UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549




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


**FORM
      10-QSB**


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






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







FOR
      THE
      QUARTERLY PERIOD ENDED **December
      31, 2006**




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




FOR
      THE
      QUARTERLY PERIOD FROM _____ TO _________ .




Commission
      File # 000-51055




**RED
      MILE ENTERTAINMENT, INC.**


(Exact
      name of registrant as specified in its charter)




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




**4000
      Bridgeway, Suite 101**


**Sausalito,
      CA 94965**


(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICES)




**(415)
      339-4240**


(ISSUER
      TELEPHONE NUMBER)




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




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




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






Number
      of
      shares of the registrant's common stock outstanding as of February 8, 2007
      is:
      9,661,740.





1












Table
                of Contents
            
            PagePART
                I
            FINANCIAL
                INFORMATIONITEM
                1.
            FINANCIAL
                STATEMENTS
            3ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            21ITEM
                3.
            CONTROLS AND PROCEDURES
            29PART
                II
            OTHER
                INFORMATIONITEM
                1A.
            RISK
                FACTORS
            30ITEM
                2
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            35ITEM
                4
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITIES HOLDERS
            36ITEM
                6.
            EXHIBITS
                AND REPORTS ON FORM 8-K
            37FORM
                10QSB SIGNATURE PAGE
            38











2









Part
      I.
      FINANCIAL INFORMATION




ITEM
      1.
      Financial Statements




**RED
      MILE ENTERTAINMENT, INC.**


**Condensed
      Consolidated Balance Sheets**


**(Unaudited)**


**December
                  31,**
                **2006**
              
              **March
                  31,**
                **2006,
                  (1)****ASSETS**Cash
                  in bank
              
              $
              4,172,490
              
              $
              769,926Marketable
                  securities
              
              
              —
              
              
              10,313Accounts
                  receivable, net of reserves of $115,331 and $0
              
              
              399,422
              
              
              355,861Current
                  portion of issuance costs on senior secured convertible
                  debentures
              
              
              305,226
              
              
              —Prepaid
                  expenses
              
              
              32,742
              
              
              22,883Inventory,
                  net of reserves of $140,540 and $0
              
              
              49,159
              
              
              —Software
                  development costs and advanced royalties
              
              
              6,221,297
              
              
              3,280,769Total
                  current assets
              
              
              11,180,336
              
              
              4,439,752Long
                  term portion of issuance costs on senior secured convertible debentures,
                  net
              
              
              237,658
              
              
              —Property
                  and equipment, net
              
              
              279,910
              
              
              101,588Other
                  assets
              
              
              249,521
              
              
              205,000Total
                  assets
              
              $
              11,947,425
              
              $
              4,746,340**LIABILITIES,
                  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
                  (DEFICIT)**Current
                  liabilitiesAccounts
                  payable
              
              $
              662,936
              
              $
              472,880Accrued
                  liabilities
              
              
              563,919
              
              
              531,645Deferred
                  revenue
              
              
              —
              
              
              27,500Total
                  current liabilities
              
              
              1,226,855
              
              
              1,032,025Commitments
                  (see note 4)Senior
                  secured convertible debentures
              
              
              8,244,000
              
              
              —Total
                  Liabilities
              
              
              9,470,855
              
              
              1,032,025Redeemable,
                  convertible preferred stock, no par value, authorized 20,000,000
                  shares;
                  issued and outstanding 0 and 12,075,860, respectively; the aggregate
                  redemption value and liquidity preference $0 and $12,419,127,
                  respectively
              
              
              —
              
              
              12,077,075Warrants
                  on
                  redeemable, convertible preferred stock
              
              
              —
              
              
              342,0520
              
              
              12,419,127Stockholders’
                  equity (deficit)Common
                  stock, $0.0001 par value, authorized 100,000,000 shares; issued
                  and
                  outstanding 9,626,566 and 4,806,957, respectively
              
              
              963
              
              
              481Additional
                  paid in capital
              
              
              16,364,949
              
              
              474,003Accumulated
                  deficit
              
              
              (13,890,889
              )
              
              (9,179,296
              )Accumulated
                  other comprehensive income
              
              
              1,547
              
              
              —Total
                  stockholders’ equity (deficit)
              
              
              2,476,570
              
              
              (8,704,812
              )Total
                  liabilities, redeemable convertible preferred stock and stockholders’
                  equity (deficit)
              
              $
              11,947,425
              
              $
              4,746,340










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


3








**RED
      MILE ENTERTAINMENT, INC.**


**Condensed
      Consolidated Statements of Operations**


**For
      the three months ended December 31, 2006 and 2005**


**(Unaudited)**




**Three
                months ended**
              **December
                31,**
              **2006**
            
            **Three
                months ended**
              **December
                31,**
              **2005**Revenues
            
            $
            502,503
            
            $
            582,225Cost
                of sales
            
            
            1,322,570
            
            
            641,942Gross
                margin
            
            
            (820,067
            )
            
            (59,717
            )Operating
                expensesResearch
                and development costs
            
            
            143,551
            
            
            90,578General
                and administrative costs
            
            
            785,961
            
            
            437,133Sales,
                marketing, and business development costs
            
            
            496,694
            
            
            171,240Public
                shell acquisition costs
            
            
            —
            
            
            467,530Total
                operating expenses
            
            
            1,426,206
            
            
            1,166,481Interest
                income (expense), net
            
            
            (46,771
            )
            
            361Amortization
                of senior secured convertible debentures issuance costs
            
            
            (52,599
            )
            
            —Loss
                before income tax expense
            
            
            (2,345,643
            )
            
            (1,225,837
            )Income
                tax expense
            
            
            —
            
            
            —Net
                loss
            
            
            (2,345,643
            )
            
            (1,225,837
            )Accretion
                of redeemable, convertible preferred stock
            
            
            (31,726
            )
            
            —Net
                loss attributable to common shareholders
            
            $
            (2,377,369
            )
            $
            (1,225,837
            )Net
                loss per share:Net
                loss per common share, basic and diluted
            
            $
            (0.27
            )
            $
            (0.27
            )Shares
                used in computing basic and diluted loss per share
            
            
            8,729,297
            
            
            4,510,867




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











4










**RED
      MILE ENTERTAINMENT, INC.**


**Condensed
      Consolidated Statements of Operations**


**For
      the nine months ended December 31, 2006 and 2005**


**(Unaudited)**




**Nine
                  months ended**
                **December
                  31,**
                **2006**
              
              **Nine
                  months ended**
                **December
                  31,**
                **2005,
                  (1)**Revenues
              
              $
              829,253
              
              $
              3,454,769Cost
                  of sales
              
              
              1,935,825
              
              
              4,655,265Gross
                  margin
              
              
              (1,106,572
              )
              
              (1,200,496
              )Operating
                  expensesResearch
                  and development costs
              
              
              334,371
              
              
              184,743General
                  and administrative costs
              
              
              2,104,621
              
              
              982,555Sales,
                  marketing and business development costs
              
              
              1,076,179
              
              
              479,025Debt
                  conversion inducement costs
              
              
              —
              
              
              1,000,000Public
                  shell acquisition costs
              
              
              —
              
              
              467,530Total
                  operating expenses
              
              
              3,515,171
              
              
              3,113,853Interest
                  income (expense), net
              
              
              (37,251
              )
              
              6,883Amortization
                  of senior secured convertible debentures issuance costs
              
              
              (52,599
              )
              
              —Loss
                  before income tax expense
              
              
              (4,711,593
              )
              
              (4,307,466
              )Income
                  tax expense
              
              
              —
              
              
              —Net
                  loss
              
              
              (4,711,593
              )
              
              (4,307,466
              )Accretion
                  of redeemable, convertible preferred stock
              
              
              (101,200
              )
              
              —Net
                  loss attributable to common shareholders
              
              $
              (4,812,793
              )
              $
              (4,307,466
              )Net
                  loss per share:Net
                  loss per common share, basic and diluted
              
              $
              (0.60
              )
              $
              (1.00
              )Shares
                  used in computing basic and diluted loss per share
              
              
              8,058,190
              
              
              4,298,291




(1)  
Derived
      from the Company’s audited consolidated financial statements as of December 31,
      2005.





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




5





**RED
      MILE ENTERTAINMENT, INC.**


**Condensed
      Consolidated Statements Of Cash Flows**


**For
      the Nine months ended December 31, 2006 and 2005**


**(Unaudited)**


**Nine
                months ended December 31,****2006**
            
            **2005,
                (1)**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (4,711,593
            )
            $
            (4,307,466
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
            
            
            84,512
            
            
            43,860Amortization
                of software development costs
            
            
            252,263
            
            
            2,515,495Amortization
                of senior secured convertible debenture issuance costs
            
            
            52,599
            
            
            —Debt
                conversion inducement costs
            
            
            —
            
            
            1,000,000Impairment
                of software development and licensing costs
            
            
            1,268,031
            
            
            1,554,205Public
                shell acquisition cost
            
            
            —
            
            
            467,530Stock
                based compensation
            
            
            243,009
            
            
            —Allowance
                for doubtful accounts and price protection reserves
            
            
            115,331
            
            
            —Inventory
                reserve for shrinkage and obsolescence
            
            
            140,540
            
            
            —Changes
                in current assets and liabilitiesAccounts
                receivable
            
            
            (158,892
            )
            
            122,722Prepaid
                expenses
            
            
            (9,859
            )
            
            (5,616
            )Licenses
            
            
            —
            
            
            322,205Inventory
            
            
            (189,699
            )
            
            —Software
                development costs
            
            
            (4,570,822
            )
            
            (4,942,989
            )Other
                assets
            
            
            (44,521
            )
            
            (195,000
            )Accounts
                payable
            
            
            190,056
            
            
            (26,193
            )Accrued
                liabilities
            
            
            32,274
            
            
            526,265Deferred
                revenue
            
            
            (27,500
            )
            
            250,008Net
                cash used in operating activities
            
            
            (7,334,271
            )
            
            (2,674,974
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of marketable securities
            
            
            —
            
            
            (616,876
            )Sales
                of marketable securities
            
            
            10,313
            
            
            850,000Acquisition
                of property and equipment
            
            
            (262,834
            )
            
            (21,513
            )Amount paid related to public shell acquisition
            
            
            —
            
            
            (130,000
            )Net
                cash provided by (used in) investing activities
            
            
            (252,521
            )
            
            81,611CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from exercises of warrants
            
            
            859,916
            
            
            **—**Proceeds
                from issuances of preferred stock
            
            
            2,645,000
            
            
            1,871,250Proceeds
                from issuances of convertible debt
            
            
            **—**
            
            
            1,000,000Proceeds
                from issuance of senior secured convertible debentures
            
            
            8,244,000
            
            
            —Costs
                from issuance of common and preferred stock
            
            
            —
            
            
            (19,754
            )Costs
                from issuance of senior secured convertible debentures
            
            
            (595,483
            )
            
            —Cost
                of redeemable preferred stock issuances
            
            
            (165,624
            )
            
            —Net
                cash provided by financing activities
            
            
            10,987,809
            
            
            2,851,496




(1)
      Derived from the Company’s audited consolidated financial statements as of
      December 31, 2005.





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


6


**RED
      MILE ENTERTAINMENT, INC.**


**Condensed
      Consolidated Statements Of Cash Flows (Continued)**


**For
      the Nine months ended December 31, 2006 and 2005**


**(Unaudited)**





**Nine
                Months Ended December 31,****2006**
            
            **2005,
                (1)**Effect
                of foreign currency adjustments
            
            1,547
            
            —NET
                INCREASE IN CASH
            
            3,402,564
            
            258,133CASH,
                beginning of period
            
            769,926
            
            302,280CASH,
                end of period
            
            $
            4,172,490
            
            $
            560,413




SUPPLEMENTAL
                DISCLOSURE OF NON-CASH FINANCING TRANSACTIONSAccretion
                of redeemable convertible preferred stock and foreign currency
                adjustment
            
            $
            101,200
            
            $
            —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
            
            
            —Shares
                issued - acquisition of Fluent assets
            
            
            —
            
            
            9,505Debt
                acquired - acquisition of assets
            
            
            —
            
            
            1,852,083Conversion
                of Series B and C Redeemable Convertible Preferred Stock, net of
                offering
                costs
            
            
            4,655,257
            
            
            —Cancellation
                of common stock
            
            
            (110,000
            )
            
            —




(1)
      Derived from the Company’s audited consolidated financial statements as of
      December 31, 2005.





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





7




**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
      Delaware in August of 2004. The Company is a developer and publisher of
      interactive entertainment software across multiple hardware platforms, with
      a
      focus on creating or licensing intellectual properties. The Company is currently
      developing products in the action/adventure game categories. The Company sells
      its games directly to distributors and retailers in North America. In Europe,
      the Company licenses its games with major international game distributors in
      exchange for payment to the Company 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, the Company is entitled to
      additional royalties as computed under the agreements. The Company operates
      in
      one business segment, interactive software publishing. 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** —
These
      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 $13,890,889 at
      December 31, 2006, and has incurred negative cash flows from operations. These
      factors raise substantial doubt about the Company’s ability to continue as a
      going concern. These condensed consolidated financial statements do not include
      any adjustments relating to the recoverability and classification of asset
      carrying amounts or the amount and classification of liabilities that might
      result should the Company be unable to continue as a going
      concern.




The
      Company has a strategic financing plan that it believes to be viable and will
      contribute to meeting the Company’s cash flow requirements. Management believes
      that this plan is reasonably capable of removing the threat to continuation
      of
      the business during the 12 month period following the most recent balance sheet
      presented in this quarterly report on Form 10-QSB.




**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.





The
      March
      31, 2006 year-end condensed consolidated balance sheet data, and the December
      31, 2005 condensed consolidated balance sheet, the condensed consolidated
      statements of operations  for
      the
      nine months ended December 31, 2005, and the condensed consolidated statement
      of
      cash flows for the nine months ended December 31, 2005 were derived from audited
      financial statements, but do not include all disclosures required by accounting
      principles generally accepted in the United States of America.





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




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










8










**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**









**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. Such estimates include sales returns and
      allowances, price protection estimates, provisions for doubtful accounts,
      accrued liabilities, estimates regarding the recoverability of prepaid
      royalties, inventories, software development costs, long lived assets, and
      deferred tax assets. These estimates generally involve complex issues and
      require us to make judgments, involve analysis of historical and future trends,
      can require extended periods of time to resolve, and or subject to change from
      period to period. Actual results could differ materially from our
      estimates.




**Inventories** —
      Inventories consist of materials (including manufacturing royalties paid to
      console manufacturers), labor charges from third parties, and freight-in.
      Inventories are stated at the lower of cost or market, using the first-in,
      first-out method. All inventories are produced by third party manufacturers,
      and
      substantially all inventories are located at third party warehouses.





**Revenue
      Recognition** — **** The
      Company’s revenue recognition policies are in accordance with the American
      Institute Of Certified Public Accountants (“AICPA”) Statement of Position
      (“SOP”) 97-2 “Software Revenue Recognition” as amended by SOP 98-9 “Modification
      of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”
and SOP 81-1 “Accounting for Performance of Construction Type and Certain
      Production-Type Contracts”, and Staff Accounting Bulletin (“SAB”) No. 101,
“Revenue Recognition in Financial Statements”, as revised by SAB No. 104,
“Revenue Recognition”. We evaluate revenue recognition using the following basic
      criteria and recognize revenue when all four criteria are met:





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





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





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





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





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




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) or distributor(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 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.





9







**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**










In
      cases
      where the contract with a 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.





Determining
      when and the amount of revenue to be recognized often involves assumptions
      and
      judgments that can have a significant impact on the timing and amount of revenue
      we report. For example, in recognizing revenue, we must make assumptions as
      to
      the total number of units a product will sell through to the consumer, the
      average selling price of these units, potential returns and potential price
      protection of the product which could result in credits to distributors and
      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.




**Reclassification**




Certain
      prior period items have been reclassified to conform to the current period’s
      presentation. These items include the reclassification of amounts from Common
      Stock to Additional Paid in Capital for the one for three reverse stock split
      which went into effect on February 8, 2007. These reclassifications had no
      impact on consolidated net income or total stockholders’ equity as previously
      reported.





**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 allowed by SFAS 123, amended by SFAS 148 “ *Accounting
      for stock based compensation - transition and disclosure* ”.
      Accordingly, we have elected to use the prospective transition method as
      permitted by SFAS 123(R) and therefore have not restated our financial results
      for prior periods. Under this transition method, stock-based compensation
      expense for the nine months ended December 31, 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 SAB No. 107, which offers guidance on SFAS 123(R). SAB
      107
      was issued to assist preparers by simplifying some of the implementation
      challenges of SFAS 123(R) while enhancing the information that investors
      receive. SAB 107 creates a framework that is premised on two overarching themes:
      (a) considerable judgment will be required by preparers to successfully
      implement SFAS 123(R), specifically when valuing employee stock options; and
      (b)
      reasonable individuals, acting in good faith, may conclude differently on the
      fair value of employee stock options. Key topics covered by SAB 107 include
      valuation models, expected volatility and expected term. The Company is applying
      the principles of SAB 107 in conjunction with its adoption of SFAS
      123(R).




The
      fair
      value of employee options granted in the nine and three month periods ended
      December 31, 2006 has been estimated at the date of grant using the fair value
      method with the following weighted average assumptions:




Nine
                Months Ended December 31, 2006
            
            Three
                Months Ended December 31, 2006Expected
                life (in years)
            
            
            4.2
            
            
            4.2Risk
                free rate of return
            
            
            5.13
            %
            
            5.13
            %Volatility
            
            
            50-70
            %
            
            70
            %Dividend
                yield
            
            
            —
            
            
            —Forfeiture
                rate
            
            
            9
            %
            
            9
            %






10











**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**








The
      following table sets forth the total stock-based compensation expense for the
      nine and three months ended December 31, 2006, resulting from options awarded
      to
      employees and consultants during the nine and three months ended December 31,
      2006. All Research and development costs, and Sales, marketing, and business
      development costs in this table are related to employees. General and
      administrative costs are broken out between those related to consultants and
      those related to employees.




Nine
                  Months Ended December 31, 2006
              
              Three
                  Months Ended December 31, 2006Research
                  and development costs
              
              $
              14,332
              
              $
              6,948Sales,
                  marketing, and business development costs
              
              
              28,624
              
              
              18,067General
                  and administrative costs--consultants
              
              
              192,655
              
              
              130,133General
                  and administrative costs--employees
              
              
              7,398
              
              
              7,398Stock-based
                  compensation before income taxes
              
              
              243,009
              
              
              162,546Income
                  tax benefit
              
              
              -
              
              
              -Total
                  stock-based employee compensation expense after income
                  taxes
              
              $
              243,009
              
              $
              162,546







The
      following table sets forth the total stock-based compensation expense for the
      nine and three months ended December 31, 2006, resulting from options awarded
      to
      both employees and consultants during the nine and three months ended December
      31, 2006.




Nine
                  Months Ended December 31, 2006
              
              Three
                  Months Ended December 31, 2006Stock-based
                  employee compensation expense before income taxes
              
              $
              50,354
              
              $
              32,413Stock-based
                  consultant compensation expense before income taxes
              
              
              192,655
              
              
              130,133Stock-based
                  compensation before income taxes
              
              
              243,009
              
              
              162,546Income
                  tax benefit
              
              
              -
              
              
              -Total
                  stock-based employee compensation expense after income
                  taxes
              
              $
              243,009
              
              $
              162,546




During
        the nine and three months ended December 31, 2006, 98,333 and 68,333,
        respectively, 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 nine and three
        months ending December 31, 2006 and 2005 was $192,655 and $130,133, and $0
        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.





11







**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**








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(R) to employee stock-based compensation during the nine and three months
      ended December 31, 2005:






Nine
                Months
              Ended
              December
                31, 2005
            
            Three
                Months Ended December 31, 2005Net
                loss as reported
            
            $
            (4,307,466
            )
            $
            (1,225,837
            )Add:
                total stock-based employee compensation expense included in reported
                net
                loss, net of tax benefit of $0 and $0, respectively
            
            
            -
            
            
            **-**Less:
                total stock-based employee compensation expense for non-employees
                determined under the SFAS 123 fair-value method, net of tax benefit
                of $0
                and $0, respectively
            
            
            -
            
            
            **-**Net
                loss, pro forma
            
            $
            (4,307,466
            )
            $
            (1,225,837
            )Basic
                and diluted net loss per share:As
                reported
            
            $
            (1.00
            )
            $
            (0.27
            )Pro
                forma
            
            $
            (1.00
            )
            $
            (0.27
            )







**Loss
      Per Share** —We
      computed basic and diluted loss per share amounts pursuant to 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, the conversion of senior secured
      convertible debentures, and the conversion of preferred stock (using the
      treasury stock method). Potentially dilutive securities are excluded from the
      computation if their effect is anti-dilutive.




The
      following table summarizes the weighted average shares outstanding for the
      nine
      months ending December 31, 2006 and 2005.




Nine
                Months
              Ended
              December
                31, 2006
            
            Nine
                Months
              Ended
              December
                31, 2005Basic
                weighted average shares outstanding
            
            
            8,058,190
            
            
            4,298,291Total
                stock options outstanding
            
            
            1,210,410
            
            
            447,659Less:
                anti-dilutive stock options due to loss
            
            
            (1,210,410
            )
            
            (447,659
            )Total
                redeemable convertible preferred stock outstanding
            
            
            --
            
            
            3,452,333Less:
                anti-dilutive redeemable convertible preferred stock due to
                loss
            
            
            --
            
            
            (3,452,333
            )Total
                senior secured convertible debentures outstanding
            
            
            1,570,286
            
            
            --Less:
                senior secured convertible debentures outstanding due to
                loss
            
            
            (1,570,286
            )
            
            --Total
                warrants outstanding
            
            
            3,319,510
            
            
            2,699,000Less:
                anti-dilutive warrants due to loss
            
            
            (3,319,510
            )
            
            (2,699,000
            )Diluted
                weighted average shares outstanding
            
            
            8,058,190
            
            
            4,298,291









12










**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**







The
      following table summarizes the weighted average shares outstanding for the
      three
      months ending December 31, 2006 and 2005.





**Three
                Months ending December 31,****2006**
            
            **2005**Basic
                weighted average shares outstanding
            
            
            8,729,297
            
            
            4,510,867Total
                stock options outstanding
            
            
            1,210,410
            
            
            447,659Less:
                anti-dilutive stock options due to loss
            
            
            (1,210,410
            )
            
            (447,659
            )Total
                redeemable convertible preferred stock outstanding
            
            
            —
            
            
            3,452,333Less:
                anti-dilutive redeemable convertible preferred stock due to
                loss
            
            
            —
            
            
            (3,452,333
            )Total
                senior secured convertible debentures outstanding
            
            
            1,570,286Less:
                senior secured convertible debentures outstanding due to
                loss
            
            
            (1,570,286
            )
            
            —Total
                warrants outstanding
            
            
            3,319,510
            
            
            2,699,000Less:
                anti-dilutive warrants due to loss
            
            
            (3,319,510
            )
            
            (2,699,000
            )Diluted
                weighted average shares outstanding
            
            
            8,729,297
            
            
            4,510,867




**NOTE
      2 — ACCRUED LIABILITIES**




**December
                31, 2006**
            
            **March
                31, 2006**Accrued
                professional fees
            
            $
            101,620
            
            $
            20,000Accrued
                royalties payable
            
            
            97,086
            
            
            170,898Accrued
                price protection
            
            
            87,342
            
            
            —Accrued
                bonuses
            
            
            87,314
            
            
            169,000Accrued
                interest on senior secured convertible debentures
            
            
            78,137
            
            
            —Accrued
                milestone payments to developers
            
            
            50,000
            
            
            50,000Accrued
                paid time off
            
            
            37,267
            
            
            45,323Other
            
            
            25,153
            
            
            6,424Accrued
                liability for purchase of Edmonds 1
            
            
            —
            
            
            35,000Accrued
                liability to related party for purchase of Edmonds 1
            
            
            —
            
            
            35,000Total
            
            $
            563,919
            
            $
            531,645






**NOTE
      3 — DEFERRED REVENUE**




**December
                31, 2006**
            
            **March
                31, 2006**Crusty
                Demons
            
            $
            —
            
            $
            15,000Disney’s
                Aladdin Chess Adventure
            
            
            —
            
            
            12,500Total
            
            $
            —
            
            $
            27,500










13




**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**







**NOTE
      4 — COMMITMENTS**





In
      the
      normal course of business, we enter into contractual arrangements with
      third-parties for the development of products, as well as for the 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 may be deemed to be advances and are recoupable against future royalties
      earned by the developer or intellectual property holder based on the sale of
      the
      related game. Assuming all contractual provisions are met, the total future
      minimum contract commitments for development contracts in place as of December
      31, 2006 are approximately $4,490,406. which is scheduled to be paid as follows:




**Year
                ended March 31,**2007
            
            $
            715,3652008
            
            
            2,176,8712009
            
            
            1,598,170Total
            
            
            
            
            $
            4,490,406




In
      addition the company has entered into a small number of operating leases. These
      lease commitments total less than $100,000 and as such are not listed here
      as
      they are not significant.





**NOTE
      5 — REDEEMABLE CONVERTIBLE PREFERRED STOCK**




In
      the
      nine months ended December 31, 2006, the Company issued 658,667 investment
      units
      consisting of one share of Series B Redeemable Convertible Preferred Stock
      and a
      warrant to purchase an additional share of Common Stock with a strike price
      of
      $4.50 and an expiration date of May 1, 2008 for $2,470,000. During the first
      quarter of fiscal 2007, the Company also issued 46,667 investment units
      consisting of one share of Series C Redeemable Convertible Preferred Stock
      and a
      warrant to purchase an additional share of Common Stock with a strike price
      of
      $4.50 and an expiration date of May 1, 2008 for $175,000. Using the
      Black-Scholes option pricing model, the relative fair values of the Preferred
      Series B warrants and Preferred Series C warrants of $395,748 and $28,040 were
      allocated to Preferred Series B and Preferred Series C warrants on redeemable
      convertible preferred stock for the quarter ended June 30, 2006. The Series
      B
      and C redeemable convertible preferred stock were being accreted to their
      redemption values through the redemption date using the effective interest
      method. Accretion of redeemable convertible preferred stock was $101,200 and
      $31,726, and $0 and $0 for the nine and three months ending December 31, 2006
      and 2005, respectively.




In
      May
      2006, all 3,452,333 shares of Series A Redeemable Convertible Preferred Stock
      converted into common stock. In December 2006, all 1,278,287 shares of Series
      B
      and C Redeemable Convertible Preferred Stock converted into common
      stock.





The
      Series B Redeemable Convertible Preferred Stock had a security interest in
      all
      the assets of the Company. This security interest terminated upon the Series
      B
      Redeemable Convertible Preferred Stock converting to common shares. All shares
      of preferred stock voted 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 had 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 would be distributed ratably to the holders of
      Common Stock and the Redeemable Convertible Preferred Stock until the Redeemable
      Convertible Preferred Stock holders would have received three times their
      original investment. All remaining assets, if any, would then have been
      distributed to the holders of Common Stock.




14






**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**







**NOTE
      6 — 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 of Directors to grant to officers,
      directors, employees and third parties incentive stock options (“ISOs”),
      non-qualified stock options, restricted stock and stock appreciation rights
      (“SARs”). Under this plan, options for 1,333,333 shares of common stock are
      reserved for issuance. Options have been issued with exercise prices of between
      $0.66 and $3.30 per share.




Options
            
            Shares
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual Term
            
            Aggregate
                Intrinsic ValueOutstanding
                at April 1, 2005
            
            
            -
            
            $
            -
            
            
            
            
            $
            -Granted
            
            
            940,966
            
            
            0.75Exercised
            
            
            -
            
            
            -Forfeited
                or expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at March 31, 2006
            
            
            940,966
            
            $
            0.75
            
            
            -
            
            
            -Exercisable
                at March 31, 2006
            
            
            177,620
            
            $
            0.90
            
            
            -
            
            
            -Granted
            
            
            274,167
            
            
            2.97Exercised
            
            
            -
            
            
            -Forfeited
                or expired
            
            
            (4,723
            )
            $
            0.66
            
            
            -
            
            
            -Outstanding
                at December 31, 2006
            
            
            1,210,410
            
            $
            1.24
            
            
            9.10
            
            $
            3,034,830Exercisable
                at December 31, 2006
            
            
            351,849
            
            $
            0.85
            
            
            8.41
            
            $
            1,020,368




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 values of such options issued for the nine
        and
        three months ending December 31, 2006 and 2005 were $192,655 and
        $130,133 **,** and
        $0
        and $0, respectively. During the nine months ended December 31, 2006, at
        the
        time of grant, the estimated fair values per option were from $1.87 to $1.90.
        During the three months ended December 31, 2006 at the time of grant, the
        estimated fair value per option was $1.90.
 
 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 nine and three months ending December 31, 2006 and 2005 was $319,720
        and
        $186,076 **,** and
        $0
        and $0, respectively. Expense recognized for the nine and three months ending
        December 31, 2006 and 2005 was $50,354 and $32,413, and $0 and $0, respectively.
        During the nine months ended December 31, 2006 at the time of grant, the
        estimated fair values per option were from $1.87 to $1.90. During the three
        months ended December 31, 2006 at the time of grant the estimated fair value
        per
        option was $1.90.








15







**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**





**NOTE
      7 — CONCENTRATIONS**




*Customer
      base*




Our
      customer base includes co-publishers, distributors, and retailers of video
      games
      in the United States, Europe, and Australia. We review the credit worthiness
      of
      our customers on an ongoing basis, and believe that we need an allowance for
      potential credit losses at December 31, 2006 of $84,011. Also netted against
      accounts receivable are returns and price protection reserves on existing
      receivables of $31,320. The receivables recorded from our customers are net
      of
      their reserves for uncollectible accounts, returns and price protection reserves
      from their customers. Account balances are charged off against the allowance
      when the Company believes it is probable that accounts receivable will not
      be
      recovered. As of December 31, 2006, we had two customers who accounted for
      48.8%
      and 25.7% of gross accounts receivable. These customers were Navarre Corporation
      and GameStop, respectively. Navarre Corporation and Game Stop accounted for
      41.6
      % and 21.6%, respectively, of revenue during the first nine months of fiscal
      2007. As of March 31, 2006, we had two customers who accounted for 79.2% and
      16.6% of gross accounts receivable.




*Operations
      by Geographic Area*




Our
      products are sold in North America, Europe, and Australia through third-party
      licensing arrangements, through distributors, and through retailers. During
      the
      nine and three months ended December 31, 2006, we derived substantially all
      revenue in the United States.




*Location
      of assets*




The
      Company’s tangible assets excluding inventory are located at its corporate
      offices in Northern California and on loan to a third party developer in
      Melbourne, Australia. Inventory is located at several third party warehouse
      facilities, primarily in Minnesota.




**NOTE
      8 — 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, 405,348 shares of
      common stock valued at $267,530 and warrants to purchase 132,667 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.










16










**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**









The
      warrants issued in connection with the acquisition of Edmonds 1, Inc., were
      as
      follows:




**Expiring**
              
              **Strike**
                **Price**
              
              **Number
                  of**
                **common
                  shares**December
                  31, 2006
              
              3.75
              
              34,000January
                  31, 2007
              
              3.30
              
              30,667December
                  31, 2007
              
              4.50
              
              34,000December
                  31, 2008
              
              5.25
              
              34,000Total
              
              
              
              132,667




On
      January 31, 2007, the warrants issued for 30,667 common shares with a $3.30
      strike price expired and a portion of those options were exercised. On and
      prior
      to December 31, 2006, 25,333 of the 34,000 warrants issued with a $3.75 strike
      price were exercised. The remaining 8,667 warrants expired.




In
      April
      2006, the name of Edmonds 1, Inc. was changed to Red Mile Entertainment, Inc.
      (Red Mile-Edmonds). On May 2, 2006, Red Mile Entertainment, Inc., a Florida
      Corporation (“Red Mile Florida”) entered into and closed upon a Merger Agreement
      among Red Mile-Edmonds, whereby Red Mile-Edmonds merged with and into Red Mile
      Florida with Red Mile-Edmonds becoming the surviving legal entity and Red Mile
      Florida became the surviving entity for accounting purposes. In accordance
      with
      the merger agreement, Red Mile Florida’s separate existence ceased and all
      outstanding shares of Red Mile Florida 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 provide shareholders an opportunity for liquidity.




**NOTE
      9 — WARRANTS**





The
      following table lists the total number of warrants outstanding as of December
      31, 2006. These include the warrants listed above in Note 8 issued in
      conjunction with the purchase of Edmonds 1 Inc.





**Expiring**
            
            **Strike**
              **Price**
            
            **Number
                of**
              **common
                shares**January
                31, 2007
            
            3.30
            
            30,667January
                31, 2007
            
            3.30
            
            494,667December
                31, 2007
            
            4.50
            
            34,000December
                31, 2007
            
            4.50
            
            647,778May
                1, 2008
            
            4.50
            
            585,287May
                2, 2008
            
            4.50
            
            845,333December
                31, 2008
            
            5.25
            
            34,000December
                31, 2008
            
            5.25
            
            647,778Total
            
            
            
            3,319,510





During
      the nine months ended December 31, 2006, there were 219,546 warrants with a
      $3.30 strike price exercised, and 36,111 warrants with a $3.75 strike price
      were
      exercised. During this period there were also 628,666 warrants with a $3.75
      strike price which expired. During the three months ended December 31, 2006,
      36,111 warrants with a $3.75 strike price were exercised. .




17





**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**





**NOTE
      10 — SENIOR SECURED CONVERTIBLE DEBENTURES**





On
      October 19, 2006, the Company issued $5,824,000 of Senior Secured Convertible
      Debentures.  Pursuant to the terms of the Agency Agreement, the Agent
      facilitated the purchase of 5,824 convertible debentures to 74 Debenture Holders
      for an aggregate principal face amount of $5,824,000. The Debentures mature
      on
      October 19, 2008 and are convertible into shares of the Common Stock of the
      Company at a ratio of $5.25 per Common Share (the “Conversion Price).





On
      November 20, 2006, the Company, issued $2,420,000 of Senior Secured Convertible
      Debentures.  Pursuant to the terms of the Agency Agreement, the Agent
      facilitated the purchase of 2,420 convertible debentures to 7 Debenture Holders
      for an aggregate principal face amount of $2,420,000. These Debentures mature
      on
      November 20, 2008 and are convertible into shares of the Common Stock of the
      Company at a ratio of $5.25 per Common Share (the “Conversion Price).





The
      conversions on the above mentioned Debentures may be exercised at the election
      of the holders of the Debentures at any time after a minimum non-conversion
      period of 12 months from the issue date. The conversions can also be exercised
      by the Company after a minimum non-conversion period of 12 months from the
      issue
      date so long as the Company’s Common Shares have begun trading on a recognized
      exchange and have traded at a minimum volume weighted average price of
      $9.00/share for 20 consecutive trading days, subject to certain limitations.





On
      the
      maturity dates of the two sets of Debentures, the Company retains the right
      to redeem the Debentures in cash, in kind, or in cash and in kind with Common
      Shares of the Company. The Company also has the right to redeem the Debentures
      at a redemption price equal to 115% of the principal face value at any time
      after a period of 12 months so long as the Company’s Common Shares have begun
      trading on a recognized exchange and have traded at a minimum volume weighted
      average price of $9.00/share for 20 consecutive trading days, subject to certain
      limitations.





The
      Debentures carry a coupon rate of 5.5% per annum, non-compounded, and the
      interest is payable semi-annually on March 15 and September 15 in cash, or
      in
      kind.  The accrued interest at December 31, 2006 is $78,137. This is
      included within the Accrued Liabilities account.





The
      Debentures are secured direct senior obligations of the Company secured against
      all present and after acquired property of the Company except for accounts
      receivable in which case the Debenture holders rank less senior to other
      creditors for the security interest in accounts receivable. The Debentures
      have
      full rights to piggyback registration after a period of 12 months.




**NOTE
      11 — RECENT ACCOUNTING PRONOUNCEMENTS**





In
      June 2006, the FASB ratified the consensus reached on Emerging Issues Task
      Force (“EITF”) Issue No. 06-3, “ *How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross Versus Net
      Presentation)* ”.
      The
      scope of EITF Issue No. 06-3 includes any transaction-based tax assessed by
      a governmental authority that is imposed concurrent with or subsequent to a
      revenue-producing transaction between a seller and a customer. The scope does
      not include taxes that are based on gross receipts or total revenues imposed
      during the inventory procurement process. Gross versus net income statement
      classification of that tax is an accounting policy decision and a voluntary
      change would be considered a change in accounting policy requiring the
      application of SFAS No. 154, “ *Accounting Changes and Error Corrections* ”.
      The
      following disclosures will be required for taxes within the scope of this issue
      that are significant in amount: (1) the accounting policy elected for these
      taxes and (2) the amounts of the taxes reflected gross (as revenue) in the
      income statement on an interim and annual basis for all periods presented.
      The
      EITF Issue No. 06-3 ratified consensus is effective for interim and annual
      periods beginning after December 15, 2006. The adoption of EITF Issue
      No. 06-3 did not have a material impact on our Condensed
      Consolidated Financial Statements.





18


**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**








In
      July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,
“ *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109* ”.
      FIN
      No. 48 clarifies the accounting for uncertainty in income taxes recognized
      in financial statements in accordance with SFAS No. 109, “ *Accounting for Income Taxes* ”.
      FIN
      No. 48 prescribes a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return and provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. Under FIN No. 48, the evaluation of a tax position
      is a two-step process. The first step is a recognition process where we are
      required to determine whether it is more likely than not that a tax position
      will be sustained upon examination, including resolution of any related appeals
      or litigation processes, based on the technical merits of the position. In
      evaluating whether a tax position has met the more-likely-than-not recognition
      threshold, it is presumed that the position will be examined by the appropriate
      taxing authority that has full knowledge of all relevant information. The second
      step is a measurement process whereby a tax position that meets the
      more-likely-than-not recognition threshold is calculated to determine the amount
      of benefit to recognize in the financial statements. FIN No. 48 also
      requires new tabular reconciliation of the total amounts of unrecognized tax
      benefits at the beginning and end of the reporting period. The provisions of
      FIN
      No. 48 are effective for fiscal years beginning after December 15,
      2006. As such, we are required to adopt it in our first quarter of fiscal year
      2008. Any changes to our income taxes due to the adoption of FIN No. 48 are
      treated as the cumulative effect of a change in accounting principle. We do
      not
      expect the adoption of FIN No. 48 to have a material impact on our Consolidated
      Financial Statements.





In
      September 2006, the SEC issued SAB No. 108, “ *Financial
      Statements — Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements* ”.
      SAB
      No. 108 provides guidance on how prior year misstatements should be taken
      into consideration when quantifying misstatements in current year financial
      statements for purposes of determining whether the current year’s financial
      statements are materially misstated. The impact of correcting all misstatements,
      including both the carryover and reversing effects of prior year misstatements,
      must be quantified on the current year financial statements. When a current
      year
      misstatement has been quantified, SAB No. 99, “ *Financial Statements Materiality* ”
should
      be applied to determine whether the misstatement is material and should result
      in an adjustment to the financial statements. SAB No. 108 also discusses
      the implications of misstatements uncovered upon the application of SAB No.
      108
      in situations when a registrant has historically been using either the iron
      curtain approach or the rollover approach as described in the SAB. Registrants
      electing not to restate prior periods should reflect the effects of initially
      applying the guidance in Topic 1N in their annual financial statements covering
      the first fiscal year ending after November 15, 2006. We do not expect that
      the adoption of SAB No. 108 will have a material impact on our Consolidated
      Financial Statements.





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ”.
      SFAS
      No. 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles and expands disclosures about
      fair value measurements. Fair value refers to the price that would be received
      to sell an asset or paid to transfer a liability in an orderly transaction
      between market participants in the market in which the reporting entity
      transacts. SFAS No. 157 establishes a fair value hierarchy that prioritizes
      the information used to develop those assumptions. Fair value measurements
      would
      be separately disclosed by level within the fair value hierarchy. The provisions
      of SFAS No. 157 are effective for financial statements issued for fiscal
      years beginning after November 15, 2007, and interim periods within those
      fiscal years. We do not expect the adoption of SFAS No. 157 to have a
      material impact on our Consolidated Financial Statements.











19









**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements -
      (Continued)**








**NOTE
      12 — SUBSEQUENT EVENTS**





On
      January 30, 2007, the Company amended its Certificate of Incorporation to effect
      a reverse stock split of its common stock at a ratio of one share for every
      three shares outstanding. The reverse stock split became effective on February
      8, 2007. These statements have been prepared with all amounts reflective of
      this
      stock split, as effective. The reverse stock split was approved by the
      Registrant’s board of directors and stockholders owning a majority of the
      Registrant’s common stock.




In
      accordance with the Securities and Exchange Commission’s Staff Accounting
      Bulletin 4c, a change in a registrant's capital structure due to a reverse
      split
      occurring after the date of the latest reported balance sheet, but before the
      release (issuance) of the financial statements or the effective date of the
      registration statement, whichever is later, will be given retroactive effect
      in
      the balance sheet. Accordingly, these financial statements and notes thereto
      have been prepared showing this stock split as effective. All convertible
      preferred stock had automatically converted to common stock before this common
      stock reverse split. Therefore all convertible preferred stock references have
      also been adjusted for this reverse split.










20









**RED
      MILE ENTERTAINMENT, INC.**







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




*Liquidity
      and Capital resources*






We
      anticipate needing an additional $10,000,000 to finance our planned expansion
      within the next 12 months. We will be unable to complete development of new
      games or publish additional games other than those currently under development,
      or consummate any acquisitions, if we are unable to raise any additional
      financing. We believe our current cash on hand of approximately $3.4 **** million
      as of February 6, 2007, in addition to anticipated cash flow from operations,
      will enable the company to continue operating into our first fiscal quarter
      of
      2008.




In
      addition to money needed to develop new games, we will also need money to fund
      the expansion of our staff. It is currently anticipated we will hire an
      additional two employees in the next six months to support our expansion plans,
      including taking direct responsibility for marketing our products to
      consumers.










21





**RED
      MILE ENTERTAINMENT, INC.**








*Results
      of Operations*




The
      unaudited results of operations for the nine and three months ending December
      31, 2006 and December 31, 2005 are as follows:




Summary
      of Unaudited Statements of Operations


Nine
      Months Ended December 31, 2006 and 2005




2006
              
              2005
              
              Amount
                Increase
                (Decrease)
              
              Percent
                Increase
                (Decrease)Revenues
              
              $
              829,253
              
              $
              3,454,769
              
              $
              (2,625,516
              )
              
              (76.0
              %)Cost
                  of sales
              
              
              1,935,825
              
              
              4,655,265
              
              
              (2,719,440
              )
              
              (58.4
              %)Gross
                  margin
              
              
              (1,106,572
              )
              
              (1,200,496
              )
              
              NM
              
              
              NMOperating
                  expenses
              
              
              3,515,171
              
              
              3,113,853
              
              
              401,318
              
              
              12.9
              %Interest
                  income (expense), net
              
              
              (37,251
              )
              
              6,883
              
              
              (44,134
              )
              
              (641.2
              %)Amortization
                  of senior secured convertible debenture issuance costs
              
              
              (52,599
              )
              
              ---
              
              
              (52,599
              )
              
              (100
              %)Net
                  loss before income tax expense
              
              
              (4,711,593
              )
              
              (4,307,466
              )
              
              NM
              
              
              NMIncome
                  tax expense
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---Net
                  loss
              
              $
              (4,711,593
              )
              $
              (4,307,466
              )
              
              NM
              
              
              NMAccretion on redeemable convertible preferred stock and foreign
                  currency
                  adjustments
              
              
              (101,200
              )
              
              ---
              
              $
              (101,200
              )
              
              (100
              %)Net loss attributable to common shareholders
              
              $
              (4,812,793
              )
              $
              (4,307,466
              )
              
              NM
              
              
              NMNet
                  loss per common share
                Basic
                  and diluted
              
              $
              (0.60
              )
              $
              (
                  1.00
              )
              
              NM
              
              
              NMShares used in computing basic and diluted net loss per share (in
                  000’s)
              
              
              8,058
              
              
              4,298
              
              
              NM
              
              
              NM












22








**RED
      MILE ENTERTAINMENT, INC.**








Summary
      of Unaudited Statements of Operations


Three
      Months Ended December 31, 2006 and 2005


2006
              
              2005
              
              Amount
                Increase
                (Decrease)
              
              Percent
                Increase
                (Decrease)Revenues
              
              $
              502,503
              
              $
              582,225
              
              $
              (79,722
              )
              
              (13.7
              %)Cost
                  of sales
              
              
              1,322,570
              
              
              641,942
              
              
              680,628
              
              
              106.0
              %Gross
                  margin
              
              
              (820,067
              )
              
              (59,717
              )
              
              NM
              
              
              NMOperating
                  expenses
              
              
              1,426,206
              
              
              1,166,481
              
              
              259,725
              
              
              22.3
              %Interest
                  income (expense) net
              
              
              (46,771
              )
              
              361
              
              
              (47,132
              )
              
              (13,056.0
              %)Amortization
                  of senior secured convertible debenture issuance costs
              
              
              (52,599
              )
              
              ---
              
              
              (52,599
              )
              
              (100.0
              %)Net
                  loss before income tax expense
              
              
              (2,345,643
              )
              
              (1,225,837
              )
              
              NM
              
              
              NMIncome
                  tax expense
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---Net
                  loss
              
              $
              (2,345,643
              )
              $
              (1,225,837
              )
              
              NM
              
              
              NMAccretion on redeemable convertible preferred stock and foreign
                  currency
                  adjustments
              
              
              (31,726
              )
              
              ---
              
              
              (31,726
              )
              
              (100
              %)Net loss attributable to common shareholders
              
              $
              (2,377,369
              )
              $
              (1,225,837
              )
              
              NM
              
              
              NMNet
                  loss per common share
                Basic
                  and diluted
              
              $
              (0.27
              )
              $
              (0.27
              )
              
              NM
              
              
              NMShares used in computing basic and diluted net loss per share (in
                  000’s)
              
              
              8,729
              
              
              4,511
              
              
              NM
              
              
              NM






*Revenues*




For
      the
      nine months ended December 31, 2006, our revenue was derived from ten products:
      Heroes of the Pacific, Crusty Demons, GripShift, Disney's Aladdin Chess
      Adventures, El Matador, Dual Sudoku, Aircraft Power Pack, Lucinda Green’s
      Equestrian Challenge, Who Rules? Almighty Edition, and Timothy and Titus. Crusty
      Demons, GripShift, and Disney’s Aladdin Chess Adventures were developed by third
      parties under our supervision and licensed to three other video game
      co-publishers. GripShift, Crusty Demons, Heroes of the Pacific and Disney's
      Aladdin Chess Adventures are near the end of their lives and we expect minimal
      future revenue from them. El Matador, Dual Sudoku, Aircraft Power Pack and
      Timothy and Titus are personal computer games developed by third parties that
      are being published directly by us. We expect minimal future revenue from each
      of these games. Who Rules? Almighty Edition, a DVD game, was developed by a
      third party, is being published by us and we expect minimal future revenue
      from
      this game. Lucinda Green’s Equestrian Challenge was developed by a third party
      under our supervision, and is being published by us.





We
      have
      several games under development which we anticipate will be ready for shipment
      in fiscal 2008. We expect Jackass: the Game (for console and handheld platforms)
      and a new version playable on the handheld platform of Heroes of the Pacific
      to
      be ready for shipment in the fall of 2008. We are also developing a sequel
      to
      Heroes of the Pacific that is set in the European theatre (next generation
      console and PC) that we expect to ship in fiscal 2009.





During
      the three and nine months ended December 31, 2005 we received royalties on
      shipments of both Heroes of the Pacific and GripShift as co-publishers. We
      also
      received development income on GripShift. All of our revenue in the three months
      ended December 31, 2005 was derived from royalties on Heroes of the Pacific
      and
      GripShift.




In
      fiscal
      2008, we expect to self-publish our video games under development for release
      in
      North America. 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 could 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.


23








**RED
      MILE ENTERTAINMENT, INC.**







*Cost
      of sales*




For
      the
      nine months ended December 31, 2006, cost of sales includes the amortization
      of
      development costs for Crusty Demons, El Matador, Dual Sudoku, and Lucinda
      Green’s Equestrian Challenge. Cost of sales also includes the amortization of
      prepaid royalties paid to the licensors of Timothy and Titus, and Who Rules?
      Almighty Edition. In addition, cost of sales includes the cost of manufacturing
      all of our products sold in the period as well as actual royalties paid to
      the
      developers of Heroes of the Pacific and GripShift. Also included in cost of
      sales for the nine months ended December 31, 2006 is a $1,408,571 charge for
      the
      impairment of development costs and inventory for several games for which we
      now
      do not project we will be able to realize the carrying value. Of this, $37,575
      was recorded during the first quarter of fiscal 2007, $399,452 was recorded
      in
      the second quarter of fiscal 2007, and $1,081,544 was recorded during the third
      quarter of fiscal 2007.




The
      $4.7
      million cost of sales recorded in the nine months ended December 31, 2005
      includes a $1.6 million charge for the cancellation of development of Jackass:
      The Game at a predecessor studio and a charge for the development costs incurred
      through the date of cancellation. We acquired this game while it was already
      in
      development but decided to cancel the contract and restart the development
      with
      a new developer. In the nine months ended December 31, 2005, 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 cost of
      sales
      during the three months ended December 31, 2005 is primarily the amortization
      of
      development costs for Heroes of the Pacific and GripShift.







24





**RED
      MILE ENTERTAINMENT, INC.**








*Operating
      Expense*




Operating
      expenses for the nine months and three months ended December 31, 2006 and
      December 31, 2005 were as follows:




Nine
                  months ended December 31,2006
              
              Percent
                  of Total
              
              2005
              
              Percent
                  of total
              
              Dollar
                  increase
                (decrease)
              
              Percent
                  increase
                (decrease)Research
                  and development costs
              
              $
              334,371
              
              
              9.5
              %
              $
              184,743
              
              
              5.9
              %
              $
              149,628
              
              
              81.0
              %General
                  and administrative costs
              
              
              2,104,621
              
              
              59.9
              %
              
              982,555
              
              
              31.6
              %
              
              1,122,066
              
              
              114.2
              %Sales,
                  marketing and business
                development
                  costs
              
              
              1,076,179
              
              
              30.6
              %
              
              479,025
              
              
              15.4
              %
              
              597,154
              
              
              124.7
              %Public
                  shell acquisition costs
              
              
              ---
              
              
              ---
              
              
              467,530
              
              
              15.0
              %
              
              (467,530
              )
              
              (100.0
              %)Debt
                  conversion inducement costs
              
              
              ---
              
              
              ---
              
              
              1,000,000
              
              
              32.1
              %
              
              (1,000,000
              )
              
              (100.0
              %)Total
                  operating expenses
              
              $
              3,515,171
              
              
              100.0
              %
              $
              3,113,853
              
              
              100.0
              %
              $
              401,318
              
              
              12.9
              %




Three
                  months ended December 31,2006
              
              Percent
                  of Total
              
              2005
              
              Percent
                  of total
              
              Dollar
                  increase
                (decrease)
              
              Percent
                  increase
                (decrease)Research
                  and development costs
              
              $
              143,551
              
              
              10.1
              %
              $
              90,578
              
              
              7.8
              %
              $
              52,973
              
              
              58.5
              %General
                  and administrative costs
              
              
              785,961
              
              
              55.1
              %
              
              437,133
              
              
              37.4
              %
              
              348,828
              
              
              79.8
              %Sales,
                  marketing  and business
                development
                  costs
              
              
              496,694
              
              
              34.8
              %
              
              171,240
              
              
              14.7
              %
              
              325,454
              
              
              190.1
              %Public
                  shell acquisition costs
              
              
              ---
              
              
              ---
              
              
              467,530
              
              
              40.1
              %
              
              (467,530
              )
              
              (100.0
              %)Total
                  operating expenses
              
              $
              1,426,206
              
              
              100.0
              %
              $
              1,166,481
              
              
              100.0
              %
              $
              259,725
              
              
              22.3
              %







For
        the
        nine months ended December 31, 2006, our total operating expenses increased
        by
        12.9% over the nine months ended December 31, 2005. This increase was the
        result
        of the increased number of products in development and the growth in headcount
        across the Company. During the first quarter of fiscal 2006, the Company
        developed products for future sale. During the second and third quarters
        of
        fiscal 2006, Heroes of the Pacific and GripShift shipped to customers from
        our
        licensed co-publishers.


In
      the
      three months ended December 31, 2005, development costs decreased significantly
      because of the completion of GripShift and Heroes of the Pacific. A charge
      of
      $1,000,000 was taken in the second quarter of the fiscal year 2006 for costs
      to
      induce the conversion of certain debt. In the first quarter of fiscal 2006,
      we
      were continuing development of 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 developed from third party contractors to our own internal
      development staff.





Public
      shell acquisition costs in the three and nine months ended December 31, 2005
      relate to the purchase of Edmonds 1 Inc. General and administrative costs in
      this quarter were also higher due to increased legal and accounting
      fees.







25








**RED
      MILE ENTERTAINMENT, INC.**








*Research
      and development*




Our
      research and development expenses consist of the costs incurred in our internal
      development group for supervising development taking place at third party
      developers. All actual game development is performed by third party developers
      under fixed fee, fee for service, and royalty based contracts. Once
      technological feasibility has been established, 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.




During
      the first nine months of fiscal 2006, we expanded our development team from
      one
      person to three. Of the total research and development costs, 81.6% were
      salaries and benefits for these three people. These employees were principally
      involved in managing and supervising the three outside developers and evaluating
      new product concepts.




In
      the
      three months ended December 31, 2006, our internal development costs increased
      58.5% over those incurred during the three months ended December 31, 2005.
      This
      increase was the result of having four versus two production employees on staff
      for the full quarter, salary increases, and extensive travel managing our
      external developers during the three months ended December 31, 2006. Salaries
      and benefits accounted for 70.6% of research and development costs in this
      quarter. The majority of our video game development takes place in Australia
      and
      New Zealand. Our internal team has spent extensive time in both locations
      providing hands-on management and oversight of the development process.
      Approximately 20.9% of research and development costs in the three months ended
      December 31, 2006 relate to the potential development of a new consol game.




In
      general, a product goes through multiple levels of design, production, approvals
      and authorizations before it may be shipped. These approvals and authorizations
      include concept approvals from the platform licensors of the game concept and
      product content, approvals from the licensor of the intellectual property of
      the
      game design and game play, and approvals from the platform licensors that the
      game is free of all material bugs and defects. In addition, all games 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, was completed during the first quarter
      of
      fiscal year 2007. The North American Xbox version shipped in late June by our
      co-publisher. The European version shipped in our fourth quarter of fiscal
      2007.
      Another multi-platform product, Lucinda Green’s Equestrian Challenge, was
      shipped in late November in the PS2 format in North America, and shipped in
      early January 2007 in the PC format. This product is expected to ship in March
      2007 in Europe.





Jackass:
      the Video Game, currently under development, has received initial stage concept
      approval from the platform licensor on the handheld platform. We expect it
      to be
      available for shipment worldwide in the second fiscal quarter of 2008 on console
      and handheld platforms. Our intention is to directly publish this game in the
      United States, and co-publish this game outside of the United States. A handheld
      version of our Heroes of the Pacific game is currently in progress and awaiting
      concept approval from the platform licensor. We expect it will be ready for
      release in the third fiscal quarter of 2008. In August of 2006, we also began
      the production stage of a sequel of Heroes of the Pacific set in the European
      theatre on the next generation console and PC. It is targeted for shipment
      in
      fiscal 2009. This game moved in August of 2006 from the pre-production phase
      to
      the production phase.




The
      funds
      required to develop a new game depend on several factors, including: the target
      release platform, the scope and genre of the game design, the cost of any
      underlying intellectual property licenses, the length of the development
      schedule, the size of the development team, the complexity of the game, the
      skill and experience of the development team, the location of the development
      studio, 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 the costs of stock
      options issued to consultants, employee salaries and benefits, professional
      fees
      (legal, accounting, investor relations, and consulting), facilities expenses,
      and insurance costs.




Total
        G&A costs increased from $982,555 in the nine months ended December, 2005 to
        $2,104,621 in the nine months ended December 31, 2006, an increase of 114%.
        Overall, this was driven by increased headcount costs and the costs of stock
        options issued to consultants of $192,655. In addition, this increase was
        due to
        increased legal, accounting, and printing costs in connection with the Company
        becoming a publicly reporting entity as well as a bad debt charge on an
        uncollectible receivable.








26





**RED
      MILE ENTERTAINMENT, INC.**




For
        the 3
        months ended December 31, 2006, G&A costs increased by $348,828 from
        $437,133 in the same period for the prior fiscal year. The increase is primarily
        due to the costs of stock options issued to consultants and an increase in
        employee salaries and benefits in connection with our increase in
        headcount.





Excluding
      the effects of consultant stock options, the Company expects that G&A costs
      will increase moderately throughout the remainder of fiscal 2007 as the Company
      expands the scope of its operations and incurs all the costs associated with
      having our common stock trading and being a publicly reporting company.




*Sales,
      marketing, and business development costs*





Sales,
      marketing, and business development costs consist primarily of employee
      salaries, stock option expenses, and employee benefits, consulting costs, public
      relations costs, marketing research, and sales support materials
      costs.




For
      the
      nine months ended December 31, 2006, total sales, marketing and business
      development expenses increased 125% from $479,025 in the nine months ended
      December 31, 2005 to $1,076,179 in the nine months ended December 31, 2006.
      The
      majority of the increase was in costs incurred at 2WG in connection with our
      launch of new games.





For
      the
      three months ended December 31, 2006, total marketing and business development
      expenses increased 190% from $171,240 in the three months ended December 31,
      2006 to $496,694 in the three months ended December 31, 2006. The majority
      of
      the increase was in costs incurred at 2WG in connection with our launch of
      new
      games.







*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 an effect on our consolidated results
      of
      operations, financial position or liquidity for the periods presented in this
      report.










27





**RED
      MILE ENTERTAINMENT, INC.**








*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”, and Staff Accounting Bulletin (“SAB”) No. 101,
“Revenue Recognition in Financial Statements”, as revised by SAB No. 104,
“Revenue Recognition”. We evaluate revenue recognition using the following basic
      criteria and recognize revenue when all four criteria are met:





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


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


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


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





Product
      revenue, including sales to distributors, is recognized when the above criteria
      are met. We reduce product revenue for estimated future returns and price
      protection, which may occur with our distributors. In the future, we may decide
      to give price protection for either our PC or video game system products. When
      evaluating the adequacy of sales returns and price protection allowances, we
      analyze our historical returns, current sell-through of distributor and retailer
      inventory, historical returns on similar products, current trends in the video
      game market and the overall economy, changes in customer demand and acceptance
      of our products, and other factors.




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 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.





28





**RED
      MILE ENTERTAINMENT, INC.**







*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.




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
      December 31, 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 were effective as of December
      31,
      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 December 31, 2006.










29








**RED
      MILE ENTERTAINMENT, INC.**








**PART
      II. OTHER INFORMATION**




ITEM
      1A.
      RISK FACTORS




Item
      1A
      (“Risk Factors”) of the Company’s Form 10-KSB for the year ended March 31, 2006
      sets forth information relating to important risks and uncertainties that could
      materially adversely affect the Company’s business, financial condition or
      operating results. Those risks factors continue to be relevant to an
      understanding of the Company’s business, financial condition and operating
      results. Certain of those risk factors have been revised below to provide
      updated information. References to “we,” “our” and “us” in these risks factors
      refer to the Company.




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




***Risks
      Relating to Our Company***




***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 nine months ended December 31, 2006
        we
        incurred net losses of approximately $4,329,618, $4,849,678, and $4,711,593,
        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 first fiscal quarter of 2008. We anticipate needing an additional
      $10,000,000 to finance our planned expansion within the next 12
      months.




***Because
      we have significant accumulated deficit and negative cash flows our
      independent***  ***registered***  ***accounting
      firm has qualified its opinion regarding our ability to continue as a going
      concern.***




We
      have a
      significant accumulated deficit and have sustained negative cash flows from
      operations since our inception. The opinion of our independent registered
      accounting firm for the 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.





***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.








30





**RED
      MILE ENTERTAINMENT, INC.**







***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 and our debenture
      holders.




***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 as was recently experienced
      by Sony and Nintendo.




***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 ten games, two of
      which began in September 2005. We are currently involved in the development
      of
      three games. If we are unable to continually identify, develop and publish
      games
      that are popular with the consumers on a regular basis, our business will
      suffer. Our business will also suffer if we do not receive additional financing
      to be used for research and development of new games.




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




Video
      game platforms generally have a life cycle of approximately six to ten years,
      which has caused the market for video games to also be cyclical. Sony’s
      PlayStation 2 was introduced in 2000 and Microsoft’s Xbox and the Nintendo
      GameCube were introduced in 2001. Microsoft introduced the Xbox 360 in Q1 2006,
      and Sony and Nintendo introduced their next generation consoles in Q4 2006.
      These introductions 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 revenues, we will continue to incur losses.





31







**RED
      MILE ENTERTAINMENT, INC.**







***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 were recently released. 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.Nintendo
                GameCube
            
            Expires
                on August 17, 2007. Royalty rates are subject to change with 60 days
                notice. Cost of manufacture is subject to change at any
                time.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 trademark 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.





32




**RED
      MILE ENTERTAINMENT, INC.**






***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 significant customers, the loss
      of
      any of which could cause a significant decrease in our
      revenue.***




As
      of
      December 31, 2006, we had two customers who accounted for 48.8% (Navarre
      Corporation) and 25.7% (GameStop) of our gross accounts receivable and two
      customers who accounted for 41.6 % (Navarre Corporation) and 21.6% (GameStop)
      of
      revenue during the first nine months of fiscal 2007. 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.











33













**RED
      MILE ENTERTAINMENT, INC.**




***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.




***Effect
      of Recent Accounting Pronouncements***




In
      June 2006, the FASB ratified the consensus reached on Emerging Issues Task
      Force (“EITF”) Issue No. 06-3, “ *How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross Versus Net
      Presentation)* ”.
      The
      scope of EITF Issue No. 06-3 includes any transaction-based tax assessed by
      a governmental authority that is imposed concurrent with or subsequent to a
      revenue-producing transaction between a seller and a customer. The scope does
      not include taxes that are based on gross receipts or total revenues imposed
      during the inventory procurement process. Gross versus net income statement
      classification of that tax is an accounting policy decision and a voluntary
      change would be considered a change in accounting policy requiring the
      application of SFAS No. 154, “ *Accounting Changes and Error Corrections* ”.
      The
      following disclosures will be required for taxes within the scope of this issue
      that are significant in amount: (1) the accounting policy elected for these
      taxes and (2) the amounts of the taxes reflected gross (as revenue) in the
      income statement on an interim and annual basis for all periods presented.
      The
      EITF Issue No. 06-3 ratified consensus is effective for interim and annual
      periods beginning after December 15, 2006.  The adoption of EITF Issue
      No. 06-3 did not have a material impact on our Condensed Consolidated
      Financial Statements.





In
      July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,
“ *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109* ”.
      FIN
      No. 48 clarifies the accounting for uncertainty in income taxes recognized
      in financial statements in accordance with SFAS No. 109, “ *Accounting for Income Taxes* ”.
      FIN
      No. 48 prescribes a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return and provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. Under FIN No. 48, the evaluation of a tax position
      is a two-step process. The first step is a recognition process where we are
      required to determine whether it is more likely than not that a tax position
      will be sustained upon examination, including resolution of any related appeals
      or litigation processes, based on the technical merits of the position. In
      evaluating whether a tax position has met the more-likely-than-not recognition
      threshold, it is presumed that the position will be examined by the appropriate
      taxing authority that has full knowledge of all relevant information. The second
      step is a measurement process whereby a tax position that meets the
      more-likely-than-not recognition threshold is calculated to determine the amount
      of benefit to recognize in the financial statements. FIN No. 48 also
      requires new tabular reconciliation of the total amounts of unrecognized tax
      benefits at the beginning and end of the reporting period. The provisions of
      FIN
      No. 48 are effective for fiscal years beginning after December 15,
      2006. As such, we are required to adopt it in our first quarter of fiscal year
      2008. Any changes to our income taxes due to the adoption of FIN No. 48 are
      treated as the cumulative effect of a change in accounting principle. We do
      not
      expect the adoption of FIN No. 48 to have a material impact on our Consolidated
      Financial Statements.





In
      September 2006, the SEC issued SAB No. 108, “ *Financial
      Statements — Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements* ”.
      SAB
      No. 108 provides guidance on how prior year misstatements should be taken
      into consideration when quantifying misstatements in current year financial
      statements for purposes of determining whether the current year’s financial
      statements are materially misstated. The impact of correcting all misstatements,
      including both the carryover and reversing effects of prior year misstatements,
      must be quantified on the current year financial statements. When a current
      year
      misstatement has been quantified, SAB No. 99, “ *Financial Statements Materiality* ”
should
      be applied to determine whether the misstatement is material and should result
      in an adjustment to the financial statements. SAB No. 108 also discusses
      the implications of misstatements uncovered upon the application of SAB No.
      108
      in situations when a registrant has historically been using either the iron
      curtain approach or the rollover approach as described in the SAB. Registrants
      electing not to restate prior periods should reflect the effects of initially
      applying the guidance in Topic 1N in their annual financial statements covering
      the first fiscal year ending after November 15, 2006. We are evaluating
      what impact the adoption of SAB No. 108 will have on our Consolidated
      Financial Statements.





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ”.
      SFAS
      No. 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles and expands disclosures about
      fair value measurements. Fair value refers to the price that would be received
      to sell an asset or paid to transfer a liability in an orderly transaction
      between market participants in the market in which the reporting entity
      transacts. SFAS No. 157 establishes a fair value hierarchy that prioritizes
      the information used to develop those assumptions. Fair value measurements
      would
      be separately disclosed by level within the fair value hierarchy. The provisions
      of SFAS No. 157 are effective for financial statements issued for fiscal
      years beginning after November 15, 2007, and interim periods within those
      fiscal years. The adoption of SFAS No. 157 did not have a material
      impact on our Consolidated Financial Statements.





34







**RED
      MILE ENTERTAINMENT, INC.**








ITEM
      2.
      Unregistered Sales of Equity Securities and Use of Proceeds





On
      October 19, 2006, the Company, pursuant to an Agency Agreement with J.F. Mackie
      & Company, Ltd. (the “Agent”) issued $5,824,000 of Senior Secured
      Convertible Debentures.  Pursuant to the terms of the Agency Agreement, the
      Agent facilitated the purchase of 5,824 convertible debentures to 74 Debenture
      Holders for an aggregate principal face amount of $5,824,000. Of the 74
      Debenture Holders, 71 were residents of Canada, 2 were residents of Argentina,
      and 1 was a resident of the Bahamas. The Debentures mature on October 19, 2008
      and are convertible into shares of the Common Stock of the Company at a ratio
      of
      $5.25 (after the effect of the one for three reverse stock split which occurred
      on February 8, 2007) per Common Share (the “Conversion Price).





On
      November 20, 2006, the Company, pursuant to an Agency Agreement with the same
      agent, issued $2,420,000 of Senior Secured Convertible Debentures. 
Pursuant to the terms of the Agency Agreement, the Agent facilitated the
      purchase of 2,420 convertible debentures to 7 Debenture Holders for an aggregate
      principal face amount of $2,420,000. Of the 7 Debenture Holders, 6 were
      residents of Canada, and 1 was a resident of the Bahamas. These Debentures
      mature on November 20, 2008 and are convertible into shares of the Common Stock
      of the Company at a ratio of $5.25 (after the effect of the one for three
      reverse stock split which occurred on February 8, 2007) per Common Share (the
      “Conversion Price).





The
      conversions on the above mentioned Debentures may be exercised at the election
      of the holders of the Debentures at any time after a minimum non-conversion
      period of 12 months from the issue date. The conversions can also be exercised
      by the Company after a minimum non-conversion period of 12 months from the
      issue
      date so long as the Company’s Common Shares have begun trading on a recognized
      exchange and have traded at a minimum volume weighted average price of
      $9.00/share (after the effect of the one for three reverse stock split which
      occurred on February 8, 2007) for 20 consecutive trading days, subject to
      certain limitations.





On
      the
      maturity dates of the two sets of Debentures, the Company retains the right
      to redeem the Debentures in cash, in kind, or in cash and in kind with Common
      Shares of the Company. The Company also has the right to redeem the Debentures
      at a redemption price equal to 115% of the principal face value at any time
      after a period of 12 months so long as the Company’s Common Shares have begun
      trading on a recognized exchange and have traded at a minimum volume weighted
      average price of $9.00/share (after the effect of the one for three reverse
      stock split which occurred on February 8, 2007) for 20 consecutive trading
      days,
      subject to certain limitations.





The
      Debentures carry a coupon rate of 5.5% per annum, non-compounded, and the
      interest is payable semi-annually on March 15 and September 15 in cash, or
      in
      kind.





The
      Debentures are secured direct senior obligations of the Company secured against
      all present and after acquired property of the Company except for accounts
      receivable in which case the Debenture holders rank less senior to other
      creditors for the security interest in accounts receivable. The Debentures
      have
      full rights to piggyback registration after a period of 12 months.





The
      Agent
      is an independent equity investment firm located in Calgary, Canada.  In
      aggregate, on the 2 sets of debentures, the Company has paid the Agent a 6%
      commission on each set, totaling an aggregate of $494,640 which was paid upon
      the closings of the respective transactions. The total capitalized fees were
      $595,483, and the $494,640 in agent’s commissions comprise the majority of those
      fees. The remaining $100,843 in fees were primarily legal fees.





The
      Debentures were issued in two private placement transactions to investors who
      are not "U.S. persons" pursuant to the exemption from registration provided
      by
      Rules 901 and 903 of Regulation S under the Securities Act of 1933, as
      amended.


35





**RED
      MILE ENTERTAINMENT, INC.**











ITEM
      4:
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





On
      December 28, 2006, the holders of the Company’s common shares representing 54.0%
      of the Company’s voting power executed a written consent giving the Company’s
      Board of Directors the authority to effect a reverse stock split of each share
      of common stock of the Company at a ratio of one share for every three shares
      of
      common stock outstanding. On January 2, 2007, the Board of Directors authorized
      this transaction and the reverse split became effective on February 8, 2007.







36




**RED
      MILE ENTERTAINMENT, INC.**




ITEM
      6.
      EXHIBITS AND REPORTS ON FORM 8-K




(a)  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





(b)
            Reports
                on Form 8-K





(1)
            Departure
                of Directors or Principal Officers; Election of Directors; Appointment
                of
                Principal Officers (a)





(2)
            Unregistered
                Sales of Equity Securities 
(b)





(3)
            Entry
                into a Material Definitive Agreement
                (c)





(4)
            Unregistered
                Sales of Equity Securities 
(d)





(5)
            Resignation
                of an Officer (e)





(6)
            Election
                of Director (f)





(7)
            Departure
                of Directors or Principal Officers; Election of Directors; Appointment
                of
                Principal Officers (g)





(8)
            Other
                Events (h)







(a)
      Incorporated by reference herein to the Company’s 8-K filed on October 2, 2006.





(b) Incorporated
      by reference herein to the Company’s 8-K filed on October 23, 2006





(c)
      Incorporated by reference herein to the Company’s 8-K filed on October 30,
      2006





(d)
      Incorporated by reference herein to the Company’s 8-K filed on November 22,
      2006





(e) Incorporated
      by reference herein to the Company’s 8-K filed on November 28,
      2006




(f)  Incorporated
      by reference herein to the Company’s 8-K filed on November 30,
      2006




(g)  Incorporated
      by reference herein to the Company’s 8-K filed on December 8,
      2006




(h)   Incorporated
      by reference herein to the Company’s 8-K filed on December 19,
      2006







37







**RED
      MILE ENTERTAINMENT, INC.**






SIGNATURES




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







**RED
                MILE ENTERTAINMENT, INC.**(Registrant)Date:        February
                14, 2007
            
            By:
                /s/ Chester AldridgeChester
                AldridgeChief
                Executive Officer(Principal
                Executive Officer)Date:        February
                14, 2007
            
            By:
                /s/ Ben ZadikBen
                ZadikChief
                Financial Officer(Principal
                Financial Officer)