UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




-----------------------------------------


FORM
10-QSB


-----------------------------------------






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




FOR THE
QUARTERLY PERIOD ENDED DECEMBER 31, 2007




o
            TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
      SECURITIES EXCHANGE ACT OF 1934




FOR THE
QUARTERLY PERIOD FROM _____ TO _________ .






Commission
File # 000-51055




RED
MILE ENTERTAINMENT, INC.


(Exact
name of registrant as specified in its charter)




Delaware
            20-4441647(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification Number)




4000
Bridgeway, Suite 101


Sausalito,
CA 94965


(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)




(415)
339-4240


(ISSUER
TELEPHONE NUMBER)




Securities
registered pursuant to Section 12(b) of the Act: None




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No o




Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act. Yes o No [ X
]





Number of
shares of the registrant's common stock outstanding as of February 13, 2008 is:
15,952,005.





Transitional
Small Business Disclosure Format (check one) Yes o No [ X
]














1











Table
of Contents
 
 
 
 PagePART
      I
              FINANCIAL
      INFORMATIONITEM
    1.
              FINANCIAL
      STATEMENTS
              3ITEM 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
              18ITEM 3.
              CONTROLS
      AND PROCEDURES
              25PART II
              OTHER
      INFORMATIONITEM
      1A.
              RISK
      FACTORS
              26ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES
              31ITEM
      6.
              EXHIBITS
              32SIGNATURE
      PAGE
              33







2








Part I.
FINANCIAL INFORMATION






ITEM
1. Financial Statements






RED MILE ENTERTAINMENT, INC.
AND SUBSIDIARIES




Condensed
      Consolidated Balance SheetsDecember
      31, 2007
              
              
              March
      31, 2007Assets
              
              (Unaudited)Current
      assets:Cash
      and cash equivalents
              
              $
              1,368,988
              
              
              $
              1,912,992Accounts
      receivable, net of reserves of $875,964 and $265,765
              
              
              2,314,642
              
              
              
              245,843Inventory,
      net
              
              
              348,128
              
              
              
              77,232Prepaid
      expenses and other assets
              
              
              14,595
              
              
              
              302,431Current
      portion of issuance costs on senior secured convertible
      debentures
              
              
              -
              
              
              
              305,226Software
      development costs and advanced royalties
              
              
              5,059,713
              
              
              
              6,072,849Total
      current assets
              
              
              9,106,066
              
              
              
              8,916,573Property
      and equipment, net
              
              
              181,976
              
              
              
              241,171Long
      term portion of  issuance costs on senior secured convertible
      debentures, net
              
              
              -
              
              
              
              176,321Intangible assets, net
              
              
              81,958
              
              
              
              114,240Other
      assets
              
              
              427,999
              
              
              
              313,244Total
      assets
              
              $
              9,797,999
              
              
              $
              9,761,549Liabilities, and stockholders’
      deficitCurrent
      liabilities:Accounts
      payable
              
              $
              1,392,670
              
              
              $
              994,675Accrued
      liabilities
              
              
              2,008,908
              
              
              
              1,124,398Deferred
      revenue
              
              
              576,395
              
              
              
              -Other current
      liabilities
              
              
              190,080
              
              
              
              -Total
      current liabilities
              
              
              4,168,053
              
              
              
              2,119,073Senior
      secured convertible debentures
              
              
              -
              
              
              
              8,244,000Total
      liabilities
              
              
              4,168,053
              
              
              
              10,363,073Common
      stock, $0.01 par value, authorized 100,000,000 shares; 15,952,005 and
                9,661,740 shares outstanding, respectively
              
              
              159,520
              
              
              
              96,617Additional
      paid-in capital
              
              
              36,358,847
              
              
              
              16,518,164Accumulated
      other comprehensive income
              
              
              2,986
              
              
              
              1,885Accumulated
      deficit
              
              
              (30,891,407
              )
              
              
              (17,218,190
              )Total
      stockholders’ equity (deficit)
              
              
              5,629,946
              
              
              
              (601,524
              )Total
      liabilities and stockholders’ equity (deficit)
              
              $
              9,797,999
              
              
              $
              9,761,549




The
accompanying notes are an integral part of these unaudited condensed financial
statements.





3




RED MILE
ENTERTAINMENT, INC. AND SUBSIDIARIES




Condensed
Consolidated Statements of Operations


(Unaudited)




Three
      months ended December 31,2007
              
              
              2006Revenues,
      net
              
              $
              5,704,034
              
              
              $
              502,503Cost
      of sales
              
              
              6,314,875
              
              
              
              1,322,570Gross
      margin
              
              
              (610,841
              )
              
              
              (820,067
              )Operating
      expensesResearch and
      development costs
              
              
              442,333
              
              
              
              143,551General
      and administrative costs
              
              
              1,156,000
              
              
              
              785,961Sales,
      marketing and business development costs
              
              
              428,511
              
              
              
              496,694Total
      operating expenses
              
              
              2,026,844
              
              
              
              1,426,206Net
      loss before other income (expense) and provision for income
      taxes
              
              
              (2,637,685
              )
              
              
              (2,246,273
              )Debt
      conversion inducement costs
              
              
              -
              
              
              
              -Beneficial
      debt conversion costs
              
              
              -
              
              
              
              -Interest
      income (expense), net
              
              
              8,806
              
              
              
              (46,771
              )Amortization
      of senior secured convertible debentures issuance costs
              
              
              -
              
              
              
              (52,599
              )Other
      income (expense), net
              
              
              (190,080
              )
              
              
              -Net
      loss before income tax expense
              
              
              (2,818,959
              )
              
              
              (2,345,643
              )Income
      tax expense
              
              
              -
              
              
              
              -Net
      loss
              
              
              (2,818,959
              )
              
              
              (2,345,643
              )Accretion
      on redeemable convertible preferred
stock
              
              
              -
              
              
              
              (31,726
              )Net
      loss attributable to common
      shareholders
              
              $
              (2,818,959
              )
              
              $
              (2,377,369
              )Net
      loss per common share, basic and
      diluted
              
              $
              (0.18
              )
              
              $
              (0.27
              )Shares
      used in computing basic and diluted loss per
      share
              
              
              15,952,005
              
              
              
              8,729,297








The
accompanying notes are an integral part of these unaudited condensed financial
statements.





4




RED MILE ENTERTAINMENT, INC.
AND SUBSIDIARIES




Condensed
Consolidated Statements of Operations


(Unaudited)




Nine
      months ended December 31,2007
              
              
              2006Revenues,
      net
              
              $
              9,137,350
              
              
              $
              829,253Cost
      of sales
              
              
              11,342,119
              
              
              
              1,935,825Gross
      margin
              
              
              (2,204,769
              )
              
              
              (1,106,572
              )Operating
      expensesResearch and
      development costs
              
              
              1,038,426
              
              
              
              334,371General
      and administrative costs
              
              
              2,749,295
              
              
              
              2,104,621Sales,
      marketing and business development costs
              
              
              2,350,805
              
              
              
              1,076,179Total
      operating expenses
              
              
              6,138,526
              
              
              
              3,515,171Net
      loss before other income (expense) and provision for income
      taxes
              
              
              (8,343,295
              )
              
              
              (4,621,743
              )Debt
      conversion inducement costs
              
              
              4,318,286
              
              
              
              -Beneficial
      debt conversion costs
              
              
              662,902
              
              
              
              -Interest
      income (expense), net
              
              
              (80,255
              )
              
              
              (37,251
              )Amortization
      of senior secured convertible debentures issuance costs
              
              
              78,399
              
              
              
              52,599Other
      income (expense), net
              
              
              (190,080
              )
              
              
              -Net
      loss before income tax expense
              
              
              (13,673,217
              )
              
              
              (4,711,593
              )Income
      tax expense
              
              
              -
              
              
              
              -Net
      loss
              
              
              (13,673,217
              )
              
              
              (4,711,593
              )Accretion
      on redeemable convertible preferred stock
              
              
              -
              
              
              
              (101,200
              )Net
      loss attributable to common shareholders
              
              $
              (13,673,217
              )
              
              $
              (4,812,793
              )Net
      loss per common share, basic and diluted
              
              $
              (1.02
              )
              
              $
              (0.60
              )Shares
      used in computing basic and diluted loss per share
              
              
              13,378,805
              
              
              
              8,058,190






The
accompanying notes are an integral part of these unaudited condensed financial
statements.








5




RED MILE ENTERTAINMENT INC.
AND SUBSIDIARIES




Condensed
Consolidated Statements of Cash Flows


(Unaudited)





Nine
      months ended December 31,2007
              
              
              2006Cash
      flows from operating activities:Net
      loss
              
              $
              (13,673,217
              )
              
              $
              (4,711,593
              )Adjustments to
      reconcile net loss to net cash used in operating
    activities:Depreciation
              
              
              156,015
              
              
              
              84,512Amortization of
      software development costs
              
              
              4,180,123
              
              
              
              252,263Amortization of
      senior secured convertible debenture issuance costs
              
              
              76,307
              
              
              
              52,599Amortization of
      intangibles                                                      `
              
              
              32,282
              
              
              
              -Loss on
      disposal of assets
              
              
              1,970
              
              
              
              -Impairment of
      inventory
              
              
              410,044
              
              
              
              140,540Impairment of
      software development and licensing costs
              
              
              1,776,252
              
              
              
              1,268,031Stock
      based compensation
              
              
              355,832
              
              
              
              243,009Reserve
      for price protection and bad debt expense
              
              
              610,197
              
              
              
              115,331Beneficial debt
      conversion costs
              
              
              662,902
              
              
              
              -Debt
      conversion inducement costs
              
              
              4,318,286
              
              
              
              -Liquidated
      damage charges
              
              
              190,080
              
              
              
              -Changes
      in current assets and liabilitiesAccounts
      receivable
              
              
              (2,678,996
              )
              
              
              (158,892
              )Inventory
              
              
              (680,939
              )
              
              
              (189,699
              )Prepaid
      expenses and other current assets
              
              
              287,836
              
              
              
              (9,859
              )Software
      development costs
              
              
              (4,943,238
              )
              
              
              (4,570,822
              )Other
      assets
              
              
              -
              
              
              
              (44,521
              )Accounts
      payable
              
              
              397,995
              
              
              
              190,056Accrued
      liabilities
              
              
              1,039,791
              
              
              
              32,274Deferred
      revenue
              
              
              576,395
              
              
              
              (27,500
              )Net cash used in operating
      activities
              
              $
              (6,904,083
              )
              
              $
              (7,334,271
              )
 Cash
      flows from investing activities:Purchases of
      marketable securities
              
              
              -
              
              
              
              -Sales
      of marketable securities
              
              
              -
              
              
              
              10,313Acquisition of
      property and equipment
              
              
              (99,268
              )
              
              
              (262,834
              )Cash
      paid for other investment
              
              
              (114,755
              )
              
              
              -Net Cash flows used in investing
      activities
              
              $
              (214,023
              )
              
              $
              (252,521
              )Cash
      flows from financing activities:Proceeds from
      sales of preferred stock and warrants
              
              
              -
              
              
              
              2,645,000Proceeds from
      exercise of warrants
              
              
              -
              
              
              
              859,916Cost of
      redeemable convertible preferred stock issuances
              
              
              -
              
              
              
              (165,624
              )Proceeds from
      sales of common stock, net of costs
              
              
              4,295,527
              
              
              
              -Proceeds from
      issuance of senior secured convertible debentures
              
              
              -
              
              
              
              8,244,000Costs
      from issuance of senior secured convertible debentures
              
              
              -
              
              
              
              (595,483
              )Proceeds from
      issuance of convertible promissory notes, net of costs
              
              
              2,277,000
              
              
              
              -Net
      cash provided by financing activities
              
              
              6,572,527
              
              
              
              10,987,809Effect
      of exchange rate changes on cash
              
              
              1,575
              
              
              
              1,547Net
      increase (decrease) in cash
              
              $
              (544,004
              )
              
              $
              3,402,564Cash
      and cash equivalents, beginning of period
              
              $
              1,912,992
              
              
              $
              769,926Cash
      and cash equivalents, ending of period
              
              $
              1,368,988
              
              
              $
              4,172,490Supplemental
      Disclosure of Non-Cash Financing Transactions


Accretion
      of redeemable preferred stock and foreign
      currency  adjustment
              
              $
              
              
              
              $
              101,200Conversion
      of senior secured convertible debentures
              
              
              8,244,000
              
              
              
              -Accrued
      interest on senior secured convertible debentures....
              
              $
              155,281
              
              
              
              -Debt
      issuance costs related to the issuance of the senior secured convertible
      debentures
              
              $
              528,240
              
              
              
              -Conversion
      of convertible promissory notes
              
              $
              2,400,000
              
              
              
              -Relative
      fair value of warrants issued for conversion of promissory
      notes
              
              $
              662,902
              
              
              
              -Relative
      fair value of warrants issued for preferred stock
              
              
              -
              
              
              $
              423,788Conversion
      of Series A Redeemable Convertible Preferred Stock, net of offering
      costs
              
              
              -
              
              
              $
              10,344,446Conversion
      of Series B and C Redeemable Convertible Preferred Stock, net of offering
      costs
              
              
              -
              
              
              $
              4,655,257Cancellation
      of common stock
              
              
              -
              
              
              $
              (110,000
              )




The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements


6










RED
MILE ENTERTAINMENT, INC.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)




NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Business — Red Mile
Entertainment, Inc. (“Red Mile” or “the Company”) was incorporated in Delaware
in August of 2004. The Company is a developer and publisher of interactive
entertainment software across multiple hardware platforms, with a focus on
creating or licensing intellectual properties.  The Company sells its
games directly to distributors, retailers, and video rental companies in North
America. In Europe and Australia, the Company either sells its games directly to
distributors or licenses its games with major international game co-publishers
in exchange for payment to the Company of either development fees or guaranteed
minimum payments. The guaranteed minimum payments are recoupable by the
distributor or co-publisher against amounts owed computed under the various
agreements. Once the distributor or co-publisher recoups the guaranteed minimum
payments, the Company is entitled to additional payments as computed under the
agreements. The Company operates in one business segment, interactive software
publishing.





Going Concern — The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern. However, the
Company has an accumulated deficit of $30,891,407at December 31, 2007, and
has incurred negative cash flows from operations since inception.




The
Company shipped its first products in August and September of calendar 2005
generating its initial revenue. The Company expects that sales growth from
existing as well as new products will continue. The continuation of the Company
as a going concern is dependent upon the continued financial support of current
shareholders, and new investors, of which management cannot make any
assurances.




The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities or any other adjustment that might result from
these uncertainties.





Basis of Presentation— The
unaudited condensed consolidated financial statements of the Company have been
prepared in accordance with the instructions for Form 10-QSB and Article 10 of
Regulation SX. The March 31, 2007 balance sheet was derived from audited
financial statements filed with our 10-KSB as of March 31, 2007 and therefore
may not include all the information and disclosures necessary for a presentation
of the Company’s financial position, results of operations and cash flows in
conformity with generally accepted accounting principals in the United States of
America. In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary for a fair
statement of the Company’s financial position, results of operations and cash
flows. The results of operations for an interim period are not necessarily
indicative of the results for the full year. The financial statements should be
read in conjunction with the audited financial statements and notes thereto
contained in the Company’s Annual Report on Form 10-KSB for the fiscal year
ended March 31, 2007.





On
January 30, 2007, the company amended its Certificate of Incorporation to affect
a 1 for 3 reverse stock split of the company’s common stock. The unaudited
condensed consolidated financial statements for the current and prior periods
have been adjusted to reflect the change in the number of shares.




Principles of Consolidation —
The consolidated financial statements of Red Mile Entertainment, Inc. include
the accounts of the Company, and its wholly-owned subsidiaries, 2WG Media, Inc.,
Roveractive Ltd., and Red Mile Australia Pty Ltd. All inter-company accounts and
transactions have been eliminated in consolidation.




Use of
Estimates – The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such estimates include sales
returns and allowances, price protection estimates, retail sell through
estimates, provisions for doubtful accounts, accrued liabilities, estimates
regarding the recoverability of advanced royalties, inventories, software
development costs, long lived assets, estimates of when a game in development
has reached technological feasibility, and deferred tax assets. These estimates
generally involve complex issues and require us to make judgments, involve
analysis of historical and future trends, can require extended periods of time
to resolve, and are subject to change from period to period. Actual results
could differ materially from our estimates.




Concentration of Credit Risk —
Financial instruments which potentially subject us to concentration of credit
risk consist of temporary cash investments and accounts receivable. During the
periods ended December 31, 2007 and March 31, 2007, we had deposits in excess of
the Federal Deposit Insurance Corporation (“FDIC”) limit at one U.S. based
financial institution and at one financial institution outside of the
U.S.






7







At December 31, 2007 and March 31,
2007, Red Mile had uninsured bank balances and certificates of deposit totaling
approximately $1,267,000 and $1,731,000, respectively.




Receivable Allowances–
Receivables are stated net of allowances for price protection, returns,
discounts, doubtful accounts, allowances for value added services by retailers,
and deductions for cooperative marketing costs.




We may
grant price protection to, and sometimes allow product returns from our
customers and customers of our distributors under certain
conditions.  Therefore, we record a reserve for potential price
protection and returns at each balance sheet date.  The provision
related to this allowance is reported in net revenues.  Price
protection means credits relating to retail price markdowns on our products
previously sold by us to customers or customers of our
distributors.  We base these allowances on expected trends and
estimates of future retail sell through of our games.  Actual price
protection and product returns may materially differ from our estimates as our
products are subject to changes in consumer preferences, technological
obsolescence due to new platforms or competing products.  At December
31, 2007 and March 31, 2007, Red Mile had price protection and returns reserves
of $404,333 and $171,841, respectively. Changes in these factors could change
our judgments and estimates and result in variances in the amount of reserve
required.  If customers request price protection in amounts exceeding
the rate expected and if management agrees to grant it, then we may incur
additional charges against our net revenues, but we are not required to grant
price protection to retailers who purchase our products from distributors and
the decision to grant price protection is discretionary. At December 31, 2007
and March 31, 2007, Red Mile had allowance reserves for doubtful accounts of
$471,108 and $93,924, respectively. We may also incur cooperative marketing
costs for our products owed to our customers, or to customers of our
distributors. These costs are deducted from accounts receivable due to us from
our customers. At December 31, 2007 and March 31, 2007, Red Mile had cooperative
marketing deductions of $102,500 and $0, respectively, recorded as deductions
from accounts receivable. We may also incur value added service costs for
certain services performed by retailers carrying our products. At December 31,
2007 and March 31, 2007, Red Mile had allowance reserves for value added
services of $523 and $0, respectively.




Intangible Assets— Intangible
assets primarily consist of a website and customer list in conjunction with the
acquisition of the assets of Rover Active, Ltd.  These intangible
assets are being amortized by the straight-line method over their useful lives,
ranging from 12 to 120 months.  Amortization of these intangible
assets totaled $10,760 and $32,281 for the three and nine months ended December
31, 2007 and $0 and $0 for the three and nine months ended December 31, 2006,
respectively.





Other Assets –Other assets
consist primarily of our 18% equity investment in the outstanding shares of IR
Gurus Pty Ltd/Transmission Games, a developer of interactive video games
headquartered in Melbourne, Australia.





Inventories — Inventories,
consisting primarily of finished goods and components, are made up of materials
(including manufacturing royalties paid to console manufacturers), labor charges
from third parties, and freight-in. Inventories are stated at the lower of cost
or market, using the first-in, first-out method.  The Company performs
periodic assessments to determine the existence of obsolete, slow moving and
non-saleable inventories, and records necessary provisions to reduce such
inventories to net realizable value.  We recognize all inventory
reserves as a component of cost of goods sold.  All inventories are
produced by third party manufacturers, and substantially all inventories are
located at third party warehouses on consignment in North America.




Software Development Costs and
Advanced Royalties — Software development costs and advanced royalties to
developers include milestone payments or advances on milestone payments made to
software developers and other third parties and direct labor
costs.  Advanced royalties also include license payments made to
licensors of intellectual property we license.




Software
development costs and advanced royalty payments made to developers are accounted
for in accordance with Statement of Financial Standards No. 86, “Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed”.




Software development costs and advanced royalty payments to
developers are capitalized once technological feasibility of a product is
established and such costs are determined to be recoverable. For products where
proven technology exists, this may occur very early in the development cycle.
Factors we consider in determining when technological feasibility has been
established include (i) whether a proven technology exists; (ii) the quality and
experience levels of the development studio developing the game; (iii) whether
the game is a sequel to an already completed game which has used the same or
similar technology; and (iv) whether the game is being developed with a proven
underlying game engine. Technological feasibility is evaluated on a
product-by-product basis. Capitalized costs for those products that are
cancelled or abandoned are charged immediately to cost of sales. The
recoverability of capitalized software development costs and advanced royalty
payments to developers are evaluated based on the expected performance of the
specific products for which the costs relate.




Commencing
upon a product’s release, capitalized software development costs and advanced
royalty payments to developers are amortized to cost of sales using the greater
of the ratio of actual cumulative revenues during the quarter to the total of
actual cumulative revenues during the quarter plus projected future revenues for
each game or straight-line over the remaining estimated life of the
product.






8






For
products that have been released in prior periods, we evaluate the future
recoverability of capitalized amounts on a quarterly basis or when events or
circumstances indicate the capitalized costs may not be recoverable. The primary
evaluation criterion is actual title performance.




Significant
management judgments and estimates are utilized in the assessment of when
technological feasibility is established, as well as in the ongoing assessment
of the recoverability of capitalized development costs and advanced royalty
payments to developers.  In evaluating the recoverability of
capitalized software development costs and advanced royalty payments to
developers, the assessment of expected product performance utilizes forecasted
sales quantities and prices and estimates of additional costs to be incurred or
expensed.




If
revised forecasted or actual product sales are less than and/or revised
forecasted or actual costs are greater than the original forecasted amounts
utilized in the initial recoverability analysis, the net realizable value may be
lower than originally estimated in any given quarter, which could result in a
larger charge to cost of sales in future quarters or an impairment charge to
cost of sales.




Advanced
royalty payments made to licensors of intellectual property are capitalized and
evaluated for recoverability based on the expected performance of the underlying
games for which the intellectual property was licensed. Any royalty payments
made to licensors of intellectual property determined to be unrecoverable
through future sales of the underlying games are charged to cost of
sales.





Revenue Recognition —
 The Company’s
revenue recognition policies are in accordance with the American Institute Of
Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2
“Software Revenue Recognition” as amended by SOP 98-9 “Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions”.  SOP 81-1 “Accounting for Performance of Construction
Type and Certain Production-Type Contracts”.  Staff Accounting
Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as
revised by SAB No. 104, “Revenue Recognition”.  EITF 01-09 “Accounting
for  Consideration Given by a Vendor to a Customer”, and FASB
Interpretation No. 39 “Offsetting of amounts related to certain contracts an
interpretation of APB No. 10 and FASB Statement No. 105, and  EITF
06-03, “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement”.





We
evaluate revenue recognition using the following basic criteria and recognize
revenue when all four criteria are met:





(i)
Evidence of an arrangement: Evidence of an arrangement with the customer that
reflects the terms and conditions to deliver products must be present in order
to recognize revenue.





(ii)
Delivery: Delivery is considered to occur when the products are shipped and the
risk of loss and reward has been transferred to the customer. At times for us,
this means when the product has shipped to the retailer from the distributor
that we sold to on consignment.





(iii)
Fixed or determinable fee: If a portion of the arrangement fee is not fixed or
determinable, we recognize that amount as revenue when the amount becomes fixed
or determinable.





(iv)
Collection is deemed probable: We conduct a credit review of each customer
involved in a significant transaction to determine the creditworthiness of the
customer. Collection is deemed probable if we expect the customer to be able to
pay amounts under the arrangement as those amounts become due. If we determine
that collection is not probable, we recognize revenue when collection becomes
probable (generally upon cash collection).





Product
revenue, including sales to distributors, retailers, co-publishers, and video
rental companies is recognized when the above criteria are met. We reduce
product revenue for estimated future returns and price protection, which may
occur with our distributors, retailers, retailers of our distributors, and
co-publishers. In the future, we may decide to issue price protection credits
for either our PC or console products. When evaluating the adequacy of sales
returns and price protection reserve allowances, we analyze our historical
returns on similar products, current sell-through of distributor and retailer
inventory, current trends in the video game market and the overall economy,
changes in customer demand , acceptance of our products, and other
factors.  At December 31, 2007 and March 31, 2007, our returns and
price protection reserves was $404,333 and $171,841, respectively.





In North
America, we primarily sell our games to distributors who in turn sell to
retailers that both our internal sales force, our outsourced independent sales
group, and distributors’ sales force generate orders from.  These
distributors will charge us a distribution fee based on a percentage of the
prevailing wholesale price of the product. We record revenues net of these
distribution fees.





Red Mile
may receive minimum guaranteed amounts or other up front cash amounts from a
co-publisher or distributor prior to delivery of the products. Pursuant to SOP
81-1, the completed contract method of accounting is used as these minimum
guarantee amounts usually do not become non-refundable until the co-publisher or
distributor accepts the completed product. These receipts are credited to
deferred revenue when received. Revenues are recognized as the product is
shipped and actual amounts are earned. In the case of distributors who hold our
inventory on consignment, revenues are recognized once the product leaves the
distributor warehouse.









9







Periodically,
we review the deferred revenue balances and, when the product is no longer being
actively sold by the co-publisher or distributor, or when our forecasts show
that a portion of the revenue will not be earned out, this excess is taken into
revenue. For the three and nine months ended December 31, 2007, $1,089,136 and
$2,764,587 in deferred revenue was recognized in revenue.





Red Mile
may be required to levy European Value Added Tax (“VAT”) and Australian Goods
and Services Tax (“GST”) on shipments of our products within the EU member
countries, and Australia, respectively. Pursuant to EITF 06-03, “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement”, Red Mile has included the taxes assessed by
a governmental authority that is directly imposed on a revenue-producing
transaction on a gross basis (included in revenues and costs). For the three and
nine months ended December 31, 2007, $167,300 in taxes assessed by a
governmental authority were included revenue and cost of sales.





Our
revenues are subject to material seasonal fluctuations. In particular, revenues
in our third fiscal quarter will ordinarily be significantly higher than other
fiscal quarters. Revenues recorded in our third fiscal quarter are not
necessarily indicative of what our reported revenues will be for an entire
fiscal year.





Reclassification– Certain
prior period items have been reclassified to conform to the current period’s
presentation.




Foreign Currency Translation —
The functional currency of our foreign subsidiary is its local currency. All
assets and liabilities of our foreign subsidiary are translated into U.S.
dollars at the exchange rate in effect at the end of the period, and revenue and
expenses are translated at weighted average exchange rates during the period.
The resulting translation adjustments are reflected as a component of
accumulated other comprehensive income (loss) in shareholders’ equity. The
functional currency of the Company’s assets and liabilities denominated in
foreign currencies is the US dollar.





Stock-Based Compensation Plans
— On April 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) 123 (revised 2004), “Share-Based Payment” (the
“Statement or “SFAS 123(R)”), requiring us to recognize expense related to the
fair value of our
stock-based compensation awards. Prior to April 1, 2006, the Company used the
minimum value method in estimating the value of employee option grants as
allowed by SFAS 123, amended by SFAS 148 “ Accounting for stock based
compensation - transition and disclosure ”. Accordingly, we have elected
to use the prospective transition method as permitted by SFAS 123(R) and
therefore have not restated our financial results for prior periods. Under this
transition method, stock-based compensation expense for the three and nine
months ended December 31, 2007 includes compensation expense for all stock
option awards granted subsequent to March 31, 2006 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). We recognize
compensation expense for stock option awards on a straight-line basis over the
requisite service period of the award.




In March
2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting
Bulletin (“SAB”) No. 107, which offers guidance on SFAS 123(R). SAB 107 was
issued to assist preparers by simplifying some of the implementation challenges
of SFAS 123(R) while enhancing the information that investors receive. SAB 107
creates a framework that is premised on two overarching themes: (a) considerable
judgment will be required by preparers to successfully implement SFAS 123(R),
specifically when valuing employee stock options; and (b) reasonable
individuals, acting in good faith, may conclude differently on the fair value of
employee stock options. Key topics covered by SAB 107 include valuation models,
expected volatility and expected term. The Company is applying the principles of
SAB 107 in conjunction with its adoption of SFAS 123(R) for stock options
granted up to December 31, 2007.





In
December 2007, the SEC issued SAB No. 110, which expresses the views of the
staff regarding the use of a "simplified" method, as discussed in SAB No. 107 in
developing an estimate of expected term of stock options in accordance with
Statement of Financial Accounting Standards No. 123(R). Under SAB No. 110, the
staff will continue to accept, under certain circumstances, the use of the
simplified method permitted under SAB No. 107 beyond December 31,
2007.





Prior to
the adoption of SFAS 123(R), we applied SFAS 123, amended by SFAS 148,
“Accountingfor Stock-Based
Compensation, Transition and Disclosure” (“SFAS 148”), which allowed
companies to apply the existing accounting rules under Accounting Principles
Board No. 25,    “accounting for Stock Issued to
Employees ,” (APB 25) and related Interpretations. In general, as the
exercise price of options granted under these plans was equal to the market
price of the underlying common stock on the grant date, no stock-based employee
compensation cost was recognized in our statements of operations for periods
prior to the adoption of SFAS 123(R). As required by SFAS 148, prior to the
adoption of SFAS 123(R), we disclosed reported net loss which included
stock-based compensation expense of $0, calculated in accordance with APB 25,
and then pro forma net loss as if the fair-value-based compensation expense
calculated in accordance with SFAS 123 using the minimum value method had been
recorded in the financial statements.




Loss Per Share — We compute
basic and diluted loss per share amounts pursuant to the Statement of Financial
Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” Basic loss per
share is computed using the weighted average number of common shares outstanding
during the period.






10






Diluted
loss per share is computed using the weighted average number of common and
potentially dilutive securities outstanding during the period. Potentially
dilutive securities consist of the incremental common shares that could be
issued upon exercise of stock options, warrants, convertible promissory notes,
convertible preferred stock, and senior secured convertible debentures (using
the treasury stock method). Potentially dilutive securities are excluded from
the computation if their effect is anti-dilutive.




The
following table summarizes the weighted average shares outstanding for the nine
months ending December 31, 2007 and 2006:







Nine
      Months Ended December 31,2007
            
            
            2006Basic
      weighted average shares outstanding
            
            
            13,378,805
            
            
            
            8,058,190Total
      stock options outstanding
            
            
            1,776,007
            
            
            
            1,210,410Less:
      anti-dilutive stock options due to loss
            
            
            (1,776,007
            )
            
            
            (1,210,410
            )Total
      redeemable convertible preferred stock outstanding
            
            
            -
            
            
            
            -Less:
      anti-dilutive redeemable convertible preferred stock due to
      loss
            
            
            -
            
            
            
            -Total
      senior secured convertible debentures outstanding
            
            
            -
            
            
            
            1,570,286Less:
      senior secured convertible debentures outstanding due to
      loss
            
            
            -
            
            
            
            (1,570,286
            )Total
      warrants outstanding
            
            
            3,374,327
            
            
            
            3,319,510Less:
      anti-dilutive warrants due to loss
            
            
            (3,374,327
            )
            
            
            (3,319,510
            )Diluted
      weighted average shares outstanding
            
            
            13,378,805
            
            
            
            8,058,190







The
following table summarizes the weighted average shares outstanding for the three
months ending December 31, 2007 and 2006:







Three
      Months Ended December 31,2007
            
            
            2006Basic
      weighted average shares outstanding
            
            
            15,952,005
            
            
            
            8,729,297Total
      stock options outstanding
            
            
            1,776,007
            
            
            
            1,210,410Less:
      anti-dilutive stock options due to loss
            
            
            (1,776,007
            )
            
            
            (1,210,410
            )Total
      redeemable convertible preferred stock outstanding
            
            
            -
            
            
            
            -Less:
      anti-dilutive redeemable convertible preferred stock due to
      loss
            
            
            -
            
            
            
            -Total
      senior secured convertible debentures outstanding
            
            
            -
            
            
            
            1,570,286Less:
      senior secured convertible debentures outstanding  due to
      loss
            
            
            -
            
            
            
            (1,570,286
            )Total
      warrants outstanding
            
            
            3,374,327
            
            
            
            3,319,510Less:
      anti-dilutive warrants due to loss
            
            
            (3,374,327
            )
            
            
            (3,319,510
            )Diluted
      weighted average shares outstanding
            
            
            15,952,005
            
            
            
            8,729,297







NOTE 2 — ACCRUED LIABILITIES




December
      31, 2007
            
            
            March
      31, 2007Accrued
      professional fees
            
            $
            157,352
            
            
            $
            217,370Accrued
      royalties payable
            
            
            1,087,574
            
            
            
            50,676Accrued
      bonuses
            
            
            142,313
            
            
            
            87,314Accrued
      milestone payments to developers
            
            
            114,732
            
            
            
            420,000Accrued
      paid time off
            
            
            44,258
            
            
            
            38,741Other
      miscellaneous
            
            
            66,404
            
            
            
            93,203Accrued
      marketing costs
            
            
            270,000
            
            
            
            175,000Accrued
      commissions
            
            
            126,275
            
            
            
            42,094Total
            
            $
            2,008,908
            
            
            $
            1,124,398






11







NOTE
3 — DEFERRED REVENUE





December
      31, 2007
            
            
            March
      31, 2007Jackass:
      The Game (Nintendo DS Platform)
            
            
            384,109
            
            
            
            —Lucinda
      Green’s Equestrian Challenge
            
            $
            192,286
            
            
            $
            —Total
            
            $
            576,395
            
            
            $
            —







NOTE
4 — OTHER CURRENT LIABILITIES





December
      31, 2007
            
            
            March
      31, 2007Contingent
      Registration Payment Liability
            
            
            190,080
            
            
            
            —Total
            
            $
            190,080
            
            
            $
            —





On July
18, 2007, holders of the Company’s convertible promissory  notes
converted their notes into shares of common stock of the Company. In connection
with the conversion, holders of the notes received 0.2 warrants with a strike
price of $0 per share for every common share they received. These warrants
contained a provision for automatic cancellation of the warrants if the Company
would be able to realize a liquidity event in Canada on or before March 18,
2008. The Company has determined that it will be unable to realize a liquidity
event by the aforementioned date. Accordingly, in accordance with EITF 19-2,
“Accounting For Registration Payments Arrangements”, the company has recorded a
contingent liability representing the value of 192,000 shares of common stock of
the Company that the Company would be required to deliver after March 18, 2008
upon exercise of the warrants.





NOTE
5 — COMMITMENTS





In the
normal course of business, we enter into contractual arrangements with
third-parties for the development of products, as well as for the license rights
to intellectual property and or for the license rights to underlying game
engines. Under these agreements, we commit to provide specified payments to a
developer, or intellectual property holder, based upon contractual
arrangements.  For our development agreements, we will often
renegotiate development fees if the costs to complete the product has differed
from what was contractually agreed to. In these cases, we may increase the
amounts of payments made to developers before a new contractual agreement is
reached. Typically, the payments to third-party developers are conditioned upon
the achievement by the developers of contractually specified development
milestones. These payments to third-party developers and intellectual property
holders may be deemed to be advances and are recoupable against future royalties
earned by the developer or intellectual property holder based on the sale of the
related game. Assuming all contractual provisions are met, the total future
minimum commitments for development contracts, intellectual property holders,
and licensors of underlying game engines in place as of December 31, 2007 are
approximately $22,319,167, which is scheduled to be paid as
follows:








Year ended March
      31,2008
            
            $
            3,466,7372009
            
            $
            10,733,6142010
            
            $
            8,118,816Total
            
            $
            22,319,167




Lease
Commitments




Operating Leases — Red Mile leases its office
space under a twelve month operating lease expiring March 2008 with a monthly
base rental of $6,240 per month. Rent expense for the nine months ended December
31, 2007 was $56,860.




The
minimum future lease payment for the above lease as of December 31, 2007 is
$18,720 for the fiscal year ended March 31, 2008.  In order to renew
the lease for an additional 12 month period, as of April 1, 2008, the monthly
base rent will increase to $6,427 per month.





NOTE
6 — STOCK OPTIONS AND STOCK COMPENSATION





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:







12






Period
      Ended December 31, 2007Expected
      life (in years)
              4.2 -
      6.5Risk
      free rate of return
              4.0%
      - 5.13%Volatility
              50%
      - 80%Dividend
      yield
              -Forfeiture
      rate
              9%
      - 15%




The
following table sets forth the total stock-based compensation expense for the
three months ended December 31, 2007 and December 31, 2006.  All
research and development costs, and sales, marketing, and business development
costs in this table are related to employees. General and administrative costs
are broken out between those related to consultants and those related to
employees.





Three
      Months Ended December 31, 2007
            
            
            Three
      Months
              Ended
              December
      31, 2006Research
      and development costs
            
            $
            5,658
            
            
            $
            6,948Sales,
      marketing, and business development costs
            
            
            4,568
            
            
            
            18,067General
      and administrative costs—consultants
            
            
            3,395
            
            
            
            130,133General
      and administrative costs—employees
            
            
            103,336
            
            
            
            7,398Stock-based
      compensation before income taxes
            
            
            116,957
            
            
            
            162,546Income
      tax benefit
            
            
            -
            
            
            
            -Total
      stock-based employee compensation expense after income
    taxes
            
            $
            116,957
            
            
            $
            162,546








The
following table sets forth the total stock-based compensation expense for the
nine months ended December 31, 2007 and December 31, 2006.  All
research and development costs, and sales, marketing, and business development
costs in this table are related to employees. General and administrative costs
are broken out between those related to consultants and those related to
employees.







Nine
      Months Ended December 31, 2007
            
            
            Nine
      Months
              Ended
              December
      31, 2006Research
      and development costs
            
            $
            16,914
            
            
            $
            14,332Sales,
      marketing, and business development costs
            
            
            19,137
            
            
            
            28,624General
      and administrative costs—consultants
            
            
            4,834
            
            
            
            192,655General
      and administrative costs—employees
            
            
            314,947
            
            
            
            7,398Stock-based
      compensation before income taxes
            
            
            355,832
            
            
            
            243,009Income
      tax benefit
            
            
            -
            
            
            
            -Total
      stock-based employee compensation expense after income
    taxes
            
            $
            355,832
            
            
            $
            243,009







During
the nine and three months ended December 31, 2007, the Company granted employee
stock options for 15,000 common shares and non-employee stock options for 30,000
common shares exercisable at $2.35 per share expiring in 10 years and vesting
over 3 years.  The options were valued at $71,301 or $1.58 per option
using a Black-Scholes option pricing method that uses the assumptions noted
above.





On April
8, 2005, the Board of Directors approved the Red Mile Entertainment 2005 Stock
Option Plan which permits the Board of Directors to grant to officers,
directors, employees and third parties incentive stock options (“ISOs”),
non-qualified stock options, restricted stock and stock appreciation rights
(“SARs”). At March 15, 2007, the Board of Directors and stockholders holding a
majority of voting power voted to authorize the board of directors, at its
discretion, to amend the 2005 Stock Option Plan.









13






Under the
Amended Plan, options for 2,500,000 shares of common stock are reserved for
issuance.  At December 31, 2007, 723,993 options are available for
grant.  Options have been issued with exercise prices of between $0.66
and $4.00 per share as follows:








Options
      Outstanding
            
            
            Options
      ExercisableNumber
            
            
            Weighted
      Avg.
            
            
            Weighted
      Avg.
            
            
            Number
            
            
            Weighted
      Avg.Range
      of Exercise Prices
            
            
            Outstanding
            
            
            Remaining
      Life
            
            
            Exercise
      Price
            
            
            Exercisable
            
            
            Exercise
      Price$
            0.66
      - $1.49
            
            
            
            660,173
            
            
            
            8.04
            
            
            $
            0.71
            
            
            
            469,363
            
            
            $
            0.74$
            1.50
      - $2.37
            
            
            
            126,667
            
            
            
            8.50
            
            
            $
            2.14
            
            
            
            80,000
            
            
            $
            2.01$
            2.38
      - $4.00
            
            
            
            989,167
            
            
            
            9.21
            
            
            $
            3.90
            
            
            
            115,208
            
            
            $
            3.601,776,007
            
            
            
            
            
            
            
            
            
            
            
            664,571








Option
activity under the Amended Plan is as follows:




Options
            Shares
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Contractual Term
            
            Aggregate
      Intrinsic ValueOutstanding
      at March 31, 2006
            940,966
            
            $
            0.75Exercisable at March 31, 2006
            177,620
            
            $
            0.90Granted
            1,124,167
            
            
            3.75Forfeited or expired
            (76,388)
            
            
            2.73Outstanding at March 31, 2007
            1,988,745
            
            $
            2.28Exercisable at March 31, 2007
            607,000
            
            $
            0.83Granted
            45,000
            
            
            2.35Exercised
            (143,069)
            
            
            .71Forfeited
      or expired
            (114,669)
            
            $
            .88Outstanding
      at December 31, 2007
            1,776,007
            
            $
            2.59
            
            8.69
            
            $
            182,138Exercisable
      at December 31, 2007
            685,388
            
            $
            1.24
            
            8.07
            
            $
            136,837








In the
case where shares have been granted to third parties, the fair value of such
shares is recognized as an expense in the period issued using the Black-Scholes
option pricing model.





In the
case of shares granted to employees, the fair value of such shares is recognized
as an expense over the service period.  As of December 31, 2007, the
fair value of options issued by the Company was $2,626,385 of which $789,150 has
been forfeited. Expense recognized for the nine and three months ending December
31, 2007 and 2006 was $355,832 and $116,957, and $243,009 and $162,546,
respectively.  The unamortized cost remaining at December 31, 2007 was
$1,114,974 with a weighted average expected term for recognition of 4.47 years.
At the time of grant, the estimated fair values per option were from $0.33 to
$2.94.





During
the nine months ended December 31, 2007, 112,243 options with a $0.66 strike
price and 30,825 options with a $0.90 strike price were exercised pursuant to a
cashless provision.  The Company issued 97,952 common shares for the
options exercised.





During
the nine months ended December 31, 2007, 98,331 options with a $0.66 strike
price and 1,338 options with a $0.90 strike price expired and 15,000 options
with a strike price of $2.35 were forfeited.




NOTE 7 — COMMON STOCK





On July
18, 2007, the Company issued 1,872,600 of its common stock to a total of 69
accredited investors for an aggregate amount of $4,681,500.  The
shares were issued pursuant to an agency agreement with J.F. Mackie &
Company, Ltd. (the “Agent”).  The Agent is an independent equity
investment firm located in Calgary, Canada.  Upon the closing of the
transaction, the Company paid the Agent commissions of $320,890 and $64,523 for
related legal fees.








14








On July
18, 2007, holders of more than 66 2/3% of the $8,244,000 principal amount of
senior secured convertible debentures and $155,281 in accrued interest on the
debentures, after a proposal brought forth by the Company, voted by way of
extraordinary resolution to cancel such debentures and convert the principal and
accrued interest amounts of their debentures into shares of the Company’s stock
at $2.50 per share, thereby resulting in the conversion of the full principal
and interest amounts associated with such debentures into 3,359,713 shares of
the Company’s common stock.  With the conversion, the Company recorded
a non-cash debt inducement conversion charge of $4,318,286.





On July
18, 2007, convertible promissory notes with an aggregate principal amount of
$2,400,000 automatically converted into 960,000 of the Company’s common stock
concurrent with the closing of the purchase of 1,872,600 of the Company’s common
stock.





On
September 30, 2007, the Company issued 97,952 of its common stock in connection
with the exercise of cashless options.





NOTE
8 — WARRANTS





On July
18, 2007, the Company issued 374,520 warrants to 69 accredited investors as part
of unregistered sales of equity securities.  Each whole warrant
entitles the holder of the warrant to acquire, for no additional consideration,
one share of common stock in the event that the Company does not complete by
March 18, 2008, a liquidity transaction, as defined in the agency agreement with
the Agent.  The warrants will automatically be cancelled if the
Company completes a liquidity transaction by March 18, 2008.  At this
time, it is Management’s best estimation that a liquidity transaction is not
probable to be completed by March 18, 2008, if at all.




On July
18, 2007, concurrent with the conversion of $2,400,000 convertible promissory
notes, the Company issued 480,000 warrants.  Each whole warrant
entitles the former note holders to acquire one share of common stock at $2.75
per share until July 18, 2009.  Using the Black-Scholes option pricing
model, the fair value of such warrants issued was $662,902.  This
value has been recorded as a non-cash beneficial conversion inducement charge in
other expense.





In
addition, concurrent with the conversion of $2,400,000 convertible promissory
notes, the Company issued 0.2 of one warrant to the former note
holders.  Each whole warrant entitles the holder of the warrant to
acquire, for no additional consideration, one share of common stock in the event
that the Company does not complete by March 18, 2008, a liquidity transaction,
as defined in the agency agreement with the Agent.  The warrants will
automatically be cancelled if the Company completes a liquidity transaction by
March 18, 2008.  At this time, it is Management’s best estimation that
a liquidity transaction is not probable to be completed by March 18, 2008, if at
all.  For the three and nine months ended December 31, 2007, the
company recorded a contingent liability charge of $190,080 related to the value
of the company’s common shares to be delivered upon exercise of the
aforementioned warrants.





On July
18, 2007, upon the closing of the unregistered sales of equity securities as
described above, the Company issued the Agent and its nominees broker’s warrants
entitling it to purchase up to 215,408 shares of the Company’s common stock at
$3.00 per share until July 18, 2009.





The
following table lists the total number of warrants outstanding as of December
31, 2007.








Expiring
            
            Strike
              Price
            
            Number
      of
              Common
      sharesMay
      1, 2008
            
            $4.50
            
            585,287May
      2, 2008
            
            $4.50
            
            845,333December
      31, 2008
            
            $5.25
            
            681,779January
      18, 2009 (a)
              July
      17, 2009
              July
      18, 2009
            
            (a)
              $2.75
              $3.00
            
            566,520
              480,000
              215,408Total
            
            
            
            3,374,327




(a) The
warrants expire the earlier of a liquidity transaction or January 18,
2009.  The warrants entitle the holder to acquire common stock
for no consideration.











15





NOTE
9 — CONCENTRATIONS




Customer
base




Our
customer base includes distributors, co-publishers, and retailers of video games
in the United States, Europe, Australia, and Asia. We review the credit
worthiness of our customers on an ongoing basis, and believe that we need an
allowance for potential credit losses at December 31, 2007 of $471,108. Also
netted against accounts receivable are returns and price protection reserves on
existing receivables of $404,333 and deductions for cooperative marketing costs
of $102,500.  Account balances are charged off against the allowance
when the Company believes it is probable that accounts receivable will not be
recovered. As of December 31, 2007, we had three customers who accounted for
67.5%, 17.7%, and 5.4% of net accounts receivable.





These
customers were Navarre Corporation, Empire Interactive, and Blockbuster Video,
respectively. Navarre Corporation, Empire Interactive and Funtastic Corporation
accounted for 51.8%, 31.0% and 6.6%, respectively, of consolidated revenue
during the nine months ended December 31, 2007. As of March 31, 2007, we had two
customers who accounted for 49.1% and 28.1% of  accounts
receivable.




Operations
by Geographic Area




Our
products are sold in North America, Europe, Australia, and Asia through
third-party licensing arrangements, through distributors, and through
retailers.





The
following table displays consolidated net revenue by location during the nine
months ended December 31, 2007:





Location
            
            RevenueNorth
      America
            
            $
            5,448,205Europe
            
            
            2,939,675Australia
      and Asia
            
            
            749,470$
            9,137,350





Location of
assets




The
Company’s tangible assets excluding inventory are primarily located at its
corporate offices in Northern California and on loan to a third party developer
in Melbourne, Australia, for which the Company owns an 18% interest in.
Inventory is located at several third party warehouse facilities.




NOTE
10 — NEW ACCOUNTING PRONOUNCEMENT




EITF
06-03




In June
2006, the EITF reached a consensus on Issue No. 06-03 (“EITF 06-03”), “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation).”
EITF 06-03 provides that the presentation of taxes assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between a
seller and a customer on either a gross basis (included in revenues and costs)
or on a net basis (excluded from revenues) is an accounting policy decision that
should be disclosed. The provisions of EITF 06-03 became effective as of
December 31, 2006.  Red Mile has included the European Value Added Tax
and the Australian Goods and Services Tax that is directly imposed on a
revenue-producing transaction on a gross basis (included in revenues and
costs).  For the three and nine months ended December 31, 2007,
$167,300 in taxes assessed by a governmental authority were included revenue and
cost of sales.




SFAS
141(R) and SFAS 160




In
December 2007, the Financial Accounting Standards Board  (“FASB”)
issued Statement No. 141(Revised 2007), Business Combinations(SFAS
141(R)) and Statement No. 160, Accounting and Reporting of
Non-controlling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51 (SFAS 160). These statements will significantly
change the financial accounting and reporting of business combination
transactions and non-controlling (or minority) interests in consolidated
financial statements. SFAS 141(R) requires companies to: (i) recognize, with
certain exceptions, 100% of the fair values of assets acquired, liabilities
assumed, and non-controlling interests in acquisitions of less than a 100%
controlling interest when the acquisition constitutes a change in control of the
acquired entity; (ii) measure acquirer shares issued in consideration for a
business combination at fair value on the acquisition date; (iii) recognize
contingent consideration arrangements at their acquisition-date fair values,
with subsequent changes in fair value generally reflected in
earnings;









16






(iv) with
certain exceptions, recognize pre-acquisition loss and gain contingencies at
their acquisition-date fair values; (v) capitalize in-process research and
development (IPR&D) assets acquired; (vi) expense, as incurred,
acquisition-related transaction costs; (vii) capitalize acquisition-related
restructuring costs only if the criteria in SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, are met as of the acquisition date; and
(viii) recognize changes that result from a business combination
transaction in an acquirer’s existing income tax valuation allowances and tax
uncertainty accruals as adjustments to income tax expense. SFAS 141(R) is
required to be adopted concurrently with SFAS 160 and is effective for business
combination transactions for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008 (our fiscal 2009). Early adoption of these statements is
prohibited. We believe the adoption of these statements will have a material
impact on significant acquisitions completed after March 31, 2009.




SAB
110




In
December 2007, the Securities and Exchange Commission published SAB Staff
Accounting Bulletin (SAB) 110, which amends SAB 107 to allow for the continued
use, under certain circumstances, of the "simplified" method in developing an
estimate of the expected term of so-called "plain vanilla" stock options
accounted for under FAS 123R, Share Based Payment (FAS 123R).  SAB 110
provides that the SEC staff will accept, under certain circumstances, the use of
the simplified method beyond December 31, 2007 for "plain vanilla" options. Our
adoption of SAB 110 is not expected to have a material effect on our
consolidated financial position or results of operations.




SFAS 157




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
157), which provides guidance on how to measure assets and liabilities that use
fair value.  SFAS 157 will apply whenever another US GAAP standard
requires (or permits) assets or liabilities to be measured at fair value but
does not expand the use of fair value to any new circumstances.  This
standard also will require additional disclosures in both annual and quarterly
reports.  SFAS 157 will be effective for fiscal 2009. We are currently
evaluating the potential impact this standard may have on its financial position
and results of operations.




SFAS
159




On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). Under this Standard, we
may elect to report financial instruments and certain other items at fair value
on a contract-by-contract basis with changes in value reported in earnings. This
election is irrevocable. SFAS No. 159 provides an opportunity to mitigate
volatility in reported earnings that is caused by measuring hedged assets and
liabilities that were previously required to use a different accounting method
than the related hedging contracts when the complex provisions of SFAS No. 133
hedge accounting are not met. SFAS No. 159 is effective for years beginning
after November 15, 2007.  Management is currently evaluating the
potential impact of adopting this Standard.




FIN
48




Effective
April 1, 2007, we adopted the provisions of FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109, or FIN 48. FIN 48 provides detailed guidance for
the financial statement recognition, measurement and disclosure of uncertain
income tax positions recognized in the financial statements in accordance with
SFAS No. 109. Income tax positions must meet a “more-likely-than-not”
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods.




Upon
review and analysis by the Company, we have concluded that no FIN 48 effects are
present as of December 31, 2007 and our tax position has not materially changed
since March 31, 2007.  For the nine months ended December 31, 2007, we
did not identify and record any liabilities related to unrecognized income tax
benefits.  Therefore the adoption of FIN 48 does not impact our
financial statements for the three and nine months ended December 31,
2007.




We
recognize interest and penalties related to uncertain income tax positions in
income tax expense. No interest and penalties related to uncertain income tax
positions were accrued at December 31, 2007.  Income tax returns for
the fiscal tax year ended March 31, 2005 to the present are subject to
examination by major tax jurisdictions.





NOTE
11 — SUBSEQUENT EVENTS




On
February 11, 2008, we entered into an uncommitted revolving line of credit
agreement with Tiger Paw Capital Corporation, a corporation owned and operated
by Mr. Kenny Cheung, a member of the Company’s Board Of Directors and the owner
of approximately 9.4% of the Company's outstanding common stock (“Lender”), in
the amount of $1,000,000 ("The Line"). The Line is available for working capital
requirements. Any amounts drawn on the Line are payable on demand but in no
event later than 90 days from the date each respective draw is made. The Line is
an uncommitted obligation where Lender may decline to make advances under the
Line, or terminate the Line, at any time and for any reason without prior notice
to the Company.  The Line bears interest at the rate of 10% per annum
and is payable to Lender on demand. Advances under the Line may be pre-paid
without penalty. The line is secured by all present and future assets of the
Company and carries no financial or operating covenants.










17




RED
MILE ENTERTAINMENT, INC.




ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATIONS




This
report on Form 10-QSB includes forward-looking statements, within the meaning of
Section 21E of the Securities Exchange Act of 1934, that reflect Red Mile
Entertainment, Inc.’s current expectations about its future results,
performance, prospects and opportunities, including statements regarding the
development and publishing of interactive entertainment software for console
video game systems, personal computers and other interactive entertainment
platforms.  Where possible, we have tried to identify these
forward-looking statements by using words such as "anticipates," "believes,"
"intends," or similar expressions. We cannot assure you that we will be able to
successfully develop or publish any of these products. All forward-looking
statements made in this report are made as of the date hereof, and we assume no
obligation to update the forward-looking statements whether as a result of new
information, future events, or otherwise, other than as required by law. The
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially, including risks that our proposed
games will not be popular with consumers, that we may lose one or more of our
key customers and other risks detailed in our SEC reports, including our Form
10-KSB. Copies of these filings are available at www.sec.gov.





Liquidity
and Capital resources




During
the nine months ended December 31, 2007, we raised $7,081,500 million before
agent’s commissions in cash through private offerings.  We have used
the proceeds from the offerings for development and marketing of our interactive
game franchises and ongoing working capital requirements.




On
February 11, 2008, we entered into an uncommitted revolving line of credit
agreement with Tiger Paw Capital Corporation, a corporation owned and operated
by Mr. Kenny Cheung, a member of the Company’s Board Of Directors and the owner
of approximately 9.4% of the Company's outstanding common stock (“Lender”), in
the amount of $1,000,000 ("The Line"). The Line is available for working capital
requirements. Any amounts drawn on the Line are payable on demand but in no
event later than 90 days from the date each respective draw is made. The Line is
an uncommitted obligation where Lender may decline to make advances under the
Line, or terminate the Line, at any time and for any reason without prior notice
to the Company.  The Line bears interest at the rate of 10% per annum
and is payable to Lender on demand. Advances under the Line may be pre-paid
without penalty. The line is secured by all present and future assets of the
Company and carries no financial or operating covenants.




We
currently need to raise additional capital in order to continue operating our
business. We believe our current cash on hand of approximately $864,000, plus
our expected cash from operations and expected draws on the line of credit
facility will allow us to continue our business operations until the end of our
fiscal year. In the event that we are not successful in raising additional
capital on or before March 31, 2008, we will be unable to continue
operations.





We
anticipate needing an additional $15,000,000 to $20,000,000 to finance our
planned operations over the next 12 to 18 months. We will be unable to complete
development of our existing games or develop and publish additional games, or
consummate any acquisitions, if we are unable to raise this
capital.




In
addition to money needed to develop new games, we will also need money to fund
the expansion of our staff. It is currently anticipated we will hire one
additional employee in the next six months to support our expansion
plans.




Projections





We are
projecting our consolidated revenues will be in the range of $25 million to $28
million for fiscal 2009, and in the range of $40 million to $44 million for
fiscal 2010.





Recent
Developments





License
Agreement


On May
18, 2007, we entered into a multi-year world-wide license agreement with Frank
Miller, Inc., a New York Corporation (“FMI”).  The license grants the
Company the exclusive rights for the development, manufacturing, and publishing
of games on multiple platforms based on all current and future Sin City comic
books and collections, graphic novels, and other books owned or controlled by
FMI, including all storylines of those comic books and graphic
novels.





Definitive Agreement
..





On August
24, 2007, we entered into a definitive agreement with IR Gurus Pty Ltd. (the
“Company”), a corporation formed under the laws of Australia, and Nathan Eric
Murphy, Michael Thomas Fegan, Andrew Geoffrey Niere, Craig Philip Laughton, Ben
Byron Palmer, Ian George Cunliffe and Votraint No. 651 Pty Ltd, stockholders of
the Company (each a “Seller” and collectively, the “Sellers”), providing for the
acquisition of the remaining outstanding shares of the Company not owned by us
subject to certain closing conditions.









18







This
agreement expired on December 31, 2007 and we are currently in negotiations to
extend the term of the agreement.




RED MILE ENTERTAINMENT,
INC.




Results
of Operations




The
unaudited results of operations for the nine and three months ending December
31, 2007 and December 31, 2006 are as follows:






Summary of Unaudited Statements
of Operations


Nine
Months Ended December 31, 2007 and 2006


Summary
of Statements of Operations




2007
              
              
              2006
              
              
              %
      ChangeRevenue
              
              $
              9,137,350
              
              
              $
              829,253
              
              
              
              1,002
              %Cost
      of sales
              
              
              11,342,119
              
              
              
              1,935,825
              
              
              
              486
              %Gross
      margin
              
              
              (2,204,769
              )
              
              
              (1,106,572
              )Operating
      expenses
              
              
              6,138,526
              
              
              
              3,515,171
              
              
              
              75
              %Net
      loss before interest and provision for income taxes
              
              
              (8,343,295
              )
              
              
              (4,621,743
              )Debt
      conversion inducement costs
              
              
              4,318,286
              
              
              
              ---Beneficial
      debt conversion costs
              
              
              662,902
              
              
              
              ---Interest
      income (expense), net
              
              
              (80,255
              )
              
              
              (37,251
              )Amortization
      of senior secured convertible debenture issuance costs
              
              
              (78,399
              )
              
              
              (52,599
              )Other
      income (expense), net
              
              
              (190,080
              )
              
              
              ---Income
      tax expense
              
              
              ---
              
              
              
              ---Net
      loss
              
              
              (13,673,217
              )
              
              
              (4,711,593
              )
              
              
              190
              %Accretion
      on redeemable convertible preferred stock
              
              
              ---
              
              
              
              101,200Net
      loss attributable to common shareholders
              
              $
              (13,673,217
              )
              
              $
              (4,812,793
              )Net loss per common share
      - Basic and
      diluted
              
              $
              (1.02
              )
              
              $
              (.60
              )Shares
      used in computing basic and diluted net loss per share (in
      000’s)
              
              
              13,378,805
              
              
              
              8,058,190




19







Summary
of Unaudited Statements of Operations


Three
Months Ended December 31, 2007 and 2006


Summary
of Statements of Operations




2007
              
              
              2006
              
              
              %
      ChangeRevenue
              
              $
              5,704,034
              
              
              $
              502,503
              
              
              
              1035
              %Cost
      of sales
              
              
              6,314,875
              
              
              
              1,322,570
              
              
              
              377
              %Gross
      margin
              
              
              (610,841
              )
              
              
              (820,067
              )Operating
      expenses
              
              
              2,026,844
              
              
              
              1,426,206
              
              
              
              167
              %Net
      loss before interest and provision for income taxes
              
              
              (2,637,685
              )
              
              
              (2,246,273
              )Debt
      conversion inducement costs
              
              
              ---
              
              
              
              ---Beneficial
      debt conversion costs
              
              
              ---
              
              
              
              ---Interest
      income (expense), net
              
              
              8,806
              
              
              
              (46,771
              )Amortization
      of senior secured convertible debenture issuance costs
              
              
              ---
              
              
              
              (52,599
              )Other
      income (expense), net
              
              
              (190,080
              )
              
              
              ---Income
      tax expense
              
              
              ---
              
              
              
              ---Net
      loss
              
              
              (2,818,959
              )
              
              
              (2,345,643
              )
              
              
              20
              %Accretion
      on redeemable convertible preferred stock
              
              
              ---
              
              
              
              (31,726
              )Net
      loss attributable to common shareholders
              
              $
              (2,818,959
              )
              
              $
              (2,377,369
              )Net loss per common share
      - Basic and
      diluted
              
              $
              (.18
              )
              
              $
              (.27
              )Shares
      used in computing basic and diluted net loss per share (in
      000’s)
              
              
              15,952,005
              
              
              
              8,729,297




Revenues




Revenues
were approximately $5,704,000 and $9,137,000 during the three and nine months
ended December 31, 2007 as compared to approximately $503,000 and $829,000
during the comparable periods from 2006.  The increase is primarily
due to sales of Jackass: The Game in North America, Europe, Australia and Asia
in fiscal 2008.  During the three months ended December 31, 2007,
substantially all of our revenues came from Jackass: The Game.  For
the nine months ended December 31, 2006, our revenue consisted primarily of
sales from Aircraft Power Pack (PC) and Crusty Demons (Xbox).





Our
revenues are subject to material seasonal fluctuations. In particular, revenues
in our third fiscal quarter will ordinarily be significantly higher than other
fiscal quarters. Revenues recorded in our third fiscal quarter are not
necessarily indicative of what our reported revenues will be for an entire
fiscal year.





We
currently have two games under development which we anticipate will be ready for
shipment in fiscal years 2009 through 2010. We are developing “Heroes Over
Europe”, a sequel to Heroes of the Pacific that is set in the European theatre
(for the next generation consoles and PC) that we expect to ship in fiscal
2009.  We are also developing Sin City: The Game, and expect to ship
this game in fiscal 2010.





At
December 31, 2007, Navarre Corporation, Empire Interactive, and Blockbuster
Video accounted for approximately 67.5%, 17.7%, and 5.4%, respectively, of our
accounts receivable. For the nine months ended December 31, 2007, Navarre
Corporation, Empire Interactive, and Funtastic Ltd. accounted for 51.8%, 31.0%,
and 6.6%, respectively, of our revenue.  Accordingly, we were
materially dependent upon these customers for our revenues.  The loss
of any single significant customer, especially Navarre Corporation and Empire
Interactive, would have a material adverse effect on our results.  We
record revenues net of Navarre’s distribution fees.





Red Mile
may be required to levy European Value Added Tax (“VAT”) and Australian Goods
and Services Tax (“GST”) on shipments of our products within the EU member
countries, and Australia, respectively. Pursuant to EITF 06-03, “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement”, Red Mile has included the taxes assessed by
a governmental authority that is directly imposed on a revenue-producing
transaction on a gross basis (included in revenues and costs). For the three and
nine months ended December 31, 2007, $167,300 in taxes assessed by a
governmental authority were included revenue and cost of sales.





We are
projecting our consolidated revenues will be in the range of $25 million to $28
million for fiscal 2009, and in the range of $40 million to $ 44 million for
fiscal 2010.









20





Cost of
sales





Cost of
sales were approximately $6,315,000 and $11,342,000 during the three and nine
months ended December 31, 2007 as compared to approximately $1,323,000 and
$1,936,000 during the comparable periods from 2006.  The increase in
cost of sales as compared to the prior year is primarily the result of costs of
sales from Jackass: The Game.




For the
nine months ended December 31, 2007, cost of sales primarily include the
following: (i) the amortization of software development costs
for  Jackass: The Game; (ii) manufacturing costs of Jackass: The Game;
(iii) royalties payable on Jackass: The Game; and  (iv) impairment
costs on Jackass: The Game.





Cost of
sales for the nine months ended December 31, 2007 consisted of:





Amortization
      of capitalized software development costs and manufacturing and
      distribution costs
            
            $
            8,117,402Royalties
      to third party game developers
            
            
            883,117Write down of inventory costs to net realizable value
            
            
            410,044Write down of software development costs and advanced royalties to
      net realizable value
            
            
            1,764,256Taxes
      Collected from Customers and Remitted to governmental
      Authorities
            
            
            167,300Total
            
            $
            11,342,119





Operating
Expenses




Operating
expenses for the nine months ended December 31, 2007 and 2006, respectively,
were as follows:




Nine
      months ended
              December
      31, 2007
            
            
            Percent
              of
      total
            
            
            Nine
      months ended
              December
      31, 2006
            
            
            Percent
              Of
      total
            
            
            Percent
              IncreaseResearch
      and development costs
            
            $
            1,038,426
            
            
            
            16.9
            %
            
            $
            334,371
            
            
            
            9.5
            %
            
            
            211
            %General
      and administrative costs
            
            
            2,749,295
            
            
            
            44.8
            %
            
            
            2,104,621
            
            
            
            59.9
            %
            
            
            31
            %Marketing,
      sales and business development costs
            
            
            2,350,805
            
            
            
            38.3
            %
            
            
            1,076,179
            
            
            
            30.6
            %
            
            
            118
            %Total
      operating expenses
            
            $
            6,138,526
            
            
            
            100.0
            %
            
            $
            3,515,171
            
            
            
            100.0
            %





Research and Development
Costs





Our
research and development (R&D) expenses consist of the following: (i) costs
incurred at our third party developers for which the game has not yet reached
technological feasibility as described in FAS 86; and (ii) costs incurred in our
internal development group which are not capitalized into our games under
development. All direct game development during the year was performed by third
party developers under development and royalty contracts. These external
development costs are capitalized upon the company determining that the game has
passed the technological feasibility standard of FAS 86 and commencing upon
product release, capitalized software development costs are amortized to cost of
sales using the greater of the ratio of actual cumulative revenues during the
quarter to the total of actual cumulative revenues during the quarter plus
projected future revenues for each game or straight-line over the estimated
remaining life of the product.





Certain
internal costs are capitalized as part of the development costs of a game.
During the nine months ended December 31, 2007, approximately $354,000 of
internal costs were capitalized and approximately $1,000,000 of external costs
were expensed as incurred as costs prior to the related game reaching
technological feasibility.





Research
and development expenses were approximately $442,000 and $1,038,000 during the
three and nine months ended December 31, 2007 as compared to approximately
$144,000 and $334,000 during the three and nine months ended December 31, 2006,
an increase of approximately 208% and 211%, respectively.  Virtually
all of the costs for R&D during the nine months ended December 31, 2007,
related to costs incurred in the development of Sin City: the Game and Jackass:
The Game for the Nintendo DS prior to the related game reaching technological
feasibility.





In
general, a product goes through multiple levels of design, production, approvals
and authorizations before it may be shipped.






21





These
approvals and authorizations include concept approvals from the platform
licensors of the game concept and product content, approvals from the licensor
of the intellectual property of the game design and game play, and approvals
from the platform licensors that the game is free of all material bugs and
defects. In addition, all games are required to be rated by the Entertainment
Software Rating Board (ESRB) for their content.





Once the
aforementioned approvals have been satisfied, the game can be placed into
manufacturing at a manufacturer that must also be approved by the platform
licensor. Once a product is manufactured and inspected, it is ready to be
shipped.




One
multi-platform product, Lucinda Green’s Equestrian Challenge, shipped in late
November 2006 for the PS2 in North America, and shipped in early January 2007
for the PC. This product shipped in July 2007 in Europe and shipped in September
2007 in Australia.





Jackass:
The Game for the PSP and PS2 platforms shipped in North America in late
September 2007, and in Europe and Australia in November 2007. The Nintendo DS
version of the game shipped in January 2008.





In August
of 2006, we also began development of a sequel of Heroes of the Pacific set in
the European theatre on next generation consoles and PC (“Heroes Over
Europe”).  The game is expected to ship in our fiscal 2009
year.





On May
18, 2007, we entered into a multi-year world-wide license agreement with Frank
Miller, Inc., a New York Corporation (“FMI”). This license grants us the
exclusive rights for the development, manufacturing, and publishing of games on
multiple platforms based on all current and future Sin City comic books and
collections, graphic novels, and other books owned or controlled by FMI,
including all storylines of those comic books and graphic novels.




The funds
required to develop a new game depend on several factors, including: the target
release platform, the scope and genre of the game design, the cost of any
underlying intellectual property licenses, the length of the development
schedule, the size of the development team, the complexity of the game, the
skill and experience of the development team, the location of the development
studio, whether an underlying game engine is being licensed, and any specialized
software or hardware necessary to develop a game.





General and Administrative
Costs





General
and administrative costs were approximately $1,156,000 and $2,749,000 in the
three and nine months ended December 31, 2007 as compared to approximately
$786,000 and $2,105,000 in the three and nine months ended December 31, 2006,
respectively.  General and administrative (G&A) costs are
comprised primarily of the costs of stock options issued to employees and
consultants, employee salaries and benefits, professional fees (legal,
accounting, investor relations, and consulting), facilities expenses,
amortization and depreciation expenses, insurance costs, and travel. During the
three months ended December 31, 2007, we took a bad debt charge in the amount of
approximately $380,000 related to one of our customers, Hollywood Video, who
filed Chapter 11 protection during the quarter. Other causes of the increase
relates to increased employee salaries and the cost of stock option
expenses.  Employee salaries and the costs of stock option grants had
a year over year increase of approximately $151,000 or 29%.





We expect
that G&A cost will decrease throughout the remainder of fiscal 2008 related
to the non-recurring bad debt charge we took in our third fiscal
quarter.





Sales, Marketing and
Business Development Costs





Sales,
marketing and business development costs were approximately $429,000 and
$2,351,000 during the three and nine months ended December 31, 2007 as compared
to approximately $497,000 and $1,076,000 during the three and nine months ended
December 31, 2006, a decrease of 16% and increase of 54%,
respectively.  Sales, marketing, and business development costs
consist primarily of employee salaries, stock option expenses, employee
benefits, consulting costs, public relations costs, promotional costs, marketing
research, sales commissions, and sales support materials
costs.  Sales, marketing, and business development costs increased
year over year for the nine months ended December 31, 2007 mainly due to the
marketing campaign for Jackass: The Game and sales commissions related to
Jackass: The Game.  Marketing costs for Jackass: The Game included
costs for print media, online media, TV media, and for public relations and
trade promotions.





Other
Expense





During
the nine months ended December 31, 2007, we took a non-cash debt inducement
conversion charge of approximately $4,318,000 related to converting $8,244,000
principal amount of senior secured convertible debentures and approximately
$155,000 in accrued interest on the debentures into shares of our common stock
at a lower conversion price than the conversion price attached to the
debentures.





We also
took a non-cash charge of approximately $663,000 on the conversion of $2,400,000
in principal amount of convertible promissory notes into shares of our common
stock related to the beneficial value of warrants issued with the common stock
at the time of conversion.




22






In
addition, we took a non-cash charge of approximately $190,000 in the three and
nine months ended December 31, 2007, related to contingent liability charges on
the value of 192,000 warrants issued on July 18, 2007, that management now
believes will not be cancelled as the Company will not be able to realize a
liquidity event in Canada before March 18, 2008.





Critical
Accounting Policies and Estimates




Red
Mile's financial statements and related public financial information are based
on the application of accounting principles generally accepted in the United
States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenues, expenses, and equity amounts reported. These
estimates can also affect supplemental information contained in our external
disclosures including information regarding contingencies, risk and financial
condition.





We
believe our use of estimates and underlying accounting assumptions adhere to
GAAP and are consistently applied. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ materially from these
estimates under different assumptions or conditions. We continue to monitor
significant estimates made during the preparation of our financial
statements.




Our significant accounting policies are
summarized in Note 1 of our consolidated financial statements. While all these
significant accounting policies impact our financial condition and results of operations, we view certain
of these policies as critical. Policies determined to be critical are those
policies that have the most significant impact on our consolidated financial
statements and require management to use a greater degree of judgment and
estimates. Actual results may differ from those estimates. Our management
believes that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause a
material effect on our consolidated results of operations, financial position or
liquidity for the periods presented in this report.





Revenue
recognition




Our  revenue
recognition policies are in accordance with the American Institute Of Certified
Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2 “Software
Revenue Recognition” as amended by SOP 98-9 ”Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions” and SOP 81-1
“Accounting for Performance of Construction Type and Certain Production-Type
Contracts”.




In most
cases, we ship finished products to third party game distributors who will then
ship these products to retailers and charge us a distribution fee. Our internal
sales force, together with the distributors’ sales force and
an  outsourced independent sales group we use,  generate
orders from the retailers. In North America, shipments made to an exclusive
distributor (Navarre Corporation) are shipped under consignment, and accordingly
we do not record any revenue on these shipments until the distributor ships the
games to the retailers.  Revenue is recorded net of the distribution
fees levied by the distributor.  We also ship directly to a select few
specialty retailers and to video rental companies.





Red Mile
may receive minimum guaranteed amounts or development advances from its
distributors or co-publishers prior to and upon final delivery and acceptance of
a completed game.





Under
these agreements, such payments do not become non-refundable until such time as
the game is completed and accepted by the co-publisher(s). Pursuant to SOP 81-1,
the completed contract method of accounting is used and these cash receipts are
credited to deferred revenue when received.




In cases
where the contract with the co-publisher(s) is a development contract, revenue
is recognized once the product is completed and accepted by the co-publisher(s).
This acceptance by the co-publisher(s) is typically concurrent with approval
from the third party hardware manufacturer for those products where approval is
required from the third party hardware manufacturer.




In cases
where the agreement with the distributors or co-publishers calls for these
payments to be recouped from revenue share or royalties earned by us from sales
of the games, we do not recognize revenue from these payments until the game
begins selling. Accordingly, we recognize revenue as the games are sold by the
distributors or co-publishers using the stated revenue share or royalty rates
and definitions in the respective contract(s). Periodically, we review our
deferred revenue balances and if the product is no longer being sold or when our
current forecasts show that a portion of the revenue will not be earned out
through forecasted sales of the games, the excess balance in deferred revenue is
recognized as revenue.




Determining when and the amount of
revenue to be recognized often involves assumptions and judgments that can have
a significant impact on the timing and amount of revenue we report. For example,
in recognizing revenue, we must make assumptions as to the potential returns and
potential price protection of the product which could result in credits to distributors or retailers
for their unsold inventory. Changes in any of these assumptions or judgments
could cause a material increase or decrease in the amount of net revenue we
report in a particular period.






23




Software Development Costs and
Advanced Royalties — Software development costs and advanced royalties to
developers include milestone payments or advances on milestone payments made to
software developers and other third parties and direct labor
costs.  Advanced royalties also include license payments made to
licensors of intellectual property we license.




Software
development costs and advanced royalty payments made to developers are accounted
for in accordance with Statement of Financial Standards No. 86, “Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed”.




Software
development costs and advanced royalty payments to developers are capitalized
once technological feasibility of a product is established and such costs are
determined to be recoverable. For products where proven technology exists, this
may occur very early in the development cycle. Factors we consider in
determining when technological feasibility has been established include (i)
whether a proven technology exists; (ii) the quality and experience levels of
the development studio developing the game; (iii) whether the game is a sequel
to an already completed game which has used the same or similar technology; and
(iv) whether the game is being developed with a proven underlying game engine.
Technological feasibility is evaluated on a product-by-product basis.
Capitalized costs for those products that are cancelled or abandoned are charged
immediately to cost of sales. The recoverability of capitalized software
development costs and advanced royalty payments to developers are evaluated
based on the expected performance of the specific products for which the costs
relate.




Commencing
upon a product’s release, capitalized software development costs and advanced
royalty payments to developers are amortized to cost of sales using the greater
of the ratio of actual cumulative revenues during the quarter to the total of
actual cumulative revenues during the quarter plus projected future revenues for
each game or straight-line over the remaining estimated life of the
product.  For products that have been released in prior periods, we
evaluate the future recoverability of capitalized amounts on a quarterly basis
or when events or circumstances indicate the capitalized costs may not be
recoverable. The primary evaluation criterion is actual title
performance.




Significant
management judgments and estimates are utilized in the assessment of when
technological feasibility is established, as well as in the ongoing assessment
of the recoverability of capitalized development costs and advanced royalty
payments to developers.  In evaluating the recoverability of
capitalized software development costs and advanced royalty payments to
developers, the assessment of expected product performance utilizes forecasted
sales quantities and prices and estimates of additional costs to be incurred or
expensed.




If
revised forecasted or actual product sales are less than and/or revised
forecasted or actual costs are greater than the original forecasted amounts
utilized in the initial recoverability analysis, the net realizable value may be
lower than originally estimated in any given quarter, which could result in a
larger charge to cost of sales in future quarters or an impairment charge to
cost of sales.




Advanced
royalty payments made to licensors of intellectual property are capitalized and
evaluated for recoverability based on the expected performance of the underlying
games for which the intellectual property was licensed. Any royalty payments
made to licensors of intellectual property determined to be unrecoverable
through future sales of the underlying games are charged to cost of
sales.




Receivable Allowances–
Receivables are stated net of allowances for price protection, returns,
discounts, doubtful accounts, and deductions for cooperative marketing
costs.




We grant
price protection to, and sometimes allow product returns from our customers
under certain conditions.  Therefore, we record an allowance for price
protection and returns at each balance sheet date.  The provision
related to this allowance is reported in net revenues.  Price
protection means credits relating to retail price markdowns on our products
previously sold by us to customers.  We base these allowances on
expected trends and estimates of future retail sell through of our
games.




Actual
price protection and product returns may materially differ from our estimates as
our products are subject to changes in consumer preferences, technological
obsolescence due to new platforms or competing products.




Changes
in these factors could change our judgments and estimates and result in
variances in the amount of allowance required.  If customers request
price protection in amounts exceeding the rate expected and if management agrees
to grant it, then we may incur additional charges against our net revenues, but
we are not required to grant price protection credits to retailers who purchase
our products from distributors and the decision to grant price protection is
discretionary. We may also incur cooperative marketing costs for our products
owed to our customers, or to customers of our distributors. These costs are
deducted from accounts receivable due to us from our customers.





Inventories





Inventories
consist of materials (including manufacturing royalties paid to console
manufacturers), labor charges from third parties, and freight-in. Inventories
are stated at the lower of cost or market, using the first-in, first-out
method.  The Company performs periodic assessments to determine the
existence of obsolete, slow moving and non-saleable inventories, and records
necessary provisions to reduce such inventories to net realizable
value.  We recognize all inventory reserves as a component of cost of
goods sold.  All inventories are produced by third party
manufacturers, and substantially all inventories are located at third party
warehouses on consignment.







24





ITEM
3. CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of the Company’s
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) as of the end of the period covered by this Quarterly Report
(the “Evaluation Date”).





We do not
expect that our disclosure controls or internal controls over financial
reporting will prevent all errors or all instances of fraud.  A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system's objectives will be met.
 Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs.  Management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our company have been detected.  These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
 Because of the inherent limitation of a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected.  Additionally, controls can be circumvented by the
individual acts of  some  persons,  by collusion
of two or more people or by management override of a control. A design of a
control system is also based upon certain assumptions about potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be
detected.





Based
upon their  evaluation of our  controls,  our
Chief Executive Officer and Chief Financial Officer  have concluded
that, subject to the limitations  noted above,  the
disclosure  controls are effective providing  reasonable
assurance that material information relating to us is made known
to  management  on a
timely  basis  during the period when our reports are
being  prepared. There were no material changes in our internal
controls that occurred during the quarter covered by this report that have
materially affected, or are reasonably likely to materially affect our internal
controls.









25




PART
II. OTHER INFORMATION




ITEM
1A. RISK FACTORS






Item 1A
(“Risk Factors”) of the Company’s Form 10-KSB for the year ended March 31, 2007
sets forth information relating to important risks and uncertainties that could
materially adversely affect the Company’s business, financial condition or
operating results. Those risks factors continue to be relevant to an
understanding of the Company’s business, financial condition and operating
results. Certain of those risk factors have been revised below to provide
updated information. References to “we,” “our” and “us” in these risks factors
refer to the Company.




An
investment in our securities is highly speculative and involves a high degree of
risk. Therefore, in evaluating us and our business you should carefully consider
the risks set forth below. You should be in a position to risk the loss of your
entire investment.




Risks
Relating to Our Company





If
we are unable to raise additional financing, we will be unable to continue our
business operations and investors may not receive any portion of their
investment back.




We have
never achieved positive cash flow from operations and there can be no assurance
that we will do so in the future. We need additional financing to fund our
product development costs, our operating costs, and our sales and marketing
costs that we anticipate incurring over the next several quarters. Our current
cash on hand together with our expected cash flows from operating activities and
expected draws on our revolving line of credit will enable us to continue
operating until the end of our 2008 fiscal year. We anticipate needing an
additional $15,000,000 to $20,000,000 to bring our existing products under
development to market and finance our day to day operations.  If we
are unable to raise additional capital in the next 30 days, we will be unable to
continue our business operations and investors may not receive any portion of
their investment back.




Because
we have significant accumulated deficit and negative cash flows from operations,
our independent registered accounting firm has issued an explanatory paragraph
regarding our ability to continue as a going concern.




We have a
significant accumulated deficit and have sustained negative cash flows from
operations since our inception. The opinion of our independent registered
accounting firm for the years ended March 31, 2007 and 2006 contained an
explanatory paragraph regarding our ability to continue as a going concern. In
fact, the opinion states that these factors raise substantial doubt as to our
ability to continue as a going concern. In order for us to operate and not go
cease operations, we must generate and/or raise capital to stay operational. The
continuity as a going concern is dependent upon the continued financial support
of Kenny Cheung, a current member of our Board Of Directors and shareholder, our
other current shareholders, our current creditors, and new investors. There can
be no assurance that we will be able to generate income or raise additional
capital and there is high probability we will cease operations if we do not
raise additional capital in the next 30 days.





Because
we have only recently commenced business operations, it is difficult to evaluate
our prospects and we face a high risk of business failure.




We were
incorporated in August 2004 and shipped our first two games in our second fiscal
quarter of 2006 and an additional six games in fiscal 2007. During the nine
months ended December 31, 2007, we shipped Jackass: The Game for the Sony PS2,
Sony PSP, and Nintendo DS  platforms and an additional three PC games
from our Roveractive, Ltd. casual games subsidiary.  We therefore face
the risks and problems associated with businesses in their early stages in a
competitive environment and have a limited operating history on which an
evaluation of our prospects can be made. Until we develop our business further
by publishing and developing more games, it will be difficult for an investor to
evaluate our chances for success. Our prospects should be considered in light of
the risks, expenses and difficulties frequently encountered in the establishment
of any business in a competitive environment and in the video game and
publishing spaces.




We
have not yet generated any income and may never become profitable.




During
the years ended March 31, 2007 and 2006, and the nine months ended December 31,
2007, we incurred net losses of $8,038,894, $4,849,678, and $13,673,217,
respectively. Our ability to generate revenues and to become profitable depends
on many factors, including the market acceptance of our products and services,
our ability to control costs and our ability to implement our business strategy.
There can be no assurance that we will become or remain profitable.




If
our business plan fails, our company will dissolve and investors may not receive
any portion of their investment back.




If we are
unable to realize profitable operations, or raise sufficient capital, we will be
unable to implement our business strategy.






26







If we
cannot continue to self publish, we will have to license our games to
co-publishers, and our profit and operating margins will be lower, making it
more difficult to achieve profitability and positive cash flow.




In such
circumstances, it is likely that we will dissolve and, we would likely not be
able to return any funds back to investors.




Our
financial performance will suffer if we do not meet our game development or
manufacturing schedules.




We expect
that many of our future games will be developed and published in connection with
the releases of related movie titles and other significant marketing events, or
more generally in connection with higher sales periods which mainly includes our
third quarter ending December 31. As such, we often establish game development
schedules tied to these periods. If we miss these schedules, we will incur the
costs of procuring licenses without obtaining the revenue from sales of the
related games which will have an adverse effect on our revenues, margins, and
cash flow. In addition, we are required to manufacture our games with the
related console manufacturer. If we experience delays at the manufacturer, we
could miss our anticipated ship dates which would have a material adverse effect
on our operations. Any delays in development or manufacturing completion dates
that could cause our products release dates to be delayed past Thanksgiving or
Christmas could cause our business to fail with investors not receiving any
portion of their investment back. In addition, any delays in completion of
development or manufacturing could cause us to deplete our cash balances and our
business to fail.




We
are currently dependent on a small number of customers, the loss of any of which
could cause a significant decrease in our revenues and cash flows which would
seriously harm our business operations.




As of
December 31, 2007, we had three customers who accounted for 67.5% (Navarre
Corporation), 17.7% (Empire Interactive), and 5.4% (Blockbuster Video) of our
consolidated accounts receivable and for the nine months ended December 31,
2007, we had three customers who accounted for 51.8% (Navarre Corporation),
31.0% (Empire Interactive) and 6.6% (Funtastic Ltd.) of consolidated revenue. As
of March 31, 2007, we had two customers who accounted for 49.1% (Navarre
Corporation) and 28.1% (GameStop) of our consolidated accounts receivable and
for the fiscal year ended March 31, 2007, we had three customers who accounted
for 48.1% (Navarre Corporation), 18.1% (GameStop) and 14.7% (Koch Media) of
consolidated revenue. If Navarre Corporation or Empire Interactive were to
decrease their purchase volumes, discontinue advancing us cash for
manufacturing, or discontinue their relationship with us, our revenue would
decrease significantly unless we were able to find new customers to replace the
lost volume. There can be no assurance that such new customers could be found,
or if found, that they would purchase the same quantity as the current
customers. In addition, if Navarre Corporation or Empire Interactive were to go
out of business, we may never collect on our outstanding accounting receivables
which would seriously harm our business operations.





Because
we have not internally developed any of the games that we have sold, our
business and games under development ares dependent upon external sources over
which we have very little control.




We have
not yet internally developed any games that we sell and our business has been
derived from the sale of games developed by external development studios. If the
external developers of our current games under development were to discontinue
their relationship with us, we may not be able to find a replacement. If our
external developers were to increase the fees above amounts contractually agreed
to, we may be unable to pay the increased fees which could delay or even halt
development of our games. There can be no assurance that we would be able to
find alternative developers, or even if such developers are available, that they
will be available on terms acceptable to us.  Any delays in
development of our games could cause our financial projections to be materially
different from what was anticipated.




There is
no assurance that our third party developers will be able to complete the games
under development. Our two games currently under development are being developed
by the same development studio in Melbourne, Australia. If a contingency should
happen at this studio, or if the studio does not have sufficient resources to
keep operating, all of our current development will be delayed or
halted.




We are
currently in negotiations to purchase this development studio in Melbourne,
Australia. If we are unable to reach an agreement for terms with the studio, or
if we do not have sufficient capital to consummate the acquisition if an
agreement is reached, the underlying studio may not have sufficient resources to
keep operating which would cause a delay or even halt our
development.




If
we are unable to hire and retain key personnel, then we may not be able to
implement our business plan.




The
success and growth of our business will depend on the contributions of our
Chairman and Chief Executive Officer, Chester Aldridge and our President and
Chief Operating Officer, Glenn Wong, as well as our ability to attract, motivate
and retain other highly qualified personnel. Competition for such personnel in
the publishing industry is intense. We do not have employment agreements with
Mr. Aldridge, Mr. Wong or any of our other employees. The loss of the services
of any of our key personnel, or our inability to hire or retain qualified
personnel, could have a material adverse effect on our business.






27







Our
business depends on the availability and installed base of current and next
generation video game platforms and will suffer if an insufficient quantity of
these platforms is sold.




Most of
our anticipated revenues will be generated from the development and publishing
of games for play on video game platforms produced by third parties. Our
business will suffer if the third parties do not manufacture and sell an
adequate number of platforms to meet consumer demand or if the installed base of
the platforms is insufficient.




If
we do not continually develop and publish popular games, our business will
fail.




The
lifespan of any of our games is relatively short, in many cases less than one
year. It is therefore important for us to be able to continually develop games
that are popular with the consumers. During the last two fiscal years, we have
sold five Console or Handheld games and six PC only games. We are currently
involved in the development of two games. If we are unable to continually
identify, develop and publish games that are popular with the consumers on a
regular basis, our business will suffer and we will ultimately cease our
operations. Our business will also suffer if we do not receive additional
financing to be used for research and development of new games.




We have
shipped the following Console or Handheld games: (i) Heroes of the Pacific for
the PS2, Xbox and PC platforms which first began shipping in September, 2005;
(ii) GripShift for the PSP platform which first began shipping in September
2005; (iii) Crusty Demons for the PS2 and Xbox platforms which first began
shipping in July 2006; (iv) Lucinda Green’s Equestrian Challenge for the PS2 and
PC which first began shipping in November 2006; and (v) Jackass for the PS2 and
PSP which first began shipping in September 2007 and for the DS platform which
first began shipping in January 2008.  On the PC, we have shipped: (i)
Disney’s Aladdin Chess Adventures which first began shipping in February
2006;




(ii) El
Matador, which first began shipping in October 2006; (iii) Dual Sudoku, which
first began shipping in September 2006; (iv) Timothy and Titus, which first
began shipping in November 2006; (v) Aircraft Power Pack, which first began
shipping in December 2006;  (vi)  Lucinda Green’s Equestrian
Challenge, which we first began shipping in November 2006; and (vii) Ouba,
Pantheon and 10 Talismans which first began shipping in May 2007. We are
currently involved in the development of two games: (i) a sequel to Heroes of
the Pacific based in the European theatre for the Xbox 360, PS3, and PC; and
(ii) Sin City: The Game for the PS3 and Xbox 360.




In
addition, the Entertainment Software Rating Board (ESRB), a non-profit
self-regulatory body, assigns various ratings for our games. If any of our games
receive a rating that is different from the rating we anticipated, sales of our
games could be adversely effected which could ultimately cause our business to
fail.





The
cyclical nature of video game platforms and the video game market may cause our
operating results to suffer, and make them more difficult to predict. We may not
be able to adapt our games to the next generation platforms.




Video
game platforms generally have a life cycle of approximately six to ten years,
which has caused the market for video games to also be cyclical. Sony’s
PlayStation 2 was introduced in 2000 and Microsoft’s Xbox and the Nintendo
GameCube were introduced in 2001. Microsoft introduced the Xbox 360, Sony the
PlayStation3 and Nintendo the Wii in 2006. These introductions have created a
new cycle for the video game industry which will require us to make significant
financial and time investments in order to adapt our current games and develop
and publish new games for these new consoles. We cannot assure you that we will
be able to accomplish this or that we will have the funds or personnel to do
this. Furthermore, we expect development costs for each game on the new consoles
to be significantly greater than in the past. If the increased costs we incur
due to next generation consoles are not offset by greater sales, we will
continue to incur losses and we will likely cease operations.




We depend on our platform licensors for the license to publish
games for their platforms and to establish the royalty rates for the
license.




We are
dependent on our platform licensors for the license to the specifications needed
to develop software for their platforms. These platform licensors set the
royalty rates that we must pay in order to publish games for their platforms.
These royalty rates will vary based on the expected wholesale price point of the
game. Certain of our platform licensors have retained the ability to change
their royalty rates. It is possible that a platform licensor may terminate or
not renew our license.  Our gross margins and operating margins will
suffer if our platform licensors increase the royalty rates that we must pay,
terminate their licenses with us, do not renew their licenses with us, or do not
grant us a license to publish on the next generation consoles.  In
addition, if we are required to issue price protection credits to our customers
on slow moving inventory, we are not entitled to receive corresponding credits
on the royalty rates to the platform manufacturers for publishing the
games.




We are
also dependent on the platform licensors for multiple approvals on each game in
order to publish each game. There can be no assurance that such platform
licensors will approve any of our games. Accordingly, we may never be able to
ship our games that have completed development if they are not approved by the
platform manufacturers.








28




We have
the following platform licenses:





Platform
            
            TermMicrosoft
      Xbox 360
            
            Three
      years from first commercial release of platform. Then automatic renewal
      unless noticed 60 days prior to expiration of non-renewal. Royalty rates
      are fixed during the term.Microsoft
      Xbox
            
            Initial
      term expired on November 15, 2007. Then automatic renewal unless noticed
      60 days prior to expiration of non-renewal. Royalty may change on July 1st
      of any year.Sony PS2 and PSP
            
            Initial
      term expired on March 31, 2007. Then automatic renewal unless noticed 60
      days prior to expiration of non-renewal. Royalty rates are subject to
      change with 60 days notice.


Sony
      PS3
            
            Initial
      term expires on March 31, 2012. Automatic renewal for one-year terms,
      unless noticed on or before January 31 of the year in which the term would
      renew. Royalty rates are subject to change with 60 days
      notice.


Nintendo
      Wii and DS
            
            Expires
      June 12, 2010PCs
            
            There
      are no platform licenses required for the
PCs




In
addition, each platform licensor has its own criteria for approving games for
its hardware platform. Each platform licensor also has different criteria
depending on the geographical territory of the game release. These criteria are
highly subjective. Without such approval, we would not be able to publish our
games nor have the games manufactured. Failure to obtain these approvals on the
games we are currently developing and any games that we develop in the future
will preclude any sales of such products and, as such, negatively affect our
margins and profits, and could ultimately cause our business to
fail.




It
may become more difficult or expensive for us to license intellectual property,
thereby causing us to publish fewer games.




Our
ability to compete and operate successfully depends in part on our acquiring and
controlling proprietary intellectual property. Our games embody trademarks,
trade names, logos, or copyrights licensed from third parties. An example is
MTVN’s “JackassTM”, which
utilizes rights licensed from MTVN and, Frank Miller’s “Sin City”, which
utilizes characters from graphic novels and comics. If we cannot maintain the
licenses that we currently have, or obtain additional licenses for the games
that we plan to publish or co-publish, we will produce fewer games and our
business will suffer. Furthermore, most of our competitors have significantly
greater resources than we do, and are therefore better positioned to secure
intellectual property licenses. We cannot assure you that our licenses will be
extended on reasonable terms or at all, or that we will be successful in
acquiring or renewing licenses to property rights with significant commercial
value.  In addition, some of our intellectual property licenses give
substantial discretion and creative control of the game to the licensor of the
intellectual property which can cause delays in completion in the game and could
even give the licensor the ability to terminate the license for
convenience.




Infringement
claims regarding our intellectual property may harm our business.




Our
business may be harmed by the costs involved in defending product infringement
claims. We can give no assurances that infringement or invalidity claims (or
claims for indemnification resulting from infringement claims) will not be
asserted or prosecuted against us or that any such assertions or prosecutions
will not materially adversely affect our business. The images and other content
in our games may unintentionally infringe upon the intellectual property rights
of others despite our best efforts to ensure that this does not occur. It is
therefore possible that others will bring lawsuits against us claiming that we
have infringed on their rights. Regardless of whether any such claims are valid
or can be successfully asserted, defending against such lawsuits could be
expensive and cause us to stop publishing certain games or require us to license
the proprietary rights of third parties. Such licenses may not be available upon
reasonable terms, or at all.




29







The
content of our games may become subject to increasing regulation and such
regulation may limit the markets for our games.




Legislation
is periodically introduced at the local, state and federal levels in the United
States and in foreign countries that is intended to restrict the content and
distribution of games similar to the ones that we develop and produce, and could
prohibit certain games similar to ours from being sold to minors. Additionally,
many foreign countries have laws that permit governmental entities to censor the
content and advertising of interactive entertainment software.




We
believe that similar legislation will be proposed in many countries that are
significant markets for our games, including the United States.




If any of
this proposed legislation is passed, it could have the effect of limiting the
market for our games and/or require us to modify our games at an additional cost
to us.




In
addition, each game is required to be rated by the Entertainment Software Rating
Board (ESRB). If our games receive unfavorable ratings from the ESRB, this could
limit which retailers would purchase our game and have an adverse effect on our
business.





If
we or others are not successful in combating the piracy of our games, our
business could suffer.




The games
that we develop and publish are often the subject of unauthorized copying and
distribution, which is referred to as pirating. The measures taken by the
manufacturers of the platforms on which our games are played to limit the
ability of others to pirate our games may not prove successful. Increased
pirating of our games throughout the world negatively impacts the sales of our
games.





If
any of our games are found to contain hidden, objectionable content, our
business may be subject to fines or otherwise be harmed.




Some game
developers and publishers include hidden content in their games that are
intended to improve the experience of customers that play their games.
Additionally, some games contain hidden content introduced into the game without
authorization by an employee or a non-employee developer. Some of this hidden
content has in the past included graphic violence or sexually explicit material.
In such instances, fines have been imposed on the publisher of the game and the
games have been pulled off the shelves by retailers.




The
measures we have taken to reduce the possibility of hidden content in the games
that we publish may not be effective, and if not effective our future income
will be negatively impacted by increased costs associated with fines or
decreased revenue resulting from decreased sales volume because of ownership of
games that cannot be sold.





Our
business is subject to economic, political, and other risks associated with
international operations.




Because
we have distribution agreements with entities located in foreign countries, our
business is subject to risks associated with doing business internationally.
Accordingly, our future results could be harmed by a variety of factors,
including less effective protection of intellectual property, changes in foreign
currency exchange rates, changes in political or economic conditions,
trade-protection measures and import or export licensing requirements. Effective
protection of intellectual property rights is unavailable or limited in certain
foreign countries. There can be no assurance that the protection afforded our
proprietary rights in the United States will be adequate in foreign countries.
Furthermore, there can be no assurance that our business will not suffer from
any of these other risks associated with doing business in a foreign country.




We
will incur increased costs as a result of being a public company, which could
adversely affect our operating results.





As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley Act
of 2002 and the new rules subsequently implemented by the Securities and
Exchange Commissions, the National Association of Securities Dealers, Inc., and
the Public Company Accounting Oversight Board have imposed various new
requirements on public companies, including requiring changes in corporate
governance practices. We expect these rules and regulations to increase our
legal and financial compliance costs and to make some activities more
time-consuming and costly. We also expect these new rules will require us to
incur substantial costs to obtain the same or similar insurance coverage. These
additional costs will have a negative impact on our income and make it more
difficult for us to achieve profitability.




Effect
of Recent Accounting Pronouncements




EITF
06-03




In June
2006, the EITF reached a consensus on Issue No. 06-03 (“EITF 06-03”), “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation).”
EITF 06-03 provides that the presentation of taxes assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between a
seller and a customer on either a gross basis (included in revenues and costs)
or on a net basis (excluded from revenues) is an accounting policy decision that
should be disclosed. The provisions of EITF 06-03 became effective as of
December 31, 2006.








30







Red Mile
has included the European Value Added Tax and the Australian Goods and Services
Tax that is directly imposed on a revenue-producing transaction on a gross basis
(included in revenues and costs).  For the three and nine months ended
December 31, 2007, $167,300 in taxes assessed by a governmental authorities were
included revenue and cost of sales.




SFAS 157





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
157), which provides guidance on how to measure assets and liabilities that use
fair value.




SFAS 157
will apply whenever another US GAAP standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances.  This standard also will require
additional disclosures in both annual and quarterly reports.  SFAS 157
will be effective for fiscal 2009. We are currently evaluating the potential
impact this standard may have on our financial position and results of
operations.




SFAS
159




On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). Under this Standard, we
may elect to report financial instruments and certain other items at fair value
on a contract-by-contract basis with changes in value reported in
earnings.




This
election is irrevocable. SFAS No. 159 provides an opportunity to mitigate
volatility in reported earnings that is caused by measuring hedged assets and
liabilities that were previously required to use a different accounting method
than the related hedging contracts when the complex provisions of SFAS No. 133
hedge accounting are not met. SFAS No. 159 is effective for years beginning
after November 15, 2007.  Management is currently evaluating the
potential impact of adopting this Standard.




FIN 48




Effective
April 1, 2007, we adopted the provisions of FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109, or FIN 48. FIN 48 provides detailed guidance for
the financial statement recognition, measurement and disclosure of uncertain
income tax positions recognized in the financial statements in accordance with
SFAS No. 109. Income tax positions must meet a “more-likely-than-not”
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods.  For the nine months ended
December 31, 2007, we did not identify and record any liabilities related to
unrecognized income tax benefits.  Therefore the adoption of FIN 48
does not impact our financial statements for the nine months ended December 31,
2007.




SFAS
141(R) and SFAS 160




In
December 2007, the Financial Accounting Standards Board  (“FASB”)
issued Statement No. 141(Revised 2007), Business Combinations(SFAS
141(R)) and Statement No. 160, Accounting and Reporting of
Non-controlling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51 (SFAS 160). These statements will significantly
change the financial accounting and reporting of business combination
transactions and non-controlling (or minority) interests in consolidated
financial statements. SFAS 141(R) requires companies to: (i) recognize, with
certain exceptions, 100% of the fair values of assets acquired, liabilities
assumed, and non-controlling interests in acquisitions of less than a 100%
controlling interest when the acquisition constitutes a change in control of the
acquired entity; (ii) measure acquirer shares issued in consideration for a
business combination at fair value on the acquisition date; (iii) recognize
contingent consideration arrangements at their acquisition-date fair values,
with subsequent changes in fair value generally reflected in earnings;
(iv) with certain exceptions, recognize pre-acquisition loss and gain
contingencies at their acquisition-date fair values; (v) capitalize in-process
research and development (IPR&D) assets acquired; (vi) expense, as
incurred, acquisition-related transaction costs; (vii) capitalize
acquisition-related restructuring costs only if the criteria in SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, are met as of the acquisition date; and
(viii) recognize changes that result from a business combination
transaction in an acquirer’s existing income tax valuation allowances and tax
uncertainty accruals as adjustments to income tax expense. SFAS 141(R) is
required to be adopted concurrently with SFAS 160 and is effective for business
combination transactions for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008 (our fiscal 2009). Early adoption of these statements is
prohibited. We believe the adoption of these statements will have a material
impact on significant acquisitions completed after March 31, 2009.




ITEM 2.
 UNREGISTERED SALES OF EQUITY SECURITIES





On July
18, 2007, we issued 1,872,600 units (the “Units”) at $2.50 per Unit with each
Unit consisting of one share of our common stock, par value $.01 (the “Common
Stock”), and 0.2 of one warrant, pursuant to an agency agreement with J.F.
Mackie & Company, Ltd. (the “Agent”).





Pursuant
to the terms of the agency agreement, the Agent facilitated the purchase of the
Units to a total of 69 accredited investors for an aggregate amount of
$4,681,500. Of the 69 investors, 67 are residents of Canada, one is a resident
of the Bahamas and one is a resident of Argentina.






31





Each
whole warrant entitles the holder of the warrant to acquire, for no additional
consideration, one share of our Common Stock in the event that we do not
complete by March 18, 2008 a liquidity transaction, as defined in the agency
agreement with the Agent. The warrants will automatically be cancelled if we
complete a liquidity transaction by March 18, 2008.





All of
the securities were issued in private placement transactions outside the United
States to investors who are not “U.S. persons” pursuant to the exemption from
registration provided by Regulation S under the Securities Act of
1933.




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




On July
18, 2007, holders of more than 66 2/3% of the $8,244,000 principal
amount of senior secured convertible debentures and $155,281 in accrued interest
on the debentures issued by us in October and November 2006 voted by way of
extraordinary resolution to cancel such debentures and to convert the principal
and accrued interest amounts of their debentures into shares of our Common Stock
at $2.50 per share, thereby resulting in the conversion of the full principal
and interest amounts associated with all such debentures into 3,359,713 shares
of our Common Stock.




ITEM 6.  EXHIBITS









(a)
            Exhibits:


31.1
              Certification
      of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
              Certification
      of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
              Certification
      of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
              Certification
      of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002











32







SIGNATURES




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







RED
      MILE ENTERTAINMENT, INC.(Registrant)Date:        February
      14, 2008
            
            By:
      /s/ Chester AldridgeChester
      AldridgeChief
      Executive Officer(Principal
      Executive Officer)Date:        February
      14, 2008
            
            By:
      /s/ Ben ZadikBen
      ZadikChief
      Financial Officer(Principal
      Financial Officer)