SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-QSB





(Mark
One)


x   QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934




For the
quarterly period ended March 31, 2008


OR




o    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 small business issuer as specified in its charter)





Florida


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


(State or
other jurisdiction of incorporation or organization)





65-0913583


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


(IRS
Employer Identification No.)





250
Corporate Boulevard, Suites E & F, Newark,
Delaware  19702


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


(Address
of principal executive offices)





(302)
455-1334


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


(Issuer’s
telephone number)


N/A


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


(Former
name, former address, and former fiscal year, if changed since last
report)





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past twelve 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.  _X_
Yes   ___ No





Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act.


__
Yes   _X_ No





APPLICABLE
ONLY TO CORPORATE ISSUERS





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: As of June 4, 2008, there were 21,687,425
shares of common stock, $0.001 par value, issued and outstanding.





Transitional
Small Business Disclosure Format (check one):  Yes
___    No  X









THEATER
XTREME ENTERTAINMENT GROUP, INC.





Form
10-QSB Index


March 31,
2008





Page





Part I:
Financial Information




Item
      1. Financial StatementsBalance
      Sheet as of March 31, 2008, and June 30, 2007 (Unaudited)
              1Statements
      of Operations for the Three and NineMonths
      Ended March 31, 2008 and 2007 (Unaudited)
              2Statement
      of Changes in Stockholders’ Equity/Deficit for theNine
      Months Ended March 31, 2008 (Unaudited)
              3Statement
      of Cash Flows for the Nine Months EndedMarch
      31, 2008 and 2007 (Unaudited)
              4Notes
      To Financial Statements (Unaudited)
              5Item
      2. Management’s Discussion and Analysis or Plan of
    Operation
              18Item
      3. Controls and Procedures
              27
  Part
      II: Other
      InformationItem 2.Unregistered Sales of Equity
      Securities and Use of Proceeds
              28Item
      5.  Other Information
              28Item
      6.  Exhibits
              28Signatures
              
              29















PART
I


FINANCIAL
INFORMATION





Item
1.  Financial Statements





THEATER
      XTREME ENERTAINMENT GROUP, INC.BALANCESHEETSMARCH
      31 2008 AND JUNE 30 2007
  MARCH
      31
              
              
              JUNE
      302008
              
              
              2007Assets
              
              (Unaudited)
              
              
              (Audited)Current
      Assets:Cash
      and equivalents
              
              $
              112,906
              
              
              $
              232,583Accounts
      receivable, net of allowance of $129,094 and $65,782
              
              
              436,575
              
              
              
              292,060Inventory
              
              
              561,935
              
              
              
              810,504Prepaid
      expenses
              
              
              309,790
              
              
              
              164,390Other
      current assets
              
              
              163,786
              
              
              
              219,045Total
      current assets
              
              
              1,584,992
              
              
              
              1,718,582Property
      and Equipment, net
              
              
              639,765
              
              
              
              933,394Other
      Assets:Deferred
      financing fees
              
              
              250,898
              
              
              
              342,990Deposits
              
              
              48,954
              
              
              
              48,954299,852
              
              
              
              391,944Total
      Assets
              
              $
              2,524,609
              
              
              $
              3,043,920Liabilities
      and Stockholders' DeficitCurrent
      Liabilities:Accounts
      payable and accrued expenses
              
              $
              1,380,068
              
              
              $
              801,978Payroll
      liabilities
              
              
              119,691
              
              
              
              149,221Deferred
      compensation
              
              
              12,582
              
              
              
              -Current
      portion of notes payable
              
              
              38,052
              
              
              
              37,047Non-convertible
      debentures
              
              
              300,000
              
              
              
              300,000Promissory
      Notes
              
              
              225,000
              
              
              
              -Convertible
      Promissory Notes, net of discount of $41,087
              
              
              521,989
              
              
              
              -Deferred
      franchise fees
              
              
              316,500
              
              
              
              299,000Deferred
      sales
              
              
              657,726
              
              
              
              495,751Embedded
      derivative, convertible debt
              
              
              250,028
              
              
              
              -Other
      current liabilities
              
              
              56,117
              
              
              
              -Total
      current liabilities
              
              
              3,877,753
              
              
              
              2,082,997Long-term
      Liabilities:Non-convertible
      debentures
              
              
              2,700,000
              
              
              
              2,700,000Notes
      payable, net of current portion
              
              
              78,802
              
              
              
              107,224Total
      long-term liabilities
              
              
              2,778,802
              
              
              
              2,807,224Total
      liabilities
              
              
              6,656,555
              
              
              
              4,890,221Stockholders'
      Deficit:Preferred
      stock, no par value, 5,000,000 shares authorized,no
      shares issued and outstanding
              
              
              -
              
              
              
              -Common
      stock, $.001 par, 100,000,000 shares authorized;20,812,425
      and 20,087,425 shares issuedand
      outstanding
              
              
              20,812
              
              
              
              20,087Additional
      paid in capital
              
              
              6,241,226
              
              
              
              5,541,029Accumulated
      deficit
              
              
              (10,393,984
              )
              
              
              (7,407,417
              )Total
      stockholders' deficit
              
              
              (4,131,946
              )
              
              
              (1,846,301
              )$
              2,524,609
              
              
              $
              3,043,920


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


1







THEATER
      XTREME ENTERTAINMENT GROUP, INC.STATEMENTS
      OF OPERATIONSTHREE
      AND NINE MONTHS ENDED MARCH 31, 2008 AND
2007
  Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31
              
              
              March
      312008
              
              
              2007
              
              
              2008
              
              
              2007Revenues
              
              $
              825,187
              
              
              $
              1,821,275
              
              
              $
              3,203,967
              
              
              $
              4,985,992Cost
      of revenues
              
              
              377,124
              
              
              
              1,060,025
              
              
              
              1,921,169
              
              
              
              3,007,485Occupancy
      expenses
              
              
              178,936
              
              
              
              148,017
              
              
              
              509,860
              
              
              
              374,788Selling,
      general and administrative expenses
              
              
              816,534
              
              
              
              1,092,940
              
              
              
              2,997,490
              
              
              
              3,355,4441,372,594
              
              
              
              2,300,982
              
              
              
              5,428,519
              
              
              
              6,737,717Loss
      from operations
              
              
              (547,407
              )
              
              
              (479,707
              )
              
              
              (2,224,552
              )
              
              
              (1,751,725
              )Loss
      on Disposal of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              (105,375
              )
              
              
              -Interest
      income
              
              
              64
              
              
              
              2,035
              
              
              
              64
              
              
              
              2,635Interest
      expense
              
              
              (140,415
              )
              
              
              (351,028
              )
              
              
              (387,207
              )
              
              
              (436,246
              )Accretion
      of discount on convertible debt
              
              
              (269,497
              )
              
              
              -
              
              
              
              (269,497
              )
              
              
              -Net
      loss
              
              $
              (957,255
              )
              
              $
              (828,700
              )
              
              $
              (2,986,567
              )
              
              $
              (2,185,336
              )Basic and diluted:Loss per common share
              
              $
              (0.05
              )
              
              $
              (0.04
              )
              
              $
              (0.14
              )
              
              $
              (0.11
              )Weighted average shares
              
              
              20,812,425
              
              
              
              19,843,106
              
              
              
              20,762,516
              
              
              
              19,691,398


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


2





THEATER
      XTREME ENTERTAINMENT GROUP, INC.STATEMENT
      OF STOCKHOLDERS' EQUITY(DEFICIT)NINE
      MONTHS ENDED MARCH 31 2008
  Number
      ofShares
      -
              
              
              
              
              
              Additional
              
              
              
              
              
              Total($
      US except shares)
              
              Common
              
              
              Common
              
              
              Paid-in
              
              
              Accumulated
              
              
              Stockholders'Stock
              
              
              Stock
              
              
              Capital
              
              
              Deficit
              
              
              Equity
      (Deficit)Balance
      at June 30, 2007 (Audited)
              
              
              20,087,425
              
              
              $
              20,087
              
              
              $
              5,541,029
              
              
              $
              (7,407,417
              )
              
              $
              (1,846,301
              )Issuance
      of common stock, services rendered,net
      of transfer agent and legal fees
              
              
              725,000
              
              
              
              725
              
              
              
              436,312
              
              
              
              -
              
              
              
              437,037Issuance
      of warrants, services rendered
              
              
              -
              
              
              
              -
              
              
              
              91,400
              
              
              
              -
              
              
              
              91,400Issuance
      of warrants, notes payable
              
              
              -
              
              
              
              -
              
              
              
              12,200
              
              
              
              -
              
              
              
              12,200Issuance
      of warrants, convertible notes
              
              
              -
              
              
              
              -
              
              
              
              60,556
              
              
              
              -
              
              
              
              60,556Vested
      employee stock options
              
              
              -
              
              
              
              -
              
              
              
              93,511
              
              
              
              -
              
              
              
              93,511Vested
      non-employee stock options
              
              
              -
              
              
              
              -
              
              
              
              6,218
              
              
              
              -
              
              
              
              6,218Net
      loss for the nine months endedMarch
      31, 2008
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,986,567
              )
              
              
              (2,986,567
              )Balance
      at March 31, 2008 (Unaudited)
              
              
              20,812,425
              
              
              $
              20,812
              
              
              $
              6,241,226
              
              
              $
              (10,393,984
              )
              
              $
              (4,131,946
              )





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


3




THEATER
      XTREME ENTERTAINMENT GROUP, INC.STATEMENTS
      OF CASH FLOWSNINE
      MONTHS ENDED MARCH 31
  2008
              
              
              2007Cash
      flows from operating activities:Net
      Loss
              
              $
              (2,986,567
              )
              
              $
              (2,185,336
              )Adjustments
      to reconcile net loss tonet
      cash used in operating activities:Depreciation
              
              
              190,821
              
              
              
              128,489Loss
      on disposal of assets
              
              
              105,375
              
              
              
              -Amortization
      of prepaid consulting services
              
              
              376,207
              
              
              
              -Forgiveness
      of merger liabilities
              
              
              -
              
              
              
              (8,569
              )Issuance
      of common stock for services
              
              
              41,337
              
              
              
              -Issuance
      of warrants for services
              
              
              -
              
              
              
              18,400Increase
      in allowance for doubtful accounts
              
              
              63,312
              
              
              
              25,000Employee
      stock option vesting for compensation
              
              
              93,511
              
              
              
              97,352Non-employee
      stock option vesting for services
              
              
              6,218
              
              
              
              8,501Accretion
      of discount on converetible debt
              
              
              269,497
              
              
              
              -Amortization
      of deferred charges
              
              
              104,092
              
              
              
              625,025Increase
      in assetsAccounts
      receivable
              
              
              (207,827
              )
              
              
              (217,615
              )Inventory
              
              
              248,569
              
              
              
              (82,205
              )Prepaid
      expenses
              
              
              (34,307
              )
              
              
              2,723Other
      assets
              
              
              55,259
              
              
              
              (276,919
              )Increase
      in liabilitiesAccounts
      payable and accrued expenses
              
              
              578,090
              
              
              
              83,244Payroll
      liabilities
              
              
              (29,530
              )
              
              
              10,446Deferred
      compensation
              
              
              12,582
              
              
              
              -Deferred
      franchise fees
              
              
              17,500
              
              
              
              5,000Deferred
      sales
              
              
              161,975
              
              
              
              (25,251
              )Other
      current liabilities
              
              
              56,117
              
              
              
              -Net
      cash provided by (or used in) operating activities
              
              
              (877,769
              )
              
              
              (1,791,715
              )Deposits
      on stores and corporate facility
              
              
              -
              
              
              
              (28,234
              )Purchase
      of property and equipment
              
              
              (2,567
              )
              
              
              (335,170
              )Net
      cash used in investing activities
              
              
              (2,567
              )
              
              
              (363,404
              )Cash
      flows from financing activities:Repayment
      of notes payable
              
              
              (27,417
              )
              
              
              (157,756
              )Proceeds
      from short-term debentures
              
              
              -
              
              
              
              1,500,000Repayment
      of short-term debentures
              
              
              -
              
              
              
              (1,200,000
              )Proceeds
      from non-convertible debentures
              
              
              225,000
              
              
              
              -Proceeds
      from short-term promissory notes
              
              
              563,076
              
              
              
              -Proceeds
      from long-term debentures
              
              
              -
              
              
              
              2,700,000Proceeds
      from issuance of common stock
              
              
              -
              
              
              
              64,552Net
      cash provided by financing activities
              
              
              760,659
              
              
              
              2,906,796Net
      increase in cash
              
              
              (119,677
              )
              
              
              751,677Cash
      and equivalents, beginning of period
              
              
              232,583
              
              
              
              466,481Cash
      and equivalents, end of period
              
              $
              112,906
              
              
              $
              1,218,158Supplemental
      disclosure:Cash
      paid during the period for interest
              
              $
              64,055
              
              
              $
              80,846Supplemental
      disclosure of non-cashinvesting
      and financing activites:Liabilities
      assumed as part of acquisition of property
              
              $
              -
              
              
              $
              2,598Acquisition
      of property and equipmentby
      issuance of notes payable
              
              $
              -
              
              
              $
              210,608Acquisition
      of property and equipmentby
      issuance of common stock
              
              $
              -
              
              
              $
              40,000Prepaid
      consulting servicesby
      issuance of common stock
              
              $
              396,500
              
              
              $
              425,000Deferred
      Financing chargesby
      issuance of warrants
              
              $
              12,200
              
              
              $
              730,400Prepaid
      consulting servicesby
      issuance of warrants
              
              $
              91,400
              
              
              $
              18,400Discount
      on debt due to beneficial conversionoption
              
              $
              250,028
              
              
              $
              -Warrants
      issued on convertible debt
              
              $
              60,556
              
              
              $
              -




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




4


THEATER
XTREME ENTERTAINMENT GROUP, INC.
 NOTESTO FINANCIAL STATEMENTS
 (UNAUDITED)


NOTE
1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES





Basis
of Presentations


The
accompanying unaudited financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information and with the instructions for Form 10-QSB and Item 310(b) of
Regulation S-B.  In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ending March 31, 2008 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2008. The unaudited financial statements
should be read in conjunction with the financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal
year ended June 30, 2007.





Nature
of Operations


Theater
Xtreme Entertainment Group, Inc. (the “Company”), a Florida corporation, is a
retail store and franchise marketing company engaged in retail sales and
distribution through the operation of Company-owned home cinema design stores,
the sale of franchise licenses and wholesale product distribution to
franchisees. The Company opened its first Company retail store, or design store
on September 1, 2003 in Newark, Delaware.   In August 2004 the
Company opened a second Company owned design store in Wilmington,
Delaware.  A third Company owned design store opened in Bel Air,
Maryland in September 2005.  In July, 2006, the Company purchased the
assets and assumed the leasehold of its franchisee located in Leesport,
Pennsylvania. In March, 2007, the Company relocated its Wilmington, Delaware
design store to an improved location in Wilmington, Delaware and in May 2007,
the Company opened its Lutherville, Maryland design store.  The
Company sold twenty-two franchises through June 30, 2007 and an additional two
through September 30, 2007 bringing the total number of franchises sold through
March 31, 2008 to twenty-four. The first franchise design center opened in May,
2005 in East Longmeadow, Massachusetts.  Through June 30, 2007 the
Company had nine franchise stores opened and operating. During the nine months
ended March 31, 2008, an additional two franchise stores opened and one
franchise store closed bringing the total number of opened and operating
franchise locations to ten. Effective November 6, 2007, the Company closed two
of its five Company-owned retail stores, one in Leesport, Pennsylvania (formerly
a franchise store) and one in Newark, Delaware (its first location) and
eliminated staff at these locations.  The Company has taken these
actions as part of a recently implemented store performance evaluation and cost
and expense reduction initiative developed earlier and designed to reduce costs
and expenses.





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.







5


THEATER
XTREME ENTERTAINMENT GROUP, INC.
 NOTES
TO FINANCIAL STATEMENTS
 (UNAUDITED)


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.





Revenue
Recognition


Retail
sales include all sales from Company-owned design centers.  The
following is a summary of earned revenues for the three and nine months ended
March 31:




Three
      Months Ended March 31
              
              
              Nine
      Months Ended March 312008
              
              
              2007
              
              
              2008
              
              
              2007Retail
      sales
              
              $
              736,728
              
              
              $
              1,407,730
              
              
              
              2,444,793
              
              
              
              3,976,191Wholesale
      sales
              
              
              21,015
              
              
              
              341,723
              
              
              
              494,503
              
              
              
              834,976Franchise
      licenses and royalties
              
              
              67,444
              
              
              
              71,822
              
              
              
              264,671
              
              
              
              174,825Total
      revenues
              
              $
              825,187
              
              
              $
              1,821,275
              
              
              
              3,203,967
              
              
              
              4,985,992


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





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





The
following is a summary of amounts included in deferred sales as at March
31:





2008
              
              
              2007Deferred
      retail sales
              
              $
              648,694
              
              
              $
              618,683Unearned
      service contract revenue
              
              
              9,032
              
              
              
              35,772Total
      deferred retail sales
              
              $
              657,726
              
              
              $
              654,455









6


THEATER
XTREME ENTERTAINMENT GROUP, INC.
 NOTES
TO FINANCIAL STATEMENTS
 (UNAUDITED)






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 three and
nine months ended March 31, 2008 and 2007, the basic and diluted loss per share
are the same, because the assumed conversion of the common stock equivalents
would be anti-dilutive as the Company experienced net losses for these
periods.





Income
Taxes


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





Inventory
Obsolescence


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





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





Shipping
and Handling Fees and Costs


The
Company classifies shipping and handling fees, when charged to the customer, as
revenue. The Company classifies shipping and handling costs as part of selling
and administration expenses.  Shipping and handling costs were $750
and $17,177 for the three months ended March 31, 2008 and 2007, respectively,
and $19,338 and $58,194 for the nine months ended March 31, 2008 and 2007,
respectively.  In view of the Company’s treatment of shipping and
handling costs as a component of selling, general and administrative cost, its
gross margin may not be comparable to those of other companies where shipping
and handling costs are included in cost of revenue.





Advertising
Costs


Advertising
and sales promotion costs are expensed as incurred. Advertising and promotion
expense, excluding investor relations expenses, totaled $25,304 and $108,895 for
the three months ended March 31, 2008 and 2007, respectively and $274,131 and
$396,511 for the nine months ended March 31, 2008 and 2007,
respectively.






7


THEATER
XTREME ENTERTAINMENT GROUP, INC.


NOTES
TO FINANCIAL STATEMENTS


(UNAUDITED)






NOTE
1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES


(CONTINUED)





Investor
Relations Costs


Investor
relations services are expensed as incurred. Investor relations expenses,
including investor relations promotional costs, totaled $1,689 and $152,900 for
the three months ended March 31, 2008 and 2007, respectively, and $136,094 and
$392,925 for the nine months ended March 31, 2008 and 2007,
respectively.





Stock-Based
Compensation


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





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





As a
result of the adoption of SFAS No. 123(R), a) during the three months ended
March 31, 2008 and 2007, the Company’s net income was approximately $53,874 and
$36,268 lower, respectively, as a result of stock-based compensation expense,
including $9,049 and $3,721, respectively, recognized on behalf of outside board
members and b) during the nine months ended March 31, 2008 and 2007, the
Company’s net income was approximately $99,729 and $105,853 lower, respectively,
as a result of stock-based compensation expense, including $6,218 and $8,501
respectively, recognized on behalf of outside board members. The negative
amounts recognized on behalf of outside board members reflect a reversal of
stock option expense recognized in previous periods that were reversed in the
three months ended March 31, 2008 as a result of forfeited stock options that
were not exercised.





As of
March 31, 2008, there was $367,314 of unrecognized compensation expenses and
$14,999 of unrecognized expenses for services related to non-vested market-based
option share awards that are expected to be recognized through the fiscal year
ended June 30, 2012.








8


THEATER
XTREME ENTERTAINMENT GROUP, INC.


NOTES
TO FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES


(CONTINUED)





Recently Issued
Pronouncements


In June
2006, the Financial Accounting Standards Board ("FASB") issued Interpretation
No. 48 ("FIN 48"), Accounting
for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for
the financial statement recognition, measurement and disclosure of uncertain tax
positions recognized in an enterprise's financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes.
Tax positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized upon the adoption of FIN 48 and in subsequent
periods. FIN 48 has been adopted by the Company as of July 1, 2007, and the
provisions of FIN 48 were applied to all tax positions under Statement No. 109
upon initial adoption. The cumulative effect of applying the provisions of this
interpretation will be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. The adoption of FIN 48 did not require
adjustments to the Company’s financial statements.





In
September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
("SFAS No. 157"). SFAS No. 157 establishes a framework for measuring fair value
and expands disclosures about fair value measurements.  The changes to
current practice resulting from the application of this statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements.  The Statement is
effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years.  The Company does not believe that the
adoption of the provisions of SFAS No. 157 will materially impact its financial
statements or footnote disclosures.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.  This Statement permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair
value.  The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions.  This statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities.  This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and will
become effective for the Company beginning with the first quarter of fiscal
2009.  The Company has not yet determined the impact of the adoption
of SFAS No. 159 on its financial statements and footnote
disclosures.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141R”).  SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired.  SFAS 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination.  This statement is effective for the Company beginning
January 1, 2009.






9




THEATER
XTREME ENTERTAINMENT GROUP, INC.


NOTES
TO FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES


(CONTINUED)





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of Accounting Research Bulletin
No. 51 ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. This statement is effective for the Company
beginning January 1, 2009. This statement is not currently applicable since the
Company it has no majority-owned subsidiaries.





In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities ("SFAS 161"), which is effective January 1,
2009. SFAS 161 requires enhanced disclosures about derivative instruments and
hedging activities to allow for a better understanding of their effects on an
entity's financial position, financial performance, and cash flows. Among other
things, SFAS 161 requires disclosures of the fair values of derivative
instruments and associated gains and losses in a tabular formant. The Company is
in the process of evaluating the effect, if any, the adoption of SFAS 161 will
have on its financial statements.





NOTE
2 - MANAGEMENT’S PLAN





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 selling of
existing Company franchises. Further, the Company’s results of operations and
resulting capital requirements will be affected by a variety of additional
factors and risks including, but not limited to, general economic conditions,
decreases in average selling prices over the life of any particular product, new
product and technology introductions and the ability to develop and maintain
critical strategic supply and co-marketing relationships.





The
Company has incurred significant losses from operations, has an accumulated
deficit and a highly leveraged capital position that raises substantial doubts
about the Company’s ability to continue as a going concern. The financial
statements do not include any adjustments related to recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company expects to incur significant expenditures to
further the development and commercialization of its products. To achieve this,
the Company has requested and received deferral of interest payments due to its
principal debtor (Kinzer Technology LLC) through July 1, 2008 and the deferral
of principal payments due to its non-convertible debenture holders through June
30, 2008. The Company is also currently negotiating with both its principal
lender and its short term debenture and promissory note creditors for
modification of the terms of all of its debt instruments and is diligently
pursuing the raising of additional funds. See Note 7, Subsequent
Events.  Additionally, the Company received an agreement from each of
the Company’s chief executive officer and founder to defer a major portion of
their salaries until the Company’s cash flow improves.






10




THEATER
XTREME ENTERTAINMENT GROUP, INC.


NOTES
TO FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
3 - NOTES PAYABLE





Between
July 20 and August 15, 2007, the Company executed and delivered promissory notes
to three accredited investors ( the “Promissory Note Investors”) in the
aggregate face amount of $225,000 (the “Promissory Notes”), and warrants (the
“Promissory Warrants”) to purchase up to 112,500shares, in the
aggregate, of the Company’s common stock (the “Promissory Note Financing”). The
proceeds of the Promissory Note Financing were used for general corporate
purposes. The Promissory Notes bear interest at 14% per annum, mature one year
from the date of issue and may be prepaid at any time without
penalty.  The Promissory Warrants have an exercise price of $1.00 per
share and are subject to full ratchet price protection for the five-year life of
the Promissory Warrants.  Repayment of the Promissory Notes is
guaranteed by Scott R. Oglum, former Chief Executive Officer of the Company,
through separate Guaranty and Pledge agreements with all three accredited
investors. The guarantees are secured by a pledge by Mr. Oglum of up to
3,618,275 shares, in the aggregate, of the Company’s common stock which he owns
representing his entire holdings. In September, 2007, the Company indemnified
Mr. Oglum, in connection with the Guaranty and Pledge Agreements, for any and
all payments made by Mr. Oglum to the holders of the Promissory Notes and for
the dollar amount of any unrecovered proceeds pursuant to the sale of any of the
Pledged Shares as may be sold pursuant to the Guaranty and Pledge
Agreements.





In
October, 2007, the Company and Kinzer Technology, LLC (“Kinzer”) amended that
certain debenture dated March 6, 2007 in the principal amount of $2.7 million
payable to Kinzer (the “March Debenture”).  Under the original terms
of the March Debenture, the Company was prohibited from incurring any additional
unsecured indebtedness for borrowed money after March 6, 2007 in excess of $1.0
million.  The amendment increases the amount of such indebtedness
which may be incurred after March 6, 2007 to $2.0 million.  The March
Debenture also requires quarterly interest payments on each April 1, July 1,
October 1, and January 1.  The amendment permits the Company to defer
the interest payments otherwise due on October 1, 2007 and January 1, 2008 until
July 1, 2008.  On March 31, 2008, the Company and Kinzer agreed to
further amend the Debenture to defer the interest payment otherwise due on April
1, 2008 until July 1, 2008.





In
December, 2007, the Company and the holders of three debentures, whose aggregate
face value amounted to $300,000 (the “Debenture Holders”), agreed to amend the
debentures.  The amendment extended the due date of the payment of
amounts due and payable on the debentures to March 17, 2008.  In
consideration for this amendment, the Company issued warrants to the debenture
holders entitling them to purchase up to 150,000 shares of Company’s Common
Stock, in the aggregate, at an exercise price of $1.00 per share. In March,
2008, the Company and the debenture Holders further extended the due date of the
payment of amounts due and payable on the debentures to April 30, 2008 and later
amended same to June 30, 2008. See also Note 7, Subsequent Events.







11


THEATER
XTREME ENTERTAINMENT GROUP, INC.
 NOTES
TO FINANCIAL STATEMENTS
 (UNAUDITED)





NOTE
3 - NOTES PAYABLE (CONTINUED)





In
January, February and March, 2008, the Company executed and delivered,
separately to six accredited investors (the “Convertible Investors”), (i)
convertible promissory notes in the aggregate face amount of $563,076 (the
“Convertible Notes”), and (ii) warrants (the “C Warrants”) to purchase up to an
aggregate of 438,096 shares of the Company’s common stock (the “Convertible
Financing”). The proceeds of the sale of the Convertible Notes, net of
transaction expenses, were used for general corporate purposes. The Convertible
Notes mature from 120 to 180 days from date of issue and may be prepaid at any
time in whole or in part without penalty. The Convertible Notes bear interest at
19%, per annum, for the 180 day notes, and 21% per annum on the 120 day notes,
and are due and payable at their respective maturity dates. The Convertible
Investors may convert the principal balance of the Convertible Notes plus
accrued interest (if any), in whole or in part, into Common Shares, at their
election at any time prior to payment at a conversion price equal to Ten Cents
($0.10) per share. The C Warrants have an exercise price of $0.50 per share for
the five-year life of the Warrants. In accordance with EITF-00-19 (Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock), the C Warrants are classified as equity and the Company has
valued the C Warrants at $60,556, representing the fair value using the
Black-Sholes model at the time of the loans were made and reflected as a
discount on the Convertible Notes to be accreted over their term. Additionally,
in accordance with SFAS 133, the Convertible Notes are deemed derivative
instruments requiring bifurcation of the conversion feature. Under EITF-00-27
(Application of Issue No. 98-5
to Certain Convertible Instruments), the Company has calculated an
intrinsic conversion value of the Convertible Notes at $250,028 and will treat
this amount as an embedded derivative liability since the counterparty has a
choice of settlement in cash or in shares. The aggregate embedded derivative
liability of $250,028 will be reclassified to equity upon expiry or conversion
of the conversion feature. Additionally, and in accordance with EITF-98-5 (Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios), the value of the C warrants and the beneficial
conversion feature, totaling $310,584, is reflected as a discount assigned to
the Convertible Notes.  The discount associated with the beneficial
conversion feature is to be accreted over the period of the earliest conversion
date. Since the Convertible Notes are convertible immediately, the Company
accreted the entire $250,068 as interest expense.  The discount
associated with the issuance of the C Warrants is accreted over the term of the
Convertible Notes.  During the nine months ended March 31, 2008, the
Company accreted $19,469 associated with this discount as interest
expense.





NOTE
4 - STOCKHOLDERS’ EQUITY





During
the nine months ended March 31, 2008, the Company issued 650,000 of its common
shares at $0.61 per share, representing the fair value of the price per share at
the time of issuance, with an aggregate value of $395,650, net of legal
expenses, and granted warrants to purchase 500,000 shares of the Company’s
common stock at an exercise price of $1.00 per share, to a consultant for
services to be rendered over a twelve month period. The Company valued the
common stock purchase warrants at $90,800. The values of the common stock and
purchase warrants shall both be amortized over a twelve month
period.  $116,224 and $359,874 of expense was recognized during the
three and nine months ended March 31, 2008.





During
the nine months ended March 31, 2008, the Company issued 75,000 of its common
shares at $0.55 per share, representing the fair value of the price per share at
the time of issuance, with an aggregate value of $41,387, to another unrelated
consultant for services rendered.  For the three and nine months ended
March 31, 2008, $0 and $41,387 was recognized as expense,
respectively.






12


THEATER
XTREME ENTERTAINMENT GROUP, INC.


NOTES
TO FINANCIAL STATEMENTS


(UNAUDITED)






NOTE
4 - STOCKHOLDERS’ EQUITY (CONTINUED)





During
the nine months ended March 31, 2008, the Company granted warrants to purchase
8,750 shares of the Company’s common stock at an exercise price of $1.00 per
share to a consultant in consideration for services rendered. The Company valued
these warrants at $600 and expensed this amount in the nine months ended March
31, 2008 as a consulting expense.





During
the nine months ended March 31, 2008, the Company granted warrants to purchase
112,500 shares of the Company’s common stock, in the aggregate, at exercise
prices of $1.00 per share separately to three accredited investors in connection
with the Promissory Note Financing. The Company has valued these warrants at
$12,000, in the aggregate and will expense this amount over the time of the
respective underlying Promissory Notes. See Note 3, Notes Payable.





During
the nine months ended March 31, 2008, the Company and the holders of three
debentures, whose aggregate face value amounts to $300,000, agreed to amend the
debentures as to their due dates on a month-to-month basis.  The
amendments have extended the due date of the payment of amounts due and payable
on the debentures to June 30, 2008.  In consideration for the
amendments, the Company issued warrants to the debenture holders entitling them
to purchase up to 150,000 shares of Company’s Common Stock, in the aggregate, at
an exercise price of $1.00 per share.  The Company has valued these
warrants at $200, in the aggregate, and has expensed this amount in the nine
months ended March 31, 2008.





Additionally,
in December, 2007, in separate transactions, the Company and all holders of
common stock purchase warrants issued by the Company which had heretofore
included full ratchet protection (the “R Warrants”) entered into agreements to
amend the terms of the R Warrants to remove from the R Warrants those provisions
calling for full ratchet protection.  The eliminated provisions would
have given the holders the right to acquire shares at a lower exercise price at
any time that the Company issued equity securities at an effective price lower
than the then current exercise price of the outstanding warrants.





The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award, with the following assumptions: no dividend yield,
expected volatility of between 45% and 264%, risk-free interest rate of between
3.0% to 5.25% and expected option life of five years.





The
following summarizes warrants to purchase the Company’s Common Stock outstanding
through March 31, 2008:





AverageNumber
      of
              
              
              ExerciseWarrants
              
              
              PriceWarrants
      outstanding at June 30, 2007
              
              
              1,625,160
              
              
              $
              1.00Warrants
      issued during the nine monthsended
      March 31, 2008
              
              
              1,209,346
              
              
              $
              0.82Warrants
      outstanding at March 31, 2008
              
              
              2,834,506
              
              
              $
              0.92Exercisable,
      March 31, 2008
              
              
              2,834,506
              
              
              $
              0.92






13


THEATER
XTREME ENTERTAINMENT GROUP, INC.


NOTES
TO FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
4 - STOCKHOLDERS’ EQUITY (CONTINUED)





Information
with respect to the Company’s warrants that are outstanding as of March 31, 2008
is as follows:




Number
      of Warrants
              
              Weighted
      Average
              
              Weighted
      AverageRange
      of
              
              Currently
      Exercisable
              
              Remaining
              
              Exercise
      Price of Options andExercise
      Prices
              
              at
      March 31, 2008
              
              Contractual
      Life
              
              Warrants
      Currently Exercisable$0.50
      - $1.00
              
              2,834,506
              
              4.1
      Years
              
              $                                 0.92




See also,
Note 7, Subsequent Events.





NOTE
5 – STOCK BASED COMPENSATION





In April,
2005, stockholders holding a majority of the shares of the Company’s common
stock approved the adoption of the Company’s 2005 Stock Option Plan (the
“Plan”). The Plan is designed to help the Company attract, motivate and retain
high quality employees necessary to execute the Company’s business plans
successfully. On December 21, 2005 stockholders holding a majority of the shares
of the Company’s common stock approved an increase in the number of common
shares allocated to the Plan to 2,000,000, from 1,400,000
shares.  Participation in the Plan is limited to employees and outside
Directors. The exercise price of both incentive and nonqualified stock options
is at least the fair market value of the Company’s common stock at the time of
the grant. The options generally vest over a three to four year period and
expire no later than ten years from the date of grant.





In March
2008, the Company’s board of directors adopted a new 2008 Equity Incentive Plan
(“2008 Plan”). There were 7,000,000 shares of the Company’s common stock
allocated to the 2008 Plan and it is designed to provide incentives to attract,
retain and motivate eligible persons whose present and potential contributions
are key to the success of the Company by offering them an opportunity to
participate in the Company’s future performance through awards of options, the
right to purchase common stock and stock bonuses. The exercise price of
incentive stock options is at least the fair market value of the Company’s
common stock at the time of the grant. Participation in the plan is not limited
to employees. The exercise price of non-incentive stock options cannot be lower
than 85% of the fair market value of the Company’s common stock at the time of
grant. The options generally vest over a three to four year period and expire no
later than ten years from the date of grant.





The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award, with the following assumptions: no dividend yield,
expected volatility of between 45% and 264%, risk-free interest rate of between
3.0% to 5.25% and expected option life of ten years.





At June
30, 2007, there were a total of 1,515,717 stock options outstanding under the
2005 Stock Option Plan.  At March 31, 2008, there were 1,742,092 stock
options outstanding under the 2005 Stock Option Plan and 1,550,000 stock options
outstanding under the 2008 Equity Incentive Plan.





14


THEATER
XTREME ENTERTAINMENT GROUP, INC.
 NOTES
TO FINANCIAL STATEMENTS
 (UNAUDITED)




NOTE
5 – STOCK BASED COMPENSATION (CONTINUED)





During
the nine months ended March 31, 2008, the Company granted stock options totaling
2,000,000 option shares to one employee, granted stock options totaling 50,000
option shares to one director, and an aggregate of 273,625 stock options were
forfeited.





A summary
of stock option transactions for the nine months ended March 31, 2008 is as
follows:




Incentive
      Stock Options
              
              
              Nonqualified
      Stock OptionsWeighted
              
              
              
              
              
              WeightedStock
              
              
              Average
              
              
              Stock
              
              
              AverageOptions
              
              
              Exercise
              
              
              Options
              
              
              ExerciseOutstanding
              
              
              Price
              
              
              Outstanding
              
              
              PriceBalance,
      June 30, 2007
              
              
              1,335,717
              
              
              $
              0.54
              
              
              
              180,000
              
              
              $
              0.48Granted
      during the period
              
              
              2,000,000
              
              
              $
              0.11
              
              
              
              50,000
              
              
              $
              0.10Exercised
      during the period
              
              
              -
              
              
              xx
              
              
              
              -
              
              
              xxCancelled
      / forfeited during the period
              
              
              (213,625
              )
              
              $
              0.48
              
              
              
              (60,000
              )
              
              $
              0.48Balance,
      March 31, 2008
              
              
              3,122,092
              
              
              $
              0.27
              
              
              
              170,000
              
              
              $
              0.37





The
following table summarizes information about stock options outstanding at March
31, 2008:




Summary
      of ISO Options
              
              Summary
      of Nonqualified OptionsOutstanding
              
              Exercisable
              
              Outstanding
              
              ExercisableNumber
              
              Weighted
              
              Number
              
              Number
              
              Weighted
              
              NumberOutstanding
              
              Average
              
              Outstanding
              
              Outstanding
              
              Average
              
              Outstandingat
              
              Remaining
              
              at
              
              at
              
              Remaining
              
              atExercise
              
              March
      31
              
              Contractual
              
              March
      31
              
              March
      31
              
              Contractual
              
              March
      31Price
              
              2008
              
              Life
              
              2008
              
              2008
              
              Life
              
              2008$0.10
              
              -
              
              xx
              
              -
              
              50,000
              
              9.8
      Years
              
              -$0.11
              
              2,000,000
              
              10.0
      Years
              
              -
              
              -
              
              xx
              
              -$0.35
              
              751,667
              
              7.4
      Years
              
              470,000
              
              100,000
              
              7.3
      Years
              
              50,000$0.80
              
              50,000
              
              9.1
      Years
              
              -
              
              -
              
              xx
              
              -$0.89
              
              50,000
              
              9.1
      Years
              
              -
              
              -
              
              xx
              
              -$1.00
              
              265,000
              
              8.2
      Years
              
              68,750
              
              -
              
              xx
              
              -$1.04
              
              5,425
              
              8.7
      Years
              
              1,356
              
              -
              
              xx
              
              -$1.12
              
              -
              
              xx
              
              -
              
              20,000
              
              9.0
      Years
              
              5,0003,122,092
              
              
              
              540,106
              
              170,000
              
              
              
              55,000









15


THEATER
XTREME ENTERTAINMENT GROUP, INC.
 NOTES
TO FINANCIAL STATEMENTS
 (UNAUDITED)




NOTE
6 – INCOME TAXES





There is
no income tax benefit for the losses for the three months and nine months ended
March 31, 2008 and 2007, because the Company has determined that the realization
of the net deferred tax asset is not assured.  The Company has created
a valuation allowance for the entire amount of such benefits.





As
discussed in Note 1, the Company adopted FIN 48 effective July 1, 2007 which did
not require an accrual for uncertain tax positions as of July 1,
2007.





There was
no change in unrecognized tax benefits during the period ended March 31, 2008
and there was no accrual for uncertain tax positions as of March 31,
2008.





The
Company files income tax returns in the U.S. federal jurisdiction and various
state jurisdictions.  In general, the Company’s filed income tax
returns are no longer subject to examination by the respective taxing
authorities for years ending before June 30, 2004.





NOTE
7 – SUBSEQUENT EVENTS





On April
3, 2008, the Company issued 500,000 shares of its common stock to a consultant
for services rendered, valued at $190,000, fair value.





On April
4, 2008, the Company issued 25,000 shares of its common stock to a consultant
for services rendered, valued at $10,500, fair value.





On April
7, 2008, Scott R. Oglum resigned as Chairman and CEO of the Company and the
board of directors elected Robert G. Oberosler to succeed him as Chairman and
CEO.





On April
7, 2008, the Company elected Vincent P. Pipia to its board of directors and
granted Mr. Pipia stock options to purchase 50,000 shares of the Company’s
common stock at an exercise price of $0.40 per share, valued at $20,000, fair
value.





On April
21, 2008, the board of directors voted to amend the Company’s Articles of
Incorporation to increase the number of shares which the Company is authorized
to issue from 55,000,000 shares to 105,000,000 shares comprised of 100,000,000
common shares, par value $0.001, and 5,000,000 preferred shares with no par
value. The amendment was approved by a sufficient number of shareholders needed
for approval.  The amendment was filed on May 30, 2008 with the
Florida Department of State.  The number of authorized shares has been
retroactively stated on the balance sheet.





On April
24, 2008, the board of directors voted to amend the Company’s Articles of
Incorporation to designate 1,300,000 of the Company’s preferred stock as the
Company’s Series A 12% Convertible Preferred Stock and created preferences,
limitations and relative rights related thereto.  The amendment was
filed on May 12, 2008 with the Florida Department of State.






16


THEATER
XTREME ENTERTAINMENT GROUP, INC.
 NOTES
TO FINANCIAL STATEMENTS
 (UNAUDITED)


NOTE
7 – SUBSEQUENT EVENTS (CONTINUED)





On May 5,
2008 the Company entered into a Financial Advisory and Investment Banking
Agreement with American Capital Partners, Inc. (“ACP”) to act as the Company’s
non-exclusive financial and investment banking advisor on matters related to
investment banking and corporate financing activities.  The agreement
is for a period of 12 months, cancellable by either party after 30 days,
subsequent to an initial 90 day period. The agreement provides that ACP shall
receive a fee of $5,000 per month. Additionally, ACP received 350,000 shares of
the Company’s common stock valued at $52,500, fair value. Mr. Vincent Pipia, who
serves as a director of the Company, also currently serves as Director of
Capital Markets and oversees the investment banking operations of
ACP.





On May 5,
2008, the Company granted an option to purchase 100,000 shares of its common
stock at an exercise price of $0.15 per share to a consultant as compensation
for services rendered valued at $15,000, fair value.





On May 5,
2008, the Company granted to six employees stock options to purchase 150,000
shares, in the aggregate, of the Company’s common stock at an exercise price of
$0.15 per share valued at $22,500, fair value.





Through
May 14, 2008, the Company sold 1,150,000 shares of Series A 12% Convertible
Preferred Stock and warrants to purchase an additional 500,000 shares of the
common stock of the Company, par value $0.001 per share, at an exercise price of
$0.50 per share.  Fees associated with this sale included a
non-refundable cash engagement fee of $25,000, a cash fee of $149,500 in selling
commissions and expense allowance, and a warrant to purchase 149,500 shares of
Series A Preferred Stock at a price of $1.00 per share.  The net
proceeds to the Company from the offering are approximately $1,000,500, less
estimated expenses of between $65,000 and $75,000 incurred in connection with
the offering. The Company has valued these warrants at $221,500, in the
aggregate, and will reflect same as additional costs of the
offering.





On May
14, 2008, each of Scott Oglum and Justin Schakelman resigned as a member of the
Company’s board of directors. Both will remain employed with the Company. Also
on May 14, 2008, James J. Vincenzo agreed to resign as the Company’s chief
financial officer, effective June 30, 2008.





On June
2, 2008, the Company closed its Bel Air, MD corporate store.  This store
did not fit the Company’s growth model and was not
profitable.  Currently the company is still liable for the lease per
the original agreement.






17




Item
2.  Management’s Discussion and Analysis or Plan of
Operation





Forward-Looking
Information





The
following discussion of the Company’s financial condition and results of
operations should be read in conjunction with the Company’s financial statements
and notes for the three and nine month periods ended March 31, 2008 included
herein and its audited financial statements and notes included in the Company’s
Annual Report on Form 10-KSB for the year ended June 30, 2007 as filed with the
Securities and Exchange Commission. This discussion and other sections of this
Quarterly Report contain, in addition to historical information, forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the Company’s actual results, performance or
achievements expressed or implied by these forward-looking statements to differ
materially from such forward-looking statements. The forward-looking statements
included in this report may prove to be inaccurate.




These
statements are based on a number of assumptions concerning future events, and
are subject to a number of uncertainties and other factors, many of which are
outside its control. Actual results may differ materially from such statements
for a number of reasons, including the effects of regulation and changes in
capital requirements and funding. In light of the significant uncertainties
inherent in these forward-looking statements, you should not consider this
information to be a guarantee by us or any other person that the Company’s
objectives and plans will be achieved. The Company does not undertake to update
or revise its forward-looking statements even if experience or future changes
make it clear that any projected results (expressed or implied) will not be
realized.




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
also 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 expand its corporate owned stores and increase profitability as
      anticipated by management;


·
            the
      ability to maintain margin and sales growth
  rates;


·
            the
      ability to attract and retain quality
employees;


·
            the
      effect of changing economic
conditions;


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


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


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




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






18




Overview




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. A majority 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
proprietary digital theater management system called OneViewTM. 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.




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.







19




The
following table sets forth the number of design centers:




Theater
Xtreme Entertainment Group,
Inc.




Design
      Stores Opened and Operating
              
              FranchisedCompany
              
              
              
              Total
              
              Not
      YetOwned
              
              Franchised
              
              Opened
              
              Opened
              
              TotalNumber
      of design stores at June 30, 2004
              1
              
              0
              
              1
              
              0
              
              1Net
      additions (deletions) in the fiscal year ended June 30,
    2005
              1
              
              1
              
              2
              
              3
              
              5Number
      of design stores at June 30, 2005
              2
              
              1
              
              3
              
              3
              
              6Net
      additions (deletions) in the fiscal year ended June 30,
    2006
              1
              
              5
              
              6
              
              9
              
              15Number
      of design stores at June 30, 2006
              3
              
              6
              
              9
              
              12
              
              21Net
      additions (deletions) in the fiscal year ended June 30,
    2007
              2
              
              3
              
              5
              
              0
              
              5Number
      of design stores at June 30, 2007
              5
              
              9
              
              14
              
              12
              
              26Net
      additions (deletions) in the three months ended September 30,
      2007
              0
              
              2
              
              2
              
              0
              
              2Number
      of design stores at September 30, 2007
              5
              
              11
              
              16
              
              12
              
              28Net
      additions (deletions) in the three months ended December 31,
      2007
              (2)
              
              0
              
              (2)
              
              0
              
              (2)Number
      of design stores at December 31, 2007
              3
              
              11
              
              14
              
              12
              
              26Net
      additions (deletions) in the three months ended March 31,
    2008
              0
              
              (1)
              
              (1)
              
              0
              
              (1)Number
      of design stores at      March 31,
      2008
              3
              
              10
              
              13
              
              12
              
              25




In the
three months ended March 31, 2008, no new company or franchise stores opened and
one franchise store closed.




Our
business is subject to seasonal fluctuations.  Historically, we have
recognized that the seasons with the highest level of sales orders are the
spring and fall months (March, April, September, October and November), and the
seasons with the lowest level of sales orders being late spring to summer (May
through August) and the end-of-the-year holiday periods through late winter
(late December through February).




Because
of the seasonality of our business, results for any quarter are not necessarily
indicative of results that may be achieved for the full fiscal year or any
subsequent quarter. Further, due to our recent various store openings and
closings, the true extent of the seasonality of our business may not yet be
apparent.







20




Results
of Operations for the three months ended March 31, 2008 compared to the three
months ended March 31, 2007




Recognized
sales revenue for the three months ended March 31, 2008 was $825,187 compared to
$1,821,275 for the three months ended March 31, 2007, reflecting a decrease of
$996,088 or 55%. This decrease is primarily the result of decreased retail sales
due to the closing of two of the Company’s retail outlets and weakened consumer
demand.  Aggregate gross profit amounts and percentages were $448,063
and 54% for the three months ended March 31, 2008 as compared to $761,251 and
42% for the three months ended March 31, 2007.




The
following is illustrative for the three months ended March 31:




Three
      months ended March 312008
              
              2007Gross
              
              
              
              
              
              GrossSales
              
              Profit
              
              %
              
              Sales
              
              Profit
              
              %Retail
              
              $     736,728
              
              $   377,151
              
              51%
              
              $  1,407,730
              
              $     637,315
              
              45%Wholesale
              
              $       21,015
              
              $       3,468
              
              17%
              
              $     341,723
              
              $       52,114
              
              15%Franchise
              
              $       67,444
              
              $     67,444
              
              100%
              
              $       71,822
              
              $       71,822
              
              100%Total
              
              $     825,187
              
              $   448,063
              
              54%
              
              $  1,821,275
              
              $     761,251
              
              42%





For the
three months ended March 31, 2008, retail sales decreased by $671,002, or 48%,
when compared to the three months ended March 31, 2007. Same-store sales,
reflecting sales for the Company’s Delaware locations, were $593,683 and
$908,728 for the three months ended March 31, 2008 and 2007, respectively and
decreased by $315,045 or 35%. This decrease is attributable mainly to reduced
consumer spending in the consumer electronics category generally experienced by
most consumer electronics retailers and the closing of the Company’s Newark,
Delaware retail store. New stores sales were $143,045 for the three months ended
March 31, 2008 compared to $499,002 for the three months ended March 31, 2007,
for a decrease of $355,957 or 71% and accounted for the majority of the overall
retail sales decrease.  This decrease is attributable mainly to
reduced consumer spending in the consumer electronics category generally
experienced by most consumer electronics retailers coupled with their less than
favorable site locations and the closing of the Leesport, Pennsylvania retail
store. New stores reflect the inclusion of the Company’s Leesport, Pennsylvania
and Bel Air, Maryland and Lutherville, Maryland design stores, of which
Leesport, Pennsylvania is now closed.




Gross
profit amounts and percentages on retail sales for the three months ended March
31, 2008 amounted to $377,151 and 51% compared to $637,314 and 45% for the three
months ended March 31, 2007.  The increase in gross margin is
attributable mainly to the receipt of a vendor incentive rebate from the
Company’s principal video projector vendor, accounting for virtually all of the
6% improvement in gross margin.




For the
three months ended March 31, 2008, the Company recognized wholesale sales,
principally sales to franchisees, of $21,015 compared to $341,723 for the three
months ended March 31, 2007, reflecting a decrease of $320,708 or
94%.  This decrease results from the Company’s franchisees now
purchasing audio and video product components directly from manufacturers as
opposed to purchasing these components through the Company.  Wholesale
gross profit amounts and percentages were $3,468 and 17% for the three months
ended March 31, 2008 compared to $52,114 and 15% for the three months ended
March 31, 2007.  This increase is attributable to the increased mix of
the sale of Company-sourced products that have a higher gross
margin.






21




For the
three months ended March 31, 2008, no new franchises were opened and the Company
recognized no earned revenue relating to the opening of its franchises compared
to $25,000 recognized in the three months ended March 31, 2007.  The
Company’s franchise contract provides royalty payments of approximately 4% of
franchisee gross revenues.  For the three months ended March 31, 2008,
the Company recognized franchise royalties of $67,443 compared to $46,821 in
royalties recognized for the three months ended March 31, 2007.




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 three months ended March 31, 2008,
occupancy expenses were $178,936 compared to $148,017 for the three months ended
March 31, 2007.  The increase of $30,919 is attributable to the
operating costs of a population of five Company-owned stores at March 31, 2008
versus four Company-owned stores open at March 31, 2007.  The Company
continues to reflect occupancy costs for its two Company stores that it closed
in November, 2007.




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 compensation.  Selling, general and administrative expenses
for the three months ended March 31, 2008 were $816,534 compared to $1,092,940
for the three months ended March 31, 2007 for a decrease of
$276,406.  Expenses for the three months ended March 31, 2008 include
Advertising and Promotional expenses of $25,304 compared to $108,895 spent
during the three months ended March 31, 2007 reflecting reduced spending across
the board in all advertising categories. Professional fees, excluding investment
advisor expense, amounted to $231,950 for the three months ended March 31, 2008
compared to $100,517 for the three months ended March 31, 2007 reflective of
increased spending for legal and management consulting
services.  Investment advisor expense amounted to $1,689 for the three
months ended March 31, 2008 compared to $152,900 for the three months ended
March 31, 2007. Personnel costs, excluding stock option expense, amounted to
$370,096 for the three months ended March 31, 2008 compared to $433,571 for the
three months ended March 31, 2007 reflective of two closed retail
stores.  Depreciation expense for the three months ended March 31,
2008 was $52,792 compared to $47,452 for the three months ended March 31, 2007.
The majority of the remaining change in selling, general and administrative
expenses is spread evenly throughout all remaining expense
categories.




Interest
expense of $140,415 includes the amortization of deferred imputed interest
pursuant to the issuance of convertible and non-convertible debt issued with
warrants amounting to $35,004.







22




Results
of Operations for the nine months ended March 31, 2008 compared to the nine
months ended March 31, 2007




Recognized
sales revenue for the nine months ended March 31, 2008 was $3,203,967 compared
to $4,985,992 for the nine months ended March 31, 2007, reflecting a decrease of
$1,782,025 or 36%.  This decrease is primarily the result of weakened
consumer demand and two closed retail outlets. Aggregate gross profit amounts
and percentages were $1,282,798 and 40% for the nine months ended March 31, 2008
as compared to $1,978,507 and 40% for the nine months ended March 31, 2007. The
following is illustrative for the nine months ended March 31:




Nine
      months ended March 312008
              
              2007Gross
              
              
              
              
              
              GrossSales
              
              Profit
              
              %
              
              Sales
              
              Profit
              
              %Retail
              
              $  2,444,793
              
              $     975,123
              
              40%
              
              $  3,976,191
              
              $  1,691,552
              
              43%Wholesale
              
              $     494,503
              
              $       43,004
              
              9%
              
              $     834,976
              
              $     112,130
              
              13%Franchise
              
              $     264,671
              
              $     264,671
              
              100%
              
              $     174,825
              
              $     174,825
              
              100%Total
              
              $  3,203,967
              
              $  1,282,798
              
              40%
              
              $  4,985,992
              
              $  1,978,507
              
              40%




For the
nine months ended March 31, 2008, retail sales decreased by $1,531,398 or 39%,
when compared to the nine months ended March 31, 2007. Same-store sales,
reflecting sales for the Company’s Delaware locations, were $1,916,203 and
$2,614,168 for the nine months ended March 31, 2008 and 2007, respectively and
decreased significantly by $697,965, or 27%. This decrease is attributable
mainly to reduced consumer spending in the consumer electronics category
generally experienced by most consumer electronics retailers and the closing of
the Company’s Newark, Delaware retail store. New store sales were $528,590 and
$1,362,023 for the nine months ended March 31, 2008 and 2007, respectively and
accounted for a sales decrease of $833,433 or 61%. The sales decline is
reflective of reduced spending in the consumer retail category and the closing
of the Company’s Leesport, Pennsylvania retail store. New stores reflect the
inclusion of the Company’s Leesport, Pennsylvania and Bel Air, Maryland and
Lutherville, Maryland design stores, of which Leesport, Pennsylvania is now
closed.




Gross
profit amounts and percentages on retail sales for the nine months ended March
31, 2008 amounted to $975,123 and 40% compared to $1,691,552 and 43% for the
nine months ended March 31, 2007.  The decline in gross margin is
attributable to the underabsorption of warehouse and installation personnel
costs owing to the decline of sales installations experienced in the first
fiscal quarter coupled with decreased margins on supplies, the write down of
defective cable inventory and the sale of retail displays and other obsolete
component models at less than standard retail pricing offset by rebates from
vendors.




For the
nine months ended March 31, 2008, the Company recognized wholesale sales,
principally sales to franchisees, of $494,503 compared to $834,976 for the nine
months ended March 31, 2007, reflecting a decrease of $340,473 or
41%.  This decrease results from the Company’s franchisees now
purchasing audio and video product components directly from manufacturers as
opposed to purchasing these components through the Company.  Wholesale
gross profit amounts and percentages were $43,004 and 9% compared to $112,130
and 13% for the nine months ended March 31, 2007.  This decline is
attributable to the change in the franchise purchasing channel.







23




For the
nine months ended March 31, 2008, the Company recognized $62,500 in earned
revenue relating to the opening of its franchises compared to $75,000 recognized
in the nine months ended March 31, 2007. Two new franchises were opened during
the period ended March 31, 2008.  The Company’s franchise contract
provides royalty payments of approximately 4% of franchisee gross
revenues.  For the nine months ended March 31, 2008, the Company
recognized franchise royalties of $202,171 compared to $96,089 in royalties
recognized for the nine months ended March 31, 2007.




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 nine months ended March 31, 2008,
occupancy expenses were $509,860 compared to $374,788 for the nine months ended
March 31, 2007.  The increase of $135,072 is attributable to the
operating costs of a population of five Company-owned stores at March 31, 2008
versus four Company-owned stores open at March 31, 2007. During the nine months
ended March 31, 2008, the Company closed two of its stores.  Despite
these closures, occupancy costs will continue until such time as the Company can
reach an understanding with its landlords.




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 compensation.  Selling, general and administrative expenses
for the nine months ended March 31, 2008 were $2,997,490 compared to $3,355,444
for the nine months ended March 31, 2007 for a decrease of
$357,954.  Expenses for the nine months ended March 31, 2008 include
Advertising and Promotional expenses of $274,131 compared to $396,511 spent
during the nine months ended March 31, 2007 reflecting reduced spending in media
advertising and in all categories after January 1, 2008. Professional fees,
excluding investment advisor expense, amounted to $618,757 for the nine months
ended March 31, 2008 compared to $440,233 for the nine months ended March 31,
2007 reflective of increased spending for management consulting services.
Investment advisor expense amounted to $136,094 for the nine months ended March
31, 2008 compared to $392,925 for the nine months ended March 31,
2007.  Depreciation expense for the nine months ended March 31, 2008
was $171,637 compared to $109,307 for the nine months ended March 31, 2007,
reflective of the increase in new store openings at Wilmington, Delaware and
Lutherville, Maryland.  Personnel costs, excluding stock option
expense amounted to $1,206,325 compared to $1,268,866 for the nine months ended
March 31, 2007 reflective of two closed retail stores The majority of the
remaining change in selling, general and administrative expenses is spread
evenly throughout all remaining expense categories.




For the
nine months ended March 31, 2008, the Company also recognized a loss of $105,375
on disposal of its leasehold improvement fixed assets due to the closing of its
Newark, Delaware and Leesport, Pennsylvania stores.




Interest
expense of $387,207 includes the amortization of deferred imputed interest
pursuant to the issuance of convertible and non-convertible debt issued with
warrants amounting to $104,283.




The
Company had net losses of $2,986,567 and $3,446,254 for the nine months ended
March 31, 2008 and year ended June 30, 2007.  The Company had a
working capital deficit at March 31, 2008 that resulted in a current ratio of
0.41 at such date. The Company was able to maintain operations in the nine
months ended March 31, 2008 only by borrowing $788,076 on a short-term basis at
very high interest rates and allowing accounts payable and accrued expenses to
increase to $1,380,068 at March 31, 2008 from $801,978 at June 30,
2007.






24




As noted
in the Company’s auditor’s report for the twelve months ended June 30, 2007,
there is substantial doubt about the Company’s ability to continue as a going
concern. Nonetheless, the Company is seeking to remedy this extremely difficult
financial situation with cost-cutting measures and attempts to raise capital.
There is no assurance that cost-cutting measures will succeed nor is there any
assurance that additional capital will be available to the Company on any terms,
let alone terms acceptable to the Company.




Liquidity
and Capital Resources




During
the nine months ended March 31, 2008, net cash used in operating activities was
$877,769 and net cash used in investing activities was $2,567, which was due
primarily to the purchase of equipment. Net cash provided by financing
activities for the nine months ended March 31, 2008 was $760,659. At March 31,
2008, our cash and cash equivalents totaled $112,906, our assets totaled
$2,524,609, our liabilities totaled $6,656,555 and we had stockholders' deficit
of $4,131,946.







Sources and Use of Cash




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





The
Company’s cash flow from operations since inception has been and continues to be
negative.  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
management expects increased operating costs in future periods due to a
commitment to develop retail, franchising, and distribution operations on a
regional and national scale, it also recognizes the need to monitor its costs
and assess the progress of each of its Company-owned design stores. Accordingly,
it has begun and will continue a program of selective cost reduction and profit
improvement initiatives to keep costs within prescribed parameters. This program
had led to the closing of two of its five Company-owned design stores that were
underperforming at the store profit contribution level. Despite these closures,
management expects an increase in gross profits from sales resulting from the
opening of additional design stores whose locations will be in major
metropolitan retail centers. Additionally, management anticipates 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.  Currently, each
of the Company’s chief executive officer and founder have agreed to defer a
major portion of their salaries until the Company is in a better cash flow
position.






25




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




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




The
Company’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.




There can
be no assurance that the Company will be able to successfully implement its
business strategies or that profitability will ever be achieved.  The
Company expects that its future operating results will fluctuate significantly
from year to year and will be impacted by factors beyond its
control.




Analysis of
Cash Flows




For the
nine months ended March 31, 2008




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.




Net cash
used in operating activities was $877,769 for the nine months ended March 31,
2008, consisting of the loss for the nine months ended March 31, 2008 of
$2,986,567, which included non-cash depreciation and amortization charges
amounting to $671,120, an increase in accounts receivable of $207,827, and an
increase in prepaid expenses of $34,307, offset by a loss on disposal of
leasehold assets of $105,375, an increase in allowance for doubtful accounts of
$63,312, stock option vesting of $99,729, accretion of discount on convertible
debt of $269,497, a decrease in inventory of $248,569, an increase in accounts
payable of $578,090, an increase in deferred sales of $161,975, the issuance of
common share and warrants amounting to $41,337, the decrease of all other assets
of $55,259 and an increase of all other liabilities of $56,669.






26





Net cash
used by investing activities was $2,567 for the nine months ended March 31,
2008, for purchase of equipment.





Net cash
provided by financing activities was $760,659 for the nine months ended March
31, 2008 and consisted of $225,000 of proceeds from short term promissory notes
and $563,076 of proceeds from short term convertible promissory notes, offset by
the repayment of notes of $27,417.





Through
June 4, 2008, the Company negotiated with numerous vendors to resolve their
outstanding claims for payments due.  Through these negotiations, to
settle these claims in full, the Company has reduced certain vendor claims from
$504,000 to $185,000.





Off-Balance
Sheet Arrangements




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




Item 3. Controls and Procedures.





An
evaluation was performed under the supervision and with the participation of the
Company’s principal executive officer and principal financial officer of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of March 31, 2008. The evaluation revealed to the Company’s
principal executive officer and principal financial officer that the design and
operation of the Company’s disclosure controls and procedures were effective as
of March 31, 2008.




There
have been no significant changes in the Company’s internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control for the period covered by this
Quarterly Report on Form 10-QSB.






27




PART
II


OTHER
INFORMATION





Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds





On
January 4, 2008, the Company granted to a director a stock option to purchase
50,000 shares of the Company’s Common Stock at an exercise price of $0.10 per
share as compensation for serving as a director. The option expires on
January 4, 2018 and is exercisable as follows: 25% on each of January 4, 2009,
January 4, 2010, January 4, 2011 and January 4, 2012.





Item 5. Other Information





In March
2008 we adopted a new 2008 Equity Incentive Plan for the benefit of our
directors, officers, key employees and consultants, and we have reserved
7,000,000 shares of common stock for such persons pursuant to that
Plan.





On June
2, 2008, the Company closed its Bel Air, MD corporate store.  This store
did not fit the Company’s growth model and was not
profitable.  Currently the company is still liable for the lease per
the original agreement.








Item 6.  Exhibits





Exhibit
            Description of
      Exhibit10.1
            2008 Equity Incentive Plan31.1
            Certification pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended executed by the Chief
      Executive Officer of the Company.31.2
            Certification pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended executed by the Chief
      Financial Officer of the Company.32.1
            Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed
      by the Chief Executive Officer of the Company.32.2
            Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed
      by the Chief Financial Officer of the
  Company.






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SIGNATURES





In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.







THEATER
      XTREME ENTERTAINMENT GROUP, INC.RegistrantJune
      5, 2008
            By:
      /s/ Robert G.
      OberoslerRobert
      G. OberoslerChairman
      of the Board and Chief Executive OfficerJune
      5, 2008
            By:
      /s/ Robert G.
      OberoslerRobert
      G. OberoslerChairman
      of the Board and Chief Executive OfficerBy:
      /s/ James J.
      VincenzoJames
      J. VincenzoChief
      Financial Officer






29