**Draft
      dated 3/23/07**


**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**Form
      10-KSB**





R
            **ANNUAL
                REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the year ended December 31, 2006****Or**£
            **TRANSITION
                REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the transition period from****____________****to
                ____________**





**Commission
      file number: 001-16781**


**microHelix,
      Inc.**


*(Name
      of Small Business Issuer in Its Charter)*





**Oregon**
            **91-1758621***(State
                or Other Jurisdiction of Incorporation or
                Organization)*
            *(I.R.S.
                Employer Identification No.)***19500
                SW 90****th****Court, Tualatin, Oregon**
            **97062***(Address
                of Principal Executive Offices)*
            *(Zip
                Code)*





**(Issuer's
      Telephone Number, Including Area Code):**


**(503)
      692-5333**




**Securities
      registered under Section 12(g) of the Exchange Act:**





**Common
      Stock, no par value per share**





Check
      whether issuer is not required to file reports pursuant to Section 13 or 15(d)
      of the Exchange Act. £





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 12 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. Yes R No £





Check
      if
      no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is
      contained in this form, and no disclosure will be contained, to the best of
      registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB, or any amendments
      to
      this Form 10-KSB. £





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes £ No R





The
      issuer's revenues for its most recent fiscal year: $15,281,564.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates, as of March 31, 2007, was approximately $1,791,814 based upon
      the last sale price reported for such date on the NASDAQ OTC Market.





There
      were 14,485,082 shares of the issuer's common stock outstanding as of March
      31,
      2007.




**Transitional
      Small Business Disclosure Format: Yes** £ **No** R










**PART
      I**





*This
      Annual Report on Form 10-KSB contains forward-looking statements within the
      meaning of the Private Securities Litigation Reform Act of 1995. Such statements
      reflect management's current view and estimates of future economic and market
      circumstances, industry conditions, company performance and financial results.
      Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
      "estimates" and variations of such words and similar expressions are intended
      to
      identify such forward-looking statements. These statements are subject to risks
      and uncertainties that could cause our future results to differ materially
      from
      the results discussed herein. Factors that might cause such a difference
      include, but are not limited to, those discussed elsewhere in this Annual Report
      on Form 10-KSB. We do not intend, and undertake no obligation, to update any
      such forward-looking statements to reflect events or circumstances that occur
      after the date of this filing.*





**Item
      1.** ***Description
      of Business***





***Overview***





microHelix,
      Inc. ("we,”, “us”, “our”. microHelix" or the "Company") is a manufacturer of
      complex cable assemblies for the medical and commercial markets. The Company
      serves a segment of the quick turn, high mix, and low volume cable assembly
      market generally referred to as the custom cable assembly market. Typical cable
      assemblies may include cable, connectors, flex reliefs, housings and printed
      circuit boards ("PCBs") and are critical sub-components of medical devices
      and
      commercial electronic systems. The Company operates its business in a single
      operating segment through two divisions: our Moore Electronics division and
      our
      MicroCoax Assembly Solutions division.





***Moore
      Electronics Division***





On
      April
      8, 2005, the Company acquired 100% of the outstanding stock of Moore
      Electronics, Inc. ("Moore"). Moore, headquartered in Tualatin, Oregon, was
      founded in 1978 and is a manufacturer of customized cable assemblies,
      sub-assemblies, wire harnesses and electro-mechanical assemblies. Moore serves
      the cable assembly requirements of major medical equipment manufacturers and
      commercial equipment manufacturers. Moore also does complex mechanical
      assemblies ("box builds") for commercial and aerospace customers. Many major
      original equipment manufacturers ("OEMs") outsource their cable assembly work
      so
      they can focus on final assembly and sale of their products. Moore's competitive
      advantage has been driven by its ability to partner with its customers, support
      complex projects with in-house engineering resources, provide low-cost assembly
      services and offer turn-key solutions for custom cable assembly projects. Custom
      cable assembly work is generally not well-suited for transfer to offshore
      operations for three principal reasons: (1) low unit volume; (2) rapid turn
      (i.e. accelerated delivery schedule) and (3) frequent engineering changes.
      Moore will be operated as a wholly owned subsidiary.




Moore
      competes for business in the United States with companies of similar size and
      capabilities and with the cable assembly divisions of certain large connector
      and cable manufacturers such as Molex, Lemo, Fischer, Tyco Electronics and
      W.L.
      Gore. Most high volume cable assembly is now done in lower labor cost countries.
      This leaves the high mix, quick turn, low volume custom cable assembly business
      in the United States. Most competitors purchase components rather than make
      them
      so OEM customers select vendors based on responsiveness, engineering and
      technical support, consistent quality and price. Management believes the total
      value of the custom cable assembly business available to U.S - based companies
      exceeds $1.0 billion per year.





2


***MicroCoax
      Assembly Solutions Division***





The
      MicroCoax Assembly Solutions division ("MicroCoax"), headquartered in Tucson,
      Arizona, designs and manufactures custom cable assemblies for OEM customers
      that
      are used in applications such as medical ultrasound probes, patient monitoring
      devices, catheters and flaw detection ultrasound.





The
      Company believes the total worldwide market for medical ultrasound systems
      approached $3.5 billion in 2006, with the U.S. market accounting for
      approximately 33% of this total. Over the past ten years, the ultrasound
      business has consolidated, leaving four principal global integrated
      manufacturers and several smaller specialty manufacturers. A number of smaller
      cable suppliers have left the business as part of this process, creating
      additional market opportunities for the remaining manufacturers of cable
      assemblies for sale to these OEM customers. Although the Company has a small
      share of the total market, management have the benefit of low cost manufacturing
      operations, a reputation for quality, on-time delivery, an experienced
      engineering team and proven responsiveness to customer needs. Sales to customers
      in the medical and commercial ultrasound markets represented over 85% of total
      MicroCoax revenues in 2006. Overall industry demand grew by 6% in 2005 but
      was
      expected to slow somewhat in 2006 and 2007. Growth in demand has been driven
      by
      a combination of replacement and upgrading needs, increased use of ultrasound
      systems for diagnosis, and various procedures and system enhancements such as
      real time 3-D "color" imaging.





***Principal
      Products and Markets***





·  *Custom
      Cable Assemblies.* We
      design
      and manufacture custom cable assemblies, sub-assemblies, wire harnesses and
      electro-mechanical assemblies that serve major medical and commercial
      OEMs.




·  *Patient
      Monitoring and Defibrillation* .
      We
      design and manufacture cables and leads for a variety of applications including
      external defibrillation, EKG, EEG and oxygen sensors. For such critical
      applications, our customers depend on the quality and reliability of the
      assemblies we produce.





·  *Diagnostic
      Ultrasound* .
      We
      design and manufacture custom cable assemblies for medical ultrasound imaging
      systems for the OEM market. Our typical probe cable connects to a transducer
      and
      an ultrasound imaging system, and typically consists of between 64 and 256
      micro-coaxial wires.





·  *Catheters* .
      We
      manufacture certain sub-assemblies for balloon ablation cardiac catheters,
      used
      in the treatment of atrial fibrillation.





·  *Commercial
      Ultrasound.* We
      manufacture cable assemblies for a variety of ultrasound inspection and flaw
      detection applications.





·  *Mechanical
      Assemblies.* We
      developed the capability to engineer and manufacture mechanical assemblies
      ("box
      builds") in 2005. This involves the integration of cables, connectors, PCBs,
      flex circuits, modems, power supplies and other critical components into
      housing, creating a complete device. These devices are typically integrated
      into
      a more complex system that represents the product that our customers sell to
      their customers. Box builds require the successful integration of our
      engineering, assembly and testing capabilities.





***Engineering***





The
      Company has experienced engineering personnel in Tualatin, Oregon, Tucson,
      Arizona, and Nogales, Mexico. The Tualatin engineering team is principally
      focused on the development, manufacturing and testing of custom cable
      assemblies. The Tucson engineering team is principally focused on the
      development, manufacturing and testing of ultrasound cable assemblies and
      supervises our Nogales-based manufacturing and testing engineering functions.





3


***Manufacturing***





The
      Company’s principal custom cable assembly manufacturing operations are conducted
      in a 33,000 square foot leased facility located in Tualatin, Oregon. This
      facility houses manufacturing, engineering, materials management, sales,
      purchasing, finance and other staff functions. The Company has a skilled work
      force and experienced management in Tucson, Arizona and Nogales, Mexico that
      offers a lower-cost production alternative, particularly competitive when cable
      assemblies have high labor content. The Company has 4,500 square feet of office
      and warehouse space in Tucson. This facility provides space for administration,
      design and manufacturing engineering, customer service personnel, inventory
      storage, shipping and receiving. The Company also has a 10,000 square foot
      facility in Nogales, Mexico that provides manufacturing, warehouse and office
      space.




The
      Company assembles and tests all of the manufactured ultrasound and flaw
      detection ultrasound cable assemblies in the Nogales facility.





The
      Company purchases wire, cable, connectors, contacts and other components from
      many qualified vendors. The Company’s customers sometimes provide certain
      components and lower level materials for their manufacturing builds. For
      ultrasound products, cable and components are shipped to the Tucson office
      where
      they are staged and submitted on the proper permits for shipment to the Nogales
      facility where the cable assemblies are completed. After testing and quality
      inspection in Nogales, the completed assemblies are returned to the facility
      in
      Tucson for shipment to customers.





***Government
      Regulation***





The
      Company’s medical device customers are generally subject to regulation by the
      U.S. Food and Drug Administration ("FDA") and therefore rely on us to maintain
      appropriate documentation and quality controls to meet product regulatory
      requirements. The Company relies on its Quality Managers in Tualatin and in
      Tucson under the guidance of the Company’s Director of Quality Assurance and
      Regulatory Affairs, to assist the Company in supporting its customers to meet
      all applicable regulatory requirements. The Company’s facilities are registered
      to ISO 9001-2000.





***Environmental
      Laws***





The
      costs
      and effects of complying with federal, state and local environmental laws do
      not
      significantly affect the Company’s operations.





***Principal
      Customers***





The
      Company has approximately 418 active customers. In 2006 sales to its four
      largest customers accounted for 28.2%, **** 23.5%,
      14.1% and 6.2%, respectively, of its total revenues.





***Sales
      and Marketing***





The
      Company’s sales and marketing efforts for the Moore division are managed by its
      National Sales Manager for the Moore division that is headquartered in Tualatin.
      Our sales and marketing efforts for the MicroCoax division are managed by our
      Vice President - Sales Manager for the MicroCoax division that is headquartered
      in Tucson. Applications, new product development and manufacturing engineers
      located in Tualatin, Tucson and Nogales support sales efforts, working closely
      with customers and their engineering teams.





Our
      OEM
      sales cycle, depending on the type of product, generally takes from one to
      twelve months from the initial contact to the first shipment. Our sales process
      may involve either taking over manufacturing of designed and approved cable
      assemblies or designing cable assemblies for new systems, so the sale of these
      assemblies in commercial quantities will either require us to produce first
      article production samples for customer approval (a relatively quick process)
      or
      can be preceded by a pre-production design phase in which we produce various
      prototype cable assemblies based on the input from our customers' engineers
      and
      our staff. After the prototypes are submitted to the customer it may take
      several months for the customer's quality assurance or product engineering
      department to complete their evaluation testing to determine if the prototypes
      meet their qualification test requirements.





4


Our
      commercial OEM customers are generally able to move forward rapidly to approve
      our parts and issue production quantity orders. However, our medical OEM
      customers may have to amend their FDA filings if they are changing suppliers
      or
      the design of an existing cable assembly. If developing a new medical device,
      our medical OEM customers must obtain the approval of the FDA and other
      regulatory agencies before commercial production can begin. If their device
      is
      approved, we can expect to begin manufacturing our custom cable assemblies
      and/or components in commercial quantities. Products going through this kind
      of
      development cycle can usually expect a three to five year product life before
      next generation technology or new models supplant the current version. Our
      objective is to be working on next generation prototypes while providing
      assemblies for the current device in commercial quantities.





***Competition***





Several
      companies, most of which are more established and larger than we are,
      manufacture the same products and provide the same services that we do, thus
      offering our customers and potential customers competitive alternatives for
      most
      applications. These companies include W.L. Gore, Precision Interconnect (Tyco)
      and Tensolite, all of which are larger and financially stronger than we are.





As
      a
      small cable assembly supplier, we believe we have certain cost advantages,
      including making effective use of lean manufacturing practices that materially
      improve workflow and of our lower-cost Nogales, Mexico assembly operation when
      appropriate, and a reputation for quality, on-time delivery, engineering
      expertise and responsiveness. Our cable assembly, component design, and
      manufacturing capabilities give us a broad platform of skills allowing us to
      compete successfully to serve customers in several industries including medical
      device, test and measurement, flaw detection and inspection, robotics and
      aerospace. In almost all situations, we compete against larger and financially
      stronger companies.





The
      consolidation in the U.S.- based cable assembly business has also reduced the
      number of suppliers, providing the remaining suppliers with additional
      opportunities to compete for business. This has become more important as major
      OEM customers and prospects continue to outsource more sub-assemblies, allowing
      them to concentrate on the initial development and design of products and then
      on final assembly and test. We believe that our focus on serving the medical
      and
      commercial OEM markets will enable us to continue to build our cable assembly
      business over time. Our entry into the "box build" business has added another
      capability, permitting us to offer complete solutions to customers. We believe
      these competitive advantages may help us to offset the advantages enjoyed by
      our
      larger and better-capitalized competitors.





***Research
      and development***





Our
      research and development efforts are limited to leveraging certain competencies
      as a designer and manufacturer of miniaturized interconnect systems for Case
      Western Reserve University as part of a multi-year project. In the initial
      stages of our development, we received funding for a substantial portion of
      our
      research and development efforts from government grants. For the past two years
      we have received virtually no funding from governmental agencies. We spent
      immaterial amounts on research and development in 2006 and 2005.





***Patents
      and intellectual property***





We
      have
      no patents or patent applications pending as of the date of this report. We
      continue to have certain know-how and trade secrets that we use as part of
      our
      ongoing manufacturing processes and development contracts with customers.





5


We
      currently own the trademark "MICROHELIX" that is listed on the principal
      register of the United States Patent and Trademark Office. Our intellectual
      property also includes common law trademarks, service marks and trade
      names.





***Employees***





We
      had
      129 full-time employees and 1 part-time employee in the United States as of
      December 31, 2006. In our office in Tualatin, Oregon, we had 121 full-time
      employees and 1 part-time employee, and in our office in Tucson, we had 8
      full-time employees. Additionally, we contract with a company in Mexico that
      employs 42 people who work at our factory in Nogales. None of our employees
      are
      represented by a collective bargaining agreement, nor have we experienced any
      work stoppage. We consider our relationship with our employees to be
      good.





***Where
      You Can Find More Information***





We
      are
      subject to the information requirements of the Securities Exchange Act of 1934,
      as amended. In accordance with the Securities Exchange Act, we file annual,
      quarterly and current reports, proxy statements and other information with
      the
      Securities and Exchange Commission. You may inspect and copy any document we
      file with the SEC at the SEC's public reference rooms in Washington, D.C. at
      450
      Fifth Street, N.W., Washington, D.C. 20549, at the SEC's Northeast Regional
      Office at 233 Broadway New York, NY 10279, and at the SEC's Midwest Regional
      Office at 500 West Madison Street, Chicago, Illinois 60611-2511. You may obtain
      information on the operation of the SEC's public reference rooms by calling
      (800) SEC-0330. You may also purchase copies of our SEC filings by writing
      to
      the SEC, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
      20549. Our SEC filings are also available on the SEC's website at http://www.sec.gov .
      You may
      also find additional information about us at our website at http://www.microhelix.com .
      Information contained in our website or any other website does not constitute
      a
      part of this report.





**Item
      2.** ***Description
      of Property***





We
      lease
      a 33,000 square foot facility in Tualatin, Oregon under a lease that expires
      in
      August 2008, and contains renewal options. This facility provides space for
      our
      corporate headquarters, administration, cable design and manufacturing,
      engineering, customer service personnel, inventory storage, and shipping and
      receiving.





We
      lease
      approximately 4,500 square feet of office and warehouse space in Tucson, Arizona
      under a lease that expires in August 2007 with a two year optional extension.
      This facility provides space for administration, design and manufacturing
      engineers, customer service personnel, inventory storage, and shipping and
      receiving.





We
      lease
      approximately 10,000 square feet of manufacturing, warehouse and office space
      in
      Nogales, Mexico. The lease expires in February 2010 and contains renewal
      options.





We
      believe that our facilities are adequate for our current and near-term future
      needs. Our management believes that all of our facilities are adequately covered
      by insurance. As of the date of this report, we have no investments in publicly
      traded securities, real estate, mortgages or securities of or interests in
      persons engaged in real estate activities.





**Item
      3.** ***Legal
      Proceedings***





From
      time
      to time we may become involved in ordinary, routine, or regulatory legal
      proceedings incidental to our business. As of the date of this report, we are
      not engaged in any legal proceedings nor are we aware of any pending or
      threatened legal proceedings that, singly or in the aggregate, could have a
      material adverse effect on our business, financial condition or results of
      operations.





6


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





Our
      2006
      annual meeting of shareholders was held on August 17, 2006 for the purpose
      of
      electing directors. The following votes were cast for or withheld as to each
      of
      the six nominees for the position of director:





**Director
                Nominee**
            
            **Votes
                For**
            
            **Votes
                Withheld**James
                M. Williams
            
            
            10,432,837
            
            
            0Tyram
                H. Pettit
            
            
            10,419,770
            
            
            13,067Terrence
                A. Rixford
            
            
            10,418,236
            
            
            14,601John
                L. Crary
            
            
            10,432,837
            
            
            0Marti
                D. Lundy
            
            
            10,395,609
            
            
            37,228James
                M. Thornton
            
            
            10,432,837
            
            
            0





All
      of
      the nominees for directors were elected by the shareholders. There were no
      abstentions or broker non-votes with regard to this matter.





On
      August
      17, 2006, the holders of the Series B Preferred Stock, voting as a separate
      class at our 2006 Annual Meeting of shareholders, voted to authorize conversion
      of their shares of Series B Preferred Stock into shares of our Common Stock.
      The
      Company's Amended and Restated Articles of Incorporation ("Articles") provided
      that holders of two-thirds of the outstanding shares of Series B Preferred
      Stock
      could authorize the conversion of all the outstanding shares of Series B
      Preferred Stock into Common Stock at any time after the issuance of the
      Series B Preferred Stock. Upon approval, the Articles further provided that
      each share of Series B Preferred Stock would be automatically converted into
      shares of Common Stock at the conversion rate in effect on the date approved
      by
      the Series B Preferred Stock holders. The conversion rate in effect on August
      17, 2006 provided that each share of Series B Preferred Stock would be converted
      into four shares of Common Stock. No shares of Series B Preferred are
      outstanding or authorized to be issued as of the date of this
      report.




7


**PART
      II**





**Item
      5.** ***Market
      for Common Equity and Related Shareholder Matters***





Our
      Common Stock trades on the NASDAQ OTC Bulletin Board under the symbol MHLX.OB.
      Our Class B Warrants traded on the NASDAQ OTC Bulletin Board until their
      expiration on November 16, 2006. The table below sets forth for the periods
      indicated the high and low bid prices for the Common Stock as reported by the
      NASDAQ OTC Bulletin Board from January 1, 2005 through December 31,
      2006. The high and low bid prices for the Class B Warrants, as reported by
      the
      NASDAQ OTC Bulletin Board from January 1, 2005 through November 16, 2006 are
      also set forth below. The prices shown represent inter-dealer prices without
      adjustments for retail mark-ups, mark-downs or commissions and consequently
      do
      not necessarily reflect actual transactions.





**Common
      Stock "MHLX.OB"**





**2006
                Fiscal Quarters**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            0.58
            
            $
            0.40Second
                Quarter
            
            $
            0.48
            
            $
            0.35Third
                Quarter
            
            $
            0.45
            
            $
            0.35Fourth
                Quarter
            
            $
            0.37
            
            $
            0.25




**2005
                Fiscal Quarters**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            0.18
            
            $
            0.18Second
                Quarter
            
            $
            0.43
            
            $
            0.31Third
                Quarter
            
            $
            0.30
            
            $
            0.29Fourth
                Quarter
            
            $
            0.58
            
            $
            0.25





**Class
      B Warrant "MHLXZ.OB"**





**2006
                Fiscal Quarters**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            .055
            
            $
            010Second
                Quarter
            
            $
            .050
            
            $
            .0050Third
                Quarter
            
            $
            .140
            
            $
            .005Fourth
                Quarter
            
            $
            .070
            
            $
            .001





**2005
                Fiscal Quarters**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            0.04
            
            $
            0.01Second
                Quarter
            
            $
            0.04
            
            $
            0.005Third
                Quarter
            
            $
            0.03
            
            $
            0.015Fourth
                Quarter
            
            $
            0.05
            
            $
            0.015





Holders
      of shares of Common Stock are entitled to receive such dividends, if any, as
      may
      be declared by our Board of Directors out of funds legally available therefore
      and, upon our liquidation, dissolution or winding up are entitled to share
      ratably in all net assets available for distribution to such shareholders.
      We
      have not, to date, declared or paid any cash dividends.





8


**Series
      C Preferred Stock**





During
      2006, the Company issued 279,070 shares of Series C Preferred Stock to an
      accredited investor in private placements. On October 19, 2006 the Company
      sold
      139,535 shares of Series C Preferred Stock at $2.15 per share for total gross
      cash proceeds of $300,000. On November 2, 2006, the Company sold 139,535 shares
      of Series C Preferred Stock at $2.15 per share for total gross cash proceeds
      of
      $300,000. The proceeds of the October and November 2006 sales of Series C
      Preferred Stock were used for working capital.





The
      shares of Series C Preferred Stock were issued in reliance on Regulation D
      promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
      and the Company obtained representations from the investor as to its status
      as
      an "accredited investor" as that term is defined in Regulation D.





Each
      share of Series C Preferred Stock is convertible into 10 shares of Common Stock
      (subject to adjustment for stock splits, stock dividends, reclassifications
      and
      the like). The Company has granted demand and piggy-back registration rights
      to
      the holders of Series C Preferred Stock with respect to the underlying shares
      of
      Common Stock obtainable upon conversion.





**Shareholders
      of Record**





As
      of
      March 31, 2007, there were approximately 60 shareholders of record of the
      Company’s Common Stock.





**Securities
      Authorized for Issuance Under Equity Compensation Plans**





The
      Company’s Board of Directors determined in 2005 that the cost of maintaining the
      equity compensation plans outweighed the perceived benefits received from the
      Company’s employees under those plans. The Company expects that for the
      foreseeable future any equity compensation grants to the employees and directors
      will be in the form of grants of shares of Common Stock. Such grants may be
      restricted or unrestricted.





**Item
      6.** ***Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations***





**Overview**





microHelix
      is a manufacturer of custom cable assemblies for the medical and commercial
      OEM
      markets. We serve a segment of the quick turn, high mix, low volume cable
      assembly market generally referred to as the custom cable assembly market.
      Typical cable assemblies include cable, connectors, contacts, flex reliefs,
      housings and PCBs and are critical sub-components of medical devices and
      commercial electronic systems. We operate our business in a single operating
      segment through two divisions: our Moore division and our MicroCoax division.





On
      April
      8, 2005, we acquired 100% of the outstanding stock of Moore. Moore,
      headquartered in Tualatin, Oregon, was founded in 1978 and is a manufacturer
      of
      customized cable assemblies, sub-assemblies, wire harnesses and
      electro-mechanical assemblies. Moore serves the cable assembly requirements
      of
      major medical equipment manufacturers and commercial equipment manufacturers.
      Moore also does "box builds" for commercial and aerospace customers. Many major
      OEMs outsource their cable assembly work so they can focus on final assembly
      and
      sale of their products. Moore's competitive advantage has been driven by its
      ability to partner with its customers, support complex projects with strong
      in-house engineering resources, provide low-cost assembly services and offer
      turn-key solutions for custom cable assembly projects. Custom cable assembly
      work is generally not well-suited for transfer to offshore operations for three
      principal reasons: (1) low unit volume; (2) rapid turn (i.e.
      accelerated delivery schedule) and (3) frequent engineering changes. We
      operate Moore as a wholly owned subsidiary.





Our
      MicroCoax division, headquartered in Tucson, Arizona, develops and manufactures
      for OEM customers cable assemblies that are used in applications such as medical
      ultrasound probes, laparoscopes, catheters and flaw detection ultrasound.





9


microHelix
      began in 1991 in Portland, Oregon as a grant and private equity funded research
      company, formed to develop leading edge manufacturing techniques for medical
      device interconnect systems. In the years that followed we established a
      foundation of proprietary processes and intellectual property in the areas
      of
      ultra-thin wall pinhole free wire, micro-interconnect technology, advanced
      laser
      micro-machining, specialty connectors and flex circuits. We began manufacturing
      operations in 1998, designing and building cable assemblies and micro-electric
      interconnects for use in the medical device and commercial industries.





In
      April
      1999, we acquired Key-Tech, a privately held Portland-based designer and
      manufacturer of interconnect systems for the medical and commercial markets.
      In
      addition to acquiring a customer base, we enhanced our manufacturing and
      engineering capabilities.





In
      December 1999, we acquired the assets of the medical ultrasound division of
      Alcatel NA Cable Systems, Inc., the United States subsidiary of one of the
      largest wire and cable manufacturers in the world, which designs and
      manufactures cable assemblies for use in non-invasive ultrasound probes and
      systems. In connection with this acquisition, we acquired facilities and
      employees in Tucson, Arizona and Nogales, Mexico.





We
      completed our initial public offering in November 2001. Our Common Stock
      currently trades on the NASDAQ OTC Bulletin Board under the symbol MHLX.OB.





In
      April
      2004, we sold the assets of our wire and cable division to Advanced
      Neuromodulation Systems, Inc. ("ANS"), and in April 2005 we acquired all of
      the
      stock of Moore, a manufacturer of customized cable assemblies, sub-assemblies,
      wire harnesses and electro-mechanical assemblies.





We
      have
      incurred significant losses since inception and those losses have continued
      following our initial public offering. In our business we have had to rely
      on a
      relatively small number of OEMs for the majority of our sales. Short term
      changes in the OEM's demand schedule have made our expenses and cash
      requirements uncertain. We have not been successful in achieving profitability
      due to in part the unpredictability of the OEM requirements. During the past
      several years we have tried to broaden the OEM customer base, in part through
      our acquisition of Moore.





**Critical
      Accounting Policies and Estimates**





The
      discussion and analysis of our financial condition and results of operations
      is
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. We
      evaluate our estimates on an on-going basis, including those related to product
      returns, bad debts, inventories, prepaid expenses, income taxes, warranty
      obligations, and other contingencies. We base our estimates on historical
      experience and on various other assumptions we believe are reasonable under
      the
      circumstances, the results of which form the basis for making judgments about
      the carrying value of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. We believe the following critical accounting policies
      and related judgments and estimates affect the preparation of our consolidated
      financial statements.





*Revenue
      Recognition* —We
      recognize revenue from commercial sales of cables, connectors, customized cable
      assemblies, wire harnesses, and mechanical assemblies when title passes, which
      is upon shipment. Commercial sales are made F.O.B. point of shipment. The
      products must be physically shipped from the factory. In some cases, tooling
      that has been paid for by a customer may remain at our facility or at a vendor's
      facility. Returns are limited to nonconforming products and the volume of
      returns has been insignificant. We do not establish reserves for returns because
      returns have been minimal.





*Goodwill
      and Intangible Assets* —We
      follow the provisions of Statement of Financial Accounting Standards ("SFAS")
      No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires an annual
      impairment test for goodwill and intangible assets with indefinite lives. Under
      the provisions of SFAS No. 142, the first step of the impairment test requires
      that we determine the fair value of each reporting unit, and compare the fair
      value to the reporting unit's carry amount. To the extent a reporting unit's
      carrying amount exceeds its fair value, an indication exists that the reporting
      unit's goodwill may be impaired and we must perform a second more detailed
      impairment assessment. The second impairment assessment involves allocating
      the
      reporting unit's fair value to all of its recognized and unrecognized assets
      and
      liabilities in order to determine the implied fair value of the reporting unit's
      goodwill as of the assessment date. The implied fair value of the reporting
      unit's goodwill is then compared to the carrying amount of goodwill to quantify
      an impairment charge as of the assessment date. We perform our annual impairment
      test during our fiscal first quarter unless events or circumstance indicate
      impairment may have occurred before that time.





10


Development
      contracts are structured on a cost reimbursement or cost plus basis. Revenue
      from development contracts for non-recurring engineering is recognized using
      the
      percentage of completion method as time and materials costs are incurred.
      Revenue from contracts for the production of prototypes is recognized when
      the
      title passes, which is upon shipment. In some cases, customers make pre-payments
      for product and services that are classified as deferred revenue until the
      services are performed, at which time they are recognized as revenue. We had
      no
      deferred revenue at December 31, 2006 and $163,456 of deferred revenue at
      December 31, 2005.





Government
      grant sales are recognized as time and materials costs are incurred using the
      percentage of completion method. The government generally provides grants to
      perform specific research and is not the ultimate customer. We had no revenue
      in
      either 2005 or 2006 from government grants.





**Results
      of operations**





The
      following table presents our historical operating results for the periods
      indicated as a percentage of sales:





**Year
                Ended December 31,****2005**
            
            **2006**Sales
            
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            92
            
            
            91Gross
                profit (loss)
            
            
            8
            
            
            9Operating
                expenses:Research and development
            
            
            0
            
            
            0Sales and marketing
            
            
            6
            
            
            4General and administrative
            
            
            20
            
            
            12Total operating expenses
            
            
            26
            
            
            16Loss
                from operations
            
            
            (18
            )
            
            (7
            )Other
                income (expense)
            
            
            (2
            )
            
            (8
            )Net loss from continuing operations
            
            
            (20
            )
            
            (15
            )Income
                tax benefit
            
            
            2
            
            
            2Net
                loss
            
            
            (18
            )%
            
            (13
            )%





***Year
      ended December 31, 2006 compared with year ended December 31,
      2005***





One
      principal event affected the Company’s financial results in 2006 and 2005. On
      April 8, 2005 the Company acquired 100% of the outstanding stock of Moore,
      a
      manufacturer of customized cable assemblies, sub-assemblies, wire harnesses
      and
      electro-mechanical assemblies.





11


Total
      sales in 2006 were $15,281,564, compared to $9,164,242 in 2005, an increase
      of
      67%. This increase is due to including a full year of Moore revenues in 2006
      (vs. approximately nine months of Moore revenue in 2005) and increased demand
      for the Company’s products. Total sales for the MicroCoax division in 2006 were
      $2,307,311 compared to $1,863,566 in 2005, an increase of 24%. The increase
      in
      MicroCoax division sales resulted from an increase in demand from the medical
      and commercial ultrasound OEM customers.





Gross
      profit in 2006 was $1,391,418 compared to gross profit of $703,037 in 2005.
      The
      improvement in gross profit resulted primarily from including a full year of
      Moore gross profit and cost management at the Moore division. The MicroCoax
      division had negative gross profit of $156,961 in 2006 and $113,363 in 2005.





Total
      operating expenses in 2006 were $2,370,388 compared to $2,360,441 in
      2005.





Sales
      and
      marketing expenses for 2006 were $551,016 compared to $497,001 in 2005, an
      increase of 11%. This increase was primarily a result of including a full year
      of Moore sales and marketing expenses.





General
      and administrative expenses for 2006 were $1,819,372 compared to $1,863,440
      in
      2005.





Net
      other
      expense for 2006 was $1,197,783 compared to net other expense of $179,556 for
      2005. The difference was primarily a result of an impairment of the goodwill
      and
      increased interest expense related to the additional borrowing during
      2006.





Loss
      before provision (benefit) for income taxes for 2006 was $2,176,753 compared
      to
      $1,836,960 for 2005.





Dividends
      on the Series B Preferred Stock were $260,496 in 2006 and $253,125 in 2005,
      and
      were paid in shares of our Common Stock in 2006. Net loss available to common
      shareholders was $2,876,744 in 2006 and $1,956,555 in 2005. The Series C
      Preferred Stock had a dividend for the value of the warrants and the beneficial
      conversion feature in the amount of $533,000.





***Liquidity
      and Capital Resources***





As
      of
      December 31, 2006, we had $40,680 of cash and cash equivalents. Cash used in
      operating activities in 2006 was $1,181,124 compared to $1,274,811 used in
      2005.
      The net cash used in operations of $1,181,124 included an increase in accounts
      receivable of $303,377and an increase in inventories of $624,741 and was
      partially offset by $661,231 in depreciation and amortization, $887,853 of
      impairment. and an increase of $322,711 in accounts payable. The decrease of
      $17,632 in the cash balance during this reporting period represents the net
      cash
      used in operations of $1,181,124 plus $279,399 used in investing activities,
      offset by $1,442,891 of cash provided from financing activities.




As
      of
      December 31, 2006, we had a $2,000,000 line of credit for working capital,
      secured by accounts receivable and inventory. As of December 31, 2006, there
      was
      $1,711,528 outstanding on the line of credit and our availability on the line
      of
      credit was $288,472. The line of credit expired on April 7, 2007, however there
      is an auto-renewal clause within the loan agreement that allows for renewal.
      Management is in the process of formalizing and completing the renewal (See
      Note
      5).





As
      of
      December 31, 2006, we had no purchase orders outstanding for capital equipment.





The Company subleased the
      facility in Portland to ANS from April 21, 2005 through November 30, 2005,
      the
      expiration date of the original lease.





On
      April
      8, 2005, we borrowed $250,000 from CTK Capital Corporation at an annual interest
      rate of 15%. The loan proceeds were used to complete the Moore acquisition.
      Three $50,000 principal payments were made on April 18, April 25 and May 3,
      2005 along with accrued interest. The balance of the note was converted into
      100,000 newly issued shares of Series B Preferred Stock at $1.00 per share
      on
      October 28, 2005. Accrued interest totaling $8,501 was paid in cash to CTK
      Capital Corporation on October 28, 2005. CTK Capital Corporation is a Nevada
      corporation controlled by James M. Williams, one of our directors.





12


During
      2005, we issued 2,750,000 shares of Series B Preferred Stock to accredited
      investors in private placements. On April 8, 2005 we sold 2,000,000 shares
      of
      Series B Preferred Stock at $1.00 per share for total gross cash proceeds of
      $2.0 million, which we used as partial consideration for the acquisition of
      Moore. On April 8, 2005 we also issued 250,000 shares of Series B Preferred
      Stock to a selling shareholder of Moore as partial consideration in the
      acquisition of Moore.





On
      October 28, 2005 we sold 310,000 shares of Series B Preferred Stock at $1.00
      per
      share. We received total gross cash proceeds of $210,000. The remaining $100,000
      of the purchase price for the shares was paid by conversion of the outstanding
      principal on a promissory note owed by microHelix to an affiliate of
      James M. Williams, one of our directors. On December 7, 2005 we sold
      190,000 shares of Series B Preferred Stock at $1.00 per share for total gross
      cash proceeds of $190,000. The proceeds of the October and December 2005 sales
      of Series B Preferred Stock were used for working capital.





At
      our
      Annual Meeting of Shareholders on August 17, 2006, the holders of Series B
      Preferred Stock voted to convert each share of Series B Preferred Stock at
      the
      then-applicable conversion rate of four shares of Common Stock.





On
      October 19, 2006 and November 2, 2006, the Company issued a total of 279,070
      shares of Series C Preferred Stock to MH Financial Associates, LLC (“MH
      Financial”) at $2.15 per share for total gross cash proceeds of $600,000. The
      proceeds from the sale of Series C Preferred Stock were used for working
      capital.





On
      April
      8, 2005, we issued a promissory note (the "Original Note") in the amount of
      $1,250,000 to Marti D. Lundy as part of the Moore acquisition. The Original
      Note
      was purchased from Ms. Lundy by MH Financial on October 19, 2006 in connection
      with the purchase by MH Financial of shares of our Series C Preferred Stock.
      James M. Williams, one of our directors, is an investor in MH Financial. MH
      Financial is an affiliate of Aequitas Capital Management, Inc., which serves
      as
      our exclusive financial advisor.





On
      March
      12, 2007, the Company obtained an additional loan from MH Financial of $750,000.
      The Original Note was amended (the "Amended Note") to reflect a revised
      principal amount of $1,778,964, which bears interest at a rate of 12% per annum
      ("Current Interest"). Additional interest accrues on the Amended Note at a
      rate
      of 8% per annum, which is compounded quarterly and is payable at maturity
      ("Deferred Interest"). The Company will make separate payments with respect
      to
      $1,006,086 of the principal under the Original Note ("Loan 1") and with respect
      to $750,000 of the principal added in the Amended Note ("Loan 2"). Beginning
      April 19, 2007 and on the same day of each subsequent month, microHelix
      will pay $20,000 per month to be applied to Current Interest and principal
      on
      Loan 1 and will pay $7,500 per month of Current Interest on Loan 2. On
      September 30, 2007, the Company will make an additional payment of accrued
      Current Interest through that date with regard to Loan 2. Beginning on
      October 31, 2007, and on the last day of each subsequent month through and
      including May 31, 2008, the Company will pay $87,555 per month to be
      applied against the Current Interest and principal balance of Loan 2. All
      amounts outstanding under the Amended Note, including the Deferred Interest,
      are
      due and payable on June 30, 2008.





The
      Amended Note continues to be secured by a lien against substantially all of
      the
      assets of microHelix and Moore, including all of the outstanding common stock
      of
      Moore. MH Financial may accelerate all amounts due under the Amended Note in
      the
      event of default. In addition, all amounts outstanding under the Note are due
      and payable upon the sale of all or substantially all of our assets to anyone
      other than MH Financial, or upon the transfer of ownership of more than 50%
      of
      our stock.





The
      Company used $153,698 of the proceeds from Loan 2 of the Amended Note to pay
      in
      full a promissory note previously issued to James M. Williams, one of the
      Company’s directors. The remaining proceeds were used to make payments to
      certain vendors and to fund operating costs. The Amended Note replaces and
      supersedes the Original Note. In connection with Loan 2, microHelix issued
      a
      warrant (the "Note Warrant") to MH Financial to purchase 10,000,000 shares
      of
      Common Stock at an initial exercise price of $0.001 per share. The Note Warrant
      expires on March 11, 2010. In connection with the Amended Note, the right to
      convert the Original Note into shares of our Common Stock was
      deleted.





13


As
      additional consideration to MH Financial for extending additional credit to
      the
      Company in connection with the Amended Note, our Board of Directors approved
      (subject to approval by shareholders) the sale (the "Sale") to MH Financial
      or
      its assigns all of the assets of the MicroCoax and Moore Electronics divisions,
      which comprise substantially all of our operating assets, and all issued and
      outstanding shares of Moore. The closing date for the sale would be not later
      than September 30, 2007. The Sale is subject to the following terms and
      conditions:





(a)
            The
                purchase price for the Sale would consist of the release of us from
                liability under the Amended Note, including all amendments and
                modifications thereto, and assumption by the purchaser or by Moore
                of all
                of our loans, debts and payables.





(b)
            All
                of our outstanding Series C Preferred Stock (which is currently held
                by MH
                Financial) is converted into shares of our Common Stock before or
                concurrently with the closing of the
                Sale.





(c)
            Our
                Board of Directors retains the fiduciary right to obtain a better
                offer
                for the purchase of us and/or our assets (an "Alternative Sale"),
                provided
                that no Event of Default (as defined in the Amended Note) has occurred
                and
                is continuing, and, subject to MH Financial's right to close the
                Sale as
                set forth in (d) below, all principal, interest and other amounts
                due
                under the Amended Note are paid in full before the closing of the
                Sale and
                contemporaneously with the closing of the Alternative
                Sale.





(d)
            MH
                Financial or its assigns may close the Sale at any time following
                approval
                of the Sale by our shareholders. Following such approval, MH Financial
                may
                give us notice of its intent to close the Sale. If we have not closed
                an
                Alternative Sale within 10 days following MH Financial's notice,
                we and MH
                Financial shall proceed to close the Sale within 20 days following
                MH
                Financial's notice or such longer period as is mutually
                agreed.




We
      have
      agreed to use commercially reasonable efforts to obtain shareholder approval
      at
      our 2007 annual meeting for the Sale and an increase of our authorized capital
      stock to 100 million shares of Common Stock and 10 million shares of Preferred
      Stock. Exercise of the warrants issued to MH Financial in connection with the
      Amended Note and the Forbearance Agreement (defined below) requires such an
      increase in our authorized capital, and their exercise is conditioned upon
      such
      increase in authorized capital. Shareholders holding approximately 52.7% of
      our
      voting capital stock have executed and delivered to MH Financial a voting
      agreement under which they have agreed to vote in favor of the Sale (subject
      to
      our Board of Director's fiduciary right to accept an Alternative Sale) and
      to
      approve the increase in authorized capital stock. We anticipate that we will
      mail a proxy statement to our shareholders during the fourth week of May 2007
      and will hold our annual meeting on or about July 15, 2007.





On
      March
      12, 2007 we were in default under the Original Loan. On that date, we and MH
      Financial entered into a Forbearance and Waiver Agreement (the "Forbearance
      Agreement") under which MH Financial agreed to forbear with respect to such
      defaults and agreed to waive certain of our obligations to register shares
      of
      Common Stock owned by MH Financial pursuant to the Registration Rights Agreement
      dated October 19, 2006 between us and MH Financial. As consideration for
      the Forbearance Agreement, we issued a warrant to MH Financial (the "Forbearance
      Warrant") to purchase 2,900,000 shares of Common Stock at an exercise price
      of
      $0.001 per share. The Forbearance Warrant expires on March 11, 2010. As
      additional consideration for the Forbearance Agreement, we also agreed to reduce
      the exercise price to $0.001 per share for warrants issued to MH Financial
      pursuant to the Original Note for a total of 2,296,532 shares of our Common
      Stock. We also agreed to issue future warrants under the Amended Note with
      an
      exercise price of $0.001 per share. After giving effect to the additional
      warrants issued in connection with the Amended Note and the Forbearance
      Agreement, MH Financial is the beneficial holder of approximately 55% of our
      voting capital stock.





March
      12,
      2007, the Company issued warrants to purchase a total of 12,900,000 shares
      of
      Common Stock to MH Financial. The warrants were issued in connection with MH
      Financial’s additional $750,000 loan to the Company. The warrants have an
      exercise price of $0.001 per share, and expire on March 11, 2010.





14


On
      March
      12, 2007, we issued a warrant to purchase 1,000,000 shares of our Common Stock
      with an exercise price of $0.001 per share to Steve Ashton in connection with
      this appointment as President and Chief Executive Officer of microHelix and
      of
      Moore.





On
      April
      1, 2007, we issued a warrant to purchase 96,896 shares of our Common Stock
      with
      an exercise price of $0.001 per share to MH Financial pursuant to the terms
      of
      the Amended Note.





In
      all of
      the above cases, shares of Series B Preferred Stock and Series C Preferred
      Stock
      and warrants to purchase Common Stock were issued in reliance on Regulation
      D
      promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
      and we obtained representations from the investors as to their status as
      "accredited investors" as that term is defined in Regulation D.





**Risk
      Factors**





Following
      are the key risk factors that have affected us in the past and could in the
      future materially impact our business, financial condition or results of
      operations. In addition, if any of these risks occur, the market price of our
      securities could decline and investors could lose all or part of their
      investment:





***Our
      potential need for additional capital***





We
      may
      need additional capital in order to continue our operations. It may be difficult
      or impossible for us to raise any additional capital on terms beneficial to
      our
      shareholders, or at all. If we are unable to generate sufficient cash flows
      from
      operations to pay our obligations as they come due, or if we are unable to
      obtain additional needed funds through loans or equity offerings, we may be
      unable to continue operations.





***Our
      on-going business plan is based on assumptions that could prove to be incorrect,
      which could mean that we may be unable to expand as planned and could cause
      us
      to invest in areas that do not result in new sales.***





The
      key
      element of our on-going business plan involves the expansion of our cable
      assembly business and customer base, in part through our acquisition in April
      2005 of Moore. This effort intends to capitalize on what we expect to be new
      opportunities in the medical and commercial equipment markets and our ability
      to
      expand our "box build" business. The success of our plan depends on numerous
      assumptions that we cannot be sure are justified. If any of our key assumptions
      are incorrect, we could be unable to expand our business as we currently
      anticipate and we may make investments in product development and/or marketing
      efforts that do not result in new product sales. Our assumptions include the
      following:





·
            demand
                for sophisticated "next generation" diagnostic systems will continue
                to
                increase;





·
            our
                cable assembly capabilities that serve both medical and commercial
                OEMs
                will efficiently address market needs as they develop and we will
                remain a
                competitive and reliable supplier;





·
            OEMs
                with whom we have or may develop relationships will be successful
                in
                developing their technologies and addressing their markets and will
                remain
                agreeable to outsource some or all of these cable assemblies;
                and





·
            other
                companies will not expand their cable assembly capabilities that
                offer
                technological or economic advantages over ours, whether inside North
                America or elsewhere.


15


***The
      development of products by our medical device OEM customers may be subject
      to
      review by the U.S. Food and Drug Administration and other regulatory agencies,
      which means that new cable assemblies provided by us that are designed as part
      of these systems may not be sold in commercial quantities for a long time,
      if
      ever.***




Our
      sales
      process involves designing our cable assemblies into both existing and new
      OEM
      devices. The sale of any new medical device or other product in commercial
      quantities may be preceded by a pre-production design phase in which we produce
      various cable assembly prototypes based on a collaboration with the customer's
      engineering and product design staff. Medical devices, in particular, are
      subject to regulation and licensing, usually by the FDA, and sometimes by
      comparable foreign regulatory bodies, which increases the cost and time required
      for the development, marketing and sale of these systems. We expect that the
      sales cycle for most of our medical cable assemblies will take three to 12
      months to develop and validate for medical devices and one to three months
      for a
      commercial cable assembly. We are generally paid for prototypes during the
      design phase but do not expect such payments to contribute significantly to
      our
      revenues. If either our proposed cable assembly solution or the overall device
      is not approved or is not successfully brought to market in a timely manner,
      the
      failure to do so will have a direct and adverse impact on our future sales
      on
      these projects.





***A
      large portion of our sales is concentrated with a few customers that could
      make
      fluctuations in revenue and earnings more severe.***





Sales
      to
      our largest customer, Medtronic ERS, accounted for approximately
      28% of our
      total sales in 2006. Although we provide cable assemblies and/or other services
      to industry-leading OEMs and to several specialized competitors, the loss of
      a
      significant customer would have a material adverse impact on us. Concentration
      in our customer base may make fluctuations in revenue and earnings more severe
      and make business planning more difficult. In January 2007, Medtronic's
      Physio-Control, Inc. subsidiary, microHelix's customer, suspended the shipment
      of products manufactured at its Redmond, Washington facility to customers in
      the
      United States, which has had a material adverse impact on us.





***Large
      OEM customers can change their demand on short notice, further adding to the
      unpredictability of our quarterly sales and earnings.***




Our
      quarterly results have in the past and may in the future vary due to the lack
      of
      dependable long-term demand forecasts from our larger OEM customers. In addition
      to this risk, many of our OEM customers have the right to change their demand
      schedule, either up or down, within a relatively short time horizon. These
      changes may result in us incurring additional working capital costs and causing
      increased manufacturing expenses due to these short-term fluctuations. In
      particular, our quarterly operating results have in the past fluctuated as
      a
      result of some of the larger OEM customers changing their orders within a fiscal
      quarter. Our expense levels, to a large extent, are based on shipment
      expectations in the quarter. If sales levels fall below these expectations,
      operating results are likely to be adversely affected. Although we have tried
      to
      lessen our dependency on a few large customers, this is the nature of the OEM
      cable assembly industry that we serve and we can provide no assurance that
      we
      will be able to materially alter this dependency in the immediate future, if
      at
      all.




***In
      our highly competitive markets, many of our potential competitors have resources
      that we lack, which could impair our relationships with actual or potential
      customers.***





Our
      markets are highly competitive. This is particularly true in the area of cable
      assemblies sold to OEM customers. Competition is based on technology,
      established relationships, quality of support, location of facilities and price.
      Several of our competitors have a longer history of operations and more
      established relationships with actual and potential customers than we have.
      In
      addition, most of our OEM customers choose to concentrate their cable assembly
      business with one or two suppliers and may have certain geographic preferences.
      The combination of these factors may have a direct and adverse impact on our
      ability to serve these customers in the future. We believe that our principal
      competitive advantages are: (1) established and efficient manufacturing
      operations in Tualatin, Oregon, (2) lower cost manufacturing in Nogales,
      Mexico; (3) consistent quality record; (4) highly responsive to
      customers with quick turn capability; (5) competitive pricing, and
      (6) long term relationships with industry-leading customers. Despite these
      advantages, many of our competitors and potential competitors have technological
      and financial resources and established business relationships that may afford
      them a competitive advantage.





16


***Intellectual
      Property***




We
      do not
      currently have any patents granted or pending and have no plans to make patent
      applications in the future. If however we apply for patents for some of our
      products, the patents may not be granted or may not provide adequate protection
      of our intellectual property. We intend to rely on copyrights, trademarks,
      trade
      secret laws and contractual obligations with employees and third parties to
      protect our intellectual property. Despite efforts to protect our intellectual
      property, unauthorized parties may attempt to copy aspects of our processes
      and
      products or obtain and use information that we regard as proprietary. Our
      efforts to protect our intellectual property from third-party discovery and
      infringement may be insufficient and third parties may independently develop
      technologies similar to ours, duplicate our products or design around any
      patents we may obtain. In addition, third parties may assert that our products
      and technologies infringe their intellectual property.




***Growth
      Management***




The
      execution necessary for us to successfully implement our business plan requires
      an effective planning and management process. We anticipate growth and will
      be
      required to continually improve our financial and management controls, reporting
      systems and procedures on a timely basis, and expand, train and manage our
      personnel. There can be no assurance that our systems, procedures or controls
      will be adequate to support our operations or that our management will be able
      to achieve the execution necessary to successfully implement our business
      plan.





We
      have
      recently converted substantially all of our operational and financial functions
      to a new enterprise resource planning ("ERP") software system. The ERP system
      impacts every aspect of our operations, including production, engineering,
      finance, and sales. Although we have taken steps we believe are reasonable
      to
      ensure a successful conversion of our operations to the ERP system, we can
      provide no assurances that the conversion will be successful or that the ERP
      system will achieve its expected benefits. Failure to achieve a successful
      conversion or to obtain the expected benefits of the ERP system could have
      an
      adverse material effect on us.





***Dependence
      on Key Personnel***





Our
      success depends on our ability to identify, attract and retain highly qualified
      personnel and the failure to do so could have a material adverse effect on
      us.





**Item
      7.** ***Consolidated
      Financial Statements***





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Page**Report
                of Peterson Sullivan PLCC - Independent Registered Public Accounting
                Firm
            19Report
                of Stonefield Josephson, Inc. - Independent Registered Public Accounting
                Firm
            18Consolidated
                Balance Sheet as of December 31, 2006
            20Consolidated
                Statements of Operations for the Years Ended December 31, 2005 and
                2006
            21Consolidated
                Statements of Shareholders' Deficit for the Years Ended December 31,
                2005 and 2006
            22Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2005 and
                2006
            23Notes
                to Consolidated Financial Statements
            25





17


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  To
        the
        Board of Directors
 microHelix,
        Inc.
 Tualatin,
        Oregon
 
 We
        have
        audited the accompanying consolidated balance sheet of microHelix, Inc. and
        Subsidiary, ("the Company") as of December 31, 2006, and the related
        consolidated statements of operations, stockholders' equity (deficit), and
        cash
        flows for the year ended December 31, 2006. These consolidated financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these consolidated financial
        statements based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company has determined
        that it
        is not required to have, nor were we engaged to perform, an audit of its
        internal control over financial reporting. Our audit included consideration
        of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the Company's internal control
        over financial reporting. Accordingly, we express no such opinion. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements. An audit also includes assessing
        the
        accounting principles used and significant estimates made by management,
        as well
        as evaluating the overall financial statement presentation. We believe that
        our
        audit provides a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of microHelix, Inc. and
        Subsidiary, as of December 31, 2006, and the results of their operations
        and their cash flows for the year ended December 31, 2006, in conformity
        with accounting principles generally accepted in the United States.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        the
        Company will continue as a going concern. As discussed in Note 1 to the
        consolidated financial statements, the Company has experienced recurring
        losses
        and negative cash flows from operations. This raises substantial doubt about
        the
        Company's ability to continue as a going concern. Management's plans regarding
        this matter are also described in Note 1. The financial statements do not
        include any adjustments that might result from the outcome of this
        uncertainty.
 
 /S/
        PETERSON SULLIVAN PLLC
 
 Seattle,
        Washington
 May
        16,
        2007
  18


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
        Board
        of Directors and Stockholders
 Of
        microHelix, Inc.
 
 We
        have
        audited the accompanying consolidated statements of operations, stockholders'
        equity and cash flows for the year ended December 31, 2005. These financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. We were not engaged to perform
        an
        audit of the Company's internal control over financial reporting. Our audit
        included consideration of internal control over financial reporting as a
        basis
        for designing audit procedures that are appropriate in the circumstances,
        but
        not for the purpose of expressing an opinion on the effectiveness of the
        Company's internal control over financial reporting. Accordingly, we express
        no
        such opinion. An audit also includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial statements, assessing
        the accounting principles used and significant estimates made by management,
        as
        well as evaluating the overall financial statement presentation. We believe
        that
        our audit provides a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated results of operations and cash
        flows
        of microHelix, Inc. for the year ended December 31, 2005, in conformity with
        accounting principles generally accepted in the United States of
        America.
 
  The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 1 to the
        consolidated financial statements, the Company has incurred operating losses
        since inception, has an accumulated deficit of $22,593,545 and used cash
        for
        operating activities of $1,490,200 during the year ended December 31, 2005,
        and
        has a working capital deficiency. These conditions raise substantial doubt
        about
        its ability to continue as a going concern. Management’s plans regarding those
        matters also are described in Note 1. The consolidated financial statements
        do
        not include any adjustments that might result from the outcome of this
        uncertainty.
  
 /s/
        Stonefield Josephson, Inc.
 
 Stonefield
        Josephson, Inc.
 Certified
        Public Accountants
 
 April
        10,
        2006




19


**microHelix,
      Inc.**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2006**


**Assets**Current
                  Assets:Cash
              
              $
              40,680Accounts
                  receivable, net of allowance of $3,206
              
              
              1,905,660Inventories,
                  net
              
              
              1,600,403Prepaid
                  expenses and other current assets
              
              
              43,692Total
                  current assets
              
              
              3,590,435Property
                  and equipment, net
              
              
              904,231Intangible
                  assets
              
              
              350,112Goodwill
              
              
              732,365Total
                  assets
              
              $
              5,577,143**Liabilities
                  and Shareholders’ Deficit**Current
                  Liabilities:Checks
                  issued in excess of bank balances
              
              $
              129,397Accounts
                  payable
              
              
              1,633,288Accounts
                  payable-related parties
              
              
              8,232Accrued
                  liabilities
              
              
              609,599Line
                  of credit
              
              
              1,897,432Current
                  maturities of notes payable
              
              
              347,938Note
                  payable to shareholder
              
              
              150,000Total
                  current liabilities
              
              
              4,775,886Long-term
                  LiabilitiesNotes
                  Payable, less current maturities, net of debt discounts
              
              
              801,262Deferred
                  tax liability
              
              
              298,145Total
                  long-term liabilities
              
              
              1,099,407Total
                  liabilities
              
              
              5,875,293Shareholders'
                  Deficit:Preferred
                  stock, convertible, no par value, 750,000 shares authorized, 279,070
                  Series C
                Preferred
                  stock issued and outstanding, liquidation preference of $600,000
              
              
              533,000Common
                  stock, no par value, 25,000,000 shares authorized, 14,485,082 shares
                  issued andoutstanding
              
              
              17,462,823Additional
                  paid-in capital
              
              
              6,292,850Accumulated
                  deficit
              
              
              (24,586,823
              )Total
                  shareholders' deficit
              
              
              (298,150
              )Total
                  liabilities and shareholders' deficit
              
              $
              5,577,143
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 20





**microHelix,
      Inc.**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**Year
                  Ended December****31,****2005**
              
              **2006**Sales,
                  net
              
              $
              9,164,242
              
              $
              15,281,564Cost
                  of Sales
              
              
              8,461,205
              
              
              13,890,146Gross profit
              
              
              703,037
              
              
              1,391,418Operating
                  Expenses:Sales
                  and marketing
              
              
              497,001
              
              
              551,016General
                  and administrative
              
              
              1,863,440
              
              
              1,819,372Total operating expenses
              
              
              2,360,441
              
              
              2,370,388Loss
                  from operations
              
              
              (1,657,404
              )
              
              (978,970
              )Other
                  income (expense):Other
                  income
              
              
              1,181
              
              
              8,883Gain
                  on debt settlement
              
              
              —
              
              
              90,373Goodwill
                  Impairment
              
              
              —
              
              
              (887,853
              )Interest
                  expense
              
              
              (180,737
              )
              
              (409,186
              )Total
                  other income (expense)
              
              
              (179,556
              )
              
              (1,197,783
              )Loss
                  before provision (benefit) for income taxes
              
              
              (1,836,960
              )
              
              (2,176,753
              )Provision
                  (Benefit) for Income Taxes
              
              
              (133,530
              )
              
              (183,475
              )Net loss
              
              
              (1,703,430
              )
              
              (1,993,278
              )Preferred
                  stock dividends
              
              
              (253,125
              )
              
              (793,496
              )Net
                  loss available to common shareholders
              
              $
              (1,956,555
              )
              $
              (2,786,774
              )Loss
                  per common share — basic and diluted:Net loss
              
              $
              (.83
              )
              $
              (.41
              )Weighted
                  average number of shares outstanding — basic and diluted
              
              
              2,061,742
              
              
              6,814,407





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




21




**microHelix,
      Inc.**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' DEFICIT**


**Years
      Ended December 31, 2006 and 2005**




**Common
                  Stock**
              
              **Preferred**
                    **Stock**
              
              **Preferred**
                    **Stock**
              
              **Additional
                  Paid-in**
              
              **Accumulated****Shares**
              
              **Amount**
              
              **Series
                  B**
              
              **Series
                  C**
              
              **Capital**
              
              **Deficit**
              
              **Total**Balance,
                  December 31, 2004
              
              
              1,959,713
              
              $
              14,473,409
              
              $
              —
              
              $
              —
              
              $
              6,487,417
              
              $
              (20,890,115
              )
              $
              70,711Dividends
                  on preferred stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (253,125
              )
              
              
              
              
              (253,125
              )Preferred
                  stock issued for the purchase of Moore and working capital
              
              
              
              
              
              
              
              
              2,475,793
              
              
              
              
              
              
              
              
              
              
              
              2,475,793Common
                  stock issued
              
              
              169,384
              
              
              
              
              
              
              
              
              
              
              
              35,710
              
              
              
              
              
              35,710Net
                  loss for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,703,430
              )
              
              (1,703,430
              )Balance,
                  December 31, 2005
              
              
              2,129,097
              
              
              14,473,409
              
              
              2,475,793
              
              
              —
              
              
              6,270,002
              
              
              (22,593,545
              )
              
              625,659Dividends
                  on preferred stock-series B
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (260,496
              )
              
              
              
              
              (260,496
              )Conversion
                  of preferred stock and accrued dividends to common stock
              
              
              12,188,086
              
              
              2,989,414
              
              
              (2,475,793
              )
              
              
              
              
              
              
              
              
              
              
              513,621Preferred
                  stock issued forCash-net
              
              
              
              
              
              
              
              
              
              
              
              533,000
              
              
              
              
              
              
              
              
              533,000Common
                  stock issued for services
              
              
              167,899
              
              
              
              
              
              
              
              
              
              
              
              73,750
              
              
              
              
              
              73,750Warrants
                  issued in conjunction with debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              171,865
              
              
              
              
              
              171,865Beneficial
                  conversion feature associated with debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              37,729
              
              
              
              
              
              37,729Warrants
                  issued in conjunction and beneficial conversion feature associated
                  with
                  preferred stock
              
              
              
              
              
              
              
              
              
              
              
              (533,000
              )
              
              533,000
              
              
              
              
              
              —Dividend
                  value of warrants and beneficial conversion feature on immediately
                  convertible preferred stock
              
              
              
              
              
              
              
              
              
              
              
              533,000
              
              
              (533,000
              )Net
                  loss for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,993,278
              )
              
              (1,993,278
              )Balance,
                  December 31, 2006
              
              
              14,485,082
              
              $
              17,462,823
              
              $
              —
              
              $
              533,000
              
              $
              6,292,850
              
              $
              (24,586,823
              )
              $
              (298,150
              )


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





22




**microHelix,
                Inc.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS**




**Year
                Ended December 31,****2005**
            
            **2006****Cash
                Flows Provided By (Used For) Operating
                Activities:**Net
                loss
            
            $
            (1,703,430
            )
            $
            (1,993,278
            )Adjustments
                to reconcile net loss to cash used in operating
                activities:Depreciation-property
                and equipment
            
            
            283,848
            
            
            446,317Amortization-intangible
                assets
            
            
            161,448
            
            
            214,914Change
                in provision for doubtful accounts
            
            
            (29,027
            )
            
            (16,258
            )Change
                in provision inventory reserves
            
            
            47,583
            
            
            145,845Common
                stock issued for services
            
            
            35,710
            
            
            73,750Goodwill
                impairment
            
            
            —
            
            
            887,853Benefit
                from deferred income taxes
            
            
            (133,530
            )
            
            (183,475
            )Gain
                on debt settlement
            
            
            —
            
            
            (90,373
            )Interest
                expense-amortization
            
            
            —
            
            
            23,307Change
                in assets and liabilities:(Increase)
                Decrease in assets:Accounts
                receivable
            
            
            (725,480
            )
            
            (303,377
            )Inventories
            
            
            167,737
            
            
            (624,741
            )Prepaid
                expenses and other current assets
            
            
            (178,090
            )
            
            5,922Customer
                Deposits
            
            
            (6,487
            )
            
            (163,456
            )Increase
                (Decrease) in liabilities:Accounts
                payable
            
            
            779,880
            
            
            322,711Accounts
                payable-related parties
            
            
            —
            
            
            (64,988
            )Accrued
                Dividends
            
            
            253,125
            
            
            —Accrued
                liabilities
            
            
            (228,098
            )
            
            138,203Net
                cash used in operating activities
            
            
            (1,274,811
            )
            
            (1,181,124
            )**Cash
                Flows from Investing Activities:**Capital
                expenditures
            
            
            (59,547
            )
            
            (279,399
            )Cash
                for stock of Moore Electronics
            
            
            (1,500,000
            )
            
            —Cash
                used to pay-off loan of Moore Electronics
            
            
            (412,683
            )
            
            —Net
                cash used in investing activities
            
            
            (1,972,230
            )
            
            (279,399
            )**Cash
                Flows from Financing Activities:**Proceeds
                from line of credit , net
            
            
            1,196,052
            
            
            571,748Payments
                on notes payable
            
            
            —
            
            
            (186,849
            )Proceeds
                from issuance of notes payable
            
            
            —
            
            
            350,000Proceeds
                from preferred stock offering, net of expenses
            
            
            2,125,793
            
            
            533,000Payment
                on notes payable to shareholders
            
            
            (146,964
            )
            
            (104,405
            )Checks
                issued in excess of bank balances
            
            
            —
            
            
            129,397Proceeds
                from issuance of notes payable to shareholders
            
            
            100,000
            
            
            150,000Net
                cash provided by financing activities
            
            
            3,274,881
            
            
            1,442,891Change
                in cash
            
            
            27,840
            
            
            (17,632
            )Cash,
                beginning of year
            
            
            30,472
            
            
            58,312Cash,
                end of year
            
            $
            58,312
            
            $
            40,680





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




23




**MICROHELIX,
      INC.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS, (CONTINUED)**


**Years
      Ended December 31, 2005 and 2006**


**Year
                  Ended December 31,****2005**
              
              **2006**Supplemental
                  disclosure of cash flow information — Cash paid for
                  interest
              
              $
              141,277
              
              $
              333,224Supplemental
                  disclosure of cash flow information — Cash paid for income
                  taxes
              
              $
              —
              
              $
              —**Supplemental
                  Disclosure of Non-cash Investing Activities:**Purchase
                  price acquisition of Moore Electronic details:Fair
                  value of assets acquired
              
              $
              4,558,702
              
              $
              —Liabilities
                  assumed
              
              
              (1,146,019
              )
              
              —Note
                  payable to former shareholders of Moore as part of the acquisition
                  price
              
              
              (1,250,000
              )
              
              —Preferred
                  stock issued to former shareholder of Moore as part of the acquisition
                  price
              
              
              (250,000
              )
              
              —Cash
                  paid
              
              $
              1,912,683
              
              $
              —**Supplemental
                  disclosure of non-cash Financing Activities:**Common
                  stock issued for services
              
              $
              35,710
              
              $
              73,750Warrants
                  and beneficial conversion feature issued to lender
              
              
              
              
              $
              209,594Conversion
                  of shareholder note to preferred stock
              
              $
              100,000Issuance
                  of note payable to settle accounts payable
              
              
              
              
              $
              106,471Dividend
                  declared-preferred stock
              
              $
              253,125
              
              $
              260,496Preferred
                  dividends paid via common stock
              
              
              
              
              $
              513,621Refinance
                  shareholder note payable
              
              
              
              
              $
              1,028,982Conversion
                  of preferred stock to common stock
              
              
              
              
              $
              2,475,793Warrants
                  and beneficial conversion feature issued with preferred
                  stock
              
              
              
              
              $
              533,000





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




24


**MICROHELIX,
      INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1.
      Summary of Significant Accounting Policies**





*Nature
      of Operations* —
      microHelix, Inc. ("we," "us," the "Company" or "microHelix") is a manufacturer
      of custom cable assemblies and mechanical assemblies for the medical and
      commercial original equipment manufacturer ("OEM") markets.





*Principles
      of Consolidation* —
These
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiary, Moore Electronic, Inc. ("Moore"). Moore was acquired
      in
      April 2005. All material inter-company accounts have been eliminated in
      consolidation.





*Use
      of Estimates* —
The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts
      of
      revenues and expenses during the reporting period. Actual results could differ
      from those estimates.





*Reclassification* —
Certain
      amounts from the year ended December 31, 2005 have been reclassified to
      correspond to the year ended December 31, 2006.





*Going
      Concern* —
These
      consolidated financial statements have been prepared on a going concern basis
      which contemplates the realization of assets and the satisfaction of liabilities
      in the normal course of business. The Company has incurred recurring net losses
      and had negative cash flows from operations during each of the past two years
      and at December 31, 2006 had an accumulated deficit of $24,586,823. These
      conditions raise substantial doubt about the Company’s ability to continue as a
      going concern for a reasonable period of time. These consolidated financial
      statements do not include any adjustments relating to the recoverability and
      classification of recorded asset amounts or the amounts and classification
      of
      liabilities that may be necessary should the Company be unable to continue
      as a
      going concern.





Effective
      March 12, 2007, microHelix entered into several agreements in connection with
      an
      additional loan from MH Financial Associates, LLC, an Oregon limited liability
      company ("MH Financial"). The agreements entered into were :





Second
      Agreement Regarding Amendment of Promissory Note under which MH Financial agreed
      to loan an additional $750,000 to microHelix by adding that amount to the
      Amended and Restated Promissory Note dated October 19, 2006 (the "Original
      Note") payable by microHelix to MH Financial. In connection with the additional
      loan, the right to convert the Original Note into Common Stock of microHelix
      was
      deleted. James M. Williams, Chairman of the Board and a director of microHelix,
      is an investor in MH Financial. MH Financial is an affiliate of Aequitas Capital
      Management, Inc., which serves as microHelix's exclusive financial
      advisor.





As
      additional consideration to MH Financial for extending additional credit to
      microHelix, microHelix's Board of Directors approved (subject to approval by
      the
      shareholders of microHelix) the sale (the "Sale") to MH Financial or its assigns
      of all of microHelix's MicroCoax division's assets, which comprise substantially
      all of the operating assets of microHelix, and all issued and outstanding shares
      of Moore Electronics, Inc. ("Moore"), microHelix's wholly owned subsidiary.
      The
      closing date for the sale would be not later than September 30, 2007. The Sale
      is subject to the following terms and conditions:





(i)
            The
                purchase price for the Sale would consist of the release of microHelix
                from liability under the Amended Note (defined below), including
                all
                amendments and modifications thereto, and assumption by the purchaser
                or
                by Moore of all loans, debts and payables of
                microHelix.




25




(ii)
            All
                Series C Preferred Stock of microHelix (which is currently held by
                MH
                Financial) is converted into shares of Common Stock of microHelix
                before
                or concurrently with the closing of the
                Sale.





(iii)
            microHelix's
                Board of Directors retains the fiduciary right to obtain a better
                offer
                for the purchase of microHelix and/or its assets (an "Alternative
                Sale"),
                provided that no Event of Default (as defined in the Amended Note)
                has
                occurred and is continuing, and, subject to MH Financial's right
                to close
                the Sale as set forth in (iv) below, all principal, interest and
                other
                amounts due under the Amended Note are paid in full before the closing
                of
                the Sale and contemporaneously with the closing of the Alternative
                Sale.





(iv)
            MH
                Financial or its assigns may close the Sale at any time following
                approval
                of the Sale by microHelix's shareholders. Following such approval,
                MH
                Financial may give microHelix notice of its intent to close the Sale.
                If
                microHelix has not closed an Alternative Sale within 10 days following
                MH
                Financial's notice, microHelix and MH Financial shall proceed to
                close the
                Sale within 20 days following MH Financial's notice or such longer
                period
                as is mutually agreed.





*Cash
      Equivalents* —
For
      the
      purpose of the statements of cash flows, cash equivalents include all highly
      liquid debt instruments with original maturities of three months or less which
      are not securing any debt or obligations. The Company maintains its cash in
      bank
      accounts which, at times, may exceed federally insured limits. The Company
      has
      not experienced any losses in such accounts.





*Accounts
      Receivable* —
The
      Company extends credit to its customers based on an assessment of a customer's
      financial circumstances, generally without requiring collateral. No significant
      customers have experienced financial difficulties in the past, although future
      financial difficulties of customers could have a material adverse effect on
      the
      Company's business. A reserve for bad debts has been provided and on a regular
      basis individual accounts that are past due are reviewed. If an account is
      determined to be uncollectible the amount is charged to the bad debt reserve.
      These write-offs have been insignificant and have been adequately covered by
      the
      bad debt reserve. Four of the Company’s customers accounted for 74% of the
      Company’s total accounts receivable at December 31, 2006.





*Inventories* are
      stated at the lower of cost (first-in, first-out) or market. The manufactured
      inventory is valued using the standard cost method. The inventory reserves
      for
      slow moving and obsolete parts are adjusted on the basis of reviewing quantities
      on hand, quantities on order, and sales projections by customers, and actual
      versus projected sales volume.





*Property
      and Equipment* are
      recorded at cost. Depreciation is provided using the straight-line method over
      the estimated useful lives of the assets (three to seven years) beginning on
      the
      date placed in service. Leasehold improvements are amortized over the lesser
      of
      the remaining lease term or the useful life. Costs of repairs and maintenance
      are expensed as incurred. Management periodically evaluates the recoverability
      of property and equipment by comparing the carrying amounts to future
      undiscounted cash flows expected to be generated by such assets. The Company
      has
      not identified any such impairment losses to date.





The
      Company evaluates long-lived assets whenever events or changes in business
      circumstances or planned use of assets indicate that their carrying amounts
      may
      not be fully recoverable or that their useful lives are no longer appropriate.
      Reviews are performed to determine whether the carrying values of assets are
      impaired based on comparison to either discounted expected future cash flows
      (in
      the case of goodwill and intangible assets) or to the undiscounted expected
      future cash flows (for all other long-lived assets). If the comparison indicates
      that impairment exists, the impaired asset is written down to its fair value.
      Significant management judgment is required in the forecast of future operating
      results that are used in the preparation of expected discounted and undiscounted
      cash flows.




26





*Revenue
      Recognition* —
The
      Company recognizes revenues from commercial sales of cable assemblies and
      related supplies when title passes (which is upon shipment); persuasive evidence
      of an agreement exists, the price is fixed or determinable, and collectability
      is probable. Commercial sales are made F.O.B. point of shipment. Returns are
      limited to nonconforming products. The Company expenses shipping and handling
      costs as incurred, which are included in operating expense. Shipping costs
      recovered from customers, if any, are included in net sales.





*Goodwill
      and Other Intangible Assets* —
      Goodwill represents the excess of the purchase price over the estimated fair
      value of the net identified tangible and intangible assets of the acquired
      business. Goodwill must be tested for impairment at least on an annual basis,
      or
      if an event occurs or circumstances change prior to the annual test of
      impairment, then the carrying value of goodwill must be tested on an interim
      basis. The Company had determined that the required annual impairment analysis
      would be performed on the anniversary date of the acquisition of
      Moore.





As
      a
      result of the Moore purchase, the Company acquired identifiable defined life
      intangible assets such as customer contacts and lists and manufacturing process
      technology. The customer lists and contacts are amortized on a straight-line
      basis over a three-year period and the manufacturing process technology is
      amortized over a five-year period on a straight-line basis. The Company will
      continue to amortize these identifiable intangible assets over these lives
      unless an event occurs or circumstances change that indicate that the carrying
      value of these assets may not be recoverable.





*Income
      Taxes* —
The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards, No. 109, Accounting for Income Taxes. Deferred income
      taxes result primarily from temporary differences between financial and tax
      reporting. Deferred tax assets and liabilities are determined based on the
      differences between the financial statement bases and tax bases of assets and
      liabilities using enacted tax rates. A valuation allowance is recorded to reduce
      a deferred tax asset to that portion that is expected to more likely than not
      be
      realized.




*Stock-Based
      Compensation* —
As
      of
      December 31, 2005, the Company terminated all of the equity compensation plans.
      In October 2005 the Company agreed to repurchase from the existing option
      holders options exercisable for up to a total of 14,262 shares of the Company's
      Common Stock in exchange for the issuance of a total of 12,851 shares of Common
      Stock and payment of a total of $423 in cash. Such transactions were completed
      by February 28, 2006. No additional expense was recognized as the fair
      value at the date on cancellation and repurchase was not in excess of the
      original compensation recognized.





The
      Board
      of Directors determined in 2005 that the cost of maintaining the Company's
      equity compensation plans outweighed the perceived benefits received from the
      employees under those plans. The Company expects that for the foreseeable future
      any equity compensation grants to the employees and directors will be in the
      form of grants of shares of Common Stock. Such grants may be restricted or
      unrestricted.





No
      options were granted in 2005 or 2006.





Since
      the
      Company had no options outstanding at December 31, 2005, there was no effect
      when the Company adopted SFAS No. 123(R), “Share Based Payment” in
      2006.




*Fair
      Value of Financial Instruments* —
The
      carrying value of the Company's accounts receivable, accounts payable, other
      accrued liabilities, and line of credit approximate their estimated fair values
      due to the relatively short maturities of those instruments. Due to the complex
      terms associated with the long term debt, the Company has determined that it
      is
      no practical to assign a fair value to the long term debt.





*Comprehensive
      Loss* —
The
      Company has no components of Other Comprehensive Income (Loss) and, accordingly,
      no Statement of Comprehensive Income (Loss) has been included in the
      accompanying consolidated financial statements.




27





*Net
      Loss per Share* —
The
      Company uses SFAS No. 128, "Earnings per Share" for calculating the basic and
      diluted loss per share. Basic loss per share is computed by dividing net loss
      attributable to common stockholders by the weighted average number of common
      shares outstanding. Diluted loss per share is computed similar to basic loss
      per
      share except that the denominator is increased to include the number of
      additional common shares that would have been outstanding if the potential
      common shares had been issued and if the additional common shares were dilutive.
      At December 31, 2006, the outstanding number of potentially dilutive common
      shares totaled 9,919,125 shares of Common Stock, consisting of Series C
      Preferred Stock convertible into 2,790,700 shares of Common Stock, note payable
      to MH Financial convertible to 3,429,940 shares of Common Stock and warrants
      to
      purchase 3,698,485 shares of Common Stock. At December 31, 2005, the outstanding
      number of potentially dilutive common shares totaled 12,621,289 shares of Common
      Stock, consisting of Series B Preferred Stock convertible into 11,000,000
      shares of Common Stock, Class B warrants to purchase 926,833 shares of
      Common Stock, and other warrants to purchase 694,456 shares of Common Stock.
      In
      periods when the Company has net losses, their effect is anti-dilutive and
      has
      not been included in the diluted weighted average earnings per share as shown
      on
      the Consolidated Statements of Operations.





*Operating
      Segments and Reporting Units* **** — **** Based
      on
      the Company's integration and management strategies; it operates in a single
      business segment and reporting unit. For the years ended December 31, 2006
      and
      2005, substantially all revenues have been derived from domestic
      operations.





***Recent
      Accounting Pronouncements***





In
      February of 2006 the FASB issued SFAS No. 155 "Accounting for Certain Hybrid
      Financial Instruments", which is intended to simplify the accounting and improve
      the financial reporting of certain hybrid financial instruments (i.e.,
      derivatives embedded in other financial instruments). The statement amends
      SFAS
      No. 133, "Accounting for Derivative Instruments and hedging Activities", and
      SFAS No. 140, "Accounting for Transfers and Servicing of Financial assets and
      Extinguishments of Liabilities-a replacement for FASB Statement No. 125." SFAS
      155 is effective for all financial instruments issued or acquired after the
      beginning of an entity's first fiscal year that begins after September 15,
      2006.
      Management is currently evaluating the impact SFAS No. 155 will have on the
      consolidated financial statements, if any.





In
      June
      2006, the FASB issued FASB Interpretation Number 48 ("FIN 48"), "Accounting
      for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109."
      The
      interpretation contains a two step approach to recognizing and measuring
      uncertain tax positions accounted for in accordance with SFAS No. 109. The
      first
      step is to evaluate the tax position for recognition by determining if the
      weight of available evidence indicates it is more likely than not that the
      position will be sustained on audit, including resolution of related appeals
      or
      litigation processes, if any. The second step is to measure the tax benefit
      as
      the largest amount which is more than 50% likely of being realized upon ultimate
      settlement. The Company is required to adopt FIN 48 at the beginning of fiscal
      year 2007. The Company is currently evaluating the impact that FIN 48 will
      have
      on its consolidated financial statements, if any.





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles and expands disclosures about fair
      value measurements. SFAS No. 157 applies under other accounting pronouncements
      that require or permit fair value measurements. The Company is required to
      adopt
      SFAS No. 157 effective at the beginning of fiscal year 2008. The Company is
      currently evaluating the impact that SFAS No. 157 will have on its consolidated
      financial statements, if any.





In
      September 2006, the Commission issued Staff Accounting Bulletin ("SAB") No.
      108,
      "Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements." SAB No. 108 was issued
      in
      order to eliminate the diversity in practice surrounding how public companies
      quantify financial statement misstatements. SAB No. 108 requires that
      registrants quantify errors using both a balance sheet (iron curtain) approach
      and an income statement (rollover) approach, and evaluate whether either
      approach results in a misstated amount that, when all relevant quantitative
      and
      qualitative factors are considered, is material. SAB No. 108 is effective for
      fiscal years ending after November 15, 2006. The Company does not believe SAB
      No. 108 will have a material effect on its consolidated results of operations,
      financial position, or cash flows.




28





In
      February, 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial
      Assets and Financial Liabilities”. SFAS No. 157 permits entities to choose to
      measure many financial instruments and certain other items at fair value .SFAS
      159 is expected to expand the use of fair value measurement and 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. The Company is required to adopt SFAS No. 159 effective at the
      beginning of fiscal year 2008. The Company is currently evaluating the impact
      that SFAS No. 159 will have on its consolidated financial statements, if
      any.





**2.
      Inventories**





A
      summary
      is as follows:





Finished
                goods
            
            $
            401,564Work
                in Process
            
            
            208,633Raw
                materials
            
            
            1,394,682Total
                inventories
            
            
            2,004,879Less:
                Reserves
            
            
            (404,476
            )Inventories,
                net
            
            $
            1,600,403





**3.
      Property and Equipment**





A
      summary
      is as follows:





Machinery
                and equipment
            
            $
            1,385,461Leasehold
                improvements
            
            
            84,028Office
                furniture and equipment
            
            
            101,687Automobiles
            
            
            27,228Software
            
            
            610,7662,209,170Accumulated
                depreciation and amortization
            
            
            (1,304,939
            )Property and equipment — net
            
            $
            904,231





29


**4.
      Goodwill and Other Intangible Assets**





Goodwill
      represents the excess of the purchase price over the estimated fair value of
      the
      net identified tangible and intangible assets of the acquired business. Goodwill
      must be tested for impairment at least on an annual basis, or if an event occurs
      or circumstances change prior to the annual test of impairment, then the
      carrying value of goodwill must be tested on an interim basis. The Company
      had
      determined that the required annual impairment analysis would be performed
      on
      the anniversary date of the acquisition of Moore.  Based
      on
      the decision to dispose of Moore, the goodwill also was tested for impairment
      at
      December 31, 2006. As a result of this interim impairment analysis, an
      impairment of $887,853 was recorded at December 31, 2006. The impairment was
      determined by comparing the estimated fair value of the Company’s assets
      (excluding goodwill-$4,844,771) to the estimated fair value of the Company’s
      liabilities (excluding the deferred tax liability-$5,577,146) to calculate
      the
      excess of the fair value of the liabilities over the value of the assets
      sold-$732,365. The $732,365 was then compared to the carrying value of the
      goodwill ($1,620,218) and the difference ($887,853) is the calculated goodwill
      impairment. For the purposes of this calculation, management considered all
      of
      the Company’s assets and liabilities as part of one reporting unit.





As
      a
      result of the Moore purchase, the Company acquired identifiable defined life
      intangible assets such as customer contacts and lists and manufacturing process
      technology. The customer lists and contacts are amortized on a straight-line
      basis over a three-year period and the manufacturing process technology is
      amortized over a five-year period on a straight-line basis. The Company will
      continue to amortize these identifiable intangible assets over these lives
      unless an event occurs or circumstances change that indicate that the carrying
      value of these assets may not be recoverable. The following table reflects
      the
      cost of other identifiable intangible assets and the accumulated amortization
      related to these respective assets as of December 31, 2006:





Gross
                Carrying Value
            
            Accumulated
                Amortization
            
            Net
                Carrying ValueCustomer
                lists and contacts
            
            $
            522,466
            
            $
            304,779
            
            $
            217,687Manufacturing
                process technology
            
            
            203,738
            
            
            71,313
            
            
            132,425Total
                other intangible assets
            
            $
            726,204
            
            $
            376,092
            
            $
            350,112





For
      the
      years ending December 31, 2006 and 2005, the Company recorded $214,914 and
      $161,178 as amortization expense on intangible assets. The Company expects
      to
      record annual amortization expense of approximately $215,000 in 2007, $84,000
      in
      2008, $41,000 in 2009 and $10,000 in 2010 related to the other identifiable
      intangible assets purchased in the Moore acquisition.





30


**5.**
            **Line
                of Credit**





In
      April
      2005, the Company amended its revolving line of credit with an asset-based
      lender. The line of credit is fully secured by accounts receivable and
      inventory. The line of credit bears interest at the prime rate plus 5.00%
      (13.25% at December 31, 2006) per annum and allows the Company to borrow up
      to
      $2,000,000. At December 31, 2006, $1,711,528 was outstanding on the line of
      credit. As of December 31, 2006, the Company was in compliance with the terms
      of
      the line of credit. The line of credit expired on April 7, 2007, however there
      is an auto-renewal clause within the loan agreement that allows for renewal.
      Management is in the process of formalizing and completing the
      renewal.





On
      December 13, 2006 the Company entered into a separate Purchase Order Financing
      Agreement with the same asset-based lender noted above in the amount of
      $195,000. The Purchase Order Financing Agreement bears interest at the prime
      rate plus 5.00% (13.25% at December 31, 2006) per annum. Proceeds were used
      to
      purchase materials to complete a Purchase Order from a customer. Upon shipment
      of the goods to the customer, the Purchase Order Financing Agreement is to
      be
      repaid from advances under the line of credit. As of December 31, 2006, the
      balance outstanding under this Agreement was $155,813. This Agreement was paid
      in full on January 26, 2007.





On
      December 26, 2006 the Company entered into a separate Purchase Order Financing
      Agreement with the same asset-based lender noted above in the amount of $30,000.
      The Purchase Order Financing Agreement bears interest at the prime rate plus
      5.00% (13.25% at December 31, 2006) per annum. Proceeds were used to purchase
      materials to complete a Purchase Order from a customer. Upon shipment of the
      goods to the customer, the Purchase Order Financing Agreement is to be repaid
      from advances under the line of credit. As of December 31, 2006, the balance
      outstanding under this Agreement was $30,091. This Agreement was paid in full
      on
      January 5, 2007.





All
      amounts outstanding under this line of credit and Purchase Order Financing
      Agreements are included in the line of credit on the consolidated balance sheet
      at December 31, 2006.





**6.
      Notes Payable**





A
      summary
      is as follows:


VenCore
                  Solutions, LLC
              
              $
              245,451MH
                  Financial Associates, LLC
              
              
              1,006,086EPICOR
                  Software Corporation
              
              
              63,137Other
              
              
              20,813Total
                  Notes Payable
              
              $
              1,335,487Debt
                  discounts (see Note 8)Warrants
                  issued with VenCore note
              
              $
              (25,538
              )Warrants
                  Issued with MH Financial note
              
              
              (126,614
              )Beneficial
                  conversion feature on MH Financial note
              
              
              (34,135
              )(186,287
              )Notes
                  Payable, net
              
              
              1,149,200Less
                  Current maturities
              
              
              (347,938
              )$
              801,262





On
      April
      8, 2005, the Company borrowed $250,000 from CTK Capital Corporation at an annual
      interest rate of 15%. The loan proceeds were used to complete the Moore
      acquisition. Three $50,000 principal payments were made on April 18, April
      25 and May 3, 2005 along with accrued interest. The balance of the note was
      converted into 100,000 newly issued shares of Series B Preferred Stock at $1.00
      per share on October 28, 2005. Accrued interest totaling $8,501 was paid in
      cash
      to CTK Capital Corporation on October 28, 2005. CTK Capital Corporation is
      a
      Nevada corporation controlled by James M. Williams, Chairman of the Board and
      one of our directors.





On
      April
      8, 2005, the Company issued a promissory note in the amount of $1,250,000 to
      Marti D. Lundy as part of the Moore acquisition. MH Financial Associates, LLC
      ("MH Financial") assumed the note from Ms. Lundy on October 19, 2006. On
      that date, the principal amount outstanding was $1,119,355. The face amount
      of
      the new note to MH Financial amounted to $1,028,982, resulting in a gain on
      debt
      settlement of $90,373. (See Note 14).





31


On
      June
      22, 2006, the Company issued a promissory note to VenCore Solutions, LLC
      ("VenCore") in the principal amount of $350,000. Pursuant to the note the
      Company is to pay VenCore $14,175 per month including interest, payable in
      30
      consecutive monthly installments, beginning on July 15, 2006, with subsequent
      payments due on the same day of each month thereafter. A final payment of
      $ 35,000 is due
      on January 15, 2009. The note is secured by substantially all of the Company’s
      property and equipment.





On
      August
      16, 2006, the Company issued a promissory note to EPICOR Software Corporation
      in
      the amount of $106,471 for goods and services purchased by us. The Company
      agreed to make monthly payments of principal and interest (at 8%) in the amount
      of $9,262 through the maturity date of June 15, 2007. As of December 31, 2006,
      the balance outstanding under this note was $63,137.





MH
      Financial’s assumption of Ms. Lundy’s note occurred on October 19, 2006. The
      revised terms require the Company to make monthly payments of $20,000 (including
      interest at 10% until July 19, 2007 and 14% thereafter). All principal and
      unpaid interest is due at maturity on July 19, 2008. The note is secured by
      substantially all of the Company’s assets. As of December 31, 2006 the note was
      convertible into 3,429,940 share of Common Stock based on a stated conversion
      rate of $0.30. After giving value to warrants issued in conjunction with this
      note (see Note 8), the effective conversion rate was less than the market price
      of the common stock at the commitment date. The resulting beneficial conversion
      feature has been valued at $37,729. The conversion feature of the note was
      deleted in March 2007. (see Note 14)





The
      future maturities on the above notes payable are as follows:


2007
              
              $
              347,9382008
              
              
              987,0532009
              
              
              495Total
              
              $
              1,335,486





**7.**  **Income Taxes**





Deferred
      income taxes, reflecting the net tax effects of temporary differences between
      the carrying amount of assets and liabilities recognized for financial reporting
      purposes and the amounts recognized for income tax purposes, are based on tax
      laws currently enacted.





The
      components of deferred tax liability are as follows:




**For
                the year ended**
              **December
                31,******
            
            **2005**
            
            **2006**Federal
                net operating loss carry forwards
            
            $
            5,711,000
            
            $
            5,940.000State
                net operating loss carry forwards
            
            
            1,110,000
            
            
            1,155,000Basis
                difference in property and equipment upon acquisition of Moore
                Electronics
            
            
            (481,620
            )
            
            (298,145
            )Inventory
                Reserves
            
            
            95,000
            
            
            164,000Other
            
            
            (18,000
            )
            
            81,000Deferred tax liability
            
            
            6,416,380
            
            
            7,041,855Valuation
                allowance
            
            
            (6,898,000
            )
            
            (7,340,000
            )Net deferred tax liability
            
            $
            (481,620
            )
            $
            (298,145
            )





32


As
      of
      December 31, 2006 the Company had federal and state net operating loss carry
      forwards of $17,472,000 and $17,340,000, respectively, expiring during the
      years
      2013 through 2026.





A
      benefit
      for income taxes of $183,475 has been recorded due to the Company’s amortization
      of its deferred tax liability related to the acquisition of Moore and in
      accordance with FASB 109. The differences between the provision for income
      taxes
      and income taxes computed using the U.S. federal income tax rate was as
      follows:





**For
                the year ended**
              **December
                31,****2005**
            
            **2006**Amount
                computed using statutory rate (34%)
            
            $
            (349,700
            )
            $
            (740,000
            )Change
                in Valuation Allowance
            
            
            491,153
            
            
            442,000Goodwill
                Impairment (permanent difference)
            
            
            —
            
            
            302,000Other
                Permanent Differences
            
            
            (72,453
            )
            
            141,000Amortization
                of Deferred Tax Liability
            
            
            (133,558
            )
            
            (183,475
            )State
                Income Taxes
            
            
            (69,000
            )
            
            (145,000
            )Provision
                (benefit) for Income Taxes
            
            $
            (133,530
            )
            $
            (183,475
            )




SFAS
      No.
      109, *Accounting for Income Taxes,* requires
      that the tax benefit of net operating losses, temporary differences, and credit
      carry forwards be recorded as an asset to the extent that management assesses
      that realization is “more likely than not.” Realization of the future tax
      benefits is dependent on the Company’s ability to generate sufficient taxable
      income within the carry forward period. Because of the Company’s current
      operating losses, management has provided a 100% valuation allowance for its
      net
      deferred tax assets.





**8.
      Shareholders’ Deficit**





*Preferred
      Stock —* The
      Company is authorized to issue 750,000 shares of preferred stock, 279,070 of
      which are designated Series C Preferred Stock, 279,070 of which are issued
      and outstanding.





During
      2005 the Company issued 2,750,000 shares of Series B Preferred Stock to
      accredited investors in private placements. On April 8, 2005 the Company sold
      2,000,000 shares of Series B Preferred Stock at $1.00 per share for total gross
      cash proceeds of $2.0 million, which the Company used as partial consideration
      for the acquisition of Moore. On April 8, 2005 the Company also issued 250,000
      shares of Series B Preferred Stock to a selling shareholder as partial
      consideration in the acquisition of Moore.




On
      October 28, 2005 the Company sold 310,000 shares of Series B Preferred Stock
      at
      $1.00 per shares. The Company received total gross cash proceeds of $210,000.
      The remaining $100,000 of the purchase price for the shares was paid by
      conversion of the outstanding principal on a promissory note owed by microHelix
      to an affiliate of James M. Williams, one of our directors. On December 7,
      2005
      the Company sold 190,000 shares of Series B Preferred Stock at $1.00 per share
      for total gross cash proceeds of $190,000. The proceeds of the October and
      December 2005 sales of Series B Preferred Stock were used for working
      capital.




On
      August
      17, 2006, the holders of the Series B Preferred Stock, voting as a separate
      class at the 2006 Annual Meeting of shareholders, voted to authorize conversion
      of their shares of Series B Preferred Stock, as well as accrued dividends on
      Series B Preferred Stock, into shares of the Common Stock. The Company’s Amended
      and Restated Articles of Incorporation (“Articles”) provided that holders of
      two-thirds of the outstanding shares of Series B Preferred Stock could authorize
      the conversion of all the outstanding shares of Series B Preferred Stock into
      Common Stock at any time after the issuance of the Series B Preferred
      Stock. Upon approval, the Articles further provided that each share of Series
      B
      Preferred Stock would be automatically converted into shares of Common Stock
      at
      the conversion rate in effect on the date approved by the Series B Preferred
      Stock holders. The conversion rate in effect on August 17, 2006 provided that
      each share of Series B Preferred Stock would be converted into four shares
      of
      Common Stock, resulting in 11,000,000 shares of Common Stock issued on
      conversion. No shares of Series B Preferred Stock are outstanding or authorized
      to be issued as of the date of this report.





33


Effective
      October 19, 2006, microHelix entered into several agreements under which it
      issued shares of its newly authorized Series C Preferred Stock, no par value
      ("Series C Preferred Stock"), and issued warrants to purchase shares of its
      Common Stock, no par value ("Common Stock). The agreements entered into
      were:





·
            Series
                C Preferred Stock Purchase Agreement under which MH Financial purchased
                139,535 shares of Series C Preferred Stock for $2.15 per share, or
                a total
                of $300,000. Transactions fees of $33,500 have been allocated to
                this
                issuance of preferred stock, resulting in net proceeds recorded of
                $266,500. Each share of Series C Preferred Stock is initially convertible
                into 10 shares of Common Stock. If the Series C Preferred Stock were
                convertedusingthe
                initial conversion ratio, microHelix would issue 1,395,350 shares
                of
                Common Stock. James M. Williams, Chairman of the Board and a director
                of
                microHelix, is an investor in MH Financial. MH Financial is an affiliate
                of Aequitas Capital Management, Inc., which serves as microHelix's
                financial advisor.




·
            Warrant
                issued to MH Financial to purchase 1,046,513 shares of Common Stock
                at an
                initial exercise price of $0.30 per share. The warrant expires on
                October
                18, 2011.





·
            Registration
                Rights Agreement under which microHelix granted MH Financial certain
                registration rights with respect to the shares of Common Stock issuable
                upon conversion of the Series C Preferred Stock, upon conversion
                of the
                Restated Note (defined below) and upon exercise of the warrants issued
                and
                issuable to MH Financial in connection with the transactions described
                herein.




Effective
      November 2, 2006, microHelix entered into two agreements under which it issued
      shares of its newly authorized Series C Preferred Stock and issued warrants
      to
      purchase shares of its Common Stock. The agreements entered into
      were:





·
            Series
                C Preferred Stock Purchase Agreement under which MH Financial purchased
                139,535 shares of Series C Preferred Stock for $2.15 per share, or
                a total
                of $300,000. Transactions fees of $33,500 have been allocated to
                this
                issuance of preferred stock, resulting in net proceeds recorded of
                $266,500. Each share of Series C Preferred Stock is initially convertible
                into 10 shares of Common Stock. If the Series C Preferred Stock were
                converted at the initial conversion ratio, microHelix would issue
                1,395,350, shares of Common Stock. James M. Williams, Chairman of
                the
                Board and a director of microHelix, is an investor in MH Financial.
                MH
                Financial is an affiliate of Aequitas Capital Management, Inc., which
                serves as microHelix's financial
                advisor.





·
            Warrant
                (the "Series C Warrant") issued to MH Financial to purchase 1,046,512
                shares of Common Stock at an initial exercise price of $0.30 per
                share.
                The Series C Warrant expires on November 1,
                2011.





The
      2,093,025 of warrants noted above were valued using the Black-Scholes valuation
      model. Based on the relative fair values of the preferred stock and the
      warrants, the value assigned to the warrants was $226,101. After giving value
      to
      these warrants, the effective conversion rate of the preferred stock was less
      than the market price of the common stock at the commitment date. The resulting
      beneficial conversion feature was valued at $446,590. Since the combined value
      assigned to the warrants and beneficial conversion feature exceeded the net
      proceeds on the preferred stock ($533,000), the amount recorded as a discount
      to
      the preferred stock was limited to the net proceeds. Since the preferred stock
      was immediately convertible, the recorded discount was then written off against
      preferred dividends. The warrant value was calculated using the Black-Scholes
      option pricing model with the following assumptions:


Expected
                  life (in years)
              
              
              10Expected
                  volatility
              
              
              117
              %Risk-free
                  interest rate
              
              
              4.65
              %Expected
                  dividend
              
              
              —
  34





In
      all of
      the above cases, shares of Series B Preferred Stock and Series C Preferred
      Stock
      were issued in reliance on Regulation D promulgated under the Securities Act
      of
      1933, as amended (the “Securities Act”), and the Company obtained
      representations from the investors as to their status as “accredited investors”
as that term is defined in Regulation D.





*Stock
      Option Plan —* The
      Company’s 2002 Non Qualified Stock Option Plan (the “2002 Plan”) was adopted by
      the Board of Directors in October 2002. The 2002 Plan provided for the issuance
      of options to purchase up to 20,000 shares of common stock to its employees
      and
      consultants. Options were granted under various vesting arrangements, up to
      a
      maximum of four years and expired after a maximum of ten years, and were subject
      to a stock transfer restriction agreement to be entered into upon
      exercise.





*Stock
      Incentive Plans —* The
      Company’s 2001 Stock Incentive Plan (the “2001 Plan”) was adopted by the Board
      of Directors in July 2001 and approved by the shareholders in August 2001.
      The
      2001 Plan provided for the issuance of options to purchase up to 200,000 shares
      of common stock. Options were granted under various vesting arrangements, up
      to
      a maximum of five years and expired after a maximum of ten years and were
      subject to a stock transfer restriction agreement to be entered into upon
      exercise.





The
      Company had a 1998 Stock Incentive Plan (the “1998 Plan”), under which options
      to purchase shares of common stock were granted to its employees and service
      providers. Options were granted under various vesting arrangements, up to a
      maximum of five years and expired after a maximum of ten years and were subject
      to a stock transfer restriction agreement to be entered into upon exercise.
      In
      2002, the Board of Directors voted to discontinue further grants of options
      under this plan.





As
      of
      December 31, 2005, the Company had terminated the 2002 Plan, the 2001 Plan
      and
      1998 Plan. In October 2005, the Company agreed to repurchase from its existing
      option holders options exercisable for up to a total of 14,262 shares of Common
      Stock in exchange for the Company’s issuance of a total of 12,851 shares of
      Common Stock and payment of a total of $423 in cash. Such transactions were
      completed by February 28, 2006. There was no activity under the 1998, 2001
      and
      2002 Plans after February 28, 2006.





*Other
      Stock Warrants —* In
      connection with bridge loans issued in June 2001, the Company granted warrants
      to purchase 52,000 units, with each unit consisting of a share of common stock
      and a Class B warrant, at a price of $16.20 per unit. The warrants expired
      on
      November 16, 2005.




In
      connection with a credit facility agreement entered into in January 2001, the
      Company granted 1,472 common stock warrants at an exercise price of $27.18
      per
      share. The warrants expire in January 2008.





The
      Company had Class B warrants (OTCBB: MHLXZ) outstanding that were exercisable
      to
      purchase 926,833 shares of Common Stock at a price of $21.60 per share. The
      Class B warrants were issued as part of units in the Company’s initial public
      offering on November 16, 2001 and expired on November 16, 2006.





The
      Company issued warrants on April 8, 2005 to its financial advisor and its
      affiliates to purchase a total of 478,000 shares of Common Stock for services
      rendered in connection with the Series B Preferred Stock offering. Such warrants
      can be exercised through April 7, 2015 for a price of $0.25 per
      share.





On
      June
      22, 2006, the Company issued warrants to VenCore Solutions, LLC to purchase
      72,917 shares of Common Stock with an exercise price of $0.48 per share. The
      warrants were issued in connection with a Loan and Security Agreement and a
      corresponding promissory note issued to VenCore in the amount of $350,000 (See
      Note 6). The warrants expire on June 22, 2016. Based on the Black-Sholes
      valuation model, the warrants were valued at $31,923 with the following
      assumptions:


Expected
                  life (in years)
              
              
              10Expected
                  volatility
              
              
              100
              %Risk-free
                  interest rate
              
              
              5.00
              %Expected
                  dividend
              
              
              —
  35





In
      conjunction with the note payable to MH Financial a total of 738,087 warrants
      are issuable over the term of the loan, based on the outstanding principal
      balance each quarter. At the commitment date, management determined that the
      value of the warrants should be recorded immediately as it was probable that
      the
      note would be carried to its term and therefore, it was considered probable
      that
      all of the warrants would be earned. The 738,087 of warrants noted above were
      valued using the Black-Scholes valuation model. Based on the relative fair
      values of the notes payable and the warrants, the value assigned to the warrants
      was $139,942. The warrant value was calculated using the Black Scholes option
      pricing model with the following assumptions:


Expected
                  life (in years)
              
              
              10Expected
                  volatility
              
              
              117
              %Risk-free
                  interest rate
              
              
              4.65
              %Expected
                  dividend
              
              
              —





On
      August
      17, 2006,the Company issued a warrant to purchase 100,000 shares of Common
      Stock
      to Aequitas Capital Management, Inc. for their engagement in services rendered
      in obtaining additional financing. The value of these warrants was, as per
      a
      Black-Scholes valuation, not material.




*Common
      Stock —* The
      Company issued on April 8, 2005 a total of 123,033 shares of Common Stock to
      six
      of its employees and directors. These shares were unrestricted and were made
      for
      services related to the successful completion of the merger. The Company issued
      on September 19, 2005 a total of 33,500 shares of Common Stock to employees
      and
      a director. These shares were unrestricted.





On
      August
      17, 2006, the Board of Directors declared and paid, in shares of the Company’s
      Common Stock, the dividends accrued on the shares of Series B Preferred Stock.
      The holders of the Series B Preferred Stock were entitled to an annual dividend
      of $0.15 per share, payable in arrears either in cash or Common Stock when
      and
      as if declared by the Board of Directors. The dividend had been accrued and
      was
      paid in shares of Common Stock depending on the number of days each share of
      Series B Preferred Stock had been outstanding. For purposes of determining
      the
      amount of the dividend in shares of the Common Stock, the Amended and Restated
      Articles of Incorporation (the “Articles”) provided that the value of a share of
      Common Stock would be equal to the average closing price of the Company’s Common
      Stock as reported by Nasdaq for the ten trading days immediately prior to August
      17, 2006. That value was $0.435 per share. A total of 1,188,086 shares of common
      stock were issued.





During
      2006 the Company issued 167,899 shares of common stock to various members of
      the
      Board of Directors and to employees for services rendered valued at
      $73,750.





**9.**
            **Related-Party
                Transactions**





There
      are
      no transactions with the affiliates or related parties that impact sales. The
      significant transactions are summarized below.




On
      April
      8, 2005, the Company borrowed $250,000 from CTK Capital Corporation at an annual
      interest rate of 15%. The loan proceeds were used to complete the Moore
      acquisition. Three $50,000 principal payments were made on April 18, April
      25
      and May 3, 2005 along with accrued interest. The balance of the note was
      converted into 100,000 newly issued shares of Series B Preferred Stock at $1.00
      per share on October 28, 2005. Accrued interest totaling $8,501 was paid in
      cash
      to CTK Capital Corporation on October 28, 2005. CTK Capital Corporation is
      a
      Nevada corporation controlled by James M. Williams, one of the Company’s
      directors.





On
      April
      8, 2005, the Company issued a promissory note in the amount of $1,250,000 as
      part of the Moore acquisition, Marti D. Lundy was a co-owner of Moore
      Electronics, Inc. and, following the acquisition of Moore Electronics, Inc.
      on
      April 8, 2005, Ms. Lundy was appointed to the position of Vice President and
      General Manager of Moore Electronics. MH Financial assumed the note from Ms.
      Lundy on October 19, 2006. On December 31, 2006, Ms. Lundy retired from the
      Company. On October 19, 2006, the principal amount outstanding was $1,119,355
      (see Note 6). James M. Williams, Chairman of the Board and a director of
      microHelix, is an investor in MH Financial. MH Financial is an affiliate of
      Aequitas Capital Management, Inc., which serves as microHelix’s financial
      advisor. Interest expense on the note to Ms. Lundy amounted to $68,293 and
      $99,822 for the years ended December 31, 2006 and 2005 respectively. Interest
      expense on the note to MH Financial amounted to $46,820 for the year ended
      December 31, 2006.





36


On
      December 28, 2006, microHelix issued a note to James M. Williams in the
      principal amount of $150,000, together with interest on the unpaid principal
      at
      the rate of 15% per annum. microHelix will use the proceeds from the Note for
      working capital. Beginning on February 1, 2007, microHelix will pay Mr. Williams
      six monthly principal payments of $25,000, together with accrued and unpaid
      interest. All amounts owing under the note held by Mr. Williams were paid on
      March 12, 2007 in connection with MH Financial's additional loan to the Company.
      (See Note 14 - Subsequent Events).





On
      December 31, 2006 there was $8,232 of Accounts Payable to related parties.
      These
      payables were for travel expense reports that had not been reimbursed to
      employees at December 31, 2006.





**10.
      Commitments and Contingencies**





*Operating
      Leases —* The
      Company leases certain office space and equipment. The operating leases expire
      at various dates through August 2009. The following is a schedule by years
      of
      future minimum rental payments required under operating leases that have
      non-cancelable lease terms in excess of one year without regards to renewal
      options as of December 31, 2006.





**Year
                Ending December 31,**2007
            
            $
            309,3902008
            
            
            194,4002009
            
            
            53,201Net operating lease commitments
            
            $
            556,991




** For
      the
      years ended December 31, 2006 and 2005, the Company incurred rent expense of
      $348,717 and $341,620, respectively. The Company subleased all of the Portland
      facility to ANS from April 21, 2005 through the termination of the lease on
      November 30, 2005. During 2005 the Company received $71,068 from ANS as payments
      under the sublease agreement.





*Litigation
      —* From
      time
      to time, the Company is involved as a defendant in litigation in the ordinary
      course of business, the outcome of which cannot be predicted with certainty.
      As
      of December 31, 2006, the Company is not aware of any legal proceedings or
      claims against the Company.





**11.
      Major Customers**





In
      2005,
      sales to three customers accounted for 61% of the Company's sales. In 2006,
      sales to four customers represented 72% of the
      Company's sales from continuing operations. No other customer in 2005 or 2006
      accounted for more than 10% of sales from continuing operations.





On
      January 16, 2007, one of the Company’s major customers informed the Company that
      one of its divisions had temporarily suspended shipments of products
      manufactured at its production facility to customers in the United States.
      According to the customer, the decision to suspend U.S. product shipment was
      made to address quality system issues in its production facility that was
      identified by the customer and the U.S. Food and Drug Administration See Note
      14
      Subsequent Events).





37


**12.
      Retirement Plan**





The
      Company offers a 401(k) employee savings plan with eligibility requirements
      of
      three months of service. There are no required employer contributions and no
      Company contributions were made to the plan during the years ended December
      31,
      2005 and 2006.





**13.
      Business Combination**





On
      April
      8, 2005, the Company entered into a merger agreement and acquired 100% of the
      outstanding stock of Moore from two shareholders. On April 4, 2005, the Company
      incorporated microHelix Acquisition Corp., an Oregon corporation, as a 100%
      owned subsidiary of the Company. microHelix Acquisition Corp. was merged with
      Moore, with Moore being the surviving corporation and becoming a wholly owned
      subsidiary of the Company.





Moore,
      headquartered in Tualatin, Oregon, was founded in 1978 and is an independent
      manufacturer of customized cable assemblies, sub-assemblies, wire harnesses
      and
      electro-mechanical assemblies. Moore serves major medical equipment
      manufacturers and commercial equipment manufacturers. Moore is operated as
      a
      wholly owned subsidiary of microHelix.





The
      Company paid $3,000,000 for the 2,000 shares of common stock of Moore, which
      consisted of $1,500,000 in cash, $1,250,000 in the form of a promissory note
      and
      250,000 shares of microHelix Series B Preferred Stock valued at $250,000. In
      addition, the Company refinanced $413,000 of bank debt owed by Moore. In order
      to finance the acquisition of Moore, the Company sold 2.0 million shares of
      Series B Preferred Stock at $1.00 per share in a private placement. Each share
      of Series B Preferred Stock was converted into four shares of Common Stock
      on
      August 17, 2006 by a vote of the holders of the Series B Preferred
      Stock. The Company also borrowed $250,000 from CTK Capital Corporation at an
      annual interest rate of 15%. The loan proceeds were used to complete the Moore
      acquisition.





The
      fair
      value of assets acquired and liabilities assumed was recorded in the Company's
      balance sheet as of April 8, 2005, the effective date of the acquisition,
      and the results of operations of Moore have been included in the Company's
      consolidated results of operations for the period from April 8, 2005 through
      December 31, 2006.





38


**14.
      Subsequent Events.**





As
      described in Note 11, on January 16, 2007, one of the Company’s major customers
      suspended certain shipments to its customers. The result of this action was
      the
      inability of the Company to meet its current obligations to vendors under its
      present financing.





On
      March
      12, 2007, the Company obtained an additional loan from MH Financial of $750,000.
      The original note to MH Financial (the “Original Note”) (see Note 6) was amended
      (the "Amended Note") to reflect a revised principal amount of $1,778,964, which
      bears interest at a rate of 12% per annum ("Current Interest"). Additional
      interest accrues on the Amended Note at a rate of 8% per annum, which is
      compounded quarterly and is payable at maturity ("Deferred Interest"). The
      Company will make separate payments with respect to $1,006,086 of the principal
      under the Original Note ("Loan 1") and with respect to $750,000 of the principal
      added in the Amended Note ("Loan 2"). Beginning April 19, 2007 and on the
      same day of each subsequent month, microHelix will pay $20,000 per month to
      be
      applied to Current Interest and principal on Loan 1 and will pay $7,500 per
      month of Current Interest on Loan 2. On September 30, 2007, the
      Company will make an additional payment of accrued Current Interest through
      that
      date with regard to Loan 2. Beginning on October 31, 2007, and on the last
      day of each subsequent month through and including May 31, 2008, the
      Company will pay $87,555 per month to be applied against the Current Interest
      and principal balance of Loan 2. All amounts outstanding under the Amended
      Note, including the Deferred Interest, are due and payable on June 30,
      2008.





The
      Amended Note continues to be secured by a lien against substantially all of
      the
      assets of microHelix and Moore, including all of the outstanding common stock
      of
      Moore. MH Financial may accelerate all amounts due under the Amended Note in
      the
      event of default. In addition, all amounts outstanding under the Note are due
      and payable upon the sale of all or substantially all of the Company’s assets to
      anyone other than MH Financial, or upon the transfer of ownership of more than
      50% of our stock.





The
      Company used $153,698 of the proceeds from Loan 2 of the Amended Note to pay
      in
      full a promissory note previously issued to James M. Williams, one of our
      directors. The remaining proceeds were used to make payments to certain vendors
      and to fund operating costs. The Amended Note replaces and supersedes the
      Original Note. In connection with Loan 2, microHelix issued a warrant (the
      "Note
      Warrant") to MH Financial to purchase 10,000,000 shares of Common Stock at
      an
      initial exercise price of $0.001 per share. The Note Warrant expires on March
      12, 2010. In connection with the Amended Note ,
      the
      right to convert the Original Note into shares of our Common Stock was
      deleted.





As
      additional consideration to MH Financial for extending additional credit to
      the
      Company in connection with the Amended Note, the Board of Directors approved
      (subject to approval by our shareholders) the sale (the "Sale") to MH Financial
      or its assigns all of the assets of the microCoax and Moore Electronics
      divisions, which comprise substantially all of the Company’s operating assets,
      and all issued and outstanding shares of Moore. The closing date for the sale
      would be not later than September 30, 2007. The Sale is subject to the following
      terms and conditions:





(a)
            The
                purchase price for the Sale would consist of the release of the Company
                from liability under the Amended Note, including all amendments and
                modifications thereto, and assumption by the purchaser or by Moore
                of all
                of the Company’s loans, debts and
                payables.





(b)
            All
                of the Company’s outstanding Series C Preferred Stock (which is currently
                held by MH Financial) is converted into shares of Common Stock before
                or
                concurrently with the closing of the
                Sale.





(c)
            The
                Board of Directors retains the fiduciary right to obtain a better
                offer
                for the purchase of the Company and/or the Company’s assets (an
                "Alternative Sale"), provided that no Event of Default (as defined
                in the
                Amended Note) has occurred and is continuing, and, subject to MH
                Financial's right to close the Sale as set forth in (d) below, all
                principal, interest and other amounts due under the Amended Note
                are paid
                in full before the closing of the Sale and contemporaneously with
                the
                closing of the Alternative Sale.





39


(d)
            MH
                Financial or its assigns may close the Sale at any time following
                approval
                of the Sale by the Company’s shareholders. Following such approval, MH
                Financial may give the Company notice of its intent to close the
                Sale. If
                the Company has not closed an Alternative Sale within 10 days following
                MH
                Financial's notice, the Company and MH Financial shall proceed to
                close
                the Sale within 20 days following MH Financial's notice or such longer
                period as is mutually agreed.




The
      Company has agreed to use commercially reasonable efforts to obtain shareholder
      approval at the 2007 annual meeting for the Sale and an increase of the
      Company’s authorized capital stock to 100 million shares of Common Stock and 10
      million shares of Preferred Stock. Exercise of the warrants issued to MH
      Financial in connection with the Amended Note and the Forbearance Agreement
      (defined below) requires such an increase in authorized capital, and their
      exercise is conditioned upon such increase in authorized capital. Shareholders
      holding approximately 52.7% of the Company’s voting capital stock have executed
      and delivered to MH Financial a voting agreement under which they have agreed
      to
      vote in favor of the Sale (subject to the Board of Director's fiduciary right
      to
      accept an Alternative Sale) and to approve the increase in authorized capital
      stock. The Company anticipates that a proxy statement will be mailed to
      shareholders during the fourth week of May 2007 and the annual meeting will
      be
      held on or about July 16, 2007.





On
      March
      12, 2007 the Company was in default under the Original Loan. On that date,
      the
      Company and MH Financial entered into a Forbearance and Waiver Agreement (the
      "Forbearance Agreement") under which MH Financial agreed to forbear with respect
      to such defaults and agreed to waive certain obligations to register shares
      of
      Common Stock owned by MH Financial pursuant to the Registration Rights Agreement
      dated October 19, 2006 between the Company and MH Financial. As
      consideration for the Forbearance Agreement, the Company issued a warrant to
      MH
      Financial (the "Forbearance Warrant") to purchase 2,900,000 shares of Common
      Stock at an exercise price of $0.001 per share. The Forbearance Warrant expires
      on March 11, 2010. As additional consideration for the Forbearance Agreement,
      the Company also agreed to reduce the exercise price to $0.001 per share for
      warrants issued to MH Financial pursuant to the Original Note for a total of
      2,296,532 shares of Common Stock. The Company also agreed to issue future
      warrants under the Amended Note with an exercise price of $0.001 per share.
      After giving effect to the additional warrants issued in connection with the
      Amended Note and the Forbearance Agreement, MH Financial is the beneficial
      holder of approximately 55% of the Company’s voting capital stock.





On
      March
      12, 2007, the Company issued warrants to purchase a total of 12,900,000 shares
      of Common Stock to MH Financial. The warrants were issued in connection with
      MH
      Financial’s additional $750,000 loan to the Company. The warrants have an
      exercise price of $0.001 per share, and expire on March 11, 2010.





On
      March
      12, 2007, the Company issued a warrant to purchase 1,000,000 shares of Common
      Stock with an exercise price of $0.001 per share to Steve Ashton in connection
      with this appointment as President and Chief Executive Officer of microHelix
      and
      of Moore.





On April
      1,
      2007 the Company issued a warrant to purchase 96,896 shares of the Company’s
      Common Stock with an exercise price of $0.001 per share to MH Financial pursuant
      to the terms of the Amended Note.





**Item
      8.** ***Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure***





On
      September 21, 2006, the Company dismissed Stonefield Josephson, Inc.
      ("Stonefield") as its independent registered accounting firm. Stonefield’s
      reports on the Company’s financial statements for the years ended December 31,
      2005 and 2004 did not contain an adverse opinion or a disclaimer of opinion
      and
      were not qualified or modified as to uncertainty, audit scope or accounting
      principles, except for a going concern opinion expressing substantial doubt
      about the ability of the Company to continue as a going concern. The decision
      to
      change accountants was approved by the Company’s Audit Committee. The decision
      to change accountants was not the result of any disagreements between Stonefield
      and us on matters of accounting principles or practices, financial statement
      disclosure or audit scope or procedures. On September 25, 2006, the Company
      approved the engagement of Peterson Sullivan PLLC to serve as the Company's
      independent registered accountants for the year ended December 31, 2006.





40


**Item
      8A.** ***Controls
      and Procedures***





The
      Company's Chief Executive Officer and Chief Financial Officer evaluated the
      effectiveness of the design and operation of the Company's disclosure controls
      and procedures as of December 31, 2006. Based on that evaluation, the Company's
      Chief Executive Officer/Chief Financial Officer concluded that as of the
      evaluation date the Company's disclosure controls and procedures are designed
      to
      and are effective to give reasonable assurance that the information the Company
      must disclose in reports filed with the Securities and Exchange Commission
      are
      properly recorded, processed, summarized, and reported as required. The
      Company's Chief Executive Officer and Chief Financial Officer also concluded
      that the Company's disclosure controls and procedures are effective to ensure
      that the information required to be disclosed in reports filed or submitted
      by
      the Company under the Securities Exchange Act of 1934, as amended, is
      accumulated and communicated to the Company's management, including its
      principal executive and principal financial officers, as appropriate to allow
      timely decisions regarding required disclosure. There were no changes in the
      Company's internal control over financial reporting during 2006 that materially
      affected, or were reasonably likely to materially affect, the Company's internal
      control over financial reporting.





Stonefield
      advised the Company in connection with its audit for the year ended December
      31,
      2005 that the Management Operating System (“MOS”) software, which served as
      Moore’s operational and financial reporting system, was antiquated and did not
      provide the necessary information in a timely manner. The Company also
      recognized the MOS related weakness and determined it to be ineffective,
      creating more work while becoming progressively less reliable. After an
      extensive evaluation of various Enterprise Resource Planning systems (“ERP”),
      the company began implementation of its new ERP system (Vantage 8) and the
      Company successfully completed the conversion April 1, 2006.





**Item
      8B.** ***Other
      Information***




None.


**Part
      III**





**Item
      9.** ***Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a)
      of the Act.***





The
      following table sets forth the names of the directors and key employees of
      the
      Company. Also set forth is certain information with respect to each such
      person's age at April 13, 2007, principal occupation or employment during at
      least the past five years, the periods during which he or she has served as
      a
      director of microHelix and positions currently held with microHelix.





**Name**
            
            **Age**
            
            **Position**James
                M. Williams
            
            63
            
            Chairman
                of the BoardWilliam
                C. McCormick
            
            72
            
            DirectorSteven
                G. Ashton
            
            62
            
            President,
                Chief Executive Officer and Assistant Secretary of microHelix and
                of
                Moore, DirectorJames
                E. Horswill
            
            58
            
            Chief
                Financial Officer, Corporate Controller and Secretary of microHelix
                and of
                Moore





*James
      M. Williams* has
      been
      a director of microHelix since 1998 and was elected Chairman of the Board in
      April 2003. He was the Chairman of Encore Senior Living, LLC, one of the
      nation's largest privately-held providers of senior living services, until
      May
      2005. From Encore's inception in 1996 until his retirement in 2001, Mr. Williams
      was President and Chief Executive Officer. Prior to Encore, Mr. Williams was
      a
      co-founder, Chief Operating Officer and Vice-Chairman of Brim, Inc., one of
      the
      nation's leading hospital management companies, which merged into Providence
      Healthcare Inc. in 1996. Mr. Williams obtained a B.S. in Engineering and an
      M.B.A. from Oregon State University.





41


*William
      C. McCormick* is
      Chairman of the Board of Directors of Microfield, Inc., a company focused
      on energy related systems and products. He was Chairman and Chief Executive
      Officer of Precision Castparts Corp., a publicly traded aerospace company,
      from
      August 1994 to August 2002 and a member of the Board beginning in 1985. Prior
      to
      Precision Castparts, Mr. McCormick spent 32 years at General Electric in various
      businesses, including GE Aircraft Engines, Carboloy Systems, Distribution
      Equipment, and Industrial Electronics. Mr. McCormick is Chairman and interim
      CEO of Merix Corporation, a publicly traded manufacturer of high
      performance interconnect products. He serves on the boards of several other
      for
      profit and nonprofit companies. Mr. McCormick also serves on the Advisory Board
      of Aequitas Capital Management, Inc., a private equity firm ("Aequitas").
      Aequitas serves as the exclusive financial adviser of microHelix and is the
      manager of MH Financial Associates, LLC, which owns certain subordinated debt
      of
      microHelix and all of microHelix's issued and outstanding Series C Preferred
      Stock. Mr. McCormick earned a B.S. Degree in mathematics from the University
      of
      Cincinnati.





*Steven
      G. Ashton* was
      appointed President and Chief Executive Officer of Moore in February 2007 and
      of
      the Company in March 2007. He has been an independent business coach to CEOs
      since 2001. From 2001 to 2005, he was a continuous improvement consultant to
      NRV
      Incorporated, a public company that manufactures travel trailer and motor
      coaches. Dr. Ashton was Vice President of Manufacturing at SMC Corporation
      from
      1999 to 2000 and Chief Technology Officer of Ashton Photo Company from 1996
      to
      1998, where he was also President and CEO from 1976 to 1996. Dr. Ashton received
      his Ph.D. from the University of Oregon.





*James
      E. Horswill* was
      appointed Corporate Controller in July 2005, Chief Financial Officer in February
      2007 and Secretary in April 2007. From 1998 through 2003, Mr. Horswill was
      the
      Accounting Manager of Komatsu Silicon America, Inc, where he also served as
      Controller from 2003 through July 2005. Mr. Horswill received his Bachelor
      of
      Science in Business Administration from Linfield College and his M.B.A. from
      George Fox University.





Officers
      serve at the discretion of the Board of Directors. There are no family
      relationships among any of our directors and executive officers.





**Audit
      Committee**





The
      members of the Audit Committee during 2006 were John L. Crary, Terrence Rixford
      and James M. Thornton (until January 2007). Mr. Crary is an independent
      director. Mr. Thornton was an independent director. Mr. Rixford was not an
      independent director since he was employed by the Company within the past three
      years. The Board of Directors appointed Mr. Rixford to the Audit Committee
      in
      recognition of his long-term experience with the Company and his expertise
      in
      accounting and financial matters. As reported on Form 8K, Mr. Rixford resigned
      from the Board of Directors in April 2007. The Board of Directors appointed
      William C. McCormick and James M. Williams to the Audit Committee in April
      2007.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires the Company's executive officers, directors,
      and persons who beneficially own more than 10% of the Common Stock to file
      reports of ownership and changes in ownership with the SEC. Executive officers,
      directors and beneficial owners of more than 10% of the Common Stock are
      required by the SEC's regulations to furnish the Company with copies of all
      Section 16(a) reports they file. Based solely on a review of such reports
      received by the Company and on written representations from certain reporting
      persons that they have complied with the relevant filing requirements, the
      Company believes that all Section 16(a) filing requirements applicable to its
      executive officers, directors and 10% beneficial owners have been filed in
      a
      timely manner, except that (i) James M. Williams filed one late Form 4 in
      connection with stock granted as compensation for service on the Company's
      Board
      of Directors and as a result of the dividend paid on and the conversion of
      the
      Series B Preferred Stock on August 17, 2006; (ii) James M. Thornton, John R.
      Crary and Terrence A. Rixford, former directors, each filed one late Form 4
      in connection with stock granted as compensation for service on the Company's
      Board of Directors and as a result of the dividend paid on and the conversion
      of
      the Series B Preferred Stock on August 17, 2006; (iii) James E. Horswill has
      not
      filed a Form 3 upon his appointment as an executive officer of microHelix;
      (iv)
      Yee Ling Hayden failed to file a Form 4 in connection with a change in
      ownership due to the dividend paid on and the conversion of the Series B
      Preferred Stock on August 17, 2006; and (v) MH Financial Associates, LLC filed
      late its Form 13D.





42


**Code
      of Ethics**





microHelix
      adopted a code of ethics on April 6, 2005 that applies to its directors,
      officers and employees. A copy of the code of ethics can be accessed on our
      website at http://www.microhelix.com/Code_of_Ethics.pdf. The information on
      or
      that can be accessed through our website is not part of this Annual Report
      on
      Form 10-KSB.





**Item
      10.** ***Executive
      Compensation.***





**Summary
      Compensation Table**





The
      following table sets forth certain information regarding compensation paid
      during the last three fiscal years to our former President and Chief Executive
      Officer and our other executive officer who received compensation in excess
      of
      $100,000 in any year.





**Name
                and Principal Position**
            
            **Year**
            
            **Salary****($)**
            
            **Bonus****($)**
            
            **Stock
                Awards ($)**
            
            **All
                Other Compensation ($)**
            
            **Total
                ($)**Tyram
                H. Pettit
              President
                and ChiefExecutive
                Officer,
              Director(1)
            
            
            2006
            
            $
            96,930
            
            
            
            
            
            
            
            
            
            
            $
            96,9302005
            
            $
            108,980
            
            $
            25,000
            (2)
            $
            9,866
            (3)
            
            
            
            $
            133,980Marti
                D. Lundy,
              VicePresident
                - MooreElectronics,
              Director(4)
            
            
            2006
            
            $
            138,765
            
            
            
            
            
            
            
            $
            14,400
            (5)
            $
            153,1652005
            
            $
            107,302
            
            
            
            
            
            
            
            $
            11,077
            (5)
            $
            118,379





(1)
            Mr.
                Pettit did not receive any compensation for services rendered as
                a
                director. Mr. Pettit resigned as a director and officer of the Company
                and
                of Moore in March 2007.(2)
            Bonus
                granted upon completion of the acquisition of Moore.(3)
            Consists
                of unrestricted stock grant of 48,000 shares of Common Stock, and
                an
                unrestricted grant of 4,377 shares Mr. Pettit received in exchange
                for
                voluntarily surrendering all of his outstanding options to purchase
                shares
                of Common Stock, effective October 31, 2005. The value of the Company's
                Common Stock on that date was $0.28 per share.(4)
            Ms.
                Lundy did not receive any compensation for services rendered as a
                director. Ms. Lundy resigned as a director and officer of the Company
                and
                of Moore in October 2006.(5)
            Consists
                of automobile allowance.





**Option
      Grants in Last Fiscal Year**





No
      options were granted in 2006 to our named executive officers.





**Option
      Exercises in Last Fiscal Year and Fiscal Year End Option Values**





None
      of
      our named executive officers held any outstanding stock options at
      December 31, 2006. No stock options were exercised by our named executive
      officers during 2006.





43


**Director
      Compensation**





**Name**
            
            **Fees
                Earned or Paid in Cash ($)**
            
            **Stock
                Awards ($)**
            
            **Total
                ($)**James
                M. Williams
            
            $
            6,450
            (1)
            $
            450
            (2)
            $
            6,900Terrence
                A. Rixford
            
            $
            4,450
            
            $
            450
            (2)
            $
            4,900John
                L. Crary
            
            $
            4,450
            
            $
            450
            (2)
            $
            4,900James
                M. Thornton
            
            $
            4,450
            
            $
            450
            (2)
            $
            4,900





(1)
            Consists
                of $2,000 annual retainer, $1,000 retainer paid for service as Chairman
                of
                the Board, and $1,000 retainer paid for service as Chairman of the
                Compensation Committee.


(2)
            Each
                director received an unrestricted grant of 10,000 shares of Common
                Stock
                during 2006, all of which were outstanding as of December 31,
                2006.





Outside
      directors are eligible to be paid a $2,000 annual retainer, $350 for each Board
      of Directors meeting attended and $200 for each committee meeting attended.
      The
      Chairman of the Board, the Compensation Committee Chair and the Audit Committee
      Chair each are eligible to be paid an additional $1,000 retainer. Each of the
      outside directors received in 2006 a grant of 10,000 shares of the Company's
      Common Stock. Outside directors are reimbursed for their out-of-pocket expenses
      incurred on behalf of the Company. Employee directors do not receive any
      compensation for serving on the Board of Directors.





**Item
      11.** ***Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters.***





The
      following table sets forth information, as of April 13, 2007, with respect
      to
      the beneficial ownership of the Common Stock and Series C Preferred Stock
      of the Company by: (i) each shareholder known by us to be the beneficial
      owner of more than 5% of the Common Stock and of our Series C Preferred Stock;
      (ii) each of our directors; (iii) our Chief Executive Officer and our
      other executive officers; and (iv) all executive officers and directors as
      a group. Unless otherwise indicated, the address of each person listed below
      is:
      c/o microHelix, Inc., 19500 SW 90th Court, Tualatin, Oregon 97062. Beneficial
      ownership is determined in accordance with the rules of the SEC and generally
      includes voting or investment power with respect to securities. Shares of Common
      Stock issuable on exercise of currently exercisable or convertible securities
      or
      securities exercisable or convertible within 60 days of April 13, 2007 are
      deemed beneficially owned and outstanding for purposes of computing the
      percentage owned by the person holding such securities, but are not considered
      outstanding for purposes of computing the percentage of any other person, except
      with respect to Series C Preferred. Since each share of Series C
      Preferred is immediately convertible into ten shares of Common Stock, and thus
      has ten votes, it has been assumed for purposes of calculating a person's total
      beneficial ownership that all shares of Series C Preferred have been
      converted into shares of Common Stock. Unless otherwise noted, each shareholder
      named in the table has sole voting and investment power with respect to the
      shares set forth opposite that shareholder's name. The information in the
      following table also assumes that the increase in the authorized capital stock
      of the Company is approved pursuant to Proposal 2 below.





**Shares
                Beneficially Owned****Name
                of Beneficial Owner**
            
            **Common****Stock**
            
            **Series
                C Preferred**
            
            **Total**
            
            **Percent**MH
                Financial Associates, LLC
            
            
            15,293,428
            (1)
            
            2,790,700
            
            
            18,084,128
            
            
            55.5
            %Yee
                Ling Hayden
            
            
            2,334,790
            (2)
            
            0
            
            
            2,334,790
            
            
            13.4
            %Paulson
                Investment Company, Inc.
            
            
            2,182,405
            (3)
            
            0
            
            
            2,182,405
            
            
            12.6
            %James
                M. Williams
            
            
            1,637,870
            (4)
            
            0
            
            
            1,637,870
            
            
            9.5
            %Steven
                G. Ashton
            
            
            1,000,000
            (5)
            
            0
            
            
            1,000,000
            (5)
            
            5.5
            %William
                C. McCormick
            
            
            10,000
            
            
            0
            
            
            10,000
            
            
            *James
                E. Horswill
            
            
            4,375
            
            
            0
            
            
            4,375
            
            
            ***Directors
                and Officers as a Group (4 persons)**
            
            
            2,652,245
            (5)
            
            0
            
            
            2,652,245
            
            
            14.5
            %





*Less
      than 1%





(1)
      Includes warrants to purchase 15,293,428 shares of Common Stock. MH Financial
      Associates, LLC has agreed to assign certain of its warrants to its investors
      as
      follows: (i) Aequitas Catalyst Fund, LLC: warrants to purchase 3,891,300 shares;
      (ii) Thurman Holdings 1, Limited Partnership: warrants to purchase 999,975
      shares; and (iii) CTK Capital Corporation, a corporation controlled by James
      M.
      Williams, Chairman of the Company's Board of Directors: warrants to purchase
      2,608,725 shares. As of the date of this amendment, such assignment has not
      been
      completed.





44


(2)
      Includes a warrant to purchase 100,000 shares of Common Stock held by Trust
      Company of America for the benefit of Yee Ling Hayden. Business address is
      7103
      S. Revere Parkway, Englewood, Colorado 80112.





(3)
      Business address is 811 SW Naito Parkway, Suite 200, Portland, Oregon
      97204.





(4)
      Includes 1,578,687 shares of Common Stock held by a corporation controlled
      by
      Mr. Williams. Mr. Williams's retirement plan and a corporation controlled by
      Mr.
      Williams is also a member of MH Financial Associates, LLC, but he has no control
      over the voting or disposition of any securities held by MH Financial
      Associates, LLC.





(5)
      Includes 1,000,000 shares of Common Stock issuable upon exercise of a
      warrant.





**Item
      12.** ***Certain
      Relationships and Related Transactions*** .





On
      April
      8, 2005, we issued a promissory note in the amount of $1,250,000 to Marti D.
      Lundy as part of the Moore acquisition (the "Original Note"). MH Financial
      assumed the Original Note from Ms. Lundy on October 19, 2006. On that date,
      the principal amount outstanding was $1,028,982. **** Subsequently,
      on March 12, 2007, MH Financial loaned an additional $750,000 to the Company
      by
      adding that amount to the Original Note, which was amended to become the
      "Amended Note," for a total principal amount of $1,778,964. The Amended Note
      bears current interest at a rate of 12% per annum ("Current Interest").
      Additional interest accrues on the Amended Note at a rate of 8% per annum,
      which
      is compounded quarterly and is payable at maturity ("Deferred Interest").
      microHelix will make separate payments with respect to $1,006,086 of the
      principal under the Original Note ("Loan 1") and with respect to $750,000 of
      the
      principal added in the Amended Note ("Loan 2"). Beginning April 19, 2007 and
      on
      the same day of each subsequent month, microHelix will pay $20,000 per month
      to
      be applied to Current Interest and principal on Loan 1 and will pay $7,500
      per
      month of Current Interest on Loan 2. On September 30, 2007, microHelix will
      make
      an additional payment of accrued Current Interest through that date with regard
      to Loan 2. Beginning on October 31, 2007, and on the last day of each subsequent
      month through and including May 31, 2008, microHelix will pay $87,555 per month
      to be applied against the Current Interest and principal balance of Loan 2.
      All amounts outstanding under the Amended Note, including the Deferred Interest,
      are due and payable on June 30, 2008. James M. Williams, one of our
      directors, is an indirect investor in MH Financial through a retirement plan
      and
      a corporation controlled by Mr. Williams.





On
      December 28, 2006, microHelix issued a note to James M. Williams in the
      principal amount of $150,000, together with interest on the unpaid principal
      at
      the rate of 15% per annum. microHelix used the proceeds from the note for
      working capital. On March 12, 2007, microHelix repaid the entire principal
      balance and accrued but unpaid interest.





The
      terms
      of the above transactions were as favorable to us as those generally available
      from unaffiliated third parties. Each transaction was ratified by a majority
      of
      our directors who did not have an interest in the transactions and who had
      access, at our expense, to our legal counsel or independent legal
      counsel.


45


**Item
      13.** ***Exhibits***





**Exhibit**
              **Number**
            
            **Description**3.1(1)
            
            Amended
                and Restated Articles of Incorporation of microHelix, Inc., as amended
                November 16, 2001, December 5, 2003, April 8, 2005, October 28, 2005
                and
                October 17, 2006.




3.2(2)
            
            Bylaws
                of microHelix, Inc.10.1(2)
            
            Warrant
                dated March 27, 2000 to The Polymer Technology Group.10.2(2)
            
            Warrant
                Agreement dated January 5, 2001 with Imperial Bank, as
                predecessor-in-interest to Comerica Bank, as amended May 31,
                2001.10.3(2)
            
            Antidilution
                Agreement dated January 5, 2001 between microHelix, Inc. and Imperial
                Bank, as predecessor-in-interest to Comerica Bank.10.4(2)
            
            Stock
                Transfer Restriction Agreement dated January 5, 2001 between microHelix,
                Inc. and Imperial Bank, as predecessor-in-interest to Comerica
                Bank.10.5(2)
            
            Form
                of Warrant for Bridge Loan for Pre-IPO Financing.10.6(2)
            
            Standard
                Commercial-Industrial Lease Agreement dated August 1, 2004 between
                microHelix, Inc. and La Bajada Land Company LLC.10.7(3)
            
            Contractual
                Guideline for Shelter Program Relationships dated December 28, 1999
                between Javid LLC and Grayscale, Inc. (which merged into microHelix,
                Inc.
                on December 31, 2000), and Lease Contract entered into through Javid
                LLC's
                subsidiary Camex de Nogales, S.A. de C.V. on behalf of microHelix,
                Inc.
                dated effective November 1, 2003.10.8(3)
            
            Lease
                Agreement between microHelix, Inc. as Landlord, ADM De Mexico, Inc.
                as
                Tenant.10.9(4)
            
            Form
                of Warrant dated April 8, 2005 issued by microHelix, Inc. to financial
                advisors.10.10(4)
            
            Merger
                Agreement dated April 8, 2005 among microHelix, Inc., microHelix
                Acquisition Corp., Moore Electronics, Inc., Lawrence T. Moore and
                Marti D.
                Lundy.10.11(5)
            
            Promissory
                Note dated April 8, 2005 made by microHelix, Inc. in favor of Marti
                D.
                Lundy, as amended August 5, 2005, November 18, 2005 and January 3,
                2006.10.12(4)
            
            Security
                Agreement dated April 8, 2005 among microHelix, Inc., Moore Electronics,
                Inc. and Marti D. Lundy.10.13(6)
            
            Amended
                and Restated Loan and Security Agreement dated as of April 5, 2005
                among
                microHelix, Inc., Moore Electronics, Inc. and BFI Business Finance
                as
                modified on October 11, 2005, December 22, 2005 , and January 5,
                2006.10.14(8)
            
            Secured
                Promissory Note dated April 17, 2006 between microHelix, Inc. and
                Moore
                Electronics, Inc., and BFI Business Finance.10.14(4)
            
            Stock
                Pledge Agreement dated as of April 5, 2005 between microHelix, Inc.
                and
                BFI Business Finance.10.15(4)
            *
            Employment
                Agreement dated April 8, 2005 between Marti D. Lundy and Moore
                Electronics, Inc. as amended on October 19,2006.10.16(4)
            
            Lease
                dated August 15, 1999 between Sylvia B. Giustina and Moore Electronics,
                Inc. ("Tenant"), as modified and amended by a Memorandum of Understanding
                effective January 1, 2001, a First Addendum to Lease effective August
                15,
                2002, a Second Addendum to Lease effective August 15, 2002 and a
                Third
                Addendum to Lease effective April 7, 2005.10.17(9)
            
            Loan
                and Security Agreement Number 1202, dated June 22, 2006 between VenCore
                Solutions LLC and microHelix, Inc. and Moore Electronics,
                Inc.10.18(9)
            
            Promissory
                Note, dated June 22, 2006, executed in favor of VenCore Solutions
                LLC by
                microHelix, Inc. and Moore Electronics, Inc.10.19(10)
            
            Series
                C Preferred Stock Purchase Agreement dated October 19, 2006 between
                microHelix, Inc. and MH Financial Associates, LLC.10.20(11)
            
            Form
                of Warrant dated October 19, 2006 issued by microHelix, Inc. to MH
                Financial Associates, LLC, as amended on March 12, 2007.10.21(10)
            
            Agreement
                Regarding Amendment to Promissory Note dated October 19, 2006 between
                microHelix, Inc. and MH Financial Associates, LLC.10.22(10)
            
            Amended
                and Restated Promissory Note dated October 19, 2006 executed by
                microHelix, Inc. in favor of MH Financial Associates,
                Inc.10.23(11)
            
            Registration
                Rights Agreement dated October 19, 2006 between microHelix, Inc.
                and MH
                Financial Associates, LLC, as amended on March 12,
                2007.10.24(12)
            
            Series
                C Preferred Stock Purchase Agreement dated November 2, 2006 between
                microHelix, Inc. and MH Financial Associates,
                LLC.




46




10.25(13)
            
            Form
                of Warrant dated November 2, 2006 issued by microHelix, Inc. to MH
                Financial Associates, LLC, as amended on March 12,
                2007.10.26(14)
            
            Promissory
                Note dated December 28, 2006 issued by microHelix, Inc. to James
                M.
                Williams.10.27(14)
            
            Subordination
                Agreement dated December 28, 2006 among microHelix, Inc., James M.
                Williams and BFI Business Finance.10.28(15)
            
            Second
                Agreement Regarding Amendment of Promissory Note dated March 12,
                2007
                between microHelix, Inc. and MH Financial Associates,
                LLC.10.29(15)
            
            Second
                Amended and Restated Promissory Note dated March 12, 2007 issued
                by
                microHelix, Inc. to MH Financial Associates, LLC.10.30(15)
            
            Form
                of Warrant dated March 12, 2007 issued by microHelix, Inc. to MH
                Financial
                Associates, LLC and to be issued to Dr. Steve Ashton.10.31(15)
            
            Forbearance
                and Waiver Agreement dated March 12, 2007 between microHelix, Inc.
                and MH
                Financial Associates, LLC.10.32(15)
            *
            Independent
                Contractor Agreement effective February 12, 2007 between Moore
                Electronics, Inc. and Steve Ashton.14.1(4)
            
            Policy
                on Business Ethics for Directors, Officers and
                Employees.21.1(3)
            
            Subsidiaries.31.1(7)
            
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2(7)
            
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1(7)
            
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2(7)
            
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.








(1)
            Incorporated
                by reference to the Company's Annual Report on Form 10-KSB for the
                year
                ended December 31, 2004, and to the Company's Forms 8-K filed on
                April 14,
                2005, October 31, 2005 and October 19,
                2006.


(2)
            Incorporated
                by reference to the Company's Proxy Statement filed on March 23,
                2004.


(3)
            Incorporated
                by reference to the Company's Annual Report on Form 10-KSB for the
                year
                ended December 31, 2004.


(4)
            Incorporated
                by reference to the Company's Forms 8-K filed on April 14, 2005 and
                October 20, 2006.


(5)
            Incorporated
                by reference to the Company's Form 8-K filed on April 14, 2005, to
                the
                Company's Form 10-QSB for the quarter ended September 30, 2005 and
                to the
                Company's Forms 8-K filed on January 4, 2006, May 23, 2006 and August
                11,
                2006.


(6)
            Incorporated
                by reference to the Company's Form 8-K filed on April 14, 2005, and
                to the
                Company's Forms 8-K filed on October 31, 2005, January 4, 2006 and
                January
                26, 2006.


(7)
            Filed
                herewith.


(8)
            Incorporated
                by reference to the Company's Form 8-K filed on April 21,
                2006.


(9)
            Incorporated
                by reference to the Company's Form 8-K filed on June 28,
                2006.


(10)
            Incorporated
                by reference to the Company's Form 8-K filed on October 20,
                2006.


(11)
            Incorporated
                by reference to the Company's Forms 8-K filed on October 20, 2006
                and
                March 16, 2007.


(12)
            Incorporated
                by reference to the Company's Form 8-K filed on November 8,
                2006.


(13)
            Incorporated
                by reference to the Company's Forms 8-K filed on November 8, 2006
                and
                March 16, 2007.


(14)
            Incorporated
                by reference to the Company's Form 8-K filed on January 3,
                2007.


(15)
            Incorporated
                by reference to the Company's Form 8-K filed on March 16,
                2007.





*
      Management contract or compensatory plan or arrangement.





47


**Item
      14.** ***Principal
      Accountant Fees and Services*** **.**





On
      September 25, 2006, the Company approved the engagement of Peterson Sullivan
      PLLC to serve as the Company's independent registered public accountants for
      the
      fiscal year ending December 31, 2006. During the fiscal years ended December
      31,
      2004 and 2005 and through the date hereof, the Company did not consult Peterson
      Sullivan PLLC with respect to the application of accounting principles to a
      specified transaction, either completed or proposed, the type of audit opinion
      that might be rendered on the Company's consolidated financial statements,
      or
      any other matters or events.





Peterson
      Sullivan PLLC has been selected as the Company's independent public accountants
      for the current year.


Representatives
      from Peterson Sullivan PLLC are not expected to be present at the Annual
      Meeting; however, representatives from Peterson Sullivan PLLC are expected
      to be
      available to respond to appropriate questions via telephone at the Annual
      Meeting and will have the opportunity to make a statement if they desire to
      do
      so.





Stonefield
      Josephson, Inc. ("Stonefield") served as the Company's independent public
      accountants for the fiscal year ended December 31, 2005. On September 21, 2006,
      the Company dismissed Stonefield as our independent registered public accounting
      firm. Stonefield's reports on the Company's financial statements for the years
      ended December 31, 2005 and 2004 did not contain an adverse opinion or a
      disclaimer of opinion and were not qualified or modified as to uncertainty,
      audit scope or accounting principles, except for a going concern opinion
      expressing substantial doubt about the ability of the Company to continue as
      a
      going concern. The decision to change accountants was approved by the Company's
      Audit Committee. The Company's decision to change accountants was not the result
      of any disagreements between Stonefield and us on matters of accounting
      principles or practices, financial statement disclosure or audit scope or
      procedures.





Stonefield
      advised the Company in connection with its audit for the year ended December
      31,
      2004 that two adjustments needed to be made with regard to the interim financial
      statements prepared for the periods ending March 31, 2004 and June 30, 2004.
      The
      Company acknowledged that these recommended adjustments to the interim financial
      statements reflected a material weakness under standards established by the
      Public Company Accounting Oversight Board. The adjustments were made and the
      Company's internal controls were changed as disclosed in Item 8A of the
      Company's Annual Report on Form 10-KSB for the year ended December 31,
      2005.





The
      following table shows the fees paid or accrued by the Company for the audit
      and
      other services provided by Stonefield for 2005 and 2006.




**2005**
            
            **2006**Audit
                Fees
            
            $
            326,849
            
            $
            271,503Audit-Related
                Fees
            
            
            -Tax
                Fees
            
            
            5,900All
                Other Fees
            
            
            13,028Totals
            
            $
            345,777
            
            
            271,503





The
      following table shows the fees paid or accrued by the Company for the audit
      and
      other services provided by Peterson Sullivan PLLC for 2006.





**2006**Audit
                Fees
            
            $
            94,153Audit-Related
                Fees
            
            $Tax
                Fees
            
            $All
                Other Fees
            
            $Totals
            
            $
            94,153





48


*Audit
      Fees* .
      Audit
      services of Stonefield and of Peterson Sullivan PLLC for 2006 and 2005 consisted
      of examination of the consolidated financial statements of the Company,
      quarterly reviews of the financial statements and services related to the
      filings made with the SEC.





*Tax
      Fees.* Tax
      preparation services were provided in 2006 by Geffen Mesher & Company, P.C..
      Tax fees included in 2005 relate to filing the required tax reports for the
      fiscal year ended December 31, 2004 and an accrual for tax preparation fees
      for
      the 2005 returns.





*All
      Other Fees* .
      There
      were no fees billed by Stonefield or Peterson Sullivan PLLC for services other
      than as described under "Audit Fees" for the years ended December 31, 2005
      or
      December 31, 2006. In 2005, The Mentor Group provided asset valuation services
      relating to the acquisition of Moore.





All
      of
      the services described above were approved by the Audit Committee. The Audit
      Committee has not adopted formal pre-approval policies, but has the sole
      authority to engage the Company's outside auditing and tax preparation firms
      and
      must approve all tax consulting and auditing arrangements with the independent
      accounting firms prior to the performance of any services. Approval for such
      services is evaluated during Audit Committee meetings and must be documented
      by
      signature of an Audit Committee member on the engagement letter of the
      independent accounting firm.





49


**SIGNATURES**





**SIGNATURES**





In
      accordance with the requirements of Section 13 or 15 (d) of the Securities
      Exchange Act of 1934, the registrant has duly caused this report to be signed
      on
      this behalf by the undersigned, thereunto duly authorized, on April  ,
      2007.


MICROHELIX,
                INC.By:
            /s/
                Steven G. AshtonSteve
                Ashton*President
                and Chief Executive Officer*




In
      accordance with the requirements of the Securities Exchange Act of 1934, this
      report has been signed below by the following persons on behalf of the
      registrant and in the capacities and on the dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s/James
                M. Williams
            
            Chairman
                and Director
            
            May
                11, 2007James
                M. Williams/s/
                William C. McCormick
            
            Director
            
            May
                11, 2007William
                McCormick/s/
                Steven G. Ashton
            
            Director
            
            May
                11, 2007Steven
                G. Ashton




50