theaterxtreme10qsba.htm

10QSB/A 1 theaterxtreme10qsba.htm THEATER XTREME ENTERTAINMENT GROUP, INC. FORM 10-QSB/A theaterxtreme10qsba.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB/A

(Amendment No.1)

(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, 2007.

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File number 0-26845

Theater Xtreme Entertainment Group, Inc.

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

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

Florida

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

(State or other jurisdiction of incorporation or organization)

65-0913583

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

(IRS Employer Identification No.)

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

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

(Address of principal executive offices)

(302) 455-1334

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

(Issuer’s telephone number)

N/A

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

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

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

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

__ Yes _X_ No

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of February 18, 2008, there were 20,812,425 shares of common stock, $0.001 par value, issued and outstanding.

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

THEATER XTREME ENTERTAINMENT GROUP, INC.

Form 10-QSB/A Index

December 31, 2007

	Page

Explanatory Note	3

Part I: Financial Information

Item 1. Financial Statements		4

	Balance Sheet as of December 31, 2007 and June 30, 2007 (Unaudited)	4

	Statements of Operations for the Three and Six Months Ended December 31, 2007 and 2006 (Unaudited)	5

	Statement of Changes in Stockholders’ Equity/Deficit for the Six Months Ended December 31, 2007 (Unaudited)	6

	Statement of Cash Flows for the Six Months Ended Six Months Ended December 31, 2007 (Unaudited)	7

	Notes To Financial Statements (Unaudited)	8

Item 2. Management’s Discussion and Analysis or Plan of Operation		18

Item 3. Controls and Procedures		26

Part II: Other Information

Item 6. Exhibits		27

Signatures		28

EXPLANATORY NOTE

Theater Xtreme Entertainment Group, Inc. (the “Company”) filed a Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 2007 (the “Quarterly Report”) with the Securities and Exchange Commission (“SEC”) on February 19, 2008. The financial statements as presented in the Quarterly Report were not reviewed by the Company’s principal auditors, Morison Cogen, LLP and, as such, were subject to adjustment. Subsequently, Morrison Cogen, LLP has reviewed the financial statements, which are included in this Amendment No. 1. to the Quarterly Report.

The adjusted financial statements reflect, among other things, a minor change to the revenue for the three months ended December 31, 2007 amounting to $205, a change in occupancy expense amounting to $150 and a change to Selling, General and Administrative expenses amounting to a reduction in expense of $105,375, which amount represented, and has been reflected as, a loss on the abandonment of the leasehold assets of two stores the Company closed in November, 2007. The change in revenue also changed the gross margin.

In addition to adjusting the financial statements in this Amendment No. 1, we have revised Part I, Item 2 “Management Discussion and Analysis of Financial Condition and Results of Operations” to reflect the changes made. Additionally, Part II, Item 6 “Exhibits” reflects the filing of currently dated certifications of our principal executive officer and our principal financial and accounting officer.

This Amendment No. 1 continues to speak as of the date of the Quarterly Report, and we have not updated or amended the disclosures contained herein to reflect events that have occurred since the filing of the Quarterly Report, or modified or updated those disclosures in any way, other than as described in the preceding paragraphs. Accordingly, this Amendment No. 1 should be read in conjunction with our filings made with the SEC subsequent to the filing of the Quarterly Report on February 19, 2008, as information in such filings may update or supersede certain information contained in this Amendment No. 1.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

THEATER XTREME ENERTAINMENT GROUP, INC.
BALANCE SHEETS
DECEMBER 31, 2007 AND JUNE 30, 2007


		DECEMBER 31	JUNE 30
		2007	2007
Assets		(Unaudited)	(Audited)

Current Assets:
	Cash and equivalents	$ 90,353	$ 232,583
	Accounts receivable, net of allowance of $ 56,568, and $ 65,782	202,853	292,060
	Inventory	560,605	810,504
	Prepaid expenses	351,498	164,390
	Other current Assets	173,073	219,045
	Total current assets	1,378,382	1,718,582

Property and Equipment, net		698,952	933,394

Other Assets:
	Deferred financing fees	285,911	342,990
	Deposits	48,954	48,954

	Total Assets	$2,412,199	$3,043,920

Liabilities and Stockholders' Deficit

Current Liabilities:
	Accounts payable and accrued expenses	$1,280,782	$ 801,978
	Payroll liabilities	128,454	149,221
	Current portion of notes payable	38,052	37,047
	Non-convertible debentures	300,000	300,000
	Promissory Notes	225,000	-
	Deferred franchise fees	316,500	299,000
	Deferred sales	625,286	495,751
	Total current liabilities	2,914,074	2,082,997

Long-term Liabilities:
	Non-convertible debentures	2,700,000	2,700,000
	Notes payable, net of current portion	87,246	107,224
	Total long-term liabilities	2,787,246	2,807,224

	Total liabilities	5,701,320	4,890,221

Stockholders' Equity (Deficit):
	Preferred stock, no par value, 5,000,000 shares authorized,
	no shares issued and outstanding	-	-
	Common stock, $.001 par, 50 million shares authorized;
	20,812,425 and 20,087,425 shares issued
	and outstanding	20,812	20,087
	Additional paid in capital	6,126,796	5,541,029
	Accumulated deficit	(9,436,729)	(7,407,417)
	Total stockholders' deficit	(3,289,121)	(1,846,301)

Total Liabilities and Stockholders' Deficit		$2,412,199	$3,043,920

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

THEATER XTREME ENTERTAINMENT GROUP, INC.
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006





		Three Months Ended		Six Months Ended
		December 31		December 31
		2007	2006	2007		2006

Revenues		$1,175,767	$1,702,189	$2,378,780		$3,164,717

Cost of revenues		723,760	1,014,866	1,544,045		1,947,460
Occupancy expenses		175,867	104,858	330,924		226,771
Selling, general and administrative expenses		982,115	1,206,042	2,180,956		2,262,504
		1,881,742	2,325,766	4,055,925		4,436,735


	Loss from operations	(705,975)	(623,577)	(1,677,145)		(1,272,018)

	Loss on abandoned leasehold
	improvements	(105,375)	-	(105,375)		-


Interest income		-	358	-		600
Interest expense		(124,818)	(81,654)	(246,792)		(85,218)

	Net loss	$ (936,168)	$ (704,873)	$ (2,029,312)	*	$ (1,356,636)

	Basic and diluted:
	Loss per common share	$ (0.04)	$ (0.04)	$ (0.10)		$ (0.07)

* The aggregate of the net loss for the three months ended December 31, 2007 and the three months ended September 30, 2007 may differ slightly the when compared to the above results for the six months ended December 31, 2007 due to rounding errors amounting to approximately $10..

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

THEATER XTREME ENTERTAINMENT GROUP, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2007



		Number of
	($ US except shares)	Shares -		Additional		Total
		Common	Common	Paid-in	Accumulated	Stockholders'
		Stock	Stock	Capital	Deficit	Equity



Balance at June 30, 2007 (Audited)		20,087,425	$ 20,087	$ 5,541,029	$ (7,407,417)	$ (1,846,301)

Issuance of common stock, services rendered,
net of transfer agent and legal fees		725,000	$ 725	$ 436,312	$ -	437,037

Vested employee stock options		-	-	48,686	-	48,686

Vested non-employee stock options		-	-	(2,831)	-	(2,831)

Issuance of warrants, notes payable		-	-	12,200	-	12,200

Issuance of warrants, services rendered		-	-	91,400	-	91,400

Net loss for the six months ended
December 31, 2007		-	-	-	(2,029,312)	(2,029,312)

Balance at December 31, 2007 (Unaudited)		20,812,425	$ 20,812	$ 6,126,796	$ (9,436,729)	$ (3,289,121)

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

THEATER XTREME ENTERTAINMENT GROUP, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31
(UNAUDITED)

	2007			2006
Cash flows from operating activities:
Net Loss	$	(2,029,312	)	$	(1,356,636	)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss on disposal of assets		105,375			-
Depreciation		131,634			74,643
Amortization of prepaid consulting services		117,429			-
Issuance of common stock for services		41,337			40,000
Increase (decrease) in Allowance for Doubtful Accounts		(9,214	)		25,000
Employee stock option vesting for compensation		48,686			64,805
Non-employee stock option vesting for services		(2,831	)		4,780
Amortization of deferred charges		69,079			223,465
(Increase) decrease in assets
Accounts receivable		98,421			(189,382	)
Inventory		249,899			(1,830	)
Prepaid expenses		182,763			(52,377	)
Other Assets		45,972			(96,037	)
Increase (decrease) in liabilities
Accounts payable and accrued expenses		478,804			(68,357	)
Payroll liabilities		(20,767	)		51,225
Deferred franchise fees		17,500			30,000
Deferred sales		129,535			236,599
Net cash provided by (or used in) operating activities		(345,690	)		(1,014,102	)

Cash flows from investing activities:
Deposits on stores and corporate facility		-			(28,234	)
Purchase of property and equipment		(2,567	)		(30,362	)
Net cash used in investing activities		(2,567	)		(58,596	)

Cash flows from financing activities:
Repayment of notes payable		(18,973	)		(150,775	)
Proceeds from non-convertible debentures		-			1,500,000
Proceeds from short-term promissory notes		225,000			-
Proceeds from issuance of common stock		-			60,614
Net cash provided by financing activities		206,027			1,409,839

Net increase (decrease) in cash		(142,230	)		337,141
Cash and equivalents, beginning of period		232,583			466,481

Cash and equivalents, end of period	$	90,353		$	803,622

Supplemental disclosure:

Cash paid during the period for interest	$	41,402		$	25,128

Supplemental disclosure of non-cash
investing and financing activites:

Liabilities assumed as part of acquisition of property	$	-		$	2,598

Acquisition of property and equipment
by issuance of notes payable	$	-		$	210,608

Prepaid consulting services
by issuance of common stock	$	396,500		$	-

Prepaid consulting services
by issuance of warrants	$	90,800		$	-

Deferred Financing charges
by issuance of warrants	$	12,000		$	-

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

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. Additionally, the financial statements appearing herein have been reviewed by the Company’s principal accountants, Morison Cogen LLP. 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 ending December 31, 2007 are not necessarily indicative of the results that may be expected for the year ending June 30, 2008. The unaudited financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 2007.

Nature of Operations. Theater Xtreme Entertainment Group, Inc. (the “Company”), a Florida corporation, is a retail store and franchise marketing company engaged in retail sales and distribution through the operation of Company-owned home cinema design stores, the sale of franchise licenses and wholesale product distribution to franchisees. The Company opened its first Company retail store, or design store on September 1, 2003 in Newark, Delaware. In August 2004 the Company opened a second Company owned design store in Wilmington, Delaware. A third Company owned design store opened in Bel Air, Maryland in September 2005. In July, 2006, the Company purchased the assets and assumed the leasehold of its franchisee located in Leesport, Pennsylvania. In March, 2007, the Company relocated its Wilmington, Delaware design store to an improved location in Wilmington, Delaware. The Company sold twenty-two franchises through June 30, 2007 and an additional two through September 30, 2007 bringing the total number of franchises sold through December 31, 2007 to twenty-four. The first franchise design center opened in May, 2005 in East Longmeadow, Massachusetts. Through June 30, 2007 the Company had nine franchise stores opened and operating. During the six months ended December 31, 2007, an additional two franchise stores opened bringing the total number of opened and operating franchise locations to eleven. Effective November 6, 2007, the Company closed two of its five Company-owned retail stores, one in Leesport, Pennsylvania (formerly a franchise store) and one in Newark, Delaware (its first location) and eliminated staff at these locations. The Company has taken these actions as part of a recently implemented store performance evaluation and cost and expense reduction initiative developed earlier and designed to reduce costs and expenses.

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

THEATER XTREME ENTERTAINMENT GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

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

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 31
		2007		2006	2007	2006

Retail sales	$	940,805	$	1,305,897	1,708,065	2,568,461
Wholesale sales		161,863		331,233	473,488	493,253
Franchise licenses and royalties		73,099		65,059	197,227	103,003

Total revenues	$	1,175,767	$	1,702,189	2,378,780	3,164,717

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 December 31:

		2007		2006

Deferred retail sales	$	610,032	$	890,877
Unearned service contract revenue		15,254		25,428
Total deferred retail sales	$	625,286	$	916,305

THEATER XTREME ENTERTAINMENT GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

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

Loss Per Share. The Company follows SFAS No. 128, "Earnings Per Share," resulting in the presentation of basic and diluted earnings (loss) per share. The basic loss per share calculations include the change in capital structure which resulted from the merger for all periods presented. For the three and six months ended December 31, 2007 and 2006, the basic and diluted loss per share are the same, because the assumed conversion of the common stock equivalents would be anti-dilutive as the Company experienced net losses for these periods.

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

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

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

Shipping and Handling Fees and Costs. The Company classifies shipping and handling fees when charged to the customer as revenue. The Company classifies shipping and handling costs as part of selling and administration expenses. Shipping and handling costs were $4,460 and $16,996 for the three months ended December 31, 2007 and 2006, respectively, and $18,588 and $41,017 for the six months ended December 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 promotion expense, excluding investor relations expenses, totaled $100,993 and $113,834 for the three months ended December 31, 2007 and 2006, respectively and $248,827 and $287,616 for the six months ended December 31, 2007 and 2006, respectively.

THEATER XTREME ENTERTAINMENT GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

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

Investor Relations Costs. Investor relations services are expensed as incurred. Investor relations expenses, including investor relations promotional costs, totaled $30,204 and $152,076 for the three months ended December 30, 2007 and 2006, respectively, and $137,783 and $240,025 for the six months ended December 30, 2007 and 2006, respectively,.

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

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

As a result of the adoption of SFAS No. 123(R), a) during the three months ended December 31, 2007 and 2006, the Company’s net income was approximately $10,691 and $34,541 lower, respectively, as a result of stock-based compensation expense, including $(6,552) and $2,390, respectively, recognized on behalf of outside board members and b) during the six months ended December 31, 2007 and 2006, the Company’s net income was approximately $45,855 and $69,585 lower, respectively, as a result of stock-based compensation expense, including $(2,831) and $4,780 respectively, recognized on behalf of outside board members. The negative amounts recognized on behalf of outside board members reflect a reversal of stock option expense recognized in previous periods that were reversed in the three months ended December 31, 2007 as a result of forfeited stock options that were not exercised.

As of December 31, 2007, there was $231,709 of unrecognized compensation expenses and $19,048 of unrecognized expenses for services related to non-vested market-based option share awards that are expected to be recognized through the fiscal year ended June 30, 2011.

THEATER XTREME ENTERTAINMENT GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

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

Recently Issued Pronouncements: In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 has been adopted by the Company as of July 1, 2007, and the provisions of FIN 48 were applied to all tax positions under Statement No. 199after initial adoption. The cumulative effect of applying the provisions of this interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The adoption of FIN 48did not require adjustments to the Company’s financial statements.

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 fiscal 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 and interim periods within those fiscal years. The Company does not believe that the adoption of the provisions of SFAS No. 157 will materially impact its financial statements or footnote disclosures.

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

THEATER XTREME ENTERTAINMENT GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 2: Management’s Plans

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

The Company has incurred significant losses from operations, has an accumulated deficit and a highly leveraged capital position that raises substantial doubts about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments related to recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company expects to incur significant expenditures to further the development and commercialization of its products. To achieve this, the Company has requested and received deferral of interest payments due to its principal debtor (Kinzer Technology) through December 31, 2007 and the deferral of principal payments due to its non-convertible debenture holders through March 17, 2008. The Company is also currently negotiating with its both its principal lender and its short term debenture and promissory note creditors for modification of the terms of all of its debt instruments and is diligently pursuing the raising of additional funds. The Company has identified a number of potential sources of new funding and is currently working toward a conclusion that would provide interim funds as well as a longer term capital raise effort. At the time of preparation of these statements, the Company executed a Financial Representation However, at the time of preparation of these financial statements no definitive arrangements have been made and there is no assurance that any would be forthcoming.

Note 3: Notes Payable

Between July 20 and August 15, 2007, the Company executed and delivered promissory notes to three accredited investors ( the “Promissory Note Investors”) in the aggregate face amount of $225,000 (the “Promissory Notes”), and warrants (the “Promissory Warrants”) to purchase up to 112,500 shares, in the aggregate, of the Company’s common stock (the “Promissory Note Financing”). The proceeds of the Promissory Note Financing were used for general corporate purposes. The Promissory Notes bear interest at 14% per annum, mature one year from the date of issue and may be prepaid at any time without penalty. The Promissory Warrants have an exercise price of $1.00 per share and are subject to full ratchet price protection for the five-year life of the Promissory Warrants. Repayment of the Promissory Notes is guaranteed by Scott R. Oglum, Chief Executive Officer of the Company, through separate Guaranty and Pledge agreements with all three accredited investors. The guarantees are secured by a pledge by Mr. Oglum of up to 3,618,275 shares, in the aggregate, of the Company’s common stock which he owns representing his entire holdings. In September, 2007, the Company indemnified Mr. Oglum, in connection with the Guaranty and Pledge Agreements, for any and all payments made by Mr. Oglum to the holders of the Promissory Notes and for the dollar amount of any unrecovered proceeds pursuant to the sale of any of the Pledged Shares as may be sold pursuant to the Guaranty and Pledge Agreements. The Promissory Note Financing was made in reliance on an exemption from securities registration afforded by the provisions of Section 4(2) of the Securities Act of 1933, as amended.

THEATER XTREME ENTERTAINMENT GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 3: Notes Payable (continued)

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

In December 2007, the Company and the holders of three debentures, whose aggregate face value amounted to $300,000, agreed to amend the debentures. The amendment extended the due date of the payment of amounts due and payable on the debentures to March 17, 2008. In consideration for this amendment, the Company issued warrants to the debenture holders entitling them to purchase up to 150,000 shares of Registrant’s Common Stock, in the aggregate, at an exercise price of $1.00 per share.

Note 4: Common Stock

During the six months ended December 31, 2007, the Company issued 650,000 of its common shares at $0.61 per share, representing the fair value of the price per share at the time of issuance, with an aggregate value of $395,650, net of legal expenses, and granted warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $1.00 per share, to a consultant for services rendered. The Company valued the common stock purchase warrants at $90,800. The values of the common stock and purchase warrants shall both be amortized over a twelve month period.

During the six months ended December 31, 2007, the Company issued 75,000 of its common shares at $0.55 per share, representing the fair value of the price per share at the time of issuance, with an aggregate value of $41,387, to another unrelated consultant for services rendered.

During the six months December 31, 2007, the Company granted warrants to purchase 8,750 shares of the Company’s common stock at an exercise price of $1.00 per share to a consultant in consideration for services rendered. The Company valued these warrants at $600 and expensed this amount in the six months ended December 31, 2007 as a consulting expense.

During the six months December 31, 2007, the Company granted warrants to purchase 112,500 shares of the Company’s common stock, in the aggregate, at exercise prices of $1.00 per share separately to three accredited investors in connection with the Promissory Note Financing. The Company has valued these warrants at $12,000, in the aggregate and will expense this amount over the time of the respective underlying Promissory Notes. See Note 3, Notes Payable.

In December 2007, the Company and the holders of three debentures, whose aggregate face value amounts to $300,000, agreed to amend the debentures. The amendment extended the due date of the payment of amounts due and payable on the debentures to March 17, 2008. In consideration for this amendment, the Company issued warrants to the debenture holders entitling them to purchase up to 150,000 shares of Company’s Common Stock, in the aggregate, at an exercise price of $1.00 per share. The Company has valued these warrants at $200, in the aggregate, and has expensed this amount in the three months ended December 31, 2007.

THEATER XTREME ENTERTAINMENT GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 4: Common Stock (continued)

Additionally, in December, 2007, in separate transactions, the Company and all holders of common stock purchase warrants issued by the Company which had heretofore included full ratchet protection (the “R Warrants”) entered into agreements to amend the terms of the R Warrants to remove from the R Warrants those provisions calling for full ratchet protection. The eliminated provisions would have given the holders the right to acquire shares at a lower exercise price at any time that the Company issued equity securities at an effective price lower than the then current exercise price of the outstanding warrants.

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 five years.

The following summarizes warrants to purchase the Company’s Common Stock outstanding through December 31, 2007:

	Number of	Exercise
	Warrants	Price

Warrants outstanding at June 30, 2007	1,625,160	$ 1.00

Warrants issued during the six months
ended December 31, 2007	771,250	$ 1.00

Warrants outstanding at December 31, 2007	2,396,410	$ 1.00

See also, Note 7, Subsequent Events.

Note 5: Stock Option Plan

In April, 2005, stockholders holding a majority of the shares of the Company’s common stock approved the adoption of the Company’s 2005 Stock Option Plan (the “Plan”). The Plan is designed to help the Company attract, motivate and retain high quality employees necessary to execute the Company’s business plans successfully. On December 21, 2005 stockholders holding a majority of the shares of the Company’s common stock approved an increase in the number of common shares allocated to the Plan to 2,000,000, from 1,400,000 shares. Participation in the Plan is limited to employees and outside Directors. The exercise price of both incentive and nonqualified stock options is at least the fair market value of the Company’s common stock at the time of the grant. The options generally vest over a three to four year period and expire no later than ten years from the date of grant.

THEATER XTREME ENTERTAINMENT GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 5: Stock Option Plan (continued)

At June 30, 2007, there were 1,515,717 stock options outstanding under the 2005 Stock Option Plan. At December 31, 2007, there were 1,292,092 stock options outstanding under the 2005 Stock Option Plan. In the six months ended December 31, 2007, the Company granted no options to employees, made no grants of non-qualified options, In the six months ended December 31, 2007 there were no exercises of options and an aggregate of 223,625 stock options were forfeited.

A summary of stock option transactions for the six months ended December 31, 2007 is as follows:

	Incentive Stock Options		Nonqualified Stock Options
		Weighted		Weighted
	Stock	Average	Stock	Average
	Options	Exercise	Options	Exercise
	Outstanding	Price	Outstanding	Price

Balance, June 30, 2007	1,335,717	$0.54	180,000	$0.48

Granted during the period	-	xx	-	xx

Exercised during the period	-	xx	-	xx

Cancelled / forfeited during the period	(163,625)	$0.44	(60,000)	$0.48

Balance, December 31, 2007	1,172,092	$0.55	120,000	$0.48

The following table summarizes information about stock options outstanding at December 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	December 31	Contractual	December 31	December 31	Contractual	December 31
Price	2007	Life	2007	2007	Life	2007

$0.35	751,667	7.6 Years	470,000	100,000	7.3 Years	50,000
$0.61	50,000	9.4 Years	-	-	xx	-
$0.80	50,000	9.3 Years	-	-	xx	-
$0.89	50,000	9.3 Years	-	-	xx	-
$1.00	265,000	8.5 Years	66,250	-	xx	-
$1.04	5,425	8.9 Years	1,356	-	xx	-
$1.12	-	xx	-	20,000	9.0 Years	5,000

	1,172,092		537,606	120,000		55,000

THEATER XTREME ENTERTAINMENT GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 6: Income Taxes

Deferred income taxes reflect the net effect of an operating loss carryforward. There are no significant temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax purposes. The components of the deferred assets are as follows at December 31, 2007 and June 30, 2007:

	December 31, 2007			June 30 2007
Net operating loss tax benefit	$	3,704,000		$	2,884,000
Non-deductible options		112,000			85,000
Allowance for bad debt		26,000			26,000
Less valuation allowance		(3,842,000	)		(2,995,000	)

	$	0		$	0

A valuation allowance was required because the ultimate realization of deferred tax assets is dependent upon future taxable income and management believes that it is more likely than not that the deferred tax asset will not be realized through future taxable income. There is no income tax benefit for the losses for the six months ended December 31, 2007, because management has determined that the realization of the net deferred tax asset is not assured and has created a valuation allowance for the entire amount of such benefits.

At June 30, 2007, the Company had a net operating loss carryforward for Federal and State income tax purposes of approximately $7,150,000 which, if not used, will expire in various years through June 30, 2028.

Note 7: Subsequent Events

On January 4, 2008, the Company elected Harold R. Bennett to its Board of Directors and granted Mr. Bennett stock options to purchase 50,000 shares of the Company’s Common Stock at an exercise price of $0.10 per share , representing the fair value of the Company’s Common Stock at the time of grant. The Company has valued these options at $1,800 and will expense this amount over the four-year vesting period of the grant of options.

On January 15, 2008, the Company executed and delivered, to two accredited investors (the “Investors”), (i) convertible promissory notes in the aggregate face amount of $263,116.44 (the “Convertible Promissory Notes”), and (ii) warrants (the “Warrants”) to purchase up to an aggregate of 263,116 shares of the Registrant’s common stock (the “Promissory Financing”). The Convertible Promissory Notes mature 120 days from date of issue and may be prepaid at any time in whole or in part without penalty. The Convertible Promissory Notes bear interest at 21% per annum, due and payable at maturity. The Investors may convert the principal balance of the Convertible Promissory Notes plus accrued interest (if any), in whole or in part, into Common Shares, at their election at any time prior to payment at a conversion price equal to Ten Cents ($0.10) per share. The Warrants have an exercise price of $0.50per share for the five-year life of the Warrants. The Company has valued these warrants at $1,600 and will expense this amount in the three months ended March 31, 2008.

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

Forward-Looking Information

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the Company’s financial statements and notes for the three and six month periods ended December 31, 2007 included herein and its audited financial statements and notes included in the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2007 as filed with the Securities and Exchange Commission. This discussion and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Company’s actual results, performance or achievements expressed or implied by these forward-looking statements to differ materially from such forward-looking statements. The forward-looking statements included in this report may prove to be inaccurate.

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

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

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

the ability to maintain margin and sales growth rates;

the ability to attract and retain quality employees;

the effect of changing economic conditions;

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

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

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

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

Overview

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

The Company’s design centers focus on the sale and installation of affordable large screen front projection in-home cinema rooms comprised of video and audio home theater components. A majority of 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 OneView™. The Company targets its home theater system marketing toward a larger consumer base than traditional custom home theater companies and focuses on lower retail price points in a store setting where customers can easily and readily encounter the complete home theater experience in a number of home settings.

The Company’s first retail store or “design center” opened on September 1, 2003 in Newark, Delaware and was built to resemble an actual movie theater. A separate distribution center, warehouse and administrative office facility opened in February 2004, also in Newark, Delaware. This multi-purpose facility provides installation and service, warehousing and product distribution, and other retail support services to a cluster of company-owned design centers in contiguous and surrounding areas. The Company anticipates that it will open additional Company-owned design centers in the Mid-Atlantic region in the future.

The following table sets forth the number of design centers:

Theater Xtreme Entertainment Group, Inc.

	Design Stores Opened and Operating			Franchised
	Company		Total	Not Yet
	Owned	Franchised	Opened	Opened	Total

Number of design stores at June 30, 2004	1	0	1	0	1

Net additions (deletions) in the fiscal year ended June 30, 2005	1	1	2	3	5

Number of design stores at June 30, 2005	2	1	3	3	6

Net additions (deletions) in the fiscal year ended June 30, 2006	1	5	6	9	15

Number of design stores at June 30, 2006	3	6	9	12	21

Net additions (deletions) in the fiscal year ended June 30, 2007	2	3	5	0	5

Number of design stores at June 30, 2007	5	9	14	12	26

Net additions (deletions) in the three months ended September 30, 2007	0	2	2	0	2

Number of design stores at September 30, 2007	5	11	16	12	28

Net additions (deletions) in the three months ended December 31, 2007	(2)	0	(2)	0	(2)

Number of design stores at December 31, 2007	3	11	14	12	26

In November, 2007, the Company closed two of its underperforming Company-owned retail outlets. In the three months ended December 31, 2007, no new franchise stores opened.

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

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

Recognized sales revenue for the three months ended December 31, 2007 was $1,175,767 compared to $1,702,189 for the three months ended December 31, 2006, reflecting a decrease of (31)%. This decrease is primarily the result of decreased retail sales in underperforming and closed retail outlets. Aggregate gross profit amounts and percentages were $452,007 and 38% for the three months ended December 31, 2007 as compared to $687,323 and 40% for the three months ended December 31, 2006.

The following is illustrative for the three months ended December 31:

	Three months ended December 31
	2007			2006
		Gross			Gross
	Sales	Profit	%	Sales	Profit	%

Retail	$ 940,805	$ 377,766	40%	$ 1,305,897	$ 584,425	45%
Wholesale	$ 161,863	$ 1,142	1%	$ 331,233	$ 37,839	11%
Franchise	$ 73,099	$ 73,099	100%	$ 65,059	$ 65,059	100%
Total	$ 1,175,767	$ 452,007	38%	$ 1,702,189	$ 687,323	40%

For the three months ended December 31, 2007, retail sales decreased by $(365,092), or (28)%, when compared to the three months ended December 31, 2006. Same-store sales, reflecting sales for the Company’s Delaware locations, were $733,319 and $753,153 for the three months ended December 31, 2007 and 2006, respectively and decreased by $(9,815), or (1)%. This decrease is attributable mainly to reduced consumer spending in the consumer electronics category generally experienced by most consumer electronics retailers. New stores sales were $197,467 for the three months ended December, 2007 compared to $552,744 for the three months ended December 31, 2006 and accounted for the majority of the overall retail sales decrease and amounted to a $(355,277) or a (64)% decline. This decrease is attributable mainly to reduced consumer spending in the consumer electronics category generally experienced by most consumer electronics retailers coupled with their less than favorable site locations. New stores reflect the inclusion of the Company’s Leesport, Pennsylvania and Bel Air and Lutherville design stores, of which Leesport, Pennsylvania is now closed.

Gross profit amounts and percentages on retail sales for the three months ended December 31, 2007 amounted to $377,766 and 40% compared to $584,425 and 45% for the three months ended December 31, 2006. The decline in gross margin is attributable to the sale of retail displays and other obsolete component models at less than standard retail pricing. Additionally, the Company wrote down more defective cables used in installations.

For the three months ended December 31, 2007, the Company recognized wholesale sales, principally sales to franchisees, of $161,863 compared to $331,233 for the three months ended December 31, 2006, reflecting a (51)% decrease. This decrease results from almost all of the Company’s franchisees purchasing audio and video product components directly from manufacturers as opposed to purchasing these components through the Company. Wholesale gross profit amounts and percentages were $1,142 and 1% for the three months ended December 31, 2007 compared to $37,839 and 11% for the three months ended December 31, 2006. This decline is attributable to the change in the franchise purchasing channel.

For the three months ended December 31, 2007, the Company recognized no earned revenue relating to the opening of its franchises compared to $25,000 recognized in the three months ended December 31, 2006. No new franchises were opened during the period. The Company’s franchise contract provides royalty payments of approximately 4% of franchisee gross revenues. For the three months ended December 31, 2007, the Company recognized franchise royalties of $73,099 compared to $40,059 in royalties recognized for the three months ended December 31, 2006.

Occupancy expenses include leasing expenses for retail design centers and office and warehouse facilities, property taxes, utilities, maintenance and other related occupancy expenses. For the three months ended December 31, 2007, occupancy expenses were $175,867 compared to $104,858 for the three months ended December 31, 2006. The increase is attributable to the operating costs of a population of five Company-owned stores at December 31, 2007 versus four Company-owned stores open at December 31, 2006. During the three months ended December 31, 2007, the Company closed two of its stores. Despite these closures, occupancy costs will continue until such time as the Company can reach an understanding as to sub-leasing these closed properties.

Selling, general and administrative expenses include the compensation of design center personnel, the franchise sales and support operations, advertising, marketing and other merchandising expenses, finance and information systems, human resources and training operations, related support functions, and executive officers compensation. Selling, general and administrative expenses for the three months ended December 31, 2007 were $982,115 compared to $1,206,042 for the three months ended December 31, 2006. Expenses for the three months ended December 31, 2007 include Advertising and Promotional expenses of $100,995 compared to $113,834 spent during the three months ended December 31, 2006 reflecting reduced spending for media advertising. Professional fees, excluding investment advisor expense, amounted to $197,853 for the three months ended December 31, 2007 compared to $239,994 for the three months ended December 31, 2006 reflective of increased spending for management consulting services offset by decreased legal fees. Investment advisor expense amounted to $30,204 for the three months ended December 31, 2007 compared to $152,076 for the three months ended December 31, 2006. Depreciation expense for the three months ended December 31, 2007 was $63,044 compared to $39,673 for the three months ended December 31, 2006, the increase primarily due to the write-down of leasehold assets of the two closed Company stores. The majority of the remaining change in selling, general and administrative expenses is spread evenly throughout all remaining expense categories.

For the three months ended December 31, 2007, the Company also recognized a loss of $(105,375) on disposal of its leasehold improvement fixed assets due to the closing of its Newark, Delaware and Leesport, Pennsylvania stores.

Results of Operations for the six months ended December 31, 2007 compared to the six months ended December 31, 2006

Recognized sales revenue for the six months ended December 31, 2007 was $2,378,780 compared to $3,164,717 for the six months ended December 31, 2006, reflecting a decrease of (25)%. This decrease is primarily the result of decreased retail sales in underperforming and closed retail outlets. Aggregate gross profit amounts and percentages were $834,735 and 35% for the six months ended December 31, 2007 as compared to $1,217,257 and 39% for the six months ended December 31, 2006. The following is illustrative for the six months ended December 31:

	Six months ended December 31
	2007			2006
		Gross			Gross
	Sales	Profit	%	Sales	Profit	%

Retail	$ 1,708,065	$ 597,972	35%	$ 2,568,461	$ 1,054,238	41%
Wholesale	$ 473,488	$ 39,536	8%	$ 493,253	$ 60,016	12%
Franchise	$ 197,227	$ 197,227	100%	$ 103,003	$ 103,003	100%
Total	$ 2,378,780	$ 834,735	35%	$ 3,164,717	$ 1,217,257	39%

For the six months ended December 31, 2007, retail sales decreased by $(860,396), or (34)%, when compared to the six months ended December 31, 2006. Same-store sales, reflecting sales for the Company’s Delaware locations, were $1,352,329 and $1,705,440 for the six months ended December 31, 2007 and 2006, respectively and decreased significantly by $(353,111), or (21)%. This decrease is attributable mainly to reduced consumer spending in the consumer electronics category generally experienced by most consumer electronics retailers experienced in the three months ended September 30, 2007. For the same continuing reasons, new store sales were $355,736 and $863,021 for the six months ended December 31, 2007 and 2006, respectively and accounted for a sales decrease of $(507,285) or (59)%. New stores reflect the inclusion of the Company’s Leesport, Pennsylvania and Bel Air and Lutherville design stores, of which Leesport, Pennsylvania is now closed.

Gross profit amounts and percentages on retail sales for the six months ended December 31, 2007 amounted to $597,972 and 35% compared to $1,054,238 and 41% for the six months ended December 31, 2006. The decline in gross margin is attributable to the underabsorption of warehouse and installation personnel costs owing to the decline of sales installations experienced in the first fiscal quarter coupled with coupled with decreased margins on supplies, the write down of defective cable inventory and the sale of retail displays and other obsolete component models at less than standard retail pricing.

For the six months ended December 31, 2007, the Company recognized wholesale sales, principally sales to franchisees, of $473,488 compared to $493,253 for the six months ended December 31, 2006, reflecting a (4)% decrease. This decrease results from almost all of the Company’s franchisees purchasing audio and video product components directly from manufacturers as opposed to purchasing these components through the Company. Wholesale gross profit amounts and percentages were $39,536 and 8% compared to $60,016 and 12% for the six months ended December 31, 2006. This decline is attributable to the change in the franchise purchasing channel.

For the six months ended December 31, 2007, the Company recognized $62,500 in earned revenue relating to the opening of its franchises compared to $50,000 recognized in the six months ended December 31, 2006. Two new franchises were opened during the period ended December 31, 2007. The Company’s franchise contract provides royalty payments of approximately 4% of franchisee gross revenues. For the six months ended December 31, 2007, the Company recognized franchise royalties of $134,727 compared to $53,003 in royalties recognized for the six months ended December 31, 2006.

Occupancy expenses include leasing expenses for retail design centers and office and warehouse facilities, property taxes, utilities, maintenance and other related occupancy expenses. For the six months ended December 31, 2007, occupancy expenses were $330,924 compared to $226,771 for the six months ended December 31, 2006. The increase is attributable to the operating costs of a population of five Company-owned stores at December 31, 2007 versus four Company-owned stores open at December 31, 2006. During the six months ended December 31, 2007, the Company closed two of its stores. Despite these closures, occupancy costs will continue until such time as the Company can reach an understanding as to sub-leasing these closed properties.

Selling, general and administrative expenses include the compensation of design center personnel, the franchise sales and support operations, advertising, marketing and other merchandising expenses, finance and information systems, human resources and training operations, related support functions, and executive officers compensation. Selling, general and administrative expenses for the six months ended December 31, 2007 were $2,180,956 compared to $2,262,504 for the six months ended December 31, 2006. Expenses for the six months ended December 31, 2007 include Advertising and Promotional expenses of $248,827 compared to $287,616 spent during the six months ended December 31, 2006 reflecting reduced spending for media advertising. Professional fees, excluding investment advisor expense, amounted to $386,807 for the six months ended December 31, 2007 compared to $339,716 for the six months ended December 31, 2006 reflective of increased spending for management consulting services partially offset by reduced legal fees. Investment advisor expense amounted to $126,581 for the six months ended December 31, 2007 compared to $240,025 for the six months ended December 31, 2006. Depreciation expense for the six months ended December 31, 2007 was $131,634 compared to $74,643 for the six months ended December 31, 2006, the increase in new store openings at Wilmington, Delaware and Lutherville, Maryland. The majority of the remaining increase in selling, general and administrative expenses is spread evenly throughout all remaining expense categories.

For the six months ended December 31, 2007, the Company also recognized a loss of $(105,375) on disposal of its leasehold improvement fixed assets due to the closing of its Newark, Delaware and Leesport, Pennsylvania stores.

The Company had net losses of $(2,029,312) and $(3,446,254) for the six months ended December 31, 2007 and year ended June 30, 2007. The Company had a working capital deficit at December 31, 2007 that resulted in a current ratio of 0.47 at such date. The Company was able to maintain operations in the six months ended December 31, 2007 only by borrowing $225,000 on a short-term basis at a very high interest rate and allowing accounts payable and accrued expenses to increase to $1,280,782 at December 31, 2007 from $801,978 at June 30, 2007.

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

Liquidity

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

The Company’s cash position decreased to $90,353 at December 31, 2007 from $232,583 at June 30, 2007. The loss for the six months ended December 31, 2007 of $(2,029,312) included non-cash depreciation and amortization charges amounting to $249,063 and a loss on disposal of leasehold assets of $105,375 and was further offset by a decreases in accounts receivable and inventory of $98,421 and 249,899, respectively, an increase in accounts payable of $478,804, an increase in deferred sales of $129,535, the issuance of common share and warrants amounting to $41,337 for services rendered, employee stock option vesting of $48,686 and a net reduction in prepaid expenses and the remainder of other assets of $182,763 and $99,739, respectively, resulting in a net cash used in operating activities of $(345,690).

During the six months ended December 31, 2007, the Company spent $2,567 for the acquisition of equipment.

During the six months ended December 31, 2007, to finance its loss, capital expenditures, and changes in other working capital items, the Company increased its notes payable by $225,000.

At December 31, 2007, the Company did not have a credit facility or line-of-credit arrangement. The Company has no compensating balance requirements. The Company has a borrowing covenant in connection with the long term debenture (the “March Debenture”), as amended, whereby the Company’s borrowing ability is proscribed to an aggregate of $2,000,000 in additional unsecured indebtedness that may be incurred subsequent to March 6, 2007. Should the Company exceed this limitation, the March Debenture would become due and payable in its entirety. Pursuant to this covenant, the Company has $1,746,822 of remaining borrowing capacity as of December 31, 2007. Additionally and also pursuant to the March Debenture, should the Company raise in excess of $6,000,000 in equity financing, the March Debenture would become due and payable in its entirety.

In December 2007, the Company and the holders of three debentures in the aggregate face amount of $300,000 agreed to amend the terms of the debentures. The amendment extended the due date of the payment of amounts due and payable on the debentures to March 17, 2008.

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

Item 3. Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Company’s principal executive officer and principal financial officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2007. The evaluation revealed to the Company’s principal executive officer and principal financial officer that the design and operation of the Company’s disclosure controls and procedures were effective as of December 31, 2007.

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

PART II

OTHER INFORMATION

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.

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 16, 2008	By:	/s/ Robert G. Oberosler
		Robert G. Oberosler
		Chairman of the Board and Chief Executive Officer


	By:	/s/ James J. Vincenzo
		James J. Vincenzo
		Chief Financial Officer