Summary of GENIUS PRODUCTS INC

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

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

NATURE OF BUSINESS

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

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

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

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

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

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

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

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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES

FAIR VALUE OF FINANCIAL INSTRUMENTS.
The carrying amounts of cash and cash equivalents, prepaid expenses, accounts payable, accrued expenses, and Class W Option Liability approximate the fair value thereof.

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

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

CLASS W OPTION LIABILITY
The Company records the Class W Option Liability at fair value in accordance with Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("FAS 157"), which the Company adopted beginning on January 1, 2008. The Company has utilized a lattice valuation model to simulate future stock movements of the Company's Common Stock in order to determine the fair value of the Class W Option Liability. The assumptions used in preparing such model include, among other things, inputs such as volatility, risk-free interest rates, dividend yield, expected time of redemption and assessment of counterparty risk.

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

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

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

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

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

RESULTS OF OPERATIONS OF GENIUS PRODUCTS, INC.

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

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

Revenues

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

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

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

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

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

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

Costs and expenses

Cost of Revenues

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

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

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

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

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

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

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

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

Operating Expenses

The Company had selling, general and administrative expenses of $1.3 million and $2.6 million for the three and six months ended June 30, 2008, respectively, versus $1.5 million and $2.5 million for the three and six months ended June 30, 2007, respectively.

The Company's 30% equity in the net loss of the Distributor was $8.8 and $13.6 million for the three and six months ended June 30, 2008 versus $1.0 million and $3.6 million for the three and six months ended June 30, 2007. Included within the Company's 30% equity in the net loss of the Distributor for the three and six months ended June 30, 2008 was $6.2 million resulting from the Distributor recording an impairment to its goodwill and intangible assets.

In the second quarter of 2008, the Company hired an independent financial and strategic advisory firm to determine the fair value of the Distributor as of June 30, 2008, which resulted in the Company recording an impairment charge of $34.9 million for the three and six months ended June 30, 2008, as the Company concluded that an other than temporary decline had occurred in the fair value of the Distributor as of June 30, 2008.

Other Income and Expense

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

LIQUIDITY AND CAPITAL RESOURCES

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

We may consider additional issuances of equity and/or debt financing to fund future growth opportunities. The Company is reliant on the Distributor to pay certain costs. The Distributor has limited access to additional capital and has used its maximum availability under its current credit facility which was $16.5 million as of June 30, 2008. Accordingly, near term cash needs are met through support from TWC. Payments to TWC under the TWC Distribution Agreement are due 45 days from the last day in the calendar month. As needed, these terms are extended anywhere from 15 to 45 days in order to provide flexibility and manage cash flows. The Distributor expects TWC to continue to provide such flexibility through at least December 31, 2008. In addition, the financing historically provided by TWC will not be available to the Distributor effective January 1, 2009.

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