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, 2006





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 exchangeSecurities
                  registered under Section 12(b) of the Exchange Act:
              Title
                  of Class
              on
                  which registeredCommon
                  Stock, par value $.001 per share
              OTC
                  Bulletin Board






Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act [  ]





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 $4,619,142





As
      of
      September 15, 2006, the aggregate market value of the voting stock held by
      non-affiliates of the registrant was approximately $11,406,966. Such aggregate
      market value was computed by reference to the September 15, 2006 closing stock
      price of the Company’s common stock as quoted on the OTC Bulletin
      Board.





As
      of
      September 15, 2006, 19,662,342 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
              6ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              6ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF OUR SECURITY
                  HOLDERS
              6PART
                  II
              
              7ITEM
                  5.
              MARKET
                  FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS AND SMALL
                  BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
              7ITEM
                  6.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              8ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE
              35ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
              35ITEM
                  8B.
              OTHER
                  INFORMATION
              35PART
                  III
              
              36ITEM
                  9.
              DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
                  WITH SECTION 16(a) OF THE EXCHANGE ACT
              36ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              36ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND RELATED STOCKHOLDER MATTERS
              36ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS
              36ITEM
                  13.
              EXHIBITS
              37ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              38











**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 $9,000. Systems are comprised of components
      from manufacturers such as Denon, Epson, Infocus®, Klipsch, Marantz, Mitsubishi
      and Polk Audio. 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 or “design center” 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. The Company anticipates that it will open additional
      Company-owned design centers in the Mid-Atlantic region in the
      future.




The
      following table sets forth the number of design centers:




**Theater
      Xtreme Entertainment Group** **,
      Inc.**




**Owned
                and**
              **Operated**
              **by
                the****Company**
            **Franchised**
              **and
                Open**
            **Subtotal**
            **Franchised
                but**
              **Not
                Yet Open**
            **Total**Number
                of Design Centers
              at
                June 30, 2004
            1
            0
            1
            0
            1Additions
                and deletions in the fiscal year ended June 30, 2005
            1
            1
            2
            3
            5Number
                of Design Centers
              at
                June 30, 2005
            2
            1
            3
            3
            6Additions
                and deletions in the fiscal year ended June 30, 2006
            1
            5
            6
            9
            15Number
                of Design Centers
              at
                June 30, 2006
            3
            6
            9
            12
            21












In
      early
      2005 the Company began to consider changes to the layout of its design centers
      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. Although the Company is
      still considering certain design center enhancements, most of its newer stores
      feature a redesigned layout including the Company-owned store located in Bel
      Air
      Maryland, and all but one franchisee-operated store.




The
      sale
      of franchises is integral to the Company’s success. The Company sold four
      franchises through June 30, 2005 and an additional fourteen through June 30,
      2006 bringing the total number of franchises sold through June 30, 2006 to
      eighteen. The first franchise design center opened in May, 2005 in East
      Longmeadow, Massachusetts. During the past fiscal year an additional five
      franchise stores opened. Other franchised design centers are planned for opening
      dates beginning in the third and fourth calendar quarters of 2006 and continuing
      throughout 2007. These and future franchised retail design centers will
      generally reflect enhanced physical layouts and may incorporate other
      refinements or modifications depending on the store’s physical characteristics.
      Initial franchises sold for $25,000 per single franchise. The most recent sales
      price for a single franchise has been $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 franchisees’ use and application 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 2006, the Company 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 expand its branding
      program to include additional trademarked products.




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 six 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.






2




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
      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. This Offering was fully subscribed
      and
      the shares of the Company’s common stock were issued in reliance upon exemptions
      for 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 $1,273,178.




On
      January 20, 2006, the Company began offering up to 1,500,000 shares of its
      common stock at a purchase prices of $1.00 per share. For this Offering, 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.” Under this
      Offering 1,053,000 shares were sold with net Proceeds (net of costs) amounting
      to approximately $985,218.




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) Although no Units
      have been sold as of October 13, 2006, management expects that this issue will
      be fully subscribed. Management believes that the net proceeds of the offering
      will capitalize and sustain the Company sufficiently to allow for retail center
      growth and the continued development and improvement of the franchise program,
      the implementation of a marketing campaign, and distribution of the Company’s
      products for a certain period of time. The Company has reserved the right to
      offer the Units for a sale price greater than $2.00 per share as well as the
      right to increase the number of Units under the offering. See Item
      6--Management’s Discussion and Analysis or Plan of Operation.




The
        Company has received expressions of interest from two institutional investors
        who propose to purchase at par an aggregate of $500,000 of Company debentures
        bearing interest at 10% per year and maturing in 13 months. If purchased,
        the
        debentures would be issued with warrants expiring in five years to purchase
        400,000 shares of Company common stock at an exercise price of $1.00 per
        share.
        There is no assurance that the Company will succeed in closing the $500,000
        transaction. However, the Company has received a commitment from Universal
        Capital Management, Inc. that, if the Company does not sell at least $250,000
        of
        such debentures and warrants on or before October 31, 2006, then Universal
        would
        purchase, on or before November 30, 2006, at par $250,000 of such debentures
        which would be issued with warrants to purchase 200,000 shares of Company
        Common
        stock.


As
      of
      June 30, 2006, the Company had 26 full-time employees and 5 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.




3


**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”) is the successor by merger to
      Theater Xtreme, Inc., which 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 could sustain losses
      in
      the future. There can be no assurances that the Company will operate
      profitably.




**Inadequacy
      of Funds**




The
      Company had a working capital deficit of $(299,290) at June 30, 2006 and
      sustained a net loss of $(2,132,730) for the twelve months then ended. If the
      Company does not raise a sufficient amount of capital, it may not have the
      ability to remain in business until such time, if ever, when it becomes
      profitable.




Although
      collectively the Company-owned design centers produce positive store operating
      profits in the aggregate, 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 offset the Company’s overhead expense. There is no
      assurance that the Company will be able to do so.




**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.






4




**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. 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, 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
      there does exist some current competition, Management believes that the
      Company’s marketing programs are 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 success 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.




**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.








5




**Control
      by Management**




As
      of
      September 15, 2006, the Company’s officers and directors owned approximately 24%
      of the Company’s outstanding shares. Upon completion of the August 23, 2006
      Offering described above (assuming all offered Shares are sold and all warrants
      are exercised), the Company’s officers and directors will continue to own
      approximately 22% of then issued and outstanding shares. Following the
      conversion of their outstanding options and without further increasing the
      number of offered shares pursuant to the August 23, 2006 Offering, the officers
      and directors will own approximately 25% of the 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 3,000,000 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 PROPERT** **Y**




The
      Company leases its corporate offices and warehouse located in Newark, DE and
      retail design centers located in Newark, DE, Bel Air, MD, and Leesport, PA
      for
      various terms under long-term, non-cancelable operating lease agreements. The
      leases expire at various dates through 2011 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.




**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, 2006.




6


**PART** **II**





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




As
      of
      June 30, 2006, the Company’s common stock did not trade and was not quoted on
      any exchange. However, the Company’s common stock has been quoted on the OTC
      Bulletin Board since July 7, 2006. Between July 7, 2006 and September 15, 2006
      the highest and lowest sale prices of the Company common stock were $3.05 and
      $0.80, respectively. The closing sale price on September 15, 2006 was
      $1.13.




As
      of
      September 15, 2006, the Company’s common stock was held by 19,662,342 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.




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. This Offering was fully subscribed
      and
      the 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 $1,273,178.




On
      January 20, 2006, the Company began offering up to 1,500,000 shares of its
      common stock at a purchase price of $1.00 per share. For this Offering, 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.” Under this
      Offering 1,053,000 shares were sold with proceeds (net of costs) amounting
      to
      approximately $985,218.




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) Although no Units
      have been sold as of September 25, 2006, management expects that this issue
      will
      be fully subscribed. Management believes that the net proceeds of the offering
      will capitalize and sustain the Company sufficiently to allow for retail center
      growth and the continued development and improvement of the franchise program,
      the implementation of a marketing campaign, and distribution of the Company’s
      products for a certain period of time. The Company has reserved the right to
      offer the Units for a sale price greater than $2.00 per share as well as the
      right to increase the number of Units under the offering. See Item
      6--Management’s Discussion and Analysis or Plan of Operation.




No
      underwriters or agents were involved in the foregoing issuances and no
      commissions were paid. The Company did engage the services of a consultant
      in
      certain of the foregoing issuances and paid remuneration in the amount of
      $43,750 for services rendered.











7





**ITEM6.** **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
                rate;


·
            the
                ability to attract and retain quality
                employees;


·
            the
                effect of changing economic conditions;


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


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


·
            the
                ability successfully to compete with competitors in our
                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.




8







**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 table sets forth selected financial information for the periods
      indicated.


Year
                  Ended
              
              Year
                  EndedJune
                  30, 2006
              
              June
                  30, 2005Revenue:Retail
                  sales
              
              $
              3,963,441
              
              $
              2,751,780Wholesale
                  sales
              
              
              467,518
              
              
              44,021Franchise
                  license fees
              
              
              120,000
              
              
              25,000Franchise
                  royalties
              
              
              68,183
              
              
              2,070Total
                  revenue
              
              
              4,619,142
              
              
              2,822,871Cost
                  of revenues
              
              
              2,726,383
              
              
              1,710,596Occupancy
                  expenses
              
              
              326,159
              
              
              206,053Selling,
                  general and administrative expenses
              
              
              3,693,829
              
              
              2,409,016Loss
                  from operations
              
              
              (2,127,229
              )
              
              (1,502,794
              )Loss
                  on disposal of assets
              
              
              (2,173
              )
              
              -Interest
                  income
              
              
              1,797
              
              
              464Interest
                  expense
              
              
              (5,125
              )
              
              (30,355
              )Net
                  loss
              
              $
              (2,132,730
              )
              $
              (1,532,685
              )Basic
                  and diluted:Loss
                  Per Share
              
              $
              (0.12
              )
              $
              (0.12
              )Weighted
                  average shares outstanding
              
              
              17,671,587
              
              
              12,358,814







9




Year
                  Ended
              
              Year
                  EndedJune
                  30, 2006
              
              June
                  30, 2005Operating
                  Data:Company
                  Owned:Design
                  Centers open at beginning of period
              
              
              2
              
              
              1New
                  Design Centers
              
              
              1
              
              
              1Closed
                  Design Centers
              
              
              -
              
              
              -Design
                  Centers open at end of period
              
              
              3
              
              
              2Franshise
                  Operations:Design
                  Centers open at beginning of period
              
              
              1
              
              
              -New
                  Design Centers
              
              
              5
              
              
              1Closed
                  Design Centers
              
              
              -
              
              
              -Design
                  Centers open at end of period
              
              
              6
              
              
              1Total
                  Design Centers open at end of period
              
              
              9
              
              
              3Company
                  Owned Design Centers underConstruction at end of period
              
              
              3
              
              
              1Franchises
                  sold - not yet open at end of period
              
              
              12
              
              
              415
              
              
              5Balance
                  Sheet Data:Working
                  capital (deficit)
              
              
              (299,290
              )
              
              (216,790
              )Total
                  assets
              
              
              1,761,704
              
              
              1,007,646Long
                  term debt, excluding current portion
              
              
              47,163
              
              
              40,614Stockholders'
                  equity (deficit)
              
              
              31,701
              
              
              31,016




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, 2006 compared to the year ended June
      30, 2005**




In
      fiscal
      2006, management expects the sale of franchise licenses to have a positive
      effect on cash flow from operations and working capital. Management also expects
      increased operating costs in future periods due to a commitment to develop
      retail, franchising, and distribution operations on a regional and national
      scale.




*Total
      Revenue.* Total
      revenue includes delivered and installed merchandise, installation and service
      labor, customer service revenues, earned franchise license fees and franchise
      royalties. Total






10




revenue
      for the year ended June 30, 2006 increased to $4,619,142 from $2,822,871 for
      the
      year ended June 30, 2005, reflecting an increase of 63.6%. This increase is
      primarily the result of revenues from the third company design center and from
      the opening of franchise design centers.




For
      the
      year ended June 30, 2006 the Company had total new customer orders of
      $4,528,175, compared to $3,257,602 for the year ended June 30, 2005. The
      Company’s backlog at June 30, 2006 and June 30, 2005 was $1,423,912 and
      $859,179, 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, 2006, the Company recognized wholesale sales, principally
      to
      franchisees, of $467,518 compared to $44,021 for the year ended June 30, 2005.
      This increase results from the increasing number of franchisees open and under
      construction.




In
      the
      year ended June 30, 2006, the Company collected $326,500 in non-refundable,
      initial franchise license fees versus $97,500 collected in the year ended June
      30, 2005. In the year ended June 30, 2006, the Company recognized $120,000
      as
      earned revenue relating to the opening of its franchises compared to $25,000
      recognized in the year ended June 30, 2005. At June 30, 2006, the Company had
      $279,000 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, 2006, the Company
      recognized franchise royalties of $68,183 compared to $2,070 in royalties
      recognized for the year ended June 30, 2005. Franchise royalties are expected
      to
      increase in the current year due to the increasing number of
      franchises.




*Cost
      of Sales and Gross Profit.* Gross
      profit amounts and percentages on retail sales for the year ended June 30,
      2006
      amounted to $1,636,870 and 41.3% compared to $1,080,800 and 39.3% for the year
      ended June 30, 2005. Wholesale gross profit amounts and percentages were $67,705
      and 14.5% compared to $4,402 and 10.0% for the year ended June 30, 2005.
      Management expects to maintain gross profit percentages as operations expand
      and
      increase.




*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, 2006, occupancy expenses were
      $326,159 compared to $206,053 for the year ended June 30, 2005. The increase
      relates to the opening of the third Company-owned design center.




*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, 2006 were $3,693,829 compared to $2,409,016 for the year ended June 30,
      2005.






11




The
      following discussion describes significant components within the Company’s
      selling, general and administrative expenses. Personnel costs for the year
      ended
      June 30, 2006 were $1,601,217 compared to $967,268 for the year ended June
      30,
      2004. This 66% increase in personnel costs relates to continued efforts to
      hire
      and obtain the necessary personnel to implement the Company’s long-term business
      plan. 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, 2006 were $477,141 compared
      to $433,934, as adjusted to exclude investor relations expense, for the year
      ended June 30, 2005. This 10% increase is principally attributable to the
      addition of the Company’s third design center. These costs are expected to
      increase in the current fiscal year.




Professional
      fees amounted to $825,549 in the year ended June 30, 2006 compared to $651,553
      for the year ended June 30, 2005 as adjusted to include investor relations
      services, which totaled $280,000 and $210,000 for the years ended June 30,
      2006
      and 2005, 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 increased to $466,481 at June 30, 2006 from $112,874 at
      June 30, 2005. This increase is the result of the Company’s the additional funds
      provided by the sale of common stock offset by the funding of the Company’s cash
      used in operations.




Working
      capital at June 30, 2006 was a deficit of $(299,290), lower compared to the
      deficit of $(216,790) at June 30, 2005. The increase in the working capital
      deficit can be attributed to a disproportionate increase in deferred sales
      when
      compared to other components of working capital.




The
      primary source of financing has been derived from proceeds from the sale of
      equity. 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. This Offering was
      fully
      subscribed and the 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 $1,273,178.




On
      January 20, 2006, the Company began offering up to 1,500,000 shares of its
      common stock at a purchase price of $1.00 per share. For this Offering, 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.” Under this
      Offering 1,053,000 shares were sold with net Proceeds (net of costs) amounting
      to approximately $985,218.




12


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 centers and by selling additional franchises and
      increasing its product distribution network to franchisees.




Management
      believes there will be sufficient cash to fund operations for the next 12
      months. To accomplish this, management expects an increase in gross profits
      from
      sales resulting from the expansion of Company owned design centers, 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 $941,897 of cash in operating activities in the year ended June
      30,
      2006, or approximately $79,000 per month. If the Company continues to use cash
      in operating activities at this rate, it would consume its June 30, 2006 cash
      reserves of $466,481 by December 31, 2006.




To
      fund
      any continued losses, the Company, on August 23, 2006, 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). Although no Units have been sold as of October 13,
      2006,
      management expects that this issue will be fully subscribed. Management believes
      that the net proceeds of the offering will capitalize and sustain the Company
      sufficiently to allow for retail center growth and the continued development
      and
      improvement of the franchise program, the implementation of a marketing
      campaign, and distribution of the Company’s products for a certain period of
      time. The Company has reserved the right to offer the Units for a sale price
      greater than $2.00 per share as well as the right to increase the number of
      Units under the offering.




The
        Company has received expressions of interest from two institutional investors
        who propose to purchase at par an aggregate of $500,000 of Company debentures
        bearing interest at 10% per year and maturing in 13 months. If purchased,
        the
        debentures would be issued with warrants expiring in five years to purchase
        400,000 shares of Company common stock at an exercise price of $1.00 per
        share.
        There is no assurance that the Company will succeed in closing the $500,000
        transaction. However, the Company has received a commitment from Universal
        Capital Management, Inc. that, if the Company does not sell at least $250,000
        of
        such debentures and warrants on or before October 31, 2006, then Universal
        would
        purchase, on or before November 30, 2006, at par $250,000 of such debentures
        which would be issued with warrants to purchase 200,000 shares of Company
        Common
        stock.
  At
        June
        30, 2006 and 2005 the Company did not have a credit facility or line-of-credit
        arrangement. Thus, there are no restrictive covenants or compensating balance
        requirements. 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. If adequate
        funds are not available, the Company’s business, financial condition, and
        results of operations will be materially and adversely affected. 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






13




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’ 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.




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.




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.




**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.






14




**Allowance
      for Bad and Doubtful Accounts**





The
      majority of the Company’s accounts receivable are due from retail customers. The
      Company’s net accounts receivable balance at June 30, 2006 of $139,893
      represents 8% of total assets, and the reserve of $25,000 is 15% of gross
      accounts receivable. Net accounts receivable for the year ended June 30, 2005
      amounted to $22,797 or less than 3% of Company assets. The reserve for doubtful
      accounts is based on a review of the likely collectibility of specific accounts
      and represents an increase of $20,149 over the reserve of $4,851 as of June
      30,
      2005.




**Inventory
      Obsolescence**





Inventory
      represents a significant portion of the Company’s assets (36%). 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. Generally, the Company attempts
      to
      sell these discontinued models at standard retail prices. In estimating its
      obsolescence reserve, the Company analyzes sales of discontinued merchandise
      and
      determines what profit or loss was recorded in the period. If such discontinued
      product is sold below cost, then the Company applies that negative gross margin
      to reduce the value of the inventory on hand as of the balance sheet date.
      In
      addition, the Company includes the selling costs to be incurred in the sale
      of
      such discontinued inventory as part of this obsolescence reserve. The Company
      also evaluates the obsolescence of its display inventories and service parts
      inventory.




**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, 2006 and 2005. The Company expects that its future operating results
      will fluctuate significantly from year to year and will be affected by factors
      beyond its control.




15


**ITEM
      7.**  **FINANCIAL
      STATEMENTS**


**INDEX
      TO FINANCIAL STATEMENTS**


**PAGE**REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                  FIRM
              17BALANCE
                  SHEETS
              18STATEMENTS
                  OF OPERATIONS
              19STATEMENTS
                  OF STOCKHOLDERS’ EQUITY
              20STATEMENTS
                  OF CASH FLOW
              21NOTES
                  TO FINANCIAL STATEMENTS
              22-34




16




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, 2006 and 2005, and the related statements of operations, stockholders'
      equity 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, 2006 and 2005, 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.





/s/
      MORISON COGEN LLP





Bala
      Cynwyd, Pennsylvania


September
      26, 2006,


except
      for Note 2 and


Note
      10
      for which the


date
      is


October
      13, 2006.








17


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


BALANCE
      SHEETS


JUNE
      30,
      2006 AND 2005


2006
              
              2005**Assets**Current
                  Assets:Cash
                  and equivalents
              
              $
              466,481
              
              $
              112,874Accounts
                  receivable, net of allowance of $25,000 and $4,851
              
              
              139,893
              
              
              22,797Inventory
              
              
              629,056
              
              
              460,111Prepaid
                  expenses
              
              
              132,679
              
              
              123,444Other
                  Current Assets
              
              
              15,441
              
              
              -Total
                  current assets
              
              
              1,383,550
              
              
              719,226Property
                  and Equipment, net
              
              
              357,434
              
              
              267,700Other
                  Assets:Deposits
              
              
              20,720
              
              
              20,720$
              1,761,704
              
              $
              1,007,646**Liabilities
                  and Stockholders' Equity**Current
                  Liabilities:Accounts
                  payable and accrued expenses
              
              $
              646,290
              
              $
              323,132Payroll
                  tax liabilities
              
              
              58,715
              
              
              31,769Current
                  portion of notes payable
              
              
              19,129
              
              
              12,010Due
                  to officer
              
              
              -
              
              
              243Deferred
                  franchise fees
              
              
              279,000
              
              
              72,500Deferred
                  sales
              
              
              679,706
              
              
              496,362Total
                  current liabilities
              
              
              1,682,840
              
              
              936,016Long-term
                  Liabilities:Notes
                  payable, net of current portion
              
              
              47,163
              
              
              40,614Total
                  long-term liabilities
              
              
              47,163
              
              
              40,614Total
                  liabilities
              
              
              1,730,003
              
              
              976,630Stockholders'
                  Equity:Preferred
                  stock, no par value, 5,000,000 shares authorized,no
                  shares issued and outstanding
              
              
              -
              
              
              -Common
                  stock, $.001 par, 50 million shares authorized;19,122,342
                  and 16,291,814 shares issued and outstanding
              
              
              19,122
              
              
              16,292Additional
                  paid in capital
              
              
              3,973,742
              
              
              1,843,157Accumulated
                  deficit
              
              
              (3,961,163
              )
              
              (1,828,433
              )Total
                  stockholders' equity
              
              
              31,701
              
              
              31,016$
              1,761,704
              
              $
              1,007,646




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





18


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


STATEMENTS
      OF OPERATIONS


YEARS
      ENDED JUNE 30, 2006 AND 2005





2006
              
              2005Revenues
              
              $
              4,619,142
              
              $
              2,822,871Cost
                  of revenues
              
              
              2,726,383
              
              
              1,710,596Occupancy
                  expenses
              
              
              326,159
              
              
              206,053Selling,
                  general and administrative expenses
              
              
              3,693,829
              
              
              2,409,0166,746,371
              
              
              4,325,665Loss
                  from operations
              
              
              (2,127,229
              )
              
              (1,502,794
              )Loss
                  on disposal of assets
              
              
              (2,173
              )
              
              -Interest
                  income
              
              
              1,797
              
              
              464Interest
                  expense
              
              
              (5,125
              )
              
              (30,355
              )Net
                  loss
              
              $
              (2,132,730
              )
              $
              (1,532,685
              )Basic
                  and diluted:Loss per common share
              
              $
              (0.12
              )
              $
              (0.12
              )Weighted average shares
              
              
              17,671,587
              
              
              12,358,814




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





19


THEATER
      XTREMEENTERTAINMENT GROUP, INC.


STATEMENTS
      OF STOCKHOLDERS’ EQUITY (DEFICIT)


YEARS
      ENDED JUNE 30, 2006 AND 2005




Additional
              
              
              
              TotalCommon
              
              Paid-in
              
              Accumulated
              
              Stockholders'Stock
              
              Capital
              
              Deficit
              
              Equity
                  (Deficit)Balance
                  at June 30, 2004
              
              
              9,775
              
              
              240,225
              
              
              (295,748
              )
              
              (45,748
              )Conversion
                  of notes payable
              
              
              3,348
              
              
              970,214
              
              
              -
              
              
              973,562Issuance
                  of common stock for services
              
              
              1,462
              
              
              510,308
              
              
              -
              
              
              511,770Issuance
                  of common stock at merger
              
              
              1,250
              
              
              (1,250
              )
              
              -
              
              
              -Liabilities
                  assumed upon merger
              
              
              -
              
              
              (13,026
              )
              
              -
              
              
              (13,026
              )Issuance
                  of common stock, private placement
              
              
              457
              
              
              136,686
              
              
              -
              
              
              137,143Net
                  loss for the year ended June 30, 2005
              
              
              -
              
              
              -
              
              
              (1,532,685
              )
              
              (1,532,685
              )Balance
                  at June 30, 2005
              
              $
              16,292
              
              $
              1,843,157
              
              $
              (1,828,433
              )
              $
              31,016Issuance
                  of common stock, private placement
              
              
              2,500
              
              
              1,470,191
              
              
              -
              
              
              1,472,691Redemption
                  of Founder Stock
              
              
              (800
              )
              
              800
              
              
              -
              
              
              -Issuance
                  of common stock for services
              
              
              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
              
              $
              3,973,742
              
              $
              (3,961,163
              )
              $
              31,701


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


20


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


STATEMENTS
      OF CASH FLOWS


YEARS
      ENDED JUNE 30, 2006 AND 2005




2006
              
              2005**Cash
                  flows from operating activities:**Net
                  Loss
              
              $
              (2,132,730
              )
              $
              (1,532,685
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Loss
                  on disposal of fixed assets
              
              
              2,173Depreciation
              
              
              98,948
              
              
              52,405Issuance
                  of common stock for services
              
              
              603,500
              
              
              511,770Increase
                  in allowance for doubtful accounts
              
              
              20,149
              
              
              4,851Employee
                  stock option vesting for compensation
              
              
              46,073
              
              
              -Non-employee
                  stock option vesting for services
              
              
              11,151
              
              
              -Increase
                  in assetsAccounts
                  receivable
              
              
              (137,245
              )
              
              (20,587
              )Inventory
              
              
              (168,945
              )
              
              (279,798
              )Prepaid
                  expenses
              
              
              (9,235
              )
              
              (123,444
              )Other
                  current assets
              
              
              (15,441
              )
              
              -Increase
                  (decrease) in liabilitiesAccounts
                  payable and accrued expenses
              
              
              323,158
              
              
              182,281Payroll
                  tax liabilities
              
              
              26,946
              
              
              20,553Due
                  to officer
              
              
              (243
              )
              
              (5,866
              )Deferred
                  franchise fees
              
              
              206,500
              
              
              72,500Deferred
                  sales
              
              
              183,344
              
              
              351,499Net
                  cash used in operating activities
              
              
              (941,897
              )
              
              (766,521
              )**Cash
                  flows from investing activities:**Deposits
                  on stores and corporate facility
              
              
              -
              
              
              (14,960
              )Purchase
                  of property and equipment
              
              
              (160,325
              )
              
              (127,370
              )Net
                  cash used in investing activities
              
              
              (160,325
              )
              
              (142,330
              )**Cash
                  flows from financing activities:**Repayment
                  of notes payable
              
              
              (16,862
              )
              
              (10,000
              )Proceeds
                  from convertible note payable
              
              
              -
              
              
              773,562Proceeds
                  from financing lease
              
              
              -
              
              
              1,792Proceeds
                  from issuance of common stock
              
              
              1,472,691
              
              
              137,143Net
                  cash provided by financing activities
              
              
              1,455,829
              
              
              902,497Net
                  increase (decrease) in cash
              
              
              353,607
              
              
              (6,354
              )Cash
                  and equivalents, beginning of year
              
              
              112,874
              
              
              119,228Cash
                  and equivalents, end of year
              
              $
              466,481
              
              $
              112,874**Supplemental
                  disclosure:**Cash
                  paid during the year for interest
              
              $
              5,125
              
              $
              16,803**Supplemental
                  disclosure of non-cash****investing
                  and financing activites:**Conversion
                  of notes payable to common stock
              
              $
              -
              
              $
              973,562Liabilities
                  assumed as part of merger
              
              $
              -
              
              $
              13,026Acquisition
                  of property and equipmentby
                  issuance of notes payable
              
              $
              30,530
              
              $
              26,596


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





21


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005














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 centers,
      the sale of franchise licenses and wholesale product distribution to
      franchisees.  The
      Company opened its first Company retail store or design center on September
      1,
      2003 in Newark, Delaware. In August 2004 the Company opened a second Company
      owned design center in Wilmington, Delaware. A third Company owned design center
      opened in Bel Air, Maryland in September 2005. The Company sold four franchises
      through June 30, 2005 and an additional fourteen through June 30, 2006 bringing
      the total number of franchises sold through June 30, 2006 to eighteen. The
      first
      franchise design center opened in May, 2005 in East Longmeadow, Massachusetts.
      During the past fiscal year an additional five franchise stores opened. The
      Company expects 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).





*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.


22


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005





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





*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,
      2006 the Company had approximately $219,756 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 sells 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, 2006 and 2005, the allowances for doubtful
      accounts were $25,000 and $4,851, respectively. Bad debt expense for the year
      ended June 30, 2006 was $20,719.





*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:





2006
            
            2005Equipment
                and furniture products
            
            $
            316,187
            
            $
            256,547Cable
                and supplies
            
            
            16,861
            
            
            9,283Retail
                displays
            
            
            266,694
            
            
            194,281Product
                in transit
            
            
            29,314
            
            
            -$
            629,056
            
            $
            460,111








23


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005








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.








24


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005





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:





2006
            
            2005Retail
                sales
            
            $
            3,963,441
            
            $
            2,751,780Wholesale
                sales
            
            
            467,518
            
            
            44,021Franchise
                licenses and royalties
            
            
            188,183
            
            
            27,070Total
                revenues
            
            $
            4,619,142
            
            $
            2,822,871





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 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 pro rata on larger, more complex systems
      where installation occurs over a period of time.







Customer
      deposits on orders which are not completed are shown as deferred revenue.
      Included in deferred sales is an amount which represents the unexpired portions
      of extended service contracts. In addition, the Company has deferred revenues
      from the sales of franchise licenses. Such revenues will be recognized when
      the
      related franchise design center opens for business, as that is when the Company
      has substantially completed its initial obligations to the franchisee. The
      following is a summary of orders and retail sales for the years ended June
      30:







2006
            
            2005Customer
                orders
            
            $
            4,528,175
            
            $
            3,257,602Increase
                in unfinished orders
            
            
            (564,734
            )
            
            (505,822
            )Recognized
                retail sales
            
            $
            3,963,441
            
            $
            2,751,780The
                following amounts are included in deferred sales at June
                30:Deferred
                retail sales
            
            $
            656,130
            
            $
            460,877Deferred
                service contracts
            
            
            23,576
            
            
            35,485Customer
                deposits, deferred retail sales
            
            
            679,706
            
            
            496,362Deferred
                franchise licenses
            
            
            279,000
            
            
            72,500Total
                deferred sales
            
            $
            958,706
            
            $
            568,862











25


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005





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, 2006 and
      2005, 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.





*Shipping
      and Handling Fees and Costs.* The
      Company classifies shipping and handling costs as part of selling and
      administration expenses. Shipping and handling costs were $38,438 and $15,661
      for the years ended June 30, 2006 and 2005.





*Advertising
      Costs.* Advertising
      and sales promotion costs are expensed as incurred. Advertising and promotion
      expense, excluding investor relations expenses, totaled $477,141 and $433,935
      for the years ended June 30, 2006 and 2005.





*Investor
      Relations Costs.* Investor
      relations services and promotional costs are expensed as incurred. Investor
      relations expenses, including investor relations promotional costs, totaled
      $280,000 and $210,000 for the years ended June 30, 2006 and 2005.





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


26


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005





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 includes compensation cost for all non-forfeited share-based
      payments granted prior to, and without regard to vesting, as of June 30, 2006,
      based on the grant-date fair value estimated in accordance with the provisions
      of SFAS No. 123(R). In accordance with the modified prospective method of
      adoption, the Company’s results of operations and financial position for the
      year ended June 30, 2005 has not been restated.





As
      a
      result of the adoption of SFAS No. 123(R), during the year ended June 30, 2006,
      the Company’s net income was approximately $57,224 lower as a result of
      stock-based compensation expense, including $11,151 recognized on behalf of
      outside board members. As of June 30, 2006, there was $395,592 of unrecognized
      compensation expense and $27,087 of unrecognized expenses for services related
      to non-vested market-based option share awards that are expected to be
      recognized through June 30, 2010.





Accordingly,
      no compensation cost was recognized for its stock options issued during any
      period prior to January 1, 2006. Had compensation cost for the Company’s
      issuance of vested stock options been determined based on the fair value at
      grant dates for options consistent with the method of SFAS No. 123(R), the
      Company’s fiscal 2006 and 2005 net loss and net loss per common share would have
      been modified to the pro forma amounts indicated below. 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
      60%, risk-free interest rate of from between 3.0% to 5.25% and expected option
      life of ten years.





For
                the Years Ended June 302006
            
            2005Net
                loss:As
                reported
            
            $
            (2,132,730
            )
            $
            (1,532,685
            )Pro
                forma
            
            $
            (2,172,804
            )
            $
            (1,556,795
            )Net
                loss per share:As
                reported
            
            $
            (0.12
            )
            $
            (0.12
            )Pro
                forma
            
            $
            (0.12
            )
            $
            (0.13
            )








27


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005





Note
      2:
      Management’s Plans





To
      fund
      any continued losses, the Company, on August 23, 2006, 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). Although no Units have been sold as of October 13,
      2006,
      management expects that this issue will be fully subscribed. Management believes
      that the net proceeds of the offering will capitalize and sustain the Company
      sufficiently to allow for retail center growth and the continued development
      and
      improvement of the franchise program, the implementation of a marketing
      campaign, and distribution of the Company’s products for a certain period of
      time. The Company has reserved the right to offer the Units for a sale price
      greater than $2.00 per share as well as the right to increase the number of
      Units under the offering.




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 received expressions of interest from two institutional investors
          who propose to purchase at par an aggregate of $500,000 of Company debentures
          bearing interest at 10% per year and maturing in 13 months. If purchased,
          the
          debentures would be issued with warrants expiring in five years to purchase
          400,000 shares of Company common stock at an exercise price of $1.00 per
          share.
          There is no assurance that the Company will succeed in closing the $500,000
          transaction. However, the Company has received a commitment from Universal
          Capital Management, Inc. that, if the Company does not sell at least $250,000
          of
          such debentures and warrants on or before October 31, 2006, then Universal
          would
          purchase, on or before November 30, 2006, at par $250,000 of such debentures
          which would be issued with warrants to purchase 200,000 shares of Company
          Common
          stock.
  The
          company believes that the proceeds from the
          securities described above along with diligent cash management will be
          sufficient for the Company to meet its obligations when they come
          due.


Note
      3:
      Reverse Merger





Effective
      February 11, 2005 Theater Xtreme Entertainment Group, Inc. completed its merger
      with BF Acquisition Group II, Inc., which was treated as a reverse acquisition.
      The following pro forma consolidated statement of operations assumes the merger
      was effective July 1, 2004.





For
      the
      year ending June 30, 2005:




Revenues
              
              $
              2,822.871Net
                  Loss
              
              $
              1,681,435Basic
                  and Diluted Loss Per Share
              
              $
              (0.14
              )


Note
      4:
      Property and Equipment





Property
      and equipment consist of the following at June 30:





2006
            
            2005Vehicles
            
            $
            105,842
            
            $
            69,312Equipment
                and computers
            
            
            77,686
            
            
            63,265Leasehold
                improvements
            
            
            336,244
            
            
            202,523519,772
            
            
            335,100Accumulated
                depreciation
            
            
            (162,338
            )
            
            (67,400
            )$
            357,434
            
            $
            267,700





Depreciation
      expense was $98,948 and $52,405 for the years ended June 30, 2006 and
      2005.


28


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005





Note
      5:
      Long-term Liabilities and Notes Payable





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




2006
              
              2005Note
                  Payable to bank, in monthly installmentsof
                  $402, including interest at 7.25%.secured
                  by vehicle, maturingNovember
                  2008
              
              $
              10,677
              
              $
              14,307Note
                  Payable to bank, in monthly installmentsof
                  $349, including interest at 7.25%,secured
                  by vehicle, maturingDecember
                  2008
              
              
              9,546
              
              
              12,863Note
                  Payable to bank, in monthly installmentsof
                  $539, including interest at 7.99%secured
                  by vehicle, maturingDecember
                  2009
              
              
              19,697
              
              
              24,387Note
                  Payable to bank, in monthly installmentsof
                  $338, including interest at 5.99%.secured
                  by vehicle, maturingJuly
                  2010
              
              
              14,656
              
              
              -Note
                  Payable to bank, in monthly installmentsof
                  $252, including interest at 5.99%.secured
                  by vehicle, maturingJuly
                  2010
              
              
              10,937
              
              
              -Capitalized
                  lease with monthly payments of $34and
                  imputed interest at 8% and 10%through
                  July 2008
              
              
              779
              
              
              1,06766,292
              
              
              52,624Less
                  current portion
              
              
              (19,129
              )
              
              (12,010
              )Notes
                  Payable, net of current portion
              
              $
              47,163
              
              $
              40,614




29


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005


Note
      5:
      Long-term Liabilities and Notes Payable





Future
      maturities of long-term debt as of June 30, 2006 are as follows:




Year
                  ending June 30,2006
              
              $
              19,1282007
              
              
              20,1472008
              
              
              16,4452009
              
              
              9,9842010
              
              
              588$
              66,292


The
      Company incurred interest costs of $5,125 and $30,355 for the years ended June
      30, 2006 and 2005. Of these amounts $13,552 were paid by the issuance of common
      stock for the year ended June 30, 2005.




Note
      6:
      Lease Commitments





The
      Company leases its corporate offices, warehouse and retail design centers for
      various terms under long-term, non-cancelable operating lease agreements. The
      leases expire at various dates through 2010 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 vehicles and office equipment with monthly
      payments aggregating $1,522.





The
      following is a schedule by year of future minimum rental payments required
      under
      the operating lease agreements




Year
                  ending June 30,2007
              
              $
              363,9812008
              
              
              410,3392009
              
              
              418,9462010
              
              
              372,9332011
              
              
              283,050thereafter
              
              
              34,468$
              1,883,717





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 $227,494 and $136,635 for the years ended
      June
      30, 2006 and 2005





30


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005





Note
      7:
      Stockholders’ Equity




Common
      Stock





In
      February 2005, the Company issued 675,000 shares for services valued at
      $236,250.





In
      December 2004, various shareholders converted $325,000 of promissory notes
      into
      1,495,000 shares of the Company’s common stock. In June 2005, the remaining
      promissory notes and related interest amounting to $648,562 were converted
      into
      1,853,035 shares of common stock.





In
      April
      2005 the Company issued 787,200 shares of its common stock for services valued
      at $275,520.





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. As of June 30, 2005, the Company issued
      456,578 shares of its common stock for proceeds of $137,143, net of filing
      fees
      and related attorney fees in connection with this offering.





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.”





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. Also
      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.





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








31


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005


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, up from 1,400,000 shares.
      Participation in the Plan is limited to employees and outside
      Directors.





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:
      850,000 option shares for the year ended June 30, 2006 and 890,000 option shares
      for the year ended June 30, 2005, aggregating 1,740,000 option shares. Of this
      aggregate, 150,000 option shares were forfeit during the year ended June 30,
      2006 leaving a remaining exercisable balance of 1,590,000 option shares as
      of
      June 30, 2006. No shares were forfeit for the year ended June 30, 2005. The
      exercise prices per share of these options ranges from $0.35 to $1.00 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 60%, risk-free interest rate of from between 3.0% to
      5.25% and expected option life of ten years. The following table summarizes
      all
      stock option activity of the Company since July 1, 2004:


**Incentive
                    Stock Options**
                
                **Non-Qualified
                    Stock Options****Vested**
                
                **Exercise
                    Price**
                
                **All
                    Non-**
                
                **Vested**
                
                **Exercise
                    Price****All
                    ISO**
                
                **(Exercisable)**
                
                **Per
                    Common**
                
                **Qualified**
                
                **(Exercisable)**
                
                **Per
                    Common****Shares**
                
                **Shares**
                
                **Share**
                
                **Shares**
                
                **Shares**
                
                **Share**Balance,
                    June 30, 2004
                
                
                None
                
                
                xx
                
                
                xx
                
                
                None
                
                
                xx
                
                
                xxGranted
                    / vested
                
                
                740,000
                
                
                57,500
                
                $
                0.35
                
                
                150,000
                
                
                -
                
                $
                0.35Exercised
                
                
                -
                
                
                -
                
                
                xx
                
                
                -
                
                
                -
                
                
                xxCancelled
                    / forfeit
                
                
                -
                
                
                -
                
                
                xx
                
                
                -
                
                
                -
                
                
                xxBalance,
                    June 30, 2005
                
                
                740,000
                
                
                57,500
                
                $
                0.35
                
                
                150,000
                
                
                -
                
                $
                0.35Granted
                    / vested
                
                
                850,000
                
                
                211,250
                
                $
                0.35
                    to $1.00
                
                
                -
                
                
                37,500
                
                $
                0.35Exercised
                
                
                -
                
                
                -
                
                
                xx
                
                
                -
                
                
                -
                
                
                xxCancelled
                
                
                (150,000
                )
                
                -
                
                
                xx
                
                
                -
                
                
                -
                
                
                xxBalance,
                    June 30, 2006
                
                
                1,440,000
                
                
                268,750
                
                $
                0.35
                    to $1.00
                
                
                150,000
                
                
                37,500
                
                $
                0.35


32


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005


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:





2006
            
            2005Income
                tax benefit at US federal income tax rates
            
            $
            725,000
            
            $
            521,000State
                benefits at statutory rates
            
            
            188,000
            
            
            31,000Change
                in valuation allowance
            
            
            (913,000
            )
            
            (552,000
            )Income
                tax benefit
            
            $
            None
            
            $
            NoneIncome
                tax benefit consists of the following:Current
                tax benefitFederal
            
            
            None
            
            
            NoneState
            
            
            None
            
            
            NoneDeferred
                tax benefitFederal
            
            $
            1,335,000
            
            $
            567,000State
            
            
            236,000
            
            
            91,000Valuation
                Allowance
            
            
            (1,571,000
            )
            
            (658,000
            )$
            -
            
            $
            -The
                components of deferred assets are as follows:Net
                Operating Loss Tax Benefit
            
            $
            1,539,000
            
            $
            658,000Non-deductible
                options
            
            
            24,000
            
            
            -Allowance
                for bad debt
            
            
            8,000
            
            
            -Valuation
                Allowance
            
            
            (1,571,000
            )
            
            (658,000
            )$
            -
            
            $
            -





The
      valuation allowance for deferred assets as of June 30, 2006 and 2005 was
      $1,571,000 and $658,000. The change in the total valuation allowance for the
      years ended June 30, 2006 and 2005 was an increase of $913,000 and an increase
      of $552,000, 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, 2006, the Company had net operating loss carry forwards for Federal and
      State income tax purposes of approximately $3,837,000, which were available
      to
      offset future taxable income, if any, and expire in various years through June
      30, 2027. Based upon the limited operating history of the Company and losses
      incurred to date, management has fully reserved the deferred tax
      asset.


33


THEATER
      XTREME ENTERTAINMENT GROUP, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


JUNE
      30,
      2006 AND 2005







Note
      10:
      Subsequent Events





On
      July
      1, 2006, the Company purchased the assets and business of its former franchisee,
      Theaters 4 U LLC, located in Leesport, Pennsylvania for a total consideration
      of
      $193,307. In consideration for the purchased assets, the Company will pay
      $10,000 cash, 40,000 shares of the Company’s common stock valued at $1.00 per
      share, or $40,000, assume liabilities of $2,598 and issue a promissory note
      of
      $140,709. The note expires December, 2006 with payments of $3,000 per month
      and
      a final balloon payment of $130,442, including interest at 7%.





On
      July
      5, 2006, the Company entered into lease agreements for two additional design
      centers - one in Wilmington, Delaware and another in Lutherville, Maryland.
      Minimum future lease payments have been reflected in note 5, above, based on
      the
      Company’s estimated occupancy dates.





On
      August
      23, 2006, the Company began offering for sale, at a price of $2.00 per Unit,
      500,000 Units (each of which consisted of two (2) 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). The Company has reserved
      the right to offer the Units for a sale price greater than $2.00 per unit as
      well as the right to increase the number of Units under the
      Offering.




The
        Company has received expressions of interest from two institutional investors
        who propose to purchase at par an aggregate of $500,000 of Company debentures
        bearing interest at 10% per year and maturing in 13 months. If purchased,
        the
        debentures would be issued with warrants expiring in five years to purchase
        400,000 shares of Company common stock at an exercise price of $1.00 per
        share.
        There is no assurance that the Company will succeed in closing the $500,000
        transaction. However, the Company has received a commitment from Universal
        Capital Management, Inc. that, if the Company does not sell at least $250,000
        of
        such debentures and warrants on or before October 31, 2006, then Universal
        would
        purchase, on or before November 30, 2006, at par $250,000 of such debentures
        which would be issued with warrants to purchase 200,000 shares of Company
        Common
        stock.


34





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


On
      April
      5, 2004, a predecessor to the Company, BF Acquisition Group II, Inc. (“BF”),
      dismissed Ahearn, Jasco & Company, P.A., certified public accountants
      (“Ahearn”) as its independent certified public accountants. The decision to
      change accountants was approved by the Board of Directors. The issued reports
      did not contain any adverse opinion, disclaimer or opinion, or modification
      as
      to uncertainty, audit scope or accounting principles. There were no
      disagreements between BF and Ahearn on any matter of accounting principles
      or
      practices, financial statement disclosure, or auditing scope or procedure,
      during the period of their engagement. BF engaged De Leon & Company, P.A.
      (“De Leon”) on May 6, 2004 as its new independent accountants for its fiscal
      years ending April 30, 2001, 2002, and 2003 and for the review of its quarterly
      information for the quarters ended during such fiscal year ending April 30,
      2002, 2003, 2004. Such engagement was approved by the Board of
      Directors.




On
      October 28, 2004, BF dismissed De Leon as its independent certified public
      accountants. The decision to change accountants was approved by BF’s Board of
      Directors. The issued reports did not contain any adverse opinion, disclaimer
      or
      opinion, or modification as to uncertainty, audit scope or accounting
      principles. There were no disagreements between BF and De Leon on any matter
      of
      accounting principles or practices, financial statement disclosure, or auditing
      scope or procedure, during the period of their engagement.




On
      October 28, 2004, BF engaged Morison Cogen LLP (formerly Cogen Sklar LLP) as
      its
      new independent accountants for its fiscal years ending April 30, 2005, and
      for
      the review of its quarterly information for the remaining quarters ended during
      such fiscal year ending April 30, 2005. BF’s Board of Directors approved this
      engagement.




**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 June 30, 2006, which is the end of the period
      covered by this Annual Report on Form 10-KSB. Based on that evaluation, the
      principal executive officer and principal financial officer has concluded that
      the Company’s disclosure controls and procedures are effective.




There
      were no changes that occurred during the fiscal quarter ended June 30, 2006
      that
      have materially affected, or are reasonable likely to materially affect, the
      Company’s internal controls over financial reporting.




**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 2006 fiscal year has been reported.







35




**PART**  **III**







**ITEM9.** **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
      28, 2006.




**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
      28, 2006.




**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
      28, 2006.




**ITEM12.** **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
      28, 2006.







36


**ITEM13.** **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. (incorporatedby
                    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
                    filedFebruary
                    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
                    CurrentReport
                    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.,
                    BFAcquisition
                    Group II, Inc., Scott Oglum, William R. Colucci and David M.
                    Bovidated
                    February 11, 2005 (incorporated by reference to the Company’s
                    CurrentReport
                    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.


37


**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
      28, 2006.







38


**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
                  13, 2006
              By:/s/ Scott OglumScott
                  OglumChairman
                  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
                  13, 2006Scott
                  R. Oglum
              Director
 
  /s/
                  Justin L.
                  Schakelman
              Corporate
                  Vice President
              October
                  13, 2006Justin
                  L. Schakelman
              Director
                  and Secretary
 
  /s/
                  David R.
                  Hludzinski
              Director
              October
                  13, 2006David
                  R. Hludzinski
   /s/
                  W. James
                  Ludlow
              Director
              October
                  13, 2006W.
                  James Ludlow
 
  /s/
                  H. Gregory
                  Silber
              Director
              October
                  13, 2006H.
                  Gregory Silber




39


**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.


40