UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


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


**FORM
      10-QSB**


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




x   QUARTERLY
        REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
  FOR
        THE
        QUARTERLY PERIOD ENDED **September 30, 2006**
  o   TRANSITION
        REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
  FOR
        THE
        QUARTERLY PERIOD FROM _____ TO _________ .




Commission
      File # 000-51055




**RED
      MILE ENTERTAINMENT, INC.**


(Exact
      name of registrant as specified in its charter)




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




**4000
      Bridgeway, Suite 101**


**Sausalito,
      CA 94965**


(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICES)




**(415)
      339-4240**


(ISSUER
      TELEPHONE NUMBER)




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








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




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






Number
      of
      shares of the registrant's common stock outstanding as of November 10, 2006
      is:
      25,436,506.














Table
                of Contents
            
            PagePART
                I
            FINANCIAL
                INFORMATIONITEM
                1.
            FINANCIAL
                STATEMENTS
            3ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            23ITEM
                3.
            CONTROLS
                AND PROCEDURES
            32OTHER
                INFORMATIONITEM
                1A.
            RISK
                FACTORS
            33ITEM
                6.
            EXHIBITS
            40FORM
                10QSB SIGNATURE PAGE
            41













2








Part
      I.
      FINANCIAL INFORMATION




ITEM
      1.
      Financial Statements




**RED
      MILE ENTERTAINMENT, INC.**


**Unaudited
      Condensed Consolidated Balance Sheets**


**(Unaudited)**





**September
                30,**
              **2006**
            
            **March
                31,**
              **2006**ASSETSCurrent
                assetsCash
                in bank
            
            $
            266,045
            
            $
            769,926Marketable
                securities
            
            
            —
            
            
            10,313Accounts
                receivable, net of reserves of $84,011 and $0
            
            
            412,523
            
            
            355,861Prepaid
                expenses
            
            
            40,421
            
            
            22,883Inventory,
                net of reserves of $6,550 and $0
            
            
            114,785
            
            
            —Software
                development costs
            
            
            5,162,424
            
            
            3,280,769Total
                current assets
            
            
            5,996,198
            
            
            4,439,752Property
                and equipment, net
            
            
            147,382
            
            
            101,588Other
                assets
            
            
            263,150
            
            
            205,000Total
                assets
            
            $
            6,406,730
            
            $
            4,746,340




LIABILITIES,
                REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’
                DEFICITCurrent
                liabilitiesAccounts
                payable
            
            $
            1,199,320
            
            $
            472,880Accrued
                liabilities
            
            
            484,003
            
            
            531,645Deferred
                revenue
            
            
            90,000
            
            
            27,500Total
                current liabilities
            
            
            1,773,323
            
            
            1,032,025Redeemable,
                convertible preferred stock, no par value, authorized 20,000,000
                shares;
                issued and outstanding 3,834,860 and 12,075,860, respectively; the
                aggregate redemption value and liquidity preference $ 4,793,870 and
                $12,419,127, respectively
            
            
            3,857,691
            
            
            12,077,075Warrants
                on redeemable convertible preferred stock
            
            
            765,840
            
            
            342,0524,623,531
            
            
            12,419,127Stockholders’
                equity (deficit)Common
                stock, no par value, authorized 100,000,000 shares; issued and outstanding
                25,436,506 and 14,420,870, respectively
            
            
            444,457
            
            
            434,035Additional
                paid in capital
            
            
            11,109,962
            
            
            40,449Accumulated
                deficit
            
            
            (11,545,246
            )
            
            (9,179,296
            )Accumulated
                other comprehensive income
            
            
            703
            
            
            —Total
                stockholders’ equity (deficit)
            
            
            9,876
            
            
            (8,704,812
            )Total
                liabilities, redeemable convertible preferred stock and stockholders’
                equity (deficit)
            
            $
            6,406,730
            
            $
            4,746,340









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






3




**RED
      MILE ENTERTAINMENT, INC.**


**Unaudited
      Condensed Consolidated Statements of Operations**


**For
      the three months ended September 30, 2006 and 2005**


**(Unaudited)**




**Three
                months ended**
              **September
                30,**
              **2006**
            
            **Three
                months ended**
              **September
                30,**
              **2005**Revenues
            
            $
            284,903
            
            $
            2,852,544Cost
                of sales
            
            
            575,795
            
            
            2,459,118Gross
                margin
            
            
            (290,892
            )
            
            393,426Operating
                expensesResearch
                and development costs
            
            
            104,990
            
            
            52,595General
                and administrative costs
            
            
            635,576
            
            
            250,965Marketing
                and business development costs
            
            
            347,541
            
            
            132,206Debt
                Conversion Inducement Costs
            
            
            —
            
            
            1,000,000Total
                operating expenses
            
            
            1,088,107
            
            
            1,435,766Interest
                income
            
            
            3,974
            
            
            4,561Loss
                before expense from income taxes
            
            
            (1,375,025
            )
            
            (1,037,779
            )Income
                tax expense
            
            
            —
            
            
            —Net
                loss
            
            
            (1,375,025
            )
            
            (1,037,779
            )Accretion
                of redeemable, convertible preferred stock
            
            
            (38,586
            )
            
            —Net
                loss attributable to common shareholders
            
            $
            (1,413,611
            )
            $
            (1,037,779
            )Net
                loss per share:Net
                loss per common share, basic and diluted
            
            $
            (0.06
            )
            $
            (0.08
            )Shares
                used in computing basic and diluted loss per share
            
            
            25,135,824
            
            
            12,504,826




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








4




**RED
      MILE ENTERTAINMENT, INC.**


**Unaudited
      Condensed Consolidated Statements of Operations**


**For
      the six months ended September 30, 2006 and 2005**


**(Unaudited)**




**Six
                  months ended**
                **September
                  30,**
                **2006**
              
              **Six
                  months ended**
                **September
                  30,**
                **2005**Revenues
              
              $
              326,751
              
              $
              2,852,544Cost
                  of sales
              
              
              613,255
              
              
              4,013,323Gross
                  margin
              
              
              (286,504
              )
              
              (1,160,779
              )Operating
                  expensesResearch
                  and development costs
              
              
              190,820
              
              
              95,906General
                  and administrative costs
              
              
              1,318,661
              
              
              455,067Marketing
                  and business development costs
              
              
              579,485
              
              
              300,493Debt
                  Conversion Inducement Costs
              
              
              —
              
              
              1,000,000Total
                  operating expenses
              
              
              2,088,966
              
              
              1,851,466Interest
                  income
              
              
              9,520
              
              
              6,514Loss
                  before benefit from income taxes
              
              
              (2,365,950
              )
              
              (3,0005,731
              )Income
                  tax expense
              
              
              —
              
              
              —Net
                  loss
              
              $
              (2,365,950
              )
              $
              (3,005,731
              )Accretion
                  of redeemable, convertible preferred stock
              
              
              (69,474
              )
              
              —Net
                  loss attributable to common shareholders
              
              $
              (2,435,424
              )
              $
              (3,005,731
              )Net
                  loss per share:Net
                  loss per common share, basic and diluted
              
              $
              (0.11
              )
              $
              (0.24
              )Shares
                  used in computing basic and diluted loss per share
              
              
              22,411,022
              
              
              12,504,826






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




5




**RED
      MILE ENTERTAINMENT, INC.**


**Condensed
      Consolidated Statements of Stockholder' Equity (Deficit)**


**For
      the year ended March 31, 2006 and the six months ended September 30,
      2006**









Common
                StockNumber
                of Shares
            
            Amount
            
            Additional
              Paid-in
                Capital
            
            Accumulated
              Deficit
            
            Accumulated
                Other
              Comprehensive
              Income/(Loss)
            
            Total
                Stockholders'
              Equity
                (Deficit)**Balance,
                March 31, 2006**
            
            
            14,420,870
            
            $
            434,035
            
            $
            40,449
            
            $
            (9,179,296
            )
            $
            -
            
            $
            (8,704,812
            )Stock
                issued upon conversion of Series A Redeemable, Convertible Preferred
                Stock
            
            
            10,357,000
            
            
            10,357
            
            
            10,334,089
            
            
            -
            
            
            -
            
            
            10,344,446Conversion
                of Warrants
            
            
            658,636
            
            
            65
            
            
            724,435
            
            
            -
            
            
            -
            
            
            724,500Stock
                based compensation
            
            
            -
            
            
            -
            
            
            80,463
            
            
            -
            
            
            -
            
            
            80,463Accretion
                of redeemable, convertible preferred stock
            
            
            -
            
            
            -
            
            
            (69,474
            )
            
            -
            
            
            -
            
            
            (69,474
            )Foreign
                currency translation adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            703
            
            
            703Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,365,950
            )
            
            -
            
            
            (2,365,950
            )**Balance,
                September 30, 2006 (Unaudited)**
            
            
            25,436,506
            
            $
            444,457
            
            $
            11,109,962
            
            $
            (11,545,246
            )
            $
            703
            
            $
            9,876
















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




6


**RED
      MILE ENTERTAINMENT, INC.**


**Unaudited
      Condensed Consolidated Statements Of Cash Flows**


**For
      the Six months ended September 30, 2006 and 2005**


**(Unaudited)**




**Six
                months ended September 30,****2006**
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (2,365,950
            )
            $
            (3,005,731
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
            
            
            44,603
            
            
            28,496Amortization
                of software development costs
            
            
            166,175
            
            
            1,316,831Impairment
                of software development and licensing costs
            
            
            437,027
            
            
            2,115,215Stock
                based compensation
            
            
            80,463
            
            
            —Allowance
                for doubtful accounts
            
            
            84,011
            
            
            —Inventory
                reserve for shrinkage and obsolescence
            
            
            6,550
            
            
            —Changes
                in current assets and liabilitiesAccounts
                receivable
            
            
            (140,673
            )
            
            (1,033,344
            )Prepaid
                expenses
            
            
            (17,538
            )
            
            (5,505
            )Licenses
            
            
            —
            
            
            322,205Inventory
            
            
            (121,335
            )
            
            —Software
                development costs
            
            
            (2,484,857
            )
            
            (4,027,680
            )Other
                assets
            
            
            (46,371
            )
            
            (100,326
            )Accounts
                payable
            
            
            726,440
            
            
            (114,140
            )Accrued
                liabilities
            
            
            (47,642
            )
            
            1,663,143Deferred
                revenue
            
            
            62,500
            
            
            493,300Net
                cash (used in) operating activities
            
            
            (3,616,597
            )
            
            (2,347,536
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of marketable securities
            
            
            —
            
            
            (614,830
            )Sales
                of marketable securities
            
            
            10,313
            
            
            848,315Acquisition
                of property and equipment
            
            
            (90,397
            )
            
            (7,882
            )Net
                cash provided by (used in) investing activities
            
            
            (80,084
            )
            
            225,603CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from sales of warrants
            
            
            724,500
            
            
            2,400,000Proceeds
                from sales of preferred stock
            
            
            2,645,000
            
            
            —Costs
                from issuance of common and preferred stock
            
            
            —
            
            
            (4,846
            )Convertible
                debenture issuance costs
            
            
            (11,779
            )
            
            —Cost
                of redeemable preferred stock issuances
            
            
            (165,624
            )
            
            —Net
                cash provided by financing activities
            
            
            3,192,097
            
            
            2,395,154Effect
                of foreign currency adjustments
            
            
            703
            
            
            —NET
                INCREASE (DECREASE) IN CASH
            
            
            (503,881
            )
            
            273,221CASH,
                beginning of period
            
            
            769,926
            
            
            302,280CASH,
                end of period
            
            $
            266,045
            
            $
            575,501




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


7


**RED
      MILE ENTERTAINMENT, INC.**


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


**For
      the Six months ended September 30, 2006 and 2005**


**(Unaudited)**








**Six
                Months Ended September 30,****2006**
            
            **2005**SUPPLEMENTAL
                DISCLOSURE OF NON-CASH FINANCING TRANSACTIONSAccretion
                of redeemable convertible preferred stock and foreign currency
                adjustment
            
            $
            69,474
            
            
            —Relative
                fair value of warrants issued for preferred stock
            
            $
            423,788
            
            
            —Conversion
                of Series A Redeemable Convertible Preferred Stock, net of offering
                costs
            
            $
            10,344,446
            
            
            —









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







8







**RED
      MILE ENTERTAINMENT, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**






**NOTE
      1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**




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




**Going
      Concern** —
These
      financial statements have been prepared in conformity with accounting principles
      generally accepted in the United States of America, which contemplates
      continuation of the Company as a going concern. However, the Company has
      sustained substantial operating losses since inception of $11,545,246 at
      September 30, 2006, and has incurred negative cash flows from operations. These
      factors raise substantial doubt about the Company’s ability to continue as a
      going concern. These consolidated financial statements do not include any
      adjustments relating to the recoverability and classification of asset carrying
      amounts or the amount and classification of liabilities that might result should
      the Company be unable to continue as a going concern.




The
      Company is currently assembling a strategic financing plan that it believes
      to
      be viable and will contribute to meeting the Company’s cash flow requirements.
      Management believes that this plan is reasonably capable of removing the threat
      to continuation of our business during the 12 month period following the most
      recent balance sheet presented in this quarterly report on Form 10-QSB. This
      plan includes but is not limited to the net $5.4 million of financing received
      on October 19, 2006 that is discussed in the subsequent events Note 10.




**Basis
      of Presentation**




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




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







9




**RED
      MILE ENTERTAINMENT, INC.**


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









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




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





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





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


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


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


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





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















10




**RED
      MILE ENTERTAINMENT, INC.**


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








Red
      Mile
      may receive minimum guaranteed royalties or development advances from its
      co-publisher(s) or distributor(s) prior to and upon final delivery and
      acceptance of a completed game. Under these agreements, such payments do not
      become non-refundable until such time as the game is completed and accepted
      by
      the co-publisher(s). Pursuant to SOP 81-1, the completed contract method of
      accounting is used and these cash receipts are credited to deferred revenue
      when
      received.




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




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




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




**Reclassification**




Certain
      prior period items have been reclassified to conform to the current period’s
      presentation. These reclassifications had no impact on consolidated net income
      or total stockholders’ equity as previously reported.





**Stock-Based
      Compensation Plans** —
On
      April 1, 2006, we adopted the provisions of Statement of Financial Accounting
      Standards (“SFAS”) 123(R), *“Share-Based
      Payment”* (the
“Statement or “SFAS 123(R)”), requiring us to recognize expense related to the
      fair value of our stock-based compensation awards. Prior to April 1, 2006,
      the
      Company used the minimum value method in estimating the value of employee option
      grants as allowed by SFAS 123, amended by SFAS 148 “ *Accounting
      for stock based compensation - transition and disclosure* ”.
      Accordingly, we have elected to use the prospective transition method as
      permitted by SFAS 123(R) and therefore have not restated our financial results
      for prior periods. Under this transition method, stock-based compensation
      expense for the six months ended September 30, 2006 includes compensation
      expense for all stock option awards granted subsequent to April 1, 2006 based
      on
      the grant date fair value estimated in accordance with the provisions of SFAS
      123(R). We recognize compensation expense for stock option awards on a
      straight-line basis over the requisite service period of the award.
















11




**RED
      MILE ENTERTAINMENT, INC.**


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








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




The
      fair
      value of employee options granted in the six and three month periods ended
      September 30, 2006 has been estimated at the date of grant using the fair value
      method with the following weighted average assumptions:




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






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







Six
                Months Ended September 30, 2006
            
            Three
                Months Ended September 30, 3006Research
                and development costs
            
            
            7,384
            
            
            5,648Marketing
                and business development costs
            
            
            10,557
            
            
            5,707Stock-based
                compensation before income taxes
            
            
            17,941
            
            
            11,355Income
                tax benefit
            
            
            -
            
            
            -Total
                stock-based employee compensation expense after income
                taxes
            
            $
            17,941
            
            $
            11,355







12




**RED
      MILE ENTERTAINMENT, INC.**


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








The
      following table sets fourth the total stock-based compensation expense for
      the
      six and three months ended September 30, 2006, resulting from options awarded
      to
      both employees and consultants during the six and three months ended September
      30, 2006.





Six
                Months Ended September 30, 2006
            
            Three
                Months Ended September 30, 3006Stock-based
                employee compensation expense before income taxes
            
            $
            17,941
            
            $
            11,355Stock-based
                consultant compensation expense before income taxes
            
            
            62,522
            
            
            0Stock-based
                compensation before income taxes
            
            
            80,463
            
            
            11,355Income
                tax benefit
            
            
            -
            
            
            -Total
                stock-based employee compensation expense after income
                taxes
            
            $
            80,463
            
            $
            11,355







During
      the six and three months ended September 30, 2006, 90,000 and 0, respectively
      common stock options were granted to non-employees. In the case where shares
      have been granted to third parties, the fair value of such shares is recognized
      as an expense in the period issued. Using the Black-Scholes option pricing
      model, the fair value of such options issued for the six and three months ending
      September 30, 2006 and 2005 was $62,522 and $0, and $0 and $0, respectively.




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


13




**RED
      MILE ENTERTAINMENT, INC.**


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








The
      following table illustrates the effect on net loss after tax, and net loss
      per
      common share, as if we had applied the fair value recognition provisions of
      SFAS
      123 to employee stock-based compensation during the six and three months ended
      September 30, 2005:








Six
                Months
              Ended
              September
                30, 2005
            
            Three
                Months Ended September 30, 2005Net
                loss as reported
            
            $
            (3,005,731
            )
            $
            (1,037,779
            )Add:
                total stock-based employee compensation expense included in reported
                net
                loss, net of tax benefit of $0 and $0, respectively
            
            
            -
            
            
            -Less:
                total stock-based employee compensation expense for non-employees
                determined under the SFAS 123 fair-value method, net of tax benefit
                of $0
                and $0, respectively
            
            
            -
            
            
            -Net
                loss, pro forma
            
            $
            (3,005,731
            )
            $
            (1,037,779
            )Basic
                and diluted net loss per share:As
                reported
            
            $
            (0.24
            )
            $
            (0.08
            )Pro
                forma
            
            $
            (0.24
            )
            $
            (0.08
            )









**Loss
      Per Share** —
We
      computed basic and diluted loss per share amounts pursuant to SFAS No. 128,
      “Earnings per Share.” Basic earnings per share are computed using the weighted
      average number of common shares outstanding during the period. Diluted earnings
      per share are computed using the weighted average number of common and
      potentially dilutive securities outstanding during the period. Potentially
      dilutive securities consist of the incremental common shares issuable upon
      on
      exercise of stock options and warrants and the conversion of Preferred Stock
      (using the treasury stock method). Potentially dilutive securities are excluded
      from the computation if their effect is anti-dilutive.




The
      following table summarizes the weighted average shares outstanding for the
      Six
      Months ending September 30, 2006 and 2005:




Six
                Months ending September 30,**2006**
            
            **2005**Basic
                weighted average shares outstanding
            
            22,411,022
            
            12,504,826Total
                stock options outstanding
            
            3,112,898
            
            350,000Less:
                anti-dilutive stock options due to loss
            
            (3,112,898
            )
            (350,000
            )Total
                redeemable convertible preferred stock outstanding
            
            3,834,860
            
            9,000,000Less:
                anti-dilutive redeemable convertible preferred stock due to
                loss
            
            (3,834,860
            )
            (9,000,000
            )Total
                warrants outstanding
            
            10,427,860
            
            7,451,500Less:
                anti-dilutive warrants due to loss
            
            (10,427,860
            )
            (7,451,500
            )Diluted
                weighted average shares outstanding
            
            22,411,022
            
            12,504,826






14




**RED
      MILE ENTERTAINMENT, INC.**


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












The
      following table summarizes the weighted average shares outstanding for the
      three
      months ending September 30, 2006 and 2005:


**Three
                  Months ending September 30,****2006**
              
              **2005**Basic
                  weighted average shares outstanding
              
              
              25,135,824
              
              
              12,504,826Total
                  stock options outstanding
              
              
              3,112,898
              
              
              350,000Less:
                  anti-dilutive stock options due to loss
              
              
              (3,112,898
              )
              
              (350,000Total
                  redeemable convertible preferred stock outstanding
              
              
              3,834,860
              
              
              9,000,000Less:
                  anti-dilutive redeemable convertible preferred stock due to
                  loss
              
              
              (3,834,860
              )
              
              (9,000,000
              )Total
                  warrants outstanding
              
              
              10,427,860
              
              
              7,451,500Less:
                  anti-dilutive warrants due to loss
              
              
              (10,427,860
              )
              
              (7,451,500
              )Diluted
                  weighted average shares outstanding
              
              
              25,135,824
              
              
              12,504,826




**NOTE
      2 — ACCRUED LIABILITIES**




**September
                30, 2006**
            
            **March
                31, 2006**Accrued
                Bonuses
            
            $
            223,322
            
            $
            169,000Accrued
                professional fees
            
            
            112,800
            
            
            20,000Accrued
                royalties payable
            
            
            69,731
            
            
            170,898Accrued
                milestone payments to developers
            
            
            50,000
            
            
            50,000Accrued
                paid time off
            
            
            26,299
            
            
            45,323Other
            
            
            1,851
            
            
            6,424Accrued
                liability for purchase of Edmonds 1
            
            
            —
            
            
            35,000Accrued
                liability to related party for purchase of Edmonds 1
            
            
            —
            
            
            35,000Total
            
            $
            484,003
            
            $
            531,645









**NOTE
      3 — DEFERRED REVENUE**




**September
                30, 2006**
            
            **March
                31, 2006**Crusty
                Demons
            
            $
            90,000
            
            $
            15,000Disney’s
                Aladdin Chess Adventure
            
            
            -
            
            
            12,500Total
            
            $
            90,000
            
            $
            27,500







15




**RED
      MILE ENTERTAINMENT, INC.**


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







**NOTE
      4 — CONTRACTUAL OBLIGATIONS**





*Developer
      and Intellectual Property Contracts*





In
      the
      normal course of business, we enter into contractual arrangements with
      third-parties for the development of products, as well as for the rights to
      intellectual property. Under these agreements, we commit to provide specified
      payments to a developer, or intellectual property holder, based upon contractual
      arrangements. Typically, the payments to third-party developers are conditioned
      upon the achievement by the developers of contractually specified development
      milestones. These payments to third-party developers and intellectual property
      holders may be deemed to be advances and are recoupable against future royalties
      earned by the developer or intellectual property holder based on the sale of
      the
      related game. Assuming all contractual provisions are met, the total future
      minimum contract commitments for development contracts in place as of September
      30, 2006 are approximately $6,507,030, which is scheduled to be paid as follows:




**Year
                ended March 31,**2007
            
            $
            2,781,9892008
            
            
            2,126,8712009
            
            
            1,598,170Total
            
            $
            6,507,030






**NOTE
      5 — REDEEMABLE CONVERTIBLE PREFERRED STOCK**




In
      the
      six months ended September 30, 2006, the Company issued 1,976,000 investment
      units consisting of one share of Series B Redeemable Convertible Preferred
      Stock
      and a warrant to purchase an additional share of Series B Redeemable Convertible
      Preferred Stock with a strike price of $1.50 and an expiration date of May
      1,
      2008 for $2,470,000. During the first quarter of fiscal 2007, the Company also
      issued 140,000 investment units consisting of one share of Series C Redeemable
      Convertible Preferred Stock and a warrant to purchase an additional share of
      Series C Redeemable Convertible Preferred Stock with a strike price of $1.50
      and
      an expiration date of May 1, 2008 for $175,000. Using the Black-Scholes option
      pricing model, the relative fair values of the Preferred Series B warrants
      and
      Preferred Series C warrants of $395,748 and $28,040 was allocated to Preferred
      Series B and Preferred Series C warrants on redeemable convertible preferred
      stock for the quarter ended June 30, 2006. The Series B and C redeemable
      convertible preferred stock are being accreted to their redemption values
      through the redemption date using the effective interest method. Accretion
      of
      redeemable convertible preferred stock was $69,474 and $38,586, and $0 and
      $0
      for the six and three months ending September 30, 2006 and 2005,
      respectively.




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


16




**RED
      MILE ENTERTAINMENT, INC.**


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







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




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




The
      Series B and C Redeemable Convertible Preferred Stock are redeemable five years
      after issuance, upon election of holders of at least 50% of the outstanding
      shares of the class. In such a case, the shareholders in said class would be
      entitled to the actual amount of their original investment, plus declared but
      unpaid dividends. At September 30, 2006 and March 31, 2006, the redemption
      value
      of all of the Preferred Stock issued and outstanding was $4,793,870 and
      $12,419,127 respectively. The preferred shares are redeemable outside the
      discretion of the Company and, accordingly, are classified outside permanent
      equity in accordance with EITF Topic D-98.


17




**RED
      MILE ENTERTAINMENT, INC.**


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







**NOTE
      6 — STOCK OPTIONS AND STOCK COMPENSATION**




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






Options
            
            Shares
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual Term
            
            Aggregate
                Intrinsic ValueOutstanding
                at April 1, 2005
            
            
            -
            
            $
            -
            
            
            
            
            $
            -Granted
            
            
            2,822,898
            
            
            0.25Exercised
            
            
            -
            
            
            -Forfeited
                or expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at March 31, 2006
            
            
            2,822,898
            
            $
            0.25
            
            
            -
            
            
            -Exercisable
                at March 31, 2006
            
            
            532,861
            
            $
            0.30
            
            
            -
            
            
            -Granted
            
            
            290,000
            
            
            0.79Exercised
            
            
            -
            
            
            -Forfeited
                or expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at September 30, 2006
            
            
            3,112,898
            
            $
            0.30
            
            
            9.26
            
            $
            1,701,514Exercisable
                at September 30, 2006
            
            
            778,201
            
            $
            0.30
            
            
            8.80
            
            $
            623,018








In
      the
      case where shares have been granted to third parties, the fair value of such
      shares is recognized as an expense in the period issued. Using the Black-Scholes
      option pricing model, the fair value of such options issued for the six and
      three months ending September 30, 2006 and 2005 was $62,522 and $0, and $0
      and
      $0, respectively. At the time of grant the estimated fair value per option
      was
      $0.69.


18




**RED
      MILE ENTERTAINMENT, INC.**


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







In
      the
      case of shares granted to employees, the fair value of such shares is recognized
      as an expense over the service period. The fair value of such options issued
      for
      the six and three months ending September 30, 2006 and 2005 was $133,644 and
      $0,
      and $0 and $0, respectively. Expense recognized for the six and three months
      ending September 30, 2006 and 2005 was $17,941 and $11,355, and $0 and $0,
      respectively. At the time of grant the estimated fair value per option was
      $0.69




**NOTE
      7 — CONCENTRATIONS**




*Customer
      base*




Our
      customer base includes publishers, distributors, and retailers of video games
      in
      the United States and Europe. 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, 2006 of $84,011. The receivables recorded from our
      customers are net of their reserves for uncollectible accounts 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, 2006, we had two customers who accounted for 67.1% and
      31.9%
      of net accounts receivables. These customers are GameStop and Codemasters,
      respectively. As of March 31, 2006, we had two customers who accounted for
      79.2%
      and 16.6% of net accounts receivables.




*Operations
      by Geographic Area*




Our
      products are sold in North America and Europe through third-party licensing
      arrangements, through distributors, and through retailers. During the six and
      three months ended September 30, 2006, we derived substantially all revenue
      in
      the United States.




*Location
      of assets*




Substantially
      all the Company’s tangible assets are located at its corporate offices in
      Northern California, with the exception of inventory, which is located at
      several third party warehouse facilities, primarily in Minnesota.




**NOTE
      8 — ACQUISITIONS**







*Acquisition
      of Edmond 1, Inc.*




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







19




**RED
      MILE ENTERTAINMENT, INC.**


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









The
      warrants issued were as follows:


**Expiring**
              
              **Strike**
                **Price**
              
              **Number
                  of**
                **common
                  shares**December
                  31, 2006
              
              1.25
              
              102,000January
                  31, 2007
              
              1.10
              
              92,000December
                  31, 2007
              
              1.50
              
              102,000December
                  31, 2008
              
              1.75
              
              102,000Total
              
              
              
              398,000




On
      August
      11, 2006, the warrants issued for 92,000 common shares on January 31, 2007
      with
      a $1.10 strike price expired.




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




**NOTE
      9 — RECENT ACCOUNTING PROCOUNCEMENTS**





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





20




**RED
      MILE ENTERTAINMENT, INC.**


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








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





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





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














21




**RED
      MILE ENTERTAINMENT, INC.**


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








**NOTE
      10 — SUBSEQUENT EVENTS**





On
      October 19, 2006 the Company, pursuant to an Agency Agreement with J.F. Mackie
      & Company, Ltd. (the “Agent”) issued $5,824,000 of Senior Secured
      Convertible Debentures.  Pursuant to the terms of the Agency Agreement, the
      Agent facilitated the purchase of 5,824 convertible debentures (the
“Debentures”) to 74 Debenture Holders for an aggregate principal face amount of
      $5,824,000. The net proceeds after costs were approximately $5.4
      million.





The
      Debentures mature on October 19, 2008 and are convertible into shares of the
      Common Stock of the Company at a ratio of $1.75 (with proportional adjustments
      for stock splits) per Common Share (the “Conversion Price”). This conversion may
      be exercised at the election of the holders of the Debentures at any time after
      a minimum non-conversion period of 12 months from the issue date. The conversion
      can also be exercised by the Company after a minimum non-conversion period
      of 12
      months from the issue date so long as the Company’s Common Shares have begun
      trading on a recognized exchange and have traded at a minimum volume weighted
      average price of $3.00/share for 20 consecutive trading days, subject to certain
      limitations.





On
      the
      maturity date, the Company retains the right to redeem the Debentures in cash,
      in kind, or in cash and in kind with Common Shares of the Company. The Company
      also has the right to redeem the Debentures at a redemption price equal to
      115%
      of the principal face value at any time after a period of 12 months so long
      as
      the Company’s Common Shares have begun trading on a recognized exchange and have
      traded at a minimum volume weighted average price of $3.00/share for 20
      consecutive trading days.





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





The
      Company intends to use the proceeds of the offering for general corporate
      purposes, which will include the ongoing development of new interactive video
      games.











22




**RED
      MILE ENTERTAINMENT, INC.**







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




*Liquidity
      and Capital resources*






Funding
      totaling $5.4 million has been received in late October of 2006, as described
      in
      Subsequent Events footnote number 10. We anticipate needing an additional
      $10,000,000 to finance our planned expansion within the next 12 months.




We
      will
      be unable to develop or publish additional games other than those currently
      under development, or consummate any acquisitions if we are unable to raise
      additional financing. We believe our current cash on hand of approximately
      $3.9 **** million
      as of November 6, 2006, in addition to anticipated cash flow from operations,
      would enable the company to continue operating into our fourth fiscal
      quarter.




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




23


**RED
      MILE ENTERTAINMENT, INC.**








*Results
      of Operations*




The
      unaudited results of operations for the six and three months ending September
      30, 2006 and September 30, 2005 are as follows:




Summary
      of Unaudited Statements of Operations


Six
      Months Ended September 30, 2006 and 2005




2006
            
            2005
            
            Dollar
              Increase
              (Decrease)
            
            Percent
              Increase
              (Decrease)Revenues
            
            $
            326,751
            
            $
            2,852,544
            
            $
            (2,525,793
            )
            
            (88.5
            %)Cost
                of sales
            
            
            613,255
            
            
            4,013,323
            
            
            (3,400,068
            )
            
            (84.7
            %)Gross
                margin
            
            
            (286,504
            )
            
            (1,160,779
            )
            
            874,275
            
            
            75.3
            %Operating
                expenses
            
            
            2,088,966
            
            
            1,851,466
            
            
            237,500
            
            
            12.8
            %Interest
                income
            
            
            9,520
            
            
            6,514
            
            
            3,006
            
            
            46.1
            %Net
                loss
            
            
            (2,365,950
            )
            
            (3,005,731
            )
            
            639,781
            
            
            21.3
            %Income
                tax expense
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Net
                loss
            
            $
            (2,365,950
            )
            $
            (3,005,731
            )
            $
            639,781
            
            
            21.3
            %Accretion
                on redeemable convertible preferred stock and foreign currency
                adjustments
            
            
            (69,474
            )
            
            ---
            
            $
            (69,474
            )
            
            (100
            %)Net
                loss attributable to common shareholders
            
            $
            (2,435,424
            )
            $
            (3,005,731
            )
            $
            570,307
            
            
            19.0
            %Net
                loss per common share
              Basic
                and diluted
            
            $
            (.11
            )
            $
            (
                .24
            )
            $
            0.13
            
            
            54.2
            %Shares
                used in computing basic and diluted net loss per share (in
                000’s)
            
            
            22,411
            
            
            12,505
            
            
            -
            
            
            79
            %









24


**RED
      MILE ENTERTAINMENT, INC.**








Summary
      of Unaudited Statements of Operations


Three
      Months Ended September 30, 2006 and 2005




2006
            
            2005
            
            Dollar
              Increase
              (Decrease)
            
            Percent
              Increase
              (Decrease)Revenues
            
            $
            284,903
            
            $
            2,852,544
            
            $
            (2,567,641
            )
            
            (90.0
            %)Cost
                of sales
            
            
            575,795
            
            
            2,459,118
            
            
            (1,883,323
            )
            
            (76.6
            %)Gross
                margin
            
            
            (290,892
            )
            
            393,426
            
            
            (684,318
            )
            
            (173.9
            %)Operating
                expenses
            
            
            1,088,107
            
            
            1,435,766
            
            
            (347,659
            )
            
            (24.2
            %)Interest
                income
            
            
            3,974
            
            
            4,561
            
            
            (587
            )
            
            (12.9
            %)Net
                loss
            
            
            (1,375,025
            )
            
            (1,037,779
            )
            
            337,246
            
            
            ---Income
                tax expense
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Net
                loss
            
            $
            (1,375,025
            )
            $
            (1,037,779
            )
            $
            337,246
            
            
            ---Accretion
                on redeemable convertible preferred stock and foreign currency
                adjustments
            
            
            (38,586
            )
            
            ---
            
            
            (38,586
            )
            
            (100
            %)Net
                loss attributable to common shareholders
            
            $
            (1,413,611
            )
            $
            (1,037,779
            )
            $
            375,832
            
            
            36.2
            %Net
                loss per common share
              Basic
                and diluted
            
            $
            (.06
            )
            $
            (
                .08
            )
            $
            .02
            
            
            25.0
            %Shares
                used in computing basic and diluted net loss per share (in
                000’s)
            
            
            25,136
            
            
            12,505
            
            
            -
            
            
            101.0
            %









*Revenues*




For
      the
      six months ended September 30, 2006, our revenue was derived from five products:
      Crusty Demons, GripShift, Disney's Aladdin Chess Adventures, El Matador, and
      Dual Sudoku. Crusty Demons, GripShift, and Disney’s Aladdin Chess Adventures
      were developed by third parties under our supervision and licensed to three
      other video game co-publishers. GripShift is near the end of its life and we
      expect minimal future revenue from it. Crusty Demons, which we do not expect
      to
      be material to our operations, is expected to ship in Europe in our third fiscal
      quarter. Disney's Aladdin Chess Adventures is near the end of its life and
      we
      expect minimal revenue from it. El Matador and Dual Sudoku are personal computer
      games developed by third parties that are being published directly by us.
      Substantially all of our revenue during the three months ended September 30,
      2006 came from these two products, which were both released during the three
      months ended September 30, 2006.


25


**RED
      MILE ENTERTAINMENT, INC.**







We
      have
      several games under development which we anticipate will be ready for shipment
      in the second half of fiscal 2007. These include the PC game Timothy and Titus,
      a set of game player’s tools for the PC based Microsoft Flight Simulator called
      Aircraft Power Pack for Microsoft Flight Simulator X, as well as one DVD game,
      Who Rules? Almighty Edition. We anticipate that we will ship all of these games
      during the third quarter of fiscal 2007. Other games under development which
      we
      expect to ship later this fiscal year are Jackass: the Game (for console and
      handheld platforms), and Lucinda Green’s Equestrian Challenge (console and PC).
      We expect to ship Heroes of the Pacific (handheld platform) during fiscal 2008.
      We are also developing a sequel to Heroes of the Pacific that is set in the
      European theatre (next generation console and PC) that we expect to ship in
      fiscal 2009.





During
      the first three of the six months ended September 30, 2005, we had not completed
      or shipped any product, hence we had no revenue. During the three months ended
      September 30, 2005 we received royalties on shipments of both Heroes of the
      Pacific and GripShift as co-publishers. Most of our revenue in the three months
      ended September 30, 2005 was derived from royalties on Heroes of the
      Pacific.




With
      the
      funding that we have raised during October of 2006, we expect to self-publish
      some of our video games under development for release in North America later
      this fiscal year. Video games are significantly more capital intensive to
      self-publish due to the high cost of goods, which includes the hardware
      manufacturer royalties and the extensive marketing which is necessary to
      generate high consumer awareness. Due to these costs, we could continue to
      license the publishing rights to co-publishing partners. Self publishing in
      North America would enable us to retain a greater portion of the wholesale
      revenue from these games. We would also take responsibility for consumer and
      trade advertising for these games under a self publishing model. We plan to
      continue using third party co-publishers in Europe and Asia.





*Cost
      of sales*




Cost
      of
      sales for the six months ended September 30, 2006 consists of the amortization
      of prepaid royalties paid to our third party developers and amortization of
      development costs for Crusty Demons, Dual Sudoku, and El Matador. Also included
      are actual manufacturing costs for Dual Sudoku and El Matador. Also included
      in
      cost of sales for the six months ended September 30, 2006 is a $437,027 charge
      for the impairment of several games for which we now do not project we will
      be
      able to realize the carrying value. Of this, $37,575 was recorded during the
      first quarter of fiscal 2007, and $399,452 was recorded in the second quarter
      of
      fiscal 2007.




The
      $4.0
      million cost of sales recorded in the six months ended September 30, 2005
      includes a $1.6 million charge for the cancellation of development of a game
      (Jackass), and a charge for the development costs incurred through the date
      of
      cancellation. The Company acquired this game already in development but decided
      to cancel the contract and restart the development with a new developer. In
      the
      six months ended September 30, 2005 we expensed the entire cost of development
      of GripShift when the product was completed and accepted under its development
      contract with our co-publisher. The cost of sales during the three months ended
      September 30, 2005 is primarily the amortization of development costs for Heroes
      of the Pacific and GripShift.


26


**RED
      MILE ENTERTAINMENT, INC.**








*Operating
      Expense*




Operating
      expenses for the six months and three months ended September 30, 2006 and
      September 30, 2005 were as follows:


Six
                months ended September 30,2006
            
            Percent
                of Total
            
            2005
            
            Percent
                of total
            
            Dollar
                increase
            
            Percent
                increaseResearch
                and development costs
            
            $
            190,820
            
            
            9.2
            %
            $
            95,906
            
            
            5.2
            %
            $
            94,914
            
            
            99.0
            %General
                and administrative costs
            
            
            1,318,661
            
            
            63.1
            %
            
            455,067
            
            
            24.6
            %
            
            863,594
            
            
            189.8
            %Marketing
                and business
              development
                costs
            
            
            579,485
            
            
            27.7
            %
            
            300,493
            
            
            16.2
            %
            
            278,992
            
            
            92.8
            %Debt
                conversion inducement costs
            
            
            -
            
            
            -
            
            
            1,000,000
            
            
            54.0
            %
            
            (1,000,000
            )
            
            -Total
                operating expenses
            
            $
            2,088,966
            
            
            100.0
            %
            $
            1,851,466
            
            
            100.0
            %
            $
            237,500
            
            
            12.8
            %








Three
                months ended September 30,2006
            
            Percent
                of Total
            
            2005
            
            Percent
              of
                total
            
            Dollar
              increase
            
            Percent
              increaseResearch
                and development costs
            
            $
            104,990
            
            
            9.7
            %
            $
            52,595
            
            
            3.7
            %
            $
            52,395
            
            
            99.6
            %General
                and administrative costs
            
            
            635,576
            
            
            58.4
            %
            
            250,965
            
            
            17.5
            %
            
            384,611
            
            
            153.3
            %Marketing
                and business
              development costs
            
            
            347,541
            
            
            31.9
            %
            
            132,206
            
            
            9.2
            %
            
            215,335
            
            
            162.9
            %Debt
                conversion inducement costs
            
            
            -
            
            
            -
            
            
            1,000,000
            
            
            69.6
            %
            
            (1,000,000
            )
            
            (100
            %)Total
                operating expenses
            
            $
            1,088,107
            
            
            100.0
            %
            $
            1,435,766
            
            
            100.0
            %
            $
            (347,659
            )
            
            (24.2
            %)







For
      the
      six months ended September 30, 2006, our total operating expenses increased
      by
      12.8% over the six month ended September 30, 2005. This increase was the result
      of the increased number of products in development and the growth in headcount
      across the Company. During the first quarter of fiscal 2006, the Company was
      developing products for future sale. During the second quarter of fiscal 2006,
      Heroes of the Pacific and GripShift started to ship to customers from our
      licensed co-publishers.




In
      the
      three months ended September 30, 2005, development costs decreased significantly
      because of the completion of GripShift and Heroes of the Pacific. A charge
      of
      $1,000,000 was taken in the second quarter of the fiscal year 2006 for costs
      to
      induce the conversion of certain debts. In the first quarter of fiscal 2006,
      we
      were continuing development of two games (GripShift and Heroes of the Pacific)
      and stopped development of one other game (Jackass) which we restarted with
      a
      new developer. In addition, we also moved the management and supervision of
      our
      games being developed from third party contractors to our own internal
      development staff.




27


**RED
      MILE ENTERTAINMENT, INC.**








*Research
      and development*




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




During
      the first six months of fiscal 2006, we were building our development team
      (our
      staff increased from one to two people). 89% of our costs were salaries and
      benefits for these two people. These employees were principally involved in
      managing and supervising the three outside developers and evaluating new product
      concepts.




In
      the
      three months ended September 30, 2006, our internal development costs increased
      99.6% over those incurred during the three months ended September 30, 2005.
      This
      increase was the result of having three versus two production employees on
      staff
      for the full quarter, salary increases, and extensive travel managing our
      external developers. Salaries and benefits accounted for 89.6% of research
      and
      development costs in this quarter. Our key video games in development slated
      for
      completion later this fiscal year are being developed in New Zealand and
      Australia. Our internal team has spent extensive time in both locations
      providing hands-on management and oversight of the development process. Travel
      accounted for virtually all the remaining development costs.




In
      general, a product goes through multiple levels of design, production, approvals
      and authorizations before it may be shipped. These approvals and authorizations
      include concept approvals from the platform licensors of the game concept and
      product content, approvals from the licensor of the intellectual property of
      the
      game design and game play, and approvals from the platform licensors that the
      game is free of all material bugs and defects. In addition, all games are
      required to be rated by the Entertainment Software Rating Board (ESRB) for
      their
      content. Once the aforementioned approvals have been satisfied, the game can
      be
      placed into manufacturing at a manufacturer that must also be approved by the
      platform licensor. Once a product is manufactured and inspected, it is ready
      to
      be shipped.




One
      multi-platform product, Crusty Demons, was completed during the first quarter
      of
      fiscal year 2007. The North American Xbox version shipped in late June by our
      co-publisher, Evolved Games. We expect the European version should ship in
      our
      third quarter of fiscal 2007. Games under development include: Lucinda Green’s
      Equestrian Challenge, which has received concept approval from the platform
      licensor. We expect the game to be ready for worldwide release in the third
      fiscal quarter of 2007 for console and PC. Jackass: the Video Game, currently
      under development has received initial stage concept approval from the platform
      licensor on the handheld platform. We expect it to be available for shipment
      worldwide in the fourth fiscal quarter of 2007 on console and handheld
      platforms. Our intention is to directly publish this game in the United States,
      and co-publish this game outside of the United States. A handheld version of
      our
      Heroes of the Pacific game is currently in progress and awaiting concept
      approval from the platform licensor. We expect it will be ready for release
      in
      the first fiscal quarter of 2008. In August of 2006, we also began the
      production stage of a sequel of Heroes of the Pacific set in the European
      theatre on the next generation console and PC. It is targeted for shipment
      in
      fiscal 2009. This game in August of 2006 moved from the pre-production phase
      to
      the production phase.




28


**RED
      MILE ENTERTAINMENT, INC.**





2WG
      has
      completed Dual Sudoku (Formerly Super Sudoku), El Matador, and Timothy and
      Titus. All three are PC games and do not require approvals from third parties
      before shipping and they have been rated by the ESRB (a requirement before
      a
      game can be shipped). 2WG is self-publishing these games in North America.
      El
      Matador and Dual Sudoku shipped in our second quarter of fiscal 2007, and
      Timothy and Titus is expected ship in the third quarter of 2007. In addition,
      2WG has one DVD game that has completed development, Who Rules? Almighty
      Edition. We have impaired the development costs of two other DVD games this
      quarter. There are no third party approvals required before a DVD game is
      shipped. We anticipate that this game will also ship in the second half of
      fiscal 2007. In addition, a set of game player’s tools for the PC based
      Microsoft Flight Simulator called Aircraft Power Pack for Microsoft Flight
      Simulator X is expected to ship in the third quarter of fiscal
      2007.




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




*General
      and administrative costs*




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




Total
      G&A costs increased from $455,067 in the six months ended September 30, 2005
      to $1,318,661 in the six months ended September 30, 2006, an increase of 190%.
      Salaries and related costs increased 133%. 49% of this increase was the result
      of 2WG administrative salaries (2WG was acquired in our fourth quarter of fiscal
      2006), with the remaining increase due to an additional person in G&A at Red
      Mile. This additional person was necessitated by the merger with Edmonds 1
      and
      related public filings now required. Other significant increases from our first
      six months of fiscal 2006 were experienced in legal fees (increased 99% or
      $65,986) and accounting costs (increased 348% or $79,917), both related to
      becoming a publicly reporting company. Consulting costs increased 942% or
      $123,575 as a result of using an investor relations person ($74,354) to interact
      with investors, and expensing stock options ($62,522) given to a consultant.
      Office expenses increased 226% or $253,316 with the addition of 2WG’s offices in
      Texas, and substantial office costs including printing costs relating to our
      public filings. Insurance costs increased 70% with the addition of directors
      and
      officers insurance.





For
      the 3
      months ended September 30, 2006, G&A costs increased to $635,576 from
      $250,965 in the same period in fiscal 2005. Salaries and related costs increased
      115%, comprising 32% of the total increase in G&A. 18% of the total G&A
      increase was the result of $68,617 of 2WG administrative salaries (2WG was
      acquired in our fourth quarter of fiscal 2006), with the remaining increase
      due
      to an additional person in G&A at Red Mile. Included in the 3 months ended
      September 30, 2006 was $84,011 of bad debt expense, compared to no expense
      in
      the 3 months ended September 30, 2005. This accounts for 22% of the total
      increase in G&A. Accounting costs increased by 200% or $32,644, which is
      directly related to becoming a publicly reporting company with increased
      reporting requirements. Legal costs decreased by $2,505 or 6.1% from the prior
      period.





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




29


**RED
      MILE ENTERTAINMENT, INC.**








*Marketing
      and business development costs*




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




Total
      marketing and business development expenses increased 93% from $300,493 in the
      six months ended September 30, 2005 to $579,485 in the six months ended
      September 30, 2006. The majority of the increase was in costs incurred at 2WG,
      which were not included in the first six months of fiscal 2006. The costs
      incurred at 2WG were $190,320 in the six months ended September 30, 2006. In
      our
      first quarter of fiscal 2006, we were principally in a planning mode as we
      were
      still two quarters from shipping our initial products, then in the second
      quarter of fiscal 2006 costs were incurred to market GripShift and Heroes of
      the
      Pacific.





In
      the
      three months ended September 30, 2006, we launched Dual Sudoku, and El Matador,
      and were preparing to release Timothy and Titus and Lucinda Green’s Equestrian
      Challenge. We performed $12,370 of public relations functions in the first
      six
      months of fiscal 2006, most of this related to Heroes of the Pacific. In the
      six
      months ended September 30, 2006 we also have started grass roots marketing
      for
      our Jackass game as we began to build initial awareness of the game. We expect
      that marketing expenses will increase substantially throughout the remainder
      of
      fiscal 2007 as we self publish and market some of our new games.




*Critical
      Accounting Policies*




Red
      Mile's financial statements and related public financial information are based
      on the application of accounting principles generally accepted in the United
      States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments
      and
      subjective interpretations of accounting principles that have an impact on
      the
      assets, liabilities, revenue and expense amounts reported. These estimates
      can
      also affect supplemental information contained in our external disclosures
      including information regarding contingencies, risk and financial condition.
      We
      believe our use of estimates and underlying accounting assumptions adhere to
      GAAP and are consistently applied. We base our estimates on historical
      experience and on various other assumptions that we believe to be reasonable
      under the circumstances. Actual results may differ materially from these
      estimates under different assumptions or conditions. We continue to monitor
      significant estimates made during the preparation of our financial
      statements.




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




30


**RED
      MILE ENTERTAINMENT, INC.**








*Revenue
      recognition*




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





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


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


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


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





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




Red
      Mile
      may receive minimum guaranteed royalties or development advances from its
      co-publisher(s) or distributor(s) prior to and upon final delivery and
      acceptance of a completed game. Under these agreements, such payments do not
      become non-refundable until such time as the game is completed and accepted
      by
      the co-publisher(s). Pursuant to SOP 81-1, the completed contract method of
      accounting is used and these cash receipts are credited to deferred revenue
      when
      received.




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




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




31


**RED
      MILE ENTERTAINMENT, INC.**








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




*Software
      Development Costs*




Software
      development costs include the costs of milestone payments made to independent
      software developers and other third parties under development contracts. Such
      costs are accounted for in accordance with Statement of Financial Standards
      No.
      86 “Accounting For The Costs Of Computer Software To Be Sold, Leased or
      Otherwise Marketed”.




Software
      development costs are capitalized once technological feasibility is established
      and such costs are determined to be recoverable from future sales of the game.
      For products where proven technology exists, this may occur very early in the
      development cycle. Technological feasibility is determined on a game by game
      basis. Capitalized costs for such games that are cancelled or abandoned are
      charged immediately to cost of sales. Recoverability of capitalized software
      is
      evaluated on the expected performance of the specific games for which the costs
      relate. Once the product is completed and released, capitalized software and
      development costs are amortized to cost of sales using the greater of the ratio
      of the total current unit shipments to total projected unit shipments or
      straight line over the estimated life of the product. For products released
      in
      prior periods, we evaluate the future recoverability of capitalized amounts
      on a
      quarterly basis or when events or circumstances indicate the capitalized costs
      may not be recoverable.




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




ITEM
      3.
      CONTROLS AND PROCEDURES




Evaluation
      of disclosure controls and procedures.




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




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




Changes
      in internal controls.




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







32


**RED
      MILE ENTERTAINMENT, INC.**








PART
      II.
      OTHER INFORMATION






ITEM
      1A.
      RISK FACTORS






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




***Risks
      Relating to Our Company***




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




We
      were
      incorporated in August 2004 and shipped our first two games in our second fiscal
      quarter of 2006. We therefore face the risks and problems associated with
      businesses in their early stages in a competitive environment and have a limited
      operating history on which an evaluation of our prospects can be made. Until
      we
      develop our business further by publishing and developing more games or
      implementing our proposed distribution system, it will be difficult for an
      investor to evaluate our chances for success. Our prospects should be considered
      in light of the risks, expenses and difficulties frequently encountered in
      the
      establishment of any business in a competitive environment.




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




During
      our initial fiscal period (December 21, 2004 through March 31, 2005), for the
      year ended March 31, 2006, and for the six months ended September 30, 2006
      we
      incurred net losses of approximately $4,329,618, $4,849,678, and $2,365,950,
      respectively. Our ability to generate revenues and to become profitable depends
      on many factors, including the market acceptance of our products and services,
      our ability to control costs and our ability to implement our business strategy.
      There can be no assurance that we will become or remain profitable.




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




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




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




We
      have a
      significant accumulated deficit and have sustained negative cash flows from
      operations since our inception. The opinion of our independent registered
      accounting firm for the period from December 21, 2004 through March 31, 2005
      and
      the year ended March 31, 2006 is qualified subject to uncertainty regarding
      our
      ability to continue as a going concern. In fact, the opinion states that these
      factors raise substantial doubt as to our ability to continue as a going
      concern. In order for us to operate and not go out of business, we must generate
      and/or raise capital to stay operational. The continuity as a going concern
      is
      dependent upon the continued financial support of our current shareholders
      and
      new investors. There can be no assurance that we will be able to generate income
      or raise capital.


33


**RED
      MILE ENTERTAINMENT, INC.**







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




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




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




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




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




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




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




The
      lifespan of any of our games is relatively short, in many cases less than one
      year. It is therefore important for us to be able to continually develop games
      that are popular with the consumers. To date, we have sold six games, two of
      which began in September 2005. A third product, which is not material to our
      operations, started shipping in our fourth quarter of fiscal 2006. A fourth
      product started shipping in June 2006. The fifth and sixth products began
      shipping in September 2006. We are currently involved in the development of
      four
      games. If we are unable to continually identify, develop and publish games
      that
      are popular with the consumers on a regular basis, our business will suffer.
      Our
      business will also suffer if we do not receive additional financing to be used
      for research and development of new games.




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




2WG
      has
      completed the development of the PC games Timothy and Titus, and the Aircraft
      Power Pack for Microsoft Flight Simulator X, which are expected to ship in
      November of 2006. 2WG has also completed the development of a DVD game Who
      Rules? Almighty Edition, which is expected to ship in our third fiscal quarter
      of 2007.







34




**RED
      MILE ENTERTAINMENT, INC.**









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




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




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




We
      are
      dependent on our platform licensors for the license to the specifications needed
      to develop software for their platforms. These platform licensors set the
      royalty rates that we must pay in order to publish games for their platforms.
      Certain of our platform licensors have retained the ability to change their
      royalty rates. It is possible that a platform licensor may terminate or not
      renew our license. Additionally, we will require licenses in order to publish
      games for the next generation consoles that we expect to be released in fiscal
      2007. Our business results will suffer if our platform licensors increase the
      royalty rates that we must pay, terminate their licenses with us, do not renew
      their licenses with us, or do not grant us a license to publish on the next
      generation consoles.




We
      have
      the following platform licenses:




**Platform**
            
            **Term**Microsoft
                Xbox 360
            
            Three
                years from first commercial release of platform. Then automatic renewal
                unless noticed 60 days prior to expiration of non-renewal. Royalty
                rates
                are fixed during the term.Microsoft
                Xbox
            
            Initial
                term expires on November 15, 2007. Then automatic renewal unless
                noticed
                60 days prior to expiration of non-renewal. Royalty may change on
                July 1st
                of any year.Sony
                PS2 and PSP
            
            Initial
                term expires on March 31, 2007. Then automatic renewal unless noticed
                60
                days prior to expiration of non-renewal. Royalty rates are subject
                to
                change with 60 days notice.Nintendo
                GameCube
            
            Expires
                on August 17, 2007. Royalty rates are subject to change with 60 days
                notice. Cost of manufacture is subject to change at any
                time.PC
                and DVDs
            
            There
                are no platform licenses required for the PC or
                DVDs




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


35




**RED
      MILE ENTERTAINMENT, INC.**









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




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




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




Our
      ability to compete and operate successfully depends in part on our acquiring
      and
      controlling proprietary intellectual property. Our games embody trademarks,
      trade names, logos, or copyrights licensed from third parties. An example is
      MTV’s Jackass trademark utilizes rights licensed from MTV. If we cannot maintain
      the licenses that we currently have, or obtain additional licenses for the
      games
      that we plan to publish, we will produce fewer games and our business will
      suffer. Furthermore, some of our competitors have significantly greater
      resources than we do, and are therefore better positioned to secure intellectual
      property licenses. We cannot assure you that our licenses will be extended
      on
      reasonable terms or at all, or that we will be successful in acquiring or
      renewing licenses to property rights with significant commercial
      value.




***Infringement
      claims regarding our intellectual property may harm our
      business.***




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




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




Legislation
      is periodically introduced at the local, state and federal levels in the United
      States and in foreign countries that is intended to restrict the content and
      distribution of games similar to the ones that we develop and produce, and
      could
      prohibit certain games similar to ours from being sold to minors. Additionally,
      many foreign countries have laws that permit governmental entities to censor
      the
      content and advertising of interactive entertainment software. We believe that
      similar legislation will be proposed in many countries that are significant
      markets for our games, including the United States. If any of this proposed
      legislation is passed, it could have the effect of limiting the market for
      our
      games and/or require us to modify our games at an additional cost to
      us.

















36




**RED
      MILE ENTERTAINMENT, INC.**









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




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




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




Some
      game
      developers and publishers include hidden content in their games that are
      intended to improve the experience of customers that play their games.
      Additionally, some games contain hidden content introduced into the game without
      authorization by an employee or a non-employee developer. Some of this hidden
      content has in the past included graphic violence or sexually explicit material.
      In such instances, fines have been imposed on the publisher of the game and
      the
      games have been pulled off the shelves by retailers. The measures we have taken
      to reduce the possibility of hidden content in the games that we publish may
      not
      be effective, and if not effective our future income will be negatively impacted
      by increased costs associated with fines or decreased revenue resulting from
      decreased sales volume because of ownership of games that cannot be
      sold.




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




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




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




As
      of
      September 30, 2006, we had two customers who accounted for 67.1% (GameStop)
      31.9% (Codemasters) of our accounts receivable and two customers who accounted
      for 25.7 % (Evolved Games), 84.7% (Codemasters) and of revenue during the first
      six months of fiscal 2007. As of March 31, 2006, we had two customers who
      accounted for 80.7% (Codemasters) and 18.5% (Sony On-Line Entertainment) of
      our
      accounts receivable and three customers who accounted for 44.4% (Ubisoft) ,
      28.6% (Codemasters) and 26.5% (Sony On-Line Entertainment) of revenue. If any
      of
      these customers were to decrease their purchase volume or discontinue their
      relationship with us, our revenue would decrease significantly unless we were
      able to find new customers to replace the lost volume. There can be no assurance
      that such new customers could be found, or if found, that they would purchase
      the same quantity as the current customers.


37




**RED
      MILE ENTERTAINMENT, INC.**









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




We
      have
      not yet developed any games that we sell and our business has been derived
      from
      the sale of games developed by external sources from which we purchase
      publishing rights. We have very little control over the terms of our publishing
      rights. If any of the developers of the games were to discontinue its
      relationship with us, our sales would decrease causing a decrease in revenue.
      If
      any of the developers were to increase the price that we pay for publishing
      rights, our costs would increase, making it more difficult to achieve
      profitability. In either situation, we would be forced to find alternative
      developers. There can be no assurance that we would be able to find alternative
      developers, or even if such developers are available, that they will be
      available on terms acceptable to us.




***Effect
      of Recent Accounting Pronouncements***







In
      July,
      2006 the FASB issued Financial Interpretation Number 48, *Accounting
      for Uncertainty in Income* In
      June 2006, the FASB ratified the consensus reached on Emerging Issues Task
      Force (“EITF”) Issue No. 06-3, “ *How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross Versus Net
      Presentation)* ”.
      The
      scope of EITF Issue No. 06-3 includes any transaction-based tax assessed by
      a governmental authority that is imposed concurrent with or subsequent to a
      revenue-producing transaction between a seller and a customer. The scope does
      not include taxes that are based on gross receipts or total revenues imposed
      during the inventory procurement process. Gross versus net income statement
      classification of that tax is an accounting policy decision and a voluntary
      change would be considered a change in accounting policy requiring the
      application of SFAS No. 154, “ *Accounting Changes and Error Corrections* ”.
      The
      following disclosures will be required for taxes within the scope of this issue
      that are significant in amount: (1) the accounting policy elected for these
      taxes and (2) the amounts of the taxes reflected gross (as revenue) in the
      income statement on an interim and annual basis for all periods presented.
      The
      EITF Issue No. 06-3 ratified consensus is effective for interim and annual
      periods beginning after December 15, 2006. We do not expect the adoption of
      EITF Issue No. 06-3 to have a material impact on our Condensed Consolidated
      Financial Statements.


38




**RED
      MILE ENTERTAINMENT, INC.**








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





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





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


39




**RED
      MILE ENTERTAINMENT, INC.**









ITEM
      6.
      EXHIBITS




Exhibits:





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





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





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





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





40




**RED
      MILE ENTERTAINMENT, INC.**






SIGNATURES




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







**RED
                MILE ENTERTAINMENT, INC.**(Registrant)Date:        November
                13, 2006
            
            By:
                /s/ Chester AldridgeChester
                AldridgeChief
                Executive Officer(Principal
                Executive Officer)Date:        November
                13, 2006
            
            By:
                /s/ Ben ZadikBen
                ZadikChief
                Financial Officer(Principal
                Financial Officer)