**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 September 30, 2006.


OR




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


SECURITIES
      EXCHANGE ACT OF 1934




For
      the
      transition period from ________ to ________




**Commission
      File number 0-26845**





**Theater
      Xtreme Entertainment Group, Inc.**


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


(Exact
      name of 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 November 10, 2006, there were
      19,827,425 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


September
      30, 2006





Page


Part
                  I: Financial InformationItem
                  1. Financial Statements
              3Balance
                  Sheet as of September 30, 2006 and June 30, 2006
                  (Unaudited)
              3Statements
                  of Operations for the ThreeMonths
                  Ended September 30, 2006 and 2005 (Unaudited)
              4Statement
                  of Changes in Stockholders’ Equity/Deficit for theThree
                  Months Ended September 30, 2006 (Unaudited)
              5Statement
                  of Cash Flows for the Three Months EndedSeptember
                  30, 2006 and 2005 (Unaudited)
              6Notes
                  To Financial Statements (Unaudited)
              7Item
                  2. Management’s Discussion and Analysis or Plan of
                  Operation
              13Item
                  3. Controls and Procedures
              15Part
                  II: Other InformationItem
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              17Item
                  6. Exhibits
              17Signatures
              
              18











**PART
      I**


**FINANCIAL
      INFORMATION**





**Item
      1. Financial Statements**


**THEATER
                  XTREME ENERTAINMENT GROUP, INC.****BALANCE
                  SHEET****SEPTEMBER
                  30, 2006 AND JUNE 30, 2006****SEPTEMBER
                  30,**
              
              **JUNE
                  30,****2006**
              
              **2006****Assets**
              
              **(UNAUDITED)**
              
              **(AUDITED)**Current
                  Assets:Cash
                  and equivalents
              
              $
              196,180
              
              $
              466,481Accounts
                  receivable, net of allowance of $50,000, and $25,000
              
              
              84,168
              
              
              139,893Inventory
              
              
              776,467
              
              
              629,056Prepaid
                  expenses
              
              
              485,306
              
              
              132,679Other
                  current assets
              
              
              -
              
              
              15,441Total
                  current assets
              
              
              1,542,121
              
              
              1,383,550Property
                  and equipment, net
              
              
              464,392
              
              
              357,434Other
                  assets:Deposits
              
              
              48,954
              
              
              20,720$
              2,055,467
              
              $
              1,761,704**Liabilities
                  and Stockholders' Equity (Deficit)**Current
                  Liabilities:Accounts
                  payable and accrued expenses
              
              $
              873,784
              
              $
              646,290Payroll liabilities
              
              
              93,218
              
              
              58,715Current
                  portion of notes payable
              
              
              18,918
              
              
              19,129Short
                  term note payable
              
              
              134,133
              
              
              -Deferred
                  franchise fees
              
              
              294,000
              
              
              279,000Deferred
                  sales
              
              
              677,327
              
              
              679,706Other
                  current liabilities
              
              
              41,343
              
              
              -Total
                  current liabilities
              
              
              2,132,723
              
              
              1,682,840Long-term
                  Liabilities:Notes
                  payable, net of current portion
              
              
              42,762
              
              
              47,163Total
                  long-term liabilities
              
              
              42,762
              
              
              47,163Total
                  liabilities
              
              
              2,175,485
              
              
              1,730,003Stockholders'
                  Equity (deficit):Preferred
                  stock, no par value, 5,000,000 shares authorized,no
                  shares issued and outstanding
              
              
              -
              
              
              -Common
                  stock, $.001 par, 50,000,000 shares authorized;19,662,342,
                  19,122,342 shares issuedand
                  outstanding
              
              
              19,662
              
              
              19,122Additional
                  paid in capital
              
              
              4,473,246
              
              
              3,973,742Accumulated
                  deficit
              
              
              (4,612,926
              )
              
              (3,961,163
              )Total
                  stockholders' equity (deficit)
              
              
              (120,018
              )
              
              31,701$
              2,055,467
              
              $
              1,761,704




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


3




**THEATER
                  XTREME ENTERTAINMENT GROUP, INC.****STATEMENTS
                  OF OPERATIONS****THREE
                  MONTHS ENDED SEPTEMBER 30****(UNAUDITED)**2006
              
              2005Revenues
              
              $
              1,462,528
              
              $
              1,020,853Cost
                  of revenues
              
              
              932,594
              
              
              573,901Occupancy
                  expenses
              
              
              121,913
              
              
              74,948Selling,
                  general and administrative expenses
              
              
              1,056,462
              
              
              640,7812,110,969
              
              
              1,289,630Loss
                  from operations
              
              
              (648,441
              )
              
              (268,777
              )Interest
                  income
              
              
              242
              
              
              46Interest
                  expense
              
              
              (3,564
              )
              
              (1,246
              )Net
                  loss
              
              $
              (651,763
              )
              $
              (269,977
              )Basic
                  and diluted:Loss
                  per common share
              
              $
              (0.03
              )
              $
              (0.02
              )Weighted
                  average shares
              
              
              19,420,854
              
              
              16,783,721




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





4


**THEATER
                  XTREME ENTERTAINMENT GROUP, INC.****STATEMENT
                  OF STOCKHOLDERS' EQUITY****THREE
                  MONTHS ENDED SEPTEMBER 30, 2006****(UNAUDITED)**Additional
              
              
              
              TotalCommon
              
              Paid-in
              
              Accumulated
              
              Stockholders'Stock
              
              Capital
              
              Deficit
              
              Equity
                  (Deficit)Balance
                  at June 30, 2006
              
              $
              19,122
              
              $
              3,973,742
              
              $
              (3,961,163
              )
              $
              31,701Issuance
                  of common stock,purchase
                  of assets
              
              
              40
              
              
              39,960
              
              
              -
              
              
              40,000Issuance
                  of common stock,services
                  rendered, net of transferagent
                  and legal fees
              
              
              500
              
              
              424,500
              
              
              -
              
              
              425,000Vested
                  employee stock options
              
              
              -
              
              
              32,654
              
              
              -
              
              
              32,654Vested
                  non-employee stock options
              
              
              -
              
              
              2,390
              
              
              -
              
              
              2,390Net
                  loss for the three months endedSeptember
                  30, 2006
              
              
              -
              
              
              -
              
              
              (651,763
              )
              
              (651,763
              )Balance
                  at September 30, 2006
              
              $
              19,662
              
              $
              4,473,246
              
              $
              (4,612,926
              )
              $
              (120,018
              )





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


5


**THEATER
                  XTREME ENTERTAINMENT GROUP, INC.****STATEMENTS
                  OF CASH FLOWS****THREE
                  MONTHS ENDED SEPTEMBER 30****(UNAUDITED)**2006
              
              2005**Cash
                  flows from operating activities:**Net
                  Loss
              
              $
              (651,763
              )
              $
              (269,977
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Depreciation
              
              
              34,970
              
              
              25,196Issuance
                  of common stock for services
              
              
              425,000
              
              
              -Issuance
                  of common stock, purchase of assets
              
              
              40,000
              
              
              -Increase
                  in allowance for doubtful accounts
              
              
              25,000
              
              
              -Employee
                  stock option vesting for compensation
              
              
              32,654
              
              
              -Non-employee
                  stock option vesting for services
              
              
              2,390
              
              
              -Decrease
                  (Increase) in assetsAccounts
                  receivables
              
              
              30,725
              
              
              (31,682
              )Inventory
              
              
              (147,411
              )
              
              (108,755
              )Prepaid
                  expenses
              
              
              (352,627
              )
              
              51,301Other
                  current assets
              
              
              15,441
              
              
              -Increase
                  (Decrease) in liabilitiesAccounts
                  payable and accrued expenses
              
              
              227,494
              
              
              231,345Payroll
                  tax liabilities
              
              
              34,503
              
              
              40,584Deferred
                  franchise fees
              
              
              15,000
              
              
              21,250Deferred
                  sales
              
              
              (2,379
              )
              
              (77,021
              )Other
                  current liabilities
              
              
              41,343
              
              
              -Net
                  cash used in operating activities
              
              
              (229,660
              )
              
              (117,759
              )**Cash
                  flows from investing activities:**Deposits
                  on stores and corporate facilities
              
              
              (28,234
              )
              
              -Purchase
                  of property and equipment
              
              
              (141,928
              )
              
              (165,804
              )Net
                  cash used in investing activities
              
              
              (170,162
              )
              
              (165,804
              )**Cash
                  flows from financing activities:**Repayment
                  of notes payable
              
              
              (11,188
              )
              
              -Proceeds
                  from notes payable
              
              
              140,709
              
              
              -Proceeds
                  from convertible notes payable
              
              
              -
              
              
              27,024Proceeds
                  from issuance of common stock
              
              
              -
              
              
              255,925Net
                  cash provided by financing activities
              
              
              129,521
              
              
              282,949Net
                  decrease in cash
              
              
              (270,301
              )
              
              (614
              )Cash
                  and equivalents, beginning of period
              
              
              466,481
              
              
              112,874Cash
                  and equivalents, end of period
              
              $
              196,180
              
              $
              112,260**Supplemental
                  disclosure:**Cash
                  paid for interest
              
              $
              3,564
              
              $
              1,246**Supplemental
                  disclosure of non-cash****investing
                  and financing activites:**Liabilities
                  assumed as part of acquisition of property
              
              $
              2,598
              
              $
              -Liabilities
                  assumed as part of merger
              
              $
              -
              
              $
              13,026Acquisition
                  of property and equipmentby
                  issuance of notes payable
              
              $
              140,709
              
              $
              36,530


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


6


**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 months ending September 30,
      2006
      are not necessarily indicative of the results that may be expected for the
      year
      ending June 30, 2007. 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,
      2006.





*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, a third in Bel-Air,
      Maryland in September 2005 and in July, 2006 acquired the business and assets
      of
      a fourth, in Leesport, Pennsylvania, from one of its former franchisees. The
      Company has sold twenty franchises, seven of which are open and operating with
      one now operating as a Company-owned store. 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.




*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 months ended September 30:





2006
            
            2005Retail
                sales
            
            $
            1,262,564
            
            $
            924,803Wholesale
                sales
            
            
            162,020
            
            
            67,024Franchise
                licenses and royalties
            
            
            37,944
            
            
            29,026Total
                revenues
            
            $
            1,462,528
            
            $
            1,020,853





Retail
      sales represent the sale and installation of home-theater equipment to end
      users. 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.





7


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





Customer
      deposits on orders that are not completed are shown as deferred sales. 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 at September 30,
      2006 and June 30, 2006:


September
                30, 2006
            
            June
                30, 2006Deferred
                retail sales
            
            $
            651,898
            
            $
            656,130Unearned
                service contract revenue
            
            
            25,428
            
            
            23,576Total
                deferred sales
            
            $
            677,326
            
            $
            679,706





*Loss
      Per Share.* The
      Company follows SFAS 128, “Earnings Per Share,” resulting in the presentation of
      basic and diluted earnings (loss) per share. For the three months ended
      September 30, 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 $173,782 and $123,819 for the three month periods ended
      September 30, 2006 and 2005, respectively. The increase in advertising is
      primarily attributable to an increase in billboard advertising.





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





On
      January 1, 2006, the Company adopted SFAS No. 123(R) using the modified
      prospective method as permitted under SFAS No. 123(R). Under this transition
      method, beginning with the first calendar quarter of 2006, recognized
      compensation costs includes compensation cost for all non-forfeited share-based
      payments granted, 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 three months ended
      September 30, 2005 has not been restated.


8


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





As
      a
      result of the adoption of SFAS No. 123(R), during the three months ended
      September 30, 2006, the Company’s net income was approximately $35,044 lower as
      a result of stock-based compensation expense, including $2,390 recognized on
      behalf of outside board members. As of September 30, 2006, there was $357,621
      of
      unrecognized compensation expense and $24,697 of unrecognized expenses for
      services related to non-vested market-based option share awards that are
      expected to be recognized through June 30, 2010.





Accordingly,
      no compensation cost was recognized for stock options issued during any period
      prior to January 1, 2006. Had compensation cost for the Company’s issuance of
      vested stock options been determined based on the fair value at grant dates
      for
      options consistent with the method of SFAS No. 123(R), the Company’s net loss
      and net loss per common share for the three months ended September 30, 2005
      would have been modified to the pro forma amount indicated below. The Company
      uses the Black-Scholes option pricing model to calculate the grant-date fair
      value of an award, with the following assumptions: no dividend yield, expected
      volatility of 60%, risk-free interest rate of from between 3.0% to 5.25% and
      expected option life of ten years.





Results
      for the three months ended September 30, 2005:





Net
                loss:As
                reported
            
            $
            (269,977
            )Pro
                forma
            
            $
            (300,205
            )Net
                loss per share:As
                reported
            
            $
            (0.02
            )Pro
                forma
            
            $
            (0.02
            )




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


**Note
      3: Common Stock**





During
      the three months ended September 30, 2006, the Company issued 40,000 of its
      common shares at $ 1.00 per share for the purchase of certain assets pursuant
      to
      an asset purchase agreement dated July 1, 2006.





During
      the three months ended September 30, 2006, the Company issued 500,000 of its
      common shares at $ 0.85 per share for services rendered, which shall be
      amortized over a twelve month period, through August 2007.





At
      June
      30, 2006, there were 1,590,000 stock options outstanding under the 2005 Stock
      Option Plan. There were no stock options granted during the three months ended
      September 30, 2006. During the three months ended September 30, 2006, 22,500
      of
      unvested stock options were forfeited due to termination of
      employment.


9





**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





**Note
      4: Stock Option Plan**





In
      April,
      2005, shareholders 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 shareholders 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, 2006, there were 1,440,000 stock options outstanding under the 2005 Stock
      Option Plan. At September 30, 2006, there were 1,417,500 stock options
      outstanding under the 2005 Stock Option Plan. In the three months ended
      September 30, 2006, the Company granted no options to employees and made no
      grants of non-qualified options.





A
      summary
      of stock option transactions for the three months ended September 30, 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, 2006
              
              
              1,440,000
              
              
              268,750
              
              
              $0.35
                  to $1.00
              
              
              150,000
              
              
              37,500
              
              
              $0.35Granted
                  / vested during the period
              
              
              -
              
              
              -
              
              
              xx
              
              
              -
              
              
              -
              
              
              xxExercised
                  during the period
              
              
              -
              
              
              -
              
              
              xx
              
              
              -
              
              
              -
              
              
              xxCancelled
                  / forfeit during the period
              
              
              (22,500
              )
              
              -
              
              
              $0.35
                  to $1.00
              
              
              -
              
              
              -
              
              
              xxBalance,
                  September 30, 2006
              
              
              1,417,500
              
              
              268,750
              
              
              $0.35
                  to $1.00
              
              
              150,000
              
              
              37,500
              
              
              $0.35





10


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





**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 amounts of assets
      and
      liabilities for financial reporting purposes and the corresponding amounts
      used
      for income tax purposes.





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





September
                30, 2006
            
            June
                30 2006Net
                operating loss tax benefit
            
            $
            1,789,000
            
            $
            1,539,000Non-deductible
                options
            
            
            39,000
            
            
            24,000Allowance
                for bad debt
            
            
            19,000
            
            
            8,000Less
                valuation allowance
            
            
            (1,847,000
            )
            
            (1,571,000
            )$
            0
            
            $
            0





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. There is no income tax benefit for the losses
      for
      the three months ended September 30, 2006 and September 30, 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.





At
      June
      30, 2006, the Company had a net operating loss carryforward for Federal and
      state income tax purposes of approximately $3,837,000 which, if not used, will
      expire in the fiscal year ending June 30, 2027.


11


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





**Note
      6: Subsequent Events**





On
      October 23, 2006, the Company entered into a Securities Purchase Agreement
      with
      two accredited investors (the “Investors”) for the purchase of (i) $500,000 in
      non-convertible 10% debentures (the “Debentures”) and (ii) warrants (the
“Warrants”) to purchase 400,000 shares of the Registrant’s common stock (the
“Financing”). The Financing provided the Company with aggregate sales proceeds
      of $500,000. The Company anticipates that the proceeds of the Financing net
      of
      transaction expenses will be used for general corporate purposes.





The
      Debentures mature on the earlier of November 13, 2007 and the date that the
      Registrant shall have received net proceeds from debt and/or equity financings
      of at least $2,000,000. The Debentures bear interest at 10% per annum. Interest
      on the Debentures runs from the original commitment date, October 13, 2006.
      The
      Warrants have an exercise price of $1.00 per share. The Warrants are subject
      to
      a full ratchet price protection for the five-year life of the Warrants.





The
      Company and the Investors also entered into a Registration Rights Agreement
      whereby the Company is required to file a non-exclusive registration statement
      covering the common stock underlying the Warrants within 45 days after the
      closing. If the registration statement is not filed within 45 days from the
      date
      of closing, the Registrant is required to pay damages to the Investors. In
      addition, in the event the registration statement is not declared effective
      by
      the Securities and Exchange Commission with 120 days of the closing, the Company
      is required to pay damages to the Investors.





Each
      officer and director of the Company also entered into a 90-day lock-up agreement
      with the Investors pursuant to which they agreed not to sell, offer to sell,
      contract to sell, agree to sell, hypothecate, pledge, grant any option for
      sale
      or purchase or otherwise dispose of Company common stock or common stock
      equivalents.





The
      Financing was made in reliance on an exemption from securities registration
      afforded by the provisions of Section 4(2) of the Securities Act of
      1933.





In
      October, 2006, vested options of 162,583 option shares were exercised for a
      total consideration of $56,904.


12


**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 month
      period ended September 30, 2006 included herein and its audited financial
      statements and notes for the year ended June 30, 2006 included in its 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 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 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.




13


The
      following table sets forth the number of design centers:




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




**Owned
                and**
              **Operated
                by the**
              **Company**
            **Franchised**
              **and
                Open**
            **Subtotal**
            **Franchised
                but**
              **Not
                Yet Open**
            **Total**Number
                of Design Centers
              at
                June 30, 2004
            1
            0
            1
            0
            1Additions
                and deletions in the fiscal year ended June 30, 2005
            1
            1
            2
            3
            5Number
                of Design Centers
              at
                June 30, 2005
            2
            1
            3
            3
            6Additions
                and deletions in the fiscal year ended June 30, 2006
            1
            5
            6
            9
            15Number
                of Design Centers
              at
                June 30, 2006
            3
            6
            9
            12
            21Additions
                and deletions in the three months ended September 30, 2006
            1
            -
            1
            1
            3Number
                of Design Centers
              at
                September 30, 2006
            4
            6
            10
            13
            23







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




**Results
      of Operations for the three months ended September 30, 200** **6
      compared to the three months ended September 30, 2005**




Recognized
      sales for the three months ended September 30, 2006 were $ 1,462,528 compared
      to
      $1,020,853 for the three months ended September 30, 2005. Aggregate gross profit
      amounts and percentages were $529,934 and 36% for the three months ended
      September 30, 2006 as compared to $446,952 and 44% for the three months ended
      September 30, 2005. The following is illustrative for the three months ended
      September 30:


2006
              
              2005Sales
              
              Gross
                  Profit
              
              %
              
              Sales
              
              Gross
                  Profit
              
              %Retail
              
              $
              1,262,564
              
              $
              469,813
              
              
              37
              %
              $
              924,803
              
              $
              411,961
              
              
              44
              %Wholesale
              
              $
              162,020
              
              $
              22,177
              
              
              14
              %
              $
              67,024
              
              $
              5,965
              
              
              9
              %Franchise
              
              $
              37,944
              
              $
              37,944
              
              
              100
              %
              $
              29,026
              
              $
              29,026
              
              
              100
              %







The
      increase in sales reflects continued growth and the full quarter impact of
      the
      addition of the Company’s third design center as well as increased royalties
      from franchisees. The fluctuation in gross profit percentages continues to
      reflect the nature of operations being in a startup stage and the mix impact
      of
      wholesale sales to franchisees. Additionally, gross profit percentages for
      the
      three months ended September 30, 2006 were adversely impacted by higher than
      anticipated installation costs from subcontractors accounting for a 2%
      impairment in the retail gross margin, promotional price discounting and retail
      sales to commercial accounts whose margins are generally lower than consumer
      retail sales.




Occupancy
      expenses for the three months ended September 30, 2006 were $121,913 compared
      to
      $74,948 for the three months ended September 30, 2005. The increase is
      attributable to a full quarter impact of the opening of the Bel Air, Maryland
      design center and the acquisition of the fourth Company-owned design center
      in
      Leesport, Pennsylvania.






14






Selling,
      general and administrative expenses for the three months ended September 30,
      2006 were $1,056,462 compared to $640,781 for the three months ended September
      30, 2005. The increase relates to additional personnel and operating costs
      associated with the full quarter impact of the Company’s Bel Air, Maryland
      design center, the inclusion of the Company’s newly acquired Leesport,
      Pennsylvania design center in July, 2006 and the expansion of Company operations
      toward the creation of a national organization. Expenses for the three months
      ended September 30, 2006 include Advertising and Promotional expenses of
      $173,782 compared to $123,819 spent during the three months ended September
      30,
      2005 reflecting additional spending for billboard advertising. Professional
      fees
      amounted to $187,722 for the three months ended September 30, 2006 compared
      to
      $57,513 for the three months ended September 30, 2005 reflective of increased
      spending for legal fees related to capital financing and public trading issues
      as well as increased investment advisor fees. Personnel costs account for the
      majority of the remaining increase in selling, general and administrative
      expenses.




**Liquidity**




The
      Company’s cash position decreased to $196,180 at September 30, 2006 from
      $466,861 at June 30, 2006. The loss for the three months ended September 30,
      2006 of $(651,763) and the increase in inventories of $(147,411) and prepaid
      expenses of $(352,627) were offset by an increase in accounts payable and
      accrued liabilities and issuance of common stock for services and purchase
      of
      assets, resulting in a net cash used in operating activities of
      $(229,660).




During
      the three months ended September 30, 2006, the Company spent $170,162 for the
      acquisition of vehicles, store equipment, and leasehold
      improvements.




During
      the three months ended September 30, 2006, to finance its loss, capital
      expenditures, and changes in other working capital items, the Company increased
      its notes payable by $129,521; issued 40,000 shares of its common stock at
      $1.00
      per share in connection with the purchase of assets, and issued 500,000 shares
      of its common stock at $0.85 per share for services, aggregating
      $465,000.


In
        October, 2006, the Company entered into a Securities Purchase Agreement with
        two
        accredited investors (the “Investors”) for the purchase of (i) $500,000 in
        non-convertible 10% debentures (the “Debentures”) and (ii) warrants (the
“Warrants”) to purchase 400,000 shares of the Registrant’s common stock (the
“Financing”). The Financing provided the Company with aggregate proceeds of
        $500,000. The Company anticipates that the proceeds of the Financing net
        of
        transaction expenses will be used for general corporate purposes throughout
        the
        remainder of the fiscal year.


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.




The
      Company plans to continue to expand revenue by increasing the number of
      Company-owned design centers, by selling additional franchises, and by
      increasing the product distribution network to franchisees. Although the
      Company-owned design centers produce positive store operating profits in the
      aggregate, and although the franchised design centers provide revenue and
      profits to the Company in the form of royalty payments and profits from
      wholesale sales, the Company’s profits generated from these activities are not
      adequate to offset the Company’s aggregate overhead expenses. To rectify this
      shortfall, the Company either needs to reduce overhead expenses or increase
      the
      number of profitable operating stores to the point where the aggregate
      contribution from such stores offsets the Company’s overhead expense. There is
      no assurance that the Company will be able to do so.




Future
      capital requirements and the adequacy of available funds will depend on numerous
      factors and risks, including the successful expansion and increase in the number
      of Company-owned 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 affected 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.






15




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.**





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 September 30, 2006. 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 September 30, 2006.




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.
















16


**PART
      II**


**OTHER
      INFORMATION**





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





During
      the three months ended September 30, 2006, the Company issued 40,000 of its
      common shares at $ 1.00 per share, with net proceeds of $40,000, for the
      purchase of the Leesport, Pennsylvania franchise assets pursuant to an asset
      purchase agreement dated July 1, 2006.





During
      the three months ended September 30, 2006, the Company issued 500,000 of its
      common shares at $ 0.85 per share, with net proceeds of $425,000, for investor
      services rendered.








**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.November
                14, 2006
            By:/s/
                Scott R. OglumScott
                R. OglumChairman
                of the Board and Chief Executive OfficerBy:/s/
                James J. VincenzoJames
                J. VincenzoChief
                Financial Officer













18