UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q








x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the Quarterly Period Ended September 30, 2008




OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the Transition Period From
      __________              
To       ______________________




Commission
File Number: 000-51055








RED
MILE ENTERTAINMENT, INC.


(Exact
name of registrant as specified in its charter)








Delaware
            20-4441647(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)223
      San Anselmo Way #3
            94960San
      Anselmo, CA 94960
            (Zip
      Code)




415-339-4240


(Registrant’s
telephone number, including area code)




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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
accelerated filer   ̈                                                                                                      
Accelerated filer   ̈




Non-accelerated
filer   ̈(Do not check if a smaller
reporting company) Smaller
reporting company  x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes   ̈    No  x




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Class
            Shares
      outstanding on November 10, 2008Common
      Stock, $0.01 par value per share
            15,977,941
      shares







Table
      of Contents
            
            PagePART
      I
            FINANCIAL
      INFORMATION
            1ITEM
      1.
            FINANCIAL
      STATEMENTS
            1ITEM 2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
      OPERATIONS
            18ITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            25ITEM
      4T.
            CONTROLS
      AND PROCEDURES
            25PART II
            OTHER
      INFORMATION
            26ITEM
      1.
            LEGAL
      PROCEEDINGS
            26ITEM
      1A.
            RISK
      FACTORS
            26ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            33ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES
            33ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            33ITEM
      5.
            OTHER
      INFORMATION
            33ITEM
      6.
            EXHIBITS
            33SIGNATURE
      PAGE
            34












Part I.
FINANCIAL INFORMATION




ITEM
1. Financial Statements




RED MILE ENTERTAINMENT, INC.
AND SUBSIDIARIES


Condensed
      Consolidated Balance SheetsSeptember
      30,
                2008
            
            
            March
      31, 2008Assets
            
            (Unaudited)Current
      assets:Cash
      and cash equivalents
            
            $
            159,826
            
            
            $
            335,147Accounts
      receivable, net of reserves of $799,081 and $854,359
            
            
            941,036
            
            
            
            68,913Inventory,
      net
            
            
            23,902
            
            
            
            31,406Prepaid
      expenses and other assets
            
            
            25,594
            
            
            
            34,027Software
      development costs and advanced royalties
            
            
            8,083,844
            
            
            
            5,942,921Total
      current assets
            
            
            9,234,202
            
            
            
            6,412,414Property
      and equipment,
      net
            
            
            58,637
            
            
            
            128,234Other
      assets
            
            
            5,699
            
            
            
            9,755Total
      assets
            
            $
            9,298,538
            
            
            $
            6,550,403Liabilities,
      and stockholders’ deficitCurrent
      liabilities:Accounts
      payable
            
            $
            934,434
            
            
            $
            1,280,516Revolving
      line of credit.........................................................
            
            
            500,000
            
            
            
            500,000Secured
      credit loan...............................................................
            
            
            722,700
            
            
            
            -Accrued
      liabilities
            
            
            1,062,480
            
            
            
            1,211,934Deferred
      revenue..................................................................
            
            
            4,250,000
            
            
            
            40,892Other
      current liabilities..........................................................
            
            
            9,619
            
            
            
            48,000Total
      current liabilities
            
            
            7,479,233
            
            
            
            3,081,342Stockholders’
      Equity:Common
      stock, $0.01 par value, authorized 100,000,000 shares; 15,977,941 and
      15,977,941 shares outstanding, respectively
            
            
            159,779
            
            
            
            159,779Additional
      paid-in capital
            
            
            36,342,160
            
            
            
            36,235,106Accumulated
      other comprehensive income
            
            
            2,739
            
            
            
            3,515Accumulated
    deficit
            
            
            (34,685,373
            )
            
            
            (32,929,339
            )Total
      stockholders’ equity .......................................
            
            
            1,819,305
            
            
            
            3,469,061Total
      liabilities and stockholders’ equity ......................
            
            $
            9,298,538
            
            
            $
            6,550,403




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








1








RED
MILE ENTERTAINMENT, INC. AND SUBSIDIARIES




Condensed
Consolidated Statements of Operations


(Unaudited)




Three
      months ended September 30,2008
            
            
            2007Revenues,
      net
            
            $
            78,004
            
            
            $
            3,158,893Cost
      of
      sales
            
            
            47,454
            
            
            
            4,774,734Gross
      margin
            
            
            30,550
            
            
            
            (1,615,841
            )Operating expensesResearch  and
      development costs
            
            
            249,270
            
            
            
            442,066General
      and administrative costs
            
            
            548,107
            
            
            
            773,628Sales,
      marketing and business development costs
            
            
            11,649
            
            
            
            1,686,863Total
      operating expenses
            
            
            809,026
            
            
            
            2,902,557Net
      loss before interest income (expense),other income (expense), and
      provision for income taxes
            
            
            (778,476
            )
            
            
            (4,518,398
            )Debt
      conversion inducement costs
            
            
            -
            
            
            
            4,318,286Beneficial
      debt conversion costs
            
            
            -
            
            
            
            662,902Interest
      income (expense), net
            
            
            (30,576
            )
            
            
            22,174Other
      income (expense), net
            
            
            62,628
            
            
            
            -Net
      loss before income tax expense
            
            
            (746,424
            )
            
            
            (9,477,412
            )Income
      tax expense
            
            
            -
            
            
            
            -Net
      loss
            
            $
            (746,424
            )
            
            $
            (9,477,412
            )Net
      loss per common share, basic and diluted
            
            $
            (0.05
            )
            
            $
            (0.65
            )Shares
      used in computing basic and diluted loss per share
            
            
            15,977,941
            
            
            
            14,510,238




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








2







RED
MILE ENTERTAINMENT, INC. AND SUBSIDIARIES




Condensed
Consolidated Statements of Operations


(Unaudited)




Six
      months ended September 30,2008
            
            
            2007Revenues,
      net
            
            $
            115,090
            
            
            $
            3,433,315Cost
      of
      sales
            
            
            96,816
            
            
            
            5,027,243Gross
      margin
            
            
            18,274
            
            
            
            (1,593,928)Operating
      expensesResearch  and
      development costs
            
            
            517,991
            
            
            
            596,093General
      and administrative costs
            
            
            1,191,401
            
            
            
            1,671,693Sales,
      marketing and business development costs
            
            
            63,401
            
            
            
            1,922,294Total
      operating expenses
            
            
            1,772,793
            
            
            
            4,190,080Net
      loss before interest income (expense), other income (expense), and
      provision for income taxes
            
            
            (1,754,519)
            
            
            
            (5,784,008)Debt
      conversion inducement costs
            
            
            -
            
            
            
            4,318,286Beneficial
      debt conversion costs
            
            
            -
            
            
            
            662,902Interest
      income (expense), net
            
            
            (57,713)
            
            
            
            (89,060)Other
      income (expense), net
            
            
            56,998
            
            
            
            -Net
      loss before income tax expense
            
            
            (1,755,234)
            
            
            
            (10,854,256Income
      tax expense
            
            
            800
            
            
            
            -Net
      loss
            
            $
            (1,756,034)
            
            
            $
            (10,854,256)Net
      loss per common share, basic and diluted
            
            $
            (0.11)
            
            
            $
            (0.90)Shares
      used in computing basic and diluted loss per share
            
            
            15,977,941
            
            
            
            12,099,236




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








3






RED MILE ENTERTAINMENT INC.
AND SUBSIDIARIES




Condensed
Consolidated Statements of Cash Flows


(Unaudited)




Six
      months ended September 30,2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (1,756,034
            )
            
            $
            (10,854,256
            )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      .........................................
            
            
            72,854
            
            
            
            99,179Amortization
      of software development costs
            
            
            51,318
            
            
            
            2,199,540Amortization
      of debt costs
            
            
            4,056
            
            
            
            76,307Amortization
      of intangibles `
            
            
            -
            
            
            
            21,521Loss
      on disposal of assets.................................
            
            
            -
            
            
            
            1,970Impairment
      of inventory
            
            
            2,046
            
            
            
            13,083Impairment
      of software development and licensing costs
            
            
            11,377
            
            
            
            1,608,542Stock
      based compensation
            
            
            107,054
            
            
            
            238,875Revaluation
      of liquidated damage charges
            
            
            (38,381
            )
            
            
            -Foreign
      currency transaction gain
            
            
            (18,515
            )
            
            
            -Reserve
      for price protection and bad debt expense
            
            
            216,385
            
            
            
            287,307Beneficial
      debt conversion costs
            
            
            -
            
            
            
            662,902Debt
      conversion inducement costs
            
            
            -
            
            
            
            4,318,286Changes
      in current assets and liabilitiesAccounts
      receivable
            
            
            (1,093,601
            )
            
            
            (1,621,214
            )Inventory
            
            
            5,458
            
            
            
            (897,615
            )Prepaid
      expenses and other current assets
            
            
            8,433
            
            
            
            271,474Software
      development costs and advanced royalties
            
            
            (2,203,618
            )
            
            
            (3,044,982
            )Accounts
      payable
            
            
            (346,185
            )
            
            
            323,500Accrued
      liabilities
            
            
            (149,454
            )
            
            
            263,977Deferred
      revenue
            
            
            4,209,108
            
            
            
            217,188Net
      cash used in operating activities
            
            
            (917,699
            )
            
            
            (5,814,416
            )


Cash
      flows from investing activities:Sales
      of marketable securities
            
            
            -
            
            
            
            -Acquisition
      of property and equipment
            
            
            (3,257
            )
            
            
            (86,859
            )Cash
      paid for other investment
            
            
            -
            
            
            
            (113,812
            )Net
      Cash flows used in investing activities
            
            
            (3,257
            )
            
            
            (200,671
            )Cash
      flows from financing activities:Proceeds
      from sales of stock, net of costs
            
            
            -
            
            
            
            4,295,807Proceeds
      from issuance of debt
            
            
            746,410
            
            
            
            2,277,000Net
      cash provided by financing activities
            
            
            746,410
            
            
            
            6,572,807Effect
      of exchange rate changes on cash
            
            
            (775
            )
            
            
            1,012Net
      increase (decrease) in cash
            
            
            (175,321
            )
            
            
            558,732Cash
      and cash equivalents, beginning of period
            
            
            335,147
            
            
            
            1,912,992Cash
      and cash equivalents, ending of period
            
            $
            159,826
            
            
            $
            2,471,724Supplemental
      Disclosure of Non-Cash Financing TransactionsConversion of senior secured convertible debentures
            
            $
            -
            
            
            $
            8,244,000Accrued
      interest on revolving line of credit
            
            $
            26,111
            
            
            $
            -Accrued
      interest on secured credit facility
            
            $
            18,216
            
            
            $
            -Accrued
      interest on senior secured convertible debentures
            
            $
            -
            
            
            $
            155,821Debt
      issuance costs related to the issuance of the senior secured convertible
      debentures
            
            $
            -
            
            
            $
            528,240Conversion
      of convertible promissory notes
            
            $
            -
            
            
            $
            2,400,000Debt
      issuance costs
            
            $
            5,000
            
            
            $
            -Relative
      fair value of warrants issued for conversion of promissory
      notes
            
            $
            -
            
            
            $
            662,902




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








4







RED
MILE ENTERTAINMENT, INC.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)




NOTE
1 – BASIS OF PRESENTATION





The
accompanying condensed consolidated financial statements are unaudited and have
been prepared in accordance with generally accepted accounting principles for
interim financial information. They should be read in conjunction with the
financial statements and related notes to the financial statements of Red Mile
Entertainment, Inc. (“Red Mile” or the “Company”) for the years ended March 31,
2008 and 2007 appearing in the Company’s Form 10-KSB. The September 30, 2008
unaudited interim consolidated financial statements on Form 10-Q have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and note disclosures normally included
in the annual financial statements on Form 10-KSB have been condensed or omitted
pursuant to those rules and regulations, although the Company’s management
believes the disclosures made are adequate to make the information presented not
misleading. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair statement of the result of operations
for the interim periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of  the
results to be expected for the entire year.





NOTE
2 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




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





Going Concern — The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern. However, the
Company has sustained substantial operating losses since inception of
$34,685,373 at September 30, 2008, and has predominantly incurred negative cash
flows from operations.




The
Company has begun implementing a strategic plan that it believes is 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. This strategic financing plan has the following
components:




(1)
            The
      Company plans to enter into a co-publishing agreement for its Sin City
      video game which will provide the Companywith
      minimum guarantees on execution of the agreement as well as milestone
      payments coinciding with the timing of milestone obligations the company
      has to its developers.




(2)
            The
      Company plans to renegotiate both the amount and timing for payment of
      many of its current payables and accrued
  obligations.





Notwithstanding
this strategic financing plan, however, there can be no guarantee or assurance
that the Company will be successful in its ability to sustain a profitable level
of operations or to continue to raise capital at favorable rates, or at all. The
accompanying condensed consolidated financial statements do not include any
adjustments that might result from such failure to sustain profitability or
raise capital.





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




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






5






Concentration of Credit Risk —
Financial instruments which potentially subject us to concentration of credit
risk consist of temporary cash investments and accounts receivable. During the
periods ended September 30, 2008 and March 31, 2008, we had deposits in excess
of the Federal Deposit Insurance Corporation (“FDIC”) limit at one U.S. based
financial institution.




At September 30, 2008 and March 31,
2008, Red Mile had uninsured bank balances and certificates of deposit totaling
approximately $58,216 and $221,690, respectively.





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





We may
grant price protection to, and sometimes allow product returns from our
customers and customers of our distributors under certain
conditions.  Therefore, we record a reserve for potential price
protection and returns at each balance sheet date.  The provision
related to this allowance is reported in net revenues.  Price
protection means credits relating to retail price markdowns on our products
previously sold by us to customers or customers of our
distributors.  We base these allowances on expected trends and
estimates of future retail sell-through of our games.  Actual price
protection and product returns may materially differ from our estimates as our
products are subject to changes in consumer preferences, technological
obsolescence due to new platforms or competing products.  At September
30, 2008 and March 31, 2008, Red Mile had price protection and returns reserves
of $222,001 and $271,269, respectively. At September 30, 2008, the balance in
price protection reserves was included in accounts payable. Changes in these
factors could change our judgments and estimates and result in variances in the
amount of reserve required.  If customers request price protection in
amounts exceeding the rate expected and if management agrees to grant it, then
we may incur additional charges against our net revenues, but we are not
required to grant price protection to retailers who purchase our products from
distributors and the decision to grant price protection is discretionary. At
September 30, 2008 and March 31, 2008, Red Mile had allowance reserves for
doubtful accounts of $577,080 and $574,090, respectively. We may also incur
cooperative marketing costs for our products owed to our customers, or to
customers of our distributors. These costs are deducted from accounts receivable
due to us from our customers. At September 30, 2008 and March 31, 2008, Red Mile
had cooperative marketing deductions of $0 and $9,000, respectively, recorded as
deductions from accounts receivable. All receivables are pledged as collateral
for our secured loan from SilverBirch Inc. and our revolving line of credit with
Tiger Paw Capital Corporation.





Inventories — Inventories
consist of materials (including manufacturing royalties paid to console
manufacturers), labor charges from third parties, and freight-in. Inventories
are stated at the lower of cost or market, using the first-in, first-out
method.  The Company performs periodic assessments to determine the
existence of obsolete, slow moving and non-saleable inventories, and records
necessary provisions to reduce such inventories to net realizable
value.  All inventories are produced by third party manufacturers, and
substantially all inventories are located at third party warehouses on
consignment. All inventories are pledged as collateral for our secured loan from
SilverBirch Inc. and our revolving line of credit with Tiger Paw Capital
Corporation.





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




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




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




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




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





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






6






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




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





Property and Equipment —
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful life of the respective assets
ranging from one to three years. Salvage values of these assets are not
considered material. Repairs and maintenance costs that do not increase the
useful lives and/or enhance the value of the assets are charged to operations as
incurred. All property and equipment are pledged as collateral for our secured
loan from SilverBirch Inc. and our revolving line of credit agreement with Tiger
Paw Capital Corporation.





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





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





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





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





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





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





Product
revenue, including sales to distributors, retailers, co-publishers, and video
rental companies is recognized when the above criteria are met. We reduce
product revenue for estimated future returns and price protection, which may
occur with our distributors, retailers, retailers of our distributors, and
co-publishers. In the future, we may decide to issue price protection credits
for either our PC or console products.




When
evaluating the adequacy of sales returns and price protection reserve
allowances, we analyze our historical returns on similar products, current
sell-through of distributor and retailer inventory, current trends in the video
game market and the overall economy, changes in customer demand , acceptance of
our products, and other factors.





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





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





Periodically,
we review the deferred revenue balances and, when the product is no longer being
actively sold by the co-publisher or distributor, or when our forecasts show
that a portion of the revenue will not be earned out, this excess is taken into
revenue.





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






7







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





Distribution Costs —
Distribution costs, including shipping and handling costs of video games sold to
customers, are included in cost of sales.




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





Stock-Based Compensation Plans
— On April 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) 123 (revised 2004),Share-Based
Payment  (the “Statement or “SFAS 123(R)”), requiring us to
recognize expense related to the fair value of


our
stock-based compensation awards. Prior to April 1, 2006, the Company used the
minimum value method in estimating the value of employee option grants as
allowed by SFAS 123, amended by SFAS 148 Accounting for stock based
compensation - transition and disclosure. Accordingly, we have elected to
use the prospective transition method as permitted by SFAS 123(R) and therefore
have not restated our financial results for prior periods. Under this transition
method, stock-based compensation expense for the three and nine months ended
September 30, 2008 includes compensation expense for all stock option awards
granted subsequent to March 31, 2006 based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). We recognize
compensation expense for stock option awards on a straight-line basis over the
requisite service period of the award.




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





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





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




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




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







8






The
following table summarizes the weighted average shares outstanding for the three
months ending September 30, 2008 and 2007:




Three
      Months Ended September 30,2008
            
            
            2007Basic
      weighted average shares outstanding
            
            
            15,977,941
            
            
            
            14,510,238Total
      stock options outstanding
            
            
            1,012,734
            
            
            
            1,791,009Less:
      anti-dilutive stock options due to loss
            
            
            (1,012,734
            )
            
            
            (1,791,009
            )Total
      warrants outstanding
            
            
            1,934,707
            
            
            
            4,056,104Less:
      anti-dilutive warrants due to loss
            
            
            (1,934,707
            )
            
            
            (4,056,104
            )Diluted
      weighted average shares outstanding
            
            
            15,977,941
            
            
            
            14,510,238





The
following table summarizes the weighted average shares outstanding for the six
months ending September 30, 2008 and 2007:




Six
      Months Ended September 30,2008
            
            
            2007Basic
      weighted average shares outstanding
            
            
            15,977,941
            
            
            
            12,099,236Total
      stock options outstanding
            
            
            1,012,734
            
            
            
            1,791,009Less:
      anti-dilutive stock options due to loss
            
            
            (1,012,734
            )
            
            
            (1,791,009
            )Total
      warrants outstanding
            
            
            1,934,707
            
            
            
            4,056,104Less:
      anti-dilutive warrants due to loss
            
            
            (1,934,707
            )
            
            
            (4,056,104
            )Diluted
      weighted average shares outstanding
            
            
            15,977,941
            
            
            
            12,099,236




NOTE 3 — ACCRUED LIABILITIES





September
      30,
              2008
            
            March
      31, 2008Accrued royalties payable
            
            $
            385,521
            
            
            $
            679,469Accrued bonuses
            
            
            —
            
            
            
            67,900Accrued milestone payments to developers or other
      development costs
            
            
            450,000
            
            
            
            186,389Accrued paid time off
            
            
            24,817
            
            
            
            24,500Accrued professional fees
            
            
            121,000
            
            
            
            148,369Accrued commissions
            
            
            72,108
            
            
            
            96,865Other
            
            
            9,034
            
            
            
            8,442Total
            
            $
            1,062,480
            
            
            $
            1,211,934




NOTE
4 — DEFERRED REVENUE





September
      30, 2008
            
            
            March
      31, 2008Heroes
      Over Europe
            
            
            4,250,000
            
            
            
            —Lucinda
      Green’s Equestrian Challenge
            
            $
            —
            
            
            $
            40,892Total
            
            $
            4,250,000
            
            
            $
            40,892







9







NOTE
5 — OTHER CURRENT LIABILITIES





September
      30, 2008
            
            
            March
      31, 2008Contingent
      Registration Payment Liability
            
            
            9,619
            
            
            
            48,000Total
            
            $
            9,619
            
            
            $
            48,000





On July
18, 2007, holders of the Company’s convertible promissory notes converted their
notes into shares of common stock of the Company. In connection with the
conversion, holders of the notes received 0.2 warrants with a strike price of $0
per share for every common share they received. These warrants contained a
provision for automatic cancellation of the warrants if the Company would be
able to realize a liquidity event in Canada on or before March 18, 2008. The
Company was unable to realize a liquidity event by the aforementioned date.
Accordingly, in accordance with FASB Staff Position EITF 00-19-2, “Accounting
For Registration Payments Arrangements”, the Company recorded a contingent
liability representing the value of 192,000 shares of common stock of the
Company that the Company would be required to deliver after March 18, 2008 upon
exercise of the warrants.





NOTE
6 — COMMITMENTS





Developer and
intellectual property contracts - In the normal course of business, we
enter into contractual arrangements with third-parties for the development of
products, as well as for the license rights to intellectual property and/or
underlying game engines. Under these agreements, we commit to provide specified
payments to a developer, or intellectual property holder, based upon contractual
arrangements.  For our development agreements, we will often
renegotiate development fees if the costs-to-complete the product has differed
from what was contractually agreed to. In these cases, we may increase the
amounts of payments made to developers before a new contractual agreement is
reached. Typically, the payments to third-party developers are conditioned upon
the achievement by the developers of contractually specified development
milestones. These payments to third-party developers and intellectual property
holders may be deemed to be advances and are recoupable against future royalties
earned by the developer or intellectual property holder based on the sale of the
related game. Assuming all contractual provisions are met, the total future
minimum commitments for development contracts, intellectual property holders,
and licensors of underlying game engines in place as of September 30, 2008 are
approximately $3,505,695 which is scheduled to be paid as follows in our
upcoming fiscal years:




Year ended March
      31,2009
            
            $
            1,837,0002010
            
            $
            1,316,1952011
            
            $
            352,500Total
            
            $
            3,505,695





Lease
Commitments





In March
2008, we moved our corporate offices from Sausalito to San Anselmo, California.
Our corporate offices are in leased space in San Anselmo, California of
approximately 1,300 square feet at $2.03 per square foot per month. We believe
that if we lost this lease, we could promptly relocate within ten miles on
similar terms. Rent expense for the six months ended September 30, 2008 and 2007
was $13,209 and $37,440, respectively.




Approximate
future minimum lease payments under non-cancelable office and equipment lease
agreements are as follows:




Year
      ended March 312009
            
            $
            15,8512010
            
            
            32,6312011
            
            
            33,588Total
            
            $
            82,070




NOTE
7 — STOCK OPTIONS AND STOCK COMPENSATION





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








10






Period
      Ended September 30, 2008Expected life (in
      years)
            4.2 –
      6.5Risk free rate of
      return
            4.0% -
      5.13%Volatility
            50% -
      80%Dividend
    yield
            -Forfeiture
      rate
            9% -
    15%




The
following table sets forth the total stock-based compensation expense for the
three months ended September 30, 2008 and September 30, 2007.  All
research and development costs, and sales, marketing, and business development
costs in this table are related to employees. General and administrative costs
are broken out between those related to consultants and those related to
employees.




Three
      Months Ended September 30, 2008
            
            Three
      Months Ended September 30, 2007Research
      and development costs
            
            $
            —
            
            $
            5,659Sales,
      marketing, and business development costs
            
            
            —
            
            7,284General
      and administrative costs—consultants
            
            
            3,395
            
            1,439General
      and administrative costs—employees
            
            
            50,426
            
            106,742Stock-based
      compensation before income taxes
            
            
            53,821
            
            121,124Income
      tax benefit
            
            
            -
            
            -Total
      stock-based employee compensation expense after income
    taxes
            
            $
            53,821
            
            $
            121,124




During
the three months ended September 30, 2008, no stock options were
granted.




The
following table sets forth the total stock-based compensation expense for the
six months ended September 30, 2008 and September 30, 2007.  All
research and development costs, and sales, marketing, and business development
costs in this table are related to employees. General and administrative costs
are broken out between those related to consultants and those related to
employees.




Six
      Months Ended September 30, 2008
            
            Six
      Months Ended September 30, 2007Research
      and development costs
            
            $
            —
            
            $     
                            11,256Sales,
      marketing, and business development costs
            
            
            —
            
            14,568General
      and administrative costs—consultants
            
            
            6,752
            
            1,439General
      and administrative costs—employees
            
            
            100,302
            
            211,612Stock-based
      compensation before income taxes
            
            
            107,054
            
            238,875Income
      tax benefit
            
            
            -
            
            -Total
      stock-based employee compensation expense after income
    taxes
            
            $
            107,054
            
            $           
                    238,875




On April
8, 2005, our board of directors approved the Red Mile Entertainment 2005 Stock
Option Plan (the “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”). On March 15, 2007, the board of directors and stockholders
holding a majority of voting power voted to authorize the board of directors, at
its discretion, to amend the 2005 Stock Option Plan (the “Amended
Plan”).






11







Under the
Amended Plan, options for 2,500,000 shares of common stock are reserved for
issuance.  At September 30, 2008, we had 1,487,266 options are
available for grant.  Options have been issued with exercise prices of
between $0.66 and $4.00 per share as follows:




Option
activity under the Amended Plan is as follows:




Options
            
            Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Weighted
      Average Remaining Contractual Term
            
            
            Aggregate
      Intrinsic ValueOutstanding
      at March 31, 2006
            
            
            940,966
            
            
            $
            0.75
            
            
            
            
            
            $
            -Granted
            
            
            1,124,167
            
            
            
            3.75Exercised
            
            
            -
            
            
            
            -Forfeited or expired
            
            
            (76,388
            )
            
            
            2,73
            
            
            
            -
            
            
            
            -Outstanding at March 31, 2007
            
            
            1,988,745
            
            
            $
            2.28
            
            
            
            9.71
            
            
            $
            3,420,166Exercisable at March 31, 2007
            
            
            607,000
            
            
            $
            0.83
            
            
            
            8.65
            
            
            $
            1,926,537Granted
            
            
            45,000
            
            
            
            2.35Exercised
            
            
            (143,068
            )
            
            
            0.71Forfeited
      or expired
            
            
            (114,670
            )
            
            $
            0.88
            
            
            
            -
            
            
            
            -Outstanding
      at March 31, 2008
            
            
            1,776,007
            
            
            $
            2.59
            
            
            
            8.44
            
            
            $
            -Exercisable
      at March 31, 2008
            
            
            676,007
            
            
            $
            1.35
            
            
            
            7.86
            
            
            $
            -Granted
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
      or expired
            
            
            (763,272)
            
            
            $
            3.24
            
            
            
            -Outstanding
      at September 30, 2008
            
            
            1,012,734
            
            
            $
            2.10
            
            
            
            7.81
            
            
            
            -Exercisable
      at September 30, 2008
            
            
            580,511
            
            
            $
            0.76
            
            
            
            7.28
            
            
            
            -




Options
      Outstanding
            
            Options
      ExercisableNumber
            
            Weighted
      Avg.
            
            Weighted
      Avg.
            
            Number
            
            Weighted
      Avg.Range
      of Exercise Prices
            
            Outstanding
            
            Remaining
      Life
            
            Exercise
      Price
            
            Exercisable
            
            Exercise
      Price$0.66
      - $1.49
            
            564,400
            
            7.25
            
            $
      0.71
            
            564,400
            
            $
      0.71$1.50
      - $2.37
            
            30,000
            
            8.90
            
            $
      2.35
            
            10,000
            
            $
      2.35$2.38
      - $4.00
            
            418,334
            
            8.50
            
            $
      3.97
            
            6,111
            
            $
      3.301,012,734
            
            
            
            
            
            580,511




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





In the
case of shares granted to employees, the fair value of such shares is recognized
as an expense over the service period.  As of September 30, 2008, the
fair value of options issued by the Company was $2,626,385 of which $1,389,891
in expense has been forfeited. Expense recognized for the six months ending
September 30, 2008 was $107,056.  The unamortized cost remaining at
September 30, 2008 was $546,723 with a weighted average expected term for
recognition of 3.4 years. At the time of grant, the estimated fair values per
option were from $0.33 to $2.94.




NOTE 8 — COMMON STOCK





In March
and May 2006, the Company issued 845,333 investment units outside the U.S. to
thirty-two non U.S. investors for $3,170,000. A unit consisted of one share of
Series B Convertible Preferred stock and a warrant to purchase an additional
share of Series B Convertible Preferred stock before May 1, 2008 for $4.50 per
share. These shares of Series B Convertible Preferred stock converted to the
same number of shares of the Company’s common stock in December
2006.




In
addition, from March through May 2006, nine US investors purchased 100,000
investment units for a total of $375,000. A unit consisted of one share of
Series C Convertible Preferred stock and a warrant to purchase an additional
share of Series C Convertible Preferred stock before May 1, 2008 for $4.50 per
share. These shares of Series C Convertible Preferred stock converted to the
same number of shares of the Company’s common stock in December,
2006.






12







In
October and November 2006, the Company issued an aggregate of $8,224,000 in
senior secured convertible debentures to 81 debenture holders.





In
January 2007, the Company acquired all of the assets of Roveractive, Inc., a
worldwide distributor and publisher of downloadable PC and PDA-based casual
games, in exchange for 33,333 shares of the Company’s common stock.





On June
25 through June 27, 2007, the Company issued an aggregate of $2,050,000 of
Convertible Promissory Notes to a total of 19 note holders. In addition, on June
25, 2007, the Company issued a $350,000 Convertible Promissory Note to one note
holder. These notes automatically converted into 960,000 Units of the company in
July 2007, with one unit consisting of one share of the Company’s common stock,
and 0.2 of one warrant with an exercise price of $2.75 per share.





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





On July
18, 2007, the Company issued 1,872,600 units at $2.50 per Unit with each Unit
consisting of one share of common stock and 0.2 of one warrant  to a
total of 69 investors for an aggregate amount of $4,681,501.





NOTE
9 — WARRANTS





The
following table lists the total number of warrants outstanding as of September
30, 2008.




Expiring
            
            Strike
              Price
            
            Number
      of
              Common
      sharesDecember
      31, 2008
            
            5.25
            
            681,779January
      18, 2009 (a)
            
            (a)
            
            566,520July
      17, 2009
            
            2.75
            
            480,000July
      18, 2009
            
            3.00
            
            215,408Total
            
            
            
            1,943,707


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




NOTE
10 — CONCENTRATIONS




Customer
base





Our
customer base includes distributors, co-publishers, and retailers of video games
in the United States, Europe, and Australia. We review the credit-worthiness of
our customers on an ongoing basis, and believe that we need an allowance for
potential credit losses at September 30, 2008 of $577,080 compared to $574,090
at March 31, 2008. Also netted against accounts receivable are returns and price
protection reserves on existing receivables of $222,001 at September 30, 2008
and $271,269 at March 31, 2008. The receivables recorded from our customers
are net of their reserves for uncollectible accounts, returns and price
protection reserves from their customers. Account balances are charged off
against the allowance when the Company believes it is probable that accounts
receivable will not be recovered.




As of
September 30, 2008, one customer accounted for 59.6% of our gross accounts
receivable. During the six months ended September 30, 2008, two customers
accounted for 35.5% and 35.2%, respectively, of our consolidated net revenues.
During the six months ended September 30, 2007, three customers accounted for
75.0%, 10.3%, and 5.4%, respectively, of our consolidated net
revenues.




Operations
by Geographic Area




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





The
following tables display consolidated net revenue by location during the three
and six months ended September 30, 2008:






13







Location
            
            Three
      Months Ended September 30, 2008North
      America
            
            $
            51,270Europe
            
            
            26,734$
            78,004




Location
            
            Six
      Months Ended September 30, 2008North
      America
            
            $
            65,113Europe
            
            
            49,977$
            115,090





Location
of assets




Our
tangible assets, excluding inventory, are located at our corporate offices in
San Anselmo, California and on loan to a third party developer in Melbourne,
Australia. Inventory is located at a select few third party warehouse
facilities.





NOTE
11 – REVOLVING LINE OF CREDIT




On
February 11, 2008, we entered into an uncommitted revolving line of credit
agreement with Tiger Paw Capital Corporation, a corporation owned and operated
by Mr. Kenny Cheung, a member of the Company’s board of directors in the amount
of $1,000,000 ("the Line"). The Line is available for working capital
requirements. Any amounts drawn on the Line are payable on demand. The Line is
an uncommitted obligation where Tiger Paw Capital Corporation may decline to
make advances under the Line, or terminate the Line, at any time and for any
reason without prior notice to the Company.  The Line bears interest
at the rate of 10% per annum and is payable to Tiger Paw Capital Corporation on
demand. Advances under the Line may be pre-paid without penalty. The Line has a
subordinated security interest to all present and future assets of the
Company and carries no financial or operating covenants. As of September 30,
2008, we have drawn $500,000 on the Line.





On May 7,
2008, we entered into a Temporary Forbearance Agreement with Tiger Paw Capital
Corporation whereby Tiger Paw Capital Corporation agreed not to exercise any
demand or enforcement rights under the Line until November 7, 2008.





On
November 5, 2008, we entered into an Amendment to Temporary Forbearance
Agreement with Tiger Paw Capital Corporation whereby Tiger Paw Capital
Corporation agreed not to exercise any demand or enforcement rights under the
Line until the earlier of: (i) the closing date of our merger with and into the
subsidiary of SilverBirch, Inc; (ii) fifteen days after the termination of the
Merger Agreement (as defined below) with SilverBirch, Inc.; (iii) the date of
any change of control of Red Mile other than the merger with SilverBirch, Inc.;
and (iv) the occurrence of an event of default.





NOTE
12 – SECURED CREDIT LOAN





On May 7,
2008, we entered into a secured credit agreement with Silverbirch Inc, a
Canadian publicly traded corporation in the amount of $750,000 Canadian Dollars
($746,410 USD equivalent) ("The Facility"). The Facility is available for
development and production of our “Heroes Over Europe” video game and general
and administrative purposes. On May 7, 2008, we borrowed CAD $302,000 ($302,000
USD equivalent) against the Facility in respect of a development payment due to
the developer of the “Heroes Over Europe” video game.  On May 12,
2008, we borrowed CAD $448,000 ($444,410 USD equivalent) against the facility.
The Facility bears interest at the rate of 10% per annum and is payable to
Silverbirch, Inc. quarterly in arrears. Advances under the Facility may be
pre-paid without penalty. The Facility carries a first priority security
interest in all our present and future assets in addition to the securities in
the capital of our three wholly owned subsidiaries. The Facility contains
customary terms and conditions for credit facilities of this type, including
restrictions on the Company’s ability to incur or guaranty additional
indebtedness, create liens, make loans or investments, sell assets, pay
dividends or make distributions on, or repurchase, its stock.





In
October 2008, we amended the secured credit agreement whereby SilverBirch, Inc.
agreed not to exercise any demand or enforcement rights under such agreement
until the closing of our merger into their subsidiary.








14





NOTE
13 — NEW ACCOUNTING PRONOUNCEMENT




SFAS 157




In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (SFAS 157), which defines fair value,
establishes a framework for measuring fair value and expands the level of
disclosures regarding fair value. SFAS 157 also emphasizes that fair value is a
market-based measurement rather than an entity-specific measurement. The Company
adopted the provisions of SFAS 157 relating to financial assets and liabilities
and other assets and liabilities carried at fair value on a recurring basis
effective on April 1, 2008, as required.  As allowed by FASB
Staff Position FAS157-2, Effective
Date of FASB Statement No. 157, the Company has elected to defer the
adoption of SFAS 157 with respect to all remaining non-financial assets and
liabilities until April 1, 2009.  There was no material impact on
the Company’s financial statements at the time of adoption; however, the Company
does expect that this new standard will impact certain aspects of its accounting
for business combinations on a prospective basis, including the determination of
fair values assigned to certain purchased assets and
liabilities.




SFAS
159




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




FIN
48




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




Upon
review and analysis by the Company, we have concluded that no FIN 48 effects are
present as of March 31, 2008 and our tax position has not materially changed
since March 31, 2008.  For the year ended March 31, 2008, we did not
identify and record any liabilities related to unrecognized income tax
benefits.  The adoption of FIN 48 did not have a material impact our
financial statements.




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




EITF
07-03





In June
2007, the EITF reached a consensus on EITF No. 07-03, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities, or EITF 07-03. EITF 07-03 specifies the
timing of expense recognition for non-refundable advance payments for goods or
services that will be used or rendered for research and development activities.
EITF 07-03 was effective for fiscal years beginning after December 15, 2007, and
early adoption is not permitted. Adoption of EITF 07-has not  had a
material impact on either our financial position or results of
operations.





EITF
07-01





In
December 2007, the EITF reached a consensus on EITF No. 07-01, Accounting for
Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property, or EITF 07-01. EITF 07-01 discusses the appropriate
income statement presentation and classification for the activities and payments
between the participants in arrangements related to the development and
commercialization of intellectual property. The sufficiency of disclosure
related to these arrangements is also specified. EITF 07-01 is effective for
fiscal years beginning after December 15, 2008. As a result, EITF 07-01 is
effective for us in the first quarter of fiscal 2010. We do not expect the
adoption of EITF 07-01 to have a material impact on either our financial
position or results of operations.




SFAS
141(R) and SFAS 160




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






15






SFAS
161




In March
2008, the FASB issued SFAS No. 161,Disclosures about Derivative
Instruments and Hedging Activities -an amendment of SFAS 133 or SFAS 161.
SFAS 161 seeks to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. This standard shall be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 and early application is encouraged. We are in the process of
evaluating the new disclosure requirements under SFAS 161 and do not expect the
adoption to have a material impact on our consolidated financial
statements.




SFAS
162




In
May 2008, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 162, "The Hierarchy of Generally
Accepted Accounting Principles". This standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with US GAAP for non-governmental entities. SFAS No. 162
is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, the meaning of "Present
Fairly in Conformity with GAAP". The Company is in the process of evaluating the
impact, if any, of SFAS 162 on its consolidated financial
statements.





FSP
APB 14-1





In May
2008, the FASB released FSP APB 14-1 Accounting For Convertible
Debt  Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement) (FSP APB 14-1) that alters the accounting
treatment for convertible debt instruments that allow for either mandatory or
optional cash settlements. FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. Furthermore, it would require
recognizing interest expense in prior periods pursuant to retrospective
accounting treatment. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008. We are currently evaluating the
effect the adoption of FSP APB 14-1 will have on our consolidated results of
operations and financial condition.





NOTE 14 —  SUBSEQUENT EVENTS




On
October 7, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with SilverBirch Inc., an Ontario (Canada) corporation
(“SilverBirch, Inc.”), RME Merger Sub Corp., a Delaware corporation and wholly
owned subsidiary of SilverBirch, Inc. (“Merger Sub”), and Kenny Cheung, as
stockholder representative (the “Representative”).  On October 2,
2008, our board of directors unanimously approved the Merger Agreement and
recommended its adoption by our stockholders.





Under the
Merger Agreement, Merger Sub will merge with Red Mile, which will survive as a
wholly-owned subsidiary of SilverBirch, Inc..  Each issued and
outstanding share of our common stock will be converted into the right to
receive 0.875 shares of SilverBirch, Inc. common stock.  Any of our
stockholders who demand appraisal of their shares in accordance with Delaware
law will be entitled to seek a judicial determination of the fair value of such
shares.





Non-management
holders of options or warrants to purchase our common stock will have the right
to either net exercise such options or warrants for our common stock immediately
before the closing of the merger or convert such options or warrants into the
right to receive options or warrants to purchase a number of shares of
SilverBirch, Inc. common stock equal to the number of shares of our common stock
subject to such option or warrant times 0.875.  The exercise price for
each share of SilverBirch, Inc. common stock will equal the exercise price of
our common stock subject to such option or warrant times
1.14286.  Under the Merger Agreement, certain officers and employees,
including Chester Aldridge (our Chief Executive Officer) and Simon Price (our
President), will surrender and cancel each of their options and warrants to
purchase our common stock.






16







Under an
earn-out provision of the Merger Agreement, SilverBirch, Inc. will issue
additional SilverBirch, Inc. shares (or options or warrants, as the case may be)
to holders of our common stock (or options or warrants to purchase common stock)
if either or both of the following circumstances occur:





(i)
            if
      we, as the surviving company, meet certain gross revenue milestones in
      connection with the Publishing Agreement between us and Atari Interactive,
      Inc. regarding theHeroes over
      Europe  video game franchise,
  or




(ii)
            if
      we secures a co-publishing agreement with a third party for theSin City video game
      currently in development, provided that thirty percent of such shares will
      be held back to offset certain cost overruns in the development of the Sin
      City game.





All
undistributed earn-out shares will be available to satisfy indemnity claims
under the Merger Agreement.




All of
the SilverBirch, Inc. shares issued as merger consideration are subject to
transfer restrictions that lapse after closing of the Merger Agreement (the
“Closing”), as follows:




(i)
            30%
      of the shares shall not be transferred for 240 days after
      Closing;




(ii)
            30%
      of the shares shall not be transferred for 300 days after
      Closing;




(iii)
            20%
      of the shares shall not be transferred for 360 days after Closing;
      and




(iv)
            20%
      of the shares shall not be transferred for 420 days after
      Closing.





The total
number of shares of SilverBirch stock issuable as merger consideration will be
reduced for merger expenses incurred by us in excess of $70,000.





The
Merger Agreement includes customary representations, warranties and covenants by
the parties and is subject to customary closing conditions. The shares of
SilverBirch, Inc. stock to be issued in the merger will not be registered under
the Securities Act of 1933, as amended (the “Securities Act”), and will be
issued in reliance on the exemption from registration provided by Section
3(a)(10) of the Securities Act, relating to an exchange of securities after a
hearing regarding the fairness of the transaction.  Accordingly,
Closing is conditioned on obtaining a permit for the issuance of the
SilverBirch, Inc. stock from the California Commissioner of Corporations after a
hearing regarding the fairness of the transaction.  The Closing is
also conditioned on approval by our stockholders as well as U.S. regulatory
approval and approval by the Toronto Venture Stock Exchange
(TSX-V).





Under the
terms of the Merger Agreement, we have agreed not to solicit, discuss or
negotiate alternative transactions regarding the acquisition of us or our
assets.  The parties may terminate the Merger Agreement by mutual
written consent at any time and either party may terminate the Merger Agreement
if the transaction has not closed by January 31, 2009.  We will be
obligated to pay SilverBirch, Inc. a termination fee equal to 1,500,000 shares
of our common stock if (i) our stockholders do not approve the merger, (ii) we
fail to obtain any required approval from any governmental authority, or (iii)
our board of directors recommends an alternative transaction or withdraws its
recommendation in favor of the Merger Agreement.





Concurrently
with the execution of the Merger Agreement, certain of our stockholders,
representing approximately 23% of the combined voting power of our issued and
outstanding voting securities, entered into a Voting Agreement (the “Voting
Agreement”) with Merger Sub.  Under the Voting Agreement, our
stockholders agreed to vote all of our securities owned of record or
beneficially owned by such stockholders to facilitate consummation of the
Merger.  Each of our stockholders who signed a Voting Agreement also
signed an irrevocable proxy to vote and exercise all voting and related rights
with respect to such stockholder’s shares.


In
connection with the Merger Agreement certain of our officers and employees,
including Mr. Aldridge and Mr. Price, have each executed employment or
consulting agreements with SilverBirch, which will become effective at
Closing.







17








RED
MILE ENTERTAINMENT, INC.




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





FORWARD-LOOKING
STATEMENTS




Most of
the matters discussed within this Form 10-Q include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. In some cases you can identify
forward-looking statements by terminology such as "may," "should," "potential,"
"continue," "expects," "anticipates," "intends," "plans," "believes,"
"estimates," and similar expressions. These statements are based on our current
beliefs, expectations, and assumptions and are subject to a number of risks and
uncertainties, many of which are set forth in this Form 10-Q. Actual results and
events may vary significantly from those discussed in the forward-looking
statements.




These
forward-looking statements may include, among other things, statements relating
to the following matters:





O
            the
      likelihood that our management team will increase our profile in the
      industry and create new video games for us.O
            our
      ability to compete against companies with much greater resources than
      us.O
            our
      ability to obtain various intellectual property licenses as well as
      development and publishing licenses and approvals from the third party
      hardware manufacturers.




These
statements are not guarantees of future performance and involve certain risks
and uncertainties that are difficult to predict. Actual results could vary
materially from the description contained herein due to many factors included
and discussed in “Risk Factors” and elsewhere in the Company’s annual report on
Form 10-KSB filed on June 19, 2008 with the Securities and Exchange
Commission.





The
information contained in this Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2008 is not a complete description of the Company’s
business or the risks associated with an investment in the Company’s common
stock. Each reader should carefully review and consider the various disclosures
made by the Company in this Quarterly Report on Form 10-Q and in the Company’s
other filings with the Securities and Exchange Commission.





These
forward-looking statements are made as of the date of this Form 10-Q, and we
assume no obligation to explain the reason why actual results may differ. In
light of these assumptions, risks, and uncertainties, the forward-looking events
discussed in this Form 10-Q might not occur.





Overivew





We were
incorporated in Delaware in August of 2004. We are a developer and publisher of
interactive entertainment software across multiple hardware platforms, with a
focus on creating or licensing intellectual properties.  We sell our
games directly to distributors, retailers, and video rental companies in North
America. In Europe and Australia, we either sells our games directly to
distributors or license our games with major international game co-publishers in
exchange for payment of either development fees or guaranteed minimum payments.
The guaranteed minimum payments are recoupable by the distributor or
co-publisher against amounts owed under the various agreements. Once the
distributor or co-publisher recoups the guaranteed minimum payments, we are
entitled to additional payments as computed under the agreements.





Liquidity
and Capital resources





On May 7,
2008, we entered into a secured credit agreement with Silverbirch Inc, a
Canadian publicly traded corporation in the amount of $750,000 Canadian Dollars
("The Facility"). The Facility was made available for development and production
of our “Heroes Over Europe” video game and general and administrative purposes.
Amounts drawn on the Facility are payable upon the closing or termination of the
merger agreement.  The Facility bears interest at the rate of 10% per annum
and is payable to Lender quarterly in arrears. Advances under the Facility may
be pre-paid without penalty.





The
Facility carries a first priority security interest in all of our present and
future assets in addition to the securities in the capital of our three wholly
owned subsidiaries. The Facility contains customary terms and conditions for
credit facilities of this type, including restrictions on the Company’s ability
to incur or guaranty additional indebtedness, create liens, make loans or
investments, sell assets, pay dividends or make distributions on, or repurchase,
its stock.





In
October 2008, we amended the secured credit agreement whereby Silverbirch, Inc.
agreed not to exercise any demand or enforcement rights under such agreement
until the closing of our merger into their subsidiary.






18







We
currently need to raise additional capital in order to continue operating our
business. We believe our current cash on hand of approximately $609,000,
plus our expected cash received from co-publishing advances will allow us to
continue our business operations until the end of Fiscal 2009.





During
our second fiscal quarter of 2008, we signed a publishing agreement with Atari
for our Heroes Over Europe titles under development. Our agreement with Atari
provides us with minimum guaranteed payments from Atari in addition to back end
royalty payments. In the event that we are not successful in receiving
co-publishing advances from our Heroes Over Europe game, we will be unable to
continue operations.





We
anticipate needing an additional $10,000,000 to finance our planned operations
over the next 24 to 36 months. We will be unable to complete development of
Heroes Over Europe and Sin City: The Game (working title), or publish any other
additional games if we are unable to receive co-publishing advances on both the
foregoing titles or raise additional capital through either sale of securities
or debt borrowings.




RED MILE ENTERTAINMENT,
INC.


Results
of Operations




The
unaudited results of operations for the three months ending September 30, 2008
and  September 30, 2007 are as follows:




Summary of Unaudited Statements
of Operations


Three
Months Ended September 30, 2008 and 2007


Summary
of Statements of Operations





2008
            
            
            2007
            
            %
      changeRevenue
            
            $
            78,004
            
            
            $
            3,158,893
            
            (98)
      %Cost
      of sales
            
            
            47,454
            
            
            
            4,774,734
            
            (99)
      %Gross
      margin
            
            
            30,550
            
            
            
            (1,615,841)Operating
      expenses
            
            
            809,026
            
            
            
            2,902,557
            
            (72)
      %Net
      loss before interest income (expense), other income (expense) and
      provision for income taxes
            
            
            (778,476
            )
            
            
            (4,518,398)Debt
      conversion inducement costs
            
            
            -
            
            
            
            4,318,286Beneficial
      debt conversion costs
            
            
            -
            
            
            
            662,902Interest
      income (expense), net
            
            
            (30,576)
            
            
            
            22,174
            
            (238)
      %Other
      income (expense), net
            
            
            62,628
            
            
            
            -Net
      loss
            
            $
            (746,424
            )
            
            $
            (9,477,412)
            
            (92)
      %Net
      loss per common share - Basic and diluted
            
            $
            (0.05
            )
            
            $
            (.65)Shares
      used in computing basic and diluted net loss per share (in
      000’s)
            
            
            15,978
            
            
            
            14,510




Summary
of Unaudited Statements of Operations


Six
Months Ended September 30, 2008 and 2007





Summary
of Statements of Operations




2008
            
            
            2007
            
            
            %
      changeRevenue
            
            $
            115,090
            
            
            $
            3,433,315
            
            
            
            (97)
            %Cost
      of sales
            
            
            96,816
            
            
            
            5,027,243
            
            
            
            (98)
            %Gross
      margin
            
            
            (18,274
            )
            
            
            (1,593,928
            )Operating
      expenses
            
            
            1,772,793
            
            
            
            4,190,080
            
            
            
            (58)
            %Net
      loss before interest income (expense), other income (expense) and
      provision for income taxes
            
            
            (1,754,519
            )
            
            
            (5,784,008
            )Debt
      conversion inducement costs
            
            
            -
            
            
            
            (4,318,286
            )Beneficial
      debt conversion costs
            
            
            -
            
            
            
            (662,902)Interest
      income (expense), net
            
            
            (57,713
            )
            
            
            (89,060)
            
            
            
            (165)Other
      income (expense), net
            
            
            56,998Income
      tax expense
            
            
            800
            
            
            
            ---Net
      loss
            
            $
            (1,756,034
            )
            
            $
            (10,854,256
            )
            
            
            (84)
            %Net
      loss per common share - Basic and diluted
            
            $
            (0.11
            )
            
            $
            (.90
            )Shares
      used in computing basic and diluted net loss per share (in
      000’s)
            
            
            15,978
            
            
            
            12,099





19





Revenues




Revenues
were $78,004 and $3,158,893 during the three months ended September 30, 2008 and
2007, respectively. Revenues were $115,090 and $3,433,315 during the six months
ended September 30, 2008 and 2007, respectively. The decrease is primarily due
to sales of Jackass: The Game which first shipped in our second quarter of
fiscal 2008. Our license agreement for Jackass was terminated in March, 2008 and
accordingly, there were no sales of Jackass in fiscal 2009.





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





We
currently have two games under development which we anticipate will be ready for
shipment in fiscal years 2009 through 2011. We are developing “Heroes Over
Europe”, a sequel to Heroes of the Pacific that is set in the European Theatre
of World War II (for the next generation consoles and PC) that we expect to ship
in fiscal 2009.  We are also developing Sin City: The Game (working
title), and expect to ship this game in fiscal 2012.




We record
revenues net of distribution fees.





Red Mile
may be required to levy European Value Added Tax (“VAT”) and Australian Goods
and Services Tax (“GST”) on shipments of  products within the European
Union member countries, and Australia, respectively. Pursuant to EITF 06-03,
“How Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement”, Red Mile includes the taxes
assessed by a governmental authority that is directly imposed on a
revenue-producing transaction on a gross basis (included in revenues and costs).
For the three months ended September 30, 2008 and 2007, respectively, no taxes
assessed by a governmental authority were included in revenue and cost of
sales.





Cost of
sales





Cost of
sales were $47,454 and $4,774,734 during the three months ended September 30,
2008 and 2007, respectively. Cost of sales were $96,816 and $5,027,243 during
the six months ended September, 30, 2008 and 2007, respectively. The decrease is
primarily due to the decrease in sales of Jackass: The Game since there were no
sales of the game in fiscal 2009.





Cost of
sales for the three months ended September 30, 2008 and 2007 consisted
of:





September
      30, 2008
            
            
            September
      30, 2007Amortization
      of capitalized software development costs, cost of inventory
      sold,  manufacturing and distribution costs
            
            $
            21,758
            
            
            $
            3,148,898Royalties
      to third party game developers
            
            
            19,655
            
            
            
            31,819Write
      down of inventory costs to net realizable value
            
            
            (584
            )
            
            
            247Write
      down of software development costs and advanced royalties to net
      realizable value
            
            
            6,625
            
            
            
            1,593,770Total
            
            $
            47,454
            
            
            $
            4,774,734





Cost of
sales for the six months ended September 30, 2008 and 2007 consisted
of:




September
      30, 2008
            
            
            September
      30, 2007Amortization
      of capitalized software development costs, cost of inventory
      sold,  manufacturing and distribution costs
            
            $
            71,431
            
            
            $
            3,342,375Royalties
      to third party game developers
            
            
            11,962
            
            
            
            61,086Write
      down of inventory costs to net realizable value
            
            
            2,046
            
            
            
            13,083Write
      down of software development costs and advanced royalties to net
      realizable value
            
            
            11,377
            
            
            
            1,610,699Total
            
            $
            96,816
            
            
            $
            5,027,243





20





Operating
Expenses




Operating
expenses for three months ended September 30, 2008 and 2007, respectively, were
as follows:




Three
      Months Ended
              September
      30, 2008
            Percent
              of
      total
            Three
      Months Ended
              September
      30, 2007
            Percent
              of
      total
            Percent
              DecreaseResearch
      and development costs
            $      249,270
            30.8%
            $         442,066
            15.2%
            (44%)General
      and administrative costs
            548,107
            67.8%
            773,628
            26.7%
            (29%)Marketing,
      sales and business development costs
            11,649
            1.4%
            1,686,863
            58.1%
            (99%)Total
      operating expenses
            $      809,026
            100.0%
            $      2,902,557
            100.0%




Operating
expenses for six months ended September 30, 2008 and 2007, respectively, were as
follows:




Six
      Months Ended
              September
      30, 2008
            Percent
              of
      total
            Six
      Months Ended
              September
      30, 2007
            Percent
              of
      total
            Percent
              DecreaseResearch
      and development costs
            $  
            517,991
            29.2%
            $         596,093
            14.2%
            (13%)General
      and administrative costs
            1,191,401
            67.2%
            1,671,693
            39.9%
            (29%)Marketing,
      sales and business development costs
            63,401
            3.6%
            1,922,294
            45.9%
            (97%)Total
      operating expenses
            $      1,772,793
            100.0%
            $      4,190,080
            100.0%




Research and Development
Costs





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





Certain
internal costs are capitalized as part of the development costs of a game.
During the three and six months ended September 30, 2008, $30,875 and $73,775 of
internal costs were capitalized. During the three and six months ended September
30, 2008, $194,875 and $404,875 of external costs were expensed as incurred as
costs prior to the related game reaching technological feasibility.





Virtually
all of the costs for R&D during the three and six months ended September 30,
2008, related to costs incurred in the development of Sin City: the Game.
R&D costs have decreased from the prior year as the company’s has decreased
its development activity of Sin City: the Game.





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





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






21







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




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





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





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





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




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





We expect
research and development costs to increase during the remainder of fiscal 2009
reflecting increased development activity for Sin City.





General and Administrative
Costs





General
and administrative costs were $548,107 and $773,628 in the three months ended
September 30, 2008 and 2007, respectively, a decrease of 29%. General and
administrative costs were approximately $1,191,401 and $1,671,693 in the six
months ended September 30, 2008 and 2007, respectively, a decrease of 29%.
General and administrative (G&A) costs are comprised primarily of the costs
of stock options issued to employees and consultants, employee salaries and
benefits, professional fees (legal, accounting, investor relations, and
consulting), facilities expenses, amortization and depreciation expenses,
insurance costs, and travel. General and administrative costs primarily
decreased due to a reduction in the number of employees following the company’s
restructuring in March 2008.





Sales, Marketing and
Business Development Costs





Sales,
marketing and business development costs were $11,649 and $1,686,863 during the
three months ended September 30, 2008 and 2007, respectively, a decrease of 99%.
Sales, marketing and business development costs were approximately $63,401 and
$1,922,294 during the six months ended September 30, 2008 and 2007,
respectively, a decrease of 97%. Sales, marketing, and business development
costs consist primarily of employee salaries, stock option expenses, employee
benefits, consulting costs, public relations costs, promotional costs, marketing
research, sales commissions, and sales support materials
costs.  Sales, marketing, and business development costs decreased
year over year primarily due to the Company no longer incurring marketing or
promotional costs for Jackass: The Game and reduced headcount costs related to
the Company’s restructuring in March 2008.





Interest Income (Expense),
net





Interest
income (expense), net were ($30,576) and $22,174 for the three months ended
September 30, 2008 and 2007, respectively. The decrease primarily reflects lower
cash balances in fiscal 2009 and interest incurred on the company’s revolving
line of credit with Tiger Paw Capital Corporation and the secured credit loan
with Silverbirch Inc. Interest income (expense), net were ($57,713) and
($89,060) for the six months ended September 30, 2008 and 2007,
respectively.  This decrease is primarily related interest charges on
the company’s senior secured convertible debentures that existed in fiscal 2008
that were no longer outstanding in fiscal 2009.





Other
Expense





Other
income (expense) for the three months ended September 30, 2008 relate primarily
to the foreign currency revaluation of the Canadian dollar secured credit loan
from Silverbirch Inc and the revaluation of the contingent consideration
liability.





During
the three months ended September 30, 2007, we took a non-cash debt inducement
conversion charge of $4,318,286 related to converting $8,244,000 principal
amount of senior secured convertible debentures and $155,281 in accrued interest
on the debentures into shares of our common stock at a lower conversion price
than the conversion price attached to the debentures. Also during the three
months ended September 30, 2007, we took a non-cash charge of $662,902 on the
conversion of $2,400,000 in principal amount of convertible promissory notes
into shares of our common stock related to the beneficial value of warrants
issued with the common stock at the time of conversion.






22







Critical
Accounting Policies




Red
Mile's financial statements and related public financial information are based
on the application of accounting principles generally accepted in the United
States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenues, expenses, and equity amounts
reported.





These
estimates can also affect supplemental information contained in our external
disclosures including information regarding contingencies, risk and financial
condition.





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




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





We
believe that certain critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements: revenue recognition and software development cost and advanced
royalties.  These accounting policies are discussed in “ITEM 6 —
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION” contained in our
Annual Report on Form 10-KSB for the fiscal year ended March 31, 2008, as well
as in the notes to the March 31, 2008 consolidated financial
statements.  There have not been any significant changes to these
accounting policies since they were previously reported at March 31,
2008.





Revenue
recognition




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




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





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





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




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




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






23






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





Our
revenues are subject to material seasonal fluctuations.




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





We may be
required to levy European Value Added Tax (“VAT”) and Australian Goods and
Services Tax (“GST”) on shipments of  products within the EU member
countries, and Australia, respectively. Pursuant to EITF 06-03, “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement”, we include the taxes assessed by a
governmental authority that is directly imposed on a revenue-producing
transaction on a gross basis (included in revenues and costs).




Software
Development Costs and Advanced Royalties




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




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




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




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




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




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




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





Off-Balance Sheet
Arrangements





At
September 30, 2008, we did not have any transactions, obligations or
relationships that could be considered off-balance sheet
arrangements.








24







ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




We do not hold any derivative instruments and do not engage in
any hedging activities.




ITEM
4T. CONTROLS AND PROCEDURES




(a)
Evaluation of disclosure controls and procedures.





We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized,
and reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer (our Principal Accounting Officer), as
appropriate, to allow for timely decisions regarding required
disclosure.  In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can only provide reasonable assurance of
achieving the desired control objective, and management is required to exercise
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.





Management,
under the supervision and with the participation of our Chief Executive Officer,
who is our principal executive officer and principal financial officer, has
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered
by this Quarterly Report  (the “Evaluation
Date”).  Management assessed the effectiveness of the Company’s
internal control over financial reporting as of September 30, 2008, and this
assessment identified material weakness in the company’s internal control over
financial reporting.





In making
its assessment of internal control over financial reporting management used the
criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in  Internal Control—Integrated
Framework.  Because of the material weakness described in the
preceding paragraph, management believes that, as of September 30, 2008, the
Company’s internal control over financial reporting was not effective based on
those criteria.





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





The
Company does not have independent board members and, therefore, we have no
independent audit committee. In addition, the lack of multiple employees results
in the Company’s inability to have a sufficient segregation of duties within its
accounting and financial activities. These absences constitute material
weaknesses in the Company’s internal controls over financial reporting and
corporate governance structure.





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control system was designed to
provide reasonable assurance to the Company’s management and board of directors
regarding the preparation and fair presentation of published financial
statements. The internal control system over financial reporting includes those
policies and procedures that:





•
            
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;•
            
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorization of management and the
      our board of directors; and•
            
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.





All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.





Changes
in Internal Control Over Financial Reporting





There have
been no changes in the Company’s internal controls over financial reporting
identified in connection with the evaluation of disclosure controls and
procedures discussed above that occurred during the quarter ended September 30,
2008 or subsequent to that date that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.






25






PART
II. OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS





None.





ITEM
1A. RISK FACTORS





Our
business involves a high degree of risk. Therefore, in evaluating us and our
business you should carefully consider the risks set forth below.





If
we are unable to raise additional financing or receive advances from
co-publishing partners, we will be unable to fund our product development and
continue our business operations and investors may not receive any portion of
their investment back.




We have
never achieved positive cash flow from operations and there can be no assurance
that we will do so in the future. We need additional financing or advances from
co-publishing partners to fund our product development costs and our operating
costs that we anticipate incurring over the next several quarters. Our current
cash on hand together with our expected advances from co-publishing partners and
expected draws on our revolving line of credit will enable us to continue
operating until the end of our 2009 fiscal year. We anticipate needing an
additional $10,000,000 to bring our existing products under development to
market and finance our day to day operations.  If we are unable to
make draws on our revolving line of credit, receive advances from co-publishing
partners, or raise additional capital, we will be unable to continue our
business operations and investors may not receive any portion of their
investment back.




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




We have a
significant accumulated deficit and have sustained negative cash flows from
operations since our inception. The opinion of our independent registered
accounting firm for the years ended March 31, 2008 and 2007 is qualified subject
to uncertainty regarding our ability to continue as a going concern. In fact,
the opinion states that these factors raise substantial doubt as to our ability
to continue as a going concern. In order for us to operate and not go out of
business, we must generate and/or raise capital to stay operational. The
continuity as a going concern is dependent upon the continued financial support
of our current shareholders, current line of credit lenders, and new investors.
There can be no assurance that we will be able to generate income or raise
additional capital.





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




We were
incorporated in August 2004 and shipped our first two games in our second fiscal
quarter of 2006 and an additional six games in fiscal 2007. During the year
ended March 31, 2008, we shipped Jackass: The Game for the Sony PS2, Sony PSP,
and Nintendo DS  platforms and an additional three PC games from our
Roveractive, Ltd. casual games subsidiary.  We therefore face the
risks and problems associated with businesses in their early stages in a
competitive environment and have a limited operating history on which an
evaluation of our prospects can be made. Until we develop our business further
by publishing and developing more games, it will be difficult for an investor to
evaluate our chances for success. Our prospects should be considered in light of
the risks, expenses and difficulties frequently encountered in the establishment
of any business in a competitive environment and in the video game and
publishing spaces.




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




During
the years ended March 31, 2008 and 2007, we incurred net losses of $15,711,149
and $8,038,894, respectively. Our ability to generate revenues and to become
profitable depends on many factors, including the market acceptance of our
products and services, our ability to control costs and our ability to implement
our business strategy. There can be no assurance that we will become or remain
profitable.





The
Company has rarely generated positive gross margins.




Our
ability to generate positive gross margins depends on many factors, including
the market acceptance of our products, the selling prices of our products, our
ability to control the costs of developing and manufacturing our products and
the costs of royalties paid to licenses of any intellectual properties we have
licensed. There can be no assurance that we will be able to sustain positive
gross margins.





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




If we are
unable to receive co-publishing advances on our games under development or raise
sufficient capital, we will be unable to implement our business strategy.
Co-publishing our titles will make it more difficult to achieve profitability
and positive cash flow.  In such circumstances, it is likely that we
will dissolve and, we would likely not be able to return any funds back to
investors.






26






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




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





The
Company faces intense competition.





Our
products compete with motion pictures, television, music and other forms of
entertainment for the leisure time and money of consumers.





Our
competitors vary in size from very small companies with limited resources to
very large, diversified corporations with greater financial and marketing
resources than ours. Our business requires the continuous introduction of
popular games, which require ever-increasing budgets for development and
marketing. As a result, the availability of significant financial resources has
become a major competitive factor in developing and marketing of software
games.





We
currently compete with Sony, Microsoft, and Nintendo, each of which develop and
publish software for their respective console platforms. We also compete with
numerous companies which are, like us, licensed by the console manufacturers to
develop and publish software games that operate on their consoles. These
competitors include Activision, Atari, Capcom, Eidos, Electronic Arts, Koei,
Konami, LucasArts, Midway, Namco, Sega, Take-Two Interactive, THQ, Ubisoft and
Vivendi Universal Games, among others. Diversified media companies such as Time
Warner, Viacom and Disney have also indicated their intent to significantly
expand their software game publishing efforts in the future.





We
believe that the software games segment is best viewed as a segment of the
overall entertainment market. We believe that large software companies and media
companies are increasing their focus on the software games segment of the
entertainment market and as a result, may become more direct competitors.
Several large software companies and media companies (e.g., Microsoft and Sony)
have been publishing products that compete with ours for a long time, and other
diversified media/entertainment companies (e.g., Time Warner, Disney and MTV)
have announced their intent to significantly expand their software game
publishing efforts in the future.





In
addition to competing for product sales, we face heavy competition from other
software game companies to obtain license agreements granting us the right to
use intellectual property included in our products. Some of these content
licenses are controlled by the diversified media companies, which intend to
expand their software game publishing divisions.





Finally,
the market for our products is characterized by significant price competition
and we regularly face pricing pressures from our competitors and customers.
These pressures may, from time to time, require us to reduce our prices on
certain products. Our experience has been that software game prices tend to
decline once a generation of consoles has been in the market for a significant
period of time due to the increasing number of software titles competing for
acceptance by consumers and the anticipation of the next-generation of
consoles.





If we
fail to compete successfully, we could lose customers and our results of
operations could be affected and our business will suffer.




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




Most of
our anticipated revenues will be generated from the development and publishing
of games for play on video game platforms produced by third
parties.




Our
business will suffer if the third parties do not manufacture and sell an
adequate number of platforms to meet consumer demand or if the installed base of
the platforms is insufficient.




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




We expect
that many of our future games will be developed and published in connection with
the releases of related movie titles and other significant marketing events, or
more generally in connection with higher sales periods, including our third
quarter ending December 31. As such, we will establish game development
schedules tied to these periods. If we miss these schedules, we will incur the
costs of procuring licenses without obtaining the revenue from sales of the
related games.




We
are currently dependent on a small number of customers, the loss of any of which
could cause a significant decrease in our revenue.




We are
currently dependent on one customer, Atari, for the majority of our future
revenue which relates to co-publishing revenue of our Heroes Over Europe title
currently under development. If major customers were to decrease their purchase
volume or discontinue their relationship with us, our revenue would decrease
significantly unless we were able to find new customers or co-publishing
partners to replace the lost volume. There can be no assurance that such new
customers or co-publishing partners could be found, or if found, that they would
purchase the same quantity as the current customers.






27






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




We have
not yet internally developed any games that we sell and our business has been
derived from the sale of games developed by external development studios. If the
external developers of our current games under development were to discontinue
their relationship with us, we may not be able to find a replacement. If our
external developers were to increase the fees above amounts contractually agreed
to, we may be unable to pay the increased fees which could delay or even halt
development of our games.




There can
be no assurance that we would be able to find alternative developers, or even if
such developers are available, that they will be available on terms acceptable
to us.




Any
delays in development of our games could cause our financial projections to be
materially different from what was anticipated.





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




The
lifespan of any of our games is relatively short, in many cases less than one
year. It is therefore important for us to be able to continually develop games
that are popular with the consumers.




During
the last two fiscal years, we have sold five Console or Handheld games and six
PC only games. We are currently involved in the development of two games. If we
are unable to continually identify, develop and publish games that are popular
with the consumers on a regular basis, our business will suffer and we will
ultimately cease our operations. Our business will also suffer if we do not
receive additional financing to be used for research and development of new
games.




We have
shipped the following Console or Handheld games: (i) Heroes of the Pacific for
the PS2, Xbox and PC platforms which first began shipping in September, 2005;
(ii) GripShift for the PSP platform which first began shipping in September
2005; (iii) Crusty Demons for the PS2 and Xbox platforms which first began
shipping in July 2006; (iv) Lucinda Green’s Equestrian Challenge for the PS2 and
PC which first began shipping in November 2006; and (v) Jackass for the PS2 and
PSP which first began shipping in September 2007 and for the DS platform which
first began shipping in January 2008.  On the PC, we have shipped: (i)
Disney’s Aladdin Chess Adventures which first began shipping in February 2006;
(ii) El Matador, which first began shipping in October 2006; (iii) Dual Sudoku,
which first began shipping in September 2006; (iv) Timothy and Titus, which
first began shipping in November 2006; (v) Aircraft Power Pack, which first
began shipping in December 2006;  (vi)  Lucinda Green’s
Equestrian Challenge, which we first began shipping in November 2006; and (vii)
Ouba, Pantheon and 10 Talismans which first began shipping in May 2007. We are
currently involved in the development of two games: (i) a sequel to Heroes of
the Pacific, “Heroes Over Europe” for the Xbox 360, PS3, and PC; and (ii) Sin
City: The Game (working title) for the PS3 and Xbox 360.




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




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




Video
game platforms generally have a life cycle of approximately six to ten years,
which has caused the market for video games to also be cyclical. Sony’s
PlayStation 2 was introduced in 2000 and Microsoft’s Xbox and the Nintendo
GameCube were introduced in 2001. Microsoft introduced the Xbox 360 in 2005,
Sony the PlayStation 3 and Nintendo the Wii in 2006. These introductions have
created a new cycle for the video game industry which will require us to make
significant financial and time investments in order to adapt our current games
and develop and publish new games for these new consoles. We cannot assure you
that we will be able to accomplish this or that we will have the funds or
personnel to do this. Furthermore, we expect development costs for each game on
the new consoles to be significantly greater than in the past. If the increased
costs we incur due to next generation consoles are not offset by greater sales,
we will continue to incur losses.




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




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




In
addition, if we are required to issue price protection credits to our customers
on slow moving inventory, we are not entitled to receive corresponding credits
on the royalty rates to the platform manufacturers for publishing the
games.






28






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




We have
the following platform licenses:




Platform
            
            TermMicrosoft
      Xbox 360
            
            Three
      years from first commercial release of platform. Then automatic renewal
      unless noticed 60 days prior to expiration of non-renewal. Royalty rates
      are fixed during the term.Microsoft
      Xbox
            
            Initial
      term expired on November 15, 2007. Then automatic renewal unless noticed
      60 days prior to expiration of non-renewal. Royalty may change on July 1st
      of any year.Sony
      PS2 and PSP
            
            Initial
      term expired on March 31, 2007. Then automatic renewal unless noticed 60
      days prior to expiration of non-renewal. Royalty rates are subject to
      change with 60 days notice.Sony
      PS3
            
            Initial
      term expires on March 31, 2012. Automatic renewal for one-year terms,
      unless noticed on or before January 31 of the year in which the term would
      renew. Royalty rates are subject to change with 60 days
      notice.Nintendo
      Wii and DS
            
            Expires
      June 12, 2010.PC
            
            There
      are no platform licenses required for the PCs.




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




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




Our
ability to compete and operate successfully depends in part on our acquiring and
controlling proprietary intellectual property. Our games embody trademarks,
trade names, logos, or copyrights licensed from third parties. If we cannot
maintain the licenses that we currently have, or obtain additional licenses for
the games that we plan to publish or co-publish, we will produce fewer games and
our business will suffer.




Furthermore,
some of our competitors have significantly greater resources than we do, and are
therefore better positioned to secure intellectual property licenses. We cannot
assure you that our licenses will be extended on reasonable terms or at all, or
that we will be successful in acquiring or renewing licenses to property rights
with significant commercial value.




Infringement
claims regarding our intellectual property may harm our business.




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




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




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




We
believe that similar legislation will be proposed in many countries that are
significant markets for our games, including the United States. If any of this
proposed legislation is passed, it could have the effect of limiting the market
for our games and/or require us to modify our games at an additional cost to
us.






29






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.




Our
business may suffer from deteriorating macroeconomic conditions in the United
States.





We are
not able to predict whether macroeconomic conditions will get worse or improve,
nor are we able to predict the timing of such developments.  If
macroeconomic conditions get worse, we are not able to predict the impact such
worsening conditions will have on the online marketing industry and on our
results of operations.  Further, if and when macroeconomic conditions
do improve, there can be no assurances that we will be able to regain the levels
of revenue and profitability that we achieved prior to the macroeconomic
downturn.





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





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





Our
common stock is subject to the "Penny Stock" rules of the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our stock.





Our
common stock is considered to be a “penny stock” since it meets one or more of
the definitions in Rule 3a51-1 under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These include but are not limited to the
following: (i) the stock trades at a price less than $5.00 per share; (ii) it is
not traded on a “recognized” national exchange; (iii) it is not quoted on the
NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or
(iv) is issued by a company with net tangible assets less than $2.0 million, if
in business more than a continuous three years, or with average revenues of less
than $6.0 million for the past three years. The principal result or effect of
being designated a “penny stock” is that securities broker-dealers cannot
recommend the stock but must trade in it on an unsolicited
basis.  Section 15(g) of the Exchange Act and Rule 15g-2 promulgated
thereunder by the SEC require broker-dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of penny stocks and to
obtain a manually signed and dated written receipt of the document before
effecting any transaction in a penny stock for the investor’s
account.





Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be “penny stock.”
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives.  Compliance with these requirements may
make it more difficult for holders of our common stock to resell their shares to
third parties or to otherwise dispose of them in the market or
otherwise.






30







Delaware
law contains anti-takeover provisions that could deter takeover attempts that
could be beneficial to our stockholders.





Provisions
of Delaware law may make it more difficult for a third-party to acquire the
Company, even if doing so would be beneficial to the stockholders of the
Company. Section 203 of the Delaware General Corporation Law may make an
acquisition of the Company and the removal of incumbent officers and directors
more difficult by prohibiting stockholders holding 15% or more of the Company’s
outstanding voting stock from acquiring us, without our Board of Directors’
consent, for at least three years from the date they first hold 15% or more of
the voting stock.




Effect
of Recent Accounting Pronouncements





EITF
06-03




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




SFAS 157




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





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




In
December 2007, the FASB issued proposed FASB Staff Position ("FSP") 157-b,
"Effective Date of FASB Statement No. 157," that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity's financial
statements on a recurring basis (at least annually). Therefore, if the change in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years.
This deferral does not apply, however, to an entity that applies Statement 157
in interim or annual financial statements before proposed FSP 157-b is
finalized. We are currently evaluating the impact, if any, that the adoption of
FSP 157-b will have on our operating income or net earnings.




SFAS
159




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




FIN
48




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






31






Upon
review and analysis by the Company, we have concluded that no FIN 48 effects are
present as of March 31, 2008 and our tax position has not materially changed
since March 31, 2008.  For the year ended March 31, 2008, we did not
identify and record any liabilities related to unrecognized income tax
benefits.  We do not expect the adoption of FIN 48 to have a material
impact our financial statements.




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




EITF
07-03





In June
2007, the EITF reached a consensus on EITF No. 07-03, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities, or EITF 07-03. EITF 07-03 specifies the
timing of expense recognition for non-refundable advance payments for goods or
services that will be used or rendered for research and development activities.
EITF 07-03 was effective for fiscal years beginning after December 15, 2007, and
early adoption is not permitted. Adoption of EITF 07-has not had a material
impact on either our financial position or results of operations.





EITF
07-01





In
December 2007, the EITF reached a consensus on EITF No. 07-01, Accounting for
Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property, or EITF 07-01. EITF 07-01 discusses the appropriate
income statement presentation and classification for the activities and payments
between the participants in arrangements related to the development and
commercialization of intellectual property. The sufficiency of disclosure
related to these arrangements is also specified. EITF 07-01 is effective for
fiscal years beginning after December 15, 2008. As a result, EITF 07-01 is
effective for us in the first quarter of fiscal 2010. We do not expect the
adoption of EITF 07-01 to have a material impact on either our financial
position or results of operations.




SFAS
141(R) and SFAS 160




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




SFAS
161




In March
2008, the FASB issued SFAS No. 161,Disclosures about Derivative
Instruments and Hedging Activities -an amendment of SFAS 133 or SFAS 161.
SFAS 161 seeks to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. This standard shall be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 and early application is encouraged. We are in the process of
evaluating the new disclosure requirements under SFAS 161 and do not expect the
adoption to have a material impact on our consolidated financial
statements.




SFAS
162




In
May 2008, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 162, "The Hierarchy of Generally
Accepted Accounting Principles". This standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with US GAAP for non-governmental entities. SFAS No. 162
is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, the meaning of "Present
Fairly in Conformity with GAAP". We are in the process of evaluating the impact,
if any, of SFAS 162 on its consolidated financial statements.






32







FSP
APB 14-1





In May
2008, the FASB released FSP APB 14-1 Accounting For Convertible
Debt  Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement) (FSP APB 14-1) that alters the accounting
treatment for convertible debt instruments that allow for either mandatory or
optional cash settlements. FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. Furthermore, it would require
recognizing interest expense in prior periods pursuant to retrospective
accounting treatment. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008. We are currently evaluating the
effect the adoption of FSP APB 14-1 will have on our consolidated results of
operations and financial condition.





Item
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





None.





Item
3.   DEFAULTS UPON SENIOR SECURITIES





None.





Item
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS








None.





Item.
5. OTHER INFORMATION





None





ITEM
6. EXHIBITS





(a)
  Exhibits:





10.1(1)
            Agreement
      and Plan of Merger among Silverbirch, Inc., RME Merger Sub Corp, Red Mile
      Entertainment, Inc., and Kenny Cheung as representative dated October 7,
      2008.10.2(1)
            Voting
      Agreement among RME Merger Sub Corp., and certain stockholdes of Red Mile
      Entertainment, Inc., dated October 7, 2008.31.1
            Certification
      of Chief Executive Officer and Principal Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
            Certification
      of Chief Executive Officer and Principal Financial Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002





(1)
            Previously
      filed as an exhibit to the registrant’s current report on Form 8-K, filed
      on October 14, 2008 (Commission File No. 000-51055), and incorporated
      herein by reference.





Exhibits
to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2)
of Regulation S-K.  Red Mile agrees to furnish a supplemental copy of
any omitted exhibit to the SEC upon request.








33






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:        November
      14, 2008
            
            By:
      /s/ Chester
      AldridgeChester
      AldridgeChief
      Executive Officer(Principal
      Executive Officer and Principal Accounting Officer)