UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-KSB


(Mark
      One)





[X]           ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      fiscal year ended June 30, 2007





OR





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





For
      the
      transition period from ___________to _________





Commission
      file number: 0-26845





THEATER XTREME ENTERTAINMENT GROUP,
                INC.
              (Exact
                name of registrant as specified in its charter)Florida
              (State
                or other jurisdiction of
              incorporation
                or organization)
            65-0913583
              (I.R.S.
                Employer Identification No.)250
                Corporate Boulevard, Suite E&F
              Newark,
                Delaware
              (Address
                of principal executive offices)
            19702
              (Zip
                Code)





Registrant’s
      telephone number, including area code:  (302)
 455-1334


Name
      of each
      exchange


Securities
      registered under Section 12(b) of the Exchange Act:  Title of
      Class                                                                                                 on
      which registered


Common
      Stock, par value $.001 per
      share                                                                         OTC
      Bulletin Board





Check
      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 past 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
      [   ]





Check
      if there is no disclosure of
      delinquent filers in response to Item 405 of Regulation S-B  contained
      in this form, and no disclosure will be contained, to the best of registrant’s
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  []





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





State
      issuer’s revenues for its most recent fiscal year $6,110,464





As
      of September 21, 2007, the aggregate
      market value of the voting stock held by non-affiliates of the registrant was
      approximately $6,035,603.  Such aggregate market value was computed by
      reference to the September 21, 2007 closing stock price of the Company’s common
      stock as quoted on the OTC Bulletin Board.





As
      of September 21, 2007, 20,812,425
      shares of the registrant’s Common Stock were issued and
      outstanding.





Transitional
      Small Business Disclosure
      Format.  Yes [   ]   No
      [X]





Part
      III of this form 10-KSB in
      incorporated by reference from the registrant’s proxy statement to be filed
      within 120 days of the registrant’s fiscal year end.











**Table
      of Contents**




**Page**


PART
                  I
              
              1ITEM
                  1.
              DESCRIPTION
                  OF BUSINESS
              1ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY
              8ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              8ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF OUR SECURITY HOLDERS
              9PART
                  II
              
              9ITEM
                  5.
              MARKET
                  FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                  ISSUER
                  PURCHASES OF EQUITY SECURITIES
              9ITEM
                  6.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              10ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              21ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              42ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
              42ITEM
                  8B.
              OTHER
                  INFORMATION
              42PART
                  III
              
              43ITEM
                  9.
              DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH SECTION
                  16(a) OF
                  THE EXCHANGE ACT
              43ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              43ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS
              43ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS
              43ITEM
                  13.
              EXHIBITS
              44ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              45








i




**PART**  **I**




**ITEM
      1.DESCRIPTION OF BUSINESS**




Theater
      Xtreme Entertainment Group, Inc. (the “Company”) is a retail store and franchise
      marketing company engaged in retail sales and distribution through the operation
      of its home cinema design centers, the sale of franchise stores, and wholesale
      product distribution to franchisees.




The
      Company’s design centers focus on the sale and installation of affordable
      large-screen front projection in-home cinema rooms comprised of video and audio
      home theater components.  Almost all of its home theater systems are
      installed on-site at customer homes, with screen sizes ranging from 80 inches
      to
      over 12 feet.  The Company also sells theater seating, interior décor
      items, accessories and its digital theater management system called
      OneViewTM.  In addition to home theater sales, the Company also sells
      and installs theater systems for business use. The Company targets its home
      theater system marketing toward a larger consumer base than traditional custom
      home theater companies and focuses on lower retail price points in a store
      setting where customers can easily and readily encounter the complete home
      theater experience in a number of home settings.




Retail
      pricing of the Company’s video systems starts at under $3,000 per system with an
      average price point of approximately $7,000.  Systems are comprised of
      components from manufacturers such as Denon, Epson, Infocus®, JVC®, Klipsch®,
      marantz® and Mitsubishi.  Not all stores carry all
      products.  A basic home theater system might include a 92” screen,
      ceiling mounted projector, and cabling, all of which would be installed by
      the
      Company at the customer’s choice of location. Video systems are sold as cinema
      packages and are branded under theater names, such as “The Rialto,” “The
      Majestic,” “The Palace,” and “The Grand.”




The
      Company’s first retail store opened on September 1, 2003 in Newark, Delaware and
      was built to resemble an actual movie theater.  A separate
      distribution center, warehouse and administrative office facility opened in
      February 2004, also in Newark, Delaware.  This multi-purpose facility
      provides installation and service, warehousing and product distribution, and
      other retail support services to a cluster of company-owned design centers
      in
      contiguous and surrounding areas.  Subject to available financing, the
      Company anticipates that it will open additional Company-owned design store
      locations in the Mid-Atlantic region in the future.  The following
      table sets forth the number of Theater Xtreme design stores:




**Design
                  Stores Opened and Operating**
              
              **Franchised****Company**
              
              
              
              **Total**
              
              **Not
                  Yet****Owned**
              
              **Franchised**
              
              **Opened**
              
              **Opened**
              
              **Total**Number
                  of design stores at
                June
                  30, 2004
              1
              
              0
              
              1
              
              0
              
              1Net
                  additions (deletions) in the
                fiscal
                  year ended June 30, 2005
              1
              
              1
              
              2
              
              3
              
              5Number
                  of design stores at
                June
                  30, 2005
              2
              
              1
              
              3
              
              3
              
              6Net
                  additions (deletions) in the
                fiscal
                  year ended June 30, 2006
              1
              
              5
              
              6
              
              9
              
              15Number
                  of design stores at
                June
                  30, 2006
              3
              
              6
              
              9
              
              12
              
              21Net
                  additions (deletions) in the
                fiscal
                  year ended June 30, 2007
              2
              
              3
              
              5
              
              0
              
              5Number
                  of design stores at
                June
                  30, 2007
              5
              
              9
              
              14
              
              12
              
              26








1






In
      early
      2005 the Company began to consider changes to the layout of its design stores
      and engaged the services of an architectural design firm to reconfigure store
      layouts and establish a more sophisticated appearance to support its brand
      image
      and create a more dramatic retail store atmosphere.  This process
      continued throughout the past fiscal year culminating with three separate design
      store concepts: design centers, design studios and design galleries. Design
      studios reflect a smaller square footage layout and are generally located in
      suburban shopping plazas that are less regional in scope. Design centers reflect
      a larger retail square footage layout located in higher traffic regional
      shopping centers or regional malls. The Company’s relocated Wilmington, Delaware
      store is a design center.  The remaining Company-owned design stores
      are design studios.  Design galleries reflect an entirely new concept
      in the Company’s approach to retailing. A design gallery is intended to be a
“store within a store” or a home theater “gallery” within another separate
      retail outlet not owned by the Company. To date, the Company has no design
      galleries open or under consideration.  Although the Company is still
      considering certain design center enhancements, the Company intends for its
      future Company-owned stores to be design centers similar to its new relocated
      Wilmington, Delaware store.




In
      the
      fiscal year ended June 30, 2007, the Company relocated its Wilmington, Delaware
      design store to an improved location in Wilmington, Delaware and converted
      the
      former location to a furniture storage depot.




The
      sale
      of franchises is integral to the Company’s success. The Company sold a total of
      eighteen franchises through June 30, 2006 and an additional four through June
      30, 2007 bringing the total number of franchises sold through June 30, 2007
      to
      twenty-two.  The first franchise design center opened in May, 2005 in
      East Longmeadow, Massachusetts.  During the past fiscal year a net of
      three additional franchise stores opened – four new franchises opened their
      doors and the Company purchased the assets of one of its older franchises
      converting it to a Company-owned store. Other franchised design centers are
      planned for opening dates beginning in the third and fourth calendar quarters
      of
      2007 and continuing throughout calendar year 2008.  These and future
      franchised retail design stores will generally reflect enhanced physical layouts
      and may incorporate other refinements or modifications depending on the store’s
      physical characteristics.  The majority of the Company’s franchise
      locations can be characterized as design studios. Initial franchises sold for
      $25,000 per single franchise. The most recent sales price for a single franchise
      was $40,000.




On
      July
      1, 2006, the Company purchased the assets of and assumed the leasehold of its
      franchisee located in Leesport, Pennsylvania.





Also
      key
      to the Company’s success is the use and application by its franchisees of the
      Company’s franchise “system” that is designed to provide customers with a
      consistent and exciting store experience, reduce the time it takes to quote
      custom installation products, and improve the closing rate of the sales staff.
      To accomplish these goals, the franchise “system” involves the storewide
      integration of tour demonstration procedures and an activity management system
      called SellXTM.  The Company’s “system” shuns the typical retail
      response of “May I help you” in favor of a well-defined store
      tour.  After the tour, customers are taken to a design center
      workstation that is integrated into a web-based activity management
      system.  At the workstation the design consultant provides customers
      with a sales quotation.  Once a quotation is completed, subsequent
      customer contact is automated, with each design consultant receiving daily
      instructions following a prescribed marketing and fulfillment
      strategy.  In addition, targeted customer e-mail correspondence
      maintains contact with all store visitors on an ongoing basis.  Home
      theater component products for franchisee fulfillment are ordered at the time
      of
      sale and inventory levels are thereby minimized.  The Company believes
      that its franchise “system” is unique within the audio-video
      industry.




Another
      component of the Company’s strategic expansion is increased distribution of
      targeted private-label products.  In fiscal 2007, the Company further
      expanded its private-label distribution efforts beginning with furniture and
      interior décor elements and additional private-label
      accessories.  Seating and décor products are branded under the RowOne®
registered trademark.  The Company plans to continue to expand its
      branding program to include additional trademarked products.






2






The
      Company has a limited operating history for evaluating trends and
      seasonality.  The Company’s competition comes from existing
      audio/video dealers, custom audio/video installation companies, regional and
      national audio/video and general merchandise chain stores, furniture dealers
      and
      computer stores.  Although the Company markets its private-label
      theater seating under the RowOne® brand, other seating, including theater
      seating, can be found at furniture dealers.  Theater seating available
      at competitive stores and outlets is generally limited to a few styles and
      selections.  The Company’s design centers feature eleven different
      seating styles and over 20 color selections.  Audio/video products and
      components comprising the Company’s home theater systems are available from
      numerous manufacturers and are sold through local authorized specialty stores
      and regional and national chain stores and outlets.  Some
      manufacturers may place restrictions on certain categories of distribution,
      notably online sales, the number of authorized dealers and may establish minimum
      advertised pricing points for certain products.  The Company chooses
      its manufacturers and product offerings based on manufacturer distribution
      strategy, quality of product offerings and advantages that manufacturers would
      offer to custom retail stores.




Although
      the Company believes that it is currently difficult to find competitive outlets
      that showcase product offerings and selections in a manner similar to the
      Company’s design centers, there can be no certainty that other stores will not
      expand their selections and floor spacing to include similar product offerings,
      product displays and installation services.




On
      August
      23, 2006, the Company began offering for sale, at a minimum price of $2.00
      per
      Unit, 500,000 Units (each of which consisted of two shares of Company common
      stock and a warrant to purchase one share of Company common stock at an exercise
      price equal to one-half of the then applicable Unit price).  No units
      were sold under this offering and the Company withdrew the offering as it
      focused on the alternative financing sources described below.




On
      October 23, 2006, the Company entered into a Securities Purchase Agreement
      with
      two accredited investors (the “October Investors”) for the purchase of (i)
      $500,000 in non-convertible 10% debentures (the “October Debentures”) and (ii)
      warrants (the “October Warrants”) to purchase 400,000 shares of the Company’s
      common stock (the “October Financing”). The October Financing provided the
      Company with aggregate sales proceeds of $500,000. The proceeds of the October
      Financing net of transaction expenses were used for general corporate purposes.
      The October Warrants have an exercise price of $1.00 per share representing
      the
      fair value as of October 23, 2006. The Company has valued the October Warrants
      at $287,500 and was amortizing this amount as additional financing costs over
      the time of the October Debenture. The Company used the Black-Scholes model
      to
      calculate the fair value of the warrants, with the following assumptions: no
      dividend yield, 45% volatility, risk-free interest rate of 4.8% and expected
      warrant life of five years. The October Warrants are subject to a full ratchet
      price protection for their five-year life. The Company and the October Investors
      also entered into a Registration Rights Agreement pursuant to which the Company
      registered the common stock underlying the October Warrants. Each officer and
      director of the Company also entered into a lock-up agreement with the October
      Investors pursuant to which they agreed not to sell, offer to sell, contract
      to
      sell, agree to sell, hypothecate, pledge, grant any option for sale or purchase
      or otherwise dispose of Company common stock or common stock equivalents for
      90
      days. The October Financing was made in reliance on an exemption from securities
      registration afforded by the provisions of Section 4(2) of the Securities Act
      of 1933.
      The
      Company satisfied and retired the October Debentures on March 6, 2007 in
      connection with the March Financing, as more fully described below. Prior to
      their repayment, the October Debentures matured on the earlier of November
      13,
      2007 and the date that the Company received net proceeds from debt and/or equity
      financings of at least $2,000,000. The October Debentures bore interest at
      10%
      per annum. As a result of the October Debentures being retired earlier than
      their normal time, the Company also expensed the unamortized balances of
      additional financing costs associated with the October Warrants, amounting
      to
      $235,360 which is included in interest expense.





In
      November, 2006, the Company executed and delivered debentures to three
      accredited investors (the “November Investors”) in the aggregate face amount of
      $300,000 (the “November Debentures”), the proceeds of which, net of transaction
      expenses, were used for general corporate purposes. The November Debentures
      mature on November 30, 2007 and may be prepaid at any time in whole or in part
      upon payment of a fee equal to five percent (5%) of the amount of principal
      repayment. The November Debentures bear interest at 15% per annum. The November
      Debentures were sold to the November Investors in reliance on an exemption
      from
      securities registration afforded by the provisions of Section 4(2) of the
      Securities Act of 1933.








3





On
      December 22, 2006, the Company entered into a Securities Purchase Agreement
      with
      Kinzer Technology, LLC. (the “December Investor”) for the purchase of (i) a
      $700,000 non-convertible 10% debenture (the “December Debenture”) and (ii)
      warrants (the “December Warrants”) to purchase up to 560,000 shares of the
      Company’s common stock (the “December Financing”).  The December
      Financing provided the Company with aggregate proceeds of $700,000. The proceeds
      of the December Financing, net of transaction expenses, were used for general
      corporate purposes. The December Warrants have an exercise price of $1.10 per
      share, representing the fair value as of December 22, 2006. The Company has
      valued the December Warrants at $289,900 and will amortize this amount as
      additional financing costs over the time of the December Debenture. The Company
      used the Black-Scholes model to calculate the fair value of the warrants, with
      the following assumptions: no dividend yield, 45% volatility, risk-free interest
      rate of 4.6% and expected warrant life of five years. The December Warrants
      are
      subject to a full ratchet price protection for the five-year life of the
      Warrants. The December Financing was made in reliance on an exemption from
      securities registration afforded by the provisions of Section 4(2) of the
      Securities Act of 1933. In connection with the March Financing as more fully
      described below, the Company satisfied and retired the December Debenture.
      Prior
      to its repayment, the December Debenture matured on the earlier of November
      15,
      2007 and the date that the Company received net proceeds from debt and/or equity
      financings of at least $1,500,000. The December Debenture bore interest at
      10%
      per annum. Additionally, because the December Debenture was modified, as more
      fully described below, the Company also modified the amortization of the
      additional financing costs associated with the December Warrants.





On
      March
      6, 2007, the Company entered into a Securities Purchase Agreement with Kinzer
      Technology, LLC (the “March Investor”), modifying its existing financing and
      receiving $2,000,000 in net proceeds from the transaction which was comprised
      of
      (i) the cancellation of the December Debenture of $700,000, (ii) the issuance
      of
      a new $2,700,000 non-convertible 10% debenture (the “March Debenture”) and (iii)
      issuance of additional warrants (the “March Warrants”) to purchase up to 400,000
      shares of the Company’s common stock (the “March Financing”). The proceeds of
      the March Financing were used to repay the October Debentures and the December
      Debenture, each together with accrued and payable interest, and the remainder,
      net of transaction expenses, was used for general corporate purposes. The March
      Debenture matures on March 6, 2010. The March Debenture bears interest at 10%
      per annum with interest payable quarter annually. The March Warrants have an
      exercise price of $1.10 per share, now reduced to $1.00 per share by the terms
      of the March Warrants, representing the fair value as of March 6, 2007. The
      Company has valued the March Warrants at $153,000 and will amortize this amount
      and the remaining amount associated with the December Warrants over the time
      of
      the March Debenture. For the three months ended March 31, 2007, the Company
      expensed, as an additional interest expense, $50,380 for the December Warrants
      (January 1 through March 6, 2007) and $9,120 on behalf of the March Warrants
      (March 7 through March 31, 2007). As of March 31, 2007 an aggregate of $375,000
      of deferred financing costs remain to be amortized over the time of the March
      Debenture. The Company used the Black-Scholes model to calculate the fair value
      of the warrants, with the following assumptions: no dividend yield, 45%
      volatility, risk-free interest rate of 4.5% and expected warrant life of five
      years. The March Warrants are subject to a full ratchet price protection for
      the
      five-year life of the Warrants. The March Financing was made in reliance on
      an
      exemption from securities registration afforded by the provisions of Section
      4(2) of the Securities Act of 1933. In October, 2007, the Company and Kinzer
      Technology, LLC (“Kinzer”) amended the March Debenture.  Under the
      original terms of the March Debenture, the Company was prohibited from incurring
      any additional unsecured indebtedness for borrowed money after March 6, 2007
      in
      excess of $1.0 million.  The amendment increases the amount of such
      indebtedness which may be incurred after March 6, 2007 to $2.0
      million.  The March Debenture also requires quarterly interest
      payments on each April 1, July 1, October 1, and January 1.  The
      amendment permits the Company to defer the interest payments otherwise due
      on
      October 1, 2007 and January 1, 2008 until July 1, 2008.






4







In
      July
      and August, 2007, the Company executed and delivered promissory notes to three
      accredited investors ( the “Promissory Note Investors”) in the aggregate face
      amount of $225,000 (the “Promissory Notes”), and warrants (the “Promissory
      Warrants”) to purchase up to 112,500****shares of the
      Company’s common stock (the “Promissory Note Financing”). The proceeds of the
      Promissory Note Financing were used for general corporate purposes. The
      Promissory Notes bear interest at 14% per annum, mature one year from the date
      of issue and may be prepaid at any time without penalty.  The
      Promissory Warrants have an exercise price of $1.00 per share and are subject
      to
      full ratchet price protection for the five-year life of the Promissory
      Warrants.  Repayment of the Promissory Note is guaranteed by Scott R.
      Oglum, Chief Executive Officer of the Company, and the Guaranty is secured
      by a
      pledge by Mr. Oglum of up to 3,618,275 shares of the Company’s common stock
      which he owns representing his entire holdings.





As
      of
      June 30, 2007, the Company had 35 full-time employees and 3 part-time
      employees.




Available
      Information




For
      more
      information about the Company, visit its web site at
www.theaterxtreme.com. The Company’s electronic filings with the U.S.
      Securities and Exchange Commission (including its annual report on Form 10-KSB,
      quarterly reports on Form 10-QSB, and current reports on Form 8-K, and any
      amendments to these reports) are available free of charge at
www.sec.gov.  The public may also read and copy any materials
      the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth
      Street, N.W., Washington, D.C.  20549.  Information on the
      operation of the Public Reference Room can be obtained by calling the SEC at
      1-800-SEC-0330.








5




**RISK
      FACTORS**




*Investing
      in our securities involves a material degree of risk. Before making an
      investment decision, you should carefully consider the risk factors set forth
      below.*




**Limited
      Company History**




Theater
      Xtreme Entertainment Group, Inc. (the “Company”), a Florida corporation, is the
      successor by merger to Theater Xtreme, Inc. that was formed in 2003 and
      accordingly, the Company has only a limited history upon which an evaluation
      of
      its prospects and future performance can be made.  The Company’s
      operations are subject to all business risks associated with new
      enterprises.  The likelihood of the Company’s success must be
      considered in light of the problems, expenses, difficulties, complications,
      and
      delays frequently encountered in connection with the establishment and expansion
      of a business, operation in a competitive industry, and the continued
      development of advertising, promotions, and a corresponding customer
      base.  There is a possibility that the Company will continue to
      sustain losses in the future.  There can be no assurances that the
      Company will operate profitably.




**Inadequacy
      of Funds**




At
      June
      30, 2007, the Company had a net working capital deficit of
      $(364,415).  A significant portion of such working capital deficit
      resulted from the Company’s obligation to repay $300,000 of debentures plus
      interest on November 30, 2007.  At June 30, 2007 and September 30,
      2007, the Company had cash and cash equivalents of $232,583 and $193,578,
      respectively.  These amounts will not be sufficient to repay the
      debentures due on November 30, 2007.





Moreover,
      the Company sustained net losses of $3.4 million and $2.1 million in the fiscal
      years ended June 30, 2007 and 2006, respectively.  Because Company
      losses have continued subsequent to June 30, 2007, the Company needs to raise
      a
      sufficient amount of capital to repay the November 30, 2007 debentures and
      to
      maintain adequate working capital, or the Company may not have the ability
      to
      remain in business.  For these reasons, among others, the Company’s
      auditors have qualified their opinion with respect to the Company’s June 30,
      2007 financial statements.





Although
      Company-owned design centers produce positive store operating profit
      collectively, and although the franchised design centers provide revenue and
      profits to the Company in the form of royalty payments and profits from
      wholesale sales, the Company’s profits generated from these activities are not
      adequate to offset the Company’s aggregate overhead expenses.  To
      rectify this shortfall, the Company either needs to reduce overhead expenses
      or
      increase the number of profitable operating stores to the point where the
      aggregate contribution from such stores offsets the Company’s overhead
      expense.  There is no assurance that the Company will be able to do
      so, in part because of the possible inability to raise adequate
      capital.





**Dependence
      on Management**




The
      Company’s business is significantly dependent on the Company’s management
      team.  The Company’s success will be particularly dependent on Scott
      Oglum, the Company’s Chairman and Chief Executive Officer, founder of Theater
      Xtreme Entertainment Group, Inc. and developer of the Company’s operations and
      business plans, and manager of the businesses.  The loss of this
      individual could have a material adverse effect on the Company.  See
      Item 9, -- Directors and Executive Officers of the Registrant.




**Risks
      Associated with Expansion**




The
      Company plans on expanding its business through both expansion of its corporate
      stores and franchises.  Any such expansion of operations will entail
      risks, and such actions may involve specific operational activities which may
      negatively affect the profitability of the Company.  Consequently,
      shareholders must assume the risk that (i) such expansion may ultimately involve
      expenditures of funds beyond the resources available to the Company at that
      time, and (ii) management of such expanded operations may divert management’s
      attention and resources away from its existing operations, all of which factors
      may have a material adverse effect on the Company’s present and prospective
      business activities.






6






**Customer
      Base and Market Acceptance**




Although
      the Company believes it can develop the retail design store and franchise
      expansion program, and develop a new store base through the marketing of the
      franchise opportunity, the inability of the Company to develop such a franchise
      base could have a material adverse effect on the Company.  The Company
      believes that new design centers that are similar to its relocated Wilmington
      design center are well-suited to be the desired new format for Company-owned
      store expansion. However, some of the existing Company-owned design stores,
      the
      Company’s smaller format design studios, have experienced a decrease in customer
      traffic in the last year.  Although the Company believes that its
      market timing and the attractiveness of its franchise opportunity compared
      to
      that of alternative companies and products is competitive, no assurance can
      be
      given that the Company’s, products and e-commerce web site will attain a degree
      of market acceptance on a sustained basis or that it will generate revenues
      sufficient for sustained profitable operations.




**Competition**




To
      the
      knowledge of management, direct competition for the Company’s type of franchise
      operation is non-existent.




The
      sale
      of home theater systems (including projection systems) is currently handled
      by
      established specialty dealers and some well established mass merchants, internet
      dealers, and custom installation dealers which focus on the upscale
      marketplace.  Although some competition for its retail sales does
      exist, management believes that the Company’s focused retail design store style
      of retailing and its marketing programs are both unique in nature and the
      expertise of management combined with the innovative nature of its product
      matrix and its sophisticated web site will set the Company apart from its
      competitors.  There is the possibility that new competitors could
      seize on the Company’s product ideas and business model and produce competing
      stores with similar product matrixes.  Likewise, these new competitors
      could be better capitalized than the Company which could give them a significant
      competitive advantage.  There is the possibility that the competitors
      could capture significant market share of the Company’s intended
      market.




**General
      Economic Conditions**




The
      financial well-being of the Company may be sensitive to adverse changes in
      general economic conditions in the United States, such as recession, inflation,
      unemployment, declining real estate values and increasing interest
      rates.  Such changing conditions could reduce demand in the
      marketplace for the Company’s products and services.  Management
      believes that the niche products and the extensive product line of the Company
      may insulate the Company from excessive reduced demand.  Nevertheless,
      the Company has no control over these changes.




**Trend
      in Consumer Preferences and Spending; Possible Fluctuations in Operating
      Results**




The
      Company’s operating results may fluctuate significantly from period to period as
      a result of a variety of factors, including purchasing patterns of customers,
      competitive pricing, debt service and principal reduction payments, and general
      economic conditions.  There is no assurance that the Company will be
      successful in marketing any of its products or that the revenues from the sale
      of such products will be significant.  Consequently, the Company’s
      revenues may vary by quarter, and the Company’s operating results may experience
      fluctuations.






7






**Unanticipated
      Obstacles to Execution of the Business Plan**




The
      Company’s business plans may change significantly.  Many of the
      Company’s potential business endeavors are capital intensive and may be subject
      to statutory or regulatory requirements. Management believes that the Company’s
      chosen activities and strategies are achievable in light of current economic
      and
      legal conditions with the skills, background, and knowledge of the Company’s
      principals and advisors.  Management reserves the right to make
      significant modifications to the Company’s stated strategies depending on future
      events.




**Control
      by Management**




As
      of
      September 21, 2007, the Company’s officers and directors owned approximately 22%
      of the Company’s outstanding shares.  As of September 21, 2007, the
      Company has 2,286,410 warrants (including a 40,000 warrant reserve) to purchase
      its Common Stock outstanding.  Assuming that the current warrant
      holders exercise all of these warrants, Management would own approximately
      20%
      of the Company’s outstanding shares.  Following the conversion of all
      of their outstanding options (without regard to vesting) Management will own
      approximately 26% of the then issued and outstanding shares and, further
      assuming in this case that the current warrant holders exercise all
      outstanding  warrants, Management would own approximately 23% of the
      Company’s then issued and outstanding shares.




Although
      shareholders other than officers and directors own a majority of the Company’s
      common stock and will, therefore, have the ability to control a vote of the
      Company’s shareholders, the significant stake owned by officers and directors
      may, as a practical matter, allow them to control the affairs of the
      Company.  Moreover, because the foregoing management ownership
      percentage does not include approximately 2,978,000 shares of common stock
      owned
      by Linda Oglum, wife of Scott Oglum, CEO of the Company (as to which he
      disclaims beneficial ownership), the chances of management control are that
      much
      more likely.




**No
      Assurances of Protection for Proprietary Rights; Reliance on Trade
      Secrets**




In
      certain cases, the Company may rely on trade secrets to protect proprietary
      technology and processes which the Company has developed or may develop in
      the
      future.  There can be no assurances that secrecy obligations will be
      honored or that others will not independently develop similar or superior
      technology.  The protection of proprietary technology through claims
      of trade secret status has been the subject of increasing claims and litigation
      by various companies both in order to protect proprietary rights as well as
      for
      competitive reasons even where proprietary claims are
      unsubstantiated.  The prosecution of proprietary claims or the defense
      of such claims is costly and uncertain given the uncertainty and rapid
      development of the principles of law pertaining to this area.  The
      Company, in common with other firms, may also be subject to claims by other
      parties with regard to the use of technology information and data which may
      be
      deemed proprietary to others.




**ITEM
      2. DESCRIPTION OF
      PROPERTY**




The
      Company leases its corporate offices and warehouse located in Newark, DE and
      retail design stores located in Newark, Delaware, Wilmington, Delaware, Bel
      Air,
      Maryland, Lutherville, Maryland and Leesport, Pennsylvania for various terms
      under long-term, non-cancelable operating lease agreements.  The
      leases expire at various dates through 2012 and provide for renewal options
      ranging from none to five years.  In the normal course of business, it
      is expected that these leases will be renewed or replaced by leases on other
      properties.




**ITEM
      3. LEGAL
      PROCEEDINGS**




None.






8






**ITEM
      4. SUBMISSION OF MATTERS
      TO A VOTE OF OUR SECURITY HOLDERS**




No
      matters were submitted to a vote of the Company’s security holders during the
      fourth quarter of the fiscal year ended June 30, 2007.









**PART
      II**




**ITEM
      5. MARKET FOR COMMON
      EQUITY RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
      SECURITIES**




The
      Company’s common stock has been quoted on the OTC Bulletin Board since July 7,
      2006.  There was no public market for the Company’s common stock for
      any period prior to July 7, 2006. The following table reflects market trading
      summary information for the year ended June 30, 2007:




Sale
                PriceQuarter
                Ended
            
            High
            
            Low
            
            CloseJune
                30, 2007
            
            $0.90
            
            $0.36
            
            $0.61March
                31, 2007
            
            $1.10
            
            $0.65
            
            $0.82December
                31, 2006
            
            $1.39
            
            $0.65
            
            $1.05September
                30, 2006
            
            $3.05
            
            $0.80
            
            $0.95





*Source:  The
      Nasdaq Stock Markets, Inc. and OTCBB reports*





The
      above
      quotations reflect inter-dealer prices, without mark-up or mark-down or
      commissions, as reported through sources indicated above and may not represent
      actual transactions. The last closing sale price of the Company’s common stock
      for the quarter ended June 30, 2007 was $0.61. The closing sale price on
      September 21, 2007 was $0.29.




As
      of
      September 21, 2007, the Company’s common stock was held by approximately 698
      holders of record.




The
      Company has never paid dividends on its Common Stock and does not anticipate
      paying any cash dividends on its Common Stock in the foreseeable
      future.




In
      April,
      2007, the Company issued 50,000 shares of its common stock to one vendor for
      services at a price of $0.85 per share which reflected the closing sale price
      of
      the day of the issuance of the shares.





In
      April,
      2007, the Company issued 15,000 shares of its common stock to one employee
      pursuant to the exercise of vested common stock options at a price of $0.35
      per
      share.





In
      May,
      2007 the Company issued 100,000 shares of its common stock to one vendor for
      services at a price of $0.49 per share which reflected the closing sale price
      of
      the day of  the issuance of the shares.





In
      June,
      2007 the Company issued 75,000 shares of its common stock to one vendor for
      services at a price of $0.53 per share which reflected the closing sale price
      of
      the day of the  issuance of the shares.





In
      June,
      2007, the Company issued 62,500 common stock purchase warrants, at an exercise
      price of $1.00 per share, to one vendor for services rendered.





In
      the
      year ended June 30, 2007, The Company issued to James J. Vincenzo, Chief
      Financial Officer of the Company, 83,333 shares of its common stock, at a price
      of $0.35 per share, pursuant to the exercise of vested stock
      options.









9





**ITEM
      6. MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**




The
      following discussion of the Company’s financial condition and results of
      operations should be read in conjunction with the Company’s Consolidated
      Financial Statements and the related Notes to such Consolidated Financial
      Statements also included in this Annual Report on Form 10-KSB.  Some
      of the information that follows does not constitute historical fact but merely
      reflects management’s intent, belief or expectations regarding the anticipated
      effect of events, circumstances and trends.  Such statements should be
      considered as forward-looking statements within the meaning of the Private
      Securities Litigation Reform Act of 1995.  Management believes that
      their expectations are based on reasonable assumptions within the bounds of
      their knowledge of the Company’s business and operations. Factors that might
      cause or contribute to differences between management’s expectations and actual
      results include:




·
            the
                ability to obtain the franchise growth and profitability as anticipated
                by
                management;


·
            the
                ability to maintain margin and sales growth
                rates;


·
            the
                ability to attract and retain quality
                employees;


·
            the
                effect of changing economic
                conditions;


·
            the
                ability to obtain adequate equity and/or debt financing, the proceeds
                of
                which would be used principally to fund the opening of additional
                stores
                and for working capital


·
            the
                continued demand for the Company’s products and services;
                and


·
            the
                ability successfully to compete with competitors in the Company’s
                industry.




The
      listing of factors is not intended to include all potential risk
      factors.  The Company makes no commitment to update these factors or
      to revise any forward-looking statements for events or circumstances, occurring
      after the statement is issued, except as required by law.







10




**Results
      of Operations**




Because
      the Company is in a startup stage, it is difficult to produce same period
      results which are comparable to those of similar periods in the previous fiscal
      year or to forecast revenues, expenses and losses accurately.  As its
      design centers mature and if the number of Company-owned design centers
      increases, the Company believes that it will begin to produce more comparable
      and predictable operating results.




The
      following tables set forth selected financial information for the periods
      indicated.




Year
                  Ended
              
              
              Year
                  EndedJune
                  30, 2007
              
              
              June
                  30, 2006Revenue:Retail
                  sales
              
              $
              4,738,166
              
              
              $
              3,963,441Wholesale
                  sales
              
              
              1,080,803
              
              
              
              467,518Franchise
                  license fees
              
              
              100,000
              
              
              
              120,000Franchise
                  royalties
              
              
              191,495
              
              
              
              68,183Total
                  revenue
              
              
              6,110,464
              
              
              
              4,619,142Cost
                  of revenues
              
              
              3,751,956
              
              
              
              2,726,383Occupancy
                  expenses
              
              
              553,920
              
              
              
              326,159Selling,
                  general and administrative expenses
              
              
              4,703,677
              
              
              
              3,693,829(Loss)
                  from operations
              
              
              (2,899,089
              )
              
              
              (2,127,229
              )Loss
                  on disposal of assets
              
              
              -
              
              
              
              (2,173
              )Interest
                  income
              
              
              4,255
              
              
              
              1,797Interest
                  expense
              
              
              (551,420
              )
              
              
              (5,125
              )Net
                  (loss)
              
              $
              (3,446,254
              )
              
              $
              (2,132,730
              )Basic
                  and diluted:Loss
                  per share
              
              $
              (0.17
              )
              
              $
              (0.12
              )Weighted
                  average shares outstanding
              
              
              19,758,200
              
              
              
              17,671,587








11




Year
                  Ended
              
              
              Year
                  EndedJune
                  30, 2007
              
              
              June
                  30, 2006Operations
                  Data:Company-owned:Design
                  stores open at beginning of period
              
              
              3
              
              
              
              2New
                  and relocated design stores
              
              
              3
              
              
              
              1Closed
                  Design Stores (Old Wilmington Store)
              
              
              (1
              )
              
              
              -Design
                  stores open at end of period
              
              
              5
              
              
              
              3Franchised
                  operations:Design
                  stores open at beginning of period
              
              
              6
              
              
              
              1New
                  design stores
              
              
              4
              
              
              
              5Closed
                  design stores (Company purchase of Leesport design store)
              
              
              (1
              )
              
              
              -Design
                  stores open at end of period
              
              
              9
              
              
              
              6Total
                  design stores open at end of period
              
              
              14
              
              
              
              9Company-owned
                  design Stores underconstruction
                  at end of period
              
              
              -
              
              
              
              3Franchises
                  sold - not yet open at end of period
              
              
              12
              
              
              
              1212
              
              
              
              15Balance
                  Sheet Data:Working
                  capital (deficit)
              
              $
              (364,415
              )
              
              $
              (299,290
              )Total
                  assets
              
              $
              3,043,920
              
              
              $
              1,761,704Long
                  term debt, excluding current portion
              
              $
              2,807,224
              
              
              $
              47,163Stockholders'
                  equity (deficit)
              
              $
              (1,846,301
              )
              
              $
              31,701




Overall,
      the Company has emphasized the importance of acquiring and developing the
      requisite management team and administrative infrastructure and capacity
      necessary to implement the Company’s business plan.  The Company’s
      business plan envisions a national company capable of effectively marketing
      affordable home theater solutions and other related
      technologies.  Accordingly, the Company has expended and will continue
      to expend significant resources in acquiring the personnel, capabilities and
      facilities needed not only to operate its present and future retail design
      centers, but also to establish the foundation necessary to create a national
      organization, capable of capitalizing on the significant growth anticipated
      in
      the home theater market.




**Results
      of Operations for the year ended June 30, 2007 compared to the year ended June
      30, 2006**




*Total
      Revenue.*  Total revenue includes delivered and installed
      merchandise, installation and service labor, customer service revenues, earned
      franchise license fees and franchise royalties.  Total revenue for the
      year ended June 30, 2007 increased to $6,110,464 from $4,619,142 for the year
      ended June 30, 2006, reflecting an increase of $1,491,322 or 32.3%. This
      increase is primarily the result of revenues from the third company design
      center and from the opening of new franchise design centers.






12






The
      following is illustrative for the year ended June 30:




2007
              
              2006Gross
              
              
              
              
              
              GrossSales
              
              Profit
              
              %
              
              Sales
              
              ProfitRetail
              $
              4,738,166
              $
              1,919,866
              
              40.5%
              $
              3,963,441
              $
              1,636,870
              
              41.3%Wholesale
              
              1,080,803
              
              147,147
              
              13.6%
              
              467,518
              
              67,705
              
              14.5%Franchise
              
              291,495
              
              291,495
              
              100.0%
              
              188,183
              
              188,183
              
              100.0%Total
              $
              6,110,464
              $
              2,358,508
              
              38.6%
              $
              4,619,142
              $
              1,892,758
              
              41.0%




For
      the
      year ended June 30, 2007, retail sales increased by $774,725, or 19.5%, when
      compared to the year ended June 30, 2006. Same-store sales, reflecting sales
      for
      the Company’s Delaware locations, were $3,098,169 and $3,265,453 for the years
      ended June 30, 2007 and 2006, respectively and decreased slightly by $(167,284),
      or (5.1)%. New stores accounted for a sales increase of $942,009 and principally
      reflect the inclusion of the Company’s newest store in Leesport, Pennsylvania.
      The increase in wholesale sales for the year ended June 30, 2007 of $613,285
      is
      reflective of nine franchise stores now being open as compared to only six
      open
      as of June 30, 2006 and the fact that a number of the franchise stores open
      as
      of June 30, 2006 opened in the last fiscal quarter of fiscal 2006. For the
      year
      ended June 30, 2007, retail gross margins improved slightly due to a higher
      mix
      of sales of Company private label product. Wholesale sales, principally
      comprised of sales to franchises, reflected approximately 18% of total revenue
      for the year ended June 30, 2007 as compared to only 10% of revenue for the
      year
      ended June 30, 2006, and therefore, almost twice the mix impact on the overall
      gross margin.




For
      the
      year ended June 30, 2007 the Company had total new customer orders of
      $4,230,375, compared to $4,528,175 for the year ended June 30,
      2006.  The Company’s backlog at June 30, 2007 and June 30, 2006 was
      $916,120 and $1,423,912, respectively.




The
      Company has continued to emphasize an integrated approach to home theater design
      which increasingly includes not only audio and video equipment and cutting
      edge
      technologies, but also complementary décor items including chairs, seating and
      furniture, as well as other interior design elements which taken together
      provide customers with integrated home theater design solutions.  The
      increase in customer orders is related to the opening of the Company’s third
      design center as well as increased wholesale sales from opened franchise design
      centers.




In
      the
      year ended June 30, 2007, the Company collected $120,000 in non-refundable,
      initial franchise license fees versus $326,500 collected in the year ended
      June
      30, 2006.  In the year ended June 30, 2007, the Company recognized
      $100,000 as earned revenue relating to the opening of its franchises compared
      to
      $120,000 recognized in the year ended June 30, 2006.  At June 30,
      2007, the Company had $299,000 in deferred franchise fees that will be
      recognized as earned revenue in the periods when the franchise design centers
      open.  Management expects recognized revenue to increase and cash flow
      from the sale of franchise licenses to continue in the current fiscal
      year.




The
      Company’s franchise contract provides royalty payments of approximately 4% of
      franchisee gross revenues.  In the year ended June 30, 2007, franchise
      revenue, reflecting earned franchised fees and franchise royalties, increased
      by
      $123,312 or 180.9%, when compared to the year ended June 30, 2006 which increase
      is principally due to increased royalties from open franchises.




*Cost
        of Sales and Gross Profit.*Gross profit amounts and percentages on retail
        sales for the year ended June 30, 2007 amounted to $1,919,866, and 40.5%
        compared to $1,636,870 and 41.3% for the year ended June 30,
        2006.  The retail gross margin for the year ended June 30, 2007 was
        adversely impacted by defective private-label cable inventory problems
        experienced in the last quarter. Owing to significant failure rates, the
        Company
        wrote down its private label cable inventory by approximately $12,000, or
        0.3%
        of retail sales, to retail cost of sales reflective of defective product
        received from manufacturers and was forced to purchase approximately $26,000
        of
        replacement cables. Together these costs negatively impacted the overall
        retail
        gross margin by 0.8%.  Without the effect of the defective cables, the
        Company believes that the retail gross margins would have been consistent
        with
        the prior fiscal year.  The Company believes that it can recover the
        costs of the defective cables but is not assured of such. The retail gross
        margin for the year ended June 30, 2007 was also adversely impacted by costs
        associated with the opening of the Company’s new Lutherville, Maryland design
        store and the relocation of its Wilmington design center. Certain personnel
        costs related to these two events amounting to approximately $12,000, or
        0.3% of
        retail sales, were taken as a charge to cost of sales for the year ended
        June
        30, 2007.    Wholesale gross profit amounts and percentages
        were $147,147 and 13.6% compared to $67,705 and 14.5% for the year ended
        June
        30, 2006.  Management expects gross profit percentages to remain
        consistent as operations expand and increase.




13






*Occupancy
      Expenses.*Occupancy expenses include leasing expenses for retail design
      centers and office and warehouse facilities, property taxes, utilities,
      maintenance and other related occupancy expenses.  For the year ended
      June 30, 2007, occupancy expenses were $553,920 compared to $326,159 for the
      year ended June 30, 2006.  The increase relates to the acquisition of
      the Leesport design store (formerly a franchise), the opening of a new design
      store in Lutherville, MD and the grand re-opening of the relocated Wilmington,
      DE design store.




*Selling,
      General and Administrative Expenses.*Selling, general and administrative
      expenses include the compensation of design center personnel, the franchise
      sales and support operations, advertising, marketing and other merchandising
      expenses, finance and information systems, human resources and training
      operations, related support functions and executive
      officers.  Selling, general and administrative expenses for the year
      ended June 30, 2007 were $4,703,677 compared to $3,693,829 for the year ended
      June 30, 2006.




The
      following discussion describes significant components within the Company’s
      selling, general and administrative expenses.  Personnel costs,
      excluding stock option expense, for the year ended June 30, 2007 were $1,780,294
      compared to $1,601,217 for the year ended June 30, 2006.  This 11.2%
      increase in personnel costs is primarily attributable to increased selling
      costs
      consistent with increased retail sales.  These activities include the
      continued development of the franchise sales and support operation, the cost
      of
      opening the third Company-owned design center, and other operating activities
      related to the Company’s growth strategy.




Advertising
      and promotional expenses for the year ended June 30, 2007 were $532,040 compared
      to $477,141 for the year ended June 30, 2006.  This 11.5 % increase is
      principally attributable to increased media expense for the additional
      Company-owned design stores.  These costs are expected to increase in
      the current fiscal year. These amounts include expenses for financing promotions
      of $29,096 and $5,318 for the years ended June 30, 2007 and June 30, 2006,
      respectively.




Professional
      fees amounted to $1,277,559 in the year ended June 30, 2007 compared to $825,549
      for the year ended June 30, 2006, and included investor relations services,
      which totaled $714,893 and $280,000 for the years ended June 30, 2007 and 2006,
      respectively. Professional fees include legal, audit and accounting,
      architectural, marketing, consulting, and other fees for
      services.  The significant increase in professional fee expense is
      largely attributable to an increase in non-cash charges for investment
      consulting and investor relations services.





**Liquidity**




The
      Company’s cash needs are primarily for working capital to support inventory and
      fund anticipated future net losses, and for the capital costs of expanding
      the
      number of Company-owned design centers.  Additional working capital
      will be used to further develop the Company’s ability to significantly expand
      and support franchise operations.




The
      Company’s cash position decreased to $232,583 at June 30, 2007 from $466,481 at
      June 30, 2006.  This decrease is the result of the Company’s
      additional funds provided by incurring of indebtedness offset by the funding
      of
      the Company’s cash used in operations and the capital and working capital
      requirements of new design store openings, the relocation of its Wilmington
      Delaware design center and the acquisition of its former Leesport, Pennsylvania
      franchise design store.




Working
      capital at June 30, 2007 was a deficit of $(364,415), compared to the deficit
      of
      $(299,290) at June 30, 2006 representing a decline of $(65,125) due to a decline
      in deferred sales and the net impact of the issuance of short-term debentures
      offset by increases in inventory and accounts receivable.






14






The
      primary source of financing for the year ended June 30, 2007 was derived from
      proceeds from the sale of short-term and long-term debentures.




The
      Company’s cash flow from operations since inception has been and continues to be
      negative.  The Company continues to expand its revenues by increasing
      the number of Company-owned design stores and by selling additional franchises
      and increasing its product distribution network to franchisees.




Management
      expects increased operating costs in future periods due to a commitment to
      develop retail, franchising, and distribution operations on a regional and
      national scale. To accomplish this, management expects an increase in gross
      profits from sales resulting from the expansion of Company owned design stores,
      an increase in contributions from its franchise operations, proceeds from
      additional capital contributions from shareholders, and, to the extent
      necessary, improvements through further modifications to its business
      plan.




The
      Company used $2,619,443 of cash in operating activities in the year ended June
      30, 2007, or approximately $218,000 per month.




On
      August
      23, 2006, the Company began offering for sale, at a minimum price of $2.00
      per
      Unit, 500,000 Units (each of which consisted of two shares of Company common
      stock and a warrant to purchase one share of Company common stock at an exercise
      price equal to one-half of the then applicable Unit price).  No units
      were sold under this offering and the Company withdrew the offering as it
      focused on the alternative financing sources described below.




On
      October 23, 2006, the Company entered into a Securities Purchase Agreement
      with
      two accredited investors (the “October Investors”) for the purchase of (i)
      $500,000 in non-convertible 10% debentures (the “October Debentures”) and (ii)
      warrants (the “October Warrants”) to purchase 400,000 shares of the Company’s
      common stock (the “October Financing”). The October Financing provided the
      Company with aggregate sales proceeds of $500,000. The proceeds of the October
      Financing net of transaction expenses were used for general corporate purposes.
      The October Warrants have an exercise price of $1.00 per share representing
      the
      fair value as of October 23, 2006. The Company has valued the October Warrants
      at $287,500 and was amortizing this amount as additional financing costs over
      the time of the October Debenture. The Company used the Black-Scholes model
      to
      calculate the fair value of the warrants, with the following assumptions: no
      dividend yield, 45% volatility, risk-free interest rate of 4.8% and expected
      warrant life of five years. The October Warrants are subject to a full ratchet
      price protection for their five-year life. The Company and the October Investors
      also entered into a Registration Rights Agreement pursuant to which the Company
      registered the common stock underlying the October Warrants. Each officer and
      director of the Company also entered into a lock-up agreement with the October
      Investors pursuant to which they agreed not to sell, offer to sell, contract
      to
      sell, agree to sell, hypothecate, pledge, grant any option for sale or purchase
      or otherwise dispose of Company common stock or common stock equivalents for
      90
      days. The October Financing was made in reliance on an exemption from securities
      registration afforded by the provisions of Section 4(2) of the Securities Act
      of 1933.
      The
      Company satisfied and retired the October Debentures on March 6, 2007 in
      connection with the March Financing, as more fully described below. Prior to
      their repayment, the October Debentures matured on the earlier of November
      13,
      2007 and the date that the Company received net proceeds from debt and/or equity
      financings of at least $2,000,000. The October Debentures bore interest at
      10%
      per annum. As a result of the October Debentures being retired earlier than
      their normal time, the Company also expensed the unamortized balances of
      additional financing costs associated with the October Warrants, amounting
      to
      $235,360 which is included in interest expense.





In
      November, 2006, 2006, the Company executed and delivered debentures to three
      accredited investors (the “November Investors”) in the aggregate face amount of
      $300,000 (the “November Debentures”), the proceeds of which, net of transaction
      expenses, were used for general corporate purposes. The November Debentures
      mature on November 30, 2007 and may be prepaid at any time in whole or in part
      upon payment of a fee equal to five percent (5%) of the amount of principal
      repayment. The November Debentures bear interest at 15% per annum. The November
      Debentures were sold to the November Investors in reliance on an exemption
      from
      securities registration afforded by the provisions of Section 4(2) of the
      Securities Act of 1933.






15







On
      December 22, 2006, the Company entered into a Securities Purchase Agreement
      with
      Kinzer Technology, LLC. (the “December Investor”) for the purchase of (i) a
      $700,000 non-convertible 10% debenture (the “December Debenture”) and (ii)
      warrants (the “December Warrants”) to purchase up to 560,000 shares of the
      Company’s common stock (the “December Financing”).  The December
      Financing provided the Company with aggregate proceeds of $700,000. The proceeds
      of the December Financing, net of transaction expenses, were used for general
      corporate purposes. The December Warrants have an exercise price of $1.10 per
      share, representing the fair value as of December 22, 2006. The Company has
      valued the December Warrants at $289,900 and will amortize this amount as
      additional financing costs over the time of the December Debenture. The Company
      used the Black-Scholes model to calculate the fair value of the warrants, with
      the following assumptions: no dividend yield, 45% volatility, risk-free interest
      rate of 4.6% and expected warrant life of five years. The December Warrants
      are
      subject to a full ratchet price protection for the five-year life of the
      Warrants. The December Financing was made in reliance on an exemption from
      securities registration afforded by the provisions of Section 4(2) of the
      Securities Act of 1933. In connection with the March Financing as more fully
      described below, the Company satisfied and retired the December Debenture.
      Prior
      to its repayment, the December Debenture matured on the earlier of November
      15,
      2007 and the date that the Company received net proceeds from debt and/or equity
      financings of at least $1,500,000. The December Debenture bore interest at
      10%
      per annum. Additionally, because the December Debenture was modified, as more
      fully described below, the Company also modified the amortization of the
      additional financing costs associated with the December Warrants.





On
      March
      6, 2007, the Company entered into a Securities Purchase Agreement with Kinzer
      Technology, LLC (the “March Investor”), modifying its existing financing and
      receiving $2,000,000 in net proceeds from the transaction which was comprised
      of
      (i) the cancellation of the December Debenture of $700,000, (ii) the issuance
      of
      a new $2,700,000 non-convertible 10% debenture (the “March Debenture”) and (iii)
      issuance of additional warrants (the “March Warrants”) to purchase up to 400,000
      shares of the Company’s common stock (the “March Financing”). The proceeds of
      the March Financing were used to repay the October Debentures and the December
      Debenture, each together with accrued and payable interest, and the remainder,
      net of transaction expenses, is being used for general corporate purposes.
      The
      March Debenture matures on March 6, 2010. The March Debenture bears interest
      at
      10% per annum. The March Warrants have an exercise price of $1.10 per share,
      representing the fair value as of March 6, 2007. The Company has valued the
      March Warrants at $153,000 and will amortize this amount and the remaining
      amount associated with the December Warrants over the time of the March
      Debenture. For the three months ended March 31, 2007, the Company expensed,
      as
      an additional interest expense, $50,380 for the December Warrants (January
      1
      through March 6, 2007) and $9,120 on behalf of the March Warrants (March 7
      through March 31, 2007). As of March 31, 2007 an aggregate of $375,000 of
      deferred financing costs remain to be amortized over the time of the March
      Debenture. The Company used the Black-Scholes model to calculate the fair value
      of the warrants, with the following assumptions: no dividend yield, 45%
      volatility, risk-free interest rate of 4.5% and expected warrant life of five
      years. The March Warrants are subject to a full ratchet price protection for
      the
      five-year life of the Warrants. The March Financing was made in reliance on
      an
      exemption from securities registration afforded by the provisions of Section
      4(2) of the Securities Act of 1933.





In
      July
      and August, 2007, the Company executed and delivered promissory notes to three
      accredited investors ( the “Promissory Note Investors”) in the aggregate face
      amount of $225,000 (the “Promissory Notes”), and warrants (the “Promissory
      Warrants”) to purchase up to 112,500****shares of the
      Company’s common stock (the “Promissory Note Financing”). The proceeds of the
      Promissory Note Financing were used for general corporate purposes. The
      Promissory Notes bear interest at 14% per annum, mature one year from the date
      of issue and may be prepaid at any time without penalty.  The
      Promissory Warrants have an exercise price of $1.00 per share and are subject
      to
      full ratchet price protection for the five-year life of the Promissory
      Warrants.  Repayment of the Promissory Note is guaranteed by Scott R.
      Oglum, Chief Executive Officer of the Company, and the Guaranty is secured
      by a
      pledge by Mr. Oglum of up to 3,618,275 shares of the Company’s common stock
      which he owns representing his entire holdings.








16





At
      June
      30, 2007 and 2006 the Company did not have a credit facility or line-of-credit
      arrangement.  The Company has no compensating balance
      requirements.  The Company has a borrowing covenant in connection with
      the March Debenture, as amended (see Item I, Description of Business), whereby
      the Company’s borrowing ability is proscribed to an aggregate of $2,000,000 in
      additional unsecured indebtedness that may be incurred subsequent to March
      6,
      2007.  Should the Company exceed this limitation, the March Debenture
      would become due and payable in its entirety.  Pursuant to this
      covenant, the Company has $1,742,808 of remaining borrowing
      capacity.  Additionally and also pursuant to the March Debenture,
      should the Company raise in excess of $6,000,000 in equity financing, the March
      Debenture would become due and payable in its entirety.




In
      October, 2007, the Company and Kinzer Technology, LLC (“Kinzer”) amended the
      March Debenture,  Under the original terms of the March Debenture, the
      Company was prohibited from incurring any additional unsecured indebtedness
      for
      borrowed money after March 6, 2007 in excess of $1.0 million.  The
      amendment increases the amount of such indebtedness which may be incurred after
      March 6, 2007 to $2.0 million.  The March Debenture also requires
      quarter annual interest payments on each April 1, July 1, October 1, and January
      1.  The amendment permits the Company to defer the interest payments
      otherwise due on October 1, 2007 and January 1, 2008 until July 1,
      2008.





The
      Company does not have any committed sources of additional financing, and there
      can be no assurance that additional funding, as necessary, will be available
      on
      acceptable terms, if at all.  If adequate funds are not available, the
      Company may be required to further delay, scale back, or eliminate certain
      aspects of its business plan or current operations or attempt to obtain funds
      through arrangements with collaborative partners or others that may require
      the
      Company to surrender rights to Company methods, technologies, product
      development projects, certain products or existing
      markets.  Continuing losses together with the inability to secure
      adequate additional funds could cause the Company to cease
      operations.  See Item 1.  Description of Business -- Risk
      Factors.




Future
      capital requirements and the adequacy of available funds will depend on numerous
      factors and risks, including the successful expansion and increase in the number
      of Company-owned retail design centers, the sale of Company franchises on a
      national level, the successful development of internally branded products for
      distribution to franchisees, and the results of risks associated with the
      ability to establish meaningful consumer market identification, branding and
      penetration, the ability to adapt to rapid technological changes, and the
      ability to successfully compete against intense competitive pressures from
      potentially larger, better capitalized future competitors when such enter the
      Company’s market segment.  Further, the Company’s results of
      operations and resulting capital requirements will be affected by a wide variety
      of additional factors and risks including, but perhaps not limited to, general
      economic conditions, decreases in average selling prices over the life of any
      particular product, new product and technology introductions, the ability to
      acquire sufficient quantities of a given product in a timely manner, the ability
      to develop and maintain critical strategic supply and co-marketing relationships
      and the ability to safeguard intellectual property.




In
      the
      event the Company’s plans change or its assumptions change or prove to be
      inaccurate or the funds available prove to be insufficient to fund operations
      at
      the planned level (due to further unanticipated expenses, delays, problems
      or
      otherwise), the Company could be required to obtain additional funds through
      equity or debt financing, through strategic alliances with corporate partners
      and others, or through other sources in order to successfully continue to
      implement its business strategies.  There is no assurance any such
      additional funds could be obtained by the Company.




The
      Company has plans to increase the number of employees and/or independent
      contractors the Company employs at this time contingent upon its ability to
      have
      sufficient funds to continue to implement its business
      strategies.  The Company anticipates significant additional capital
      expenditures during the coming year in connection with the costs of increasing
      the number of company-owned design centers, the anticipated cost of expanding
      and replicating the multi-purpose facility, and the costs of implementing and
      possibly manufacturing Company branded products for distribution to franchisees
      and directly to retail customers.






17




The
      Company’s current policy is to invest its cash reserves in bank deposits,
      certificates of deposit, commercial paper, corporate notes, U.S. government
      instruments or other investment-grade instruments.




**Impact
      of Inflation**





Management
      does not believe that inflation has had a material adverse effect on the
      Company’s results of operations.  However, the Company cannot predict
      accurately the effect of inflation on future operating results.




**Seasonality**





The
      Company’s business is subject to seasonal variations.  Historically,
      the Company has realized a significant portion of its total revenue and gross
      profits for the year during the second and third fiscal quarters.  Due
      to the importance of this extended holiday shopping season, any factors
      negatively impacting this extended holiday selling season could have an adverse
      effect on the Company’s revenues and its ability to generate gross
      profit.  The Company’s quarterly results of operations may also
      fluctuate significantly due to a number of factors, including the timing of
      new
      store openings, both Company-owned and franchise stores.  In addition,
      operating results may be negatively affected by increases in merchandise costs,
      price changes in response to competitive factors and unfavorable local, regional
      or national economic developments that result in reduced consumer
      spending.






18






**Off-Balance
      Sheet Arrangements**





There
      are
      no off-balance sheet arrangements to which the Company is a party




**Critical
      Accounting Policies**







Presented
      below is a discussion about the application of critical accounting policies
      that
      require the Company to make assumptions about matters that are uncertain at
      the
      time the accounting estimate is made, and where different estimates that the
      Company could reasonably have used in the current period, or changes in the
      accounting estimate that are reasonably likely to occur from period to period,
      would have a material impact on the presentation of the Company’s financial
      condition, changes in financial condition or results of
      operations.  Management has identified the following accounting
      estimates as critical for the Company and will discuss them separately below:
      allowance for bad debts and doubtful accounts, inventory obsolescence provision,
      and income tax accruals.




**Allowance
      for Bad and Doubtful Accounts**





The
      majority of the Company’s accounts receivable are due from retail customers and
      franchisees.  The Company’s net accounts receivable balance at June
      30, 2007 of $292,060 represents 10% of total assets, and the reserve of $65,782
      is 18% of gross accounts receivable. Net accounts receivable for the year ended
      June 30, 2006 amounted to $139,893 or approximately 8% of Company
      assets.  The reserve for doubtful accounts is based on a review of the
      likelihood of collection of specific accounts and represents an increase of
      $40,782 over the reserve of $25,000 as of June 30, 2006.




**Inventory
      Obsolescence**





Inventory
      represents a significant portion of the Company’s assets (27 % at June 30,
      2007).  The Company’s profitability and viability are highly dependent
      on the demand for its products.  An imbalance between purchasing
      levels and sales could cause rapid and material obsolescence, and loss of
      competitive price advantage and market share.  The Company believes
      that its product mix has provided sufficient diversification to mitigate this
      risk.  At the end of each reporting period, the Company reduces the
      value of its inventory by an estimate of what the Company believes to be
      obsolete, and the Company recognizes an expense in this amount, which is
      included in cost of sales in its statement of operations.





In
      the
      Company’s industry, merchandise models change periodically. When they do, the
      Company reclassifies the old model into a discontinued category. The Company
      also reclassifies merchandise into the discontinued category when the Company
      decides it no longer wants to sell the item. At the end of each reporting
      period, the Company reviews the value of discontinued merchandise and reduces
      its value in cases where the net realizable value is estimated to be less than
      the cost of the merchandise. Generally, the Company attempts to sell these
      discontinued models at standard retail prices. The Company also similarly
      evaluates the obsolescence of its display inventories and service parts
      inventory.





For
      the
      years ended June 30, 2007 and June 30, 2006, the Company has not disposed of
      any
      discontinued product at prices below its original cost.






19






**Income
      Taxes**





The
      Company’s estimate of deferred tax assets is affected by the assessment of its
      ability to generate sufficient taxable income to be able to realize the deferred
      tax asset.  Because there can be no assurance that the Company will be
      able successfully to implement its business strategies or that profitability
      will ever be achieved, the deferred tax asset, net of reserve, has been valued
      at $0 at June 30, 2007 and 2006.  The Company expects that its future
      operating results will fluctuate significantly from year to year and will be
      affected by factors beyond its control.








20




**ITEM
      7.                      FINANCIAL
      STATEMENTS**









**INDEX
      TO FINANCIAL STATEMENTS**




**PAGE**REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              22BALANCE
                  SHEETS
              23STATEMENTS
                  OF OPERATIONS
              24STATEMENTS
                  OF STOCKHOLDERS’ EQUITY (DEFICIT)
              25STATEMENTS
                  OF CASH FLOW
              26NOTES
                  TO FINANCIAL STATEMENTS
              27-41























21







REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
        the
        Board of Directors
 Theater
        Xtreme Entertainment Group, Inc.
 Newark,
        Delaware
 
 
 We
        have
        audited the balance sheets of Theater Xtreme Entertainment Group, Inc. as
        of
        June 30, 2007 and 2006, and the related statements of operations, stockholders'
        equity/(deficit) and cash flows for the years then ended. These financial
        statements are the responsibility of the Company's management.  Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States).  Those standards require
        that we plan and perform the audit to obtain reasonable assurance about whether
        the financial statements are free of material misstatement.  An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements. An audit also includes assessing
        the
        accounting principles used and significant estimates made by management,
        as well
        as evaluating the overall financial statement presentation.  We
        believe that our audits provide a reasonable basis for our opinion.
  In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Theater Xtreme Entertainment
        Group,
        Inc. as of June 30, 2007 and 2006, and the results of its operations and
        cash
        flows for the years then ended, in conformity with accounting principles
        generally accepted in the United States.
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As disclosed in Note 2 to the financial
        statements, the Company incurred significant losses from operations, has
        negative working capital and an accumulated deficit which raises substantial
        doubt about its ability to continue as a going concern, Management’s plan in
        regard to these matters is also described in Note 2. The financial statements
        do
        not include any adjustments relating to the recoverability and classification
        of
        asset carrying amounts or the amount and classification of liabilities that
        might result should the Company be unable to continue as a going
        concern.
 
 
 
 
 /s/
        MORISON COGEN LLP
 
 Bala
        Cynwyd, Pennsylvania
 September
        26, 2007,
 except
        for Note 2 and
 Note
        10
        for which the
 date
        is
 October
        12, 2007.





22




THEATER
      XTREME ENTERTAINMENT GROUP, INC.


BALANCE
      SHEETS


JUNE
      30,
      2007 AND 2006




2007
              
              
              2006**Assets**Current
                  Assets:Cash
                  and equivalents
              
              $
              232,583
              
              
              $
              466,481Accounts
                  receivable, net of allowance of $65,782
                  and $25,000
              
              
              292,060
              
              
              
              139,893Inventory
              
              
              810,504
              
              
              
              629,056Prepaid
                  expenses
              
              
              164,390
              
              
              
              132,679Other
                  current assets
              
              
              219,045
              
              
              
              15,441Total
                  current assets
              
              
              1,718,582
              
              
              
              1,383,550Property
                  and Equipment, net
              
              
              933,394
              
              
              
              357,434Other
                  Assets:Deferred
                  financing fees
              
              
              342,990
              
              
              
              -Deposits
              
              
              48,954
              
              
              
              20,720Total
                assets
              
              $
              3,043,920
              
              
              $
              1,761,704**Liabilities
                  and Stockholders' Equity (Deficit)**Current
                  Liabilities:Accounts
                  payable and accrued expenses
              
              $
              801,978
              
              
              $
              646,290Payroll
                  tax liabilities
              
              
              149,221
              
              
              
              58,715Current
                  portion of notes payable
              
              
              37,047
              
              
              
              19,129Non-convertible
                  debentures
              
              
              300,000
              
              
              
              -Deferred
                  franchise fees
              
              
              299,000
              
              
              
              279,000Deferred
                  sales
              
              
              495,751
              
              
              
              679,706Total
                  current liabilities
              
              
              2,082,997
              
              
              
              1,682,840Long-term
                  Liabilities:Non-convertible
                  debentures
              
              
              2,700,000
              
              
              
              -Notes
                  payable, net of current portion
              
              
              107,224
              
              
              
              47,163Total
                  long-term liabilities
              
              
              2,807,224
              
              
              
              47,163Total
                  liabilities
              
              
              4,890,221
              
              
              
              1,730,003Stockholders'
                  Equity (Deficit):Preferred
                  stock, no par value, 5 Million shares authorized,no
                  shares issued and outstanding
              
              
              -
              
              
              
              -Common
                  stock, $.001 par, 50 million shares authorized;20,087,425
                  and 19,122,342 issued and outstanding
              
              
              20,087
              
              
              
              19,122Additional
                  paid in capital
              
              
              5,541,029
              
              
              
              3,973,742Accumulated
                  deficit
              
              
              (7,407,417
              )
              
              
              (3,961,163
              )Total
                  stockholders' equity (deficit)
              
              
              (1,846,301
              )
              
              
              31,701Total
                  liabilities and stockholders' equity (deficit)
              
              $
              3,043,920
              
              
              $
              1,761,704




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






23








THEATER
      XTREME ENTERTAINMENT GROUP, INC.


STATEMENTS
      OF OPERATIONS


YEARS
      ENDED JUNE 30, 2007 AND 2006





2007
              
              
              2006Revenues
              
              $
              6,110,464
              
              
              $
              4,619,142Cost
                  of revenues
              
              
              3,751,956
              
              
              
              2,726,383Occupancy
                  expenses
              
              
              553,920
              
              
              
              326,159Selling,
                  general and administrative expenses
              
              
              4,703,677
              
              
              
              3,693,8299,009,553
              
              
              
              6,746,371(Loss)
                  from operations
              
              
              (2,899,089
              )
              
              
              (2,127,229
              )Loss
                  on disposal of assets
              
              
              -
              
              
              
              (2,173
              )Interest
                  income
              
              
              4,255
              
              
              
              1,797Interest
                  expense
              
              
              (551,420
              )
              
              
              (5,125
              )Net
                  (loss)
              
              $
              (3,446,254
              )
              
              $
              (2,132,730
              )Basic
                  and diluted:Loss
                  per common share
              
              $
              (0.17
              )
              
              $
              (0.12
              )Weighted
                  average shares
              
              
              19,759,200
              
              
              
              17,671,587





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






24




THEATER
      XTREME ENTERTAINMENT GROUP, INC.


STATEMENTS
      OF STOCKHOLDERS’ EQUITY (DEFICIT)


YEARS
      ENDED JUNE 30, 2007 AND 2006





Number
                ofShares
                -
            
            
            
            
            
            Additional
            
            
            
            
            
            Total($
                US except shares)
            
            Common
            
            
            Common
            
            
            Paid-in
            
            
            Accumulated
            
            
            Stockholders'Stock
            
            
            Stock
            
            
            Capital
            
            
            (Deficit)
            
            
            Equity
                (Deficit)Balance
                at June 30, 2005
            
            
            16,291,814
            
            
            $
            16,292
            
            
            $
            1,843,157
            
            
            $
            (1,828,433
            )
            
            $
            31,016Issuance
                of common stock, private placements
            
            
            2,500,528
            
            
            
            2,500
            
            
            
            1,470,191
            
            
            
            -
            
            
            
            1,472,691Redemption
                of founder stock
            
            
            (800,000
            )
            
            
            (800
            )
            
            
            800
            
            
            
            -
            
            
            
            -Issuance
                of common stock for services
            
            
            1,130,000
            
            
            
            1,130
            
            
            
            602,370
            
            
            
            -
            
            
            
            603,500Vested
                employee stock options
            
            
            -
            
            
            
            -
            
            
            
            46,073
            
            
            
            -
            
            
            
            46,073Vested
                non-employee stock options
            
            
            -
            
            
            
            -
            
            
            
            11,151
            
            
            
            -
            
            
            
            11,151Net
                loss for the year ended June 30, 2006
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,132,730
            )
            
            
            (2,132,730
            )Balance
                at June 30, 2006
            
            
            19,122,342
            
            
            $
            19,122
            
            
            $
            3,973,742
            
            
            $
            (3,961,163
            )
            
            $
            31,701Issuance
                of common stock, purchase of assets
            
            
            40,000
            
            
            
            40
            
            
            
            39,960
            
            
            
            -
            
            
            
            40,000Issuance
                of common stock, services rendered,net
                of transfer agent and legal fees
            
            
            725,000
            
            
            
            725
            
            
            
            555,525
            
            
            
            -
            
            
            
            556,250Vested
                employee stock options
            
            
            -
            
            
            
            -
            
            
            
            129,278
            
            
            
            -
            
            
            
            129,278Vested
                non-employee stock options
            
            
            -
            
            
            
            -
            
            
            
            12,222
            
            
            
            -
            
            
            
            12,222Issuance
                of common stock, exercise of employeeoptions,
                net of transfer agent and legal fees
            
            
            200,083
            
            
            
            200
            
            
            
            69,602
            
            
            
            -
            
            
            
            69,802Issuance
                of warrants, notes payable
            
            
            -
            
            
            
            -
            
            
            
            730,400
            
            
            
            -
            
            
            
            730,400Issuance
                of warrants, services rendered
            
            
            -
            
            
            
            -
            
            
            
            30,300
            
            
            
            -
            
            
            
            30,300Net
                loss for the year endedJune
                30, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,446,254
            )
            
            
            (3,446,254
            )Balance
                at June 30, 2007
            
            
            20,087,425
            
            
            $
            20,087
            
            
            $
            5,541,029
            
            
            $
            (7,407,417
            )
            
            $
            (1,846,301
            )




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






25


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


STATEMENTS
      OF CASH FLOWS


YEARS
      ENDED JUNE 30, 2007 AND 2006


2007
              
              
              2006**Cash
                  flows from operating activities:**Net
                  Loss
              
              $
              (3,446,254
              )
              
              $
              (2,132,730
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Loss
                  on disposal of fixed assets
              
              ****
              **-**
              
              
              
              2,173Depreciation
              
              
              198,042
              
              
              
              98,948Amortization
                  of prepaid consulting services
              
              
              539,917
              
              
              
              603,500Issuance
                  of warrants for services
              
              
              30,300
              
              
              
              -Increase
                  in allowance for doubtful accounts
              
              
              40,782
              
              
              
              20,149Employee
                  stock option vesting for compensation
              
              
              129,278
              
              
              
              46,073Non-employee
                  stock option vesting for services
              
              
              12,222
              
              
              
              11,151Amortization
                  of deferred charges
              
              
              387,410
              
              
              
              -(Increase) decrease in assetsAccounts receivable
              
              
              (192,949
              )
              
              
              (137,245
              )Inventory
              
              
              (181,448
              )
              
              
              (168,945
              )Prepaid expenses
              
              
              (15,378
              )
              
              
              (9,235
              )Other assets
              
              
              (203,604
              )
              
              
              (15,441
              )Increase (decrease) in liabilitiesAccounts
                  payable and accrued expenses
              
              
              155,688
              
              
              
              323,158Payroll
                  liabilities
              
              
              90,506
              
              
              
              26,946Due to officer
              
              
              -
              
              
              
              (243
              )Deferred
                  franchise fees
              
              
              20,000
              
              
              
              206,500Deferred sales
              
              
              (183,955
              )
              
              
              183,344Net
                  cash provided by (or used in) operating activities
              
              
              (2,619,443
              )
              
              
              (941,897
              )**Cash
                  flows from investing activities:**Deposits
                  on stores and corporate facility
              
              
              (28,234
              )
              
              
              -Purchase
                  of property and equipment
              
              
              (491,202
              )
              
              
              (160,325
              )Net
                  cash used in investing activities
              
              
              (519,436
              )
              
              
              (160,325
              )**Cash
                  flows from financing activities:**Repayment
                  of notes payable
              
              
              (164,821
              )
              
              
              (16,862
              )Proceeds
                  from short-term debentures
              
              
              1,500,000
              
              
              
              -Repayment
                  of short-term debentures
              
              
              (1,200,000
              )
              
              
              -Proceeds
                  from long-term debentures
              
              
              2,700,000
              
              
              
              -Proceeds
                  from issuance of common stock
              
              
              69,802
              
              
              
              1,472,691Net
                  cash provided by financing activities
              
              
              2,904,981
              
              
              
              1,455,829Net
                  increase (decrease) in cash
              
              
              (233,898
              )
              
              
              353,607Cash
                  and equivalents, beginning of period
              
              
              466,481
              
              
              
              112,874Cash
                  and equivalents, end of period
              
              $
              232,583
              
              
              $
              466,481**Supplemental
                  disclosure:**Cash
                  paid during the period for interest
              
              $
              96,693
              
              
              $
              5,125**Supplemental
                  disclosure of non-cash****investing
                  and financing activites:**Liabilities
                  assumed as part of acquisition of property
              
              $
              2,598
              
              
              $
              -Acquisition
                  of property and equipmentby
                  issuance of notes payable
              
              $
              242,800
              
              
              $
              36,530Acquisition
                  of property and equipmentby
                  issuance of common stock
              
              $
              40,000
              
              
              $
              -Prepaid
                  consulting servicesby
                  issuance of common stock
              
              $
              556,250
              
              
              $
              -Deferred
                  Financing chargesby
                  issuance of warrants
              
              $
              730,400
              
              
              $
              -Consulting
                  services paidby
                  issuance of warrants
              
              $
              30,300
              
              
              $
              -




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


26






THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006





Note
      1:  Nature of Operations and Significant Accounting
      Policies





*Nature
      of Operations.*Theater Xtreme Entertainment Group, Inc. (the
“Company”), a Florida corporation, is a retail store and franchise marketing
      company engaged in retail sales and distribution through the operation of
      Company-owned home cinema design stores, the sale of franchise licenses and
      wholesale product distribution to franchisees.The
      Company opened its first Company retail store, or design store on September
      1,
      2003 in Newark, Delaware.   In August 2004 the Company opened a
      second Company owned design store in Wilmington, Delaware.  A third
      Company owned design store opened in Bel Air, Maryland in September
      2005.  In July, 2006, the Company purchased the assets and assumed the
      leasehold of its franchisee located in Leesport, Pennsylvania. In March, 2007,
      the Company relocated its Wilmington, Delaware design store to an improved
      location in Wilmington, Delaware.  The Company sold eighteen
      franchises through June 30, 2006 and an additional four through June 30, 2007
      bringing the total number of franchises sold through June 30, 2007 to
      twenty-two. The first franchise design center opened in May, 2005 in East
      Longmeadow, Massachusetts.  During the past fiscal year a net of an
      additional three franchised stores opened – four new franchises opened their
      doors and the Company purchased the assets of one of its older franchises,
      in
      Leesport, Pennsylvania, converting it to a Company-owned design store. The
      Company expects to continue to offer franchise licenses nationwide.





*Merger.*On
      February 11, 2005 the Company acquired BF Acquisition Group II, Inc., a Florida
      corporation. Under the terms of the merger agreement, each stockholder of
      Theater Xtreme, Inc. received 4.60 shares of voting common stock of BF
      Acquisition Group II, Inc. for each share of Theater Xtreme, Inc. common stock
      held by such stockholder, totaling 9,775,000 shares.  The
      stockholders’ equity at June 30, 2004 has been retroactively restated for the
      equivalent number of shares received in the reverse
      acquisition.  Following the merger, the Company changed its name to
      Theater Xtreme Entertainment Group, Inc.  Under accounting principles
      generally accepted in the United States, the share exchange is considered to
      be
      a capital transaction in substance, rather than a business
      combination.  That is, the share exchange is equivalent to the
      issuance of stock by Theater Xtreme Entertainment Group, Inc. for the net
      monetary assets of BF Acquisition Group II, Inc., accompanied by a
      recapitalization, and is accounted for as a change in capital
      structure.  Accordingly, the accounting for the share exchange will be
      identical to that resulting from a reverse acquisition, except no goodwill
      will
      be recorded.  Under reverse takeover accounting, the post reverse
      acquisition comparative historical financial statements of the legal acquirer,
      BF Acquisition Group II, Inc., are those of the legal acquiree which are
      considered to be the accounting acquirer, Theater Xtreme Entertainment Group,
      Inc.





*Industry
      Risks.* The Company participates in a highly volatile industry that is
      characterized by rapid technological change, intense competitive pressure,
      and
      cyclical market patterns. The Company’s results of operations will be affected
      by a wide variety of factors, including general economic conditions, decreases
      in average selling prices over the life of any particular product, the timing
      of
      new product introductions (by the Company, its competitors, and others), the
      ability to acquire sufficient quantities of a given product in a timely manner,
      the timely implementation of new technologies, the ability to safeguard
      intellectual property from competitors, and the effect of new technologies
      resulting in rapid escalation of demand for some products in the face of equally
      steep decline in demand for others. Based on the factors noted herein, the
      Company may experience substantial period-to-period fluctuations in future
      operating results.





*Comprehensive
      Income.*The Company follows the Statement of Financial
      Accounting Standard (“SFAS”) No. 130, “Reporting Comprehensive
      Income.”  Comprehensive income is a more inclusive financial reporting
      methodology that includes disclosure of certain financial information that
      historically has not been recognized in the calculation of net
      income.  Since the Company has no items of other comprehensive income,
      comprehensive income (loss) is equal to net income (loss).







27





THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006














Note
      1:  Nature of Operations and Significant Accounting Policies
      (Continued)





*Fair
      Value of Financial Instruments.*The Company’s financial
      statements consist of cash and cash equivalents, accounts receivable, payables,
      accrued expenses and deposits.  The carrying values of these items
      approximate fair value because of their short maturities.  The
      carrying value of notes payable also approximate fair value because the interest
      rates of these notes approximates current market interest rates.





*Use
      of Estimates.*The preparation of financial statements in conformity with
      generally accepted accounting principles requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period.  Actual results could differ from these
      estimates.





*Cash
      Equivalents.*The Company considers all short-term securities
      purchased with a maturity of three months or less to be cash
      equivalents.





*Concentration
      of Credit Risk.*Certain financial instruments potentially
      subject the Company to a concentration of credit risk. These financial
      instruments consist primarily of cash and trade accounts receivable. The Company
      maintains its cash in bank deposit accounts which, at times, may exceed
      federally insured limits. Accounts are guaranteed by the Federal Deposit
      Insurance Corporation (FDIC) up to $100,000. At June 30, 2007 the Company had
      approximately $37,189 in excess of FDIC insured limits. The Company has not
      experienced any losses in such accounts. Concentration of credit risk with
      respect to accounts receivable are limited due to the Company’s short payment
      terms and restrictive customer credit limits.





*Accounts
      Receivable.*  The Company generally seeks full payment for its
      retail products and services prior to delivery and installation and does not
      normally sell its products and services to retail customers on an open credit
      basis.  From time to time, however, certain exceptions or
      accommodations are made for creditworthy retail customers. For wholesale sales
      to franchisees, the Company does, from time to time, extend limited credit
      terms
      to creditworthy franchisees.  Management closely monitors outstanding
      accounts receivable and charges off to expense any balances that are determined
      to be uncollectible or establishes an allowance for doubtful accounts. As of
      June 30, 2007 and 2006, the allowances for doubtful accounts were $65,782 and
      $25,000 respectively. Bad debt expense was $50,000 and $20,719 for the years
      ended June 30, 2007 and 2006, respectively. For the year ended June 30, 2007,
      the Company wrote off $9,218 to its bad debt reserve representing amounts it
      deemed uncollectible.




*Inventory.*The
      Company’s inventory is stated at the lower of cost (first-in, first-out) or
      market (net realizable value), and consists of the following at June
      30:




2007
              
              
              2006Equipment
                  and furniture products
              
              $
              388,498
              
              
              $
              316,187Cables
                  and supplies
              
              
              48,063
              
              
              
              16,861Retail
                  displays
              
              
              373,943
              
              
              
              266,694Product
                  in transit
              
              
              -
              
              
              
              29,314$
              810,504
              
              
              $
              629,056







28





THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006








Note
      1:  Nature of Operations and Significant Accounting Policies
      (Continued)





*Depreciation
      and Fixed Assets.*The cost of property and equipment is
      depreciated over the estimated useful lives of the
      assets*.*Leasehold improvements are amortized over the lesser
      of the length of the related leases or the estimated useful lives of the
      assets.  Depreciation is computed using the straight-line
      method.  The estimated useful lives are as follows:




Computer
                  equipment
              3
                  yearsOffice
                  equipment
              5
                  yearsOffice
                  furniture
              7
                  yearsVehicles
              5
                  yearsLeasehold
                  improvements
              3
                  to 7 years





*Long-lived
      Assets.*The Company follows SFAS No. 144 “Accounting for the
      Impairment or Disposal of Long-Lived Assets.”  Long-lived assets to be
      held and used are reviewed for impairment whenever events or changes in
      circumstances indicate that the related carrying amount may not be recoverable.
      When required, impairment losses on assets to be held and used are recognized
      based on the excess of the asset’s carrying amount.  Fair value of the
      asset and long-lived assets to be disposed of are reported at the lower of
      carrying amount or fair value less cost to sell. The Company is not aware of
      any
      events or circumstances that indicate the existence of an impairment that would
      be material to the Company’s annual financial statements.






29







THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006








Note
      1:  Nature of Operations and Significant Accounting Policies
      (Continued)





*Revenue
      Recognition.*Retail sales include all sales from Company-owned
      design centers.  The following is a summary of earned revenues at June
      30:




2007
              
              
              2006Retail
                  sales
              
              $
              4,738,166
              
              
              $
              3,963,441Wholesale
                  sales
              
              
              1,080,803
              
              
              
              467,518Franchise
                  licenses and royalties
              
              
              291,495
              
              
              
              188,183Total
                  revenues
              
              $
              6,110,464
              
              
              $
              4,619,142







Retail
      sales represent the sale and installation of home-theater
      equipment.  In accordance with the SEC’s Staff Accounting Bulletin No.
      104 (SAB 104) “*Revenue Recognition,”* the Company recognizes revenue
      when persuasive evidence of a customer arrangement exists or acceptance occurs,
      receipt of goods by the customer occurs, the price is fixed or determinable,
      and
      the sales revenues are considered collectible.  Revenue is recognized
      on such sales when the equipment is delivered and the installation is
      substantially completed.  Generally these events occur on the same
      date. Revenues are recognized on a completion of work or product delivered
      basis
      for larger, more complex systems where installation occurs over a period of
      time.  Larger systems are principally aggregations of a number of
      smaller, same-customer service work orders or product orders that collectively
      are characterized as complex installations whose service or product delivery
      dates can extend over a number of weeks owing to both customer installation
      time
      preferences or unavailability of product.




Customer
      deposits on orders that are not completed are shown as deferred revenue. Also
      included in deferred revenue is an amount that represents the unexpired
      (unearned) portions of paid customer extended service contracts. In addition,
      the Company has deferred revenue from the sales of franchise licenses. Such
      revenue will be recognized when the related franchise design center opens for
      business, as that is the time when the Company has substantially completed
      its
      obligations to these franchisees.





The
      following is a summary of amounts included in deferred sales as at June
      30:




2007
              
              
              2006Deferred
                  retail sales
              
              $
              468,583
              
              
              $
              656,130Unearned
                  service contract revenue
              
              
              27,168
              
              
              
              23,576Total
                  deferred retail sales
              
              $
              495,751
              
              
              $
              679,706









30





THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006





Note
      1:  Nature of Operations and Significant Accounting Policies
      (Continued)





*Loss
      Per Share.*The Company follows SFAS No. 128, "Earnings Per
      Share," resulting in the presentation of basic and diluted earnings (loss)
      per
      share.  The basic loss per share calculations include the change in
      capital structure which resulted from the merger for all periods
      presented.  For the years ended June 30, 2007 and 2006, the basic and
      diluted loss per share are the same, because the assumed conversion of the
      common stock equivalents would be antidilutive as the Company experienced net
      losses for these periods.





*Income
      Taxes*.  The Company accounts for income taxes under SFAS No. 109,
“Accounting for Income Taxes,” which requires an asset and liability approach to
      financial accounting and reporting for income taxes.  Deferred income
      tax assets and liabilities are computed annually for temporary differences
      between the financial statement and tax bases of assets and liabilities that
      will result in taxable or deductible amounts in the future based on enacted
      tax
      laws and rates applicable to the periods in which the differences are expected
      to affect taxable income.  Valuation allowances are established when
      necessary to reduce deferred tax assets to the amount expected to be
      realized.  Income tax expense is the tax payable or refundable for the
      period plus or minus the change during the period in deferred tax assets and
      liabilities.





*Inventory
      Obsolescence.*Inventory represents a significant portion of the
      Company’s assets.  The Company’s profitability and viability are
      highly dependent on the demand for its products.  An imbalance between
      purchasing levels and sales could cause rapid and material obsolescence, and
      loss of competitive price advantage and market share.  The Company
      believes that its product mix has provided sufficient diversification to
      mitigate this risk.  At the end of each reporting period, the Company
      reduces the value of its inventory by an estimate of what the Company believes
      to be obsolete, and the Company recognizes an expense in this amount, which
      is
      included in cost of sales in its statement of operations.





In
      the
      Company’s industry, merchandise models change periodically. When they do, the
      Company reclassifies the old model into a discontinued category. The Company
      also reclassifies merchandise into the discontinued category when the Company
      decides it no longer wants to sell the item. At the end of each reporting
      period, the Company reviews the value of discontinued merchandise and reduces
      its value in cases where the net realizable value is estimated to be less than
      the cost of the merchandise. Generally, the Company attempts to sell these
      discontinued models at standard retail prices. The Company also similarly
      evaluates the obsolescence of its display inventories and service parts
      inventory.





*Shipping
      and Handling Fees and Costs.*  The Company classifies shipping and
      handling fees when charged to the customer as revenue. The Company classifies
      shipping and handling costs as part of selling and administration
      expenses.  Shipping and handling costs were $69,303 and $38,438 for
      the years ended June 30, 2007 and 2006, respectively. In view of the Company’s
      treatment of shipping and handling costs as a component of selling, general
      and
      administrative cost, its gross margin may not be comparable to those of other
      companies where shipping and handling costs are included in cost of
      revenue.





*Advertising
      Costs.*Advertising and sales promotion costs are expensed as
      incurred. Advertising and promotion expense, excluding investor relations
      expenses, totaled $532,040 and $477,141 for the years ended June 30, 2007 and
      2006, respectively.





*Investor
      Relations Costs.*Investor relations services are expensed as
      incurred. Investor relations expenses, including investor relations promotional
      costs, totaled $714,893 and $280,000 for the years ended June 30, 2007 and
      2006,
      respectively.





*Store
      Opening Costs.*Store opening costs and other start-up costs are
      expensed as incurred.






31






THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006





Note
      1:  Nature of Operations and Significant Accounting Policies
      (Continued)





*Stock-Based
      Compensation.*In December 2004, the Financial Accounting
      Standards Board (“FASB”) issued Statement of Financial Accounting Standard SFAS
      No. 123 (revised 2004), *Share-Based Payment* (“SFAS No. 123(R)”). SFAS
      No. 123(R) supersedes APB Opinion No. 25, *Accounting for Stock Issued to
      Employees*, and amends SFAS No. 95, *Statement of Cash
      Flows*.  Generally, the approach in SFAS No. 123(R) is similar to
      the approach described in SFAS No. 123. However, SFAS No. 123(R) requires
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the income statement based on their fair values at the
      date
      of grant. Pro forma disclosure is no longer an alternative.





On
      January 1, 2006, the Company adopted SFAS No. 123(R) using the modified
      prospective method as permitted under SFAS No. 123(R). Under this transition
      method, beginning with the first calendar quarter of 2006, recognized
      compensation costs include compensation cost for all non-forfeited share-based
      payments granted, based on the grant-date fair value estimated in accordance
      with the provisions of SFAS No. 123(R), and without regard to vesting. In
      accordance with the modified prospective method of adoption, the Company’s
      results of operations and financial position for the year ended June 30, 2006
      have not been restated.





As
      a
      result of the adoption of SFAS No. 123(R), during the years ended June 30,
      2007
      and 2006, the Company’s net income was approximately $141,500 and $57,224 lower,
      respectively, as a result of stock-based compensation expense, including $12,222
      and $11,151, respectively, recognized on behalf of outside board
      members.





Accordingly,
      no compensation cost was recognized for its stock options issued during any
      period prior to January 1, 2006. The table below illustrates the effect of
      the
      adoption of SFAS No. 123(R) for the periods indicated.  The Company
      uses the Black-Scholes option pricing model to calculate the grant-date fair
      value of an award, with the following assumptions: no dividend yield, expected
      volatility of between 45% and 60%, risk-free interest rate of from between
      3.0%
      to 5.25% and expected option life of ten years.




Year
                  Ended
                June
                  302006Net
                  (loss) :Before
                  adoption of 123(R)))
              
              
              
              
              
              $
              (2,075,506
              )Adoption
                  of 123(R) - stock-based compensation
              
              
              
              
              
              
              (46,073
              )Adoption
                  of 123(R) - services
              
              
              
              
              
              
              (11,151
              )As
                  reported
              
              
              
              
              
              
              (2,132,730
              )Pro
                  forma changes as a result of:123(R)
                  - stock-based compensation
              
              
              
              
              
              
              (40,074
              )123(R)
                  - services
              
              
              
              
              
              
              -Pro
                  forma
              
              
              
              
              
              $
              (2,172,804
              )Net
                  loss per shareAs
                  reported
              
              
              
              
              
              $
              (0.12
              )Pro
                  forma
              
              
              
              
              $
              (0.12
              )





As
      of
      June 30, 2007, there was $332,315 of unrecognized compensation expenses and
      $36,168 of unrecognized expenses for services related to non-vested market-based
      option share awards that are expected to be recognized through the fiscal year
      ended June 30, 2011.






32




THEATER
        XTREME ENTERTAINMENT GROUP, INC.
 NOTES
        TO
        FINANCIAL STATEMENTS
 JUNE
        30,
        2007 AND 2006






Note
        1:  Nature of Operations and Significant Accounting Policies
        (Continued)
 
 *Recently
        Issued Pronouncements:*  In June 2006, the Financial Accounting
        Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), *Accounting
        for Uncertainty in Income Taxes*. FIN 48 prescribes detailed guidance for
        the financial statement recognition, measurement and disclosure of uncertain
        tax
        positions recognized in an enterprise's financial statements in accordance
        with
        FASB Statement No. 109, *Accounting for Income Taxes*. 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. FIN 48
        will be
        effective for fiscal years beginning after December 15, 2006 (the Company’s
        fiscal year 2008) and the provisions of FIN 48 will be applied to all tax
        positions under Statement No. 109 upon initial adoption. The cumulative effect
        of applying the provisions of this interpretation will be reported as an
        adjustment to the opening balance of retained earnings for that fiscal year.
        The
        Company is currently evaluating the potential impact of FIN 48 on its financial
        statements.
 
 In
        September, 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB No.
        108"). SAB No. 108 addresses the process and diversity in practice of
        quantifying financial statement misstatements resulting in the potential
        build
        up of improper amounts on the balance sheet. The Company will be required
        to
        adopt the provisions of SAB No.108 in fiscal 2008. The Company currently
        does
        not believe that the adoption of SAB No. 108 will have a material impact
        on its
        consolidated financial statements.
 
 In
        September, 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*,
        ("SFAS No. 157"). SFAS No. 157 establishes a framework for measuring fair
        value
        and expands disclosures about fair value measurements.  The changes to
        current practice resulting from the application of this statement relate
        to the
        definition of fair value, the methods used to measure fair value, and the
        expanded disclosures about fair value measurements.  The Statement is
        effective for fiscal years beginning after November 15, 2007 and interim
        periods
        within those fiscal years.  The Company does not believe that the
        adoption of the provisions of SFAS No. 157 will materially impact its financial
        position and results of operations.
 
 In
        February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
        Financial Assets and Financial Liabilities*.  This Statement
        permits entities to choose to measure many financial instruments and certain
        other items at fair value that are not currently required to be measured
        at fair
        value.  The objective is to improve financial reporting by providing
        entities with the opportunity to mitigate volatility in reported earnings
        caused
        by measuring related assets and liabilities differently without having to
        apply
        complex hedge accounting provisions.  This statement also establishes
        presentation and disclosure requirements designed to facilitate comparisons
        between entities that choose different measurement attributes for similar
        types
        of assets and liabilities.  This Statement is effective for financial
        statements issued for fiscal years beginning after November 15, 2007 and
        will
        become effective for the Company beginning with the first quarter of fiscal
        2009.  The Company has not yet determined the impact of the adoption
        of SFAS No. 159 on its financial statements and footnote
        disclosures.










33




THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006





Note
      2:  Management’s Plans





Future
      capital requirements and the adequacy of available funds will depend on numerous
      factors and risks, including, among other factors, the successful expansion
      and
      increase in the number of Company-owned retail design centers and the sale
      of
      Company franchises. Further, the Company’s results of operations and resulting
      capital requirements will be affected by a variety of additional factors and
      risks including, but not limited to, general economic conditions, decreases
      in
      average selling prices over the life of any particular product, new product
      and
      technology introductions and the ability to develop and maintain critical
      strategic supply and co-marketing relationships.





The
      Company has incurred significant losses from operations and has an
      accumulated deficit and a highly leveraged capital position that raises
      substantial doubts about the Company’s ability to continue as a going concern.
      The financial statements do not include any adjustments related to
      recoverability and classification of recorded asset amounts or the amount and
      classification of liabilities that might be necessary should the Company be
      unable to continue as a going concern. The Company expects to incur significant
      expenditures to further the development and commercialization of its products.
      To achieve this, the Company has requested and received deferral of interest
      payments due to its principal debtor through December 31, 2007, it is currently
      negotiating with its short term debenture creditors for an extension of the
      term
      of the short-term debentures for an additional year, and is diligently pursuing
      the raising of additional funds. The Company has identified a number of
      potential sources of new funding and is currently working toward a conclusion
      that would provide interim funds as well as a longer term capital raise effort.
      However, at the time of preparation of these statements no definitive
      arrangements have been made and there is no assurance that any would be
      forthcoming.







Note
      3:  Property and Equipment





Property
      and equipment consists of the following at June 30:




2007
              
              
              2006Vehicles
              
              $
              226,154
              
              
              $
              105,842Equipment
                  and computers
              
              
              117,963
              
              
              
              77,686Furniture
                  and fixtures
              
              
              4,337
              
              
              
              -Leasehold
                  improvements
              
              
              945,320
              
              
              
              336,2441,293,774
              
              
              
              519,772Accumulated
                  depreciation
              
              
              (360,380
              )
              
              
              (162,338
              )$
              933,394
              
              
              $
              357,434





Depreciation
      expense was $198,042 and $98,948 for the years ended June 30, 2007 and
      2006.




Note
      4:  Short-term Non-convertible Debentures




As
      of
      June 30, 2007, short term non-convertible debentures consist of non-convertible
      debentures payable to accredited investors, aggregating $300,000, with monthly
      payments of interest only, at a rate of 15% per annum, and principal due in
      November, 2007. At June 30, 2006 there were no short-term convertible
      debentures.







34




THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006





Note
      5:  Long-term Liabilities, Notes Payable and Non-convertible
      debentures





Long-term
      debt consists of the following at June 30:


2007
              
              
              2006Note
                  Payable to bank, in monthly installmentsof
                  $402, including interest at 7.25%,secured
                    by vehicle, maturingNovember 2008
              
              $
              6,485
              
              
              $
              10,677Note
                  Payable to bank, in monthly installmentsof
                  $349, including interest at 7.25%,secured
                    by vehicle, maturingDecember 2008
              
              
              5,934
              
              
              
              9,546Note
                  Payable to bank, in monthly installmentsof
                  $539, including interest at 7.99%secured
                    by vehicle, maturingDecember 2009
              
              
              14,618
              
              
              
              19,697Note
                  Payable to bank, in monthly installmentsof
                  $338, including interest at 5.99%secured
                    by vehicle, maturingJuly 2010
              
              
              11,671
              
              
              
              14,656Note
                  Payable to bank, in monthly installmentsof
                  $252, including interest at 5.99%secured
                    by vehicle, maturingJuly 2010
              
              
              8,501
              
              
              
              10,937Note
                  Payable to financial institution, in monthly installmentsof
                  $800, including interest at 8.9%secured
                  by vehicle, maturing May 2011
              
              
              31,631
              
              
              
              -Note
                  Payable to financial institution, in monthly installmentsof
                  $631, including interest at 8.99%secured
                  by vehicle, maturing November 2012
              
              
              32,356
              
              
              
              -Note
                  Payable to financial institution, in monthly installmentsof
                  $629, including interest at 8.99%secured
                  by vehicle, maturing December 2012
              
              
              32,654
              
              
              
              -Capitalized
                  lease with monthly payments of $34and
                  imputed interest at 8% and 10%through
                  July 2008
              
              
              421
              
              
              
              779144,271
              
              
              
              66,292Less
                  current portion
              
              
              (37,047
              )
              
              
              (19,129
              )Notes
                  Payable, net of current portion
              
              $
              107,224
              
              
              $
              47,163Non-convertible
                  debenture payable to an accredited investor,with
                  payments of interest only due at the beginning ofeach
                  calendar quarter, at a rate of 10% per annum,principal
                  due in March 2010
              
              $
              2,700,000
              
              
              $
              -







35





THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006














Note
      5:  Long-term Liabilities and Notes Payable (continued)





Future
      maturities of long-term debt as of June 30, 2007 are as follows for the year
      ended June 30:




2008
              
              $
              37,0472009
              
              
              34,7192010
              
              
              2,730,6402011
              
              
              21,3212012
              
              
              13,838thereafter
              
              
              6,706$
              2,844,271





The
      Company incurred interest costs of $551,419 and $5,125 for the years ended
      June
      30, 2007 and 2006, respectively.  For the year ended June 30, 2007
      $387,410 of the amount incurred for interest expense reflects non-cash charges
      related to amortization of the costs of warrants attached to certain
      indebtedness.




Note
      6:
      Lease Commitments





The
      Company leases its corporate offices, warehouse and retail design stores for
      various terms under long-term, non-cancelable operating lease agreements. The
      leases expire at various dates through 2012 and provide for renewal options
      ranging from none to five years. In the normal course of business, it is
      expected that these leases will be renewed or replaced by leases on other
      properties. The leases provide for increases in future minimum annual rental
      payments based on either defined increases in the Consumer Price Index, subject
      to certain minimum increases, or certain non-indexed minimum increases. Also,
      the agreements generally require the Company to pay executory costs (real estate
      taxes, insurance, and repairs or allocated common area charges).





The
      Company also has operating leases on office equipment with monthly payments
      aggregating $502.





The
      following is a schedule by year of future minimum rental payments required
      under
      the operating lease agreements for the year ended June 30:




2008
              
              $
              477,4572009
              
              
              457,9652010
              
              
              371,6122011
              
              
              281,6892012
              
              
              116,177thereafter
              
              
              -$
              1,704,900





Total
      minimum lease payments do not include executory costs, common area charges,
      or
      increases measured by consumer price or other index changes.





Rent
      expense charged to operations was $408,041 and $227,494 for the years ended
      June
      30, 2007 and 2006, respectively.







36




THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006


Note
      7:  Stockholders’ Equity (Deficit)




Common
      Stock





On
      April
      26, 2005 the Company began offering up to 2,900,000 shares of its common stock
      at a purchase price of $0.35 per share. Between July 1, 2005 and November 17,
      2005, the closing date of the April 26, 2005 offering, the Company increased
      the
      number of shares under its April 26, 2005 offering to 3,757,142 shares of its
      common stock at $0.35 per share and issued 1,447,528 shares of its common stock
      for proceeds of $487,473, net of filing fees and related attorney fees in
      connection with this offering. Shares of the Company’s common stock under the
      April 26, 2005 offering were issued in reliance upon exemptions from
      registration available under Rule 506 of Regulation D and Section 4(2) of the
      Securities Act of 1933, as amended, and were “restricted
      securities.”





Between
      January 20, 2006 and June 8, 2006 the Company issued 1,053,000 of its common
      stock at a price of $1.00 per share pursuant to a stock offering which shares
      of
      the Company’s common stock were issued in reliance upon exemptions from
      registration available under Rule 506 of Regulation D and Section 4(2) of the
      Securities Act of 1933, as amended, and were “restricted
      securities.”  Proceeds of this offering, net of costs of the offering,
      amounted to approximately $985,218.





In
      November, 2005, the Company’s founder contributed 800,000 shares of the
      Company’s common stock to the Company pursuant to a Settlement
      Agreement.





In
      November, 2005, the Company issued 810,000 shares of its common stock for
      services valued at $283,500.





In
      February, 2006, the Company issued 20,000 shares of its common stock for
      services valued at $20,000.





In
      June,
      2006, the Company issued 300,000 shares of its common stock for services valued
      at $300,000.





In
      July,
      2006, the Company issued 40,000 shares of its common stock for the purchase
      of
      the assets of its former Leesport franchise valued at $40,000.





In
      August, 2006, the Company issued 500,000 shares of its common stock for services
      valued at $425,000.





In
      April,
      2007, the Company issued 50,000 shares of its common stock for services valued
      at $42,500.





In
      May,
      2007, the Company issued 100,000 shares of its common stock for services valued
      at $49,000.





In
      June,
      2007, the Company issued 75,000 shares of its common stock for services valued
      at $39,750.





For
      the
      year ended June 30, 2007, the Company issued a total of 200,083 shares of its
      common stock pursuant to exercise of employee options.  Aggregate
      proceeds of the exercised shares, net of the costs of issuance of the shares,
      amounted to $69,802.


Warrants
 
 For
        the
        year ended June 30, 2007, the Company issued 102,500 common stock purchase
        warrants at an exercise price of $1.00 per share to one vendor for services
        rendered, valued at $30,300. For the year ended June 30, 2007, the Company
        issued 400,000 common stock purchase warrants at an exercise price of $1.00
        (valued at $287,500) and 1,030,600 common stock purchase warrants at an exercise
        price of $1.10 (valued at $463,200) in connection with warrant issued at
        fair
        value in conjunction with issuance of non-convertible debentures.  The
        company amortizes these amounts over the periods of the services rendered
        or the
        time of the indebtedness, as applicable. The Company uses the Black-Scholes
        option pricing model to calculate the grant-date fair value of an award,
        with
        the following assumptions: no dividend yield, expected volatility of between
        45%
        and 60%, risk-free interest rate of between 3.0% to 5.25% and expected warrant
        life of five years.








37




THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006








Note
      8.
      Stock Option Plan





In
      April,
      2005, stockholders holding a majority of the shares of the Company’s common
      stock approved the adoption of the Company’s 2005 Stock Option Plan (the
“Plan”). The Plan is designed to help the Company attract, motivate and retain
      high quality employees necessary to execute the Company’s business plans
      successfully. On December 21, 2005 stockholders holding a majority of the shares
      of the Company’s common stock approved an increase in the number of common
      shares allocated to the Plan to 2,000,000, from 1,400,000 shares.





Participation
      in the Plan is limited to employees and outside Directors. The exercise price
      of
      both incentive and nonqualified stock options is at least the fair market value
      of the Company’s common stock at the time of the grant. The options generally
      vest over a three to four year period and expire no later than ten years from
      the date of grant.





As
      of
      June 30, 2005, the Company had 890,000 option shares remaining to be exercised.
      Pursuant to the terms of the Plan as amended, employees and outside Directors
      were granted options to purchase shares of the Company’s common stock as
      follows: 170,900 option shares for the year ended June 30, 2007 and 850,000
      option shares for the year ended June 30, 2006..For the year ended June 30,
      2007
      and 2006 forfeited option shares totaled 150,000 and 75,100 option shares,
      respectively, During the year ended June 30, 2007, 200,083 options were
      exercised leaving a remaining exercisable balance of 1,515,717 option shares
      as
      of June 30, 2007.  No shares were exercised during the year ended June
      30, 2006. The exercise prices per share of these options range from $0.35 to
      $1.12 and vesting is either 25% or 33% each year on the anniversary of grant
      date contingent upon employment or services as a member of the Board of
      Directors.





The
      Company uses the Black-Scholes option pricing model to calculate the grant-date
      fair value of an award, with the following assumptions: no dividend yield,
      expected volatility of between 45% and 60%, risk-free interest rate of between
      3.0% to 5.25% and expected option life of ten years.





The
      following table summarizes all
      fiscal year stock option activity of the Company since June 30, 2005:




**Incentive
                  Stock Options**
              
              **Nonqualified
                  Stock Options****Weighted**
              
              
              
              **Weighted****Stock**
              
              **Average**
              
              **Stock**
              
              **Average****Options**
              
              **Exercise**
              
              **Options**
              
              **Exercise****Outstanding**
              
              **Price**
              
              **Outstanding**
              
              **Price**Balance,
                  June 30, 2005
              
              740,000
              
              $0.35
              
              150,000
              
              $0.35Granted
                  during the fiscal year
              
              850,000
              
              $0.57
              
              -
              
              xxExercised
                  during the fiscal year
              
              -
              
              xx
              
              -
              
              xxCancelled
                  / forfeited during the fiscal year
              
              (150,000)
              
              $0.37
              
              -
              
              xxBalance,
                  June 30, 2006
              
              1,440,000
              
              $0.48
              
              150,000
              
              $0.35Granted
                  during the fiscal year
              
              170,900
              
              $0.80
              
              30,000
              
              $1.12Exercised
                  during the fiscal year
              
              (200,083)
              
              $0.35
              
              -
              
              xxCancelled
                  / forfeited during the fiscal year
              
              (75,100)
              
              $0.37
              
              -
              
              xxBalance,
                  June 30, 2007
              
              1,335,717
              
              $0.54
              
              180,000
              
              $0.48








38





THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006








Note
      8.
      Stock Option Plan (continued)





At
      June
      30, 2006, there were 1,590,000 stock options outstanding under the 2005 Stock
      Option Plan. For the year ended June 30, 2007 the Company granted an aggregate
      of 170,900 stock options at an exercise prices ranging from $0.61 to $1.04
      to
      twelve employees and granted an aggregate of 30,000 stock options at an exercise
      price of $1.12 to its three outside directors.





During
      the year ended June 30, 2007, a total of 75,100 of unvested stock options were
      forfeited due to termination of employment and 200,083 vested stock options
      were
      exercised.





The
      weighted-average fair value of Incentive Stock Options (ISO’s) granted during
      the year ended June 30, 2007 was $0.80. The weighted-average fair value of
      non-qualified options granted during the year ended June 30, 2007 was
      $1.12.





The
      following table summarizes information about stock options outstanding at June
      30, 2007:





**Summary
                  of ISO Options**
              
              **Summary
                  of Nonqualified Options****Outstanding**
              
              
              
              **Exercisable**
              
              **Outstanding**
              
              
              
              **Exercisable****Number**
              
              **Weighted**
              
              **Number**
              
              **Number**
              
              **Weighted**
              
              **Number****Outstanding**
              
              **Average**
              
              **Outstanding**
              
              **Outstanding**
              
              **Average**
              
              **Outstanding****at**
              
              **Remaining**
              
              **at**
              
              **at**
              
              **Remaining**
              
              **at****Exercise**
              
              **June
                  30**
              
              **Contractual**
              
              **June
                  30**
              
              **June
                  30**
              
              **Contractual**
              
              **June
                  30****Price**
              
              **2007**
              
              **Life**
              
              **2007**
              
              **2007**
              
              **Life**
              
              **2007****$0.35**
              
              887,417
              
              8.3
                  Years
              
              118,750
              
              150,000
              
              8.1
                  Years
              
              37,500**$0.61**
              
              50,000
              
              9.9
                  Years
              
              -
              
              -
              
              xx
              
              -**$0.80**
              
              50,000
              
              9.8
                  Years
              
              -
              
              -
              
              xx
              
              -**$0.89**
              
              50,000
              
              9.8
                  Years
              
              -
              
              -
              
              xx
              
              -**$1.00**
              
              277,500
              
              9.1
                  Years
              
              63,750
              
              -
              
              xx
              
              -**$1.04**
              
              20,800
              
              9.8
                  Years
              
              -
              
              -
              
              xx
              
              -**$1.12**
              
              -
              
              xx
              
              -
              
              30,000
              
              9.8
                  Years
              
              -1,335,717
              
              
              
              182,500
              
              180,000
              
              
              
              37,500








39




THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006








Note
      9:  Income Taxes





As
      discussed in Note 1, the Company uses the asset and liability method of
      accounting for income taxes in accordance with SFAS No. 109. The effective
      tax
      rates differ from the statutory rates primarily due to the amount and timing
      of
      and criteria for the deductibility of certain expenses reflected in the
      financial statements for reporting purposes versus expenses as may be reported
      in the Company’s income tax returns. Deferred income taxes reflect the net
      effect of an operating loss carryforward. The reconciliation of the statutory
      federal rate to the Company’s historical income tax expense (benefit) is as
      follows for the years ended June 30:




2007
              
              2006Income
                  tax benefit at US federal income tax rates
              $
              1,138,000
              $
              725,000State
                  benefits at statutory rates
              
              
              286,000
              
              188,000Change
                  in valuation allowance
              
              
              (1,424,000)
              
              (913,000)Income
                  tax benefit
              
              
              $
              -
              $
              -Income
                  tax benefit consists of the following:Current
                  tax benefitFederal
              
              
              
              $
              None
              $
              NoneState
              
              
              
              
              None
              
              NoneDeferred
                  tax benefitFederal
              
              
              
              
              2,473,000
              
              1,335,000State
              
              
              
              
              522,000
              
              236,000Valuation
                  allowance
              
              
              
              (2,995,000)
              
              (1,571,000)$
              -
              $
              -The
                  components of deferred assets are as follows:Net
                  operating loss tax benefit
              
              $
              2,884,000
              $
              1,539,000Non-deductible
                  options
              
              
              
              85,000
              
              24,000Allowance
                  for bad debts
              
              
              
              26,000
              
              8,000Valuation
                  allowance
              
              
              
              (2,995,000)
              
              (1,571,000)$
              -
              $
              -





The
      valuation allowance for deferred assets as of June 30, 2007 and 2006 was
      $2,995,000 and $1,571,000, respectively. The change in the total valuation
      allowance for the years ended June 30, 2007 and 2006 was an increase of
      $1,424,000 and an increase of $913,000, respectively.  In assessing
      the realizability of deferred tax assets, management considers whether it is
      more likely than not that some portion or all of the deferred tax assets will
      not be realized.  The ultimate realization of deferred tax assets is
      dependent upon the generation of future taxable income during the periods in
      which the net operating losses and temporary differences become
      deductible.  Management considered projected future taxable income and
      tax planning strategies in making this assessment.  At June 30, 2007,
      the Company had net operating loss carry forwards for Federal and State income
      tax purposes of approximately $7,150,000, which were available to offset future
      taxable income, if any, and expire in various years through June 30,
      2028.  Based upon the limited operating history of the Company and
      losses incurred to date, management has fully reserved the deferred tax
      asset.






40






THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2007 AND 2006





Note
      10:  Subsequent Events





In
      July
      and August, 2007, the Company executed and delivered promissory notes to three
      accredited investors ( the “Promissory Note Investors”) in the aggregate face
      amount of $225,000 (the “Promissory Notes”), and warrants (the “Promissory
      Warrants”) to purchase up to 112,500****shares of the
      Company’s common stock (the “Promissory Note Financing”). The proceeds of the
      Promissory Note Financing were used for general corporate purposes. The
      Promissory Notes bear interest at 14% per annum, mature one year from the date
      of issue (July and August, 2008) and may be prepaid at any time without
      penalty.  The Promissory Warrants have an exercise price of $1.00 per
      share and are subject to full ratchet price protection for the five-year life
      of
      the Promissory Warrants.  Repayment of the Promissory Note is
      guaranteed by Scott R. Oglum, Chief Executive Officer of the Company, evidenced
      by Guaranty and Pledge Agreements the terms of which call for repayment to
      be
      secured by a pledge by Mr. Oglum of up to 3,618,275 shares of the Company’s
      common stock which he owns, representing his entire holdings.





In
      July,
      2007, the Company issued 650,000 shares of its common stock and 500,000 common
      stock purchase warrants, at a strike price of $1.00 per share, to one vendor
      for
      services rendered valued at $299,000 and $53,600, respectively. Also in July,
      2007, the Company issued 75,000 shares of its common stock for services rendered
      valued at $41,250.




In August, 2007, the Company issued 8,750 common stock
      purchase warrants to one vendor for services rendered valued at
      $600.




In
      September, 2007, the Company indemnified Mr. Oglum, in connection with the
      Guaranty and Pledge Agreements, for any and all payments made by Mr. Oglum
      to
      the holders of the Promissory Notes and for the dollar amount of any
      un-recovered proceeds pursuant to the sale of any of the Pledged Shares as
      may
      be sold pursuant to the Guaranty and Pledge Agreements





In
      October, 2007, the Company and Kinzer Technology, LLC (“Kinzer”) amended the
      March Debenture. Under the original terms of the March Debenture, the Company
      was prohibited from incurring any additional unsecured indebtedness for borrowed
      money after March 6, 2007 in excess of $1.0 million.  The amendment
      increases the amount of such indebtedness which may be incurred after March
      6,
      2007 to $2.0 million.  The March Debenture also requires quarter
      annual interest payments on each April 1, July 1, October 1, and January
      1.  The amendment permits the Company to defer the interest payments
      otherwise due on October 1, 2007 and January 1, 2008 until July 1,
      2008.








41





**ITEM
      8.   CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




None.




**ITEM
      8A. CONTROLS AND
      PROCEDURES**




The
      Company’s management, under the supervision and with the participation of the
      principal executive officer and principal financial officer, has evaluated
      the
      effectiveness of controls and procedures related to the Company’s reporting and
      disclosure obligations as of the end of the period covered by this Annual Report
      on Form 10-KSB.  Based on that evaluation, both the principal
      executive officer and principal financial officer have concluded that the
      Company’s disclosure controls and procedures are effective.




**ITEM
      8B. OTHER
      INFORMATION**




All
      information required to be disclosed in a Current Report on Form 8-K during
      the
      fourth quarter of the Company’s 2007 fiscal year has been reported.














42







**PART**  **III**




**ITEM
      9. DIRECTORS AND
      EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE
      EXCHANGE ACT**




The
      information required for this item is incorporated herein by reference to the
      Company’s definitive proxy statement expected to be dated on or before October
      22, 2007.







**ITEM
      10. EXECUTIVE
      COMPENSATION**




The
      information required for this item is incorporated herein by reference to the
      Company’s definitive proxy statement expected to be dated on or before October
      22, 2007.







**ITEM
      11. SECURITY OWNERSHIP OF
      CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**




The
      information required for this item is incorporated herein by reference to the
      Company’s definitive proxy statement expected to be dated on or before October
      22, 2007.







**ITEM
      12. CERTAIN RELATIONSHIPS
      AND RELATED TRANSACTIONS**




The
      information required for this item is incorporated herein by reference to the
      Company’s definitive proxy statement expected to be dated on or before October
      22, 2007.












43







**ITEM
      13. EXHIBITS**




3.1
              Certificate
                  of Incorporation of Theater Xtreme Entertainment Group, Inc. (incorporated
                  by reference to the Company’s Current Report on Form 10-KSB filed October
                  12, 2005)3.2
              Articles
                  of Merger of Theater Xtreme Entertainment Group, Inc. (incorporated
                  by
                  reference to the Company’s Current Report on Form 8-K filed February 17,
                  2005).3.3
              Amended
                  and Restated Bylaws of Theater Xtreme Entertainment Group, Inc.
                  (incorporated by reference to the Company’s Current Report on Form 8-K
                  filed February 17, 2005).4.1
              Specimen
                  Common Stock Certificate. (Incorporated by reference to the Company’s
                  Annual Report on form 10-KSB on October 12, 2005).10.1*
              2005
                  Stock Option Plan (incorporated by reference to the Company’s Current
                  Report on Form 8-K filed April 11, 2005).10.2*
              Form
                  of Option Agreement for 2005 Stock Option Plan.10.3
              Agreement
                  and Plan of Merger by and between Theater Xtreme, Inc., BF Acquisition
                  Group II, Inc., Scott Oglum, William R. Colucci and David M. Bovi
                  dated
                  February 11, 2005 (incorporated by reference to the Company’s Current
                  Report on Form 8-K filed February 17, 2005).31.1
              Rule
                  13a-14(a)/Rule 15d-14(a) Certification of Principal
                  Executive Officer.31.2
              Rule
                  13a-14(a)/Rule 15d-14(a) Certification of Principal
                  Financial Officer.32.1
              Certification
                  of Principal Executive Officer pursuant to
                  Section 1350 of Chapter 63 of Title 18 of the United States
                  Code.32.2
              Certification
                  of Principal Financial Officer pursuant to
                  Section 1350 of Chapter 63 of Title 18 of the United States
                  Code.








*  Compensation
      plans and
      arrangements for executives and others.









44





**ITEM
      14. PRINCIPAL ACCOUNTANT
      FEES AND SERVICES**




The
      information required for this item is incorporated herein by reference to the
      Company’s definitive proxy statement expected to be dated on or before October
      22, 2007.










45




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




THEATER
      XTREME ENTERTAINMENT GROUP, INC.







October
      15,
      2007                                                                            By:  /s/
      Scott R. Oglum


Scott
      Oglum


Chairman
      and Chief Executive
      Officer








Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.




/s/
                  Scott R. Oglum
              Chairman
                  and Chief Executive Officer
              October
                  15, 2007Scott
                  R. Oglum
              Director/s/
                  Justin L. Schakelman
              Corporate
                  Vice President
              October
                  15, 2007Justin
                  L. Schakelman
              Director
                  and Secretary/s/
                  David R. Hludzinski
              Director
              October
                  15, 2007David
                  R. Hludzinski/s/
                  W. James Ludlow
              Director
              October
                  15, 2007W.
                  James Ludlow/s/
                  H. Gregory Silber
              Director
              October
                  15, 2007H.
                  Gregory Silber






46






**EXHIBIT
      INDEX**


Exhibit
                  No.
                Description3.1
                Certificate
                    of Incorporation of Theater Xtreme Entertainment Group, Inc.
                    (incorporated
                    by reference to the Company’s Current Report on Form 10-KSB filed October
                    12, 2005)3.2
                Articles
                    of Merger of Theater Xtreme Entertainment Group, Inc. (incorporated
                    by
                    reference to the Company’s Current Report on Form 8-K filed February 17,
                    2005).3.3
                Amended
                    and Restated Bylaws of Theater Xtreme Entertainment Group, Inc.
                    (incorporated by reference to the Company’s Current Report on Form 8-K
                    filed February 17, 2005).4.1
                Specimen
                    Common Stock Certificate. (Incorporated by reference to the Company’s
                    Annual Report on form 10-KSB on October 12, 2005).10.1*
                2005
                    Stock Option Plan (incorporated by reference to the Company’s Current
                    Report on Form 8-K filed April 11, 2005).10.2*
                Form
                    of Option Agreement for 2005 Stock Option Plan.10.3
                Agreement
                    and Plan of Merger by and between Theater Xtreme, Inc., BF Acquisition
                    Group II, Inc., Scott Oglum, William R. Colucci and David M.
                    Bovi dated
                    February 11, 2005 (incorporated by reference to the Company’s Current
                    Report on Form 8-K filed February 17, 2005).31.1
                Rule
                    13a-14(a)/Rule 15d-14(a) Certification of Principal
                    Executive Officer.31.2
                Rule
                    13a-14(a)/Rule 15d-14(a) Certification of Principal
                    Financial Officer.32.1
                Certification
                    of Principal Executive Officer pursuant to
                    Section 1350 of Chapter 63 of Title 18 of the United States
                    Code.32.2
                Certification
                    of Principal Financial Officer pursuant to
                    Section 1350 of Chapter 63 of Title 18 of the United States
                    Code.





*  Compensation
      plans and
      arrangements for executives and others.