UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the Quarterly Period Ended June 30, 2008
 OR
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the Transition Period From
      __________              
To       ______________________
  Commission
File Number: 000-51055
  RED
MILE ENTERTAINMENT, INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              20-4441647(State
      or other jurisdiction of
                incorporation
      or organization)
              (I.R.S.
      Employer
                Identification
      No.)223
      San Anselmo Way #3
              94043San
      Anselmo, CA 94960
              (Zip
      Code)
  415-339-4240
 (Registrant’s
telephone number, including area code)
  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   ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
accelerated filer   ̈                                                                                                Accelerated
filer   ̈
  Non-accelerated
      filer   ̈(Do not check if a
      smaller reporting company)
              Smaller
      reporting company  x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes   ̈    No  x
  Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
  Class
              Shares
      outstanding on August 13, 2008Common
      Stock, $0.01 par value per share
              15,977,941
      shares
 
 Transitional
Small Business Disclosure Format (check one) Yes o No [ X
]
 
 
 
 
 
  Table
      of Contents
              
              PagePART
      I
              FINANCIAL
      INFORMATIONITEM
      1.
              FINANCIAL STATEMENTS
              1ITEM 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS
              16ITEM 3.
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              21ITEM
      4T.
              CONTROLS
      AND PROCEDURES
              21PART II
              OTHER
      INFORMATIONITEM
      1.
              LEGAL
      PROCEEDINGS
              23ITEM
      1A.
              RISK
      FACTORS
              23ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              29ITEM 3.
              DEFAULTS UPON SENIOR SECURITIES
              29ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              29ITEM
      5.
              OTHER
      INFORMATION
              29ITEM
      6.
              EXHIBITS
              29SIGNATURE
      PAGE
              30
    
  
 Part I.
FINANCIAL INFORMATION
   ITEM
1. Financial Statements
   RED MILE ENTERTAINMENT, INC.
AND SUBSIDIARIES
 Condensed
      Consolidated Balance SheetsJune
      30,
                    2008
                
                
                March
      31, 2008Assets
                
                (Unaudited)Current assets:Cash
      and cash equivalents
                
                $
                1,636,081
                
                
                $
                335,147Accounts
      receivable, net of reserves of $837,057 and $845,359
                
                
                109,921
                
                
                
                68,913Inventory,
      net
                
                
                23,089
                
                
                
                31,406Prepaid
      expenses and other assets
                
                
                40,519
                
                
                
                34,027Software
      development costs and advanced royalties
                
                
                7,603,788
                
                
                
                5,942,921Total
      current assets
                
                
                9,413,398
                
                
                
                6,412,414Property
      and equipment,
      net
                
                
                91,868
                
                
                
                128,234Other
      assets
                
                
                5,699
                
                
                
                9,755Total
      assets
                
                $
                9,510,965
                
                
                $
                6,550,403Liabilities,
      and stockholders’ deficitCurrent liabilities:Accounts
      payable
                
                $
                2,191,273
                
                
                $
                1,280,516Revolving
      line of credit
                
                
                500,000
                
                
                
                500,000Secured
      credit loan
                
                
                742,440
                
                
                
                -Accrued
      liabilities
                
                
                1,237,105
                
                
                
                1,211,934Deferred
      revenue
                
                
                2,270,446
                
                
                
                40,892Other
      current liabilities
                
                
                57,600
                
                
                
                48,000Total
      current liabilities
                
                
                6,998,864
                
                
                
                3,081,342Stockholders’
      Equity:Common
      stock, $0.01 par value, authorized 100,000,000 shares; 15,977,941 and
      15,977,941 shares outstanding, respectively
                
                
                159,779
                
                
                
                159,779Additional
      paid-in capital
                
                
                36,288,339
                
                
                
                36,235,106Accumulated
      other comprehensive income
                
                
                2,933
                
                
                
                3,515Accumulated
    deficit
                
                
                (33,938,950
                )
                
                
                (32,929,339
                )Total
      stockholders’ equity
                
                
                2,512,101
                
                
                
                3,469,061Total
      liabilities and stockholders’ equity
                
                $
                9,510,965
                
                
                $
                6,550,403
    The
accompanying notes are an integral part of these unaudited condensed financial
statements.
 
 
 1
 
 
 
 RED MILE ENTERTAINMENT, INC.
AND SUBSIDIARIES
  Condensed
Consolidated Statements of Operations
 (Unaudited)
  Three
      months ended June 30,2008
                
                
                2007Revenues,
      net
                
                $
                37,087
                
                
                $
                274,422Cost of sales
                
                
                49,362
                
                
                
                252,508Gross
      margin
                
                
                (12,275
                )
                
                
                21,914Operating
      expensesResearch
      and development costs
                
                
                268,721
                
                
                
                154,027General
      and administrative costs
                
                
                643,294
                
                
                
                898,066Sales,
      marketing and business development costs
                
                
                51,753
                
                
                
                235,431Total
      operating expenses
                
                
                963,768
                
                
                
                1,287,524Net loss before other income (expense) and provision for income
      taxes
                
                
                (976,043
                )
                
                
                (1,265,610
                )Interest
      income (expense), net
                
                
                (27,138
                )
                
                
                (111,234
                )Other income (expense),
      net
                
                
                (5,630
                )
                
                
                -Net
      loss before income tax expense
                
                
                (1,008,811
                )
                
                
                (1,376,844
                )Income
      tax expense
                
                
                (800
                )
                
                
                -Net
      loss
                
                $
                (1,009,611
                )
                
                $
                (1,376,844
                )Net
      loss per common share, basic and diluted
                
                $
                (0.06
                )
                
                $
                (0.14
                )Shares
      used in computing basic and diluted loss per share
                
                
                15,977,941
                
                
                
                9,661,740
 
 The
accompanying notes are an integral part of these unaudited condensed financial
statements.
 
  2
 
 
 
  RED MILE ENTERTAINMENT INC.
AND SUBSIDIARIES
  Condensed
Consolidated Statements of Cash Flows
 (Unaudited)




Three
      months ended June 30,2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (1,009,611
              )
              
              $
              (1,376,844
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
              
              
              39,623
              
              
              
              46,200Amortization
      of software development costs
              
              
              36,373
              
              
              
              74,017Amortization
      of debt costs
              
              
              4,056
              
              
              
              76,307Amortization
      of intangibles
              
              
              -
              
              
              
              10,761Loss on disposal of
      assets
              
              
              -
              
              
              
              1,970Impairment
      of inventory
              
              
              2,630
              
              
              
              12,836Impairment
      of software development and licensing costs
              
              
              4,752
              
              
              
              14,772Stock
      based compensation
              
              
              53,233
              
              
              
              117,751Revaluation
      of liquidated damage charges
              
              
              9,600
              
              
              
              -Foreign
      currency transaction gain
              
              
              (3,970
              )
              
              
              -Reserve
      for price protection and bad debt expense
              
              
              (5,616
              )
              
              
              (27,597
              )Changes
      in current assets and liabilitiesAccounts
      receivable
              
              
              (35,392
              )
              
              
              (139,594
              )Inventory
              
              
              5,687
              
              
              
              14,393Prepaid
      expenses and other current assets
              
              
              (6,492
              )
              
              
              (120,746
              )Software
      development costs and advanced royalties
              
              
              (1,701,992
              )
              
              
              (1,229,743
              )Other
      assets
              
              
              -
              
              
              
              -Accounts
      payable
              
              
              910,757
              
              
              
              (91,058
              )Accrued
      liabilities
              
              
              25,171
              
              
              
              352,384Deferred
      revenue
              
              
              2,229,554
              
              
              
              248,018Net
      cash provided by (used in) operating activities
              
              
              558,363
              
              
              
              (2,016,173
              )


Cash
      flows from investing activities:Acquisition
      of property and equipment
              
              
              (3,257
              )
              
              
              (4,182
              )Cash
      paid for other investment
              
              
              -
              
              
              
              (47,366
              )Net
      Cash flows used in investing activities
              
              
              (3,257
              )
              
              
              (51,548
              )Cash
      flows from financing activities:Proceeds
      from issuance of debt
              
              
              746,410
              
              
              
              2,400,000Net
      cash provided by financing activities
              
              
              746,410
              
              
              
              2,400,000Effect of exchange rate changes on cash
              
              
              (582
              )
              
              
              635Net increase (decrease) in cash
              
              
              1,300,934
              
              
              
              332,914Cash and cash equivalents, beginning of period
              
              
              335,147
              
              
              
              1,912,992Cash and cash equivalents, ending of period
              
              $
              1,636,081
              
              
              $
              2,245,906Supplemental Disclosure
      of Non-Cash Financing TransactionsAgent
      commissions accrued on issuance of convertible promissory
      notes
              
              
              
              
              
              $
              123,000Accrued
      interest on revolving line of credit
              
              $
              13,750
              
              
              
              -Accrued
      interest on secured credit facility
              
              $
              10,722
              
              
              
              -





The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
  3
  RED
MILE ENTERTAINMENT, INC.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
  
 NOTE
1 – BASIS OF PRESENTATION
 
 The
accompanying condensed consolidated financial statements are unaudited and have
been prepared in accordance with generally accepted accounting principles for
interim financial information. They should be read in conjunction with the
financial statements and related notes to the financial statements of Red Mile
Entertainment, Inc. (“Red Mile” or the “Company”) for the years ended March 31,
2008 and 2007 appearing in the Company’s Form 10-KSB. The June 30, 2008
unaudited interim consolidated financial statements on Form 10-Q have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and note disclosures normally included
in the annual financial statements on Form 10-K have been condensed or omitted
pursuant to those rules and regulations, although the Company’s management
believes the disclosures made are adequate to make the information presented not
misleading. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair statement of the result of operations
for the interim periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of
 the
results to be expected for the entire year.
 
 NOTE
2 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Business — 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 sustained substantial operating losses since inception of
$33,938,950 at June 30, 2008, and has predominantly incurred negative cash flows
from operations.
  The
Company has assembled a strategic plan that it believes to be viable and will
contribute to meeting the Company’s cash flow requirements which it has already
begun implementing. Management believes that this plan is reasonably capable of
removing the threat to continuation of the business during the 12 month period
following the most recent balance sheet presented. This strategic financing plan
has the following components:
   (1)
              The
      company plans to enter into a co-publishing agreement for its Sin City
      video game which will provide the company
                with
      minimum guarantees on execution of the agreement as well as milestone
      payments coinciding with the timing of milestone obligations the company
      has to its developers.
  (2)
              The
      company plans to renegotiate both the amount and timing for payment of
      many of its current payables and accrued
  obligations.
 
 Notwithstanding
this strategic financing plan, however, there can be no guarantee or assurance
that the Company will be successful in its ability to sustain a profitable level
of operations or to continue to raise capital at favorable rates, or at all. The
accompanying condensed financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
 
 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.
   4
   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 June 30, 2008 and March 31, 2008, we had deposits in excess of the
Federal Deposit Insurance Corporation (“FDIC”) limit at one U.S. based financial
institution .
  At June 30, 2008 and March 31, 2008,
Red Mile had uninsured bank balances and certificates of deposit totaling
approximately $1,533,831 and $221,690, respectively.
 
 Receivable Allowances–
Receivables are stated net of allowances for price protection, returns,
discounts, doubtful accounts, and allowances for value added services by
retailers.
 
 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 June 30,
2008 and March 31, 2008, Red Mile had price protection and returns reserves of
$262,664 and $271,269 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 June 30, 2008 and
March 31, 2008, Red Mile had allowance reserves for doubtful accounts of
$574,393 and $574,090, 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 June 30, 2008 and March 31, 2008, Red Mile had cooperative
marketing deductions of $0 and $9,000, respectively, recorded as deductions from
accounts receivable. All receivables are pledged as collateral for our secured
credit loan with Silverbirch Inc. and our revolving line of credit agreement
with Tiger Paw Capital Corporation.
 
 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.  All inventories are produced by third party manufacturers, and
substantially all inventories are located at third party warehouses on
consignment. All inventories are pledged as collateral for our secured credit
loan with Silverbirch Inc. and our revolving line of credit agreement with Tiger
Paw Capital Corporation.
 
 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.
 
  5
   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.
 
 Property and Equipment —
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful life of the respective assets
ranging from one to three years. Salvage values of these assets are not
considered material. Repairs and maintenance costs that do not increase the
useful lives and/or enhance the value of the assets are charged to operations as
incurred. All property and equipment are pledged as collateral for our secured
credit loan with Silverbirch Inc. and our revolving line of credit agreement
with Tiger Paw Capital Corporation.
 
 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”.  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”,  Emerging Issues Task Force (“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 Financial Accounting Standards Board (“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.
 
 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. We will likely co-publish our current titles under
development and net sell directly to distributors.
 
 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.
 
 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.
   6
  
 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 will include 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).
 
 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.
 
 Distribution Costs —
Distribution costs, including shipping and handling costs of video games sold to
customers, are included in cost of sales.
  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.
  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.
  
 7
   The
following table summarizes the weighted average shares outstanding for the three
months ending June 30, 2008 and 2007:
  Three
      Months Ended June 30,2008
              
              
              2007Basic
      weighted average shares outstanding
              
              
              15,977,941
              
              
              
              9,661,740Total
      stock options outstanding
              
              
              1,264,340
              
              
              
              1,988,745Less:
      anti-dilutive stock options due to loss
              
              
              (1,264,340
              )
              
              
              (1,988,745
              )Total
      senior secured convertible debentures outstanding
              
              
              -
              
              
              
              1,570,286Less:
      senior secured convertible debentures outstanding due to
    loss
              
              
              -
              
              
              
              (1,570,286
              )Total
      warrants outstanding
              
              
              1,934,707
              
              
              
              2,794,176Less:
      anti-dilutive warrants due to loss
              
              
              (1,934,707
              )
              
              
              (2,794,176
              )Total
      convertible promissory notes outstanding
              
              
              -
              
              
              
              960,000Less:
      anti-dilutive convertible promissory notes outstanding
              
              
              -
              
              
              
              (960,000
              )Diluted
      weighted average shares outstanding
              
              
              15,977,941
              
              
              
              9,661,740
  NOTE 3 — ACCRUED LIABILITIES
 
 June
      30,2008
              
              March
      31, 2008Accrued royalties payable
              
              $
              613,658
              
              
              $
              679,469Accrued bonuses
              
              
              —
              
              
              
              67,900Accrued milestone payments to developers or other
      development costs
              
              
              330,000
              
              
              
              186,389Accrued paid time off
              
              
              21,255
              
              
              
              24,500Accrued professional fees
              
              
              158,750
              
              
              
              148,369Accrued commissions
              
              
              96,811
              
              
              
              96,865Other
              
              
              16,631
              
              
              
              8,442Total
              
              $
              1,237,105
              
              
              $
              1,211,934
  NOTE
4 — DEFERRED REVENUE
 
 June
      30, 2008
              
              
              March
      31, 2008Heroes
      Over Europe
              
              
              2,250,000
              
              
              
              —Lucinda
      Green’s Equestrian Challenge
              
              $
              20,446
              
              
              $
              40,892Total
              
              $
              2,270,446
              
              
              $
              40,892
  NOTE
5 — OTHER CURRENT LIABILITIES
 
 June
      30, 2008
              
              
              March
      31, 2008Contingent
      Registration Payment Liability
              
              
              57,600
              
              
              
              48,000Total
              
              $
              57,600
              
              
              $
              48,000
    8
 
 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 was unable to realize a liquidity event by the aforementioned
date. Accordingly, in accordance with FASB Staff Position EITF 19-2, “Accounting
For Registration Payments Arrangements and Financial Instruments Subject To Such
Arrangements”, the Company 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
6 — COMMITMENTS
 
 Developer and
intellectual property contracts - 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 June 30, 2008 are approximately $10,492,375 which is scheduled to be paid
as follows:
 
 
 Year ended March
      31,2009
              
              $
              4,599,8752010
              
              $
              1,180,0002011
              
              $
              4,712,500Total
              
              $
              10,492,375
 
 Lease
Commitments
 
 In March
2008, we moved our corporate offices from Sausalito to San Anselmo, California.
Our corporate offices are in leased space in San Anselmo, California of
approximately 1,300 square feet at $2.03 per square foot per month. We believe
that if we lost this lease, we could promptly relocate within ten miles on
similar terms. Rent expense for the three months ended June 30, 2008 and 2007
was $5,284 and $18,720, respectively.
  Approximate
future minimum lease payments under non-cancelable office and equipment lease
agreements are as follows:
  Year
      ended March 312009
              
              $
              23,7762010
              
              
              32,6312011
              
              
              33,588Total
              
              $
              89,995
  NOTE
7 — 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:
  Period Ended
      June 30, 2008Expected
      life (in years)
                  4.2
      – 6.5Risk
      free rate of return
                  4.0%
      - 5.13%Volatility
                  50%
      - 80%Dividend
      yield
                  -Forfeiture
      rate
                  9%
      - 15%
  9
   
 The
following table sets forth the total stock-based compensation expense for the
three months ended June 30, 2008 and June 30, 2007.  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 June 30, 2008
                
                Three
      Months Ended June 30, 2007Research
      and development costs
                
                $
                —
                
                $
                5,597Sales,
      marketing, and business development costs
                
                
                —
                
                
                7,284General
      and administrative costs—consultants
                
                
                3,355
                
                
                —General
      and administrative costs—employees
                
                
                49,878
                
                
                104,870Stock-based
      compensation before income taxes
                
                
                53,233
                
                
                117,751Income
      tax benefit
                
                
                -
                
                
                -Total
      stock-based employee compensation expense after income
    taxes
                
                $
                53,233
                
                $
                117,751
  During
the three months ended June 30, 2008, no stock options were
granted.
 
 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.
 
 Under the
Amended Plan, options for 2,500,000 shares of common stock are reserved for
issuance.  At June 30, 2008, 1,268,992 options are available for
grant.  Options have been issued with exercise prices of between $0.66
and $4.00 per share as follows:
  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
              
              
              $
              0.75
              
              
              
              
              
              $
              -Granted
              
              
              1,124,167
              
              
              
              3.75Exercised
              
              
              -
              
              
              
              -Forfeited or expired
              
              
              (76,388
              )
              
              
              2,73
              
              
              
              -
              
              
              
              -Outstanding at March 31, 2007
              
              
              1,988,745
              
              
              $
              2.28
              
              
              
              9.71
              
              
              $
              3,420,166Exercisable at March 31, 2007
              
              
              607,000
              
              
              $
              0.83
              
              
              
              8.65
              
              
              $
              1,926,537Granted
              
              
              45,000
              
              
              
              2.35Exercised
              
              
              (143,068
              )
              
              
              0.71Forfeited
      or expired
              
              
              (114,670
              )
              
              $
              0.88
              
              
              
              -
              
              
              
              -Outstanding
      at March 31, 2008
              
              
              1,776,007
              
              
              $
              2.59
              
              
              
              8.44
              
              
              $
              -Exercisable
      at March 31, 2008
              
              
              676,007
              
              
              $
              1.35
              
              
              
              7.86
              
              
              $
              -Granted
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
      or expired
              
              
              (544,999)
              
              
              $
              3.74
              
              
              
              -Outstanding
      at June 30, 2008
              
              
              1,231,008
              
              
              $
              2.15
              
              
              
              8.02
              
              
              
              -Exercisable
      at June 30, 2008
              
              
              868,784
              
              
              $
              1.35
              
              
              
              7.70
              
              
              
              -
 
 
 
 
 10
 
 
 
 
 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
              
              656,840
              
              8.69
              
              $
      0.71
              
              656,840
              
              $
      0.71$1.50
      - $2.37
              
              93,334
              
              8.03
              
              $
      2.05
              
              63,333
              
              $
      1.91$2.38
      - $4.00
              
              480,834
              
              8.75
              
              $
      3.96
              
              148,611
              
              $
      3.911,231,008
              
              
              
              
              
              868,784
  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 June 30, 2008, the fair
value of options issued by the Company was $2,626,385 of which $1,389,891 has
been forfeited. Expense recognized for the three months ending June 30, 2008 was
$53,233.  The unamortized cost remaining at June 30, 2008 was $600,543
with a weighted average expected term for recognition of 3.75 years. At the time
of grant, the estimated fair values per option were from $0.33 to
$2.94.
  NOTE 8 — COMMON STOCK
 
 In March
and May 2006, the Company issued 845,333 investment units outside the U.S. to
thirty two non U.S. investors for $3,170,000. A unit consisted of one share of
Series B Convertible Preferred stock and a warrant to purchase an additional
share of Series B Convertible Preferred stock before May 1, 2008 for $4.50 per
share. These shares of Series B Convertible Preferred stock converted to the
same number of shares of the Company’s common stock in December,
2006.
  In
addition, from March through May 2006, nine US investors purchased 100,000
investment units for a total of $375,000. A unit consisted of one share of
Series C Convertible Preferred stock and a warrant to purchase an additional
share of Series C Convertible Preferred stock before May 1, 2008 for $4.50 per
share. These shares of Series C Convertible Preferred stock converted to the
same number of shares of the Company’s common stock in December,
2006.
 
 In
October and November 2006, the Company issued an aggregate of $8,224,000 in
senior secured convertible debentures to 81 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, 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 common
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.
 
 In
January 2007, the Company acquired all of the assets of Roveractive, Inc., a
worldwide distributor and publisher of downloadable PC and PDA-based casual
games, in exchange for 33,333 shares of the Company’s common stock.
 
 On June
25 through June 27, 2007, the Company issued an aggregate of $2,050,000 of
Convertible Promissory Notes to a total of 19 note holders. In addition, on June
25, 2007, the Company issued a $350,000 Convertible Promissory Note to one note
holder. These notes automatically converted into 960,000 Units of the company in
July 2007, with one unit consisting of one share of the Company’s common stock,
and 0.2 of one warrant with an exercise price of $2.75 per share.
 
 On July
18, 2007, the Company issued 1,872,600 units at $2.50 per Unit with each Unit
consisting of one share of common stock and 0.2 of one warrant  to a
total of 69 investors for an aggregate amount of $4,681,501.
  
 11
  NOTE
9 — WARRANTS
 
 The
following table lists the total number of warrants outstanding as of June 30,
2008.
  Expiring
              
              Strike
                Price
              
              Number
      of
                Common
      sharesDecember
      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
              
              
              
              1,943,707
 (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.
  NOTE
10 — CONCENTRATIONS
  Customer
base
 
 Our
customer base includes distributors, co-publishers, and retailers of video games
in the United States, Europe, and Australia. We review the credit-worthiness of
our customers on an ongoing basis, and believe that we need an allowance for
potential credit losses at June 30, 2008 of $574,393 compared to $574,090 at
March 31, 2008. Also netted against accounts receivable are returns and price
protection reserves on existing receivables of $262,664 at June 30, 2008 and
$271,269 at March 31, 2008. The receivables recorded from our customers are net
of their reserves for uncollectible accounts, returns and price protection
reserves from their customers. Account balances are charged off against the
allowance when the Company believes it is probable that accounts receivable will
not be recovered.
  One
customer, Empire Interactive, accounted for 55.1% of consolidated revenues in
the quarter ended June 30, 2008.  We expect one major co-publishing
partner to account for substantially all of our consolidated revenue in Fiscal
2009.  At June 30, 2008 and March 31, 2008, our accounts receivable
were an immaterial balance.
  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 in our first
quarter of fiscal 2009:
 
 Location
              
              RevenueNorth
      America
              
              $
              13,843Europe
              
              
              23,244$
              37,087
 
 Location
of assets
  Our
tangible assets, excluding inventory, are located at our corporate offices in
San Anselmo, California and on loan to a third party developer in Melbourne,
Australia. Inventory is located at a select few third party warehouse
facilities.
   12
  
 NOTE
11 – REVOLVING LINE OF CREDIT
  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 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 has a subordinated security interest to all
present and future assets of the Company and carries no financial or operating
covenants. As of June 30, 2008, we have drawn $500,000 on the Line.
 
 On May 7,
2008, we entered into a Forbearance Agreement with Tiger Paw Capital Corporation
whereby Tiger Paw agreed not to exercise any demand or enforcement rights under
the Line until November 7, 2008.
 
 NOTE
12 – SECURED CREDIT LOAN
 
 On May 7,
2008, we entered into a secured credit agreement with Silverbirch Inc, a
Canadian publicly traded corporation in the amount of $750,000 Canadian Dollars
($746,410 USD equivalent) ("The Facility"). The Facility is available for
development and production of our “Heroes Over Europe” video game and general
and administrative purposes. Any amounts drawn on the Facility are payable no
later than November 7, 2008.  On May 7, 2008, we borrowed CAD $302,000
($302,000 USD equivalent) against the Facility in respect of a development
payment due to the developer of the “Heroes Over Europe” video
game.  On May 12, 2008, we borrowed CAD $448,000 ($444,410 USD
equivalent) against the facility. The Facility bears interest at the rate of 10%
per annum and is payable to Lender quarterly in arrears. Advances under the
Facility may be pre-paid without penalty. The Facility carries a first priority
security interest in all our present and future assets in addition to the
securities in the capital of our three wholly owned subsidiaries. The Facility
contains customary terms and conditions for credit facilities of this type,
including restrictions on the Company’s ability to incur or guaranty additional
indebtedness, create liens, make loans or investments, sell assets, pay
dividends or make distributions on, or repurchase, its stock.
 
 NOTE
13 — NEW ACCOUNTING PRONOUNCEMENT
  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.
  In
December 2007, the FASB issued proposed FASB Staff Position ("FSP") 157-b,
"Effective Date of FASB Statement No. 157," that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity's financial
statements on a recurring basis (at least annually). Therefore, if the change in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years.
This deferral does not apply, however, to an entity that applies Statement 157
in interim or annual financial statements before proposed FSP 157-b is
finalized.
  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 and it has not had a material impact on our consolidated
financial statements.
  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.
   13
   Upon
review and analysis by the Company, we have concluded that no FIN 48 effects are
present as of March 31, 2008 and our tax position has not materially changed
since March 31, 2008.  For the year ended March 31, 2008, we did not
identify and record any liabilities related to unrecognized income tax
benefits.  The adoption of FIN 48 did not have a material impact our
financial statements.
  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 have been accrued.  Income tax returns for the fiscal tax
year ended March 31, 2005 to the present are subject to examination by major tax
jurisdictions.
  EITF
07-03
 
 In June
2007, the EITF reached a consensus on EITF No. 07-03, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities, or EITF 07-03. EITF 07-03 specifies the
timing of expense recognition for non-refundable advance payments for goods or
services that will be used or rendered for research and development activities.
EITF 07-03 was effective for fiscal years beginning after December 15, 2007, and
early adoption is not permitted. Adoption of EITF 07-has not  had a
material impact on either our financial position or results of
operations.
 
 EITF
07-01
 
 In
December 2007, the EITF reached a consensus on EITF No. 07-01, Accounting for
Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property, or EITF 07-01. EITF 07-01 discusses the appropriate
income statement presentation and classification for the activities and payments
between the participants in arrangements related to the development and
commercialization of intellectual property. The sufficiency of disclosure
related to these arrangements is also specified. EITF 07-01 is effective for
fiscal years beginning after December 15, 2008. As a result, EITF 07-01 is
effective for us in the first quarter of fiscal 2010. We do not expect the
adoption of EITF 07-01 to have a material impact on either our financial
position or results of operations.
  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.
  SFAS
161
  In March
2008, the FASB issued SFAS No. 161,Disclosures about Derivative
Instruments and Hedging Activities -an amendment of SFAS 133 or SFAS 161.
SFAS 161 seeks to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. This standard shall be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 and early application is encouraged. We are in the process of
evaluating the new disclosure requirements under SFAS 161 and do not expect the
adoption to have a material impact on our consolidated financial
statements.
   14
   SFAS
162
  In
May 2008, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 162, "The Hierarchy of Generally
Accepted Accounting Principles". This standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with US GAAP for non-governmental entities. SFAS No. 162
is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, the meaning of "Present
Fairly in Conformity with GAAP". The Company is in the process of evaluating the
impact, if any, of SFAS 162 on its consolidated financial
statements.
 
 FSP
APB 14-1
 
 In May
2008, the FASB released FSP APB 14-1 Accounting For Convertible
Debt  Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement) (FSP APB 14-1) that alters the accounting
treatment for convertible debt instruments that allow for either mandatory or
optional cash settlements. FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. Furthermore, it would require
recognizing interest expense in prior periods pursuant to retrospective
accounting treatment. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008. We are currently evaluating the
effect the adoption of FSP APB 14-1 will have on our consolidated results of
operations and financial condition.
    15
  
 RED
MILE ENTERTAINMENT, INC.
  ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
 
 FORWARD-LOOKING
STATEMENTS
  Most of
the matters discussed within this Form 10-Q include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. In some cases you can identify
forward-looking statements by terminology such as "may," "should," "potential,"
"continue," "expects," "anticipates," "intends," "plans," "believes,"
"estimates," and similar expressions. These statements are based on our current
beliefs, expectations, and assumptions and are subject to a number of risks and
uncertainties, many of which are set forth in this Form 10-Q. Actual results and
events may vary significantly from those discussed in the forward-looking
statements.
  These
forward-looking statements may include, among other things, statements relating
to the following matters:
 
 O
              the
      likelihood that our management team will increase our profile in the
      industry and create new video games for us.O
              our
      ability to compete against companies with much greater resources than
      us.O
              our
      ability to obtain various intellectual property licenses as well as
      development and publishing licenses and approvals from the third party
      hardware manufacturers.
  These
forward-looking statements are made as of the date of this Form 10-Q, and we
assume no obligation to explain the reason why actual results may differ. In
light of these assumptions, risks, and uncertainties, the forward-looking events
discussed in this Form 10-Q might not occur.
 
 Liquidity
and Capital resources
 
 On May 7,
2008, we entered into a secured credit agreement with Silverbirch Inc, a
Canadian publicly traded corporation in the amount of $750,000 Canadian Dollars
("The Facility"). The Facility was made available for development and production
of our “Heroes Over Europe” video game and general and administrative purposes.
Amounts drawn on the Facility are payable no later than November 7, 2008. 
The Facility bears interest at the rate of 10% per annum and is payable to
Lender quarterly in arrears. Advances under the Facility may be pre-paid without
penalty.
 
 The
Facility carries a first priority security interest in all of our present and
future assets in addition to the securities in the capital of our three wholly
owned subsidiaries. The Facility contains customary terms and conditions for
credit facilities of this type, including restrictions on the Company’s ability
to incur or guaranty additional indebtedness, create liens, make loans or
investments, sell assets, pay dividends or make distributions on, or repurchase,
its stock.
 
 We
currently need to raise additional capital in order to continue operating our
business. We believe our current cash on hand of approximately $1,310,000, plus
our expected cash received from co-publishing advances will allow us to continue
our business operations until the end of Fiscal 2009.
 
 During
the quarter end June 30, 2008, we signed a  publishing agreement with
Atari for our Heroes Over Europe titles under development. Our agreement with
Atari provides us with minimum guaranteed payments from Atari in addition to
back end royalty payments. In the event that we are not successful in receiving
co-publishing advances from our Heroes Over Europe game, we will be unable to
continue operations.
 
 We
anticipate needing an additional $10,000,000 to finance our planned operations
over the next 24 to 36 months. We will be unable to complete development of
Heroes Over Europe and Sin City: The Game (working title), or publish any other
additional games if we are unable to receive co-publishing advances or raise
additional capital.
 
 
 16
  
 RED MILE ENTERTAINMENT,
INC.
 Results
of Operations
  The
unaudited results of operations for the three months ending June 30, 2008
and  June 30, 2007 are as follows:
   Summary of Unaudited Statements
of Operations
 Three
Months Ended June 30, 2008 and 2007
 Summary
of Statements of Operations
 
 2008
              
              
              2007
              
              
              %
      ChangeRevenue
              
              $
              37,087
              
              
              $
              274,422
              
              
              
              (86
              )%Cost
      of sales
              
              
              49,362
              
              
              
              252,508
              
              
              
              (80
              )%Gross
      margin
              
              
              (12,275
              )
              
              
              21,914Operating
      expenses
              
              
              963,768
              
              
              
              1,287,524
              
              
              
              (25
              )%Net
      loss before interest and provision for income taxes
              
              
              (976,043
              )
              
              
              (1,265,610
              )Interest
      income (expense), net
              
              
              (27,138
              )
              
              
              (111,234
              )Other
      income (expense), net
              
              
              (5,630
              )
              
              
              ---Income
      tax expense
              
              
              (800
              )
              
              
              ---Net
      loss
              
              
              (1,009,611
              )
              
              
              (1,376,844
              )
              
              
              (27
              )%Net loss per common share
      - Basic and
      diluted
              
              $
              (0.06
              )
              
              $
              (.14
              )Shares
      used in computing basic and diluted net loss per share (in
      000’s)
              
              
              15,977,941
              
              
              
              9,661,740
 
 Revenues
  Revenues
were $37,087 and $274,422 during the three months ended June 30, 2008 and 2007,
respectively. The decrease is primarily due to decrease in sales of our 2WG and
Rover games as those games reached the end of their product life
cycles.
 
 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 2011. We are developing “Heroes Over
Europe”, a sequel to Heroes of the Pacific that is set in the European Theatre
of World War II (for the next generation consoles and PC) that we expect to ship
in fiscal 2009.  We are also developing Sin City: The Game (working
title), and expect to ship this game in fiscal 2011.
  We record
revenues net of distribution fees.
 
 Red Mile
may be required to levy European Value Added Tax (“VAT”) and Australian Goods
and Services Tax (“GST”) on shipments of  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 includes 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
months ended June 30, 2008 and 2007, respectively, no taxes assessed by a
governmental authority were included revenue and cost of sales.
 
 Cost of
sales
 
 Cost of
sales were approximately $49,362 and $252,508 during the three months ended June
30, 2008 and 2007, respectively.  The decrease in cost of sales as
compared to the prior year is primarily the result of the decrease in sales of
our 2WG and Rover games as those games reached the end of their product life
cycles.
  Cost of
sales for the three months ended June 30, 2008 consisted of:
 
 Amortization
      of capitalized software development costs, cost of inventory
      sold,  manufacturing and distribution costs
              
              $
              49,673Royalties
      to third party game developers
              
              
              (7,693
              )Write down of inventory costs to net realizable value
              
              
              2,630Write
      down of software development costs and advanced royalties to net
      realizable value
              
              
              4,752Total
              
              $
              49,362
   17
  
 Operating
Expenses
  Operating
expenses for three months ended June 30, 2008 and 2007, respectively, were as
follows:
  Three
      months ended
                June
      30, 2008
              
              
              Percent
                of
      total
              
              
              Three
      months ended
                June
      30, 2007
              
              
              Percent
                Of
      total
              
              
              Percent
                IncreaseResearch
      and development costs
              
              $
              268,721
              
              
              
              16.9
              %
              
              $
              154,027
              
              
              
              11.9
              %
              
              
              74
              %General
      and administrative costs
              
              
              643,294
              
              
              
              44.8
              %
              
              
              898,066
              
              
              
              69.8
              %
              
              
              (31
              %)Marketing,
      sales and business development costs
              
              
              51,753
              
              
              
              38.3
              %
              
              
              235,431
              
              
              
              18.3
              %
              
              
              (78
              %)Total
      operating expenses
              
              $
              963,768
              
              
              
              100.0
              %
              
              $
              1,287,524
              
              
              
              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 SFAS 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 three months ended June 30, 2008, approximately $42,900 of internal
costs were capitalized and approximately $210,000 of external costs were
expensed as incurred as costs prior to the related game reaching technological
feasibility.
 
 Research
and development expenses were approximately $268,721 and $154,027 during the
three months ended June 30, 2008 and 2007, respectively, an increase of
approximately 74%.  Virtually all of the costs for R&D during the
three months ended June 30, 2008, related to costs incurred in the development
of Sin City: the Game.
 
 In
general, a product goes through multiple levels of design, production, approvals
and authorizations before it may be shipped.
 
 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 sold in North America are required to be rated
by the Entertainment Software Rating Board (ESRB) and equivalent regulatory
bodies in Europe 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, Sin City graphic novels, and other Sin City books owned or
controlled by FMI, including all Sin City storylines of those comic books and
graphic novels.
   18
   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.
 
 We expect
research and development costs to increase during the remainder of fiscal 2009
reflecting increased development activity for Sin City.
 
 General and Administrative
Costs
 
 General
and administrative costs were approximately $623,294 and $898,066 in the three
months ended June 30, 2008 and 2007, respectively, a decrease of 31%. 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. General and administrative costs primarily decreased due to a
reduction in the number of employees following  the company’s
restructuring in March 2008.
 
 Sales, Marketing and
Business Development Costs
 
 Sales,
marketing and business development costs were approximately $51,753 and $235,431
during the three months ended June 30, 2008 and 2007, respectively, a decrease
of 78%. 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 decreased year over year primarily due to the Company
no longer incurring marketing or promotional costs for Jackass: The Game and
reduced headcount costs related to the Company’s restructuring that took place
in March 2008.
 
 Interest Income (Expense),
net
 
 Interest
income (expense), net were approximately ($27,000) and ($111,000) for the three
months ended June 30, 2008 and 2007, respectively. The decrease primarily
reflects lower interest charges due to the conversion of the senior secured
convertible debentures in July 2007 into shares of the Company’s common stock,
partially offset by interest charges on the revolving line of credit with Tiger
Paw Capital Corporation and the secured credit loan with Silverbirch
Inc.
 
 Other
Expense
 
 Other
expense for the three months ended June 30, 2008 relate primarily to the foreign
currency revaluation of the Canadian dollar secured credit loan from Silverbirch
Inc and the revaluation of the contingent consideration liability.
 
 Critical
Accounting Policies
  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”.
   19
   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.
 
 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 may be
required to levy European Value Added Tax (“VAT”) and Australian Goods and
Services Tax (“GST”) on shipments of  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”, we include 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).
  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.
   20
   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.
 
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  We do not hold any derivative instruments and do not engage in
any hedging activities.
 
 ITEM
4T. CONTROLS AND PROCEDURES
  Our Chief
Executive Officer who is our principal executive officer and principal financial
officer has evaluated the effectiveness of our 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.
 
 The
Company does not have independent board members nor therefore an independent
audit committee. In addition, the lack of multiple employees results in the
Company’s inability to have a sufficient segregation of duties within its
accounting and financial activities. These absences constitute material
weaknesses in the Company’s internal controls over financial reporting and
corporate governance structure.
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The company’s internal control system was designed to
provide reasonable assurance to the company’s management and board of directors
regarding the preparation and fair presentation of published financial
statements. The internal control system over financial reporting includes those
policies and procedures that:
 
 •
              
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;•
              
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorization of management and
      directors of the company; and•
              
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.
 
  
 21
   All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
 Management
assessed the effectiveness of the company’s internal control over financial
reporting as of June 30, 2008, and this assessment identified the following
material weakness in the company’s internal control over financial
reporting.
 
 In making
its assessment of internal control over financial reporting management used the
criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) inInternal
Control—Integrated Framework.  Because of the material weakness
described in the preceding paragraph, management believes that, as
of  March 31, 2008, the company’s internal control over financial
reporting was not effective based on those criteria.
  (b) Changes in internal
controls.
  The
Company has made no changes in its internal controls during its fourth quarter
or in other factors that could significantly affectthe Company’s internal control over financial
reporting.
    22
   PART
II. OTHER INFORMATION
  ITEM
1. LEGAL PROCEEDINGS
  None.
  ITEM
1A. RISK FACTORS
 Our
business involves a high degree of risk. Therefore, in evaluating us and our
business you should carefully consider the risks set forth below.
 
 If
we are unable to raise additional financing or receive advances from
co-publishing partners, we will be unable to fund our product development and
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 or advances from
co-publishing partners to fund our product development costs and our operating
costs that we anticipate incurring over the next several quarters. Our current
cash on hand together with our expected advances from co-publishing partners and
expected draws on our revolving line of credit will enable us to continue
operating until the end of our 2009 fiscal year. We anticipate needing an
additional $10,000,000 to bring our existing products under development to
market and finance our day to day operations.  If we are unable to
make draws on our revolving line of credit, receive advances from co-publishing
partners, or raise additional capital, 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 qualified its opinion 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, 2008 and 2007 is qualified subject
to uncertainty 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 out of
business, we must generate and/or raise capital to stay operational. The
continuity as a going concern is dependent upon the continued financial support
of our current shareholders, current line of credit lenders, and new investors.
There can be no assurance that we will be able to generate income or raise
additional capital.
 
 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 year
ended March 31, 2008, 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.
  The
company has not yet generated any net income and may never become
profitable.
  During
the years ended March 31, 2008 and 2007, we incurred net losses of $15,711,149
and $8,038,894, 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.
 
 The
company has not yet generated positive gross margins.
  During
the quarter ended June 30, 2008 and year ended March 31, 2008, we incurred
negative gross margins of $12,275 and $2,379,902, respectively. Our ability to
generate positive gross margins depends on many factors, including the market
acceptance of our products, the selling prices of our products, our ability to
control the costs of developing and manufacturing our products and the costs of
royalties paid to licenses of any IPs we have licensed. There can be no
assurance that we will begin generating or be able to sustain positive gross
margins.
 
 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 receive co-publishing advances on our games under development or raise
sufficient capital, we will be unable to implement our business strategy.
Co-publishing our titles will make 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.
   23
   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 as well as our ability to
attract, motivate and retain other highly qualified personnel. Competition for
such personnel in the publishing and development industry is intense. We do not
have an employment agreement with Mr. Aldridge 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.
  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.
  Our
financial performance will suffer if we do not meet our game development
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, including our third
quarter ending December 31. As such, we will 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.
  We
are currently dependent on a small number of customers, the loss of any of which
could cause a significant decrease in our revenue.
  We are
currently dependent on one customer, Atari, for the majority of our future
revenue which relates to co-publishing revenue of our Heroes Over Europe title
currently under development. During the quarter ended June 30, 2008, Empire
Interactive accounted for the majority of our revenue. Our accounts receivable
balances at June 30, 2008, were an immaterial balance. If major customers were
to decrease their purchase volume or discontinue their relationship with us, our
revenue would decrease significantly unless we were able to find new customers
or co-publishing partners to replace the lost volume. There can be no assurance
that such new customers or co-publishing partners could be found, or if found,
that they would purchase the same quantity as the current
customers.
  Because
we have not internally developed any of the games that we have sold, our
business is 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.
 
 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, “Heroes Over Europe” for the Xbox 360, PS3, and PC; and (ii) Sin
City: The Game (working title) for the PS3 and Xbox 360.
   24
   In
addition, the Entertainment Software Rating Board (ESRB), a non-profit
self-regulatory body, assigns various ratings for our games as do the European
equivalent rating agencies. 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 in 2005,
Sony the PlayStation 3 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.
  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.
  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, 2010.PC
              
              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.
   25
   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. 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,
some 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.
  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.
  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.
  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
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.
   26
   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. We believe EITF 06-03 will have a material impact on our
financial statements in the future.
  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.
  In
December 2007, the FASB issued proposed FASB Staff Position ("FSP") 157-b,
"Effective Date of FASB Statement No. 157," that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity's financial
statements on a recurring basis (at least annually). Therefore, if the change in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years.
This deferral does not apply, however, to an entity that applies Statement 157
in interim or annual financial statements before proposed FSP 157-b is
finalized. We are currently evaluating the impact, if any, that the adoption of
FSP 157-b will have on our operating income or net earnings.
  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 and it is not expected to have a material impact on our
consolidated financial statements.
  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 March 31, 2008 and our tax position has not materially changed
since March 31, 2008.  For the year ended March 31, 2008, we did not
identify and record any liabilities related to unrecognized income tax
benefits.  We do not expect the adoption of FIN 48 to have a material
impact our financial statements.
  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 have been accrued.  Income tax returns for the fiscal tax
year ended March 31, 2005 to the present are subject to examination by major tax
jurisdictions.
  
 27
 
 EITF
07-03
 
 In June
2007, the EITF reached a consensus on EITF No. 07-03, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities, or EITF 07-03. EITF 07-03 specifies the
timing of expense recognition for non-refundable advance payments for goods or
services that will be used or rendered for research and development activities.
EITF 07-03 was effective for fiscal years beginning after December 15, 2007, and
early adoption is not permitted. Adoption of EITF 07-has not  had a
material impact on either our financial position or results of
operations.
 
 EITF
07-01
 
 In
December 2007, the EITF reached a consensus on EITF No. 07-01, Accounting for
Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property, or EITF 07-01. EITF 07-01 discusses the appropriate
income statement presentation and classification for the activities and payments
between the participants in arrangements related to the development and
commercialization of intellectual property. The sufficiency of disclosure
related to these arrangements is also specified. EITF 07-01 is effective for
fiscal years beginning after December 15, 2008. As a result, EITF 07-01 is
effective for us in the first quarter of fiscal 2010. We do not expect the
adoption of EITF 07-01 to have a material impact on either our financial
position or results of operations.
  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.
  SFAS
161
  In March
2008, the FASB issued SFAS No. 161,Disclosures about Derivative
Instruments and Hedging Activities -an amendment of SFAS 133 or SFAS 161.
SFAS 161 seeks to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. This standard shall be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 and early application is encouraged. We are in the process of
evaluating the new disclosure requirements under SFAS 161 and do not expect the
adoption to have a material impact on our consolidated financial
statements.
  SFAS
162
  In
May 2008, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 162, "The Hierarchy of Generally
Accepted Accounting Principles". This standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with US GAAP for non-governmental entities. SFAS No. 162
is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, the meaning of "Present
Fairly in Conformity with GAAP". We are in the process of evaluating the impact,
if any, of SFAS 162 on its consolidated financial statements.
 
 FSP
APB 14-1
 
 In May
2008, the FASB released FSP APB 14-1 Accounting For Convertible
Debt  Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement) (FSP APB 14-1) that alters the accounting
treatment for convertible debt instruments that allow for either mandatory or
optional cash settlements. FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. Furthermore, it would require
recognizing interest expense in prior periods pursuant to retrospective
accounting treatment. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008. We are currently evaluating the
effect the adoption of FSP APB 14-1 will have on our consolidated results of
operations and financial condition.
   28
 
 Item
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 None.
 
 Item
3.   DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 Item
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 
 None.
 
 Item.
5. OTHER INFORMATION
 
 None
 
 ITEM
      6. EXHIBITS
 
 (a)
        Exhibits:
 
 10.1(1)
              Credit
      Agreement10.2(1)
              General
      Security Agreement10.3(1)
              General
      Security Agreement10.4(1)
              Securities
      Pledge Agreement10.5(1)
              Subordination
      and Postponement Agreement10.6(1)
              Temporary
      Forbearance Agreement10.7(2)
              Publishing
      Agreement with Atari Interactive, Inc. dated June 20,
  2008*31.1
              Certification
      of Chief Executive Officer and Principal Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
              Certification
      of Chief Executive Officer and Principal Financial Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002
 
 (1)
      Previously filed as an exhibit to the registrant’s current report on Form
      8-K, filed on May 12, 2008 (Commission File No. 000-51055), and
      incorporated herein by reference.
 
 (2)
      Portions of this Exhibit have been omitted and filed separately with the
      Commission pursuant to a request for confidential
    treatment.
 
 
 
 
 29
 
   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:        August
      14, 2008
              
              By:
      /s/ Chester
    AldridgeChester
      AldridgeChief
      Executive Officer(Principal
      Executive Officer and Principal Accounting Officer)