**U.
        S. Securities and Exchange Commission**
 Washington,
        D. C. 20549
  **FORM
        10-QSB**
  **x
        QUARTERLY REPORT UNDER
        SECTION 13 OR 15(d) OF THE SECURITIES**
 **EXCHANGE
        ACT OF 1934**
  For
        the
        quarterly period ended June 30, 2006
  **o
        TRANSITION REPORT UNDER
        SECTION 13 OR 15(d) OF THE EXCHANGE ACT**
  For
        the
        transition period from _________ to _________
  *Commission
        File No. 000-26695*
  MICHELEX
        CORPORATION
 (Name
        of
        Small Business Issuer in its Charter)
 
 UTAH
              87-0636107(State
                  or Other Jurisdiction of
                incorporation
                  or organization)
              (I.R.S.
                  Employer I.D. No.)
 
 Outer
        Willow Street
 Massena,
        New York 13662
 (Address
        of Principal Executive offices)
  Issuer's
        Telephone Number: (315) 769-6616
  **APPLICABLE
        ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**
 **PROCEEDINGS
        DURING THE PRECEDING FIVE YEARS**
  Not
        applicable.
  Check
        whether the registrant filed all documents and reports required to be filed
        by
        Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
        under a plan confirmed by a court.
  Yes
        No
  **APPLICABLE
        ONLY TO CORPORATE ISSUERS**
  State
        the
        number of shares outstanding of each of the Registrant's classes of common
        stock, as of the latest practicable date:
  November
        13, 2006
  105,871,037
  
  **PART
        I - FINANCIAL INFORMATION**
  **Item
        1. Financial Statements.**
  The
        Financial Statements of the Registrant required to be filed with this 10-QSB
        Quarterly Report were prepared by management, and commence on the following
        page, together with Related Notes. In the opinion of management, the Financial
        Statements fairly present the financial condition of the Registrant for the
        periods then ended.
 
 
  **MICHELEX
        CORPORATION**
  **Index
        to Financial Statements**
 
 Consolidated
                  Balance Sheets
              F-2
                  - F-3Consolidated
                  Statements of Operations
              F-4Consolidated
                  Statements of Cash Flows
              F-5Notes
                  to Consolidated Financial Statements
              F-6
                  - F-15
  The
        unaudited condensed consolidated financial statements presented herein have
        been
        prepared in accordance
        with the instructions to Form 10-QSB and do not include all of the information
        and disclosures required by U.S. Generally Accepted Accounting Principles.
        Therefore, these financial statements should be read in conjunction with
        the
        consolidated financial statements and related footnotes included in the
        Company's Form 10-KSB for the year ended December 31, 2005. These financial
        statements reflect all adjustments that are, in the opinion of management,
        necessary to fairly state the results for the interim periods reported. Certain
        amounts from the prior period have been reclassified to be consistent with
        the
        current period presentation.
 **NONE
          REVIEW BY AUDITORS**
  Seligson
          & Giannattasio, LLP auditor
          for the Company, (the “Auditor”) did not review the 10Q for the Quarter ended
          June 30, 2006
  The
          audit
          report of Seligson
          & Giannattasio, LLP for
          the
          years ended December 31, 2004 and December 31, 2005
          contained a modification expressing substantial doubt about Michelex, Corp’s ability
          to continue as a going concern.
  The
          board
          of directors or an audit or similar committee of the board of directors
          acknowledged the inability as a matter of time for the auditors to review
          the
          financial statements .
  During
          the fiscal years ended Dec 31, 2004 and Dec 31, 2005 and the subsequent
          period
          from March 31, 2006,
          June 30, 2006 nor September 30, 2006 there were no disagreements with the
          accountant, whether or not resolved, on any matter of accounting
          principles or practices, financial statement disclosure, or auditing scope
          or
          procedure, which, if not
          resolved to the former accountant's satisfaction, would have caused it
          to make
          reference to the subject matter
          of
          the disagreement(s) in connection the periods 2004 and 2005 and any subsequent
          period preceding.
  The
          Company did not consult with Seligson & Giannattasio, LLP during its fiscal
          years ending Dec
          31,
          2004 and Dec 31, 2005 on the application of accounting principles to as
          specified transaction, the type
          of
          opinion that may be rendered on the Company's financial statements, any
          accounting, auditing or financial
          reporting issue, or any item that was either the subject of a disagreement
          or a
          reportable event as defined
          in item 304 of Regulation S- K.
  The
          Company has provided Seligson
          & Giannattasio, LLP with
          a
          copy of the disclosures contained
          in this filing. The 10-QSB filing will be restated once the auditors review
          it
          if they determine it to be necessary.
  The
          Company has
          retained Seligson
          & Giannattasio, LLP to perform
          our 2006 audit and statements and to review the quarterly filings.
  The
          Company is
          responsible for the adequacy and accuracy of disclosure in this filing,
          and SEC
          staff comments or changes
          to disclosure in response to staff comments do not foreclose the Commission
          from
          taking any action
          with respect to the filing and Michelex may not assert staff comments as
          a
          defense in any proceeding initiated
          by the Commission or any person under the federal securities laws of the
          United
          States.
  F-1
  **MICHELEX
        CORPORATION**
 **AND
        SUBSIDIARY**
  **CONSOLIDATED
        BALANCE SHEETS**
 
 June
                  30,
              
              December
                  31,2006
              
              2005ASSETSCurrent
                  assets:Cash
              
              $
              354,278
              
              $
              16,217Accounts
                  receivable, net
              
              
              597,465
              
              
              650,471Accounts
                  receivable related party
              
              
              14,482
              
              
              14,582Inventory,
                  net
              
              
              570,889
              
              
              726,724Restricted
                  cash
              
              
              5,840
              
              
              20,598Prepaid
                  expenses and income taxes
              
              
              418,503
              
              
              301,245Total
                  current assets
              
              
              1,961,457
              
              
              1,729,837Fixed
                  assets net of accumulated depreciation
                and
                  amortization of $19,588,322 and $19,799,098, respectively
              
              
              2,735,494
              
              
              5,380,114Other
                  assets:Land
                  and building held for investment
              
              
              119,500
              
              
              119,500Loans
                  receivable related party
              
              
              264,950
              
              
              215,245Other
                  assets
              
              
              72,044
              
              
              83,707Total
                  assets
              
              $
              5,153,445
              
              $
              7,528,403
  See
        notes
        to consolidated financial statements
  F-2
  **MICHELEX
        CORPORATION**
 **AND
        SUBSIDIARY**
  **CONSOLIDATED
        BALANCE SHEETS**
 
 June
                  30,
              
              December
                  31,2006
              
              2005LIABILITIES
                  AND SHAREHOLDERS' EQUITYCurrent
                  liabilities:Note
                  payable to bank
              
              $
              145,607
              
              $
              153,709Current
                  portion of long-term debt
              
              
              1,177,738
              
              
              1,666,310Current
                  portion of capital leases
              
              
              106,402
              
              
              89,176Convertible
                  debenture
              
              
              1,098,018
              
              
              1,258,246Accounts
                  payable
              
              
              2,083,325
              
              
              2,646,359Accrued
                  expenses
              
              
              1,195,242
              
              
              1,009,544Payroll
                  taxes payable
              
              
              172,414
              
              
              236,031Total
                  current liabilities
              
              
              5,978,746
              
              
              7,059,375Other
                  liabilities:Long-term
                  debt less current maturities
              
              
              2,450,630
              
              
              4,058,125Note
                  payable officers
              
              
              1,176,456
              
              
              123,395Capital
                  leases less current maturities
              
              
              232,520
              
              
              145,314Total
                  liabilities
              
              
              9,838,352
              
              
              11,386,206Commitments
                  and contingenciesShareholders'
                  equityCommon
                  stock - no par value,1,000,000,000
                  shares authorized, 82,421,037
                and
                  70,447,309 shares issued and outstanding, respectively
              
              
              82,421
              
              
              70,447Additional
                  paid-in-capital
              
              
              3,315,159
              
              
              2,316,953Retained
                  earnings
              
              
              (8,082,487
              )
              
              (6,245,206
              )Total
                  shareholders' equity
              
              
              (4,684,907
              )
              
              (3,857,806
              )Total
                  liabilities and shareholders' equity
              
              $
              5,153,445
              
              $
              7,528,403
  See
        notes
        to consolidated financial statements
  F-3
  **MICHELEX
        CORPORATION**
 **AND
        SUBSIDIARY**
  **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  Three
        Months Ended and Six Months Ended
 
 June
                  30,
              
              June
                  30,
              
              June
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)Net
                  sales-unrelatedparties
              
              
              187,641
              
              
              1,845,007
              
              
              612,603
              
              
              4,259,923Net
                  sales-related parties
              
              
              36,398
              
              
              17,814
              
              
              38,573
              
              
              33,783Net
                  sales
              
              
              224,039
              
              
              1,862,821
              
              
              651,176
              
              
              4,293,706Cost
                  of goods sold
              
              
              (12,659
              )
              
              1,471,224
              
              
              228,656
              
              
              3,294,745Gross
                  profit
              
              
              236,698
              
              
              391,597
              
              
              422,520
              
              
              998,961Operating
                  expenses:Selling
                  and shipping
              
              
              24,093
              
              
              153,492
              
              
              50,422
              
              
              206,619General
                  and administrative
              
              
              1,093,362
              
              
              584,168
              
              
              1,480,726
              
              
              1,849,764Depreciation
              
              
              151,416
              
              
              216,168
              
              
              315,263
              
              
              472,957Total
                  operating expenses
              
              
              1,268,871
              
              
              953,828
              
              
              1,846,411
              
              
              2,529,340(Loss)
                  income before other income
                (expense)
                  and income taxes
              
              
              (1,032,173
              )
              
              (562,231
              )
              
              (1,423,891
              )
              
              (1,530,379
              )Other
                  income (expense):Other
                  income
              
              
              5,387
              
              
              (175,831
              )
              
              9,557
              
              
              (164,643
              )Interest
                  expense
              
              
              (217,791
              )
              
              (106,741
              )
              
              (457,214
              )
              
              (471,807
              )Net
                  income from rentalproperties
              
              
              13,653
              
              
              (52,462
              )
              
              68,015
              
              
              (52,462
              )Loss
                  on sale of Assets
              
              
              (33,748
              )
              
              (49,201
              )
              
              (33,748
              )
              
              (49,474
              )Other
                  income (expenses)
              
              
              (232,499
              )
              
              (384,235
              )
              
              (413,390
              )
              
              (738,386
              )Loss
                  before income taxes
              
              
              (1,264,672
              )
              
              (946,466
              )
              
              (1,837,281
              )
              
              (2,268,765
              )Income
                  tax (benefit)
              
              
              —
              
              
              —
              
              
              —
              
              
              100Net
                  loss before discontinued operations
              
              
              (1,264,672
              )
              
              (946,466
              )
              
              (1,837,281
              )
              
              (2,268,865
              )Net
                  loss from discontinued operations
              
              
              —
              
              
              (78,549
              )
              
              —
              
              
              (183,071
              )Net
                  (loss) income
              
              
              (1,264,672
              )
              
              (1,025,015
              )
              
              (1,837,281
              )
              
              (2,451,936
              )Weighted
                  shares outstanding:Basic
              
              
              70,127,630
              
              
              70,447,309
              
              
              68,970,536
              
              
              66,389,994Diluted
              
              
              70,127,630
              
              
              70,447,309
              
              
              68,970,536
              
              
              66,389,994
 Basic
          and
          diluted (loss) per share:
 Loss
          per
          share $ (.02)$(.02)$(.03)$(.04)
  See
        notes
        to consolidated financial statements
  F-4
  **MICHELEX
        CORPORATION**
 **AND
        SUBSIDIARY**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 Six
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005(Unaudited)
              
              (Unaudited)CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (1,837,281
              )
              $
              (2,451,936
              )Adjustments
                  to reconcile net income (loss)to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              315,263
              
              
              492,489Stock
                  issued for services rendered
              
              
              144,000
              
              
              —Gain
                  (Loss( on sale of assets
              
              
              33,748
              
              
              49,474Warrants
                  issued for services
              
              
              494,119
              
              
              —Beneficial
                  Conversion Feature
              
              
              (10,228
              )
              
              126,937CHANGES
                  IN OPERATING ASSETS AND LIABILITIES:Accounts
                  receivable
              
              
              53,006
              
              
              1,972,606Notes
                  Receivable
              
              
              (49,706
              )
              
              54,022Inventory
              
              
              155,836
              
              
              528,398Restricted
                  Cash
              
              
              (14,758
              )Prepaid
                  expenses and taxes
              
              
              80,556
              
              
              376,779Other
                  assets
              
              
              11,663
              
              
              67,236Accounts
                  payable
              
              
              (563,034
              )
              
              (339,033
              )Accrued
                  expenses and taxes
              
              
              185,698
              
              
              (172,866
              )NET
                  CASH FLOWS FROM OPERATING ACTIVITIES
              
              
              (1,001,118
              )
              
              704,106CASH
                  FLOWS FROM INVESTING ACTIVITIES:Acquisition
                  of fixed assets
              
              
              (120,000
              )
              
              (274,371
              )Proceeds
                  from sale of equipment
              
              
              2,405,853
              
              
              636,208NET
                  CASH FLOWS FROM INVESTING ACTIVITIES
              
              
              2,285,853
              
              
              361,837CASH
                  FLOWS FROM FINANCING ACTIVITIES:Repayment
                  of long-term debt
              
              
              (3,311,633
              )
              
              (588,448
              )Net
                  borrowings from demand notes payable
              
              
              (8,102
              )
              
              (1,369,189
              )Proceeds
                  from issuance of convertible debentures
              
              
              
              
              
              1,000,000Proceeds
                  from long-term debt
              
              
              1,320,000
              
              
              234,490Borrowings
                  from related parties
              
              
              1,053,061
              
              
              (247,007
              )NET
                  CASH FLOWS BY FINANCING ACTIVITIES
              
              
              (946,674
              )
              
              (970,154
              )NET
                  INCREASE IN CASH
              
              
              338,061
              
              
              95,789CASH
                  AT BEGINNING OF PERIOD
              
              
              16,217
              
              
              26,027CASH
                  AT END OF PERIOD
              
              $
              354,278
              
              
              121,816SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Income
                  taxes paid
              
              $
              —
              
              $
              —Interest
                  paid
              
              $
              185,212
              
              $
              350,822
  See
        notes
        to consolidated financial statements
  F-5


**MICHELEX
      CORPORATION**


**AND
      SUBSIDIARY**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




June
      30,
      2006




**NOTE
      1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES**




In
      the
      opinion of management, the accompanying financial statements of Michelex
      Corporation ("Michelex") contain all adjustments necessary to present fairly
      the
      Company's financial position as of June 30, 2006 and December 31, 2005, the
      results of operations and cash flows for the periods ended June 30, 2006 and
      2005.




The
      results of operations for the three months and six month periods ended June
      30,
      2006 and 2005 are not necessarily indicative of the results to be expected
      for
      the full year.




Except
      as
      stated below, the accounting policies followed by the Company are set forth
      in
      Note 1 to the Company's financial statements included in its Annual Report
      on
      Form 10-KSB for the fiscal year ended December 31, 2005.





**NOTE
      2 - COMMITMENTS**





During
      the 2003 fiscal year, Michele Audio Corporation of America (the “Company”)
      entered into a Consulting Agreement with Investor Relations Services, Inc.,
      a
      Delaware corporation whose address is 120 Flagler Avenue, New Smyrna Beach,
      Florida and simultaneously a Personal Services Agreement with Mr. Charles Arnold
      located at 2 Spur Lane, Rolling Hills, California. The agreements were effective
      June 1, 2003 and they both expire on May 31, 2004. The agreements called for
      certain services, which are enumerated in the agreements, to be provided by
      Mr.
      Arnold and Investor Relations Services for the benefit of the Company. As
      compensation for these services the Company agreed to issue both Investor
      Relations Services and Mr. Arnold preferred shares of stock in Michele Audio
      Corporation of America. Additionally, the preferred shares were to have
      conversion rights allowing Mr. Arnold and Investor Relations Services, Inc.
      each
      to convert their preferred shares to 4.9% undiluted of the common stock issued
      and outstanding following the first round of financing after the Company became
      a public entity. It was further agreed the stock when issued would be restricted
      pursuant to Rule 144.





In
      March
      of 2004 Mr. Arnold and Investor Relations Services filed for arbitration, as
      called for in the agreements, against Michelex Corporation claiming they have
      not been compensated as called for in the agreements. In November 2005, the
      Company received notice of the settlement of the arbitration. Pursuant to the
      settlement, the Company is required to pay an aggregate of approximately
      $290,000 for damages, interest, legal and administrative fees. At December
      31,
      2005, there is an accrued expense for this settlement payment.





Commitment
      to Acquire Equipment





In
      October 2004, the Company agreed to acquire approximately $270,000 of
      manufacturing equipment. In connection with this agreement, the Company made
      a
      deposit toward the purchase of the equipment totaling $16,240. As of December
      31, 2004, the Company was attempting to secure the financing necessary to
      complete the acquisition. In May 2005, the agreement to purchase the equipment
      was terminated as a result of the Company’s inability to obtain the required
      financing. The Company reported a loss at that time of the total amount of
      the
      deposit.





Subpoena
      From Securities and Exchanges Commission





In
      January 2006, the Company received a subpoena from the Securities and Exchanges
      Commission (“SEC”) as part of an investigation the SEC is conducting into
      trading in certain over the counter stocks. The Company has not been notified
      that the SEC is conducting a formal or informal investigation into the
      Company.





Investor
      Relations Agreement





In
      March
      2006, the Company entered into an investor relations agreement. Pursuant the
      investor relations firm would provide public relations and investor relations
      services for a six month period for a fee of $125,000. The Company had the
      option at the end of the six month period to renew the agreement for an
      additional six months for a fee of $75,000. The Company made payments under
      the
      contract totaling $45,000 prior to the cancellation of the
      contract.




Issuance
      of Shares to Employees





In
      March
      2006, the Company issued 477,500 shares of common stock to
      employees.





Warrants
      issued for Consulting Services





In
      April
      2006, the Company entered into a one year agreement for financial consulting
      services in exchange for the granting of warrants to purchase 25,000,000 shares
      of the Company’s common stock. The warrants vest based upon a set schedule over
      a one-year period and are exercisable at $.02 per share for a period of five
      years. There was a charge of $114,000 taken for this transaction as of June
      30,
      2006.





Warrants
      Granted to Officers





In
      April
      2006, the Company granted to officers of the Company, options to purchase an
      aggregate of 50,000,000 shares of the Company’s common stock at an exercise
      price of $.02 per share. The options may be exercised after April 15, 2006
      and
      expire after April 15, 2011. The Company valued the warrants at $494,119 using
      the Black-Scholes option pricing method. The value was expensed as incurred
      as
      there was no vesting period. In August 2006, options to purchase 8,900,000
      options were exercised in exchange for $178,000. There was a charge of $494,119
      taken for this transaction as of June 30, 2006.





Financing





In
      April
      2006, the Company refinanced several of its properties in Massena, New York
      through a mortgage agreement totaling $1,200,000. The loan, which has an
      original due date of April 2007, incurs interest at the greater of 13% per
      annum
      or the prime rate plus 6% per annum. If all payments are made timely, the due
      date on the loan may be extended for an additional twelve months. The mortgage
      is guaranteed by an officer of the Company. In addition, as an additional
      incentive to loan the funds, the Company granted a warrant to the mortgage
      holder to purchase up to 1,000,000 shares of the Company’s common stock at an
      exercise price of $.02 per share. The warrant is exercisable anytime after
      April
      24, 2006 for a period of one (1) year.





In
      June
      2006, the Company obtained additional mortgage financing totaling $500,000
      from
      a separate lender. Borrowings under the mortgage which is due June 30, 2007
      incur interest at the rate of 10% per annum. The Company is required to make
      payments under the mortgage of $4,167 per month.





In
      June
      2006, the Company entered into a $40,000 secured promissory note with Ayuda
      Funding Corp. The note incurs interest at the rate of 10% per annum and is
      due
      on June 16, 2007. The note can be converted at any time at the option of the
      holder, into common shares of the Company at the lesser of $.01 per share or
      80%
      of the average closing bid price for the ten days preceding the conversion
      date.


F-6


**MICHELEX
      CORPORATION**


**AND
      SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





June
      30,
      2006





**NOTE
      3 - ACCOUNT RECEIVABLE PURCHASE AGREEMENT**





In
      May
      2005, the Company entered into a one (1) year account receivable purchase
      agreement with Commercial Capital Lending, LLC (“CCL”). Pursuant to the
      agreement, CCL agrees to purchase up to 80% of the eligible accounts receivable
      from the Company. The Company may be required to repurchase accounts sold to
      CCL
      under certain conditions. The Company is required to pay interest at the rate
      of
      prime plus one percent on 80% of the face amount of the accounts purchased.
      In
      addition, the Company is required to pay a servicing fee totaling .6% (six
      tenths of one percent) of the net face amount of the open receivables for each
      15 days the account is open. The agreement, among other provisions, is secured
      by all personal property excluding inventory and equipment.





**NOTE
      4 - SALE-LEASEBACK OF EQUIPMENT RELATED PARTY**





In
      April
      and May 2005, the Company transferred certain equipment in exchange for the
      repayment of the existing debt on the equipment to a corporation controlled
      by
      the brother of one of the Company’s officers. The Company subsequently leased
      back the equipment. Pursuant to the two separate two-year lease agreements,
      the
      Company is required to make monthly payments totaling $3,000 and $2,000 per
      month, respectively. The Company has not made any of the required lease payments
      pursuant to the agreement.





In
      May
      2006, the Company entered into a sale leaseback agreement with an unrelated
      third party. Pursuant to the agreement, the Company sold certain of its assets
      for $1,200,000. As a condition of the agreement, the Company agreed to lease
      the
      assets pursuant to a five year lease at a rental of $19,583 per month plus
      an
      additional rent factor equal to the 6.5% over the prime rate of the unpaid
      remaining rental. The Company has the additional option to purchase the assets
      anytime after the first twelve months for an amount equal to the remaining
      unpaid lease payments plus $117,500.


F-7


**MICHELEX
      CORPORATION**


**AND
      SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





June
      30,
      2006





**NOTE
      5 - MORTGAGE - RELATED PARTY**





In
      May
      2005, the Company entered into a secured convertible debenture for $150,000
      with
      the brother of one of the officer/directors. The debenture incurs interest
      at
      the rate of 8% per annum and is payable in monthly installments including
      interest totaling $3,041 through June 2010. The mortgage is secured by one
      of
      the Company’s properties as well as the home of the officer/director. The
      Company has not made the required payments under the mortgage. The Company
      has
      recorded a beneficial conversion feature totaling $50,000, which was recorded
      as
      a discount on the debentures and was being amortized over the term of the
      related debenture as additional interest expense.





In
      June
      2006, the note and accrued interest was converted into 8,100,000 shares of
      the
      Company’s common stock. At that time, the remaining beneficial conversion
      feature will be expensed.





**NOTE
      6 - CAPITAL LEASE ON EQUIPMENT**





Franklin
      Funding, Inc.




In
      May
      2005, the Company entered into a lease for equipment under capital lease
      arrangements with Franklin Funding, Inc. Pursuant to the lease, among other
      provisions, the lessor retains actual title to the leased property until the
      termination of the lease, at which time the property can be purchased for one
      dollar.





The
      lease
      dated May 17, 2005 is for certain equipment located in the Salt Lake City
      facilities. The term of the lease is forty months with monthly payments of
      $7,755 which is equal to the cost to amortize $250,000 over the lease term
      at an
      interest rate of approximately 17% per annum.





The
      Company had obtained the lease and related underlying equipment through an
      assumption agreement with one of the Company’s vendors. The vendor declared
      bankruptcy in 2006. Pursuant to a settlement agreement in June 2006 with
      Franklin Funding, The Company gave up possession of the equipment and cancelled
      the lease with Franklin Funding.




Heller
      Financial Leasing, Inc.





The
      Company leases equipment under capital lease arrangements with Heller Financial.
      The terms and amounts are described below. Pursuant to the lease, the lessor
      retains actual title to the leased property until the termination of the lease,
      at which time the property can be purchased for one dollar.





The
      leases dated August 9, 1999 are for thirteen Nissei injection mold machines.
      The
      term of the leases is sixty months with monthly payments of $27,362 which is
      equal to the cost to amortize $1,323,850 over a 5-year period at an interest
      rate of 8% per annum.





St.
      Lawrence County Industrial Development Agency.





The
      Company leases a building and land located on Lot 16 in the Massena Industrial
      Park from the St. Lawrence County Industrial Development Agency. Pursuant to the
      lease, the lessor retains actual title to the leased property until the
      termination of the lease, at which time the property can be purchased for one
      dollar. The lease dated November 6, 1998 is for 84 monthly payments of $4,431
      beginning November 1998.





The
      Company leases a second building in the Massena Industrial Park from the St.
      Lawrence County Industrial Development Agency. Pursuant to the lease, the lessor
      retains actual title to the leased property until the termination of the lease,
      at which time the property can be purchased for one dollar. The lease dated
      October 30, 2003 is for 96 monthly payments of $724 beginning November 1,
      2003.





US
      Bancorp Leasing





The
      Company leases Sumitomo injection molding machines under capital lease
      arrangements with US Bancorp Leasing. The Lease, dated September 11, 2001,
      is
      for 48 months with monthly payments of $10,012, which is equal to the cost
      to
      amortize $420,490 over a four-year period at an interest rate of 6.125% per
      annum. Pursuant to the leases the lessor retains actual title to the leased
      property until the termination of the lease, at which time the property can
      be
      purchased for one dollar.





F-8




**MICHELEX
      CORPORATION**


**AND
      SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





June
      30,
      2006





**NOTE
      6 - CAPITAL LEASE ON EQUIPMENT (continued)**





Buyout
      of capital leases





In
      July
      2005, the Company entered into an agreement with the St. Lawrence County
      Industrial Development Agency (“St. Lawrence IDA”) whereby the Company
      relinquished its use of one of the properties located in the Massena industrial
      park. The Company leased this property under an operating lease. Although the
      Company was not notified it was in default at the time the agreement, the
      Company was late in the payment of several of the monthly lease payments.
      Pursuant to this agreement, in exchange for allowing the Company to terminate
      its obligations under the operating lease for the above property, the St.
      Lawrence IDA issued credits to the Company in satisfaction of capital leases
      for
      two other properties also located in the Massena Industrial Park. The remaining
      principle balances at December 31, 2004 due on these capital leases totaled
      approximately $150,000. The total amount of the credits has been reflected
      as a
      lease buyout and included as a component of other income.





In
      December 2005, the Company entered into an agreement with the St. Lawrence
      IDA
      whereby the Company relinquished its use of one of the properties located in
      the
      Massena industrial park. The Company leased this property under a capital lease.
      The Company was late in the payment of several of the monthly lease payments
      on
      this and a lease on another property administered by the St. Lawrence IDA.
      Pursuant to this agreement, in exchange for allowing the Company to terminate
      its obligations under the lease for the above property, the St. Lawrence IDA
      issued credits to the Company in satisfaction of the capital leases for another
      property also located in the Massena Industrial Park. The total amount of the
      credits has been reflected as a lease buyout and included as a component of
      gain
      (loss) on sale of assets.





Sale-Leaseback
      Equipment





In
      May
      2006, the Company entered into a sale leaseback agreement with an unrelated
      third party. Pursuant to the agreement, the Company sold certain of its assets
      for $1,200,000. As a condition of the agreement, the Company agreed to lease
      the
      assets pursuant to a five year lease at a rental of $19,583 per month plus
      an
      additional rent factor equal to the 6.5% over the prime rate of the unpaid
      remaining rental. The Company has the additional option to purchase the assets
      anytime after the first twelve months for an amount equal to the remaining
      unpaid lease payments plus $117,500.




**NOTE
      7 - CONVERTIBLE DEBENTURES**





5%
      Convertible Debentures





During
      the quarter ended September 30, 2004 and through October 1, 2004, the Company
      issued $503,250 of 5% Convertible Debentures ("5% Debentures"). The 5%
      Debentures require the Company to issue non-restricted shares of the Company's
      common stock within 41 days of funding at a conversion price of $.17 per share.
      In the event non-restricted shares of the Company's common stock is not issued
      within the 41 days, then each debenture holder is entitled to 3 shares of
      restricted stock for each share of non-restricted shares required under the
      conversion provisions of the debenture. Additionally, if the Company fails
      to
      deliver non-restricted shares of the Company's common stock to the debenture
      holders within one (1) year after the first closing date, the Company shall
      be
      required to deliver additional shares of restricted stock in sufficient
      quantities to guarantee the holders a 45% return on their investment. The
      Private Placement Memorandum further grants the Placement Agent the right of
      first refusal on all subsequent offerings by the Company for a period of 2
      years. The Company aggregated net proceeds of $408,865 from the offering. The
      Company has recorded a beneficial conversion feature totaling $270,981, which
      was recorded as a discount on the debenture and had been amortized over the
      term
      of the debenture. At December 31, 2004, the entire beneficial conversion feature
      had been amortized to interest expense.





12%
      Convertible Debentures





The
      Company issued 12% Secured Convertible Debentures (“Convertible Debentures”)
      totaling $300,000 and $150,000 respectively. The Convertible Debentures will
      be
      due in September 2005 and may be prepaid in whole at any time after giving
      20
      days advance notice. The holders of the Convertible Debentures may elect at
      any
      time to convert the principle balance due into shares of the Company’s common
      stock at the lesser of $.1875 per share or 75% of the current market price
      at
      conversion. The Convertible Debentures are secured by a second security interest
      in all the Company’s assets. In November 2004, $300,000 of the Convertible
      Debentures were converted into 1,600,000 shares of the Company’s common stock
      (4,800,000 shares after the 3 for 1 stock split). In January 2005, the remaining
      $150,000 in Convertible Debentures were converted into 2,400,000 shares of
      the
      Company’s common stock (after giving effect to the 3 for 1 stock split). The
      Company recorded a beneficial conversion feature totaling $100,000 and $50,000,
      respectively, which were recorded as a discount on the debentures and amortized
      over the term of the related debenture. In November 2004, as a result of the
      conversion of one of the debentures, the balance of the beneficial conversion
      feature was expensed to interest expense. In January 2005, the remaining
      debentures were converted into common stock and the remaining beneficial
      conversion feature was expensed to interest expense.




F-9




**MICHELEX
      CORPORATION**


**AND
      SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





June
      30,
      2006





**NOTE
      7-CONVERTIBLE DEBENTURES (continued)**





Hindsight
      Debenture





In
      January 2005, the Company through its Hindsight Records, Inc, subsidiary closed
      on an aggregate of $1,000,000 5% Secured Convertible Debenture. The debentures
      are due December 29, 2006. The debenture is secured by the assets of Hindsight.
      The debentures are convertible at any time at the lesser of the price of the
      stock on the date of the closing or 75% of the price of the stock for the 5
      trading days prior to the date of the conversion. The Company has recorded
      a
      beneficial conversion feature totaling $333,333, which has been recorded as
      a
      discount on the debentures and is being amortized over the term of the related
      debenture. During the first quarter of 2005, $351,000 of the debentures were
      converted into 8,893,215 shares of the Company’s common stock.





**NOTE
      8 - SALE OF ASSETS**





In
      April
      2005, the Company sold several of its properties to MPG Development LLC (“MPG”),
      a limited liability company controlled by officers of the Company and their
      immediate families. The properties, which had a carrying amount on the books
      of
      $199,970, were transferred in exchange for the satisfaction of certain loans
      to
      the officers totaling $375,000. Certain of these properties are used as
      collateral pursuant to the amended agreement with Pittsford.





In
      September 2005, the Company sold one of its properties in Salt Lake City, Utah
      to 3553 Main, LLC, a limited liability company, one of whose members is an
      officer of the Company. The property, which had a carrying amount on the books
      of $618,269, was transferred in exchange for the assumption of the underlying
      mortgage and a payment of $28,000.





In
      April
      2006, the Company sold its remaining facilities in Utah to an unrelated party
      for $2,500,000 in a sale-leaseback transaction. In addition, the Company entered
      into an operating lease agreement for the rental of these facilities for a
      36
      month period through monthly payments of $9,000 commencing on the first
      anniversary of the lease agreement.





**NOTE
      9 - MANAGEMENT’S PLAN OF OPERATION AND GOING CONCERN
      MATTERS**





The
      Company has reported losses from operations for the last two years. In addition,
      the Company has a working capital deficiency, a deficiency in stockholders’
equity and has been notified by its lender that it is in default of its credit
      facility. The Company has also not paid many of its other obligations in a
      timely manner.





During
      2005 and 2006, we have made a significant effort to obtain additional financing.
      These financings have included the mortgaging of certain properties, the
      obtaining of additional lines of credit and the factoring of its receivables.
      We
      have also refinanced a number of its equipment and properties in what it
      believes will be beneficial to its future cash flow. In addition, a number
      of
      the debenture issuances have been converted into common stock.





The
      financial statements have been prepared assuming Company is able to continue
      as
      a going concern. The financial statements do not include any adjustments
      relating to the recoverability and classification of assets or liabilities
      that
      might be necessary should the Company be unable to continue as a going
      concern.




F-10





**MICHELEX
      CORPORATION**


**AND
      SUBSIDIARIES**





**NOTES
      TO FINANCIAL STATEMENTS**





June
      30,
      2006





**NOTE
      10 - SUBSEQUENT EVENTS**





Subsequent
      Financing





In
      July
      2006, the Company entered into a Securities Purchase Agreement with several
      investors whereby the Company would issue an aggregate of $1,200,000 in 6%
      convertible secured notes and options to purchase up to 10,000,000 shares of
      the
      Company’s common stock. The notes are due on July 28, 2009 and may be converted
      into common stock at any time prior to maturity at the option of the holder.
      The
      loan may be converted at a conversion price which is the lesser of $.20 or
      a
      discounted average trading price of the shares (the discount being dependent
      on
      the meeting of certain registration conditions). The holder is limited in the
      conversions prior to maturity date to the greater of $60,000 per calendar month
      or the average daily dollar volume calculated during the ten business days
      prior
      to conversion. In addition, the agreement puts limitations on certain types
      of
      transactions. In July 2006, the Company closed on the first portion of the
      notes
      aggregating $400,000.





Issuance
      of Shares for Legal Services





In
      July
      2006, the Company agreed to issue 250,000 shares of the Company’s common stock
      to its attorneys for legal services. On the date of issuance, the Company will
      reflect as expenses for legal fees, approximately $5,000 (the market value
      of
      the shares on the date of the issuance).





Also
      in
      July 2006, the Company agreed to issue 1,000,000 restricted shares of the
      Company’s common stock to another attorney in connection with services provided
      in the Arbitration with Mr. Arnold and Investor Relations Services. On the
      date
      of issuance, the Company will reflect as expenses for legal fees, approximately
      $20,000 (the market value of the shares on the date of the
      issuance.





Issuance
      of shares to vendors





In
      August
      2006, the Company issued 2,500,000 shares to one of its vendors in partial
      payment for the balance due to the vendor for materials.




Letter
        of Intent
  In
        November, 2006, the Company entered into a letter of intent to acquire Ag
        Pro,
        Ltd. Ag Pro Ltd. Operates a press process soy oilseed crushing plant and
        a
        physical method vegetable oil refinery.




F-11


**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operation.**




Some
      of
      the information in this report contains forward-looking statements that involve
      substantial risks and uncertainties. You can identify these statements by
      forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
      "estimate" and "continue," or similar words. You should read statements that
      contain these words carefully because they:





·
            discuss
                our future expectations;





·
            contain
                projections of our future results of operations or of our financial
                condition; and





·
            state
                other "forward-looking"
                information.




We
      believe it is important to communicate our expectations. However, there may
      be
      events in the future that we are not able to accurately predict or over which
      we
      have no control. Our actual results and the timing of certain events could
      differ materially from those anticipated in these forward-looking
      statements.




**General
      Overview**




We
      are
      designers and manufacturers of high quality customized and standard plastic
      components. We provide precision products manufactured with state-of-the-art
      equipment using only the finest materials meeting or exceeding our rigorous
      standards.




MICHELEX
      DIVISION




Michelex
      Division imports, manufactures and sells plastic injection molded media
      packaging products. Our products also consist of paper, vinyl, tyvek and board
      mailer-based media packaging for use with CD and DVD media. This is the larger
      of our two (2) divisions in terms of revenues, personnel, and infrastructure.
      For the 12 months ended December 31, 2004 this division accounted for
      approximately 70% of total company sales. For the 12 months ended December
      31,
      2005 this division accounted for approximately 85% of total company sales.
      Revenues for this division for the six months ended June 30, 2006 accounted
      for
      55% of total sales.




MICHELE
      AUDIO.




Michele
      Audio involved primarily in the duplication and packaging of music and spoken
      word communication products. For the 12 months ended December 31, 2004 this
      division accounted for approximately 30% of total company sales. For the 12
      months ended December 31, 2005 this division accounted for approximately 15%
      of
      total company sales. Revenues for this division for the six months ended June
      30, 2006 accounted for 45% of total sales.




F-12




During
      2005 and 2006, we have made a significant effort to obtain additional financing.
      These financings have included the mortgaging of certain properties, the
      obtaining of additional lines of credit and the factoring of its receivables.
      We
      have also refinanced a number of its equipment and properties in what it
      believes will be beneficial to its future cash flow. In addition, a number
      of
      the debenture issuances have been converted into common stock.





In
      July
      2006, the Company entered into a Securities Purchase Agreement with several
      investors whereby the Company would issue an aggregate of $1,200,000 in 6%
      convertible secured notes and options to purchase up to 10,000,000 shares of
      the
      Company’s common stock. The notes are due on July 28, 2009 and may be converted
      into common stock at any time prior to maturity at the option of the holder.
      The
      loan may be converted at a conversion price which is the lesser of $.20 or
      a
      discounted average trading price of the shares (the discount being dependent
      on
      the meeting of certain registration conditions). The holder is limited in the
      conversions prior to maturity date to the greater of $60,000 per calendar month
      or the average daily dollar volume calculated during the ten business days
      prior
      to conversion. In addition, the agreement puts limitations on certain types
      of
      transactions. In July 2006, the Company closed on the first portion of the
      notes
      aggregating $400,000.





In
      June
      2006, the Company entered into a $40,000 secured promissory note with Ayuda
      Funding Corp. The note incurs interest at the rate of 10% per annum and is
      due
      on June 16, 2007. The note can be converted at any time at the option of the
      holder, into common shares of the Company at the lesser of $.01 per share or
      80%
      of the average closing bid price for the ten days preceding the conversion
      date.





In
      June
      2006, the Company obtained additional mortgage financing totaling $500,000
      from
      a separate lender. Borrowings under the mortgage which is due June 30, 2007
      incur interest at the rate of 10% per annum. The Company is required to make
      payments under the mortgage of $4,167 per month.





In
      2006,
      Michele Audio and Wells Fargo entered into an agreement to settle the debt
      owed
      to Wells Fargo. In April 2005, Michele Audio and Wells Fargo entered into a
      letter agreement (the “Letter Agreement”) whereby the balances due under the
      line of credit were accelerated causing Michele Audio to seek alternative
      financing to repay the borrowings. Pursuant to the agreement, Michele Audio
      agreed to make payments of $1,025,000 in June 2006 (the “June Payment”),
      $1,150,000 in August 2006 (the “August Payment”) and $250,000 in December 2006
      and interest only payments at the prime rate on the remaining unpaid balance
      until the final payment is made in December 2006. The June Payment and August
      Payment including the interest only payments have been made.





In
      May
      2006, the Company entered into a sale leaseback agreement with an unrelated
      third party. Pursuant to the agreement, the Company sold certain of its assets
      for $1,200,000. As a condition of the agreement, the Company agreed to lease
      the
      assets pursuant to a five year lease at a rental of $19,583 per month plus
      an
      additional rent factor equal to the 6.5% over the prime rate of the unpaid
      remaining rental. The Company has the additional option to purchase the assets
      anytime after the first twelve months for an amount equal to the remaining
      unpaid lease payments plus $117,500.





In
      April
      2006, the Company refinanced several of its properties in Massena, New York
      through a mortgage agreement totaling $1,200,000. The loan, which has an
      original due date of April 2007, incurs interest at the greater of 13% per
      annum
      or the prime rate plus 6% per annum. If all payments are made timely, the due
      date on the loan may be extended for an additional twelve months. The mortgage
      is guaranteed by an officer of the Company. In addition, as an additional
      incentive to loan the funds, the Company granted a warrant to the mortgage
      holder to purchase up to 1,000,000 shares of the Company’s common stock at an
      exercise price of $.02 per share. The warrant is exercisable anytime after
      April
      24, 2006 for a period of one (1) year.





Our
      revenues decreased from $14.8 million for the year ended December 31, 2004
      to
      $5.5 million for the year ended December 31, 2005. Management believes
      that this decrease was the result of Wells Fargo canceling our Line of
      Credit and demanding full payment of the term loan, totaling approximately
      $3,900,000.





In
      June
      2005, Michele Audio entered into an agreement with Pittsford to amend its
      existing promissory notes and convert the loan into a term loan. The amended
      note will incur interest at the rate of ten percent (10%) per annum and is
      payable in monthly installments including interest of $7,720 through July 1,
      2008. The note may be prepaid at any time and if prepaid prior to July 1, 2006,
      Pittsford agrees to forgive $25,000 of the principle amount outstanding. The
      loan is secured by certain of Michele Audio’s properties as well as certain of
      the properties of MPG Development LLC (“MPG”) located in Massena, New York. The
      note is guaranteed by MPG in addition to certain officers of Michele Audio.
      As
      of December 31, 2005, Michele Audio owes $794,644 to Pittsford.





In
      May
      2005, the Company entered into a one (1) year account receivable purchase
      agreement with Commercial Capital Lending, LLC (“CCL”). Pursuant to the
      agreement, CCL agrees to purchase up to 80% of the eligible accounts receivable
      from the Company. The Company may be required to repurchase accounts sold to
      CCL
      under certain conditions. The Company is required to pay interest at the rate
      of
      prime plus one percent on 80% of the face amount of the accounts purchased.
      In
      addition, the Company is required to pay a servicing fee totaling .6% (six
      tenths of one percent) of the net face amount of the open receivables for each
      15 days the account is open. The agreement, among other provisions, is secured
      by all personal property excluding inventory and equipment.




F-13




In
      May
      2005, the Company entered into a secured convertible debenture for $150,000
      with
      the brother of one of the officer/directors. The debenture incurs interest
      at
      the rate of 8% per annum and is payable in monthly installments including
      interest totaling $3,041 through June 2010. The mortgage is secured by one
      of
      the Company’s properties as well as the home of the officer/director. The
      Company has not made the required payments under the mortgage. The Company
      has
      recorded a beneficial conversion feature totaling $50,000, which were recorded
      as a discount on the debentures and are being amortized over the term of the
      related debenture as additional interest expense. In June 2006, the note and
      accrued interest were converted into 8,100,000 shares of the Company’s common
      stock. At that time, the remaining beneficial conversion feature will be
      expensed.





In
      May
      2005, the Company entered into a lease for equipment under capital lease
      arrangements with Franklin Funding, Inc. Pursuant to the lease, among other
      provisions, the lessor retains actual title to the leased property until the
      termination of the lease, at which time the property can be purchased for one
      dollar. The lease dated May 17, 2005 is for certain equipment located in the
      Salt Lake City facilities. The term of the lease is forty months with monthly
      payments of $7,755 which is equal to the cost to amortize $250,000 over the
      lease term at an interest rate of approximately 17% per annum. The Company
      had
      obtained the lease and related underlying equipment through an assumption
      agreement with one of the Company’s vendors. The vendor declared bankruptcy in
      2006. Pursuant to a settlement agreement in June 2006 with Franklin Funding,
      The
      Company gave up possession of the equipment and cancelled the lease with
      Franklin Funding.





In
      April
      and May 2005, the Company transferred certain equipment in exchange for the
      repayment of the existing debt on the equipment to a corporation controlled
      by
      the brother of one of the Company’s officers. The Company subsequently leased
      back the equipment. Pursuant to the two separate two-year lease agreements,
      the
      Company is required to make monthly payments totaling $3,000 and $2,000 per
      month, respectively. The Company has not made any of the required lease payments
      pursuant to the agreement.




In
      April,
      2005 Wells Fargo cancelled our line of credit and demanded full payment of
      the
      term loan totaling $3,900,000. Management believes that this was the result
      of a
      dispute between the Company and Wells Fargo regarding a financing deal between
      the Company and Argilus Capital LLC that was not completed.





The
      Line
      of Credit with Wells Fargo was an ongoing relationship that was renewed in
      March, 2005 (See Note 4). At that time, the Company incurred a charges of
      approximately $37,000 for the renewal and there was no indication of any
      problems. As such, the cancellation of the credit line and demand for payment
      was completely unexpected by management.





The
      Company’s arrangement with Wells Fargo was an asset based lending arrangement
      and as of the cancellation date in April, 2005, Wells Fargo proceeded to retain
      all of the Company’s cash as it came it. This prevented the Company from
      operating and essentially put the Company in a “shut down mode” with the
      majority of the work force being laid off and the Company operating at a very
      limited capacity. This had a large impact on the Company’s customer
      base.





In
      order
      to keep the Company solvent, management obtained capital through the sale of
      assets and property. This resulted in a significant decline in our fixed assets
      balance from December 31, 2004 to December 31, 2005. In addition, loans were
      obtained from officers and related parties.





In
      January 2005, Michele Audio entered into a revolving line of credit agreement
      with Ringsport, Ltd., a British Virgin Islands corporation. Pursuant to the
      agreement, Michele Audio may borrow up to one million dollars ($1,000,000)
      for a
      term of one (1) year. The line bears interest at the rate of prime plus one
      percent. The line is collateralized by the cash, marketable securities and
      investments of Michele Audio. In 2005, Michele Audio borrowed $50,000 under
      the
      line.





Our
      efforts in 2004 and 2005 were spent on a number of financing deals that
      ultimately did not come to fruition. Management did not obtain financing until
      April, 2006 causing revenues to suffer in 2005.




In
      November 2004, we signed a Standby Equity Distribution Agreement with Cornell
      Capital Partners, LP (“Cornell”) whereby Cornell agreed to purchase, during the
      next two (2) years, up to $10,000,000 of our common stock. We have not borrowed
      any funds under the agreement.




In
      October 2004, we entered into a Collateral Share Agreement (the “Collateral
      Share Agreement”) with Ginette and Thomas Gramuglia the President and Vice
      President of the Company at that time. The Collateral Share Agreement called
      for
      the Company to issue to Thomas Gramuglia and Ginette Gramuglia 3,000,000 shares
      each of the Company’s common stock as consideration for their continuing
      personal guarantees of certain of the Company’s loan obligations. Ownership of
      the collateral shares remain with the Company unless an event of default occurs
      under the guaranteed loans set forth in the Collateral Share Agreement, however
      Tom and Ginette Gramuglia have voting rights for the shares during the term
      of
      the Collateral Share Agreement. Additionally, the Collateral Share Agreement
      stipulates that either Thomas or Ginette Gramuglia have the option to purchase
      the collateral shares at either $.24 (twenty-four cents) per share or the
      average closing bid price for the shares for any five (5) day trading period
      during the term of the Collateral Share Agreement. The Collateral Share
      Agreement further indicates that the Company may from time to time transfer
      ownership of the collateral shares to Thomas Gramuglia pursuant to his
      employment agreement and applicable securities laws. The term of the Collateral
      Share Agreement is the shorter of 10 years or the term of the loan
      guarantees.




In
      September 2003, Michele Audio entered into a short-term note agreement with
      Pittsford Capital Mortgage Partners, LLC (“Pittsford”) for $775,000. The note,
      which was due September 17, 2004, unless repaid sooner, bears interest at the
      rate of sixteen percent (16%) per annum. Interest only payments are due
      monthly.




In
      March
      2002, Michele Audio entered into a $7,000,000 revolving note agreement (the
      “Note Agreement”) with Wells Fargo Business Credit, Inc. (“Wells Fargo”) for
      working capital and issuance of letters of credit. Interest was payable monthly
      at Well’s Fargo’s then base rate plus 3%. The note was payable on demand. At
      December 31, 2004 total borrowings under the Note Agreement totaled $1,666,319
      placing Michele Audio in default. In April 2004, the Note Agreement was amended
      to change certain of the provisions including the formula used to calculate
      the
      funds available for borrowing and settlement of certain default
      charges.





Competition .




Two
      (2)
      of our competitors in the plastics and packaging industry went out of out of
      business. We believe that this will give us an opportunity to regain the market
      share that was lost in 2005 and 2006.




Significant
      Income or Loss .




In
      2005,
      there was no significant income or loss arising from our continuing operations.
      In 2006, we incurred charges related to options offered in exchange for
      outstanding loans due. These are one time charges.




F-14




Issuance
      of Unregistered Stock





In
      July
      2006, the Company agreed to issue 250,000 shares of the Company’s common stock
      to its attorneys for legal services. On the date of issuance, the Company will
      reflect as expenses for legal fees, approximately $5,000 (the market value
      of
      the shares on the date of the issuance).




Also
      in
      July 2006, the Company agreed to issue 1,000,000 shares of the Company’s common
      stock to another attorney in connection with services provided in the
      Arbitration with Mr. Arnold and Investor Relations Services. On the date of
      issuance, the Company will reflect as expenses for legal fees, approximately
      $20,000 (the market value of the shares on the date of the
      issuance.




In
      August
      2006, the Company issued 2,500,000 shares to one of its vendors in partial
      payment for the balance due to the vendor for materials.




In
      April
      2006, the Company granted to officers of the Company, options to purchase an
      aggregate of 50,000,000 shares of the Company’s common stock at an exercise
      price of $.02 per share. The options may be exercised after April 15, 2006
      and
      expire after April 15, 2011. The Company valued the warrants at $494,119 using
      the Black-Scholes option pricing method. The value was expensed as incurred
      as
      there was no vesting period. In August 2006, options to purchase 8,900,000
      options were exercised in exchange for $178,000.




In
      March
      2006, the Company issued 477,500 shares of common stock to
      employees.




**Forward-Looking
      Information.**




Statements
      made in this Form 10-QSB which are not purely historical are forward-looking
      statements with respect to the goals, plan objectives, intentions, expectations,
      financial condition, results of operations, future performance and business
      of
      our Company, including, without limitation, statements preceded by, followed
      by
      or that include the words "may", "would", "could", "should", "expects",
      "projects", "anticipates", "believes", "estimates", "plans", "intends",
      "targets" or similar expressions.




Forward-looking
      statements involve inherent risks and uncertainties, and important factors
      (many
      of which are beyond our Company's control) that could cause actual results
      to
      differ materially from those set forth in the forward-looking statements,
      including the following, in addition to those contained in our Company's reports
      on file with the Securities and Exchange Commission: (i) general economic or
      industry conditions, nationally and/or in the communities in which our Company
      may conduct business; (ii) changes in the interest rate environment, legislation
      or regulatory requirements; (iii) conditions of the securities markets; (iv)
      changes in the industries in which the Company competes; (v) the development
      of
      products or services that may be superior to products or services offered or
      developed by our Company; (vi) competition; (vii) changes in the quality or
      composition of products or services developed by our Company; (viii) our ability
      to develop new products or services; (ix) our ability to raise capital; (x)
      changes in accounting principals, policies or guidelines; (xi) financial or
      political instability;




(xii)
      acts of war or terrorism; (xiii) other economic, competitive, governmental,
      regulatory and technical factors affecting our Company's operations, products,
      services and prices.




Accordingly,
      results actually achieved may differ materially from expected results in these
      statements. Forward-looking statements speak only as of the date they are made.
      The Company does not undertake, and specifically disclaims, any obligation
      to
      update any forward-looking statements to reflect events or circumstances
      occurring after the date of such statements.




**Item
      3. Controls and Procedures.**




The
      Company's President and Treasurer are responsible for establishing and
      maintaining disclosure controls and procedures.




(a)
      Evaluation of Disclosure Controls and Procedures




Based
      on
      their evaluation as of June 30, 2006, the President and the Treasurer have
      concluded that the Company's disclosure controls and procedures (as defined
      in
      Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended)
      are effective to ensure that information required to be disclosed in reports
      that the Company files or submits under the Securities Exchange Act, as amended
      is recorded, processed, summarized and reported within the time periods
      specified in the rules and forms of the Securities and Exchange
      Commission.




(b)
      Changes in internal controls




Based
      on
      their evaluation as of June 30, 2006, the President and the Treasurer have
      concluded that there were no significant changes in the Company's internal
      controls over financial reporting or in any other areas that could significantly
      affect the Company's internal controls subsequent to the date of his most recent
      evaluation, including any corrective actions with regard to significant
      deficiencies and material weaknesses.




F-15




**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings.**





Except
      as
      indicated below, the Company is not a party to any pending legal proceeding.
      To
      the knowledge of management, no federal, state or local governmental agency
      is
      presently contemplating any proceeding against the Company. No director,
      executive officer or affiliate of the Company or owner of record or beneficially
      of more than five percent (5%) of its common stock is a party adverse to the
      Company or has a material interest adverse to the Company in any
      proceeding.




In
      January 2006, the Company received a subpoena from the SEC as part of an
      investigation the SEC is conducting into trading in certain over the counter
      stocks. The Company has not been notified that the SEC is conducting a formal
      or
      informal investigation into the Company.




In
      November 2005, the Company received notice of the settlement of arbitration
      between Michele Audio, Investor Relations Services, Inc., a Delaware corporation
      (“Investor Relations”) and Charles Arnold. Pursuant to the settlement, the
      Company is required to pay an aggregate of $290,928 for damages, interest,
      legal
      and administrative fees relating to a claim filed by Investor Relations and
      Charles Arnold that they had not been compensated as called for pursuant to
      a
      Consulting Agreement and Personal Services Agreement respectively (the
“Agreements”).




Michele
      Audio had simultaneously entered into the Agreements with Investor Relations
      and
      Mr. Arnold during the 2003 fiscal year. Both Investor Relations and Mr. Arnold
      had agreed to be compensated with preferred shares of Michele Audio
      stock.




**Item
      2. Changes in Securities and Small Business Issuer Purchases of Equity
      Securities.**




None;
      not
      applicable.




**Item
      3. Defaults Upon Senior Securities.**




None;
      not
      applicable.




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





On
      December 20, 2005, our Board of Directors and majority shareholders voted to
      increase the authorized number of shares from 100,000,000 to
      1,000,000,000.




On
      September 9, 2003, our Board of Directors and majority stockholders voted to
      amend Article I of our Articles of Incorporation to change our name to “Michelex
      Corporation.” The amendment became effective on September 29, 2003. A definitive
      information statement was filed on September 8, 2003.




**Item
      5. Other Information.**




None;
      not
      applicable.




**Item
      6. Exhibits and Reports on Form 8-K.**




(a)
      Exhibits.




**31.1
      - 302 Certification Thomas Gramuglia.**




**31.2
      - 302 Certification Sharon Bishop.**




**32
      - 906 Certification.**




(b)
      Reports on Form 8-K.




None.





F-16


**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this Report to be signed on its behalf by the undersigned thereunto
      duly authorized.




**MICHELEX,
                INC.**Date:
              11/22/2006
            
            /s/
              Thomas GramugliaThomas
                Gramuglia
              President
                and Director  Date:
              11/22/2006
            
            /s/
              Sharon BishopSharon
                  Bishop
                Secretary
                  and Director




F-17