UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-QSB

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



xQUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2006



oTRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD FROM _____ TO _________ .



Commission File # 000-51055



RED MILE ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)



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



4000 Bridgeway, Suite 101

Sausalito, CA 94965

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(415) 339-4240s

(ISSUER TELEPHONE NUMBER)

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





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



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





Number of shares of the registrant's common stock outstanding as of August 1, 2006 is: 24,777,870.





















---





|Table of Contents |                                                                                        | Page
|----------------- | -------------------------------------------------------------------------------------- | ----
|                  |                                                                                        |     
|PART I            | FINANCIAL INFORMATION                                                                  |     
|                  |                                                                                        |     
|ITEM 1.           | FINANCIAL STATEMENTS                                                                   | 3   
|                  |                                                                                        |     
|ITEM 2.           | MANAGEMENTS DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 13  
|                  |                                                                                        |     
|ITEM 3.           | CONTROLS AND PROCEDURES                                                                | 17  
|                  |                                                                                        |     
|                  |                                                                                        |     
|PART II           | OTHER INFORMATION                                                                      |     
|                  |                                                                                        |     
|ITEM 1.           | LEGAL PROCEEDINGS                                                                      | 17  
|                  |                                                                                        |     
|ITEM 1A.          | RISK FACTORS                                                                           | 17  
|                  |                                                                                        |     
|ITEM 2.           | UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS                                   | 20  
|                  |                                                                                        |     
|ITEM 6.           | EXHIBITS AND REPORTS ON FORM 8-K                                                       | 20  
|                  |                                                                                        |     
|                  | FORM 10QSB SIGNATURE PAGE                                                              | 21  







2



---



Part I. FINANCIAL INFORMATION



ITEM 1. Financial Statements

RED MILE ENTERTAINMENT, INC.

Unaudited Condensed Consolidated Balance Sheets

(Unaudited)





| | June 30,2006 |  | March 31,2006
| | ------------ |  | -------------

ASSETS

|Current assets              |             |  |            
|--------------------------- | ----------- |  | -----------
|Cash in bank                | $ 1,180,784 |  | $ 769,926  
|Marketable securities       |            |  | 10,313     
|Accounts receivable         | 263,817     |  | 355,861    
|Prepaid expenses            | 52,203      |  | 22,883     
|Software development costs  | 4,013,421   |  | 3,280,769  
|Total current assets        | 5,510,225   |  | 4,439,752  
|Property and equipment, net | 168,563     |  | 101,588    
|Other assets                | 246,727     |  | 205,000    
|Total assets                | $ 5,925,515 |  | $ 4,746,340
|                            |             |  |            

LIABILITIES, REDEEMABLE CONVERTIBLE  PREFERRED STOCK AND STOCKHOLDERS DEFICIT

|                                                                                                                                                                                                                                                      |              |  |            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ |  | -----------
|Current liabilities                                                                                                                                                                                                                                   |              |  |            
|Accounts payable                                                                                                                                                                                                                                      | 174,695      |  | $ 472,880  
|Accrued liabilities                                                                                                                                                                                                                                   | 389,924      |  | 531,645    
|Deferred revenue  current                                                                                                                                                                                                                            | 90,000       |  | 27,500     
|Total current liabilities                                                                                                                                                                                                                             | 654,619      |  | 1,032,025  
|Redeemable, convertible preferred stock, no par value, authorized 20,000,000 shares; issued and
outstanding 3,834,860 and 12,075,860, respectively; the aggregate redemption value and liquidity preference $4,793,575 and $12,419,127, respectively. | 3,819,105    |  | 12,077,075 
|Warrants on redeemable convertible preferred stock                                                                                                                                                                                                    | 765,840      |  | 342,052    
|                                                                                                                                                                                                                                                      | 4,584,945    |  | 12,419,127 
|Stockholders equity (deficit)                                                                                                                                                                                                                        |              |  |            
|Common stock, no par value, authorized 100,000,000 shares; issued and outstanding 24,777,870 and 14,420,870, respectively                                                                                                                             | 444,392      |  | 434,035    
|Additional paid in capital                                                                                                                                                                                                                            | 10,412,757   |  | 40,449     
|Accumulated deficit                                                                                                                                                                                                                                   | (10,170,221) |  | (9,179,296)
|Accumulated other comprehensive income/(loss)                                                                                                                                                                                                         | (977)        |  |           
|Total stockholders equity (deficit)                                                                                                                                                                                                                  | 685,951      |  | (8,704,812)
|Total liabilities, redeemable convertible preferred stock and stockholders equity (deficit)                                                                                                                                                          | $ 5,925,515  |  | $ 4,746,340



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









3

---



RED MILE ENTERTAINMENT, INC.

Unaudited Condensed Consolidated Statements of Operations

For the three months ended June 30, 2006 and 2005

(Unaudited)



|                                                          |   | Three months ended June 30,2006 |   | Three months ended June 30,2005
|--------------------------------------------------------- | - | ------------------------------- | - | -------------------------------
|                                                          |   |                                 |   |                                
|Revenues                                                  | $ | 41,848                          | $ |                               
|Cost of sales                                             |   | 37,460                          |   | $1,554,205                     
|                                                          |   |                                 |   |                                
|Gross margin                                              |   | 4,388                           |   | (1,554,205)                    
|                                                          |   |                                 |   |                                
|Operating expenses                                        |   |                                 |   |                                
|Research and development costs                            |   | 85,830                          |   | 43,311                         
|General and administrative costs                          |   | 677,539                         |   | 202,149                        
|Marketing and business development costs                  |   | 231,944                         |   | 168,287                        
|                                                          |   |                                 |   |                                
|Total operating expenses                                  |   | 995,313                         |   | 413,747                        
|                                                          |   |                                 |   |                                
|Loss before benefit from income taxes                     |   | (990,925)                       |   | (1,967,952)                    
|Income tax expense                                        |   |                                |   |                               
|                                                          |   |                                 |   |                                
|Net loss                                                  |   | (990,925)                       |   | (1,967,952)                    
|                                                          |   |                                 |   |                                
|Accretion of redeemable, convertible preferred stock      |   | (30,888)                        |   |                               
|                                                          |   |                                 |   |                                
|Net loss attributable to common shareholders              |   | $(1,021,813)                    |   | (1,967,952)                    
|                                                          |   |                                 |   |                                
|Net loss per share:                                       |   |                                 |   |                                
|Net loss per common share, basic and diluted              | $ | (0.05)                          | $ | (0.16)                         
|Shares used in computing basic and diluted loss per share |   | 19,656,277                      |   | 12,504,826                     



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









4

---



RED MILE ENTERTAINMENT, INC.

Condensed Consolidated Statements of Stockholder' Equity (Deficit)

For the year ended March 31, 2006 and the three months ended June 30, 2006





|                                                                                 | Common Stock     |           |                            |                    
|-------------------------------------------------------------------------------- | ---------------- | --------- | -------------------------- | -------------------
|                                                                                 | Number of Shares | Amount    | Additional Paid-in Capital | Accumulated Deficit
|                                                                                 |                  |           |                            |                    
|Balance, March 31, 2005                                                          | 12,504,826       | $ 12,505  | -                          | $ (4,329,618)      
|Common stock issued in connection with two acquisitions                          | 1,916,044        | 421,530   | -                          | -                  
|Stock based compensation                                                         | -                | -         | 46,439                     | -                  
|Accretion of redeemable, convertible preferred stock                             | -                | -         | (5,990)                    | -                  
|Net loss                                                                         | -                | -         | -                          | (4,849,678)        
|Balance, March 31, 2006                                                          | 14,420,870       | $ 434,035 | $ 40,449                   | $ (9,179,296)      
|Stock issued upon conversion of Series A Redeemable, Convertible Preferred Stock | 10,357,000       | 10,357    | 10,334,089                 | -                  
|Stock based compensation                                                         | -                | -         | 69,107                     | -                  
|Accretion of redeemable, convertible preferred stock                             | -                | -         | (30,888)                   | -                  
|Foreign currency translation adjustments                                         | -                | -         | -                          | -                  
|Net loss                                                                         | -                | -         | -                          | (990,925)          
|Balance, June 30, 2006 (Unaudited)                                               | 24,777,870       | $444,392  | $10,412,757                | $(10,170,221)      
|                                                                                 |                  |           |                            |                    













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



5



---



RED MILE ENTERTAINMENT, INC.

Unaudited Condensed Consolidated Statements Of Cash Flows

For the three months ended June 30, 2006 and 2005

(Unaudited)





|                                                                                     |  | Three months ended June 30, |  
|------------------------------------------------------------------------------------ |  | --------------------------- | -
|                                                                                     |  | 2006                        |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                 |  |                             |  
|Net loss                                                                             |  | $(990,925                   | )
|Adjustments to reconcile net loss to net cash used in operating activities           |  |                             |  
|Depreciation                                                                         |  | 18,704                      |  
|Amortization of software development costs                                           |  | 32,998                      |  
|Impairment of software development and licensing costs                               |  | 37,575                      |  
|Stock based compensation                                                             |  | 69,107                      |  
|Changes in current assets and liabilities                                            |  |                             |  
|Accounts receivable                                                                  |  | 92,044                      |  
|Prepaid expenses                                                                     |  | (29,320                     | )
|Licenses                                                                             |  |                            |  
|Software development costs                                                           |  | (803,225                    | )
|Other assets                                                                         |  | (41,727                     | )
|Accounts payable                                                                     |  | (298,185                    | )
|Accrued liabilities                                                                  |  | (141,721                    | )
|Deferred revenue                                                                     |  | 62,500                      |  
|                                                                                     |  |                             |  
|Net cash provided by (used in) operating activities                                  |  | (1,992,175                  | )
|                                                                                     |  |                             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                 |  |                             |  
|Purchases of marketable securities                                                   |  |                            |  
|Sales of marketable securities                                                       |  | 10,313                      |  
|Acquisition of property and equipment                                                |  | (85,679                     | )
|                                                                                     |  |                             |  
|Net cash provided by (used in) investing activities                                  |  | (75,366                     | )
|                                                                                     |  |                             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                 |  |                             |  
|Proceeds from sales of preferred stock and warrants                                  |  | 2,645,000                   |  
|Proceeds from sales of common stock                                                  |  |                            |  
|Cost of redeemable preferred stock issuances                                         |  | (165,624                    | )
|                                                                                     |  |                             |  
|Net cash provided by (used in) financing activities                                  |  | 2,479,376                   |  
|Effect of foreign currency adjustments                                               |  | (977                        | )
|NET INCREASE (DECREASE)  IN CASH                                                     |  | 410,858                     |  
|CASH, beginning of period                                                            |  | 769,926                     |  
|                                                                                     |  |                             |  
|CASH, end of period                                                                  |  | $1,180,784                  |  
|SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING TRANSACTIONS                           |  |                             |  
|Accretion of redeemable convertible preferred stock and foreign currency adjustment  |  | $30,888                     |  
|Relative fair value of warrants issued for preferred stock                           |  | $423,788                    |  
|Conversion of Series A Redeemable Convertible Preferred Stock, net of offering costs |  | $10,344,446                 |  

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



6

---

















RED MILE ENTERTAINMENT, INC.

Notes to Unaudited Condensed Consolidated Financial Statements



NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Red Mile Entertainment, Inc. (Red Mile or the Company) was incorporated in Florida in December 2004. Red Mile is a developer and distributor of entertainment software across multiple hardware platforms, with a focus on creating intellectual properties and partnering with owners of intellectual properties and licenses. The Company is developing products in the strategy, lifestyle and action/adventure game categories. Red Mile licenses its games with major international game distributors in exchange for payment to Red Mile of either development fees or guaranteed minimum royalties. The guaranteed minimum royalties are recoupable by the partner against royalties computed under the various agreements. Once the partner recoups the guaranteed minimum royalties, Red Mile is entitled to additional royalties as computed under
the agreements. The Company operates in one business segment. During the period ended March 31, 2005, the Company was a development stage company. The losses and accumulated deficit of $4,329,618 incurred through March 31, 2005, represent the losses accumulated during the development stage.

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 $10,170,221 at June 30, 2006, and has incurred negative cash flows from operations.

The Company is currently assembling a strategic financing plan that it believes to be viable and will contribute to meeting the Companys cash flow requirements. The Company plans to begin executing on this plan approximately thirty days after the Companys registration statement is declared effective by the Securities Exchange Commission. Management believes that this plan is reasonably capable of removing the threat to continuation of our business during the 12 month period following the most recent balance sheet presented in this quarterly report on Form 10-QSB. This strategic financing plan will include the following components:

1) We plan to contact the same group of individual accredited investors that participated in the Companys Series B Preferred Stock financing to inquire whether they would be interested in participating in an additional round of financing. We do not know whether any such new financing may be in the form of common shares, convertible debt or preferred stock. We can give no assurances or guarantees as to whether such additional capital will be raised.

2) We also plan to actively engage and solicit an investment banking firm to raise the additional financing necessary to enable the Company to achieve its planned expansion.

3) We also expect that the cash generated from sales of Company products under development to be released over the next 12 months will also contribute to the Company being able to meet its cash flow requirements. Management, however, can give no assurances that the cash generated from sales of its products under development will be sufficient to assist the Company in meeting its cash flow requirements.

Basis of Presentation

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions for Form 10-QSB and Article 10 of Regulation SX.  Accordingly, the financial statements do not include all the information and disclosures necessary for a presentation of the Companys financial position, results of operations and cash flows in conformity with generally accepted accounting principals in the United States of America. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the Companys financial position, results of operations and cash flows. The results of operations for an interim period are not necessarily indicative of the results for the full year. The financial statements should be read in conjunction with the audited financial statements and
notes thereto contained in the Companys Annual Report on Form 10-KSB for the fiscal year ended March 31, 2006.

Principals of Consolidation The consolidated financial statements of Red Mile include the accounts of the Company, a wholly-owned inactive subsidiary and its wholly-owned subsidiary, 2WG Media, Inc. All intercompany 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 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. Actual results could differ from those estimates.



Stock-Based Compensation PlansOn April 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) 123(R),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 prescribed 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 months ended June 30, 2006 includes compensation expense for all stock option awards granted subsequent to April 1, 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 SEC issued Staff Accounting Bulletin No. 107 (SAB 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).







7



---



The fair value of employee options granted in the period ended June 30, 2006 has been estimated at the date of grant using the fair value method with the following weighted average assumptions:



| |                          | 2006  | 2005
| | ------------------------ | ----- | ----
| | Expected life (in years) | 4.2   | 4.2 
| | Risk free rate of return | 5.13% | 4.9%
| | Volatility               | 50%   | 0%  
| | Dividend yield           |      |    
| | Forfeiture rate          | 9%    | 0%  





The following table sets forth the total stock-based compensation expense for the quarter ended June 30, 2006, resulting from options awarded to employees during the three months ended June 30, 2006.





|                                                                   |  | Three Months Ended
June 30, 2006
|------------------------------------------------------------------ |  | --------------------------------
|Research and development costs                                     |  | 1,736                           
|Marketing and business development costs                           |  | 4,850                           
|Stock-based compensation before income taxes                       |  | 6,586                           
|Income tax benefit                                                 |  | -                               
|Total stock-based employee compensation expense after income taxes |  | $               6,586           





During the quarter ended June 30, 2006, 90,000 common stock options  were granted to non-employees. 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, the fair value of such options issued for the three months ending June 30, 2006 and 2005 was $65,522 and $0, respectively.



Prior to the adoption of SFAS 123(R), we applied SFAS 123, amended by SFAS 148, Accounting for 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. The following table illustrates the effect on net loss after tax, and net loss per common share, as if we had applied the fair value recognition provisions of SFAS 123 to employee stock-based compensation during the three months ended June 30, 2005:







|                                                                                                             |  | Three Months
Ended
June 30, 2005 |  
|------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | -
|Net loss as reported                                                                                         |  | $(1,967,952                      | )
|Add: total stock-based employee compensation expense included in reported net loss, net of
tax benefit of $0 |  | -                                |  
|                                                                                                             |  |                                  |  
|Less: total stock-based employee compensation expense for non-employees                                      |  |                                  |  
|determined under the SFAS 123 fair-value method, net of tax benefit of $0                                    |  | $--                              |  
|Net loss, pro forma                                                                                          |  | $(1,967,952)                     |  
|Basic and diluted net loss per share:                                                                        |  |                                  |  
|As reported                                                                                                  |  | $(0.16                           | )
|Pro forma                                                                                                    |  | $(0.16                           | )









8



---



RED MILE ENTERTAINMENT, INC.

Notes to Unaudited Condensed Consolidated Financial Statements



Loss Per Share We computed basic and diluted loss per share amounts pursuant to the Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are 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 issuable upon on exercise of stock options and warrants (using the treasury stock method). Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.

The following table summarizes the weighted average shares outstanding:



|                                                                       |  | Quarter ending June 30,
|---------------------------------------------------------------------- |  | -----------------------
|                                                                       |  | 2006                   
|Basic weighted average shares outstanding                              |  | 19,656,277             
|Total stock options outstanding                                        |  | 3,112,898              
|Less: anti-dilutive stock options due to loss                          |  | (3,112,898             
|Total redeemable convertible preferred stock outstanding               |  | 3,834,860              
|Less: anti-dilutive redeemable convertible preferred stock due to loss |  | (3,834,860             
|Total warrants outstanding                                             |  | 12,298,860             
|Less: anti-dilutive warrants due to loss                               |  | (12,298,860            
|Diluted weighted average shares outstanding                            |  | 19,656,277             









9



---



RED MILE ENTERTAINMENT, INC.

Notes to Unaudited Condensed Consolidated Financial Statements



NOTE 2  ACCRUED LIABILITIES



| |                                                              | June 30, 2006 | March 31, 2006
| | ------------------------------------------------------------ | ------------- | --------------
| | Accrued royalties payable                                    | $84,336       | $170,898      
| | Accrued Bonuses                                              | 165,999       | 169,000       
| | Accrued milestone payments to developers                     | 50,000        | 50,000        
| | Accrued paid time off                                        | 25,452        | 45,323        
| | Accrued liability for purchase of Edmonds 1                  |              | 35,000        
| | Accrued liability to related party for purchase of Edmonds 1 |              | 35,000        
| | Accrued professional fees                                    | 61,850        | 20,000        
| | Other                                                        | 2,287         | 6,424         
| | Total                                                        | $389,924      | $531,645      

NOTE 3  DEFERRED REVENUE



| |                                  | June 30, 2006 | March 31, 2006
| | -------------------------------- | ------------- | --------------
| | Crusty Demons                    | 90,000        | 15,000        
| | Disneys Aladdin Chess Adventure |              | 12,500        
| | Total                            | $90,000       | $27,500       



NOTE 4  CONTRACTUAL OBLIGATIONS

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 rights to intellectual property. Under these agreements, we commit to provide specified payments to a developer, or intellectual property holder, based upon contractual arrangements. 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 typically are 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 contract commitment for contracts in place as of June 30, 2006 is approximately $5,870,620, which is scheduled to be
paid as follows:





| | Year ended March 31 |           
| | ------------------- | ----------
| | 2007                | $3,864,113
| | 2008                | 2,006,507 
| |                     |           
| | Total               | $5,870,620
| |                     |           







10



---



RED MILE ENTERTAINMENT, INC.

Notes to Unaudited Condensed Consolidated Financial Statements



NOTE 5  REDEEMABLE CONVERTIBLE PREFERRED STOCK

In the quarter ended June 30, 2006, the Company issued 1,976,000 investment units consisting of one share of Series B Redeemable Convertible Preferred Stock and a warrant to purchase an additional share of Series B Redeemable Convertible Preferred Stock with a strike price of $1.50 and an expiration date of May 1, 2008 for $2,470,000. During this period, the Company also issued 140,000 investment units consisting of one share of Series C Redeemable Convertible Preferred Stock and a warrant to purchase an additional share of Series C Redeemable Convertible Preferred Stock with a strike price of $1.50 and an expiration date of May 1, 2008 for $175,000. Using the Black-Scholes option pricing model, the relative fair value of the warrants of $395,748 was allocated to warrants on redeemable convertible preferred stock for the quarter ended June 30, 2006. The Series B and C redeemable convertible preferred
stock are being accreted to its redemption value through the redemption date using the effective interest method. Accretion of redeemable convertible preferred stock was $30,888 and $0 for the three months ending June 30, 2006 and 2005, respectively.

In May 2006, all 10,357,000 shares of Series A Redeemable Convertible Preferred Stock converted into common stock.

The Series B and C Redeemable Convertible Preferred Stock is convertible after the Companys common shares are publicly registered and trading, and after the Company has completed an additional financing of at least $5 million; or, the holders of at least 50% of the outstanding shares of Series B or C Redeemable Convertible Preferred Stock vote in favor of such conversion. The Series B Redeemable Convertible Preferred Stock also has a security interest in all the assets of the Company. Such security interest terminates upon the Series B Redeemable Convertible Preferred Stock converting to common shares. All shares of preferred stock vote on an as if converted basis (that is, one share of preferred equals one share of common) with the common.

The Redeemable Convertible Preferred Stock has a preference such that in the event of any liquidation or winding up of the Company, the holders of the Redeemable Convertible Preferred Stock would be entitled to receive in preference to the holders of the Common Stock an amount equal to an amount of their original purchase price, plus any declared and unpaid dividends. After the payment of the Liquidation Preference to the holders of the Redeemable Convertible Preferred Stock, the remaining assets shall be distributed ratably to the holders of Common Stock and the Redeemable Convertible Preferred Stock until the Redeemable Convertible Preferred Stock holders have received three times their original investment. All remaining assets, if any, would then be distributed to the holders of Common Stock.

The Series B and C Redeemable Convertible Preferred Stock are redeemable five years after issuance, upon election of holders of at least 50% of the outstanding shares the class. In such a case, the shareholders in said class would be entitled to the actual amount of their original investment, plus declared but unpaid dividends. At June 30, 2006 and March 31, 2006, the redemption value was $4,793,575 and $12,419,127, respectively. The preferred shares are redeemable outside the discretion of the Company and, accordingly, are classified outside permanent equity in accordance with EITF Topic D-98.

NOTE 6  COMMON STOCK

In May 2006, we filed a registration statement on Form SB-2 with the Securities and Exchange Commission.  This filing triggered the conversion of all 10,357,000 outstanding shares of Series A Redeemable Convertible Preferred Stock into common stock.

NOTE 7  STOCK OPTIONS AND STOCK COMPENSATION

On April 8, 2005, the Board of Directors approved the Red Mile Entertainment 2005 Stock Option Plan which permits the Board to grant to officers, directors, employees and third parties incentive stock options (ISOs), non-qualified stock options, restricted stock and stock appreciation rights (SARs). Under this plan, options for 4,000,000 shares of common stock are reserved for issuance. Options have been issued with exercise prices of between $0.22 and $0.79 per share.



|Options                        |  | Shares    |  | Weighted Average Exercise Price |  | Weighted Average Remaining Contractual Term |  | Aggregate Intrinsic Value
|------------------------------ |  | --------- |  | ------------------------------- |  | ------------------------------------------- |  | -------------------------
|                               |  |           |  |                                 |  |                                             |  |                          
|                               |  |           |  |                                 |  |                                             |  |                          
|Outstanding at April 1, 2005   |  | -         |  | $             -                 |  | -                                           |  | $             -          
|Granted                        |  | 2,822,898 |  | 0.25                            |  |                                             |  |                          
|Exercised                      |  | -         |  | -                               |  |                                             |  |                          
|Forfeited or expired           |  | -         |  | -                               |  |                                             |  |                          
|Outstanding at March 31, 2006  |  | 2,822,898 |  | $          0.25                 |  |                                             |  |                          
|Excercisable at March 31, 2006 |  | 532,861   |  | $          0.30                 |  |                                             |  |                          
|Granted                        |  | 290,000   |  | 0.79                            |  |                                             |  |                          
|Exercised                      |  | -         |  | -                               |  |                                             |  |                          
|Forfeited or expired           |  | -         |  | -                               |  |                                             |  |                          
|Outstanding at June 30, 2006   |  | 3,112,898 |  | $          0.30                 |  | 9.51                                        |  | $  1,701,514             
|Excercisable at June 30, 2006  |  | 672,265   |  | $          0.30                 |  | 9.05                                        |  | $    330,534             
|                               |  |           |  |                                 |  |                                             |  |                          



11



---



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, the fair value of such options issued for the three months ending June 30, 2006 and 2005 was $65,522 and $0, respectively.

In the case of shares granted to employees, the fair value of such shares is recognized as an expense over the service period. The fair value of such options issued for the three months ending June 30, 2006 and 2005 was $133,644 and $0, respectively. Expense  recognized for the quarters ending June 30, 2006 and 2005 was $6,586 and $0, respectively.

NOTE 8  CONCENTRATIONS



Customer base

Our customer base includes publishers of video games in the United States and Europe. We review the credit worthiness of our customers and do not believe that we need allowances for potential credit losses at June 30, 2006. The receivables recorded from our customers are net of their reserves for uncollectible accounts from their customers. As of June 30, 2006, we had three customers who accounted for 53.3%, 31.9%, and 14.9% of accounts receivables and as of March 31, 2006, we had two customers who accounted for 79.2% and 16.6% of accounts receivables.

Operations by Geographic Area

Our products are sold in North America and Europe through third-party licensing arrangements. During the quarter ended June 30, 2006, we derived substantially all revenue in the United States.

Location of assets

Substantially all the Companys tangible assets are located at its corporate offices in Northern California.

NOTE 9  ACQUISITIONS



Acquisition of Edmond 1, Inc.

On October 20, 2005, we acquired one hundred percent of the outstanding stock of Edmonds 1, Inc. in exchange for $130,000 payable immediately, $70,000 to be paid upon the Company raising $2 million in additional equity, 1,216,044 shares of common stock, valued at $267,530 and warrants to purchase 398,000 shares of common stock. The value of the shares issued was determined by an independent third party. Using the Black Scholes pricing model, all the warrants had a fair value of zero. Edmonds 1 was a non-trading, registered reporting company with the Securities and Exchange Commission. The acquisition was made to facilitate Red Mile becoming a publicly reporting company. SFAS No. 141 applies to the acquisition of a business. At the time of the transaction, Edmonds 1, Inc. was a non-operating public shell corporation, and therefore not a business. For reporting purposes, the transaction was treated as a
capital transaction where the acquiring corporation issued stock and cash for non-monetary assets of the shell corporation. The accounting is similar in form to a reverse acquisition, except that goodwill or other intangibles is not recorded. Accordingly, the fair value of the consideration paid was expensed as Public shell acquisition costs in the Statement of Operations.

The warrants issued were as follows:



| | Expiring          |  |  | StrikePrice |  | Number ofcommon shares
| | ----------------- |  |  | ----------- |  | ----------------------
| | December 31, 2006 |  |  | 1.25        |  | 102,000               
| | January 31, 2007  |  |  | 1.10        |  | 92,000                
| | December 31, 2007 |  |  | 1.50        |  | 102,000               
| | December 31, 2008 |  |  | 1.75        |  | 102,000               
| |                   |  |  |             |  |                       
| | Total             |  |  |             |  | 398,000               
| |                   |  |  |             |  |                       

In April 2006, the name of Edmonds 1, Inc. was changed to Red Mile Entertainment, Inc. (Red Mile-Edmonds). On May 2, 2006, we entered into and closed upon a Merger Agreement among Red Mile-Edmonds, whereby Red Mile-Edmonds merged with and into us with Red Mile-Edmonds becoming the surviving legal entity and Red Mile became the surviving entity for accounting purposes. In accordance with the merger agreement, our separate existence ceased and all outstanding shares of our capital stock were automatically exchanged for an equal number of shares of Red Mile-Edmonds. Prior to the merger, Red Mile-Edmonds was a shell company as defined in Rule 12b-2 of the Securities Exchange Act of 1934. The purpose of this merger was to make Red Mile a non-trading publicly registered company and allow us to then register our shares and give shareholders an opportunity for liquidity.





12





---



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



Liquidity and Capital resources



During the quarter ended June 30, 2006, we raised approximately $2.5 million, net of expenses, in cash through private offerings. These funds were used primarily for funding development at third party subcontractors for seven video and/or PC games, five DVD games, and to finance our internal overhead.

We anticipate needing an additional $5,000,000 to finance our current losses and bring our existing products under development to market. We anticipate needing an additional $5,000,000 to finance our planned expansion within the next 12 months, and an additional $10 million to complete our planned expansion within the next 24 months.

We will be unable to develop or publish additional games, or consummate any acquisitions if we are unable to raise additional financing.  If we are unable to raise the funds required to begin self-publishing our games, we will continue with our co-publishing model. Under the co-publishing model, we believe our current cash on hand of approximately $1.1 million as of July 15, 2006, in addition to anticipated cash flow from operations, would enable the company to continue operating through the end of its second fiscal quarter.



In addition to money needed to develop new games, we will also need money to fund the expansion of our staff. It is currently anticipated that together with 2WG, our wholly-owned subsidiary, we will hire an additional three employees and three outside consultants in the next nine months to support our expansion plans, including taking direct responsibility for marketing our products to consumers.



Results of Operations



The unaudited results of operations for the quarters ending June 30, 2006 and June 30, 2005 were as follows:



Summary of Unaudited Statements of Operations(in thousands, except per share data)



|                                                                                     | 2006               |  | 2005                      |  | Dollar
Increase
(Decrease) |  | Percent
Increase
(Decrease)
|------------------------------------------------------------------------------------ | ------------------ |  | ------------------------- |  | -------------------------- |  | ---------------------------
|Revenues                                                                             | $           41,848 |  | $                    -- - |  | $         41,848           |  |                            
|Cost of sales                                                                        | 37,460             |  | 1,554,205                 |  | (1,516,745)                |  |                            
|Gross margin                                                                         | 4,388              |  | (1,554,205)               |  | 1,558,593                  |  |                            
|Operating expenses                                                                   | 995,313            |  | 413,747                   |  | 581,566                    |  | 141%                       
|Net loss                                                                             | (990,925)          |  | (1,967,952)               |  | 977,027                    |  | (50%)                      
|Income tax expense                                                                   | ---                |  | ---                       |  | ---                        |  |                            
|Net loss                                                                             | $ (990,925)        |  | $ (1,967,952  )           |  | $       977,027            |  | (50%)                      
|Accretion on redeemable convertible preferred stock and foreign currency adjustments | (30,888)           |  | -                         |  | (30,888)                   |  |                            
|Net loss attributable to common shareholders                                         | $ (1,021,813)      |  | $(1,967,952 )             |  | $     946,139              |  |                            
|                                                                                     |                    |  |                           |  |                            |  |                            
|Net loss per common share
Basic and diluted                                          | $         (.05)    |  | $        (   .16 )        |  | $         0.11             |  |                            
|                                                                                     |                    |  |                           |  |                            |  |                            
|Shares used in computing basic and diluted net loss per share (in 000s)             | 19,656             |  | 12,505                    |  | 57%                        |  |                            

















13



---





|Revenues
|--------



For the quarter ended June 30, 2006, our revenue consisted of royalties from three products (Crusty Demons and GripShift and Disney's Aladin Chess Adventures) developed by third parties under our supervision and licensed to three other video game co-publishers. GripShift is near the end of its life and we expect minimal future revenue from it.  Crusty Demons is a minor product and shipped late in the quarter in the U.S. We expect it to ship in Europe in our second fiscal quarter. Disney's Alladin Chess Adventures is near the end of its life and we expect minimal revenue from it.



During the quarter ended June 30, 2005, we were still in the development stage and had not completed or shipped any product, hence we had no revenue.



We have several games under development which we anticipate will be ready for shipment in fiscal 2007.  These include the PC games Dual Sudoku (formerly Super Sudoku), El Matador and Timothy and Titus as well as three DVD games all of which we anticipate will ship in the second or third quarter of fiscal 2007. Also under development for shipment later this fiscal year are Jackass, the Video Game (for console and handheld platforms), Heroes of the Pacific (handheld platform), Equestrian Challenge (console and PC), and two additional DVD games. We are also developing a sequel to Heroes of the Pacific (next generation console and PC) that we expect to ship in fiscal 2009.



We anticipate self-publishing in North America the three PC games shipping in the second quarter of fiscal 2007, all under the 2WG brand. If we are successful in raising additional working capital during fiscal 2007, we may self-publish our video games under development for release in North America later this fiscal year.  Video games are significantly more capital intensive to self-publish due to the high cost of goods, which includes the hardware manufacturer royalties and the extensive marketing which is necessary to generate high consumer awareness. Due to these costs, we may continue to license the publishing rights to co-publishing partners. Self publishing in North America would enable us to retain a greater portion of the wholesale revenue from these games. We would also take responsibility for consumer and
trade advertising for these games under a self publishing model. We plan to continue using third party co-publishers in Europe and Asia under a self publishing model.



|Cost of sales
|-------------



Cost of sales for the quarter ended June 30, 2006 consists of royalties due to our third party developers and amortization of development costs for Crusty Demons. In prior periods we expensed the entire cost of development of GripShift when the product was completed and accepted under its development contract with our co-publisher.



The $1.6 million cost of sales booked in our first fiscal quarter of 2006 reflects the cancellation of development of a game (Jackass) and a charge for the development costs incurred through the date of cancellation. The Company acquired this game already in development but decided to cancel the contract and restart the development with a new developer.



Operating Expenses



Operating expenses for the quarters ended June 30, 2006 and June 30, 2005 were as follows:



|                                         | Three months ended June 30,
|---------------------------------------- | ---------------------------
|                                         | 2006                       
|Research and development costs           | $85,830                    
|General and administrative costs         | 677,539                    
|Marketing and business
development costs | 231,944                    
|Total operating expenses                 | $    995,313               



During the first quarter of fiscal 2006, the Company was in its development stage and primarily raising capital and developing products for future sale.



In the first quarter of fiscal 2006, we were continuing development on two games (GripShift and Heroes of the Pacific) and stopped development of one other game (Jackass) which we restarted with a new developer. In addition, we also moved the management and supervision of our games being development from third party contractors to our own internal development staff.







14



---



Research and development



Our research and development expenses consist of the costs incurred in our internal development group. All actual game development is performed by third party developers under fixed fee contracts. These external costs are capitalized and expensed using the greater of the ratio of total current unit shipments to the total projected unit shipments or straight-line over the estimated life of the game. All internal development costs are expensed as incurred.



During the first quarter of fiscal 2006, we were building our development team (our staff increased from one to two people).  93% of our costs were salaries and benefits for these two people.  These employees were principally involved in managing and supervising the three outside developers and evaluating new product concepts.



In the first quarter of fiscal 2007, our internal development costs increased 77% over those incurred in our fist quarter of fiscal 2006.  This increase was the result of having both employees on staff for the full quarter, increasing our staff by one person, salary increases, and extensive travel managing our external developers.  Salaries and benefits accounted for 86% of research and development costs in this quarter. Our key video games in development slated for completion later this fiscal year are being developed in New Zealand and Australia. Our internal team has spent extensive time in both locations providing hands-on management and oversight of the development process.  Travel accounted for virtually all the remaining development costs.



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 are required to be rated by the Entertainment Software Rating Board (ESRB) for their content. Once the aforementioned approvals have been satisfied, the game can be placed into manufacturing at a manufacturer that must also be approved by the platform licensor. Once a product is manufactured and inspected, it is ready to be shipped.



One multi-platform product, Crusty Demons of Dirt, was completed during the quarter.  The North American Xbox version shipped in late June by our co-publisher, Evolved Games.  We expect the European version should ship in our second quarter of fiscal 2007.  Games under development include: Equestrian Challenge, which is awaiting concept approval from the platform licensor and we expect the game to be ready for worldwide release in the third fiscal quarter of 2007 for console and and PC. Jackass the Video game, in which development is currently in progress and awaiting concept approval from the platform licensor, which we expect to be available for shipment worldwide in the fourth fiscal quarter of 2007 on console and handheld platforms; and a handheld version of our Heroes of the Pacific game in which development is currently in progress and awaiting concept approval from the platform licensor which we expect will be ready for
release in the fourth fiscal quarter of 2007. In fiscal 2007, we will also begin development of several new games for planned shipment in 2008 and 2009. Currently, a sequel of Heroes of the Pacific on the next generation console and PC is targeted for shipment in fiscal 2008. This game is currently in a pre-production phase where the game design and content is being planned, no actual development is in progress on this game.



2WG has completed Dual Sudoku (Formerly Super Sudoku), El Matador, and Timothy and Titus. All three are PC games and do not require approvals from third parties before shipping and they have been rated by the ESRB (a requirement before a game can be shipped). 2WG is self-publishing these games in North America. We expect all three games should ship in our second quarter of fiscal 2007. In addition, 2WG has five DVD games currently under development. Three of these games, Who Rocks?, Who Rules? and Who Rules? Almighty Edition, have been completed. World War II, and History of Hollywood are in the process of being developed. There is no third party approvals required before a DVD game is shipped. We anticipate that each of these DVD games will also ship in the first half of fiscal 2007.

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 and size of the development team, the complexity of the game, the skill and experience of the development team, the location of the development studio, and any specialized software or hardware necessary to develop a game.



General and administrative costs



General and administrative (G&A) costs are comprised primarily of employee salaries and benefits, professional fees (legal, accounting, investor relations and consulting), facilities expenses, and insurance costs.



Total G&A costs increased from $202,000 in the first fiscal quarter of 2006 to $678,000 in the first fiscal quarter of 2007, an increase of 236%. Salaries and related costs increased 150%. 56% of this increase was the result of 2WG administrative salaries (2WG was acquired in our fourth quarter of fiscal 2006), with the remaining increase due to an additional person in G&A at Red Mile.  This additional person was necessitated by the merger with Edmonds 1 and related public filings now required, as well as our moving from a development stage company to an operating business.  Other significant increases from our first quarter of fiscal 2006 were experienced in legal fees (increased 281% or $71,000) and accounting costs (increased 1,364% or $92,000), both related to becoming a publicly reporting company.  Only minimal accounting costs were incurred in our fist quarter of 2006.  Consulting costs
increased 942% or $93,000 as a result of using an investor relations person ($30,000) to interact with investors and expensing stock options ($62,000) given to a consultant. Office expenses increased 448% or $35,000 with the addition of 2WGs offices in Texas.  Insurance costs increased 101% with the addition of directors and officers insurance.



On a quarterly basis, as compared to our first quarter of fiscal 2007, the Company expects that G&A costs will increase moderately throughout fiscal 2007 as the Company expands the scope of its operations and incurs all the costs associated with being a publicly registered and trading company.



Marketing and business development costs



Marketing and business development costs consist primarily of employee salaries and benefits, consulting costs, public relations costs, marketing research, web site costs, and sales support materials costs.



15

---







Total marketing and business development expenses increased 38% from $168,000 in our first quarter of fiscal 2006 to $232,000 in the same quarter of 2007. The majority of the increase was in trade shows (178% or $31,000) and public relations (25,502% or 26,000).  In our first quarter of fiscal 2006, we were principally in a planning mode as we were still two quarters from shipping our initial products. In our first quarter of fiscal 2007, we were preparing to launch Dual Sudoku, El Matador and Timothy and Titus and had started public relations efforts.  We performed virtually no public relations functions in our first quarter of fiscal 2006. We also have started grass roots marketing for our Jackass game as we began to build initial awareness of the game. We expect that marketing expenses will increase substantially throughout fiscal 2007 as we self publish and market some of our new games.





Indemnification of officers and directors



Our Certificate of Incorporation provides that we may indemnify our officers and/or directors for liabilities, which can include liabilities arising under the securities laws. Therefore, our assets could be used or attached to satisfy any liabilities subject to such indemnification.



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, revenue and expense 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 financial statements. While all these significant accounting policies impact the financial results of operations, Red Mile views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on Red Mile's 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 effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.



Revenue recognition



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



Red Mile may receive minimum guaranteed royalties or development advances from its co-publisher(s) or distributor(s) 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 co-publisher(s) or distributor(s) calls for these payments to be recouped from royalties earned by Red Mile 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 co-publisher(s) or distributor(s) using the stated royalty rates and definitions in the contract. 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 royalty revenue, we must make assumptions as to the total number of units a product will sell, the average selling price of these units, potential returns and potential price protection of the product which could result in credits to 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.



Software Development Costs



Software development costs include the costs of milestone payments made to independent software developers and other third parties under development contracts. Such costs 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 are capitalized once technological feasibility is established and such costs are determined to be recoverable from future sales of the game. For products where proven technology exists, this may occur very early in the development cycle. Technological feasibility is determined on a game by game basis. Capitalized costs for such games that are cancelled or abandoned are charged immediately to cost of sales. Recoverability of capitalized software is evaluated on the expected performance of the specific games for which the costs relate. Once the product is completed and released, capitalized software and development costs are amortized to cost of sales using the greater of the ratio of the total current unit shipments to total projected unit shipments or straight line over the estimated life of the product. For products 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.





16



---







Determining the amount to be expensed in a period and the ultimate recoverability requires judgments and assumptions that can have a significant impact on the timing and amount of the cost of sales that we report. For example, because the computation of cost of sales requires us to periodically forecast the worldwide lifetime unit shipments of a game, an increase or decrease in this assumption of total lifetime shipments could cause a material increase or decrease in the amount of cost of sales we report in a particular period.



ITEM 3. CONTROLS AND PROCEDURES



Evaluation of disclosure controls and procedures.



The Company maintains controls and procedures designed to ensure that information required to be disclosed in this report is recorded, processed, accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding the required disclosure.



As of June 30, 2006, the management, with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of these disclosure controls and procedures. The Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of June 30, 2006.



Changes in internal controls.



The Company has made no changes in its internal controls or in other factors that could significantly affect these controls, nor did it take any corrective action, as the evaluation revealed no significant deficiencies or material weaknesses, in the quarter ended June 30, 2006.



PART II. OTHER INFORMATION





ITEM 1A.  RISK FACTORS



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

Risks Relating to Our Company

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. 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 or implementing our proposed distribution system, 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.

The company has not yet generated any income and may never become profitable.

During our initial fiscal period (December 21, 2004 through March 31, 2005), for the year ended March 31, 2006, and for the quarter ended June 30, 2006 we incurred net losses of approximately $4,329,618, $4,849,678, and $990,925, respectively. Our ability to generate revenues and to become profitable depends on many factors, including the market acceptance of our products and services, our ability to control costs and our ability to implement our business strategy. There can be no assurance that we will become or remain profitable.

If we are unable to raise additional financing, we will be unable to fund our planned expansion.

We have not yet achieved profitability and there can be no assurance that we will become profitable. We have never achieved positive cash flow from operations and there can be no assurance that we will do so in the future. We need additional financing to fund our planned expansion and the losses we anticipate incurring over the next several quarters. Our current cash on hand with our expected cash flows from operating activities will enable us to continue operating through the end of our second fiscal quarter. We anticipate needing an additional $5,000,000 to finance our current losses and bring our existing products under development to market. We anticipate needing an additional $5,000,000 to finance our planned expansion within the next 12 months, and an additional $10,000,000 to complete our planned expansion within the next 24 months.

Because we have significant accumulated deficit and negative cash flows our independentregisteredaccounting 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 period from December 21, 2004 through March 31, 2005 and the year ended March 31, 2006 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 and new investors. There can be no assurance that we will be able to generate income or raise capital.



17







---



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, President 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 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.

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

If we are unable to realize profitable operations, or raise sufficient capital, we will be unable to implement our business strategy. If we cannot self publish, we will have to continue licensing our games to co-publishers, and our profit margins will remain lower, making it more difficult to achieve profitability, and our business will eventually fail. In such circumstances, it is likely that we will dissolve and, depending on our remaining assets at the time of dissolution, we may not be able to return any funds back to investors.

Our business depends on the availability of current 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.

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

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. To date, we have sold four games, two of which began in September 2005. A third product, which is not material to our operations, started shipping in our fourth quarter of fiscal 2006. A fourth product started shipping in June 2006. We are currently involved in the development of four games and 2WG has licensed 3 PC games and is developing five DVD games, 3 of which have been completed. All of the games are expected to be published during fiscal 2007. 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. Our business will also suffer if we do not receive additional financing to be used for research and development of new
games.

We currently have 4 shipping products: (i) Heroes of the Pacific for the PS2 and PC platforms which first began shipping in September, 2005; (ii) GripShift for the PSP platform which first began shipping in September 2005; (iii) Disneys Aladdin Chess Adventures for the PC which first began shipping in February 2006; and (iv) Crusty Demons for the Xbox platform which first began shipping in June 2006 . We are currently involved in the development of four games: (i) Jackass for the console and handheld platforms; (ii) Equestrian Challenge for the console and PC; (iii) Heroes of the Pacific for the handheld platform; and (iv) a sequel to Heroes of the Pacific based in the European theatre for the next-generation console and PC.

2WG, has completed the development of three PC games; (i) Dual Sudoku, which is expected to ship in August 2006; (ii) El Matador, which is expected to ship in August 2006, and (iii) Timothy and Titus, which is expected to ship in August 2006. 2WG is currently involved in the development of five DVD games which are expected to ship in our second and third fiscal quarters of 2007: The first three DVD games listed below have completed development. (i) Who Rules?; (ii) Who Rules? Almighty Edition; (iii) Who Rocks; (iv) World War II; and (v) History of Hollywood.

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 just introduced the Xbox 360 and we expect Sony and Nintendo to introduce next generation consoles in 2006. This introduction will create 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 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. 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. Additionally, we will require licenses in order to publish games for the next generation consoles that we expect to be released in fiscal 2007. Our business results 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.

We have the following platform licenses:



|Platform           |  | Term                                                                                                                                                                              
|------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Microsoft 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 expires 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 expires 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.



18

---









|PC and DVDs |  | There are no platform licenses required for the PC or DVDs
|----------- |  | ----------------------------------------------------------

In addition, each platform licensor has its own criteria for approving games for its hardware platform. 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 profits.

Our financial performance will suffer if we do not meet our game development schedule.

We expect that many of our future games will be developed and published in connection with the releases of related movie titles, 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.

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

Our ability to compete and operate successfully depends in part on our acquiring and controlling proprietary intellectual property. Our games embody trademarks, trade names, logos, or copyrights licensed from third parties. An example is MTVs Jackass,TM, which utilizes rights licensed from MTV. If we cannot maintain the licenses that we currently have, or obtain additional licenses for the games that we plan to 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 are currently dependent on a small number of customers, the loss of any of which could cause a significant decrease in our revenue.







19



---



As of June 30, 2006, we had three customers who accounted for 53.3% (Codemasters) 31.9% (Evolved Games) and 14.9% (Sony On-Line Entertainment) of our accounts receivable and three customers who accounted for 200.8% (Evolved Games), 93.6% (Sony On-Line Entertainment) and 29.9% (Strategy First) of revenue. As of March 31, 2006, we had two customers who accounted for 80.7% (Codemasters) and 18.5% (Sony On-Line Entertainment) of our accounts receivable and three customers who accounted for 44.4% (Ubisoft) , 28.6% (Codemasters) and 26.5% (Sony On-Line Entertainment) of revenue. If any of these 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 to replace the lost volume. There can be no assurance that such new customers could be found, or if found, that they would purchase the same
quantity as the current customers.

Because we have not 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 developed any games that we sell and our business has been derived from the sale of games developed by external sources from which we purchase publishing rights. We have very little control over the terms of our publishing rights. If any of the developers of the games were to discontinue its relationship with us, our sales would decrease causing a decrease in revenue. If any of the developers were to increase the price that we pay for publishing rights, our costs would increase, making it more difficult to achieve profitability. In either situation, we would be forced to find alternative developers. 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.



ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

In May 2006, Red Mile issued 1,976,000 investment units outside the U.S. to twenty four non U.S. investors for $2,470,000. 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 $1.50 per share.

In April 2006, Red Mile issued 80,000 investment units outside the U.S. to one non U.S. investor for $100,000. 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 $1.50 per share.

In addition, In May 2006, five US investors purchased 60,000 units for a total of $75,000. 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 $1.50 per share.

On May 15, 2006, 10,357,000 Series A Preferred Shares, representing all our outstanding Preferred A shares, were converted to shares of our common stock pursuant to their terms when we filed our registration statement on Form SB-2.



ITEM 6. EXHIBITS



Exhibits:



|31.1 | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------



|31.2 | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------



|32.1 | Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------



|32.2 | Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------











20



---



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:        August14, 2006 |  | By: /s/ Chester Aldridge     
|                            |  | Chester Aldridge             
|                            |  | Chief Executive Officer      
|                            |  | (Principal Executive Officer)
|Date:        August14, 2006 |  | By: /s/ Ben Zadik            
|                            |  | Ben Zadik                    
|                            |  | Chief Financial Officer      
|                            |  | (Principal Financial Officer)









21