**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-QSB**




(Mark
      One)




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


SECURITIES
      EXCHANGE ACT OF 1934




For
      the
      quarterly period ended March 31, 2007.


OR




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


SECURITIES
      EXCHANGE ACT OF 1934




For
      the
      transition period from ________ to ________




**Commission
      File number 0-26845**





**Theater
      Xtreme Entertainment Group, Inc.**


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


(Exact
      name of small business issuer as specified in its charter)





Florida


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


(State
      or
      other jurisdiction of incorporation or organization)





65-0913583


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


(IRS
      Employer Identification No.)





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


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


(Address
      of principal executive offices)





(302)
      455-1334


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


(Issuer’s
      telephone number)





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


(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 April 30, 2007, there were 19,912,425
      shares of common stock, $0.001 par value, issued and outstanding.





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





**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**





Form
      10-QSB Index


March
      31,
      2007





PagePart
                I: Financial InformationItem
                1. Financial Statements
            3Balance
                Sheets as of March 31, 2007 (Unaudited) and June
                30, 2006
            3Statements
                of Operations for the Three and
                NineMonths Ended March 31, 2007 and 2006 (Unaudited)
            4Statement
                of Stockholders’ Equity (Deficit) for
                theNine
                Months Ended March 31, 2007 (Unaudited)
            5Statements
                of Cash Flows for the Nine Months
                EndedMarch
                31, 2007 and 2006 (Unaudited)
            6Notes
                To Financial Statements (Unaudited)
            7Item
                2. Management’s Discussion and Analysis or Plan of
                Operation
            16Item
                3. Controls and Procedures
            21Part
                II: Other InformationItem
                2. Unregistered Sales of Equity
                Securities
            21Item
                6. Exhibits
            22Signatures
            23











**PART
      I**


**FINANCIAL
      INFORMATION**





**Item
      1. Financial Statements**




**THEATER
                  XTREME ENERTAINMENT GROUP, INC.****BALANCE
                  SHEETS****MARCH
                  31, 2007 AND JUNE 30, 2006****MARCH
                  31**
              
              **JUNE
                  30****2007**
              
              **2006****Assets**
              
              (Unaudited)
              
              (Audited)Current
                  Assets:Cash
                  and equivalents
              
              $
              1,218,158
              
              $
              466,481Accounts
                  receivable, net of allowance of $75,000 and $25,000
              
              
              332,508
              
              
              139,893Inventory
              
              
              711,261
              
              
              629,056Prepaid
                  expenses
              
              
              410,331
              
              
              132,679Other
                  current assets
              
              
              292,360
              
              
              15,441Total
                  current assets
              
              
              3,214,618
              
              
              1,383,550Property
                  and Equipment, net
              
              
              814,723
              
              
              357,434Other
                  Assets:Deferred
                  Financing Fees
              
              
              250,000
              
              
              -Deposits
              
              
              48,954
              
              
              20,720Total
                  other assets
              
              
              298,954
              
              
              20,720$
              4,078,295
              
              $
              1,761,704**Liabilities
                  and Stockholders' Equity Deficit**Current
                  Liabilities:Accounts
                  payable and accrued expenses
              
              $
              664,180
              
              $
              646,290Payroll
                  liabilities
              
              
              125,946
              
              
              58,715Current
                  portion of notes payable
              
              
              29,113
              
              
              19,129Non-convertible
                  debentures
              
              
              300,000
              
              
              -Deferred
                  franchise fees
              
              
              284,000
              
              
              279,000Deferred
                  sales
              
              
              654,455
              
              
              679,706Total
                  current liabilities
              
              
              2,057,694
              
              
              1,682,840Long-term
                  Liabilities:Non-convertible
                  debentures
              
              
              2,700,000Notes
                  payable, net of current portion
              
              
              90,031
              
              
              47,163Total
                  long-term liabilities
              
              
              2,790,031
              
              
              47,163Total
                  liabilities
              
              
              4,847,725
              
              
              1,730,003Stockholders'
                  Equity (Deficit):Preferred
                  stock, no par value, 5 million shares authorized,no
                  shares issued and outstanding
              
              
              -
              
              
              -Common
                  stock, $.001 par, 50 million shares authorized;19,847,425
                  and 19,122,342 shares issuedand
                  outstanding
              
              
              19,847
              
              
              19,122Additional
                  paid in capital
              
              
              5,357,222
              
              
              3,973,742Accumulated
                  deficit
              
              
              (6,146,499
              )
              
              (3,961,163
              )Total
                  stockholders' equity (deficit)
              
              
              (769,430
              )
              
              31,701$
              4,078,295
              
              $
              1,761,704







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


3





**THEATER
                  XTREME ENTERTAINMENT GROUP,
                  INC.****STATEMENTS
                  OF OPERATIONS****THREE
                  AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006****(Unaudited)**Three
                  Months Ended
              
              Nine
                  Months EndedMarch
                  31
              
              March
                  312007
              
              2006
              
              2007
              
              2006Revenues
              
              $
              1,821,275
              
              $
              1,224,272
              
              $
              4,985,992
              
              $
              3,228,252Cost
                  of revenues
              
              
              1,060,025
              
              
              730,998
              
              
              3,007,485
              
              
              1,869,931Occupancy
                  expenses
              
              
              148,017
              
              
              80,025
              
              
              374,788
              
              
              233,177Selling,
                  general and administrative expenses
              
              
              1,092,940
              
              
              849,020
              
              
              3,355,444
              
              
              2,570,0512,300,982
              
              
              1,660,043
              
              
              6,737,717
              
              
              4,673,159Loss
                  from operations
              
              
              (479,707
              )
              
              (435,771
              )
              
              (1,751,725
              )
              
              (1,444,907
              )Interest
                  income
              
              
              2,035
              
              
              1
              
              
              2,635
              
              
              47Interest
                  expense
              
              
              (351,028
              )
              
              (1,293
              )
              
              (436,246
              )
              
              (3,910
              )Net
                  loss
              
              $
              (828,700
              )
              $
              (437,063
              )
              $
              (2,185,336
              )
              $
              (1,448,770
              )Basic
                  and diluted:Loss
                  per common share
              
              $
              (0.04
              )
              $
              (0.02
              )
              $
              (0.11
              )
              $
              (0.08
              )Weighted
                  average shares
              
              
              19,843,106
              
              
              17,875,225
              
              
              19,691,398
              
              
              17,360,818





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





4





**THEATER
                  XTREME ENTERTAINMENT GROUP,
                  INC.****STATEMENT
                  OF STOCKHOLDERS' EQUITY (DEFICIT)****NINE
                  MONTHS ENDED MARCH 31, 2007**Number
                  ofShares
                  -
              
              
              
              Additional
              
              
              
              Total($
                  US except shares)
              
              
              
              Common
              
              Common
              
              Paid-in
              
              Accumulated
              
              Stockholders'Stock
              
              Stock
              
              Capital
              
              Deficit
              
              Equity
                  (Deficit)Balance
                  at June 30, 2006 (Audited)
              
              
              
              
              
              19,122,342
              
              $
              19,122
              
              $
              3,973,742
              
              $
              (3,961,163
              )
              $
              31,701Issuance
                  of common stock, purchase of assets
              
              
              
              
              
              40,000
              
              
              40
              
              
              39,960
              
              
              -
              
              
              40,000Issuance
                  of common stock, services rendered,net
                  of transfer agent and legal fees
              
              
              
              
              
              500,000
              
              
              500
              
              
              424,500
              
              
              -
              
              
              425,000Vested
                  employee stock options
              
              
              
              
              
              -
              
              
              -
              
              
              97,352
              
              
              -
              
              
              97,352Vested
                  non-employee stock options
              
              
              
              
              
              -
              
              
              -
              
              
              8,501
              
              
              -
              
              
              8,501Issuance
                  of common stock, exercise of employeeoptions,
                  net of transfer agent and legal fees
              
              
              
              
              
              185,083
              
              
              185
              
              
              64,367
              
              
              -
              
              
              64,552Issuance
                  of warrants, notes payable
              
              
              
              
              
              -
              
              
              -
              
              
              730,400
              
              
              -
              
              
              730,400Issuance
                  of warrants, services rendered
              
              
              
              
              
              -
              
              
              -
              
              
              18,400
              
              
              
              
              
              18,400Net
                  loss for the nine months endedMarch
                  31, 2007
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,185,336
              )
              
              (2,185,336
              )Balance
                  at March 31, 2007 (Unaudited)
              
              
              
              
              
              19,847,425
              
              $
              19,847
              
              $
              5,357,222
              
              $
              (6,146,499
              )
              $
              (769,430
              )








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





5





**THEATER
                  XTREME ENTERTAINMENT GROUP,
                  INC.****STATEMENTS
                  OF CASH FLOWS****NINE
                  MONTHS ENDED MARCH 31****(Unaudited)**2007
              
              2006**Cash
                  flows from operating activities:**Net
                  Loss
              
              $
              (2,185,336
              )
              $
              (1,448,770
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Depreciation
              
              
              128,489
              
              
              75,587Forgiveness
                  of merger liabilities
              
              
              (8,569
              )
              
              -Issuance
                  of common stock for services
              
              
              -
              
              
              303,500Issuance
                  of warrants for services
              
              
              18,400
              
              
              -Increase
                  in allowance for doubtful accounts
              
              
              25,000
              
              
              -Employee
                  stock option vesting for compensation
              
              
              97,352
              
              
              22,084Non-employee
                  stock option vesting for services
              
              
              8,501
              
              
              8,761Amortization
                  of deferred charges
              
              
              625,025
              
              
              -Increase
                  (decrease) in assetsAccounts
                  receivable
              
              
              (217,615
              )
              
              (27,397
              )Inventory
              
              
              (82,205
              )
              
              (128,011
              )Prepaid
                  expenses
              
              
              2,723
              
              
              27,469Other
                  assets
              
              
              (276,919
              )
              
              -Increase
                  (decrease) in liabilitiesAccounts
                  payable and accrued expenses
              
              
              26,449
              
              
              259,136Payroll
                  liabilities
              
              
              67,241
              
              
              10,272Due
                  to officer
              
              
              -
              
              
              (243
              )Deferred
                  franchise fees
              
              
              5,000
              
              
              179,000Deferred
                  sales
              
              
              (25,251
              )
              
              229,821Net
                  cash used in operating activities
              
              
              (1,791,715
              )
              
              (488,791
              )**Cash
                  flows from investing activities:**Deposits
                  on stores and corporate facility
              
              
              (28,234
              )
              
              -Purchase
                  of property and equipment
              
              
              (335,170
              )
              
              (176,457
              )Net
                  cash used in investing activities
              
              
              (363,404
              )
              
              (176,457
              )**Cash
                  flows from financing activities:**Repayment
                  of notes payable
              
              
              (157,756
              )
              
              -Proceeds
                  from note payable
              
              
              -
              
              
              18,199Proceeds
                  from short term debentures
              
              
              1,500,000Repayment
                  of short term debentures
              
              
              (1,200,000
              )Proceeds
                  from long term debentures
              
              
              2,700,000
              
              
              -Proceeds
                  from issuance of common stock
              
              
              64,552
              
              
              663,563Net
                  cash provided by financing activities
              
              
              2,906,796
              
              
              681,762Net
                  increase in cash
              
              
              751,677
              
              
              16,514Cash
                  and equivalents, beginning of period
              
              
              466,481
              
              
              112,874Cash
                  and equivalents, end of period
              
              $
              1,218,158
              
              $
              129,388**Supplemental
                  disclosure:**Cash
                  paid during the period for interest
              
              $
              80,846
              
              $
              3,910**Supplemental
                  disclosure of non-cash****investing and financing activites:**Liabilities
                  assumed as part of acquisition of property
              
              $
              2,598
              
              $
              -Acquisition
                  of property and equipmentby
                  issuance of notes payable
              
              $
              210,608
              
              $
              36,530Acquisition
                  of property and equipmentby
                  issuance of common stock
              
              $
              40,000
              
              $
              -Prepaid
                  consulting servicesby
                  issuance of common stock
              
              $
              425,000
              
              $
              -Deferred
                  Financing chargesby
                  issuance of warrants
              
              $
              730,400
              
              $
              -Consulting
                  services paidby
                  issuance of warrants
              
              $
              18,400
              
              $
              -





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 Presentation.* The
      accompanying unaudited financial statements have been prepared in accordance
      with U.S. generally accepted accounting principles for interim financial
      information and with the instructions for Form 10-QSB and Item 310(b) of
      Regulation S-B. Accordingly, they do not include all of the information and
      footnotes required by generally accepted accounting principles for complete
      financial statements. In the opinion of management, all adjustments (consisting
      of normal recurring accruals) considered necessary for a fair presentation
      have
      been included. Operating results for the three and nine months ending March
      31,
      2007 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-one franchises, eight of which are open and operating
      as
      franchises and one (the Leesport store) 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 offers franchise licenses nationwide and expects to 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.


7


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








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





Three
                Months ended March 31
            
            Nine
                Months ended March 312007
            
            2006
            
            2007
            
            2006Retail
                sales
            
            $
            1,407,730
            
            $
            1,033,101
            
            $
            3,976,191
            
            $
            2,842,064Wholesale
                sales
            
            
            341,723
            
            
            138,371
            
            
            834,976
            
            
            266,447Franchise
                licenses and royalties
            
            
            71,822
            
            
            52,800
            
            
            174,825
            
            
            119,741Total
                revenues
            
            $
            1,821,275
            
            $
            1,224,272
            
            $
            4,985,992
            
            $
            3,228,252





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





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





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





2007
            
            2006Deferred
                Retail sales
            
            $
            618,683
            
            $
            701,646Unearned
                service contract revenue
            
            
            35,772
            
            
            24,537Total
                Deferred Sales
            
            $
            654,455
            
            $
            726,183





Net
      new
      retail sales orders were $1,142,880 and $3,947,940 for the three and nine months
      ended March 31, 2007, respectively.





*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 and nine months ended March 31, 2007 and 2006, the basic and
      diluted loss per share are the same, because the assumed conversion of stock
      equivalents would be anti-dilutive as the Company experienced a net loss for
      these periods.








8


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








*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 $17,177 and
      $13,247 for the three months ended March 31, 2007 and 2006, respectively and
      $58,194 and $22,573 for the nine months ended March 31, 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 promotional
      expense totaled $114,932 and $125,134 for the three month periods ended March
      31, 2007 and 2006, respectively, and $396,511 and $357,714 for the nine months
      ended March 31, 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.


9


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








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 nine months ended March
      31,
      2006 have not been restated.





Accordingly,
      no compensation cost was recognized for stock options issued during any period
      prior to January 1, 2006. For the three months ended March 31, 2006, recognized
      compensation costs included compensation costs for all non-forfeited share-based
      payments granted. Additionally, all services-related expense amounts recognized
      on behalf of outside Directors were reflected in net income for both the three
      months and nine months ended March 31, 2006. As a result of the adoption of
      SFAS
      No. 123(R), the Company’s net income was approximately $26,320 lower, during the
      nine months ended March 31, 2006 as a result of stock-based compensation expense
      than it otherwise would have been.





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 nine months ended March 31, 2006 would have been modified by
      $(26,320) and would have resulted in 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 between 45% and 60%, risk-free interest rate of from
      between 3.0% to 5.25% and expected option life of ten years.





Results
      for the nine months ended March 31, 2006:





Net
                loss:As
                reported
            
            $
            (1,448,770
            )Pro
                forma
            
            $
            (1,475,090
            )Net
                loss per share:As
                reported
            
            $
            (0.08
            )Pro
                forma
            
            $
            (0.08
            )





As
      of
      March 31, 2007, there was $300,674 of unrecognized compensation expense and
      $39,889 of unrecognized expenses for services related to non-vested market-based
      option share awards that are expected to be recognized through June 30,
      2011.





*Recently
      Issued Accounting 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 will
      be
      effective for fiscal years beginning after December 15, 2006 (the Company’s
      fiscal year 2008) and the provisions of FIN 48 will be applied to all tax
      positions under Statement No. 109 upon initial adoption. The cumulative
      effect of applying the provisions of this interpretation will be reported as
      an
      adjustment to the opening balance of retained earnings for that fiscal year.
      The
      Company is currently evaluating the potential impact of FIN 48 on its
      consolidated financial statements.


10


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**







In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
      No. 108”). SAB No. 108 addresses the process and diversity in practice
      of quantifying financial statement misstatements resulting in the potential
      build up of improper amounts on the balance sheet. The Company will be required
      to adopt the provisions of SAB No.108 in its fiscal year 2008. The Company
      currently does not believe that the adoption of SAB No. 108 will have a
      material impact on its consolidated 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 (the Company’s
      fiscal year 2009) 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 position or results of operations.


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 third calendar quarter of 2008. The Company has
        not
        yet determined the impact of the adoption of SFAS No. 159 on its financial
        statements and footnote disclosures.




**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 Company satisfied and retired this obligation on December 31,
      2006.





During
      the nine months ended March 31, 2007, the Company issued 400,000 warrants to
      purchase shares of the Company’s common stock at an exercise price of $1.00 per
      share and warrants to purchase 1,020,600 shares of the Company’s common stock at
      an exercise price of $1.10 per share, as more fully described in the paragraphs
      below.





On
      October 23, 2006, the Company entered into a Securities Purchase Agreement
      with
      two accredited investors (the “October Investors”) for the purchase of (i)
      $500,000 in non-convertible 10% debentures (the “October Debentures”) and (ii)
      warrants (the “October Warrants”) to purchase 400,000 shares of the Company’s
      common stock (the “October Financing”). The October Financing provided the
      Company with aggregate sales proceeds of $500,000. The proceeds of the October
      Financing net of transaction expenses were used for general corporate purposes.
      The October Warrants have an exercise price of $1.00 per share representing
      the
      fair value as of October 23, 2006. The Company has valued the October Warrants
      at $287,500 and was amortizing this amount as additional financing costs over
      the time of the October Debenture. The Company used the Black-Scholes model
      to
      calculate the fair value of the warrants, with the following assumptions: no
      dividend yield, 45% volatility, risk-free interest rate of 4.8% and expected
      warrant life of five years. The October Warrants are subject to a full ratchet
      price protection for their five-year life. The Company and the October Investors
      also entered into a Registration Rights Agreement pursuant to which the Company
      registered the common stock underlying the October Warrants. Each officer and
      director of the Company also entered into a 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 for 90
      days. The October Financing was made in reliance on an exemption from securities
      registration afforded by the provisions of Section 4(2) of the Securities Act
      of


11


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





1933.
      The
      Company satisfied and retired the October Debentures on March 6, 2007 in
      connection with the March Financing, as more fully described below. Prior to
      their repayment, the October Debentures matured on the earlier of November
      13,
      2007 and the date that the Company received net proceeds from debt and/or equity
      financings of at least $2,000,000. The October Debentures bear interest at
      10%
      per annum. As a result of the October Debentures being retired earlier than
      their normal time, the Company also expensed the unamortized balances of
      additional financing costs associated with the October Warrants, amounting
      to
      $235,360 which is included in interest expense.





Between
      November 15, 2006 and November 22, 2006, the Company executed and delivered
      debentures to three accredited investors (the “November Investors”) in the
      aggregate face amount of $300,000 (the “November Debentures”), the proceeds of
      which, net of transaction expenses, were used for general corporate purposes.
      The November Debentures mature on November 30, 2007 and may be prepaid at any
      time in whole or in part upon payment of a fee equal to five percent (5%) of
      the
      amount of principal repayment. The November Debentures bear interest at 15%
      per
      annum. The November Debentures were sold to the November Investors in reliance
      on an exemption from securities registration afforded by the provisions of
      Section 4(2) of the Securities Act of 1933.


On
        December 22, 2006, the Company entered into a Securities Purchase Agreement
        with
        Kinzer Technology, LLC. (the “December Investor”) for the purchase of (i) a
        $700,000 non-convertible 10% debenture (the “December Debenture”) and (ii)
        warrants (the “December Warrants”) to purchase up to 560,000 shares of the
        Company’s common stock (the “December Financing”). The December Financing
        provided the Company with aggregate proceeds of $700,000. The proceeds of
        the
        December Financing, net of transaction expenses, were used for general corporate
        purposes. The December Warrants have an exercise price of $1.10 per share,
        representing the fair value as of December 22, 2006. The Company has valued
        the
        December Warrants at $289,900 and will amortize this amount as additional
        financing costs over the time of the December Debenture. The Company used
        the
        Black-Scholes model to calculate the fair value of the warrants, with the
        following assumptions: no dividend yield, 45% volatility, risk-free interest
        rate of 4.6% and expected warrant life of five years. The December Warrants
        are
        subject to a full ratchet price protection for the five-year life of the
        Warrants. The December 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 connection with the March Financing as more fully
        described below, the Company satisfied and retired the December Debenture.
        Prior
        to its repayment, the December Debenture matured on the earlier of November
        15,
        2007 and the date that the Company received net proceeds from debt and/or
        equity
        financings of at least $1,500,000. The December Debenture bears interest
        at 10%
        per annum. Additionally, because the December Debenture was modified, as
        more
        fully described below, the Company also modified the amortization of the
        additional financing costs associated with the December Warrants.
  On
        March 6, 2007, the Company entered into a
        Securities Purchase Agreement with Kinzer Technology, LLC (the “March
        Investor”), modifying its existing financing and receiving $2,000,000 in net
        proceeds from the transaction which was comprised of (i) the cancellation
        of the
        December Debenture of $700,000, (ii) the issuance of a new $2,700,000
        non-convertible 10% debenture (the “March Debenture”) and (iii) issuance of
        additional warrants (the “March Warrants”) to purchase up to 400,000 shares of
        the Company’s common stock (the “March Financing”). The proceeds of the March
        Financing were used to repay the October Debentures and the December Debenture,
        each together with accrued and payable interest, and the remainder, net of
        transaction expenses, is being used for general corporate purposes. The March
        Debenture matures on March 6, 2010. The March Debenture bears interest at
        10%
        per annum. The March Warrants have an exercise price of $1.10 per share,
        representing the fair value as of March 6, 2007. The Company has valued the
        March Warrants at $153,000 and will amortize this amount and the remaining
        amount associated with the December Warrants over the time of the March
        Debenture. For the three months ended March 31, 2007, the Company expensed,
        as
        an additional interest expense, $50,380 for the December Warrants (January
        1
        through March 6, 2007) and $9,120 on behalf of the March Warrants (March
        7
        through March 31, 2007). As of March 31, 2007 an aggregate of $375,000 of
        deferred financing costs remain to be amortized over the time of the March
        Debenture. The Company used the Black-Scholes model to calculate the fair
        value
        of the warrants, with the following assumptions: no dividend yield, 45%
        volatility, risk-free interest rate of 4.5% and expected warrant life of
        five
        years. The March Warrants are subject to a full ratchet price protection
        for the
        five-year life of the Warrants. The March 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.




12


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**




**Note
      3: Common Stock**





During
      the nine months ended March 31, 2007, the Company issued 40,000 of its common
      shares at $ 1.00 per share, the fair value per share, for the purchase
      of certain assets pursuant to an asset purchase agreement dated July 1,
      2006.





During
      the nine months March 31, 2007, the Company issued 500,000 of its common shares
      at $ 0.85 per share, the fair value per share, for services rendered, which
      shall be amortized over a twelve month period.





During
      the nine months March 31, 2007, the Company granted
      warrants to purchase 40,000 shares of the Company’s common stock at an exercise
      price of $1.00 to a consultant in consideration for services rendered. The
      Company valued these warrants at $18,400 and expensed this amount in the third
      fiscal quarter as a consulting expense.




**Note
      4: 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.




Pursuant
        to the terms of the Plan as amended, employees and outside Directors were
        granted options to purchase shares of the Company’s common stock as follows:
        850,000 option shares for the year ended June 30, 2006 and 890,000 option
        shares
        for the year ended June 30, 2005, aggregating 1,740,000 option shares. Of
        this
        number, 150,000 option shares were forfeited during the year ended June 30,
        2006
        leaving a remaining exercisable balance of 1,590,000 option shares as of
        June
        30, 2006. No shares were forfeited for the year ended June 30, 2005. The
        exercise prices per share of these options range from $0.35 to $1.00 and
        vesting
        is either 25% or 33% each year on the anniversary of grant date contingent
        upon
        employment or services as a member of the Board of Directors.
 
 The
        Company uses the Black-Scholes option pricing model to calculate the grant-date
        fair value of an award, with the following assumptions: no dividend yield,
        expected volatility of between 45% and 60%, risk-free interest rate of between
        3.0% to 5.25% and expected option life of ten years.


13


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





At
        June
        30, 2006, there were 1,590,000 stock options outstanding under the 2005 Stock
        Option Plan. During the nine months ended March 31, 2007, the Company granted
        an
        aggregate of 20,900 stock options at an exercise price of $1.04 to nine
        employees and granted an aggregate of 30,000 stock options at an exercise
        price
        of $1.12 to its three outside directors.
 
 During
        the nine months ended March 31, 2007, 75,100 of unvested stock options were
        forfeited due to termination of employment and 185,083 vested stock options
        were
        exercised.


The
      following table summarizes all stock option activity of the Company since June
      30, 2006:




**Incentive
                  Stock Options**
              
              **Nonqualified
                  Stock Options****Weighted**
              
              
              
              **Weighted****Stock**
              
              **Average**
              
              **Stock**
              
              **Average****Options**
              
              **Exercise**
              
              **Options**
              
              **Exercise****Outstanding**
              
              **Price**
              
              **Outstanding**
              
              **Price**Balance,
                  June 30, 2006
              
              
              1,440,000
              
              $
              0.48
              
              
              150,000
              
              $
              0.35Granted
                  during the period
              
              
              20,900
              
              $
              1.04
              
              
              30,000
              
              $
              1.12Exercised
                  during the period
              
              
              (185,083
              )
              $
              0.35
              
              
              -
              
              
              xxCancelled
                  / forfeited during the period
              
              
              (75,100
              )
              $
              0.42
              
              
              -
              
              
              xxBalance,
                  March 31, 2007
              
              
              1,200,717
              
              $
              0.51
              
              
              180,000
              
              $
              0.48




The
      weighted-average fair value of incentive stock options (ISO’s) granted during
      the nine months ended March 31, 2007 was $1.04. The weighted-average fair value
      of non qualified options granted during the nine months ended March 31, 2007
      was
      $1.12.





The
      following table summarizes information about stock options outstanding at March
      31, 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**
              
              **March
                  31**
              
              **Contractual**
              
              **March
                  31**
              
              **March
                  31**
              
              **Contractual**
              
              **March
                  31****Price**
              
              **2007**
              
              **Life**
              
              **2007**
              
              **2007**
              
              **Life**
              
              **2007****$0.35**
              
              
              902,417
              
              
              8.3
                  Years
              
              
              260,333
              
              
              150,000
              
              
              8.1
                  Years
              
              
              37,500**$1.00**
              
              
              277,500
              
              
              9.1
                  Years
              
              
              -
              
              
              -
              
              
              xx
              
              
              -**$1.04**
              
              
              20,800
              
              
              9.8
                  Years
              
              
              -
              
              
              -
              
              
              xx
              
              
              -**$1.12**
              
              
              -
              
              
              xx
              
              
              -
              
              
              30,000
              
              
              9.8
                  Years
              
              
              -1,200,717
              
              
              
              
              
              260,333
              
              
              180,000
              
              
              
              
              
              37,500





14


**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 March 31, 2007 and June
      30,
      2006:





March
                31, 2007
            
            June
                30 2006Net
                operating loss tax benefit
            
            $
            2,242,000
            
            $
            1,539,000Non-deductible
                options and warrants
            
            
            223,000
            
            
            24,000Allowance
                for bad debt
            
            
            41,000
            
            
            8,000Less
                valuation allowance
            
            
            (2,506,000
            )
            
            (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 nine months ended March 31, 2007 and March 31, 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, 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.




**Note
      6: Subsequent Events**





In
      April,
      2007, the Company issued options to purchase 100,000 shares of its common stock
      at exercise prices ranging from $0.80 to $0.89 per share to two
      employees.





In
      April,
      2007, vested options of 15,000 option shares were exercised, at an exercise
      price of $0.35 per share, and the Company issued 15,000 shares of its common
      stock for a total consideration of $5,250.





In
      April,
      2007, the Company issued 50,000 shares of its common stock for services rendered
      having a total value of $42,500, representing the fair value as of the date
      of
      issuance of the shares.




15




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





**Forward-Looking
      Information**





The
      following Management’s Discussion and Analysis should be read in conjunction
      with the Company’s unaudited financial statements and notes for the three and
      nine month periods ended March 31, 2007 included herein and its audited
      financial statements and notes for the year ended June 30, 2006 included in
      its
      Annual Report on Form 10-KSB filed with the Securities and Exchange
      Commission.




This
      discussion and other sections of this Quarterly Report contain, in addition
      to
      historical information, forward-looking statements within the meaning of the
      Private Securities Litigation Reform Act of 1995. Forward-looking statements
      involve known and unknown risks, uncertainties and other factors, which may
      cause the Company’s actual results, performance or achievements expressed or
      implied by these forward-looking statements to differ materially from such
      forward-looking statements. The forward-looking statements included in this
      report may prove to be inaccurate.




These
      forward-looking 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 the Company’s 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 and the other
      risk
      factors set forth in the Company’s Annual Report on Form 10-KSB for the year
      ended June 30, 2006. In light of the significant uncertainties inherent in
      these
      forward-looking statements, you should not consider this information to be
      a
      guarantee by the Company 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 the home theater systems are installed on-site
      at customer homes, with screen sizes ranging from 80 inches to over 12 feet.
      The
      Company also sells theater seating, interior décor items, accessories and its
      digital theater management system called OneViewTM. 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 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.




16


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, 2006
            
            
            3
            
            
            6
            
            
            9
            
            
            12
            
            
            21Additions
                and deletions in the three months ended September 30, 2006
            
            
            1
            
            
            -
            
            
            1
            
            
            1
            
            
            2Number
                of Design Centers
              at
                September 30, 2006
            
            
            4
            
            
            6
            
            
            10
            
            
            13
            
            
            23Additions
                and deletions in the three months ended December 31, 2006
            
            
            -
            
            
            1
            
            
            1
            
            
            1
            
            
            2Number
                of Design Centers
              at
                December 31, 2006
            
            
            4
            
            
            7
            
            
            11
            
            
            14
            
            
            25Additions
                and deletions in the three months ended March 31, 2007
            
            
            -
            
            
            1
            
            
            1
            
            
            (1
            )
            
            0Number
                of Design Centers
              at
                March 31, 2007
            
            
            4
            
            
            8
            
            
            12
            
            
            13
            
            
            25


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




**Results
      of Operations for the three months ended March 31, 2007 compared to the three
      months ended March 31, 2006**




Recognized
      sales for the three months ended March 31, 2007 were $1,821,275 compared to
      $1,224,272 for the three months ended March 31, 2006. Gross profit amounts
      and
      percentages were $761,251 and 42% for the three months ended March 31, 2007
      as
      compared to $493,274 and 40% for the three months ended March 31, 2006. The
      following is illustrative for the three months ended March 31:




2007
            
            2006Sales
            
            Gross
                Profit
            
            %
            
            Sales
            
            Gross
                Profit
            
            %Retail
            
            $
            1,407,730
            
            $
            637,315
            
            
            45
            %
            $
            1,033,101
            
            $
            421,449
            
            
            41
            %Wholesale
            
            
            341,723
            
            $
            52,114
            
            
            15
            %
            
            138,371
            
            $
            19,025
            
            
            14
            %Franchise
            
            
            71,822
            
            $
            71,822
            
            
            100
            %
            
            52,800
            
            $
            52,800
            
            
            100
            %Total
            
            $
            1,821,275
            
            $
            761,251
            
            
            42
            %
            $
            1,224,272
            
            $
            493,274
            
            
            40
            %







For
      the
      three months ended March 31, 2007, retail sales increased by $374,629 when
      compared to the three months ended March 31, 2006. Of this increase, $123,205
      is
      attributable to same-store sales increases for the Company’s two Delaware
      locations and $251,424 is attributable to new store sales increases, almost
      two-thirds of which being contributed by the Company’s newest Company-owned
      design center in Leesport, Pennsylvania. The increase in wholesale sales for
      the
      three months ended March 31, 2007 is reflective of eight franchise stores now
      being open as compared to only three open as of March 31, 2006. Improved retail
      gross margins reflect improvement in the Company’s purchasing power. The overall
      fluctuation in gross profit percentages continues to reflect the nature of
      operations being in a startup stage and the significant mix impact of wholesale
      sales to franchisees.




Occupancy
      expenses for the three months ended March 31, 2007 were $148,017 compared to
      $80,025 for the three months ended March 31, 2006. The increase is generally
      attributable to the impact of the full nine months impact of the Company’s Bel
      Air, Maryland design center and the acquisition of the fourth Company-owned
      design center in Leesport, Pennsylvania.






17




Selling,
      general and administrative expenses for the three months ended March 31, 2007
      were $1,092,940 compared to $849,020 for the three months ended March 31, 2006.
      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. Significant components of the increase in selling,
      general and administrative expenses for the three months ended March 31, 2007
      include Professional fees amounting to $252,593 for the three months ended
      March
      31, 2007 compared to $67,917 for the three months ended March 31, 2006 primarily
      reflective of increased spending for investor relations services. The majority
      of the remaining increase in selling, general and administrative expenses was
      broadly distributed throughout all expense categories.




Interest
      expense for the three months ended March 31, 2007 amounted to $351,028 as
      compared with $1,293 for the three months ended March 31, 2006. Interest expense
      for the three months ended March 31, 2007 included $295,310 of amortized
      non-cash interest charges associated with warrants issued in connection with
      the
      issuance of debentures. Of this amount, $235,360 reflected the amortization
      of
      the remaining interest associated with the early repayment of the October
      Debentures (See Note 2 to the Financial Statements). There were no non-cash
      interest charges for the three months ended March 31, 2006.




**Results
      of Operations for the nine months ended March 31, 2007 compared to the nine
      months ended March 31, 2006**




Recognized
      sales for the nine months ended March 31, 2007 were $4,985,992 compared to
      $3,228,252 for the nine months ended March 31, 2006. Gross profit amounts and
      percentages were $1,978,507 and 40% for the nine months ended March 31, 2007
      as
      compared to $1,358,321 and 42% for the nine months ended March 31, 2006.




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




2007
            
            2006Sales
            
            Gross
                Profit
            
            %
            
            Sales
            
            Gross
                Profit
            
            %Retail
            
            $
            3,976,191
            
            $
            1,691,552
            
            
            43
            %
            $
            2,842,064
            
            $
            1,207,577
            
            
            43
            %Wholesale
            
            $
            834,976
            
            $
            112,130
            
            
            13
            %
            $
            266,447
            
            $
            31,003
            
            
            12
            %Franchise
            
            $
            174,825
            
            $
            174,825
            
            
            100
            %
            $
            119,741
            
            $
            119,741
            
            
            100
            %Total
            
            $
            4,985,992
            
            $
            1,978,507
            
            
            40
            %
            $
            3,228,252
            
            $
            1,358,321
            
            
            42
            %




For
      the
      nine months ended March 31, 2007, retail sales increased by $1,134,127 when
      compared to the nine months ended March 31, 2006. Of this increase, $119,851
      is
      attributable to same-store sales increases for the Company’s two Delaware
      locations and $1,014,276 is attributable to new store sales increases
      approximately evenly split between the Company’s Bel Air Maryland and Leesport,
      Pennsylvania stores. The increase in wholesale sales for the nine months ended
      March 31, 2007 is reflective of eight franchise stores now being open as
      compared to only three open as of March 31, 2006. For the nine months ended
      March 31, 2007, retail gross margins have not fluctuated. The overall
      fluctuation in gross profit percentages continues to reflect the nature of
      operations being in a startup stage and the significantly high mix impact of
      wholesale sales to franchisees. Wholesale sales reflected 17% of total revenues
      for the nine months ended March 31, 2007 as compared to only 8% of revenue
      for
      the nine months ended March 31, 2006, and therefore, twice the mix impact on
      gross margin.






18




Occupancy
      expenses for the nine months ended March 31, 2007 were $374,788 compared to
      $233,177 for the nine months ended March 31, 2006. The increase is directly
      attributable to the full nine months impact of the Company’s Bel Air, Maryland
      Design Center as well as the acquisition of the fourth Company-owned design
      center in Leesport, Pennsylvania.




Selling,
      general and administrative expenses for the nine months ended March 31, 2007
      were $3,355,444 compared to $2,570,051 for the nine months ended March 31,
      2006.
      The increase relates to additional personnel and operating costs associated
      with
      the opening of the Bel-Air, Maryland design center in September, 2005, the
      acquisition of the fourth Company-owned design center in Leesport, Pennsylvania,
      and the expansion of Company operations toward the creation of a national
      organization. Expenses for the nine months ended March 31, 2007 include
      Advertising and Promotional expenses of $396,511 compared to $357,714 spent
      during the nine months ended March 31, 2006, reflecting increased billboard
      and
      web advertising costs. Professional fees amounted to $832,334 for the nine
      months ended March 31, 2007 compared to $461,210 for the nine months ended
      March
      31, 2006, primarily reflective of increased spending for legal fees related
      to
      capital financing and public trading issues and the costs of investor relations
      services. Personnel costs for stock based compensation amounted $105,853 for
      the
      nine months ended March 31, 2007 as compared to $30,845 for the nine months
      ended March 31, 2006. The majority of the remaining increase in selling, general
      and administrative expenses was broadly distributed throughout all expense
      categories.




Interest
      expense for the nine months ended March 31, 2007 amounted to $436,246 as
      compared with $3,910 for the nine months ended March 31, 2006. Interest expense
      for the nine months ended March 31, 2007 included $355,400 of amortized non-cash
      interest charges associated with warrants issued in connection with the issuance
      of debentures. Of this amount, $235,360 reflected the amortization of the
      remaining interest associated with the early repayment of the October Debentures
      (See Note 2 to the Financial Statements). There were no non-cash interest
      charges for the nine months ended March 31, 2006.




**Liquidity**




The
      Company’s loss for the nine months ended March 31, 2007 of $(2,185,336) included
      $894,198 in non-cash charges. The loss for the nine months ended March 31,
      2007,
      less the non-cash charges, plus the increase in accounts receivable and other
      assets of $(217,615) and $(276,919), respectively, partially offset by an
      increase in accounts payable, resulted in net cash used in operating activities
      of $(1,791,715).




During
      the nine months ended March 31, 2007, the Company spent $585,778 for vehicles,
      store equipment and leasehold improvements (of which $210,608 was financed
      and
      $40,000 was paid by issuance of common stock) and $28,234 for deposits on
      leaseholds for new Company design centers.




During
      the nine months ended March 31, 2007, to finance its loss, capital expenditures
      and changes in working capital, the Company increased net notes payable by
      $2,842,244, 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 for services at $0.85 per share. During the nine months ended March 31,
      2007, employees and former employees exercised vested stock options providing
      $64,552 in net proceeds to the Company. As a result of this increase in debt,
      the Company’s cash position increased significantly to $1,218,158 at March 31,
      2007 from $466,481 at June 30, 2006.




Although,
      in the aggregate, the Company-owned design centers produce a positive store
      operating profit contribution, 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 have not been adequate to offset the Company’s aggregate overhead
      expenses. Consequently, the Company’s cash flow from operations since inception
      has been and continues to be negative. If the Company does not rectify this
      continuing shortfall or raise a sufficient amount of additional capital, it
      may
      not have the ability to remain in business until such time, if ever, when it
      becomes profitable.






19




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.
      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. To do so, the
      Company requires capital to finance the store acquisitions and leasehold
      improvements. Consequently, management is actively engaged in trying to secure
      such capital from several private equity sources. There is no assurance that
      the
      Company will succeed in raising such capital and consequently, it may have
      to
      increase its efforts to reduce overhead expenses. However, there is no assurance
      that the Company will successfully be able to reduce such expenses to the point
      where revenues are greater than all cash expenses.




Furthermore,
      the Company’s debt obligations from the debentures discussed above have
      increased interest expense substantially in the current year which represents
      an
      additional amount that must be added to the Company’s revenue needs to achieve
      profitability.




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
      competitors 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 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 successfully to 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 it 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.






20




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 successfully to 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 affected 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.**





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




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




**PART
      II**


**OTHER
      INFORMATION**





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





During
      the nine months ended March 31, 2007, 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 nine months ended March 31, 2007, the Company issued 500,000 of its common
      shares at $ 0.85 per share, with net proceeds of $425,000, for investor services
      rendered.





During
      the nine months March 31, 2007, the Company granted
      warrants to purchase 40,000 shares of the Company’s common stock at an exercise
      price of $1.00 per share to a consultant in consideration for services
      rendered.


21


**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.





22


**SIGNATURES**





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




THEATER
                  XTREME ENTERTAINMENT GROUP, INC.May
                  15, 2007
              By:/s/
                  Scott R. OglumScott
                  R. OglumChairman
                  of the Board and Chief Executive OfficerBy:/s/
                  James J. VincenzoJames
                  J. VincenzoChief
                  Financial Officer





23