**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, 2006.


OR


[ 
]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934




For
      the
      transition period from ________ to ________




**Commission
      File number 0-26845**





**Theater
      Xtreme Entertainment Group, Inc.**


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


(Exact
      name of 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)





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


(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 Rile
      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 April 30, 2006, there were
      approximately 18,522,342 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,
      2006





PagePart
                  I: Financial InformationItem
                  1. Financial Statements
              3Balance
                  Sheet as of March 31, 2006 and June 30, 2005
                  (Unaudited)
              3Statements
                  of Operations For the Three and
                  NineMonths
                  Ended March 31, 2006 and 2005 (Unaudited)
              4Statement
                  of Changes in Stockholders’ Deficit for
                  theNine
                  Months Ended March 31, 2006 (Unaudited)
              5Statement
                  of Cash Flows For the Nine Months
                  EndedMarch
                  31, 2006 and 2005 (Unaudited)
              6Notes
                  To Financial Statements (Unaudited)
              7Item
                  2. Management’s Discussion and Analysis or Plan of
                  Operation
              12Item
                  3. Controls and Procedures
              15Part
                  II: Other InformationItem
                  2. Unregistered Sales of Equity
                  Securities
              16Item
                  6. Exhibits
              17Signatures
              18








**PARTI**


**FINANCIAL
      INFORMATION**





**Item
      1. Financial Statements**




**THEATER
                  XTREME ENTERTAINMENT GROUP, INC.****BALANCE
                  SHEETS****MARCH
                  31 2006 AND JUNE 30 2005****MARCH
                  31**
              
              **JUNE
                  30****2006**
              
              **2005****Assets**
              
              (Unaudited)
              
              (Audited)Current
                  Assets:Cash
                  and equivalents
              
              $
              129,388
              
              $
              112,874Accounts
                  receivable, net of allowance of $ 4,281 and $4,851
              
              
              50,194
              
              
              22,797Inventory
              
              
              588,122
              
              
              460,111Prepaid
                  expenses
              
              
              95,975
              
              
              123,444Total
                  current assets
              
              
              863,679
              
              
              719,226Property
                  and Equipment, net
              
              
              368,570
              
              
              267,700Other
                  Assets:Deposits
              
              
              20,720
              
              
              20,720$
              1,252,969
              
              $
              1,007,646**Liabilities
                  and Stockholders' Deficit**Current
                  Liabilities:Accounts
                  payable and accrued expenses
              
              $
              582,268
              
              $
              323,132Payroll
                  tax liabilities
              
              
              42,041
              
              
              31,769Current
                  portion of notes payable
              
              
              18,613
              
              
              12,010Due
                  to officer
              
              
              -
              
              
              243Deferred
                  franchise fees
              
              
              251,500
              
              
              72,500Deferred
                  sales
              
              
              726,183
              
              
              496,362Total
                  current liabilities
              
              
              1,620,605
              
              
              936,016Long-term
                  Liabilities:Notes
                  payable, net of current portion
              
              
              52,210
              
              
              40,614Total
                  long-term liabilities
              
              
              52,210
              
              
              40,614Total liabilities
              
              
              1,672,815
              
              
              976,630Stockholders'
                  Equity (Deficit):Preferred
                  stock, no par value, 5 Million shares authorized,no shares issued and outstanding
              
              
              -
              
              
              -Common
                  stock, $.001 par, 50 million shares authorized;17,957,342
                  and 16,291,814 shares issuedand outstanding
              
              
              17,957
              
              
              16,292Additional
                  paid in capital
              
              
              2,839,400
              
              
              1,843,157Accumulated
                  deficit
              
              
              (3,277,203
              )
              
              (1,828,433
              )Total
                  stockholders' equity (deficit)
              
              
              (419,846
              )
              
              31,016$
              1,252,969
              
              $
              1,007,646





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


1


**THEATER
                  XTREME ENTERTAINMENT GROUP,
                  INC.****STATEMENTS
                  OF OPERATIONS****THREE
                  AND NINE MONTHS ENDED MARCH 31 2006 AND 2005**Three
                  Months Ended
              
              Nine
                  Months EndedMarch
                  31
              
              March
                  312006
              
              2005
              
              2006
              
              2005Revenues
              
              $
              1,224,272
              
              $
              827,197
              
              $
              3,228,252
              
              $
              1,919,489Cost
                  of revenues
              
              
              730,998
              
              
              428,679
              
              
              1,869,931
              
              
              1,121,959Occupancy
                  expenses
              
              
              80,025
              
              
              53,501
              
              
              233,177
              
              
              153,346Selling,
                  general and administrative expenses
              
              
              849,020
              
              
              1,043,063
              
              
              2,570,051
              
              
              1,680,2161,660,043
              
              
              1,525,243
              
              
              4,673,159
              
              
              2,955,521Loss
                  from operations
              
              
              (435,771
              )
              
              (698,046
              )
              
              (1,444,907
              )
              
              (1,036,032
              )Interest
                  income
              
              
              1
              
              
              6
              
              
              47
              
              
              60Interest
                  expense
              
              
              (1,293
              )
              
              (9,756
              )
              
              (3,910
              )
              
              (24,340
              )Net
                  loss
              
              $
              (437,063
              )
              $
              (707,796
              )
              $
              (1,448,770
              )
              $
              (1,060,312
              )Basic
                  and diluted:Loss per common share
              
              $
              (0.02
              )
              $
              (0.06
              )
              $
              (0.08
              )
              $
              (0.10
              )Weighted
                  average shares
              
              
              17,875,225
              
              
              12,300,000
              
              
              17,360,818
              
              
              10,609,836





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





2


**THEATER
                  XTREMEENTERTAINMENT GROUP,
                  INC.****STATEMENT
                  OF STOCKHOLDERS' EQUITY (DEFICIT)****NINE
                  MONTHS ENDED MARCH 31 2006**CommonStock
              
              AdditionalPaid-inCapital
              
              AccumulatedDeficit
              
              TotalStockholders'Equity
                  (Deficit)Balance
                  at June 30, 2005
              
              $
              16,292
              
              $
              1,843,157
              
              $
              (1,828,433
              )
              $
              31,016Issuance
                  of common stock, private placements
              
              
              1,635
              
              
              661,928
              
              
              -
              
              
              663,563Redemption
                  of Founder stock
              
              
              (800
              )
              
              800
              
              
              -
              
              
              -Issuance
                  of Common Stock for Services
              
              
              830
              
              
              302,670
              
              
              -
              
              
              303,500Vested
                  Employee Stock Options
              
              
              -
              
              
              22,084
              
              
              -
              
              
              22,084Vested
                  Non-Employee Stock Options
              
              
              -
              
              
              8,761
              
              
              -
              
              
              8,761Net
                  loss for the nine months ended March 31, 2006
              
              
              -
              
              
              -
              
              
              (1,448,770
              )
              
              (1,448,770
              )Balance
                  at March 31, 2006
              
              $
              17,957
              
              $
              2,839,400
              
              $
              (3,277,203
              )
              $
              (419,846
              )








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





3





**THEATER
                  XTREME ENTERTAINMENT GROUP,
                  INC.****STATEMENTS
                  OF CASH FLOWS****NINE
                  MONTHS ENDED MARCH 31**2006
              
              2005**Cash
                  flows from operating activities:**Net
                  Loss
              
              $
              (1,448,770
              )
              $
              (1,060,312
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Depreciation
              
              
              75,587
              
              
              37,951Issuance
                  of common stock for services
              
              
              303,500
              
              
              236,250Employee
                  Stock Option Vesting
              
              
              22,084
              
              
              -Non-Employee
                  Stock Option Vesting
              
              
              8,761
              
              
              -Increase/(Decrease)
                  in assetsAccounts
                  receivables
              
              
              (27,397
              )
              
              (40,533
              )Inventory
              
              
              (128,011
              )
              
              (195,010
              )Prepaid
                  expenses
              
              
              27,469
              
              
              (64,516
              )Increase/(Decrease)
                  in liabilitiesAccounts
                  payable and accrued expenses
              
              
              259,136
              
              
              355,760Payroll
                  tax liabilities
              
              
              10,272
              
              
              19,002Due
                  to officer
              
              
              (243
              )
              
              (51
              )Deferred
                  franchise fees
              
              
              179,000
              
              
              -Deferred
                  sales
              
              
              229,821
              
              
              352,125Net
                  cash used in operating activities
              
              
              (488,791
              )
              
              (359,334
              )**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              (176,457
              )
              
              (73,884
              )Net
                  cash used in investing activities
              
              
              (176,457
              )
              
              (73,884
              )**Cash
                  flows from financing activities:**Repayment
                  of notes payable
              
              
              -
              
              
              (6,746
              )Proceeds
                  from note payable
              
              
              18,199
              
              
              658,500Proceeds
                  from financing lease
              
              
              -
              
              
              1,792Proceeds
                  from issuance of common stock
              
              
              663,563
              
              
              -Net
                  cash provided by financing activities
              
              
              681,762
              
              
              653,546Net
                  increase in cash
              
              
              16,514
              
              
              220,328Cash
                  and equivalents, beginning of period
              
              
              112,874
              
              
              119,228Cash
                  and equivalents, end of period
              
              $
              129,388
              
              $
              339,556**Supplemental
                  disclosure:**Cash
                  paid during the period for interest
              
              $
              3,910
              
              $
              15,659**Supplemental
                  disclosure of non-cash****investing
                  and financing activites:**Conversion
                  of notes payable to common stock
              
              $
              -
              
              $
              325,000Liabilities
                  assumed as part of merger
              
              $
              13,026
              
              $
              13,026Acquisition
                  of property and equipmentby
                  issuance of notes payable
              
              $
              36,530
              
              $
              26,596








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





4


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO 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. Accordingly, they do not include all of the information and
      footnotes required by generally accepted accounting principles for complete
      financial statements. 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 ended March
      31,
      2006 are not necessarily indicative of the results that may be expected for
      the
      year ended June 30, 2006. 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,
      2005.





*Nature
      of Operation.* 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 its home cinema design centers, the sale
      of franchise stores and wholesale product distribution to franchisees. The
      Company opened its first Company retail store, “design center,” in September
      2003 in Newark, Delaware. In August 2004, the Company opened a second
      Company-owned design center in Wilmington, Delaware. In September 2005, the
      Company opened a third Company-owned design center in Bel-Air, Maryland. The
      Company has sold fifteen franchises, five of which are open and operating.
      The
      Company has designed and created large-format home theater entertainment systems
      offering new technology at prices affordable to many families. The Company
      expects to offer franchise licenses nationwide as well as open additional stores
      in the Mid-Atlantic region.




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





*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.


5


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








*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 312006
            
            2005
            
            2006
            
            2005Retail
                sales
            
            $
            1,033,101
            
            $
            827,197
            
            $
            2,842,064
            
            $
            1,919,489Wholesale
                sales
            
            
            138,371
            
            
            -
            
            
            266,447
            
            
            -Franchise
                licenses and royalties
            
            
            52,800
            
            
            -
            
            
            119,741
            
            
            -Total
                revenues
            
            $
            1,224,272
            
            $
            827,197
            
            $
            3,228,252
            
            $
            1,919,489





Retail
      sales represent the sale and installation of home-theater equipment. In
      accordance with the SEC’s Staff Accounting Bulletin No. 104 (SAB 104)
“ *Revenue
      Recognition,”* the
      Company recognizes revenue when persuasive evidence of a customer arrangement
      exists or acceptance occurs, receipt of goods by customer occurs, the price
      is
      fixed or determinable, and the sales revenues are considered collectible.
      Revenue is recognized on such sales when the equipment is delivered and the
      installation is substantially completed. Generally, these events occur on the
      same date. Revenues are recognized pro-rata on larger, more complex systems
      where installation occurs over a period of time.





6


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





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





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





2006
            
            2005Deferred
                Retail sales
            
            $
            701,646
            
            $
            432,693Unearned
                service contract revenue
            
            
            24,537
            
            
            14,295Total
                Deferred Sales
            
            $
            726,183
            
            $
            446,988





*Loss
      Per Share.* The
      Company follows SFAS 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 that resulted from the
      merger for all periods presented. For the three and nine months ended March
      31,
      2006 and 2005, the basic and diluted loss per share are the same, because the
      assumed conversion of stock equivalents would be antidilutive as the Company
      experienced a net loss 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.





*Advertising
      Costs.* Advertising
      and sales promotion costs are expensed as incurred. Advertising and promotional
      expense totaled $125,134 and $74,568 for the three month periods ended March
      31,
      2006 and 2005, respectively and $357,714 and $189,595 for the nine months ended
      March 31, 2006 and 2005, respectively.







7


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





**Note
      2: Common Stock**





During
      the nine months ended March 31, 2006, the Company sold 1,635,528 of its common
      shares. Of these, 1,447,528 shares were sold at a purchase price of $0.35 per
      share in an offering of common stock pursuant to an Offering Memorandum dated
      April 26, 2005, as amended. Net proceeds for these shares amounted to $487,473.
      The remaining 188,000 shares were sold at a purchase price of $1.00 pursuant
      to
      a stock offering that commenced January 20, 2006. This latest Offering remains
      open. See also subsequent events.





During
      the nine months ended March 31, 2006, the Company issued 830,000 of its common
      shares to certain vendors in consideration for services provided, valued at
      $303,500.





During
      the nine months ended March 31, 2006, the Company founder contributed 800,000
      common shares to the Company pursuant to a settlement agreement.





**Note
      3: Stock Option Plan**





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




At
      June
      30, 2005, there were 870,000 stock options outstanding under the 2005 Stock
      Option Plan. At March 31, 2006, there were 1,360,000 stock options outstanding
      under the 2005 Stock Option Plan. The 2005 Stock Option Plan was amended on
      December 21, 2005 increasing the total number of Plan shares available for
      grant
      to 2,000,000 shares. In the nine months ended March 31, 2006, the Company
      granted to certain employees common stock options on 590,000 of its common
      shares and options to purchase 100,000 shares held by former employees
      terminated. During that same period, there were no grants of non-qualified
      options.





A
      summary
      of stock option transactions for the nine months ended March 31, 2006 is as
      follows:





**Incentive
                  Stock Options**
              
              **Non-Qualified
                  Stock Options****Exercise
                  Price**
              
              **All
                  Non-**
              
              
              
              **Exercise
                  Price****All
                  ISO**
              
              **Vested**
              
              **Per
                  Common**
              
              **Qualified**
              
              **Vested**
              
              **Per
                  Common****Shares**
              
              **Shares**
              
              **Share**
              
              **Shares**
              
              **Shares**
              
              **Share**Balance,
                  June 30, 2005
              
              
              720,000
              
              
              57,500
              
              $
              0.35
              
              
              150,000
              
              
              -
              
              $
              0.35Granted
                  / vested during the period
              
              
              590,000
              
              
              132,500
              
              $
              0.35
                  to $1.00
              
              
              -
              
              
              -
              
              
              xxExercised
                  during the period
              
              
              -
              
              
              -
              
              
              xx
              
              
              -
              
              
              -
              
              
              xxCancelled
                  / forfeit during the period
              
              
              (100,000
              )
              
              -
              
              
              xx
              
              
              -
              
              
              -
              
              
              xxBalance,
                  March 31, 2006
              
              
              1,210,000
              
              
              190,000
              
              $
              0.35
                  to $1.00
              
              
              150,000
              
              
              -
              
              $
              0.35


8


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








**Note
      4: Stock Based Compensation**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard SFAS 123 (revised 2004), *Share-Based
      Payment* (“SFAS
      123R”). SFAS 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 123(R) is similar to the approach described
      in
      SFAS 123. However, SFAS 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 123(R) using the modified prospective
      method as permitted under SFAS 123(R). Under this transition method,
      compensation cost recognized in the first calendar quarter or fiscal quarter
      of
      2006 includes compensation cost for all share-based payments granted prior
      to
      but not yet vested as of December 31, 2005, based on the grant-date fair value
      estimated in accordance with the provisions of SFAS 123. In accordance with
      the
      modified prospective method of adoption, the Company’s results of operations and
      financial position for prior periods have not been restated.





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





In
      April
      2005, the Company issued, to outside members of the Company's board of
      directors, stock options to purchase 150,000 shares, in the aggregate, of its
      common stock at an exercise price of $0.35 per share in accordance with the
      provisions of the Company's 2005 Stock Option Plan, and recorded pursuant to
      Section 4(2) of the Securities Act in exchange for services. The stock options
      are exercisable until April 2015 and vest 25% per year. In accordance with
      the
      fair value method as described in accounting requirements of SFAS 123(R), the
      Company recognized $8,761 for the three months and nine months ended March
      31,
      2006.





As
      a
      result of the adoption of SFAS 123(R), during the quarter ended March 31, 2006,
      the Company’s net income was approximately $30,845 lower as a result of
      stock-based compensation expense, including $8,761 recognized on behalf of
      outside board members. As of March 31, 2006, there was $277,475 of unrecognized
      compensation expense related to non-vested market-based share awards that is
      expected to be recognized through June 30, 2010.





Prior
      to
      December 31, 2005, the Company followed the provisions of SFAS No. 123,
“ *Accounting
      for Stock-Based Compensation* ”.
      The
      provisions of SFAS No. 123 allowed companies to either expense the estimated
      fair value of stock options or to continue to follow the intrinsic value method
      set forth in Accounting Principles Board Opinion No. 25, “ *Accounting
      for Stock Issued to Employees* ”
(“APB
      25”), but disclose the pro forma effects on net income had the fair value of the
      options been expensed. The Company elected to apply APB 25 in accounting for
      its
      stock option incentive plans. For
      the
      six months ended December 31, 2005, had the fair value of the options been
      expensed, the loss from operations would have been $(1,038,026) versus
      $(1,011,706) as reported.





In
      accordance with APB 25 and related interpretations, compensation expense for
      stock options was recognized in income based on the excess, if any, of the
      quoted market price of the stock at the grant date of the award or other
      measurement date over the amount an employee must pay to acquire the stock.
      Generally, the exercise price for stock options granted to employees was equal
      to the fair market value of the Company’s common stock at the date of grant,
      thereby resulting in no recognition of compensation expense by the Company
      prior
      to December 31, 2005.


9


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





Had
      compensation cost for the Company’s stock option plans been determined based on
      the fair value method set forth in SFAS No. 123 during the prior year, the
      Company’s net income (loss) and basic and diluted net income (loss) per common
      share would not have changed since the Company did not grant any stock options
      for the quarter ended March 31, 2005.





The
      following table summarizes all stock option activity of the Company since
      December 31, 2005:




Weighted
                  AverageNumber
              
              Exercise
              
              Exerciseof
                  Shares
              
              Price
              
              PriceOutstanding,
                  December 31, 2005
              
              
              1,370,000
              
              $
              0.35
              
              $
              0.350Granted
              
              
              30,000
              
              $
              1.00
              
              $
              1.000Exercised
              
              
              None
              
              
              xx
              
              
              xxCancelled
              
              
              (40,000
              )
              $
              0.35
              
              $
              0.350Outstanding,
                  March 31, 2006
              
              
              1,360,000
              
              $
              0.35
                  to $1.00
              
              $
              0.364Exercisable,
                  March 31, 2006
              
              
              190,000
              
              $
              0.35
              
              $
              0.350


**Note
      5: Income Taxes**





Deferred
      income taxes reflect the net effect of an operating loss carryforward. There
      are
      no significant temporary differences between the carrying amount of assets
      and
      liabilities for financial reporting purposes and the amount used for income
      tax
      purposes.





The
      components of the deferred assets are as follows at March 31, 2006 and June
      30,
      2005:





March
                31, 2006
            
            June
                30 2005Net
                operating loss carryforward
            
            $
            1,125,000
            
            $
            658,000Less
                valuation allowance
            
            
            (1,125,000
            )
            
            (658,000
            )$
            0
            
            $
            0











10


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





There
      is
      no income tax benefit for the losses for the nine months ended March 31, 2006
      or
      March 31, 2005, because management has determined that the realization of the
      net deferred tax asset is not assured and has created a valuation allowance
      for
      the entire amount of such benefits. A valuation allowance was required because
      the ultimate realization of deferred tax assets is dependent upon future taxable
      income and management believes that it is more likely than not that the deferred
      tax asset will not be realized through future taxable income.





At
      June
      30, 2005, the Company had a net operating loss carryforward for Federal and
      state income tax purposes of approximately $1,828,000 which, if not used, will
      expire in the fiscal year ending June 30, 2026.





**Note
      6: Subsequent Events**





During
      April, 2006, the Company issued 565,000 shares of its common stock for sale
      at a
      price of $1.00 per share realizing proceeds of $565,000.







11


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





**Forward-Looking
      Information**





The
      following Management’s Discussion and Analysis should be read in conjunction
      with the Company’s unaudited financial statements and notes for the three and
      nine month periods ended March 31, 2006 included herein and its audited
      financial statements and notes for the year ended June 30, 2005 included in
      its
      Annual Report on Form 10-KSB 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 publicly 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.




**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, “design center,” opened in September 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 will
      provide 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 second Company-owned design center opened
      in August, 2004 in Wilmington, Delaware and a third Company-owned design center
      opened in September, 2005 in Bel-Air, Maryland. The Company anticipates that
      it
      will open additional Company-owned design centers in the Mid-Atlantic region
      in
      the future.




The
      sale
      of franchises is integral to the Company’s success. The Company has sold fifteen
      franchises through March 31, 2006, the first of which opened in May 2005 in
      East
      Longmeadow, Massachusetts, the second in September 2005 in Auburn Hills,
      Michigan, the third in Leesport, Pennsylvania in December 2005, the fourth
      in
      Boise, Idaho on March 18, 2006 and the fifth in Berwyn, Pennsylvania on April
      28, 2006. Other franchised design centers are planned for opening dates in
      early
      to






12






mid
      2006.
      Management expects to expand its franchising activities in 2006. These and
      future franchised retail design centers will generally reflect enhanced physical
      layouts and may incorporate other refinements or modifications depending on
      the
      design center’s physical characteristics.




Effective
      February 11, 2005, Theater Xtreme, Inc. merged with and into BF Acquisition
      Group II, Inc., a Florida corporation. The merged entity changed its name to
      Theater Xtreme Entertainment Group, Inc., with its principal offices located
      at
      250 Corporate Blvd., Suites E & F, Newark, DE, 19702. The following
      discussion refers to Theater Xtreme, Inc. for all periods prior to the effective
      date of the merger and to the combined company, Theater Xtreme Entertainment
      Group, Inc., thereafter.




The
      Company has a limited operating history for evaluating trends and
      seasonality.




**Results
      of Operations for the** **three
      months ended March 31, 2006 compared to the three months ended March 31,
      2005**




Recognized
      sales for the three months ended March 31, 2006 were $1,224,272 compared to
      $827,197 for the three months ended March 31, 2005. Gross profit amounts and
      percentages were $493,274 and 40% for the three months ended March 31, 2006
      as
      compared to $398,518 and 48% for the three months ended March 31, 2005. The
      increase in sales reflects continued retail sales growth given the addition
      of
      the Company’s third design center, growth in wholesale sales to franchisees as
      well as the recognition of franchise fees for the Boise, Idaho franchise and
      royalty revenue from franchisees. The fluctuation in gross profit percentages
      continues to reflect the nature of operations being in a startup stage as well
      as the impact of lower margin wholesale sales. Retail sales orders for the
      three
      months ended March 31, 2006 were $1,477,060 compared to $1,021,681 for the
      three
      months ended March 31, 2005.




Occupancy
      expenses for the three months ended March 31, 2006 were $80,025 compared to
      $53,501 for the three months ended March 31, 2005. The increase is directly
      related to the opening of the second and third design centers.




Selling,
      general and administrative expenses for the three months ended March 31, 2006
      were $849,020 compared to $1,043,063 for the three months ended March 31, 2005.
      The decrease is attributable to the absence of costs associated with the merger
      on February 11, 2005. Expenses for the three months ended March 31, 2006 include
      Advertising and Promotional expenses of $125,134 compared to $74,568 spent
      during the three months ended March 31, 2005. Professional fees amounted to
      $67,917 for the three months ended March 31, 2006 compared to $334,191 for
      the
      three months ended March 31, 2005, and reflect a reduction due to the costs
      associated with the merger. During the three months ended March 31, 2006, the
      Company sold no new franchises.




**Results
      of Operations for the** **nine
      months ended March 31, 2006 compared to the nine months ended March 31,
      2005**




Recognized
      sales for the nine months ended March 31, 2006 were $3,228,252 compared to
      $1,919,489 for the nine months ended March 31, 2005. Gross profit amounts and
      percentages were $1,358,321 and 42% for the nine months ended March 31, 2006
      as
      compared to $797,530 and 42% for the nine months ended March 31, 2005. The
      increase in sales reflects continued retail sales growth given the addition
      of
      the Company’s third design center, growth in wholesale sales, as well as the
      recognition of franchise fees for the Auburn Hills, Michigan, Leesport,
      Pennsylvania and Boise, Idaho franchises and royalty revenue from franchisees.
      Retail sales orders for the nine months ended March 31, 2006 were $3,465,147
      compared to $2,433,363 for the nine months ended March 31, 2005.




13


Occupancy
      expenses for the nine months ended March 31, 2006 were $233,177 compared to
      $153,346 for the nine months ended March 31, 2005. The increase is directly
      related to the opening of the second and third design centers.




Selling,
      general and administrative expenses for the nine months ended March 31, 2006
      were $2,570,051 compared to $1,680,216 for the nine months ended March 31,
      2005.
      The increase relates to additional personnel and operating costs associated
      with
      the opening of the Bel-Air, Maryland design center in September, 2005 and the
      expansion of Company operations toward the creation of a national organization.
      Expenses for the nine months ended March 31, 2006 include Advertising and
      Promotional expenses of $357,714 compared to $189,595 spent during the nine
      months ended March 31, 2005. Professional fees, including $280,000 in fees
      paid
      to investor relations vendors, amounted to $461,210 for the nine months ended
      March 31, 2006 compared to $365,641 for the nine months ended March 31, 2005.
      During the nine months ended March 31, 2006, the Company sold ten (10) new
      franchises incurring franchise commissions of $44,180. Personnel costs account
      for the majority of the remaining increase in selling, general and
      administrative expenses.




**Liquidity**




The
      Company’s cash position increased slightly to $129,388 at March 31, 2006 from
      $112,874 at June 30, 2005.




The
      loss
      for the nine months ended March 31, 2006 of $(1,448,770) reflected $393,745
      in
      non-cash charges including $303,500 in common stock issued for services
      rendered. The net amount, together with the increase in inventories $(128,011),
      were offset by an increase in accounts payable and accrued liabilities resulting
      in a net cash used in operating activities of $(488,791). During the nine months
      ended March 31, 2006, the Company spent $176,457 for the acquisition of
      vehicles, store equipment and leasehold improvements.




During
      the nine months ended March 31, 2006, the Company increased its notes payable
      by
      $18,199 and sold 1,635,528 shares of its common stock. Of these shares,
      1,447,528 shares were sold at a purchase price of $0.35 per share in an offering
      of common stock pursuant to an Offering Memorandum dated April 26, 2005, as
      amended. Net proceeds for these shares amounted to $487,473. The remaining
      188,000 shares were sold at a purchase price of $1.00 pursuant to a stock
      offering that commenced January 20, 2006. The Company issued 810,000 shares
      of
      its common stock at a price of $0.35 per share and 20,000 shares of its common
      stock at $1.00 per share in consideration for services rendered by certain
      vendors, totaling $303,500, inclusive of 800,000 shares for investor relations
      services.




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




The
      Company’s net cash used in operating activities and net cash used in investing
      activities combined was $(665,248) for the nine months ended March 31, 2006.
      These cash requirements were almost entirely covered by the proceeds of the
      issuance of additional shares of common stock amounting to $663,563. The
      Company’s liquidity worsened despite the sale of additional shares. Although the
      Company hopes to reduce its net cash used in operating activities as the scope
      of its operations expands and provides additional cash flow, if it is unable
      to
      timely do so, the Company will be forced to seek additional capital most likely
      in the form of additional shares of capital stock offered for sale to investors.
      There is no assurance that any such capital would be available, or if available,
      could be obtained on terms satisfactory to the Company.







14




Future
      capital requirements and the adequacy of available funds will depend on numerous
      factors and risks, including the possible increase in the number of
      Company-owned 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
      Company’s ability to establish meaningful consumer market identification,
      branding and penetration, its ability to adapt to rapid technological changes,
      and its ability to successfully compete against intense competitive pressures
      from potentially larger, better capitalized future competitors when such enter
      its market segment. Further, the Company’s results of operations and resulting
      capital requirements will be impacted by a wide 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, 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.




The
      Company does not have any committed sources of additional financing, and there
      can be no assurance that additional funding will be available on acceptable
      terms, if at all. If adequate funds are not available, the Company may be
      required to 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 us to surrender rights to
      Company methods, technologies, product development projects, certain products
      or
      existing markets. If adequate funds are not available, the business, financial
      condition and results of operations of the Company will be materially and
      adversely affected.




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




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




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.




**Item
      3. Controls and Procedures.**





As
      of the
      end of the period covered by this report, 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). 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 the end of the period covered by this
      report.




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 controls for the period covered by
      this Quarterly Report on Form 10-QSB.






15




**PART
      II**


**OTHER
      INFORMATION**





**Item
      2. Unregistered sales of Equity Securities and Use of
      Proceeds**





On
      January 20, 2006, the Company began offering up to 500,000 shares of its common
      stock at a minimum purchase price of $1.00 per share. On April 4, 2006, the
      Company increased this offering by 1,000,000 common shares to be offered at
      a
      minimum purchase price of $1.00 per share. There can be no assurance that the
      offering will be fully subscribed. This Offering remains open. As of March
      31,
      2006 and April 30, 2006, 188,000 and 565,000 common shares, respectively have
      been sold at $1.00 per share to both accredited and non-accredited investors
      realizing gross proceeds of $188,000 and $565,000, respectively.





The
      shares of the Company’s common stock were issued in reliance upon exemptions
      from registration available under Rule 506 of Regulation D and Section 4(2)
      of
      the Securities Act of 1933, as amended, and are “restricted
      securities”.





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





16





**Item
      6. Exhibits**





**Exhibit**
            **Description
                of Exhibit**31.1
            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.





17


**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.May
                  15, 2006
              By:/s/
                  Scott R. OglumScott
                  R. OglumChairman
                  of the Board and Chief Executive OfficerBy:/s/
                  James J. VincenzoJames
                  J. VincenzoChief
                  Financial Officer





18