Edgar Filing: Red Mile Entertainment Inc

f10q0908_redmile.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2008

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

For the Transition Period From __________ To ______________________

Commission File Number: 000-51055

RED MILE ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware	20-4441647
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

223 San Anselmo Way #3	94960
San Anselmo, CA 94960	(Zip Code)

415-339-4240

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer ¨ Accelerated filer ¨

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

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

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

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

Table of Contents		Page

PART I	FINANCIAL INFORMATION	1

ITEM 1.	FINANCIAL STATEMENTS	1

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS	18

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25

ITEM 4T.	CONTROLS AND PROCEDURES	25

PART II	OTHER INFORMATION	26

ITEM 1.	LEGAL PROCEEDINGS	26

ITEM 1A.	RISK FACTORS	26

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	33

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	33

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	33

ITEM 5.	OTHER INFORMATION	33

ITEM 6.	EXHIBITS	33

	SIGNATURE PAGE	34

Part I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

RED MILE ENTERTAINMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
	September 30, 2008			March 31, 2008
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	159,826		$	335,147
Accounts receivable, net of reserves of $799,081 and $854,359		941,036			68,913
Inventory, net		23,902			31,406
Prepaid expenses and other assets		25,594			34,027
Software development costs and advanced royalties		8,083,844			5,942,921
Total current assets		9,234,202			6,412,414
Property and equipment, net		58,637			128,234
Other assets		5,699			9,755
Total assets	$	9,298,538		$	6,550,403

Liabilities, and stockholders’ deficit
Current liabilities:
Accounts payable	$	934,434		$	1,280,516

Revolving line of credit…………………………………………………		500,000			500,000
Secured credit loan……………………………………………………...		722,700			-
Accrued liabilities		1,062,480			1,211,934
Deferred revenue……………………………………………………......		4,250,000			40,892
Other current liabilities………………………………………………….		9,619			48,000
Total current liabilities		7,479,233			3,081,342

Stockholders’ Equity:

Common stock, $0.01 par value, authorized 100,000,000 shares; 15,977,941 and 15,977,941 shares outstanding, respectively		159,779			159,779
Additional paid-in capital		36,342,160			36,235,106
Accumulated other comprehensive income		2,739			3,515
Accumulated deficit		(34,685,373	)		(32,929,339	)
Total stockholders’ equity …………………………………		1,819,305			3,469,061
Total liabilities and stockholders’ equity ………………….	$	9,298,538		$	6,550,403

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

RED MILE ENTERTAINMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended September 30,
	2008			2007

Revenues, net	$	78,004		$	3,158,893

Cost of sales		47,454			4,774,734

Gross margin		30,550			(1,615,841	)

Operating expenses
Research and development costs		249,270			442,066
General and administrative costs		548,107			773,628
Sales, marketing and business development costs		11,649			1,686,863
Total operating expenses		809,026			2,902,557

Net loss before interest income (expense),other income (expense), and provision for income taxes		(778,476	)		(4,518,398	)
Debt conversion inducement costs		-			4,318,286
Beneficial debt conversion costs		-			662,902
Interest income (expense), net		(30,576	)		22,174
Other income (expense), net		62,628			-
Net loss before income tax expense		(746,424	)		(9,477,412	)

Income tax expense		-			-

Net loss	$	(746,424	)	$	(9,477,412	)

Net loss per common share, basic and diluted	$	(0.05	)	$	(0.65	)
Shares used in computing basic and diluted loss per share		15,977,941			14,510,238

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

RED MILE ENTERTAINMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	Six months ended September 30,
	2008		2007


Revenues, net	$	115,090	$	3,433,315

Cost of sales		96,816		5,027,243

Gross margin		18,274		(1,593,928)

Operating expenses
Research and development costs		517,991		596,093
General and administrative costs		1,191,401		1,671,693
Sales, marketing and business development costs		63,401		1,922,294
Total operating expenses		1,772,793		4,190,080

Net loss before interest income (expense), other income (expense), and provision for income taxes		(1,754,519)		(5,784,008)
Debt conversion inducement costs		-		4,318,286
Beneficial debt conversion costs		-		662,902
Interest income (expense), net		(57,713)		(89,060)
Other income (expense), net		56,998		-
Net loss before income tax expense		(1,755,234)		(10,854,256
Income tax expense		800		-
Net loss	$	(1,756,034)	$	(10,854,256)
Net loss per common share, basic and diluted	$	(0.11)	$	(0.90)
Shares used in computing basic and diluted loss per share		15,977,941		12,099,236

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

RED MILE ENTERTAINMENT INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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

Cash flows from investing activities:
Sales of marketable securities		-			-
Acquisition of property and equipment		(3,257	)		(86,859	)
Cash paid for other investment		-			(113,812	)
Net Cash flows used in investing activities		(3,257	)		(200,671	)

Cash flows from financing activities:
Proceeds from sales of stock, net of costs		-			4,295,807
Proceeds from issuance of debt		746,410			2,277,000
Net cash provided by financing activities		746,410			6,572,807

Effect of exchange rate changes on cash		(775	)		1,012
Net increase (decrease) in cash		(175,321	)		558,732
Cash and cash equivalents, beginning of period		335,147			1,912,992
Cash and cash equivalents, ending of period	$	159,826		$	2,471,724

Supplemental Disclosure of Non-Cash Financing Transactions
Conversion of senior secured convertible debentures	$	-		$	8,244,000
Accrued interest on revolving line of credit	$	26,111		$	-
Accrued interest on secured credit facility	$	18,216		$	-
Accrued interest on senior secured convertible debentures	$	-		$	155,821
Debt issuance costs related to the issuance of the senior secured convertible debentures	$	-		$	528,240
Conversion of convertible promissory notes	$	-		$	2,400,000
Debt issuance costs	$	5,000		$	-
Relative fair value of warrants issued for conversion of promissory notes	$	-		$	662,902

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

RED MILE ENTERTAINMENT, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

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

NOTE 2 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

The Company has begun implementing a strategic plan that it believes is viable and will contribute to meeting the Company’s cash flow requirements. Management believes that this plan is reasonably capable of removing the threat to continuation of the business during the 12 month period following the most recent balance sheet presented. This strategic financing plan has the following components:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Prior to the adoption of SFAS 123(R), we applied SFAS 123, amended by SFAS 148, 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.

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

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

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

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

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

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

NOTE 3 — ACCRUED LIABILITIES


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

Total	$	1,062,480	$	1,211,934

NOTE 4 — DEFERRED REVENUE

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

Total	$	4,250,000	$	40,892

NOTE 5 — OTHER CURRENT LIABILITIES

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

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

NOTE 6 — COMMITMENTS

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

Year ended March 31,
2009	$	1,837,000
2010	$	1,316,195
2011	$	352,500
Total	$	3,505,695

Lease Commitments

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

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

Year ended March 31
2009	$	15,851
2010		32,631
2011		33,588
Total	$	82,070

NOTE 7 — STOCK OPTIONS AND STOCK COMPENSATION

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

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

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

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

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

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

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

On April 8, 2005, our board of directors approved the Red Mile Entertainment 2005 Stock Option Plan (the “plan”) which permits the Board of Directors to grant to officers, directors, employees and third parties incentive stock options (“ISOs”), non-qualified stock options, restricted stock and stock appreciation rights (“SARs”). On March 15, 2007, the board of directors and stockholders holding a majority of voting power voted to authorize the board of directors, at its discretion, to amend the 2005 Stock Option Plan (the “Amended Plan”).

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

Option activity under the Amended Plan is as follows:

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

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

Options Outstanding				Options Exercisable

	Number	Weighted Avg.	Weighted Avg.	Number	Weighted Avg.
Range of Exercise Prices	Outstanding	Remaining Life	Exercise Price	Exercisable	Exercise Price
$0.66 - $1.49	564,400	7.25	$ 0.71	564,400	$ 0.71
$1.50 - $2.37	30,000	8.90	$ 2.35	10,000	$ 2.35
$2.38 - $4.00	418,334	8.50	$ 3.97	6,111	$ 3.30
	1,012,734			580,511

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

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

NOTE 8 — COMMON STOCK

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

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

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

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

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

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

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

NOTE 9 — WARRANTS

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

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

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

NOTE 10 — CONCENTRATIONS

Customer base

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

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

Operations by Geographic Area

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

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

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

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

Location of assets

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

NOTE 11 – REVOLVING LINE OF CREDIT

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

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

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

NOTE 12 – SECURED CREDIT LOAN

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

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

NOTE 13 — NEW ACCOUNTING PRONOUNCEMENT

SFAS 157

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

SFAS 159

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

FIN 48

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

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

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

EITF 07-03

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

EITF 07-01

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

SFAS 141(R) and SFAS 160

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

SFAS 161

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

SFAS 162

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

FSP APB 14-1

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

NOTE 14 — SUBSEQUENT EVENTS

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

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

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

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

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

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

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

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

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

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

(iii)

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

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

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

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

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

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

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

RED MILE ENTERTAINMENT, INC.

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

FORWARD-LOOKING STATEMENTS

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

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

O	the likelihood that our management team will increase our profile in the industry and create new video games for us.

O	our ability to compete against companies with much greater resources than us.

O	our ability to obtain various intellectual property licenses as well as development and publishing licenses and approvals from the third party hardware manufacturers.

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

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

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

Overivew

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

Liquidity and Capital resources

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

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

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

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

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

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

RED MILE ENTERTAINMENT, INC.

Results of Operations

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

Summary of Unaudited Statements of Operations

Three Months Ended September 30, 2008 and 2007

Summary of Statements of Operations

	2008			2007		% change
Revenue	$	78,004		$	3,158,893	(98) %
Cost of sales		47,454			4,774,734	(99) %
Gross margin		30,550			(1,615,841)
Operating expenses		809,026			2,902,557	(72) %
Net loss before interest income (expense), other income (expense) and provision for income taxes		(778,476	)		(4,518,398)
Debt conversion inducement costs		-			4,318,286
Beneficial debt conversion costs		-			662,902
Interest income (expense), net		(30,576)			22,174	(238) %
Other income (expense), net		62,628			-
Net loss	$	(746,424	)	$	(9,477,412)	(92) %

Net loss per common share - Basic and diluted	$	(0.05	)	$	(.65)
Shares used in computing basic and diluted net loss per share (in 000’s)		15,978			14,510

Summary of Unaudited Statements of Operations

Six Months Ended September 30, 2008 and 2007

Summary of Statements of Operations

	2008			2007			% change
Revenue	$	115,090		$	3,433,315			(97)	%
Cost of sales		96,816			5,027,243			(98)	%
Gross margin		(18,274	)		(1,593,928	)
Operating expenses		1,772,793			4,190,080			(58)	%
Net loss before interest income (expense), other income (expense) and provision for income taxes		(1,754,519	)		(5,784,008	)
Debt conversion inducement costs		-			(4,318,286	)
Beneficial debt conversion costs		-			(662,902)
Interest income (expense), net		(57,713	)		(89,060)			(165)
Other income (expense), net		56,998
Income tax expense		800			---
Net loss	$	(1,756,034	)	$	(10,854,256	)		(84)	%

Net loss per common share - Basic and diluted	$	(0.11	)	$	(.90	)
Shares used in computing basic and diluted net loss per share (in 000’s)		15,978			12,099

Revenues

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

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

We record revenues net of distribution fees.

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

Cost of sales

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

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

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

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

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

Operating Expenses

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

	Three Months Ended September 30, 2008	Percent of total	Three Months Ended September 30, 2007	Percent of total	Percent Decrease
Research and development costs	$ 249,270	30.8%	$ 442,066	15.2%	(44%)
General and administrative costs	548,107	67.8%	773,628	26.7%	(29%)
Marketing, sales and business development costs	11,649	1.4%	1,686,863	58.1%	(99%)

Total operating expenses	$ 809,026	100.0%	$ 2,902,557	100.0%

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

	Six Months Ended September 30, 2008	Percent of total	Six Months Ended September 30, 2007	Percent of total	Percent Decrease
Research and development costs	$ 517,991	29.2%	$ 596,093	14.2%	(13%)
General and administrative costs	1,191,401	67.2%	1,671,693	39.9%	(29%)
Marketing, sales and business development costs	63,401	3.6%	1,922,294	45.9%	(97%)

Total operating expenses	$ 1,772,793	100.0%	$ 4,190,080	100.0%

Research and Development Costs

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

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

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

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

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

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

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

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

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

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

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

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

General and Administrative Costs

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

Sales, Marketing and Business Development Costs

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

Interest Income (Expense), net

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

Other Expense

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

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

Critical Accounting Policies

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

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

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

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

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

Revenue recognition

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

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

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

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

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

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

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

Our revenues are subject to material seasonal fluctuations.

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

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

Software Development Costs and Advanced Royalties

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

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

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

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

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

Off-Balance Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4T. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

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

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

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

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

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

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

	•		pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

	•		provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and the our board of directors; and

	•		provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

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

Changes in Internal Control Over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

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

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

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

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

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

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

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

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

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

The Company has rarely generated positive gross margins.

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

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

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

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

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

The Company faces intense competition.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We have the following platform licenses:

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

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

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

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

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

Infringement claims regarding our intellectual property may harm our business.

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

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

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

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

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

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

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

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

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

Because we have distribution agreements with entities located in foreign countries, our business is subject to risks associated with doing business internationally.

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

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

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

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

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

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

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

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

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

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

Effect of Recent Accounting Pronouncements

EITF 06-03

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

SFAS 157

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

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

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

SFAS 159

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

FIN 48

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

EITF 07-03

EITF 07-01

SFAS 141(R) and SFAS 160

SFAS 161

SFAS 162

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

FSP APB 14-1

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

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

Item. 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

(a) Exhibits:

10.1(1)	Agreement and Plan of Merger among Silverbirch, Inc., RME Merger Sub Corp, Red Mile Entertainment, Inc., and Kenny Cheung as representative dated October 7, 2008.
10.2(1)	Voting Agreement among RME Merger Sub Corp., and certain stockholdes of Red Mile Entertainment, Inc., dated October 7, 2008.
31.1	Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

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

SIGNATURES

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

		RED MILE ENTERTAINMENT, INC.
		(Registrant)
Date: November 14, 2008		By: /s/ Chester Aldridge
		Chester Aldridge
		Chief Executive Officer
		(Principal Executive Officer and Principal Accounting Officer)