**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 December 31, 2005.


OR




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


SECURITIES
      EXCHANGE ACT OF 1934




For
      the
      transition period from ________ to ________




**Commission
      File number 0-26845**





**Theater
      Xtreme Entertainment Group, Inc.**


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


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





Florida


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


(State
      or
      other jurisdiction of incorporation or organization)





65-0913583


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


(IRS
      Employer Identification No.)





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


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


(Address
      of principal executive offices)





(302)
      455-1334


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


(Issuer’s
      telephone number)





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


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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past twelve months (or for such shorter
      period that the registrant was required to file such reports), and (2) has
      been
      subject to such filing requirements for the past 90 days. _ X _
      Yes ___
      No





Indicate
      by check mark whether the registrant is a shell company (as defined in 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 January 23, 2006, there were
      approximately 17,790,342 shares of common stock, $0.001 par value, issued and
      outstanding.





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





**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**





Form
      10-QSB Index


December
      31, 2005








PagePart
                I: Financial InformationItem
                1. Financial Statements
            3Balance
                Sheet as of December 31, 2005 and June 30, 2005
                (Unaudited)
            3Statements
                of
                Operations For the Three and SixMonths
                Ended December 31, 2005 and 2004 (Unaudited)
            4Statement
                of
                Changes in Stockholders’ Deficit for theSix
                Months Ended December 31, 2005 (Unaudited)
            5Statement
                of
                Cash Flows For the Six Months EndedDecember
                31,
                2005 and 2004 (Unaudited)
            6Notes
                To Financial Statements (Unaudited)
            7Item
                2. Management’s Discussion and Analysis or Plan of
                Operation
            12Item
                3. Controls and Procedures
            15Part
                II: Other InformationItem
                2. Unregistered Sales of Equity Securities
            16Item
                4. Submission of Matters to a Vote of Security Holders
            16Item
                6. Exhibits
            17Signatures
            18











**PART
      I**


**FINANCIAL
      INFORMATION**





**Item
      1. Financial Statements**




**THEATER
                  XTREME ENERTAINMENT GROUP, INC.****BALANCE
                  SHEETS****DECEMBER
                  31 AND JUNE 30 2005****DECEMBER
                  31**
              
              **JUNE
                  30****2005**
              
              **2005****Assets**
              
              (Unaudited)
              
              (Audited)Current
                  Assets:Cash
                  and equivalents
              
              $
              292,992
              
              $
              112,874Accounts
                  receivable, net of allowance of $ 4,281 and $4,851
              
              
              29,240
              
              
              22,797Inventory
              
              
              524,655
              
              
              460,111Prepaid
                  expenses
              
              
              122,629
              
              
              123,444Total
                  current assets
              
              
              969,516
              
              
              719,226Property
                  and Equipment, net
              
              
              384,962
              
              
              267,700Other
                  Assets:Deposits
              
              
              20,720
              
              
              20,720$
              1,375,198
              
              $
              1,007,646**Liabilities
                  and Stockholders' Deficit**Current
                  Liabilities:Accounts
                  payable and accrued expenses
              
              $
              544,622
              
              $
              323,132Payroll
                  tax liabilities
              
              
              33,574
              
              
              31,769Current
                  portion of notes payable
              
              
              18,273
              
              
              12,010Due
                  to officer
              
              
              -
              
              
              243Deferred
                  franchise fees
              
              
              276,500
              
              
              72,500Deferred
                  sales
              
              
              654,945
              
              
              496,362Total
                  current liabilities
              
              
              1,527,914
              
              
              936,016Long-term
                  Liabilities:Notes
                  payable, net of current portion
              
              
              57,001
              
              
              40,614Total
                  long-term liabilities
              
              
              57,001
              
              
              40,614Total
                  liabilities
              
              
              1,584,915
              
              
              976,630Stockholders'
                  Equity (Deficit):Preferred
                  stock, no par value, 5 Million shares authorized,no
                  shares issued and outstanding
              
              
              -
              
              
              -Common
                  stock, $.001 par, 50 million shares authorized;17,749,342
                  and 16,291,814 shares issuedand
                  outstanding
              
              
              17,749
              
              
              16,292Additional
                  paid in capital
              
              
              2,612,673
              
              
              1,843,157Accumulated
                  deficit
              
              
              (2,840,139
              )
              
              (1,828,433
              )Total
                  stockholders' equity (deficit)
              
              
              (209,717
              )
              
              31,016$
              1,375,198
              
              $
              1,007,646





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


3


**THEATER
                  XTREME ENTERTAINMENT GROUP, INC.****STATEMENTS
                  OF OPERATIONS****THREE
                  AND SIX MONTHS ENDED DECEMBER 31 2005 AND 2004**Three
                  Months Ended
              
              Six
                  Months EndedDecember
                  31
              
              December
                  312005
              
              2004
              
              2005
              
              2004Revenues
              
              $
              983,127
              
              $
              712,324
              
              $
              2,003,980
              
              $
              1,092,291Cost
                  of revenues
              
              
              565,032
              
              
              444,494
              
              
              1,138,933
              
              
              693,280Occupancy
                  expenses
              
              
              78,204
              
              
              49,005
              
              
              153,152
              
              
              102,542Selling,
                  general and administrative expenses
              
              
              1,080,250
              
              
              370,252
              
              
              1,721,031
              
              
              634,4541,723,486
              
              
              863,751
              
              
              3,013,116
              
              
              1,430,276Loss
                  from operations
              
              
              (740,359
              )
              
              (151,427
              )
              
              (1,009,136
              )
              
              (337,985
              )Interest
                  income
              
              
              1
              
              
              5
              
              
              47
              
              
              54Interest
                  expense
              
              
              (1,371
              )
              
              (9,584
              )
              
              (2,617
              )
              
              (14,584
              )Net
                  loss
              
              $
              (741,729
              )
              $
              (161,006
              )
              $
              (1,011,706
              )
              $
              (352,515
              )Basic
                  and diluted:Loss
                  per common share
              
              $
              (0.04
              )
              $
              (0.02
              )
              $
              (0.06
              )
              $
              (0.04
              )Weighted
                  average shares
              
              
              17,428,594
              
              
              9,775,000
              
              
              17,105,708
              
              
              9,775,000





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





4


**THEATER
                  XTREME ENTERTAINMENT GROUP, INC.****STATEMENT
                  OF STOCKHOLDERS' EQUITY (DEFICIT)****SIX
                  MONTHS ENDED DECEMBER 31 AND YEAR ENDED JUNE 30,
                  2005**Additional
              
              
              
              TotalCommon
              
              Paid-in
              
              Accumulated
              
              Stockholders'Stock
              
              Capital
              
              Deficit
              
              Equity
                  (Deficit)Balance
                  at June 30, 2005
              
              $
              16,292
              
              $
              1,843,157
              
              $
              (1,828,433
              )
              $
              31,016Issuance
                  of common stock, private placement
              
              
              1,447
              
              
              486,026
              
              
              -
              
              
              487,473Redemption
                  of founder's stock
              
              
              (800
              )
              
              800
              
              
              -
              
              
              -Issuance
                  of common stock for services
              
              
              810
              
              
              282,690
              
              
              -
              
              
              283,500Net
                  loss for the Six months ended December 31, 2005
              
              
              -
              
              
              -
              
              
              (1,011,706
              )
              
              (1,011,706
              )Balance
                  at December 31, 2005
              
              $
              17,749
              
              $
              2,612,673
              
              $
              (2,840,139
              )
              $
              (209,717
              )





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





5


**THEATER
                  XTREME ENTERTAINMENT GROUP, INC.****STATEMENTS
                  OF CASH FLOWS****SIX
                  MONTHS ENDED DECEMBER 31**2005
              
              2004**Cash
                  flows from operating activities:**Net
                  Loss
              
              $
              (1,011,706
              )
              $
              (352,515
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Depreciation
              
              
              50,390
              
              
              23,443Issuance
                  of common stock for services
              
              
              283,500
              
              
              -Increase
                  in assetsAccounts
                  receivables
              
              
              (6,443
              )
              
              (4,734
              )Inventory
              
              
              (64,544
              )
              
              (95,228
              )Prepaid
                  expenses
              
              
              815
              
              
              (26,851
              )Increase
                  in liabilitiesAccounts
                  payable and accrued expenses
              
              
              221,490
              
              
              150,483Payroll
                  tax liabilities
              
              
              1,805
              
              
              19,329Due
                  to officer
              
              
              (243
              )
              
              (2,624
              )Deferred
                  franchise fees
              
              
              204,000
              
              
              50,000Deferred
                  sales
              
              
              158,583
              
              
              203,973Net
                  cash used in operating activities
              
              
              (162,353
              )
              
              (34,724
              )**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              (167,652
              )
              
              (51,475
              )Net
                  cash used in investing activities
              
              
              (167,652
              )
              
              (51,475
              )**Cash
                  flows from financing activities:**Repayment
                  of notes payable
              
              
              -
              
              
              (202,051
              )Proceeds
                  from note payable
              
              
              22,650
              
              
              -Proceeds
                  from issuance of common stock
              
              
              487,473
              
              
              325,000Net
                  cash provided by financing activities
              
              
              510,123
              
              
              122,949Net
                  increase in cash
              
              
              180,118
              
              
              36,750Cash
                  and equivalents, beginning of period
              
              
              112,874
              
              
              119,228Cash
                  and equivalents, end of period
              
              $
              292,992
              
              $
              155,978**Supplemental
                  disclosure:**Cash
                  paid during the period for interest
              
              $
              2,617
              
              $
              14,584**Supplemental
                  disclosure of non-cash****investing
                  and financing activites:**Conversion
                  of notes payable to common stock
              
              $
              -
              
              $
              202,051Liabilities
                  assumed as part of merger
              
              $
              13,026
              
              $
              -Acquisition
                  of property and equipmentby
                  issuance of notes payable
              
              $
              36,530
              
              $
              -







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





6


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





**Note
      1: Nature of Operations and Significant Accounting
      Policies**





*Basis
      of Presentations.* The
      accompanying unaudited financial statements have been prepared in accordance
      with U.S. generally accepted accounting principles for interim financial
      information and with the instructions for Form 10-QSB and Item 310(b) of
      Regulation S-B. Accordingly, they do not include all of the information and
      footnotes required by generally accepted accounting principles for complete
      financial statements. In the opinion of management, all adjustments (consisting
      of normal recurring accruals) considered necessary for a fair presentation
      have
      been included. Operating results for the three and six months ended December
      31,
      2005 are not necessarily indicative of the results that may be expected for
      the
      year ended June 30, 2006. The unaudited financial statements should be read
      in
      conjunction with the financial statements and footnotes thereto included in
      the
      Company’s annual report on Form 10-KSB for the fiscal year ended June 30,
      2005.





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




*Use
      of Estimates.* The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from these estimates.





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





Three
                Months ended December 31
            
            Six
                Months ended December 312005
            
            2004
            
            2005
            
            2004Retail
                sales
            
            $
            884,161
            
            $
            712,324
            
            $
            1,808,963
            
            $
            1,092,291Wholesale
                sales
            
            
            61,052
            
            
            -
            
            
            128,076
            
            
            -Franchise
                licenses and royalties
            
            
            37,914
            
            
            -
            
            
            66,941
            
            
            -Total
                revenues
            
            $
            983,127
            
            $
            712,324
            
            $
            2,003,980
            
            $
            1,092,291





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





7


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





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





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





2005
            
            2004Deferred
                Retail sales
            
            $
            631,845
            
            $
            496,362Unearned
                service contract revenue
            
            
            23,100
            
            
            -Total
                Deferred Sales
            
            $
            654,945
            
            $
            496,362





*Loss
      Per Share.* The
      Company follows SFAS 128, “Earnings Per Share,” resulting in the presentation of
      basic and diluted earnings (loss) per share. The basic loss per share
      calculations include the change in capital structure that resulted from the
      merger for all periods presented. For the three and six months ended December
      31, 2005 and 2004, the basic and diluted loss per share are the same, because
      the assumed conversion of stock equivalents would be antidilutive as the Company
      experienced a net loss for these periods.





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





*Advertising
      Costs.* Advertising
      and sales promotion costs are expensed as incurred. Advertising and promotional
      expense totaled $101,420 and $76,558 for the three month periods ended December
      31, 2005 and 2004, respectively and $225,240 and $120,338 for the six months
      ended December 31, 2005 and 2004, respectively.







8


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





**Note
      2: Common Stock**





During
      the six months ended December 31, 2005, the Company sold 1,447,528 of its common
      shares at a purchase price of $0.35 per share in an offering of common stock
      pursuant to an Offering Memorandum dated April 26, 2005, as amended. Net
      proceeds for these shares amounted to $487,473. During the six months ended
      December 31, 2005, the Company issued 810,000 of its common shares to certain
      vendors in consideration for services provided, valued at $283,500.





During
      the six months ended December 31, 2005, the Company founder contributed 800,000
      common shares to the Company pursuant to a settlement agreement.





**Note
      3: Stock Option Plan**





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




At
      June
      30, 2005, there were 890,000 stock options outstanding under the 2005 Stock
      Option Plan. At December 31, 2005, there were 1,370,000 stock options
      outstanding under the 2005 Stock Option Plan. The 2005 Stock Option Plan was
      amended on December 21, 2005 increasing the total number of Plan shares
      available for grant to 2,000,000 shares. In the six months ended December 31,
      2005, the Company granted to certain employees common stock options to
      purchase 560,000 shares of its common stock and
      80,000 options were forfeited by former employees.





In
      the
      six months ended December 31, 2005, the Company granted to certain employees
      common stock options to purchase 560,000 shares of its common stock and 80,000
      options were forfeit by former employees. During that same period, there were
      no
      grants of non-qualified options.





A
      summary
      of stock option transactions for the six months ended December 31, 2005 is
      as
      follows:




**Incentive
                  Stock Options**
              
              **Non-Qualified
                  Stock Options****Exercise
                  Price**
              
              **All
                  Non-**
              
              
              
              **Exercise
                  Price****All
                  ISO**
              
              **Vested**
              
              **Per
                  Common**
              
              **Qualified**
              
              **Vested**
              
              **Per
                  Common****Shares**
              
              **Shares**
              
              **Share**
              
              **Shares**
              
              **Shares**
              
              **Share**Balance,
                  June 30, 2005
              
              
              740,000
              
              
              57,500
              
              
              $0.35
              
              
              150,000
              
              
              -
              
              
              $0.35Granted
                  / vested during the period
              
              
              560,000
              
              
              75,000
              
              
              $0.35
              
              
              -
              
              
              -
              
              
              xxExercised
                  during the period
              
              
              -
              
              
              -
              
              
              xx
              
              
              -
              
              
              -
              
              
              xxForfeit
                  during the period
              
              
              (80,000
              )
              
              -
              
              
              xx
              
              
              -
              
              
              -
              
              
              xxBalance,
                  December 31, 2005
              
              
              1,220,000
              
              
              132,500
              
              
              $0.35
              
              
              150,000
              
              
              -
              
              
              $0.35




9


**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**








The
      Company accounts for stock-based compensation in accordance with SFAS No. 123,
      “Accounting for Stock-Based Compensation,” which for employee stock options
      permits the use of intrinsic value method described in APB opinion No. 25,
      Accounting for Stock Issued to Employees, and requires the Company to disclose
      the pro forma effects for accounting for stock-based compensation using the
      fair
      value method as described in the optional accounting requirements of SFAS No.
      123.





Beginning
      January 1, 2006, the Company will account for stock-based compensation in
      accordance with SFAS 123R, “Accounting for Stock-Based Compensation” requiring
      all companies to expense the fair value of employee stock options effective
      with
      the beginning of the next fiscal quarter beginning after December 15, 2005
      for a
      small business issuer.





Had
      compensation cost for the Company’s stock option plan been determined based on
      the fair value of the Company’s common stock at the dates of awards under the
      fair value method of SFAS No. 123, the Company’s net loss and net loss per
      common share for the three and six months ended December 31, 2005 would have
      been increased to the pro forma amounts indicated below. For 2005, the fair
      value amounts were estimated using the Black-Scholes options pricing model
      with
      the following assumptions: no dividend yield, expected volatility of 60%,
      risk-free interest rate of approximately 3 to 5% and expected option life of
      ten
      years. There were no stock option grants issued in 2004.




Three
                  months Ended December 31
              
              Six
                  months Ended December 312005
              
              2004
              
              2005
              
              2004Net
                  loss:As
                  reported
              
              $
              (741,729
              )
              $
              (161,006
              )
              
              (1,011,706
              )
              $
              (352,515
              )Pro
                  froma
              
              $
              (760,849
              )
              $
              (161,006
              )
              
              (1,030,826
              )
              $
              (352,515
              )Net
                  loss per common sharebasic and diluted:As
                  reported
              
              $
              (0.06
              )
              $
              (0.04
              )
              
              (0.06
              )
              $
              (0.04
              )Pro
                  forma
              
              $
              (0.06
              )
              $
              (0.04
              )
              
              (0.06
              )
              $
              (0.04
              )




**Note
      4: Income Taxes**





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





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





December
                31, 2005
            
            June
                30 2005Net
                operating loss carryforward
            
            $
            1,020,000
            
            $
            658,000Less
                valuation allowance
            
            
            (1,020,000
            )
            
            (658,000
            )$
            0
            
            $
            0





10











**THEATER
      XTREME ENTERTAINMENT GROUP, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**(UNAUDITED)**





There
      is
      no income tax benefit for the losses for the six months ended December 31,
      2005
      or December 31, 2004, since management has determined that the realization
      of
      the net deferred tax asset is not assured and has created a valuation allowance
      for the entire amount of such benefits. A valuation allowance was required
      since
      the ultimate realization of deferred tax assets is dependent upon future taxable
      income and management believes that it is more likely than not that the deferred
      tax asset will not be realized through future taxable income.





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





**Note
      5: Subsequent Events**





In
      January 2006, the Company began offering up to 500,000 shares of its common
      stock for sale at a minimum purchase price of $1.00 per share.





In
      January 2006, the Company issued to certain of its employees options to purchase
      30,000 shares of the Company’s common stock at an exercise price of $1.00 per
      share. These options expire in 10 years. These options will vest over the next
      four years, and are exercisable contingent on the employee being employed as
      of
      the vesting anniversary date. In accordance with the fair value method of
      accounting for stock options, the expense will be recognized when the
      contingency has been met.

















11


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





**Forward-Looking
      Information**





The
      following Management’s Discussion and Analysis should be read in conjunction
      with the Company’s unaudited financial statements and notes for the three and
      six month periods ended December 31, 2005 included herein and its audited
      financial statements and notes for the year ended June 30, 2005 included in
      its
      Form 10-KSB filed with the Securities and Exchange Commission.




This
      discussion and other sections of this Quarterly Report contain, in addition
      to
      historical information, forward-looking statements within the meaning of the
      Private Securities Litigation Reform Act of 1995. Forward-looking statements
      involve known and unknown risks, uncertainties and other factors, which may
      cause the Company’s actual results, performance or achievements expressed or
      implied by these forward-looking statements to differ materially from such
      forward-looking statements. The forward-looking statements included in this
      report may prove to be inaccurate. These statements are based on a number of
      assumptions concerning future events, and are subject to a number of
      uncertainties and other factors, many of which are outside its control. Actual
      results may differ materially from such statements for a number of reasons,
      including the effects of regulation and changes in capital requirements and
      funding. In light of the significant uncertainties inherent in these
      forward-looking statements, you should not consider this information to be
      a
      guarantee by us or any other person that the Company’s objectives and plans will
      be achieved. The Company does not undertake to publicly update or revise its
      forward-looking statements even if experience or future changes make it clear
      that any projected results (expressed or implied) will not be
      realized.




**Overview**




The
      Company is a retail store and franchise marketing company engaged in retail
      sales and distribution through the operation of its home cinema design centers,
      the sale of franchise stores and wholesale product distribution to
      franchisees.




The
      Company’s design centers focus on the sale and installation of affordable large
      screen front projection in-home cinema rooms comprised of video and audio home
      theater components. A majority of its home theater systems are installed on-site
      at customer homes, with screen sizes ranging from 80 inches to over 12 feet.
      The
      Company also sells theater seating, interior décor items, accessories and its
      proprietary digital theater management system called OneViewTM. The Company
      targets its home theater system marketing toward a larger consumer base than
      traditional custom home theater companies and focuses on lower retail price
      points in a store setting where customers can easily and readily encounter
      the
      complete home theater experience in a number of home settings.




The
      Company’s first retail store, “design center,” opened in September 2003 in
      Newark, Delaware, and was built to resemble an actual movie theater. A separate
      distribution center, warehouse and administrative office facility opened in
      February 2004, also in Newark, Delaware. This multi-purpose facility will
      provide installation and service, warehousing and product distribution, and
      other retail support services to a cluster of Company-owned design centers
      in
      contiguous and surrounding areas. The second Company-owned design center opened
      in August, 2004 in Wilmington, Delaware and a third Company-owned design center
      opened in September, 2005 in Bel-Air, Maryland. The Company anticipates that
      it
      will open additional Company-owned design centers in the Mid-Atlantic region
      in
      the future.




The
      sale
      of franchises is integral to the Company’s success. Since inception, the Company
      has sold fifteen franchises through December 31, 2005, the first of which opened
      in May 2005 in East Longmeadow, Massachusetts, the second in September 2005
      in
      Auburn Hills, Michigan and the third in Leesport, Pennsylvania in December
      2005.
      Other franchised design centers are planned for opening dates in early 2006.
      Management expects to significantly expand its franchising activities in 2006.
      These and






12






future
      franchised retail design centers will generally reflect enhanced physical
      layouts and may incorporate other refinements or modifications depending on
      the
      design center’s physical characteristics.




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




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




**Results
      of Operations for the three months ended December 31, 2005 compared to the
      three
      months ended December 31, 2004**




Recognized
      sales for the three months ended December 31, 2005 were $983,127 compared to
      $712,324 for the three months ended December 31, 2004. Gross profit amounts
      and
      percentages were $418,095 and 43% for the three months ended December 31, 2005
      as compared to $267,830 and 38% for the three months ended December 31, 2004.
      The increase in sales reflects continued growth and the addition of the
      Company’s third design center as well as the recognition of franchise fees for
      the Leesport, Pennsylvania franchise. The fluctuation in gross profit
      percentages continues to reflect the nature of operations being in a startup
      stage. Retail sales orders for the three months ended December 31, 2005 were
      $1,161,220 compared to $977,364 for the three months ended December 31,
      2004.




Occupancy
      expenses for the three months ended December 31, 2005 were $78,204 compared
      to
      $49,005 for the three months ended December 31, 2004. The increase is directly
      related to the opening of the second and third design centers.




Selling,
      general and administrative expenses for the three months ended December 31,
      2005
      were $1,080,250 compared to $370,252 for the three months ended December 31,
      2004. The increase relates to additional personnel and operating costs
      associated with the opening of the Bel-Air, Maryland design center in September,
      2005 and the expansion of Company operations toward the creation of a national
      organization. Expenses for the three months ended December 31, 2005 include
      Advertising and Promotional expenses of $108,408 compared to $76,558 spent
      during the three months ended December 31, 2004. Professional fees, including
      $280,000 in fees paid to investor relations vendors, amounted to $335,780 for
      the three months ended December 31, 2005 compared to $26,722 for the three
      months ended December 31, 2004. During the three months ended December 31,
      2005,
      the Company sold ten (10) new franchises incurring franchise commissions of
      $44,180. Personnel costs account for the majority of the remaining increase
      in
      selling, general and administrative expenses.




**Results
      of Operations for the six months ended December 31, 2005 compared to the six
      months ended December 31, 2004**




Recognized
      sales for the six months ended December 31, 2005 were $2,003,980 compared to
      $1,092,291 for the six months ended December 31, 2004. Gross profit amounts
      and
      percentages were $865,047 and 43% for the six months ended December 31, 2005
      as
      compared to $399,011 and 37% for the six months ended December 31, 2004. The
      increase in sales reflects continued growth and the addition of the Company’s
      third design center as well as the recognition of franchise fees for the Auburn
      Hills, Michigan and Leesport, Pennsylvania franchises. The fluctuation in gross
      profit percentages continues to reflect the nature of operations being in a
      startup stage. Retail sales orders for the six months ended December 31, 2005
      were $1,988,077 compared to $1,411,682 for the six months ended December 31,
      2004.




13


Occupancy
      expenses for the six months ended December 31, 2005 were $153,152 compared
      to
      $102,542 for the six months ended December 31, 2004. The increase is directly
      related to the opening of the second and third design centers.




Selling,
      general and administrative expenses for the six months ended December 31, 2005
      were $1,721,031 compared to $634,454 for the six months ended December 31,
      2004.
      The increase relates to additional personnel and operating costs associated
      with
      the opening of the Bel-Air, Maryland design center in September, 2005 and the
      expansion of Company operations toward the creation of a national organization.
      Expenses for the six months ended December 31, 2005 include Advertising and
      Promotional expenses of $225,240 compared to $120,338 spent during the six
      months ended December 31, 2004. Professional fees, including $280,000 in fees
      paid to investor relations vendors, amounted to $393,293 for the six months
      ended December 31, 2005 compared to $31,450 for the six months ended December
      31, 2004. During the six months ended December 31, 2005, the Company sold ten
      (10) new franchises incurring franchise commissions of $44,180. Personnel costs
      account for the majority of the remaining increase in selling, general and
      administrative expenses.




**Liquidity**




The
      Company’s cash position increased to $292,992 at December 31, 2005 from $112,874
      at June 30, 2005 owing largely to the net proceeds from the sale of its common
      stock.




The
      loss
      for the six months ended December 31, 2005 of $(1,011,706) reflected $313,890
      in
      non-cash charges including $283,500 in common stock issued for services
      rendered. The net amount, together with the increase in inventories $(64,544),
      were offset by an increase in accounts payable and accrued liabilities resulting
      in a net cash used in operating activities of $(162,353). During the six months
      ended December 31, 2005, the Company spent $167,652 for the acquisition of
      vehicles, store equipment and leasehold improvements.




During
      the six months ended December 31, 2005, the Company increased its notes payable
      by $22,650 and sold 1,447,528 shares of its common stock at a purchase price
      of
      $0.35 per share each, with net proceeds amounting to $487,473. The Company
      issued 810,000 shares of its common stock at a price of $0.35 per share in
      consideration for services rendered by certain vendors, totaling $283,500,
      inclusive of 800,000 shares for investor relations services.




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




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




In
      the
      event the Company’s plans change or its assumptions change or prove to be
      inaccurate or the funds available prove to be insufficient to fund operations
      at
      the planned level (due to further








14




unanticipated
      expenses, delays, problems or otherwise), the Company could be required to
      obtain additional funds through equity or debt financing, through strategic
      alliances with corporate partners and others, or through other sources in order
      to successfully continue to implement its business strategies.




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




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




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




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




**Item
      3. Controls and Procedures.**





As
      of the
      end of the period covered by this report, an evaluation was performed under
      the
      supervision and with the participation of the Company’s principal executive
      officer and principal financial officer of the effectiveness of the design
      and
      operation of the Company’s disclosure controls and procedures (as such term is
      defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
      end
      of the period covered by this report. 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 and in other
      factors that have materially affected, or are reasonably likely to materially
      affect, the Company’s internal controls for the period covered by this Quarterly
      Report on Form 10-QSB.












15


**PART
      II**


**OTHER
      INFORMATION**





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





On
      January 20, 2006, the Company began offering up to 500,000 shares of its common
      stock at a minimum purchase price of $1.00 per share. There can be no assurance
      that the offering will be fully subscribed.





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





No
      underwriters or agents were involved in the foregoing issuances and no
      commission or other remuneration was paid or given directly or indirectly by
      the
      Company.





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





On
      December 21, 2005, the Company held its annual meeting during which the
      shareholders elected the following individuals as Directors of the Company
      for a
      one year term, all of whom were incumbent Directors:





**Name**
            
            **Votes**
              **For**
            **Abstained**Scott
                Oglum
            
            14,674,297
            90,140Justin
                Schakelman
            
            14,674,297
            90,140H.
                Gregory Silber
            
            14,674,297
            90,140David
                Hludzinski
            
            14,674,297
            90,140W.
                James Ludlow
            
            14,674,297
            90,140





Additionally,
      at its December 21, 2005 annual meeting, shareholders voted on the following
      proposals:





**Proposal**
            
            **Votes**
              **For**
            **Votes**
              **Against**
            **Abstained**To
                appoint Cogen Sklar as the Company’s independent auditors
            
            14,506,440
            42,857
            215,140To
                amend the Company’s Stock Option Plan increasing the total number of
                shares available for grant
            
            14,496,440
            52,857
            215,140





16





**Item
      6. Exhibits**





**Exhibit**
            **Description
                of Exhibit**31.1
            Certification
                pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
                as
                amended executed by the Chief Executive Officer of the
                Company.31.2
            Certification
                pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
                as
                amended executed by the Chief Financial Officer of the
                Company.32.1
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 executed by the Chief Executive Officer
                of
                the Company.32.2
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 executed by the Chief Financial Officer
                of
                the Company.





17


**SIGNATURES**





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





THEATER
                  XTREME ENTERTAINMENT GROUP, INC.February
                  14, 2006
              By:/s/
                  Scott R. OglumScott
                  R. OglumChairman
                  of the Board and Chief Executive OfficerBy:/s/
                  James J. VincenzoJames
                  J. VincenzoChief
                  Financial Officer








18