 30, 2007. All of the costs of revenues are reflected in the results of operations of the Distributor.

~~ITEM~~Costs 3of revenues for the Distributor consist primarily of 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. ~~DEFAULTS~~Participation ~~UPON~~expenses ~~SENIOR~~related ~~SECURITIES~~to TWC’s distribution agreement are calculated based on SOP 00-2 whereby such costs of revenues are amortized using the film forecast method over a period of two years.

~~None~~The Distributor’s costs of revenues were $111.6 and $289.3 million for the three and nine months ended September 30, 2008, respectively, as compared to $86.6 million and $262.6 million for the three and nine months ended September 30, 2007, respectively. The primary factor for the $25 million (or 28.9%) and $26.7 million (or 10.2%) increase in costs of revenues for the three and nine months ended September 30, 2008, respectively, was an increase in participation expenses related to TWC and non-TWC titles which resulted from, among other things, product mix. In addition, amortization of intangibles and film library increased by $8.1 million or 578.6% for the three months ended September 30, 2008, as compared to the three months ended September 30, 2007. This increase resulted from a $5.7 million impairment charge related to certain co-production titles, an increase of $3.0 million in amortization of film library based on an evaluation of fair value and re-alignment of company resources, offset by a decrease of $0.6 million in amortization of intangibles due to the write off of certain intangible assets which were deemed to be impaired in previous quarters of 2008. Amortization of intangibles and film library increased by $15.5 million or 534.5% for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. This increase resulted from an impairment charge of $7.1 million related to certain co-production titles. In addition, the Distributor increased the amortization of the film library by $4.2 million based on re-alignment of company resources, and recognized an impairment of intangible assets of $4.2 million based on an evaluation of the fair market value of the related assets.

~~ITEM~~The increase in costs of revenues for the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, was partially offset by a reduction in product costs and supply chain costs of $4.2 million ~~SUBMISSION~~and OF$4.5 ~~MATTERS~~million, TOrespectively, Aand ~~VOTE~~a OFreduction ~~SECURITY~~in ~~HOLDERS~~marketing and advertising costs of $5.1 million and $12.1 million, respectively. The reduction in such costs was primarily driven by the Distributor’s reduced revenues, efficiencies in managing costs and the implementation of strict budgetary controls.

~~On February 17, 2008, James G. Ellis, who had previously been appointed as a director by the~~Operating 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. Expenses

~~ITEM~~The Company 5had selling, general and administrative expenses of $1.2 ~~OTHER~~million ~~INFORMATION~~and $3.9 million for the three and nine months ended September 30, 2008, respectively, as compared to $1.3 million and $3.9 million for the three and nine months ended September 30, 2007, respectively.

~~None~~The Company’s 30% equity in the net loss of the Distributor was $13.8 and $27.4 million for the three and nine months ended September 30, 2008 as compared to $3.0 million and $6.6 million for the three and nine months ended September 30, 2007. Included within the Company’s 30% equity in the net loss of the Distributor for the nine months ended September 30, 2008 was $6.2 million resulting from the Distributor recording an impairment of its goodwill and intangible assets.

~~ITEM~~An independent 6financial and strategic advisory firm engaged by the Company determined the fair value of the Distributor as of September 30, 2008, which resulted in the Company recording a further impairment charge of $1.1 ~~EXHIBITS~~million for the three months ended September 30, 2008, and $36.0 million for the nine months ended September 30, 2008 as the Company concluded that an other than temporary decline had occurred in the fair value of the Distributor as of September 30, 2008.

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.*

Other Income and Expense

*The Company ~~Filed~~had ~~herewith~~other income of $0.8 million and $2.3 million for the three and nine months ended September 30, 2008, respectively, versus other expense of $0.03 million and other income of $0.5 million for the three and nine months ended September 30, 2007, respectively. Other income reflects the re-measurement of the Class W Option Liability. The Company also had interest income of $0.1 million and $0.4 million for the three and nine months ended September 30, 2008 versus $0.09 million and $0.2 million for the three and nine months ended September 30, 2007.

24 26

~~Table~~LIQUIDITY AND ofCAPITAL ~~Contents~~RESOURCES

~~SIGNATURES~~At September 30, 2008, the Company had cash balances of $1.8 million and the Distributor had cash and restricted cash balances of $10.1 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.

~~Pursuant~~The Distributor has limited access to ~~the~~additional ~~requirements~~capital and has used its maximum availability under its current credit facility which was $20.6 million as of September 30, 2008. In the ~~Securities~~event ~~Exchange~~that ~~Act~~non-TWC ofrevenue ~~1934~~increase, resulting in increased non-TWC receivables, the ~~registrant~~Distributor’s ~~duly~~availability will increase ~~caused~~under ~~this~~its ~~report~~current credit facility. Notwithstanding, near term cash needs are met through support from TWC. Payments to beTWC ~~signed~~under onthe ~~its~~TWC Distribution ~~behalf~~Agreement byare due 45 days from the ~~undersigned~~last day in the calendar month. As needed, ~~thereunto~~these ~~duly~~terms ~~authorized~~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.

	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)

As a result of the recent economic conditions (including a decrease in consumer confidence resulting in lower spending levels) and a reduced slate of pictures, the Distributor has experienced a significant reduction in net revenues and liquidity issues. In addition, the Distributor is currently not in compliance with certain terms, conditions and covenants of the Amended Credit Agreement, and also is in a dispute with TWC relating to payments under the TWC Distribution Agreement. Based on current operating results, the Distributor will fall short of generating enough cash flow from continuing operations to timely meet its financial commitments and obligations. In addition, the financing historically provided by TWC will not be available to the Distributor effective January 1, 2009. Currently, the Distributor is carefully evaluating all capital and operational expenditures on a go forward basis, including an internal restructuring of its resources and overhead to decrease its operating expenses. Further, the Distributor is also in discussions with its lender and TWC to cure and/or resolve such instances of non-compliance and disputes. The Distributor is pursuing these options to alleviate the liquidity shortfall position that it currently finds itself in. At this time, the Distributor is unable to conclude if the aforementioned actions being taken will be successful. If the Distributor is unable to cure such instances of non-compliance under the Amended Credit Agreement, the Distributor’s lender could, among other remedies, cease to extend future loans to the Distributor, accelerate any amounts owed by the Distributor under the Amended Credit Agreement and/or foreclose on its security interest in the Distributor’s assets. If the Distributor is unable to successfully resolve its disputes with TWC, TWC could seek to terminate the TWC Distribution Agreement. In either such case and/or if the Distributor is unable to successfully reduce its overhead costs in the near future, the Distributor’s ability to generate sufficient cash flows to continue its operations and service its obligations under the credit facility may be adversely affected. As the Company relies solely on the Distributor to fund its operations and is also the guarantor of the Distributor’s credit facility, any adverse impact on the operations and liquidity of the Distributor could also adversely impact the Company’s results of operations and liquidity.

25SUBSEQUENT EVENTS

PURCHASE AND SALE AGREEMENT

On January 1, 2009 (the “Quadrant Transaction Closing Date”), the Company, the Distributor, TWC Holdings, Weinstein GP Holdings, W-G Holding (collectively, W-G Holding, TWC Holdings and Weinstein GP Holdings being referred to herein as the “TWC Parties”), Quadrant Management, Inc. (“Quadrant”) and GNPR Investments LLC, an affiliate of Quadrant (“GNPR Investments”), entered into a Purchase and Sale Agreement (the “Purchase Agreement”) in connection with the restructuring of the Distributor’s distribution relationship with TWC and the sale by the TWC Parties of substantially all of their respective shares and ownership interests in the Company and the Distributor (the “Quadrant Transaction”).

Pursuant to the Purchase Agreement and effective as of the Quadrant Transaction Closing Date, the Distributor and TWC agreed to settle all monetary obligations owing to TWC by the Distributor on an accrued basis for all distribution activity through September 30, 2008 pursuant to the Distribution Agreement between the Distributor and TWC (as amended, the “TWC Distribution Agreement”). In connection with such settlement, (i) the Distributor issued to TWC a promissory note in the principal amount of $20 million (the “TWC Note”), which is payable on January 1, 2011 and accrues interest at a rate of 5% per annum, (ii) the Distributor agreed to pay to TWC up to an additional $43.3 million, from the Quadrant Transaction Closing Date through February 2010, subject to the satisfaction by TWC of certain conditions set forth in the Purchase Agreement and (iii) the Distributor agreed to pay to TWC a further amount to the extent the estimate of amounts payable from October through and including December 2008 is less than the actual amounts determined to be payable for such period, based on the monthly accounting statements for such periods and subject to audit by TWC (to the extent such estimate exceeds the actual amounts determined to be payable for such period, such excess may be offset by the Distributor against future amounts owed to TWC). Subject to the Distributor’s satisfaction of the aforementioned payment obligations, all remaining amounts owed by the Distributor to TWC through December 31, 2008 shall be reduced to zero and shall be extinguished.

Also pursuant to the Purchase Agreement and effective as of the Quadrant Transaction Closing Date, (i) the TWC Parties sold to GNPR Investments an aggregate of 122,010,252 Class W Units of the Distributor (representing a 60% ownership interest in the Distributor) and the TWC Note for $20 million, and (ii) the TWC Parties sold to the Company an aggregate of 100 shares of the Company’s Series W Preferred Stock (representing 100% of the issued and outstanding shares of such Series W Preferred Stock). Immediately following the Quadrant Transaction Closing Date, the TWC Parties collectively retained 20,335,042 Class W Units of the Distributor, representing a 10% ownership interest in the Distributor; provided that in connection with such sale, the TWC Parties transferred to the applicable purchaser all of its rights to assert any management, control or voting rights over the Distributor.

In consideration for the sale of the Series W Preferred Stock, the Company issued to TWC Holdings two warrants (the “TWC Warrants”) entitling TWC Holdings to purchase in the aggregate 27,043,636 shares of the Company’s common stock (representing 10% of the fully-diluted shares of the Company immediately following the Quadrant Transaction Closing Date). The first of the TWC Warrants has a term of six (6) years, entitles TWC Holdings to purchase, for an exercise price of $0.0001 per share, up to 13,521,818 shares of the Company’s common stock and becomes exercisable in twelve (12) equal monthly installments commencing on January 1, 2010. The second of the TWC Warrants has a term of seven (7) years, entitles TWC Holdings to purchase, for an exercise price of $0.0001 per share, up to 13,521,818 shares of the Company’s common stock and becomes exercisable in twelve (12) equal monthly installments commencing on January 1, 2011. The vesting of shares under each of the TWC Warrants is conditioned on the effectiveness of the amended and restated TWC Distribution Agreement and TWC continuing to be in the principal business of producing, distributing, licensing and acquiring theatrical motion pictures, with unvested shares subject to forfeiture in the event that TWC terminates such agreement or ceases to engage in such business activities.

AMENDED TWC DISTRIBUTION AGREEMENT

Pursuant to the Purchase Agreement and effective as of the Quadrant Transaction Closing Date, the Distributor and TWC entered into an Amended and Restated Distribution Agreement (the “Amended TWC Distribution Agreement”), amending and restating the TWC Distribution Agreement. The Amended TWC Distribution Agreement provides for, among other things, (i) the grant to the Distributor of the exclusive right, in the United States and its territories, to distribute, design, manufacture, advertise, publicize, promote and market TWC-owned or controlled motion picture titles, with TWC retaining digital distribution rights to such titles; (ii) a term expiring on December 31, 2010, subject to extension by mutual consent until December 31, 2011; (iii) an increase in the distribution fee payable to the Distributor for theatrical titles released on home video after January 1, 2009; (iv) the elimination of all performance-based adjustments to the distribution fee payable to the Distributor (i.e., adjustments based on the level of home video sales of a title as compared to theatrical box office performance); (v) the addition of provisions requiring that all Distributor home video inventory created on or after October 1, 2008 and unsold at the end of the term be purchased by TWC at Distributor’s cost, with all inventory created prior to such date and unsold at the end of the term to be delivered to TWC at no cost; (vi) the pre-approval by TWC of the outsourcing (and the Distributor’s right to recoup outsourced costs) of certain distribution services; (vii) an increase in the Distributor’s permissible returns reserve; (viii) the elimination of provisions requiring the Distributor to maintain dedicated staff for the distribution of TWC product; (ix) the elimination of provisions requiring the Distributor to present content acquisition opportunities to TWC before the Distributor engages in such opportunities; (x) additional rights of the Distributor to recoup the costs of all approved third party manufacturing, distribution and marketing expenses, including all supply-chain expenses; (xi) the addition of potential incentive payments to TWC if certain distribution fees are earned by the Distributor from January 1, 2009 through December 31, 2010, subject to certain terms and conditions; (xii) the ability of the Distributor to cross-collateralize and recoup up to $7.5 million of unrecouped distribution and marketing expenses each month (up to $10 million for the period from October 1, 2009 through March 31, 2010), subject to certain terms and conditions; (xiii) the requirement to deliver to TWC monthly accounting statements within forty (40) days after the end of each month; (xiv) the elimination of provisions allowing TWC to terminate the agreement based on performance levels of the Distributor, such that TWC retains the right to terminate the Amended TWC Distribution Agreement only upon material default, an insolvency event or certain change of control events; (xv) the elimination of TWC’s right and/or obligation to “buy back” the distribution rights granted to the Distributor, with all such distribution rights terminating on expiration or termination of the term; (xvi) the elimination of “most favored nation” clauses in favor of TWC, except with respect only to distribution fees payable to the Distributor.

EXCHANGE AGREEMENT AND OTHER QUADRANT TRANSACTION DOCUMENTS

Exchange Agreement

Pursuant to the Purchase Agreement, the Company, GNPR Investments and the TWC Parties entered into an Exchange Agreement (the “Exchange Agreement”), pursuant to which GNPR Investments and the TWC Parties agreed, subject to obtaining all necessary approvals from the Company’s Board of Directors and stockholders, to transfer to the Company all of their respective Class W Units of the Distributor in exchange for shares of a newly created Series A Interim Convertible Preferred Stock of the Company, which Series A Convertible Preferred Stock would entitle (i) GNPR Investments to convert their preferred shares into shares of the Company’s common stock representing 60% of all issued and outstanding common shares and (ii) the TWC Parties to convert their preferred shares into shares of the Company’s common stock representing 10% of all issued and outstanding common shares. The transactions contemplated by the Exchange Agreement were consummated effective as of January 15, 2009, and, as a result, effective as of such date, the Distributor became a wholly-owned subsidiary of the Company.

Amendment to Distributor LLC Agreement

Pursuant to the Purchase Agreement, the parties agreed to amend and restate the Distributor’s Amended and Restated Limited Liability Company Agreement upon the consummation of, and to reflect, the transactions contemplated in the Exchange Agreement, subject to obtaining any necessary Company Board of Directors and/or stockholder approvals in connection with such amendments.

Amendment to Credit Agreement

In connection with the Quadrant Transaction and effective as of December 31, 2008, the Distributor entered into a Limited Consent and Amendment No. 3 to Amended and Restated Credit Agreement (the “Credit Agreement Amendment”) with Société Générale, as administrative agent, collateral agent and L/C Issuer, the lenders party thereto, and Alliance & Leicester Commercial Finance plc (collectively, the “Lenders”). The Credit Agreement Amendment amends the existing Amended and Restated Credit Agreement, dated as of November 1, 2007 (as amended, the “Credit Agreement”).

Pursuant to the Credit Agreement Amendment, among other things, (i) the Lenders consented to the Quadrant Transaction, (ii) the maturity date of the credit facility was set at August 31, 2009; (iii) the total commitment of the revolving credit facility is subject to reduction from $37.5 million to $30 million on March 31, 2009, and to $25 million on June 30, 2009; (iv) the percentage of receivables that count towards establishing the Distributor’s borrowing base is reduced over time from 80% currently to 65% as of June 30, 2009 and thereafter; (v) the interest rate for each LIBOR Loan and Base Rate Loan (each as defined in the Credit Agreement Amendment) are increased to set amounts of 4% and 3%, respectively; and (vi) additional financial covenants of the Distributor are added, requiring the Distributor to maintain certain minimum Borrowing Base Percentages and OIBDA (each as defined in the Credit Agreement Amendment).

Other Transaction Agreements

Pursuant to the Purchase Agreement, the Company also entered into a Stockholder Rights Agreement with TWC Holdings and GNPR Investments, pursuant to which (i) GNPR Investments granted to TWC Holdings the right to participate, on a pro rata basis, in a proposed bona fide sale or transfer by GNPR Investments of any equity securities of the Company; (ii) TWC Holdings and GNPR Investments agreed to vote for any proposed acquisition of the Company approved by the Company’s Board of Directors and a majority of its common stockholders; and (iii) TWC Holdings granted to the Company a right of first refusal with respect to any proposed sale by TWC Holdings of any of its equity securities of the Company (with such right of first refusal transferring to GNPR Investments if the Company declines to exercise such right), in each case subject to limited exceptions.

In addition, the Company also entered into a Registration Rights Agreement with TWC Holdings and GNPR Investments, pursuant to which the Company agreed to register for resale the shares of Company common stock issuable (i) upon conversion of the Series A Interim Convertible Preferred Stock that was issued to TWC Holdings and GNPR Investments upon the consummation of the transactions contemplated by the Exchange Agreement and/or (ii) upon the exercise of the TWC Warrants. Pursuant to the Registration Rights Agreement, the Company agreed to file an initial registration statement with the Securities and Exchange Commission no later than the forty-fifth (45th) day after the Quadrant Transaction Closing Date.

Pursuant to the Purchase Agreement and effective as of the Closing Date, each of (i) that certain Master Contribution Agreement, dated as of December 5, 2005, by and among the Company, TWC Holdings and TWC and (ii) that certain Registration Rights Agreement, dated on or about July 21, 2006, between the Company and TWC, were terminated in their entirety.

QUADRANT SERVICES AGREEMENT

On January 2, 2009, the Special Committee of the Board of Directors of the Company, on behalf of the Company, entered into a letter agreement (the “Restructuring Services Agreement”) with Quadrant, pursuant to which the Company agreed to pay to Quadrant $4 million in cash (by no later than January 2, 2009) in consideration for restructuring services provided by Quadrant since September 2008, including, among other services, securing $20 million in debt financing for the Company and the Distributor, negotiating the restructuring of the Distributor’s payment obligations to TWC and negotiating and obtaining Société Générale’s consent to the Quadrant Transaction.

NOTE AND WARRANT PURCHASE AGREEMENT

On February 17, 2009, the Company and the Distributor entered into a Note and Warrant Purchase Agreement (the “Note and Warrant Purchase Agreement”) with certain institutional investors (the “Investors”), pursuant to which, among other things, (i) the Distributor issued to the Investors promissory notes with an aggregate principal balance of $5 million (the “Investor Notes”) and (ii) the Company issued to the Investors five-year warrants to purchase an aggregate of up to 1,109,073,910 shares of the Company’s Common Stock at an exercise price of $0.0001 per share (the “Investor Warrants”). Pursuant to the terms of the Note and Warrant Purchase Agreement, the Company and the Distributor may engage in subsequent closings and issue an aggregate of up to $9.5 million of Investor Notes and an aggregate of up to 1,984,587,356 Investor Warrants.

The principal amounts of the Investor Notes are due and payable on December 31, 2010 and accrue interest at a rate of 5% per annum as of February 17, 2009. At the Distributor’s option and provided that the expiration date of the Amended TWC Distribution Agreement is extended to no earlier than December 31, 2011, the maturity date of the Investor Notes may be extended until December 31, 2011, in which case the Investor Notes shall accrue interest at a rate of 10% per annum for such extension period. Repayment of all of the Investor Notes is subordinated to amounts owed by the Distributor to Société Générale.

The Investor Warrants are mandatorily exercisable at such time that the Company has sufficient authorized Common Stock to allow for the exercise of the Investor Warrants and the conversion of the Company’s Series A Interim Convertible Preferred Stock.

The Company is obligated to register for resale the shares of Common Stock issuable upon exercise of the Investor Warrants on a registration statement to be filed within forty-five (45) days after the closing of the Note and Warrant Purchase Agreement; provided that if the Company takes material steps toward terminating the registration of its Common Stock under the Exchange Act by May 30, 2009, the obligation to file the registration statement will be delayed for one year.

The Company intends to use the proceeds of the Investor Notes to repay existing indebtedness or for other general corporate purposes.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 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 September 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.

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

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

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

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

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

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

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

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

Changes in Internal Control over Financial Reporting

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

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

FALCON PICTURE GROUP MATTER

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

ITEM 1A.

RISK FACTORS

Except for the risk factors discussed above, there are no other material changes from the risk factors previously disclosed in our Annual Report on Form 10-K/A 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

None.

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

Certificate of Designation of Series A Interim Convertible Preferred Stock of Genius Products, Inc., filed with the Delaware Secretary of State on January 14, 2009 (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2009).

3.3

First Amendment to Certificate of Designation of Series A Interim Convertible Preferred Stock of Genius Products, Inc., filed with the Delaware Secretary of State on February 13, 2009 (Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2009).

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

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

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

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

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

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

* Filed herewith.

SIGNATURES

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

	GENIUS PRODUCTS, INC.,
	a Delaware corporation

Dated: March 30, 2009	By: /s/ Trevor Drinkwater
	Trevor Drinkwater
	President and Chief Executive Officer
	(Principal Executive Officer)

Dated: March 30, 2009	By: /s/ Edward J. Byrnes
	Edward J. Byrnes
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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