**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, 2007.


OR




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


SECURITIES
      EXCHANGE ACT OF 1934




For
      the
      transition period from ________ to ________




**Commission
      File number 0-26845**





**Theater
      Xtreme Entertainment Group, Inc.**


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


(Exact
      name of 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 14, 2007, there were
      20,812,425 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, 2007





PagePart
                  I:  Financial InformationItem
                  1.
              Financial
                  Statements
              3Balance
                  Sheet as of September 30, 2007 (Unaudited) and June 30, 2007
                  (Audited)
              3Statements
                  of Operations for the ThreeMonths
                  Ended September 30, 2007 and 2006 (Unaudited)
              4Statement
                  of Changes in Stockholders’ Equity (Deficit) for theThree
                  Months Ended September 30, 2007 (Unaudited)
              5Statement
                  of Cash Flows for the Three Months EndedSeptember
                  30, 2007 and 2006 (Unaudited)
              6Notes
                  To Financial Statements (Unaudited)
              7Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              17Item
                  3.
              Controls
                  and Procedures
              22Part
                  II:  Other InformationItem
                  6.
              Exhibits
              23Signatures
              24


**PARTI**


**FINANCIAL
      INFORMATION**





**Item
      1.  Financial Statements**


**THEATER
                  XTREME ENERTAINMENT GROUP, INC.****BALANCE
                  SHEETS****SEPTEMBER
                  30, 2007 AND JUNE 30, 2007****SEPTEMBER
                  30**
              
              
              **JUNE
                  30****2007**
              
              
              **2007****Assets**
              
              (Unaudited)
              
              
              (Audited)Current
                  Assets:Cash
                  and equivalents
              
              $
              235,300
              
              
              $
              232,583Accounts
                  receivable, net of allowance of $ 65,366, and $ 65,782
              
              
              231,735
              
              
              
              292,060Inventory
              
              
              750,804
              
              
              
              810,504Prepaid
                  expenses
              
              
              473,202
              
              
              
              164,390Other
                  current assets
              
              
              207,759
              
              
              
              219,045Total
                  current assets
              
              
              1,898,800
              
              
              
              1,718,582Property
                  and Equipment, net
              
              
              867,371
              
              
              
              933,394Other
                  Assets:Deferred
                  financing fees
              
              
              320,927
              
              
              
              342,990Deposits
              
              
              48,954
              
              
              
              48,954$
              3,136,052
              
              
              $
              3,043,920**Liabilities
                  and Stockholders' Deficit**Current
                  Liabilities:Accounts
                  payable and accrued expenses
              
              $
              993,378
              
              
              $
              801,978Payroll
                  liabilities
              
              
              146,630
              
              
              
              149,221Current
                  portion of notes payable
              
              
              37,807
              
              
              
              37,047Non-convertible
                  debentures
              
              
              300,000
              
              
              
              300,000Promissory
                  notes
              
              
              225,000
              
              
              
              -Deferred
                  franchise fees
              
              
              316,500
              
              
              
              299,000Deferred
                  sales
              
              
              683,020
              
              
              
              495,751Total
                  current liabilities
              
              
              2,702,335
              
              
              
              2,082,997Long-term
                  Liabilities:Non-convertible
                  debentures
              
              
              2,700,000
              
              
              
              2,700,000Notes
                  payable, net of current portion
              
              
              97,571
              
              
              
              107,224Total
                  long-term liabilities
              
              
              2,797,571
              
              
              
              2,807,224Total
                  liabilities
              
              
              5,499,906
              
              
              
              4,890,221Stockholders'
                  Equity (Deficit):Preferred
                  stock, no par value, 5,000,000 shares authorized,no
                  shares issued and outstanding
              
              
              -
              
              
              
              -Common
                  stock, $.001 par, 50 million shares authorized;20,812,425
                  and 20,087,425 shares issuedand
                  outstanding
              
              
              20,812
              
              
              
              20,087Additional
                  paid in capital
              
              
              6,115,905
              
              
              
              5,541,029Accumulated
                  deficit
              
              
              (8,500,571
              )
              
              
              (7,407,417
              )Total
                  stockholders' deficit
              
              
              (2,363,854
              )
              
              
              (1,846,301
              )$
              3,136,052
              
              
              $
              3,043,920





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, 2007 and 2006**2007
              
              
              2006Revenues
              
              $
              1,203,013
              
              
              $
              1,462,528Cost
                  of revenues
              
              
              820,285
              
              
              
              932,594Occupancy
                  expenses
              
              
              155,067
              
              
              
              121,913Selling,
                  general and administrative expenses
              
              
              1,198,841
              
              
              
              1,056,4622,174,193
              
              
              
              2,110,969Loss
                  from operations
              
              
              (971,180
              )
              
              
              (648,441
              )Interest
                  income
              
              
              -
              
              
              
              242Interest
                  expense
              
              
              (121,974
              )
              
              
              (3,564
              )Net
                  loss
              
              $
              (1,093,154
              )
              
              $
              (651,763
              )Basic
                  and diluted:Loss
                  per common share
              
              $
              (0.05
              )
              
              $
              (0.03
              )Weighted
                  average shares
              
              
              20,661,601
              
              
              
              19,420,584


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





4


**THEATER
                  XTREME ENTERTAINMENT GROUP, INC.****STATEMENT
                  OF STOCKHOLDERS' EQUITY (DEFICIT)****THREE
                  MONTHS ENDED SEPTEMBER 30, 2007**Number
                  of($
                  US except shares)
              
              Shares
                  -
              
              
              
              
              
              Additional
              
              
              
              
              
              TotalCommon
              
              
              Common
              
              
              Paid-in
              
              
              Accumulated
              
              
              Stockholders'Stock
              
              
              Stock
              
              
              Capital
              
              
              Deficit
              
              
              Equity
                  (Deficit)Balance
                  at June 30, 2007 (Audited)
              
              
              20,087,425
              
              
              $
              20,087
              
              
              $
              5,541,029
              
              
              $
              (7,407,417
              )
              
              $
              (1,846,301
              )Issuance
                    of common stock, services rendered
              
              
              725,000
              
              
              $
              725
              
              
              $
              436,312
              
              
              $
              -
              
              
              
              437,037Vested
                  employee stock options
              
              
              -
              
              
              
              -
              
              
              
              31,443
              
              
              
              -
              
              
              
              31,443Vested
                  non-employee stock options
              
              
              -
              
              
              
              -
              
              
              
              3,721
              
              
              
              -
              
              
              
              3,721Issuance
                  of warrants, notes payable
              
              
              -
              
              
              
              -
              
              
              
              12,000
              
              
              
              -
              
              
              
              12,000Issuance
                  of warrants, services rendered
              
              
              -
              
              
              
              -
              
              
              
              91,400
              
              
              
              -
              
              
              
              91,400Net
                  loss for the three months endedSeptember
                  30, 2007
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,093,154
              )
              
              
              (1,093,154
              )Balance
                  at September 30, 2007 (Unaudited)
              
              
              20,812,425
              
              
              $
              20,812
              
              
              $
              6,115,905
              
              
              $
              (8,500,571
              )
              
              $
              (2,363,854
              )





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, 2007 and 2006**2007
              
              
              2006**Cash
                  flows from operating activities:**Net
                  Loss
              
              $
              (1,093,154
              )
              
              $
              (651,763
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Depreciation
              
              
              68,590
              
              
              
              34,970Amortization
                  of prepaid consulting services
              
              
              136,483
              
              
              
              -Issuance
                  of common stock for services
              
              
              41,387
              
              
              
              425,000Issuance
                  of common stock, purchase of assets
              
              
              -
              
              
              
              40,000Issuance
                  of warrants for services
              
              
              600
              
              
              
              -Increase
                  (decrease) in Allowance for Doubtful Accounts
              
              
              (416
              )
              
              
              25,000Employee
                  stock option vesting for compensation
              
              
              31,443
              
              
              
              32,654Non-employee
                  stock option vesting for services
              
              
              3,721
              
              
              
              2,390Amortization
                  of deferred charges
              
              
              34,063
              
              
              
              -(Increase)
                  decrease in assetsAccounts
                  receivable
              
              
              60,741
              
              
              
              30,725Inventory
              
              
              59,700
              
              
              
              (147,411
              )Prepaid
                  expenses
              
              
              41,155
              
              
              
              (352,627
              )Other
                  Assets
              
              
              11,286
              
              
              
              15,441Increase
                  (decrease) in liabilitiesAccounts
                  payable and accrued expenses
              
              
              191,400
              
              
              
              227,494Payroll
                  liabilities
              
              
              (2,591
              )
              
              
              34,503Deferred
                  franchise fees
              
              
              17,500
              
              
              
              15,000Deferred
                  sales
              
              
              187,269
              
              
              
              (2,379
              )Other
                  Current Liabilities
              
              
              -
              
              
              
              41,343Net
                  cash used in operating activities
              
              
              (210,823
              )
              
              
              (229,660
              )**Cash
                  flows from investing activities:**Deposits
                  on stores and corporate facility
              
              
              -
              
              
              
              (28,234
              )Purchase
                  of property and equipment
              
              
              (2,567
              )
              
              
              (141,928
              )Net
                  cash used in investing activities
              
              
              (2,567
              )
              
              
              (170,162
              )**Cash
                  flows from financing activities:**Repayment
                  of notes payable
              
              
              (8,893
              )
              
              
              (11,188
              )Proceeds
                  from note payable
              
              
              -
              
              
              
              140,709Proceeds
                  from short-term promissory notes
              
              
              225,000
              
              
              
              -Proceeds
                  from issuance of common stock
              
              
              -
              
              
              
              -Net
                  cash used in financing activities
              
              
              216,107
              
              
              
              129,521Net
                  increase (decrease) in cash
              
              
              2,717
              
              
              
              (270,301
              )Cash
                  and equivalents, beginning of period
              
              
              232,583
              
              
              
              466,481Cash
                  and equivalents, end of period
              
              
              235,300
              
              
              $
              196,180**Supplemental
                  disclosure:**Cash
                  paid during the quarter for interest
              
              $
              15,048
              
              
              $
              3,564**Supplemental
                  disclosure of non-cash****investing
                  and financing activites:**Liabilities
                  assumed as part of acquisition of property
              
              $
              -
              
              
              $
              2,598Acquisition
                  of property and equipmentby
                  issuance of notes payable
              
              $
              -
              
              
              $
              140,709Prepaid
                  consulting servicesby
                  issuance of common stock
              
              $
              395,650
              
              
              $
              -Prepaid
                  consulting servicesby
                  issuance of warrants
              
              $
              90,800
              
              
              $
              -Deferred
                  Financing chargesby
                  issuance of warrants
              
              $
              12,000
              
              
              $
              -
 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, 2007 are not necessarily indicative of the results that may be
      expected for the year ending June 30, 2008. The unaudited financial statements
      should be read in conjunction with the financial statements and footnotes
      thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal
      year ended June 30, 2007.





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





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





*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.


7


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








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





*Revenue
      Recognition.*Retail sales include all sales from Company-owned
      design centers.  The following is a summary of earned revenues for the
      three months ended September 30:


2007
              
              
              2006Retail
                  sales
              
              $
              767,260
              
              
              $
              1,262,564Wholesale
                  sales
              
              
              311,625
              
              
              
              162,020Franchise
                  licenses and royalties
              
              
              124,128
              
              
              
              37,944Total
                  revenues
              
              $
              1,203,013
              
              
              $
              1,462,528


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





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





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


2007
              
              
              2006Deferred
                  retail sales
              
              $
              663,451
              
              
              $
              651,898Unearned
                  service contract revenue
              
              
              19,569
              
              
              
              25,428Total
                  deferred retail sales
              
              $
              683,020
              
              
              $
              677,326


8


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








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





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





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





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





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





*Shipping
      and Handling Fees and Costs.*  The Company classifies shipping and
      handling fees when charged to the customer as revenue. The Company classifies
      shipping and handling costs as part of selling and administration
      expenses.  Shipping and handling costs were $14,128 and $24,021 for
      the three months ended September 30, 2007 and 2006, respectively. In view of
      the
      Company’s treatment of shipping and handling costs as a component of selling,
      general and administrative cost, its gross margin may not be comparable to
      those
      of other companies where shipping and handling costs are included in cost of
      revenue.





*Advertising
      Costs.*Advertising and sales promotion costs are expensed as
      incurred. Advertising and promotion expense, excluding investor relations
      expenses, totaled $147,834 and $173,782 for the three months ended September
      30,
      2007 and 2006, respectively.


9


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





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





*Investor
      Relations Costs.*Investor relations services are expensed as
      incurred. Investor relations expenses, including investor relations promotional
      costs, totaled $107,579 and $87,949 for the three months ended September 30,
      2007 and 2006, respectively.





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





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





As
      a
      result of the adoption of SFAS No. 123(R), during the three months ended
      September 30, 2007 and 2006, the Company’s net income was approximately $35,164
      and $35,044 lower, respectively, as a result of stock-based compensation
      expense, including $3,721 and $2,390, respectively, recognized on behalf of
      outside board members.





As
      of
      September 30, 2007, there was $295,474 of unrecognized compensation expenses
      and
      $32,447 of unrecognized expenses for services related to non-vested market-based
      option share awards that are expected to be recognized through the fiscal year
      ended June 30, 2011.


10


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








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





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





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





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


11


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








**Note
      2:  Management’s Plans**





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





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





**Note
      3:  Notes Payable**





Between
      July 20 and August 15, 2007, the Company executed and delivered promissory
      notes
      to three accredited investors ( the “Promissory Note Investors”) in the
      aggregate face amount of $225,000 (the “Promissory Notes”), and warrants (the
“Promissory Warrants”) to purchase up to 112,500****shares,
      in the aggregate, of the Company’s common stock (the “Promissory Note
      Financing”). The proceeds of the Promissory Note Financing were used for general
      corporate purposes. The Promissory Notes bear interest at 14% per annum, mature
      one year from the date of issue and may be prepaid at any time without
      penalty.  The Promissory Warrants have an exercise price of $1.00 per
      share and are subject to full ratchet price protection for the five-year life
      of
      the Promissory Warrants.  Repayment of the Promissory Notes is
      guaranteed by Scott R. Oglum, Chief Executive Officer of the Company, through
      separate Guaranty and Pledge agreements with all three accredited investors.
      The
      guarantees are secured by a pledge by Mr. Oglum of up to 3,618,275 shares,
      in
      the aggregate, of the Company’s common stock which he owns representing his
      entire holdings. In September, 2007, the Company indemnified Mr. Oglum, in
      connection with the Guaranty and Pledge Agreements, for any and all payments
      made by Mr. Oglum to the holders of the Promissory Notes and for the dollar
      amount of any unrecovered proceeds pursuant to the sale of any of the Pledged
      Shares as may be sold pursuant to the Guaranty and Pledge
      Agreements.  The Promissory Note 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, as amended. See also Note 7, Subsequent
      events.


12


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








**Note
      4:  Common Stock**





During
      the three months ended September 30, 2007, the Company issued 650,000 of its
      common shares at $0.61 per share, representing the fair value of the price
      per
      share at the time of issuance, with an  aggregate value of $395,650,
      and granted warrants to purchase 500,000 shares of the Company’s common stock at
      an exercise price of $1.00 per share, to a consultant for services rendered.
      The
      Company valued the common stock purchase warrants at $90,800. The values of
      the
      common stock and purchase warrants shall both be amortized over a twelve month
      period.





During
      the three months ended September 30, 2007, the Company issued 75,000 of its
      common shares at $0.55 per share, representing the fair value of the price
      per
      share at the time of issuance, with an aggregate value of $41,387, to another
      unrelated consultant for services rendered.





During
      the three months September 30, 2007, the Company granted warrants to purchase
      8,750 shares of the Company’s common stock at an exercise price of $1.00 per
      share to a consultant in consideration for services rendered. The Company valued
      these warrants at $600 and expensed this amount in the three months ended
      September 30, 2007 as a consulting expense.





During
      the three months September 30, 2007, the Company granted warrants to purchase
      112,500 shares of the Company’s common stock, in the aggregate, at exercise
      prices of $1.00 per share separately to three accredited investors in connection
      with the Promissory Note Financing. The Company has valued these warrants at
      $12,000, in the aggregate and will expense this amount over the time of the
      respective underlying Promissory Notes. See Note 3, Notes Payable.




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




The
      following summarizes warrants to purchase the
      Company's common stock outstanding through September 30, 2007:




Number
                of Warrants
            
            
            Exercise
                PriceWarrants
              outstanding at June 30, 2007
            
            
            1,625,160
            
            
            $
            1.00Warrants
              issued during the three months ended September 30, 2007
            
            
            621,250
            
            
            $
            1.00Warrants
              outstanding at September 30, 2007
            
            
            2,246,410
            
            
            $
            1.00





Currently
      all warrants outstanding have an exercise price of $1.00 per
      share.


13


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





**Note
      5:  Stock Option Plan**





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





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





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





At
      June
      30, 2007, there were 1,515,717 stock options outstanding under the 2005 Stock
      Option Plan. At September 30, 2007, there were 1,515,717 stock options
      outstanding under the 2005 Stock Option Plan. The exercise prices per share
      of
      these of options ranges from $0.35 to $1.12 and vesting is either 25% or 33%
      each year on the anniversary of grant date contingent upon continuing employment
      or services as a member of the Board of Directors. In the three months ended
      September 30, 2007, the Company granted no options to employees, made no grants
      of non-qualified options and there were no exercises of options.





A
      summary
      of stock option transactions for the three months ended September 30, 2007
      is as
      follows:


**Incentive
                  Stock Options**
              
              **Nonqualified
                  Stock Options****Weighted**
              
              
              
              **Weighted****Stock**
              
              **Average**
              
              **Stock**
              
              **Average****Options**
              
              **Exercise**
              
              **Options**
              
              **Exercise****Outstanding**
              
              **Price**
              
              **Outstanding**
              
              **Price**Balance,
                  June 30, 2007
              
              1,335,717
              
              $0.54
              
              180,000
              
              $0.48Granted
                  during the period
              
              -
              
              xx
              
              -
              
              xxExercised
                  during the period
              
              -
              
              xx
              
              -
              
              xxCancelled
                  / forfeited during the period
              
              -
              
              xx
              
              -
              
              xxBalance,
                  September 30, 2007
              
              1,335,717
              
              $0.54
              
              180,000
              
              $0.48
   14


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








**Note
      5:  Stock Option Plan (continued)**





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




**Summary
                  of ISO Options**
              
              **Summary
                  of Nonqualified Options****Outstanding**
              
              
              
              **Exercisable**
              
              **Outstanding**
              
              
              
              **Exercisable****Number**
              
              **Weighted**
              
              **Number**
              
              **Number**
              
              **Weighted**
              
              **Number****Outstanding**
              
              **Average**
              
              **Outstanding**
              
              **Outstanding**
              
              **Average**
              
              **Outstanding****at**
              
              **Remaining**
              
              **at**
              
              **at**
              
              **Remaining**
              
              **at****Exercise**
              
              **September
                  30**
              
              **Contractual**
              
              **September
                  30**
              
              **September
                  30**
              
              **Contractual**
              
              **September
                  30****Price**
              
              **2007**
              
              **Life**
              
              **2007**
              
              **2007**
              
              **Life**
              
              **2007****$0.35**
              
              887,417
              
              7.6
                  Years
              
              348,333
              
              150,000
              
              7.6
                  Years
              
              75,000**$0.61**
              
              50,000
              
              9.7
                  Years
              
              -
              
              -
              
              xx
              
              -**$0.80**
              
              50,000
              
              9.6
                  Years
              
              -
              
              -
              
              xx
              
              -**$0.89**
              
              50,000
              
              9.6
                  Years
              
              -
              
              -
              
              xx
              
              -**$1.00**
              
              277,500
              
              8.7
                  Years
              
              68,750
              
              -
              
              xx
              
              -**$1.04**
              
              20,800
              
              9.2
                  Years
              
              -
              
              -
              
              xx
              
              -**$1.12**
              
              -
              
              xx
              
              -
              
              30,000
              
              9.3
                  Years
              
              -1,335,717
              
              
              
              417,083
              
              180,000
              
              
              
              75,000




At
        September 30, 2007, there were 1,515,717 stock options outstanding under
        the
        2005 Stock Option Plan. During the three months ended September 30, 2007,
        the
        Company granted no additional stock options, no stock options were forfeited
        due
        to termination of employment and no vested stock options were
        exercised.


**Note
      6:  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, 2007 and
      June
      30, 2007:





September
                30, 2007
            
            
            June
                30 2007Net
                operating loss tax benefit
            
            $
            3,341,000
            
            
            $
            2,884,000Non-deductible
                options
            
            
            100,000
            
            
            
            85,000Allowance
                for bad debt
            
            
            26,000
            
            
            
            26,000Less
                valuation allowance
            
            
            (3,467,000
            )
            
            
            (2,995,000
            )$
            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, 2007 and September 30, 2006,
      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, 2007, the Company had a net operating loss carryforward for Federal and
      State income tax purposes of approximately $7,150,000 which, if not used, will
      expire in various years through June 30, 2028.


15


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








**Note
      7:  Subsequent Events**





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





Effective
      November 6, 2007, the Company closed two of its five Company-owned retail
      stores, one in Leesport, Pennsylvania (formerly a franchise store) and one
      in
      Newark, Delaware (its first location) and eliminated staff at these
      locations.  The Company has taken these actions as part of a recently
      implemented store performance evaluation and cost and expense reduction
      initiative developed earlier and designed to reduce costs and
      expenses.








16


**Item2.  Management’s
      Discussion and Analysis or Plan
      of Operation**





**Forward-Looking
      Information**





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




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




Some
      of
      the information that follows does not constitute historical fact but merely
      reflects management’s intent, belief or expectations regarding the anticipated
      effect of events, circumstances and trends.  Such statements should
      also be considered as forward-looking statements within the meaning of the
      Private Securities Litigation Reform Act of 1995.  Management believes
      that their expectations are based on reasonable assumptions within the bounds
      of
      their knowledge of the Company’s business and operations. Factors that might
      cause or contribute to differences between management’s expectations and actual
      results include:




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


·
            the
                ability to maintain margin and sales growth
                rates;


·
            the
                ability to attract and retain quality
                employees;


·
            the
                effect of changing economic
                conditions;


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


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


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




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




**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




17


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.




The
      following table sets forth the number of design centers:




**Theater
      Xtreme Entertainment Group,
      Inc.**


**Design
                  Stores Opened and Operating**
              
              **Franchised****Company**
              
              
              
              **Total**
              
              **Not
                  Yet****Owned**
              
              **Franchised**
              
              **Opened**
              
              **Opened**
              
              **Total**Number
                  of design stores at June 30, 2004
              1
              
              0
              
              1
              
              0
              
              1Net
                  additions (deletions) in the fiscal year ended June 30,
                  2005
              1
              
              1
              
              2
              
              3
              
              5Number
                  of design stores at June 30, 2005
              2
              
              1
              
              3
              
              3
              
              6Net
                  additions (deletions) in the fiscal year ended June 30,
                  2006
              1
              
              5
              
              6
              
              9
              
              15Number
                  of design stores at June 30, 2006
              3
              
              6
              
              9
              
              12
              
              21Net
                  additions (deletions) in the fiscal year ended June 30,
                  2007
              2
              
              3
              
              5
              
              0
              
              5Number
                  of design stores at June 30, 2007
              5
              
              9
              
              14
              
              12
              
              26Net
                  additions (deletions) in the three months ended September 30,
                  2007
              0
              
              2
              
              2
              
              0
              
              2Number
                  of design stores at September 30, 2007
              5
              
              11
              
              16
              
              12
              
              28


Subsequent
      to September 30, 2007, the Company closed two of its underperforming
      Company-owned retail outlets, See Item 1, Note 7, Subsequent
      Events.




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




18







**Results
      of Operations for the three months ended September 30, 2007 compared to the
      three months ended September 30, 2006**




Recognized
      sales for the three months ended September 30, 2007 were $ 1,203,013 compared
      to
      $1,462,528 for the three months ended September 30, 2006 reflecting a decrease
      of $(259,515) or (18)%, principally attributable to the decrease in retail
      sales
      offset in part by increases in wholesale sales and franchise revenues. Aggregate
      gross profit amounts and percentages were $382,728 and 32% for the three months
      ended September 30, 2007 as compared to $529,934 and 36% for the three months
      ended September 30, 2006. The following is illustrative for the three months
      ended September 30:




2007
            
            2006Sales
            
            
            Gross
                Profit
            
            
            %
            
            Sales
            
            
            Gross
                Profit
            
            
            %Retail
            
            $
            767,260
            
            
            $
            220,206
            
            
            
            29
            %
            
            $
            1,262,564
            
            
            $
            469,813
            
            
            
            37
            %Wholesale
            
            $
            311,625
            
            
            $
            38,394
            
            
            
            12
            %
            
            $
            162,020
            
            
            $
            22,177
            
            
            
            14
            %Franchise
            
            $
            124,128
            
            
            $
            124,128
            
            
            
            100
            %
            
            $
            37,944
            
            
            $
            37,944
            
            
            
            100
            %Total
            
            $
            1,203,013
            
            
            $
            382,728
            
            
            
            32
            %
            
            $
            1,462,528
            
            
            $
            529,934
            
            
            
            36
            %







For
      the
      three months ended September 30, 2007, retail sales decreased by $495,304,
      or
      39%, when compared to the three months ended September 30, 2006. Same-store
      sales, reflecting sales for the Company’s Delaware locations, were $608,991 and
      $952,287 for the three months ended September 30, 2007 and 2006, respectively
      and decreased significantly by $(343,281), or (36)%. This decrease is
      attributable mainly to reduced consumer spending in the consumer electronics
      category generally experienced by most consumer electronics retailers. For
      the
      same reasons, new stores accounted for a sales decrease of $(152,023) or (49)%
      and reflects the inclusion of the Company’s Leesport, Pennsylvania and Bel Air
      and Lutherville design stores. Gross profit amounts and percentages on retail
      sales for the three months ended September 30, 2007 amounted to $220,206 and
      29%
      compared to $469,813 and 37% for the three months ended September 30,
      2006.  The decline in gross margin is attributable to underabsorption
      of warehouse and installation personnel costs owing to the decline of sales
      installations coupled with decreased margins on supplies (principally cables)
      used in installations, lower product margins on certain projectors, and
      inventory shrinkage at certain of the Company’s retail locations.




For
      the
      three months ended September 30, 2007, the Company recognized wholesale sales,
      principally sales to franchisees, of $311,625 compared to $162,020 for the
      three
      months ended September 30, 2006.  This increase results from the
      increasing number of franchisees open and under construction. Wholesale gross
      profit amounts and percentages were $38,394 and 12% compared to $22,177 and
      14%
      for the three months ended September 30, 2006.




For
      the
      three months ended September 30, 2007, the Company recognized $62,500 as earned
      revenue relating to the opening of its franchises compared to $25,000 recognized
      in the three months ended September 30, 2006. The Company’s franchise contract
      provides royalty payments of approximately 4% of franchisee gross
      revenues.  For the three months ended September 30, 2007, the Company
      recognized franchise royalties of $61,628 compared to $12,944 in royalties
      recognized for the three months ended September 30, 2006.




19


Occupancy
      expenses include leasing expenses for retail design centers and office and
      warehouse facilities, property taxes, utilities, maintenance and other related
      occupancy expenses.  For the three months ended September 30, 2007,
      occupancy expenses were $155,067 compared to $121,913 for the three months
      ended
      September 30, 2006.  The increase relates to the opening of the fifth
      company-owned design center in Lutherville, Maryland and the relocated
      Wilmington design center.




Selling,
      general and administrative expenses include the compensation of design center
      personnel, the franchise sales and support operations, advertising, marketing
      and other merchandising expenses, finance and information systems, human
      resources and training operations, related support functions, and executive
      officers compensation.  Selling, general and administrative expenses
      for the three months ended September 30, 2007 were $1,198,841 compared to
      $1,056,462 for the three months ended September 30, 2006. Expenses for the
      three
      months ended September 30, 2007 include Advertising and Promotional expenses
      of
      $147,834 compared to $173,782 spent during the three months ended September
      30,
      2006 reflecting reduced spending for media advertising. Professional fees,
      excluding investment advisor expense, amounted to $188,957 for the three months
      ended September 30, 2007 compared to $99,772 for the three months ended
      September 30, 2006 reflective of increased spending for management consulting
      services. Investment advisor expense amounted to $107,579 for the three months
      ended September 30, 2007 compared to $87,949 for the three months ended
      September 30, 2006. The majority of the remaining increase in selling, general
      and administrative expenses is spread evenly throughout all remaining expense
      categories.




The
      Company had net losses of $(1,093,154) and $(3,446,254) for the three months
      ended September 30, 2007 and June 30, 2007, respectively. The Company had a
      working capital deficit at September 30, 2007 that resulted in a current ratio
      of 0.70 at such date. The Company was able to maintain operations in the three
      months ended September 30, 2007 only by borrowing $225,000 on a short-term
      basis
      at a very high interest rate and allowing accounts payable and accrued expenses
      to increase to $993,378 at September 30, 2007 from $801,978 at June 30,
      2007.




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




**Liquidity**




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




The
      Company’s cash position increased slightly to $235,300 at September 30, 2007
      from $232,583 at June 30, 2007. The loss for the three months ended September
      30, 2007 of $(1,093,154) included non-cash depreciation and amortization charges
      amounting to $205,073 and was further offset by a decreases in accounts
      receivable and inventory of $60,741 and 59,700, respectively, an increase in
      accounts payable of $191,400, an increase in deferred sales of $187,269, the
      issuance of common share and warrants amounting to $41,987 for services
      rendered, and a net reduction in prepaid expenses of $41,155, resulting in
      a net
      cash used in operating activities of $(210,823).




During
      the three months ended September 30, 2007, the Company spent $2,567 for the
      acquisition of equipment.




20


During
      the three months ended September 30, 2007, to finance its loss, capital
      expenditures, and changes in other working capital items, the Company increased
      its notes payable by $225,000.




Between
      July 20 and August 15, 2007, the Company executed and delivered promissory
      notes
      to three accredited investors ( the “Promissory Note Investors”) in the
      aggregate face amount of $225,000 (the “Promissory Notes”), and warrants (the
“Promissory Warrants”) to purchase up to 112,500****shares,
      in the aggregate, of the Company’s common stock (the “Promissory Note
      Financing”). The proceeds of the Promissory Note Financing were used for general
      corporate purposes. The Promissory Notes bear interest at 14% per annum, mature
      one year from the date of issue and may be prepaid at any time without penalty.
      See Item 1, Note 3, Notes Payable.





At
      September 30, 2007, the Company did not have a credit facility or line-of-credit
      arrangement.  The Company has no compensating balance
      requirements.  The Company has a borrowing covenant in connection with
      the long term debenture (the “March Debenture”), as amended, whereby the
      Company’s borrowing ability is proscribed to an aggregate of $2,000,000 in
      additional unsecured indebtedness that may be incurred subsequent to March
      6,
      2007.  Should the Company exceed this limitation, the March Debenture
      would become due and payable in its entirety.  Pursuant to this
      covenant, the Company has $1,746,076 of remaining borrowing capacity as of
      September 30, 2007.  Additionally and also pursuant to the March
      Debenture, should the Company raise in excess of $6,000,000 in equity financing,
      the March Debenture would become due and payable in its entirety.




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





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





The
      Company’s cash flow from operations since inception has been and continues to be
      negative.  If the Company does not raise a sufficient amount of
      capital, it may not have the ability to remain in business until such time,
      if
      ever, when it becomes profitable.




Although
      management expects increased operating costs in future periods due to a
      commitment to develop retail, franchising, and distribution operations on a
      regional and national scale, it also recognizes the need to monitor its costs
      and assess the progress of each of its Company-owned design stores. Accordingly,
      it has begun and will continue a program of selective cost reduction and profit
      improvement initiatives to keep costs within prescribed parameters. This program
      had led to the closing of two of its five Company-owned design stores that
      were
      underperforming at the store profit contribution level. Despite these closures,
      management expects an increase in gross profits from sales resulting from the
      opening of additional design stores whose locations will be in major
      metropolitan retail centers. Additionally, management anticipates an increase
      in
      contributions from its franchise operations, proceeds from additional capital
      contributions from shareholders, and, to the extent necessary, improvements
      through further modifications to its business plan.




21


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




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




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




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




**Off-Balance
      Sheet Arrangements**




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




**Item3.
      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, 2007. 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, 2007.




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.


22


**PARTII**


**OTHER
      INFORMATION**





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





During
      the three months ended September 30, 2007, the Company issued 650,000 of its
      common shares at $0.61 per share with net proceeds of $395,650, and granted
      warrants to purchase 500,000 shares of the Company’s common stock at an exercise
      price of $1.00 per share, to a consultant for services rendered.





During
      the three months ended September 30, 2007, the Company issued 75,000 of its
      common shares at $0.55 per share with net proceeds of $41,187, net of legal
      expenses, to another unrelated consultant for services rendered.





During
      the three months September 30, 2007, the Company granted warrants to purchase
      8,750 shares of the Company’s common stock at an exercise price of $1.00 per
      share to third unrelated consultant in consideration for services
      rendered.





During
      the three months September 30, 2007, the Company granted warrants to purchase
      112,500 shares of the Company’s common stock, in the aggregate, at exercise
      prices of $1.00 per share separately to three accredited investors in connection
      with the issuance of Promissory Notes whose proceeds were used for general
      corporate purposes.








**Item
      4.  Submission of Matters to a Vote of Security
      Holders**





No
      matters were submitted to a vote of the Company’s security holders during the
      three months ended September 30, 2007.




**Item6.  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.


23


**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
                  19, 2007
              By:
              /s/
                  Scott R. OglumScott
                  R. OglumChairman
                  of the Board and Chief Executive OfficerBy:
              /s/
                  James J. VincenzoJames
                  J. VincenzoChief
                  Financial Officer




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